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Sound Advice for Janet Yellen

  • Federal Reserve System Seal

Sound Advice for Janet Yellen

Adam Ferguson (Jan 27 Weekly Standard) advice to Janet Yellen is highlighted in “Notable & Quotable” in today’s Wall Street Journal. Ferguson suggests that future Fed Chair Yellen should follow John Cowperthwaite whose introduction of free market economic policies are widely credited with turning postwar Hong Kong into a thriving global financial centre and “banish statisticians from her cold marble temple on Constitution Avenue.” Ferguson credits Cowperthwaite with such insights as:

Stripped of his numbers an economist would have to resort to the old home truths about how the world works: If you tax something you get less of it; as a general rule an individual manages his own affairs better than his neighbor can; it's rude to be bossy; the number of problems that resolve themselves if only you wait long enough is far larger than the number of problems solved by mucking around in them. And the cure is often worse than the disease: In the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster.

Ferguson concludes, “Somehow the most successful practical economist of the twentieth century knew this was true, and he didn't have to work out a single equation.”

The focus of Cowperthwaite  economic policy was positive non-interventionism and his management of the Hong Kong economy is often cited as a leading example of how small government encourages economic development and growth. [Sidebar: For a discussion of Hong Kong’s monetary system during this time see Kurt Schuler here and here.]

Even better advice for Yellen comes from Vedder’s and Gallaway’s The Fraud of Macroeconomic Stabilization Policy. Their major conclusions are 1. “Ex post attempts at implementing stabilization policy are destabilizing, not stabilizing”; and 2. Therefore, the notion of short-run contracyclical macroeconomic policymaking is an exercise in futility” [emphasis added].

Per Vedder and Gallaway policy makers would do much better following Bastiat, not John M. Keynes:

This does not mean that economists have nothing to offer in the way of advice. However, their role should be conditioned by the sentiments espoused by Frédéric Bastiat and not those of John Maynard Keynes. It was Keynes who glibly pontificated, “In the long run, we are all dead.” But it was Bastiat, some 150 years ago, who commented: "There is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet, this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present gain that will be followed by a great evil to come, while the good economist pursues a great good to come, at the cost of a small present evil."

Janet Yellen’s task would now be much less formidable and the economy would be in much better shape if Bernanke and Obama’s policy advisors had heeded Vedder and Gallaway, who in the spirit of Cowperthwaite, describe the best response to a macro shock:

The best they [entrepreneurs and workers] can hope for from government policymakers is, in the spirit of Hippocrates advising future doctors, that they do no harm. Given that the phenomena that policymakers confront in the short-run are essentially unpredictable and given that even their best efforts are the equivalent of medieval doctors bleeding their patients, the most appropriate short-run macroeconomic stabilization policy is to give the aforementioned  entrepreneurs and workers maximum freedom to adjust to potentially discoordinating shocks to the macroeconomy.

While such following such advice would improve Fed policy, it, like the even better suggestion to reform monetary institutions toward a market chosen commodity-based money coupled with  Misean banking freedom, is unlikely to be adopted anytime.

John P. Cochran (1949-2015) was emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He was also a senior fellow of the Mises Institute and served on the editorial board of the Quarterly Journal of Austrian Economics.

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