First, Do No Harm
The economy is officially in the tank, and economists are standing in line to tell policymakers which levers to pull to bring it back to healthy form. Giving advice to political leaders--advice they want to hear--seems to be the way to fame in my profession, with the primary concern that the New York Times prints your name correctly.
I too have policy prescriptions. In fact, my recommendations, if implemented, would allow the economy to prosper sometime during the first quarter of 2002. Although my ideas used to reflect the mainstream of economic thinking, today they are considered novel. This is too bad, because they promise stable, long-run growth, and not the short-run stimuli that serve merely to get politicians past the next election cycle.
Herewith are my suggestions.
To Alan Greenspan, who is considered in many circles the most important man in the world: Spend more time with your wife, Andrea Mitchell. Take her down to Florida for a few months. You can't beat Boca this time of year, and with all of the Fed-engineered malinvestments of the last decade, there are many empty hotel rooms down there. Just stay away from your Fed office. Sometimes the best Fed policy is no Fed policy. Now is such a time.
To Dennis Hastert and Tom Daschle: You boys need to spend more time together. Hang out at the gym and shoot some hoops. Hit the mall, get haircuts, and buy some ties. Tom, you can show Dennis how to tie a double windsor knot. And later, Dennis, you can show Tom the double chokehold you used during your wrestling days.
When you leave, be sure to lock up the Capitol. We'll try to make do without you. Any time you could have spent productively when Congress was in session was wasted last month when you let the deadline pass for the Internet tax moratorium and then tried to federalize airport security. We'll sleep a lot better out here in the hinterlands knowing that you two are passing a football in a Chevy Chase park instead of passing laws.
And to George W. Bush: Don't you miss your ranch? Go back to Crawford, set up the horseshoe poles, and invite your dad over. Have you finished the John Adams book yet? If so, why not try reading some Henry Hazlitt? Be a compassionate conservative, and hang out with the citizens you spoke of in your inaugural. You will then remember that, contra Keynes, the Liquidity Trap is nothing more than the dunking booth at the Methodist church fair.
There is no need to sign executive orders. In short, my advice to would-be economic managers can be summarized in three words: Do no harm.
This advice runs counter to the political mind, which thinks that the elected official must look like he is doing something at all times, no matter the present state of the economy. But doing no harm during a time of recession is the only way that the economy can assume sustainable growth levels once again. Here's why.
By not intervening, wages and prices will adjust. Wages fall because of the surplus of unemployed workers, while prices fall because of the surplus output that resulted from the previous boom and because of the cutback in consumer demand that is natural during a correction. Some workers take pay cuts and reduce labor output by working shorter weeks. If workers' nominal wages are reduced while the prices of the goods they buy are reduced as well, they are no worse off in real terms. Wage and price deflations are essential aspects of the market-clearing process.
Although no single worker is affected in the same way while these adjustments take place, as is implied by aggregate macroeconomic data, such a corrective process is never easy. Through it, labor and capital move to areas that entrepreneurs hope will be more productive. Business failures are liquidated. Lives are disrupted as the newly unemployed try to find work. Some families will have to relocate to be closer to new opportunities. On an individual basis, some workers never achieve the same level of real income that they earned during the boom. Such events are inherent in the market system, but they are needlessly exacerbated following state-financed, unsustainable periods of economic growth.
Such events also create enormous political pressure to intervene, but these efforts only lengthen the correction. Tinkering with the legal code makes property less secure and less likely to be utilized by private individuals in ways that promote the social good. Adding layers to government increases its size and scope, requiring coerced capital flows from private uses to wasteful public ones. Such interventions make politicians look meaningful and compassionate, even though they always produce deleterious long-term economic effects.
By providing unemployment compensation, politicians slow adjustments in the labor market, which reduces the downward pressure on wages and causes unemployment to persist. By protecting industries via direct monetary subsidies, low interest loans, or protectionist legislation, politicians score political points while rewarding poor business decisions. By increasing the money supply, monetary authorities create a new round of malinvestments, thus setting the stage for deeper recessions in the future.
Prior to the Keynesian era, recessions were called panics and had durations of about three months. The shortness in duration, which is remarkable given that labor and capital mobility was much slower than today, reflected the lack of interventionism by extra-market authorities. Today, recessions last much longer, as the bad idea that the state should manage the economy has become legitimized.
Which is why I say to members of our political class: Adopt a do-no-harm economic policy. Stop intervening. Try being irrelevant to the correction. A healthy, stable economy growing at sustainable rates of output requires a minimalist state.
Start your holiday break early (after sending me the phone number to the New York Times).