An Enabling Macro Fallacy

Economic crisisFor anyone who monitors the state of macroeconomics, it is not merely an interesting time, it is fascinating.

Many of the presumptions that have dominated the discipline for decades are now up in the air.

Whether it be the effectiveness of fiscal or monetary policy in managing aggregate demand, if aggregate demand is indeed the key driver of economic activity, the size of the Keynesian multiplier, the appropriate monetary target (NGDP or inflation), the appropriate instrumental monetary variable, or the quality of the institutional presumptions underlying fiscal and monetary management,  there is very little that is truly settled in macro.

To this observer though, there is one core presumption which seems to be common among macroeconomists who have political decisionmakers’ ears (no doubt the Austrians and Real Business Cycle economists are excluded here).

That is that government macroeconomic interventions can somehow prevent economies and the people in them from paying any price for their misallocation of assets, short-sighted decisionmaking, and imprudent spending. There seems to be an implicit belief among policy-making economists that the goal of macroeconomics is to insulate societies from the negative consequences of individual, corporate and governmental policy. This view is clearly welcomed by politicians of all stripes.

The old idea of stabilising policy seems to have morphed into the belief that the creative destruction at the heart of capitalism can somehow be avoided by economists who are smart enough to pull the right levers, the right amount, at the right time.

And it is true; creative destruction can be avoided. But only by eliminating economic freedom in such a way that the economy no longer responds to economic signals, no longer links reward with economic productiveness, and is no longer a capitalist economy. You avoid the destruction, but you also avoid the creation.

The eternal short run of sugar hits, fiscal or monetary, so favoured by our policy-makers, is underpinned by this technocratic belief that we can somehow, if we’re smart enough, manage our way out of consequences.

It is, of course, at the heart of the Keynesian and New Keynesian views of the economic world. And it is at the heart of the basic big government intuitions that underlie most policy-making economists, and all Leftist economists.

This presumption seems to extend even to self-identified libertarians like Scott Sumner, who advocates NGDP targeting to macro-manage. He and other Market Monetarists even go to the extent of suggesting negative interest to force banks to lend and people to spend, and of the Treasury buying private (not government) bonds to increase money stocks and drive, what is in their view, necessary inflation.

What is interesting intellectually is that this presumption shares features common to other policy arenas. It assumes that:

  • macroeconomic control is possible
  • short term fixes are appropriate even if they worsen long term trends
  • longer cycles or trends beyond individual professional lifespans are of less consequence than shorter term variations
  • the macroeconomist’s role is to eliminate risks to economic agents
  • we understand enough of macroeconomic ┬ámechanism to both design and execute interventions that won’t make things worse
  • we can prevent the natural consequence of causes already established in a chaotic system
  • we are capable of preventing damage in the long term, rather than being constrained to adapt to it
  • we have institutions that are capable of intervening effectively more than once, independent of the quality of the people involved
  • omitted or non-quantifiable variables (such as elements of culture and personality) are not relevant even if they are central to the mechanism at issue.

What jumps out? We have a combination of the technocratic and managerial hubris of high modernism, with the core political desire to eliminate risk by spending other people’s money.

Sadly, no surprise. Sadly, paralleled exactly by current social policy, public health policy, health and safety policy, environmental policy, education policy, and just about all policy you can name in developed economies.

Technocratic hubris and the political desire to eliminate voter risk drive the pathologies of modern politics. Both are bad for individual freedom. Both are bad for the long term health of a capitalist economy.

Update

Snap! Steve Kates today:

If you want to understand our economic problems, there’s nowhere better than to look at the advice from the economics profession itself. Everything needs fixing by governments. Virtually nothing can be left to run itself. If there is anything left of the free market after this, I am not sure where it is.

 

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