Mr Bernanke’s grounding has given him the authority to dismiss those who view the meltdown through a moral lens and want to purge society for its excesses. Had he embraced this popular intuition, the US would now be following the UK into triple-dip recession. As Mr Bernanke noted in Texas shortly after Rick Perry, its governor, had all but threatened him with a lynch mob: “I am not a believer in the Old Testament theory of the business cycle.”As a general rule, any argument pushing for less government intervention on moral grounds in a weak economy should be viewed with suspicion. "Less is more" can be an acceptable rule for making decisions of a personal nature but in the realm of economic policy, it's often just bad advice. This is largely because of the two-sided nature of any monetary transaction: your spending is my income, public sector spending is private sector income.
A few years ago, economist Ben Friedman examined how morality intersects with economics and public policy. His view is that government intervention, in terms of its impact on the lives of citizens through its role in fostering economic growth, 'less' is definitely 'less':
A commonly held view is that government policy should try, insofar as it can, to avoid interfering with private economic initiative: the expectation of greater profits is ample incentive for a firm to expand production, or build a new factory, while the prospect of higher wages is likewise sufficient to encourage workers to seek out training or invest in their own education...The best that government can do (so the story goes) is minimize taxes, or safety regulations...The "right" pace of economic growth is whatever the market - that is, the aggregate of all private decisions - would deliver on its own.The point here is that public policy positively influences a society's moral character when it helps to raise living standards, which in turn affect the attitude of people toward themselves and encourages greater openness and tolerance.
But this familiar view too is seriously incomplete. To the extent that economic growth brings not only higher private incomes but also greater openness, tolerance, and democracy -- benefits we value but that the market does not price -- and to the extent that these unpriced benefits outweigh any unpriced harm that might ensue, market forces alone will systematically provide too little growth. Calling for government to stand aside while the market determines our economic growth ignores the vital role of public policy: the right rate of economic growth is greater than the purely market-determined rate, and the role of government policy is to foster it. (2005:14)
Also, on a separate yet related point, it's really hard to believe there's any good to be found in the popular view that government action should be avoided because it (allegedly) stifles private sector initiative. On this point, I think Bill White of the Bank for International Settlements makes a good point:
...faced with serious deflationary tendencies, all of the weapons in the macroeconomic arsenal should be used to their full effect to ensure that aggregate demand is maintained. The concept of "creative destruction" has a certain intuitive appeal, but it should be remembered that the phrase was coined well before the onset of the Great Depression.Reference
Friedman, B., The moral consequences of economic growth, 2005, New York, Knopf
I like your thread circuit. It's elegantly set up. I would only caution that it is sometimes a perilous endeavour to use a full macroeconomic arsenal, even if Bill White, a brilliant Canadian economist, who also in passing qualifies the context of its use in a deflationary scenario, highlights it. The unintended consequences, by definition highly unquantifiable-hence moot, remain a major moral hazard for the serious policymaker. The world of policy is dappled by disasters and failures motivated by very good intentions. But I think in our present global context-putting everything into drive is the only option to accelerate an aggregate demand catalyst. Bill White is among the most serious policy analysts in the world. Again he is right.
ReplyDeleteThanks, Swells. I was trying to convey the pragmatism in both authors' statement and link it to Ben Bernanke's fantastic response to Perry (which I hadn't read until this week). You're right about the context of Bill White's quote. I hope I'm not completely off when using it to challenge the popular view among some commentators that 'good things come out of hardship'. Everyday we see proof that this is delusional thinking. As I re-read my post, I wonder if it sounds overly optimistic about government. The aim was mainly to counter the free-market, small government mentality, which may have had merit a century ago but less today. Also: good point on the 'good intentions'. It's true that so many mistakes were the result of policymakers thinking they were acting in everyone's benefits. That's the main reason why it's important to be pragmatic and make decisions based on good analysis.
DeleteThis comment has been removed by the author.
DeleteActually circuit, your reference to Bill White was balanced. White was neither optimistic nor pessimistic. In fact White's assessment of Goodfriend is best conveyed in his comment to Goodfriend's leaning: 'If Goodfriend perhaps overestimates the role of monetary policy in deflationary conditions, he perhaps underestimates the role of fiscal policy.' One never tires repeating that Policy is about uncertainty and dealing with uncertainty will, as swells cautions, generate unintended consequences. Monetary policy is certainly at the forefront of criticism. It has huge exposure because markets usually rally or stumble in consequence. The challenge of macroeconomics and monetary policy in function of their mission of enhancing the public good was best and concisely formulated by Ben Friedman years ago in his introduction to a booked symposium authored by the John Taylor/R.Solow: Inflation, Employment and Monetary Policy. There is no miracle in the realm of real economies; there are only miracles when econometricians hit the target.
DeleteThe real world of policy is the anxiety of having tried your best and having failed or fallen short, or having failed to convince or having fallen short of influencing the principal actors of policy. The shortcoming of pragmatism is its preclusion of certainty and adherence to empirical effort and consistency. In the end that's the rub of economic policy. That economics has a moral character!, of course. What it is, is as difficult to define as setting out to understand economies.
Technology although a great engine, complicates at a certain time in one's life which leads to an interesting policy issue: how immigration and population growth drives technology and productivity.
DeleteYes, I agree: it sure does complicate! On technology, I just finished reading this very interesting piece by Ryan Avert
Deletehttp://www.economist.com/blogs/freeexchange/2013/03/innovation
I think it touches upon one of the most (if not the most) critical issues of the day (although it doesn't get sufficient attention). Governments must realize that public spending can be beneficial to society in the long run. As someone who's worked in the area of cost-benefit analysis, my view is that the benefits to society of government spending largely surpass the social costs. Often times, the social benefits are intangible (and, as a result, not always easy to monetize) and take a long time to surface. Take one (unfortunately) unknown example: the US Rehabilitation Act of 1973 (requiring federal organizations to accommodate employees with disabilities). Who would have guessed that this legislation would help to spur innovation (and now a booming industry) in the field of accessible technology. And the best part is that the technology is now used by everyone (who doesn't use TV captioning or the text-to-speech technology on computers or e-readers sometimes?) I sometimes tell people (somewhat jokingly) that, far from stiffing innovation, regulations actually gives it a boost! In passing, Pres Obama and his team have done a remarkable job in this area.
Just to add: the Rehabilitation Act was amended from time to time, but my point is that the demand for accessible equipment and technology created its supply (to use that expression). The public spending required to comply with the accessibility requirements gave shape to an industry. In the end, I think communities benefits from this type of government initiative. It helps make communities and workplaces more inclusive, and as the population gets older, more people will find benefits from such technologies.
Delete