Some Common Sense Economics

The economics geniuses will be out at Jackson Hole this week to discuss the world’s economy.  I love what my friend Yra Harris wrote:

In July, Barry Ritholtz posted an interesting article by Alan Jay Levinovitz in Aeon Essays titled, “How Economists Rode Maths to Become Our Era’s Astrologers.” The final paragraph sums up my continued theme of “it ain’t rocket science”: “There is no longer any excuse for making the same mistake with economic theory. For more than a century, the public has been warned, and the way forward is clear. It’s time to stop wasting our money and recognise the high priests for what they really are: gifted social scientists who excel at producing mathematical explanations of economies, but who fail, like astrologers before them, at prophecy.”

There is no doubt, macroeconomics is an inexact science.  Yra’s right though. There is certainly more than enough data that shows one form of macro works, and the other doesn’t.  That’s why I love the video “It’s a Wonderful Loaf” by Russ Roberts.

There is further drama at this Jackson Hole meeting because Fed Chair Janet Yellen’s term is up.  Will Trump re-appoint her or go a new direction?  Given the tactics of the Fed over the past several years, I’d like to see him appoint a strong freshwater economist to head the Fed.

The Fed has a dual mandate proscribed by Congress.  However, I think the people at the Fed should entertain another underlying mandate.  Restoring faith in free markets.  America has lost faith in free market capitalism.  A lot of people are totally uneducated about what it means and what it’s done to lift standards of living.  We don’t have a lot of great examples of free markets in America anymore.

What we have in America today was accurately described in City Journal as “fake capitalism”.  Not only that, but our country is littered with crony capitalism which tarnishes real capitalism. Paraphrasing economist Allen Metzler,  “Free market capitalism is engaging in actions where your actions don’t impinge upon other people. You have freedom of choice and can buy and sell anything you want. Free-market capitalism protects private property rights.”

Subsidies, mandates, price floors, price ceilings, rules on labor and other regulations all get in the way of free markets.  It’s pretty hard to name a market that doesn’t have some sort of government intervention.  Even venture capital is regulated somewhat.  The IRS says who can invest and who can’t.

We do need some rules, but in the US we have gone way too far.  Look at what New York governor Mario Cuomo is doing with natural gas.

The US Housing market is often cited as a “free market”.  However it is riddled with all kinds of subsidies.  The debate over what to do with the US health care market is also instructive. Democrats want socialized medicine.  Republicans can’t agree on anything.  The way the market worked prior to Obamacare and after Obamacare wasn’t anything close to free market capitalism.  That’s why it was so expensive.

Here is an example on how far we have gone to interfere and screw up different markets from the City Journal article.

The federal government delivers $20 billion in annual subsidies to farmers, decreasing the price of corn and soybeans, ingredients in the processed foods that have contributed to the nation’s obesity problem. Washington also subsidizes energy. Oil, gas, and coal get nearly $2 billion in direct annual subsidy, according to the Institute for Energy Research. Renewable energy gets $27 billion. Such subsidies distort energy investments, obscuring what kinds of investment the market on its own would support, and they have a dramatic effect on energy prices. When critics of capitalism denounce markets, then, they’re often making a category mistake.

All you have to read is the paper on the Economics of a POW Camp to understand.  Each prisoner got the same ration (same “income”).  When there were totally free markets, a huge economy inside the camp exploded.  There were gains from trade.  As soon as a centralized authority intervened to fix prices, the economy cratered.

We have lost our way in America.  Maybe the folks at Jackson Hole should read the paper.