Presidents
Can't Manage the Economy
By John Stossel
The presidential candidates have been repeatedly asked how they would "manage the economy." With the exception
of Ron Paul, every candidate has accepted the premise that this is something the president of the United States should do.
Or can do.
Nonsense.
Democrats act like the president is national economic manager. Republicans pay lip
service to free markets, tax and spending cuts, and less regulation -- before proposing big programs to achieve "energy
independence," job training and a cooler climate.
John McCain says it's important for government to do something "to sustain our leadership in manufacturing". Why? Manufacturing
jobs are no better for America than other jobs. Some argue that they are worse. How many parents want their children to work
in factories rather than offices? Increasing service jobs in medical, financial and computer sectors while importing manufactured
goods doesn't hurt America. It helps America.
The candidates see the global economy as an arena in which countries
compete against one another -- an economic Olympiad with winners and losers. Politicians love to promise they will keep America
No. 1, as if that matters in a worldwide marketplace.
America as a nation does not compete against China or South Korea
or Japan. American companies compete against companies in other countries, but that's something else. The purpose of production
is consumption, and American consumers prosper when foreigners compete successfully with American companies.
A president
who sees the global economy as a competition among nations will be tempted to intervene on behalf of the "United States"
and create "good American jobs." That's how governments mess up economies.
McCain says, "It is government's job to help workers get the education and training they need for the new jobs". Mike Huckabee (who glories in public-works projects as a job-creation machine) and Barack Obama talk in similar terms.
That hardly shows confidence in the free market, which, if allowed, would train and educate
workers just fine. But it shows misplaced confidence in the federal government, which, as journalist Jim Bovard has shown,
has an unbelievably bad track record at doing it. The endless list of programs, like the Manpower Development and Training Administration, Comprehensive Employment and Training Act, Job Training
Partnership Act, STIP, BEST, YIEPP, YACC, SCSEP, HIRE, etc., wasted billions and "distorted people's lives and careers
by making false promises, leading them to believe that a year or two in this or that program was the key to the future. ...
Federal training programs have tended to place people in low-paying jobs, if trainees got jobs at all.".
Sen. Hillary
Clinton told The New York Times recently, "I want to get back to the appropriate balance of power between government and the market.
... You try to find common ground, insofar as possible. But if you really believe you have to manage the economy, you have
to stake a lot of your presidency on it."
Notice that she equates government power and market power. That is absurd.
"Power" in a free market means success at creating goods and services that your fellow human beings voluntarily
choose to buy. Government power is force: the ability to fine and imprison people.
Politicians who talk about managing
the economy ignore the fact that, strictly speaking, there is no economy. There are only people producing, buying and selling
goods and services. Keep that in mind, and one realizes that government action more often than not interferes with the productive
activities that benefit everyone. When politicians propose regulations to fix some problem, they should ask if some earlier
intervention created the problem and if the new regulations will make things worse. The answer to both questions is usually
yes.
The economy is far too complex for any president -- no matter how smart -- to manage. How can politicians and bureaucrats
possibly know what hundreds of millions of individuals know, want and aspire to? How can government employees fathom what
trade-offs to make in a world of scarce resources?
They can't. That's why free people are more prosperous than
unfree people.
Presidential candidates should promise to keep their hands off the economy.
Roger Meiners
is a professor of law and economics at the University of Texas-Arlington and senior associate at the Political Economy Research
Center.
As F. A. Hayek explained in his introduction to The Road to Serfdom, a half-century ago the future
of the world was bleak. Most economists believed in some form of state control of the methods of production, and more importantly,
the rise and spread of fascism, communism, and other statist ideologies meant the loss of freedom and destruction of wealth.
Today,
however, even many people who do not trust markets admit that they work better than state control of production. Economic
analysis played a role in this victory (which was amply validated by evidence of what happens under state control). Unlike
30 years ago, when the virtues of state-controlled production were commonly preached, such sermons are now relegated to the
Universities of Havana and Pyongyang and uttered by a few intellectually senile academics here.
But despite this victory
for economic analysis, it has not penetrated as far in analyzing how government operates. Fred Mc-Chesney, a professor of
law and economics at Cornell, has written an excellent book that enhances our understanding of the political economy of government.
Money for Nothing neatly summarizes (in 170 pages of text plus 43 pages of notes and references) the research in
the past 30 years (in which McChesney has played a key role) about “rent-seeking” and “rent extraction.”
“Rent”
is an economist’s term that refers “to returns to the owner of an asset in excess of the level of returns necessary
for him to continue using the asset in its current employment.” Rent-seeking is the process of attempting to obtain
rents by manipulating the political process to grab the wealth generated or owned by another. For example, environmental groups
commonly pressure legislatures or regulatory bodies to reassign property rights in a way that reduces the wealth of property
owners while advancing the groups’ own goals (such as additional habitat for spotted owls). This is a nonmarket, but
legal, transfer of wealth.
Paul’s desire to have the state rob Peter and give the money to Paul (rent-seeking)
is well understood. Less understood is rent extraction, which is the receipt of payments in return for a promise
not to take or destroy private wealth, in other words, extortion. Private rent extraction, such as a Mafia protection
racket, exists, but is trivial (and illegal) compared to public-sector rent extraction.
Legislators have nearly unlimited
constitutional powers to impose taxes and regulations that reduce or destroy the wealth of a business. Politicians can, therefore,
extract rent from owners in exchange for not imposing destructive taxes or regulations (political extortion). Peter will be
willing to pay something not to be robbed.
Who is the key player in the political protection market? The politician.
A politician is a political entrepreneur with the legal authority to bestow favors on Peter or Paul. Exercising such power
has, in recent decades, become the primary role of government. Productive functions of government—such as law enforcement
and national defense—take a small fraction of government resources; most government now involves wealth redistribution
via taxing and entitlement schemes, or regulations that favor certain firms at the expense of consumers and other firms.
McChesney’s
book provides a readable and nontechnical explanation of the theory and practice of our political economy. His particular
contribution to this literature is his work on politicians as entrepreneurs who manage the process that allows them to be
“paid not to legislate—money for nothing.”
There is already a large literature about politicians transferring
wealth to win political support. McChesney has expanded our understanding of the extent of the politicians’ damage done
by focusing on how they can extract rents for themselves by promising to abstain from that activity.
His book is filled
with stories of the kinds that will show ordinary citizens that politics is dominated by special interests. But as Mc-Chesney
explains, politicians do not wait passively for rent-seekers to come to them with proposals. Politicians actively exploit
the process, such as by giving taxpayer dollars to so-called “consumer groups” that request ever-more regulation
at hearings run by the same members of Congress. That provides a rationale for members of Congress to threaten new regulations
unless industry mounts makes the appropriate effort (by PACs, etc.) to “convince” Congress of the “wisdom”
of not acting.
The politicians cannot lose. The losers are citizens who see their freedoms and wealth consistently chiseled
away by those who have developed the finest skills for getting money for nothing. Given the massive and expanding scope of
government, McChesney’s book is an important part of a comprehensive economic education.
Freedom, Not Growth
by Sheldon Richman, August 1996
All politicians favor economic growth. They all promise to create jobs and "grow
the economy." That is a vintage Republican issue, but the Democrats aren't dummies. Many of them have learned that
the old appeal to class warfare and other quasi-Marxist themes are passé. They too have thrown themselves onto the
growth bandwagon. Bill Clinton's so-called New Democrats can take credit for grafting the rhetoric of growth to the policies
of big government. Hence, Clinton can both declare that "the era of big government is over" and propose an increase
in the minimum wage and myriad other interventions in the economy. This
may come as a shock to Republicans and Democrats alike, but growth should be of no concern to the government. The idea that
the state is the steward of the economy is an intrinsically statist idea. In no way can it be squared with free markets. Growth
rhetoric, regardless of the intentions of those who use it, will ultimately serve the interests of statists. It is poison,
and however sweet its aroma, advocates of freedom must keep from it.
State stewardship of the economy
is an old idea. But the theory came into prominence after World War II, thanks to John Maynard Keynes. It was he who wrote
during the Great Depression that the market economy can get stuck in a rut, with high unemployment and low investment. Keynes
said that, like a car in the mud, the economy may not be able to recover under its own power and would therefore need a push
by the state's central bankers and fiscal officers.
To the uninformed, the persistence of the
Depression seemed to support Keynes. People thought America had a free market before the Depression. They also thought Herbert
Hoover had pursued a policy of laissez-faire. Thus, many people were open to Keynes's views. In truth, those beliefs were
wrong.
The reality of the 1930s did not confirm Keynes's observations; rather it vindicated Ludwig
von Mises and F.A. Hayek, the Austrian-school economists who showed how governments create and perpetuate recessions and depressions
through their monetary policies.
Nevertheless, the Keynesian view triumphed. There were some key reasons
for that. Politicians obviously preferred Keynes's to Mises's worldview because it was conducive to the exercise of
political power. (The Austrian approach doesn't leave much for politicians to do except keep the peace.)
Moreover,
World War II, like World War I, gave American policymakers a chance to exercise that power. In the name of the war effort,
the federal government effectively nationalized the U.S. economy. (The prewar New Deal had already gone far in that direction.)
The planners worried that when the war was over, Americans might demand a retrenchment of government. Because of the economic
fallacies they held, they also believed that America would slip back into depression unless government stayed at the helm.
Those things could not be permitted to happen. Keynesianism provided an ideology to justify continued intervention. As Robert
Higgs wrote in his great book, Crisis and Leviathan , after each of America's wars, the size and scope of government
remained larger than their prewar levels. That "ratchet" effect accounts for much of the government's growth
throughout our history. (Higgs has also shown, contrary to legend, that the war did not lift the U.S. economy out of the Depression.
War cannot accomplish anything so constructive.)
The upshot is that after the war, many Americans
believed that the federal government had to play a large role in managing the economy. They bought the economists' wrongheaded
idea that the economy is a huge machine requiring a central operator, rather than a process comprising billions of daily decisions
and transactions by individuals pursuing their own objectives. Without the government's pulling the levers, so they thought,
unemployment and stagnation would be the rule. So the postwar Congress gave the president various tools to carry out that
role. For example, the Council of Economic Advisers was created.
The 1950s was a time of economic
growth because people had saved during the war (there was little to buy) and afterwards that savings were available for investment.
But the new prosperity coincided with the economists' and politicians' talk about government stewardship. Many thus
concluded that the prosperity had resulted from the government's policies. The politicians were all too ready to take
credit. The commitment to activist government accelerated in the 1960s.
The real effect of the policies
caught up with the economy in the late 1970s, when the term "stagflation" was coined to describe what was impossible
in Keynes's scheme: inflation and high unemployment. In response to stagflation, the growth school, in particular supply-side
economics, was born. That school preached that the government needed a new strategy to guarantee prosperity. The school's
policies called for some reduction in government power: the supply-siders are best known for wanting to cut marginal tax rates.
They also talked about reducing regulation.
Those policies were fine, as far as they went. But there
were two problems. First, they didn't go far enough. Many supply-siders, using Arthur Laffer's famous curve, talked
as though their main objective was to maximize government revenues. They left the impression that high marginal rates are
bad not only because they are a drag on growth but also because they reduce the tax take. The presumed optimal point along
the Laffer curve is where the government's revenue is highest. The question the supply-siders never satisfactorily answered
is why would we want to maximize tax revenues. As the late Murray Rothbard repeatedly pointed out, every dollar taken out
of private hands is one less dollar available for satisfying consumers. (Contrast that with Clinton economic adviser Laura
Tyson, who says that every dollar in tax reduction is a dollar taken out of the economy!)
But
there is a more fundamental problem with the growth school: despite its devotion to cutting tax rates, its language is still
the language of government stewardship. The government is supposed to choose policies according to what will "grow the
economy." While that orientation might lead to good polices sometimes, it still reinforces the idea that the government
is responsible for economic growth. In Ronald Reagan's, George Bush's, and Bill Clinton's hands, it has meant,
for example, muscling the Japanese government into forcing private firms to buy more American-made automobiles and computer
chips; that is, it has led to managed trade. It has also encouraged Republicans and Democrats to sponsor government job-training
programs.
In the 1980s, the Heritage Foundation, in an attempt to counter Ralph Nader's antibusiness
crusades, tried to launch an annual event called "Growth Day." Fortunately, it didn't catch on. Back then, Richard
Wilcke, president of a pro-laissez-faire organization called the Council for a Competitive Economy (for which I worked), had
the right reaction to "Growth Day." He opposed it and suggested "Freedom Day" instead.
And
that's the point. Wilcke was keeping his eye on the ball. Too many conservatives fail to do that. Follow them, and we
will surely fail. If the focus of politics is on freedom rather than on economic growth, we will get economic growth. But
if the focus is economic growth rather than freedom, we won't get freedom. Freedom will beget economic growth because
most people want a rising standard of living for themselves and their children. It is possible that a preponderance of free
people will choose austerity over prosperity (some do now), and that is their right. But that is not likely. We have enough
experience to foresee that most people will pursue prosperity.
The politics of growth and the politics
of freedom are different. What's more, the language of growth and the language of freedom are different. If we hope to
change the terms of debate in this country, we must actually change the terms . The language of growth will always
imply government activism. The language of freedom will always imply government retrenchment. We should never assent to terms
that intimate that government can create jobs or produce prosperity. We should always refer to government as an impediment
to those activities. No one put it better than Henry David Thoreau in his essay "Civil Disobedience." "This
government never furthered any enterprise," Thoreau wrote, "but by the alacrity with which it got out of the way."
What better slogan for the advocate of liberty?
Mr. Richman is vice president
of policy affairs at The Future of Freedom Foundation and the author of Separating School & State: How to Liberate America's
Families , published by The Future of Freedom Foundation.
