Thoughts on economics and liberty

Category: Public policy

The Keynesians will bury the West

I normally don't comment on Australian policy, particularly where it is somewhat related to my official work. But in areas where my official role is not directly involved, I am able to comment without violating Conduct Rules. And so this post deals with Australian policy. I would like to remind everyone that my views are purely my own and do not represent the official entity that I work for.

Remember that I have commented adversely against the bailouts and stimulus packages in the USA (here). The so-called "stimulus" package in Australia has proved the same point point closer to home: that  Keynesians are the greatest enemies of the West, along with Rawlsian social "liberals" or social democrats.

With NOT THE SLIGHTEST CLUE about how governments actually work (never having worked in the 'trenches' perhaps, inside government), these economists rush in where angels fear to tread, borrowing money in the billions and then throwing it into the ditch. 

I had read a lot of Stiglitz's work as a doctoral student and to an extent he talks sense, but I soon realised that he is among the economists best avoided. I am now very clear that Keynesians of all sorts are dangerous ignoramuses, with absolutely no clue about human incentives and capacities. If only they had the slightest idea of how governments actually work. But they also have an ego the size of the dung on top of the dung beetle: always confident about their reckless "plans" for the economy. Socialists at heart, they are not bothered about things like individual freedom and the limits of a government's role. The whole society is theirs to experiment with, it would appear, with taxpayers' money. If money doesn't exist, they'll print it. 

The following article in The Age today is a breath of fresh air, putting out the key arguments against the reckless destruction of wealth and damage to incentives caused by Keynesians (and he has left out: the welfare socialists) to Australia.

Have a read: "ALP's knight is a thief in rusty armour" by Niall Ferguson

(I just visited Ferguson's website (here) and found a bunch of interesting articles such as "End of the Euro" – the end of which seems inevitable unless strong enforcement mechanisms are devised. The monetary union is turning out to be a cartel where penalties can't be enforced. Ferguson is an economic historian at Harvard – definitely worth reading more of his work.)

Key point from his article:

"Joseph Stiglitz … praised the government's debt splurge as "one of the best-designed Keynesian stimulus packages of any country"." "But is Stiglitz sure — I mean graduate-seminar sure, as opposed to Fairfax-press sure — that this was really due to the government's $52 billion cash splash?" 

(Clearly Stiglitz is imagining things, of that one can have not the slightest doubt).

The "more plausible explanations for Australia's relative outperformance" include: "1. Lady Luck 2. The Howard government 3. The RBA 4. China 5. The mining industry".

Indeed, I have argued at length on internal forums on FTI that Australia's financial system, reformed after the Wallis Review of 1997 (during the Howard government) significantly reformed the financial system and created checks and balances. There remain a few gaps which I believe can be eliminated without significant additional regulation but by better focusing of attention by the regulators.

There does exist a significant further phase of financial reform (for India but equally applicable to Australia – see DOF) which will include dissolution of the central bank and splitting its function into the private sector or independent regulators – as appropriate. Once that happens, all major risks to the financial system will be eliminated.

The government must ONLY regulate. It must NOT directly manage the financial system. And (in relation to the 'stimulus') while infrastructure funding is valid, reckless burning of tax-payer funds is not. 

ADDENDUM: 

Must read this related article: http://www.nytimes.com/2010/08/12/opinion/12poole.html?_r=1

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Misplaced environmentalism

I came across "The Economics of Ecosystems and Biodiversity Interim Report" by The Economics of Ecosystems and Biodiversity (TEEB) here, being highly recommended by some, and which apparently raises some fundamental questions.

However, as soon as I opened the report and came to the Preface (page 5) I found such absurd claims that I've shut the report and decided not to waste time on it further. 

1) "we find poverty and the loss of ecosystems and biodiversity to be inextricably intertwined."

False. Poverty is related to socialist governance everywhere in the world including absence of well-defined property rights. The loot of forests in India by the corrupt bureaucrats and ministers is related to poverty not directly but through the mechanism of bad governance. Lack of freedom is the ONLY perfect correlate of poverty. Societies without the rule of law and freedom suffer environmental degradation AND poverty. That is an iron law that can't be violated.

2) "The second issue is of ethics – risks, uncertainty, and discounting the future, issues which have also been raised in the Stern Review."

This is quite nonsensical. It is like asking the cave man to worry for our needs. We get wealthier over time. That rules out the idea of caring disproportionately for our future generations. If we take care of ourselves well enough, the future will look after itself. Ramsay was wrong. We must always focus on ourselves.

This is another form of the invisible hand: the more you look after your own self-interest the better the society becomes. 

Yes, by all means price externalities and care for the environment, but for that the Coase theorem, along with Pigovian taxes, should do us perfectly well. Standard economics is PERFECTLY capable of dealing with all environmental issues. 

I refer the writers of this report to Steven Landsburg's book, The Armchair Economist who points out numerous fundamental errors of environmentalists. I also refer the writers of this report to Julian Simon's The Ulimate Resource. And to my books.

ADDENDUM 14 August 2010
Comments from a fellow economist in red below) so I thought I'd deal with them in the main blog

On (1) – I reckon you're right, but the existence of one explanatory variable for poverty (bad governance) doesn't negate the existence of other explanatory variables. I highly doubt the correlation (beta coefficient) on the variable for environmental damage/depletion of natural capital would be zero. You might question causation – e.g. bad governance leads to excessive or premature depletion of natural capital.

My response: The most basic flaw with the econometric way of thinking is to start modelling without a theory. Science is a theory-based exercise, not an exercise of fitting the curve. There is no theory that leads directly from environmental damage to poverty. But there is a very strong theory that leads from lack of freedom, through bad governance, to BOTH environmental damage and poverty. Explanatory variables must be independent to rule out multicollinearity. In this case I can't see how the environmental damage variable is independent. Why is there environmental damage? That is the cause. And that is bad governance which, in turn, is predicted by the lack of freedom in society.

General comment: Economists are good at maximising the size of the cake and poor at splitting the cake (an equity issue – which we leave to politics). The same argument might extend to notions of 'sustainability' or 'inter-generation equity'. That said, we also understand that there is a difference between dynamic and static models – e.g. the idea of 'investment'. This suggests that economists can probably help define the amorphous concept of 'sustainability' (e.g. optimisation of consumption/investment over time). I imagine that even the cave man put a few morsels of mammoth meat aside for a rainy day (so to speak)… to last through winter…  or maybe even to feed its (unborn?) offspring. Another idea: future generations can not express their preferences in any present market (even where they exist). Is this a type of (inter-termporal) market failure which will mean society will more often than not get the inter-temporal optimisation 'wrong'? 

My response: I disagree that there is any equity issue in society. The ONLY equity issue is that of deep poverty. And that means a social minimum provided for through the social insurance program. The need for such insurance has dropped significantly in the West but these societies are now on a ruinous path because they want a welfare state (semi-socialist), thus destroying all incentives to work and to gain skills. Equity is a productivity demolishing concept, if used in any sense beyond the social minimum.

Let me explain the inter-generational issue thus: If I care for the environment, it is incumbent on me to take care of it during my lifetime, so I gain its benefits. That is why the economist insists on resolving negative externalities TODAY, for the current generation. If I am able to ensure a good clean environment today for myself, then would it not be tautological that a good clean environment would be passed on to my kids? So by taking care of MYSELF I take care of my kids. That is how the Ramsay problem is solved. By becoming rich I provide better for my kids. By ensuring a clean environment today, I ensure a clean environment for my kids. Let us take care of OURSELVES and our kids will find it easier to take care of themselves. Let us generate knowledge, let us generate wealth, let us do the right thing for the environment. That's all that is needed – or expected of us. Any other conception is misguided. In DOF I explain this at length. It is called enlightened self-interest.

In any event, the best way to conserve the environment is to apply classical economic theories and either ensure that the offender internalises the externality, or where possible, property rights enable the relevant parties to negotiate an outcome (Coase solution). I'm not arguing against regulatory standards in this area, but I'm arguing for restraint and good cost-benefit analyses.   

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Socialist USA: lessons for the world

Nicole Gelinas's article in City Journal is an absolute must-read. The gist of this long but well-argued article is this:

"Over the two decades leading up to 2008, financial markets were anything but free. The nuts-and-bolts government infrastructure that free markets require to thrive—healthy fear of failure, respect for the rule of law, and fair rules for everyone—was crumbling. The crisis books make clear, too, that Washington’s extraordinary rescues of Wall Street have eroded much of what’s left of free-market infrastructure in finance. Worse, Congress’s efforts to reform the industry will do yet more damage. The next time the financial world implodes, it will hurt the economy even more severely."

This article entirely confirms my views published in Freedom First  in January 2009. It is obvious that the USA is no longer the kind of society that the world can look up to. The freedoms of its citizens are on the back foot. It has aped the worst of Europe (welfare state) and the Keynesians have destroyed all semblance of economic sense. Their simplistic arguments (that display ZERO understanding of human incentives and human nature) have created massive amounts of moral hazard in the American monetary and financial systems, education and welfare systems,  and soon its health system. People like Greenspan, whom Ayn Rand at one time regarded highly as a votary of freedom, have bent over backwards to destroy freedom. The free market is almost dead. The heavy hand of the stupid gorilla – the state – now controls the levers of the American economy. 

What are the lessons from this for India? – That socialism is a dangerously attractive but guaranteed to be fatal mental disease. Even America, the great bastion of freedom, could not avoid this mental disease. It is therefore hurtling downwards into ignominy: and in the next 50 years if India and China become genuinely free, the power of the USA would be history. It is not Osama who has destroyed USA. It is Keynes; it is Rawls; it is the soft-touch American 'liberals' (not classical liberals like Hayek who no one listens to in America).

Each bout of 'saving' those who are too big to fail – by stealing from the tax payer – creates a guaranteed Ponzi game where even greater risks are taken. Finally, when the day of reckoning comes (and it always does come), the Emperor is found to have no clothes.

India was denuded by Nehru. The Keynesians and Rawlsians  have denuded the once great USA. A hollow shell remains. Images from Detroit reflect the end of America as  the once great nation of the past 200 years. Socialist ideal are ruinous beyond imagination. The most dangerous poison the human mind can create. If India has been a C-rated  economy for most of the past 60 years (on a sovereign risk scale of the S&P variety), USA has now clearly fallen from A to B. If India manages to follow some of the advice in BFN and gets its house in order in the next 10 years, and USA continues its downhill journey, then expect the tables to be easily reversed in the next 30 years. 

There is only ONE LESSON in economics: that there is no free lunch. Period. If you have  understood this lesson (and the subsidiary lesson of accountability – that I talk about at length in BFN and DOF) then you are done. Then you can govern and never fail. 

Reference

GELINAS, NICOLE, "Surveying the Wreckage: What can we learn from the top books on the financial crisis?", City Journal, Summer 2010, Vol. 20. No. 3.

ADDENDUM. The social security debacle in USA

http://www.economics21.org/commentary/fairly-understanding-simpson-bowles-social-security-proposal

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Why RTI is NOT the solution to India’s problems

I was having a conversation with someone by email, and clarified why RTI is not good enough, thus:

=====

Dear Mr XX

I thoroughly commend your work on RTI. That's something I've commended heartily wherever I could. I am 100% committed to this approach. So that's well and good.

But now let me suggest just one thing to you: RTI is (metaphorically) like applying a small water filter to remove muck from a wide and deep, dirty nullah that flows from the Himalayas. The TOP of India's leadership is the source of this dirty nullah that now irrigates the entire nation. You can do three things:

a) Drink dirty water

b) Leave India and go to a place with clean water

c) Filter the water and then drink (e.g.RTI)

d) Remove the SOURCE of dirty water.

I prefer (d). If that doesn't work, I'm 100% committed to (b). I am not interested in (a) or (c), although I strongly commend (c) rather than (a).

India's problems are VERY EASY to solve once the people are determined to solve them. Then they will rise and lead. There needs to be clarity on the path (strategy), the process (tactics), the outcome (the vision). Once that is there, nothing will prevent the source of this dirt from being removed and buried permanently, the ultimate cause of this muck being Nehruvian socialism.

Regards

Sanjeev

===ADDENDUM===

In my usual tearing hurry while writing most emails, I think I mixed the order of things. It ought to be:

a) Drink dirty water

b) Filter the water and then drink (e.g.RTI)

c) Remove the SOURCE of dirty water (or try desperately hard to do so).

d) Leave India and go to a place with clean water.

This order would be more consistent with my views in DOF, where exit comes last. Note that I have spent considerable effort in doing (c) and hence am mentally ready to permanently leave India (d). Just one more attempt – through FTI. If Indians want a good decent society, I'll put my shoulders to the task. Else I'm permanently out. First priority MUST BE ONESELF AND FAMILY. At all times.

Addendum

http://www.indianexpress.com/news/rti-not-a-tool-for-oppressing-public-officials-sc/832395/

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