from the that-interest-isn't-special dept
The NY Times Magazine is running a well worth reading (if long) article on the question of what sort of efforts are needed by the government to help "save" the economy. While almost anyone (myself included) will find points worth quibbling about in the article, there's a lot of good points made that are worth reflecting on in more detail. The key point is understanding the difference between just creating more jobs in the short term and actually creating sustainable economic growth that will make it possible to pay off our debts in the future (and more).
As the article notes, if you just want to create jobs, you put people to work digging useless ditches. That creates jobs, but it does little else to stimulate the economy -- and, in fact, can do plenty to hinder future economic growth by inefficiently allocating resources. It's Bastiat's old Broken Window's Fallacy of inefficiently allocated resources. The problem, though, is that the folks who are most interested in making sure those resources are allocated inefficiently, are in the best position to make that happen. And that's incredibly dangerous. The article refers to Mancur Olson's theory of how stable and affluent nations decline and fall. The NY Time's summary is a good one:
Successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy's pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods.
While the article is right about trade barriers and tariffs, don't get hung up on just those. It applies in numerous other ways as well. The healthcare system (which the article discusses in great detail) is a disaster based on a series of rules and regulations that have inefficiently allocated healthcare resources. Our entire healthcare system is a ponzi scheme, of sorts, based on ignoring the very basic lessons of moral hazard -- where we've totally separated the actual costs from the actual payment for healthcare, and created a massively inefficient bubble that encourages
bad spending on the wrong things, rather than work towards keeping people healthy. Pile on top of that a bad patent policy that diverts massive funds from actual
healthcare into
drugs without recognizing that the two are not the same thing, and you have a massive problem that doesn't get solved overnight. And, of course, we're not even discussing policies that work hard to actually artificially limit healthcare providers...
But, while the article paints some positive pictures of some of what the new administration is doing (and saying) -- and I'm thrilled with what
some of the administration folks are talking about, there are way too many examples of things going in the other direction. We've already covered the broadband stimulus plan -- which really does look like a
huge gift to incumbent players. When pushed on that, Obama's transition guy, Blair Levin, defended it in exactly the way you'd worry about based on the above,
saying that the short term focus was on creating jobs, not solving the wider broadband question. The problem is that in creating those jobs in the short-run, they're likely harming overall economic growth in the long run.
Then there are additional things that are troubling, such as the decision to include
"buy American" clauses in the stimulus. This is the sort of thing that is often demanded by folks who have little understanding of economics, but plenty of understanding about how things appear politically. Buy American sounds good, but in this case it actually does plenty to harm the American economy -- as it did in
the last Great Depression. When the American producers are a lot less efficient, the end result is that we end up spending more and getting a lot less for our taxpayer dollars. That hinders growth (significantly, in some cases) and actually does plenty to damage the American economy. It also falsely boosts the incumbent providers bottom line (see above, again, about those special interests) and doesn't get them to adjust and adapt to the changing market in a timely fashion. Even worse, it often pushes other countries to retaliate in ways that make our economy even worse off. It's a terrible policy and it does significant harm to our economy.
I still remain unconvinced that a massive government spending plan is necessary, but given that's the route we're clearly going down, all our focus should be on making sure that the choices made within that stimulus package are not focused on protecting any particular industry or company, but in creating
platforms and
infrastructure that allow anyone to compete and contribute to economic growth. To date, there's little evidence that this is actually happening, and that's scary.
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