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Capitalism, Government, and the Good Society Commentary

October 4, 2013

On April 10, 2013, Liberty Fund and Butler University sponsored a symposium, “Capitalism, Government, and the Good Society.” The evening began with solo presentations by the three participants–Michael Munger of Duke University, Robert Skidelsky of the University of Warwick, and Richard Epstein of New York University. (Travel complications forced the fourth invited participant, James Galbraith of the University of Texas, to cancel.) Each speaker gave his own interpretation of the appropriate role for government in the economy and in our lives.”

Mike Munger spent his time telling funny stories and addressing the students in the audience rather than his fellow guests. While Munger is a highly entertaining and informative speaker, he didn’t grapple with the core issues Skidelsky and Epstein were debating. The debate badly needed a market monetarist. I don’t think adding Galbraith would have done much good other than giving Skidelsky someone to agree with, but Skidelsky held his own without any trouble.

What is more important: Good micro or good macro?
Skidelsky took the position of the majority of mainstream economists that it is better to worry about macro policy first during a crisis and Epstein advocated focusing on making sure micro policy is improved. Epstein took the position that it is better to ignore macro stability and focus on improving regulation and reducing transactions costs to hiring and firing workers.

Advantages/Disadvantages of focusing on Macro:
– Macro is faster acting. The Fed can crank out money quickly, and Congress can pass a stimulus bill far faster than several industries can be reformed or tax codes can be rewritten. Even after bills are passed, it takes time for companies and workers to find the new equilibrium. Asset prices may adjust quickly, but stocks of capital and contracts will not. Monetary stimulus will have its full impact within weeks and fiscal stimulus within months, but micro reforms take years.

– Macro doesn’t have to confront special interest groups (as much). While there are those who oppose inflation, the central bank is usually effective at obfuscating their actions and displacing blame for the consequences for those actions; Congress even more so. It never occurs to most pundits that fiscal stimulus could even be a cause of inflation. Inflation opponents face the Olsonian problem of collective action – the benefits of low inflation are dispersed and uncoordinated. The beneficiaries of “opportunistic disinflation”, the temporary deflation which occurs in recessions, even more so.

– Economists/politicians disagree on what constitutes good macro policy, especially in a crisis. This debate has been raging for 100 years at least and shows no signs of abating. Some economists want higher inflation, some want lower inflation, and some believe the central bank can’t control inflation at all during recessions. Some think macro policy should target unemployment, NGDP, wages, financial stability, asset values, or many other variables (all mutually exclusive, of course). Technically, the law tells the Fed to target price stability and unemployment, but it is so vague that no matter what the Fed does, they can justify their actions.

– Economists widely agree on what constitutes good micro policy. While the minimum wage is somewhat controversial, all economists are against artificial monopolies, trade barriers, corruption, and red tape.

– Culturally and politically, macro feels more active and daring than monetary policy. When politicians say they want to “do something”, they mean fiscal stimulus, and maybe monetary stimulus, although most of them haven’t the first clue how monetary policy works. They never mean micro reforms, and may even mean anti-micro reforms such as raising the minimum wage, increasing monopoly power, and payouts to politically favored firms.

– Macro responses are a short run fix to potentially long run problem, whereas micro policy improves long run prospects.

The Speaker’s Positions
Skidelsky represents a very common perspective in the economics profession that favors macro, and Epstein’s position is not too uncommon, but both are light-years away from the consensus in the political realm. Most economists, even very free market ones, agree that wages are sticky in a recession. That suggests to me that having lower inflation or outright deflation during recessions is harmful. However, listen to any Congressional hearing on monetary policy and the loudest voices will always be calling for more deflation. Bernanke has been pushed hard the whole crisis toward less expansionary policy than he’d like, despite record low inflation levels. Epstein’s position of improving micro regulation is laughable politically. The worst laws from a microeconomics perspective have always been passed in the midst of a crisis. When the economy is doing well, politicians pass free trade laws, reduce corruption, reduce regulation, and lower corporate transactions costs, but when times are already tough, they pile on layers of complex regulation, higher taxes, barriers to entry, rent seeking payments to their favorite corporate backers, and reduced trade.

The economic consensus is that recessions should be accompanied by higher inflation and better micro policy, the political consensus stands in direct opposition to both. That is the real divide. Deciding which of the policies which economists agree on should be implemented first is useless when neither of them are implementable in reality.

Would capitalism’s inequality and instability cause it to destroy itself?
Economists sometimes treat political feasibility as an afterthought. At some points in his career, Hayek did, and I think Epstein came off as sounding that way at a few points in the debate. You can’t just ignore the politics. Economists ignoring politics is just as dumb as a engineers ignoring weight (or physicists ignoring friction for that matter). Maybe you can do it at some points in your analysis, but if you get to the end and it’s still not there, you’ve screwed up. If capitalism causes instability and if that instability results in the political destruction of the capitalist system, then capitalism must be modified to make it more palatable.

As history has shown, capitalist economies can be quite unstable. I’ve heard it said that America will always have fiat currency because politicians will never give up that much power. Individual European countries gave up their own fiat currencies, although it didn’t do them much good. No matter what you think the source of capitalist instability is, it doesn’t seem to be going away anytime soon. The question is “does a welfare state make it better?”. Skidelski was on the “yes” side, and Epstein was on the “people should just suck it up and deal with the instability” side. There wasn’t anyone on the “no” side.

I’ve been reading Stephen Pinker’s “Better Angels of Our Nature” which is good, but getting repetitive. It seems to suggest that poverty and inequality don’t cause revolution or war. There have been many poor countries which weren’t warlike, and there have been many unequal countries which have gone a long time between revolutions. Even when countries do suffer through revolutions, mostly one group of elites simply replaces another group of elites and the inequality remains. Even Communist revolutions produced virtually no change in inequality, and China and Russia are some of the most unequal countries in the world today.

The “Devil take the hindmost” attitude strikes me as tone deaf to the losers of capitalism. Empirically, I don’t think inequality or poverty necessarily results in violence, however, that doesn’t imply that it’s not a big deal. Personally, I think that if a welfare program increases the political palatability of a more free market oriented economy, so be it. Libertarians and economists don’t have the political power to unilaterally say let them eat cake, so any reforms we propose should include safeguards to ensure they will be able to survive the fickle winds of politics.

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