The Illusion of Knowledge

~ "A little learning is a dang'rous thing; Drink deep, or taste not the Pierian spring: There shallow draughts intoxicate the brain, And drinking largely sobers us again.” --Alexander Pope, An Essay on Criticism

The Illusion of Knowledge

Monthly Archives: November 2011

Chastity and Continence, But Not Yet

23 Wednesday Nov 2011

Posted by Milton in Uncategorized

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St. Augustine once wrote: “Give me chastity and continence, but not yet.” This would seem to sum up, quite nicely, the arguments that have poured forth from the economic left in support of more deficit spending. Robert H. Frank, self-described “deficit hawk” writing in The Daily Beast on July 21, stated “I believe we need to start paying down the mountain of debt the federal government has been running up. But not now, not as we continue to struggle to emerge from the deepest downturn since the Great Depression. Cutting spending now is the very last thing we should do.” In other words, let’s all be celibate – right after the fiscal orgy.

Leaving aside the manifest problems with the Keynesian assumption of the multiplier effect, the problem with this line of reasoning is that it exists in a fantasy world of government rationality and singularity of purpose, neither of which can be verified or empirically observed for any length of time. Perhaps if one could guarantee that the government, once the current crisis is over, would turn to cutting the budget and implementing fiscal responsibility then one should favor government spending in the short-term (again, assuming the Keynesian view of the world is accurate, for which there is quite a lot of theoretical and modeling evidence but far less empirical evidence). The problem, however, is that there is no such guarantee and there can never be one.

In truth, our government is not a single entity with a CEO who can order the entire organization to turn about on a strategic dime and reverse policies. We have a President and Congress that often have conflicting goals, as well as binding laws which structurally both limit the options available to the current government and encourage fiscal irresponsibility. Every politician has multiple goals, the first of which is to get elected, followed by implementing favored policies, helping constituents, promoting American interests and getting re-elected. (I am assuming here that our elected officials believe in serving the national interest, not always a reasonable premise). These are omnipresent concerns that will not end with the conclusion of the fiscal crisis.

Following the liberal plan to spend more money, we will be left with a mountain of debt that must be repaid. The money to do this can come from one or a combination of four sources. First, we could see rapid growth in the economy. This is largely what brought us prosperity in the 1990s. It’s an ideal solution, but should we formulate our fiscal strategy around assuming it will occur? Second, we can raise taxes. Raising taxes will reduce our overall economic output and will have to be levied on the middle class since there is no way taxing “the rich” could feasibly pay for all of the debts we are incurring. Third, we can inflate our currency, thereby hurting people who are fiscally responsible and save their money for retirement. Fourth, we can make some hard choice and cut entitlement spending. Who wants to bet on Congress making hard choices in the future and voluntarily reducing spending before there is absolutely no other option (a la Greece)? (For further illumination in this area, see “Supercommitte”). What’s more, since we have the ability to inflate our currency, unlike Greece, what do you want to bet that Congress holds out even past the point of no other option and simply forces the Fed to do the dirty work by fait accompli?

The view of the deficit (what to call them… whales?) is that, whatever the damage and pain inflicted today is, it can be reversed through wise and prudent policies in the future. This may work in computer simulations and in economics equations, but it is a political fantasy. Congress always talks about fiscal restraint and responsibility, and it is always going to happen in the future. Now is never the right time. When times are bad we simply must spend to get out of the recession. When times are good and there is plenty of money to pay for everything, why would we cut spending?

Any deficit whale that wants to make the case for massive amounts of upfront spending first must acknowledge the credibility problem inherent in believing that future government actions will conform to optimal economic assumptions and scenarios. The failure to acknowledge – and therefore plan for – this fact eviscerates all of the whales’ credibility. While Frank or Krugman are only too happy to point out the pain that may be caused in the short-term by foregoing massive stimulus spending, they are silent as to a workable plan for returning to fiscal responsibility in the future that has any connection to reality.

What is even more appalling is that the structural transformation that the country is currently undergoing means that even if there was a political will to do something in the future, it still may not be possible to fix our problems. States like California are finding this out the hard way. They entered into long-term contracts & commitments that were cheap at the time but with exorbitant back-end payments (such as bloated pensions) and now the courts are ruling that the states have no right to abridge their contractual obligations. While the federal government may have more ability to modify its commitments than the individual states, courts have often restrained federal action when it comes to entitlements. More importantly, even if the federal government has the authority to abrogate the promises it makes today at a later date, is it ethical to make such promises today knowing that there is a significant chance that they will be broken at a later date because of irresponsible actions taken now?

The deficit whales need a better argument, one that bridges the chasm between theoretical economics and economic policies made within the political context. (Again, I am granting them the assumption that their economic analysis is correct). One of the great virtues of Milton Friedman was that he married reality to his economic theories and understood that government structures make implementing what, in the abstract, might be the ideal choice a very difficult, if not impossible task. Calling for more spending today and ignoring the political reality of tomorrow solves nothing.

Barking Cats

22 Tuesday Nov 2011

Posted by Milton in Uncategorized

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In 1973, Milton Friedman wrote a letter which is, quite possibly, one of the best pieces of prose ever written about government and its limits. (You can find the letter here: http://www.johnlatour.com/barking_cats.htm).

What Friedman lays bare, quite nicely, is the liberal fallacy that the main problems of government exist because there is a deficit of good people in power. This notion gives rise to the fundamental belief that to fix the problems of the world, all we need to do is find the right “good” people who are intelligent, wise and selfless and who will take the appropriate steps in furtherance of the best interests of all the people. It is a comforting thought, because it means that we are in control of our destiny and we need only to tweak the machinery to get it right. The alternative, the reality, is much bleaker, even if it is true, and there is a tendency for many people not to want to acknowledge it. The reality is, as Friedman put it, that there are laws to bureaucratic systems and organizations in the same way there are laws of nature, and they are not easily fixed by changing those in power. It is the system itself which prevents the effective implementation of many good ideas. Centralization fails not because people aren’t good or intelligent, but because it is simply not possible for centralized bureaucratic institutions to be intelligent enough or wise enough to make decisions for hundreds of millions of people. The power and insight of decentralized decision making by the many is simply so much greater than that of a centralized power that they do not even compare. That is why free markets work and planned economies do not.

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