Last month I wrote of the disaster looming in the form of 1970′s style “stagflation” as a result of a continuation of the misguided Federal Reserve monetary policy of the past five years that has disregarded its first priority–the protection and stability of the value of the dollar. Now for the second leg of the looming disaster, one that is being formulated as I write by the “world’s greatest deliberative body”, the U. S. Senate, as it debates the economic stimulus plan written and advanced by the left wing of the majority party and inspired and enabled by the popularity of our new President.
Former George Bush aide Pete Wehner and Congressman Paul Ryan couldn’t have made it clearer for us in a recent op/ed: “We need to understand this new moment…………This will reshape, in deep and enduring ways, our nation’s historic sensibilities. It will lead here, as it has elsewhere, to passivity and dependence on the state. Such habits, once acquired, are hard to shake.”
We were given advance notice of these transforming intentions by President Obama’s Chief of Staff, Rahm Emanuel, when he said quite matter of factly, “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.” This is about as transparent as one can be.
In his inaugural address, President Obama was quick to depart from Ronald Reagan (“government is the problem”) and even Bill Clinton (“the era of big government is over”) with his assertion that “The question we ask today is not whether government is too big or too small, but whether it works.” He ignores one very big problem–government is never benign. At some level, whether successful in its immediate objectives or not, it brings unintended consequences and becomes tyrannical in terms of its coercive nature and its tendency to create dependency and sloth. Such is the new moment that Messrs. Wehner and Ryan admonish us to understand.
Andrew Gelman of Columbia University is further instructive on this point in outlining the futility of political direction of a complex organic economy: “The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple. It operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misguided incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.”
This is exactly what will happen with the plan currently under debate. An additional problem with this one, however, is that some of the worst consequences of the plan will not have been unintended by the perpetrators.
Recently, I revisited the 1978 classic, The Way the World Works, by the late Jude Wanniski. For those of you too young to remember, Wanniski’s work followed on that of Art Laffer and Robert Mundell in fully developing the theories of Jean-Baptiste Say into the supply-side economics that were the platform for the Reagan Revolution of the 1980′s and the Bush economic recovery of the mid-2000′s, the tax policies that are consistently dismissed by the left, as recently as this week by President Obama, as the “failed policies that got us here”. In response, we should forcefully remind these critics, as well as some who should naturally be more supportive of these principles, that supply-side fiscal policy, when combined with monetary policy that protects the value of the dollar, has worked every time it has been properly implemented because it relies on human nature and the power of marginal incentives to alter the functioning of the complex market systems that Gelman describes.
This is the only way out of this crisis of confidence. I don’t deny that the resources of government will be necessary to enable the recovery, particularly in shoring up the financial system. But the organizing principle should be, “do no harm”. And more government intervention and regulatory oversight is not and has never been the answer to such crises, nor is more Keynesian-style spending on make-work projects, nor targeted tax ”rebates” to non taxpayers. But Obama will get his stimulus bill in one form or another, because ”they won” and the great “moderates” we all admire will provide the deciding votes to win the day, but it will be a day that portends much worse news down the road, because global markets will not stand still while we experiment with Eurosocialism, American-style. There will be a larger price to pay later. Remember to understand this new moment.