Obama’s Fatal Conceit

Thom Lambert —  21 September 2011

From the beginning of his presidency, I’ve wanted President Obama to succeed.  He was my professor in law school, and while I frequently disagreed with his take on things, I liked him very much. 

On the eve of his inauguration, I wrote on TOTM that I hoped he would spend some time meditating on Hayek’s The Use of Knowledge in Society.  That article explains that the information required to allocate resources to their highest and best ends, and thereby maximize social welfare, is never given to any one mind but is instead dispersed widely to a great many “men on the spot.”  I worried that combining Mr. Obama’s native intelligence with the celebrity status he attained during the presidential campaign would create the sort of “unwise” leader described in Plato’s Apology:

I thought that he appeared wise to many people and especially to himself, but he was not. I then tried to show him that he thought himself wise, but that he was not. As a result, he came to dislike me, and so did many of the bystanders. So I withdrew and thought to myself: “I am wiser than this man; it is likely that neither of us knows anything worthwhile, but he thinks he knows something when he does not, whereas when I do not know, neither do I think I know; so I am likely to be wiser than he to this small extent, that I do not think I know what I do not know.”

I have now become convinced that President Obama’s biggest problem is that he believes — wrongly — that he (or his people) know better how to allocate resources than do the many millions of “men and women on the spot.”  This is the thing that keeps our very smart President from being a wise President.  It is killing economic expansion in this country, and it may well render him a one-term President.  It is, quite literally, a fatal conceit.

Put aside for a minute the first stimulus, the central planning in the health care legislation and Dodd-Frank, and the many recent instances of industrial policy (e.g., Solyndra).  Focus instead on just the latest proposal from our President.  He is insisting that Congress pass legislation (“Pass this bill!”) that directs a half-trillion dollars to ends he deems most valuable (e.g., employment of public school teachers and first responders, municipal infrastructure projects).  And he proposes to take those dollars from wealthier Americans by, among other things, limiting deductions for charitable giving, taxing interest on municipal bonds, and raising tax rates on investment income (via the “Buffet rule”).

Do you see what’s happening here?  The President is proposing to penalize private investment (where the investors themselves decide which projects deserve their money) in order to fund government investment.  He proposes to penalize charitable giving (where the givers themselves get to choose their beneficiaries) in order to fund government outlays to the needy.  He calls for impairing municipalities’ funding advantage (which permits them to raise money cheaply to fund the projects they deem most worthy) in order to fund municipal projects that the federal government deems worthy of funding.  (More on that here — and note that I agree with Golub that we should ditch the deduction for muni bond interest as part of a broader tax reform.)

In short, the President has wholly disregarded Hayek’s central point:  He believes that he and his people know better than the men and women on the spot how to allocate productive resources.  That conceit renders a very smart man very unwise.  Solyndra, I fear, is just the beginning.

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

71 responses to Obama’s Fatal Conceit

  1. 
    Observer125@aol.com 5 October 2011 at 6:25 am

    John Kay has an excellent new essay at the following link, including a very useful discussion of the falseness of the Ricardian Equivalence, not that clear thinking matters here

    http://ineteconomics.org/sites/inet.civicactions.net/files/kay-john-state-of-economics-v11.pdf

  2. 

    Observer,
    Impressive. But, an oligarch would never knowingly discuss their history, status or worldwide monetary intentions with the likes of me,and couldn’t be bothered with ramblings of the masses on internet blogs.

    • 

      my private jet flights across several time zones, but into and out of the US, are very boring now due to stepped up enforcement of the Mann Act (following the Tiger Woods mess). My comments on this blog are for the bloggers, not readers

      just want them to know that they teach because they cannot do

  3. 

    So, Observer. you’re arguing that there is a moral, financial and functional equivalence in being told that you can’t become the head of a single corporation because your name isn’t Murdoch or Sulzburger and being told that you can’t practice your profession at all, even at an entry level. To hold that position you have to be as contemptuous of the average American as President Obama is.

    My apologies, Observer, but someone holding that position really isn’t worth having a conversation with. SIgning off.

    • 

      Mr. Berner:

      I absolutely believe there is a a moral, financial and functional equivalence between the two. If anything, there are unions in America where the value of the membership was created through extraordinary risk. Go read about the Pinkerton guard with machine guns during the various coal mining strikes, especially before WWII

      As your friends have learned, being in a union is a very valuable right. What time, energy or effort did they put into the creation of that right? They are the kinds of free loaders you accuse welfare recipients of being, wanting something for nothing.

      Passing down a union membership is not different than passing down ownership of shares in Fox.

    • 

      Hey all you Hayekers

      How does it feel to learn that he was a bought and paid PR flack for the Kochs, who even urged him to take Social Security and Medicare

      http://www.thenation.com/article/163672/charles-koch-friedrich-hayek-use-social-security?rel=emailNation

      Hayek was cull and a fraud

  4. 

    The NYTimes is a corporation. How do we get its money out of politics?

    • 

      I wasn’t aware of the NYTimes having any influence but the power of its ideas. If you have evidence of it making campaign contributions I would find such very interesting.

      I take it you find why Fox did–giving money to potential candidates (Palin, Huckabee, etc.) very objectionable.

      You seem to object to it having better ideas, as tested in the market place.

      Campaign contributions are entirely different than ideas.

      • 

        What makes you think I’m against unions, Observor? Simply because I made the observation that Citizens United benefits them? You’re really jumping to conclusions.

        I have no problem with a properly constituted union, one which allows anyone join and tries to find jobs for them. But that’s not how it works in most unions is it? I have two friends, both well educated and qualified for what they wanted to do. One wanted to be a plumber, but was told that unless his father or an uncle was a member, he wouldn’t be allowed to join. The other friend was dying to be a window dresser for a department store, but was told that gays controlled the union and wouldn’t let her join because she wasn’t gay. Now as a self-described oligarch, you would not find something objectionable about denying someone theright to pursue their dream job, but never for an instant believe that you are on the side of angels. Unions destroy people’s livelihoods so that their members can take advantage of the higher wages the job shortage gives them. That’s OK for an oligarch like you, but not for anyone with a grain of mercy.

        Nor do they make the workers very happy. Yes, the unions in Detroit make about ten dollars more per hour than the non-union auto workers in Alabama, but the union rules are so restrictive that they turn their workers into robots doing brain dead work. The non-union auto workers report much higher job satisfaction, primarily because they have the freedom to help define their job and are rewarded for finding ways to increase the efficiency of their work. That sort of thing is inherently alien to unions, which is why foreign auto companies are putting American companies out of business.

        And the union bosses always come out ahead of the rank and file. There is no merchant marine any more, but there is a seaman’s union. Of course, an oligarch would rather see jobs go overseas and put everyone out of work.

      • 

        To Observer,

        You seem to think that Citizens United was about campaign contributions. The test questions for you are (if you wish to supply your thoughts):

        (Q1) How did the the Citizens United decision change the test for legality of campaign contributions?

        (Q2) Why is it relevant that the NYTimes is a corporation?

        In answer to your questions:

        (A1) I am not aware of the NYTimes giving to political campaigns as a corporation. I would be very surprised if they did.

        (A2) You wrote, “You seem to object to it having better ideas, as tested in the market place.” I don’t so object. You don’t yet see my point, but I will reveal all, soon.

      • 

        To Observer,
        You didn’t try to answer. Here are the answers anyway:

        (Q1) How did the the Citizens United decision change the test for legality of campaign contributions?

        (A) It didn’t change the law on corporate contributions to political campaigns. They remain prohibited. Citizens United changed the content allowed in advertisements (political speech) by corporations. Now, these ads can name candidates and recommend who to vote for, in addition to statements about public policy. As you said about the NYTimes, the average corporation now may attempt to influence through the power of its ideas.

        (Q2) Why is it relevant that the NYTimes is a corporation?

        (A) Because it is a corporation which uses free speech to widely spread its political and policy views, including recommendations about who to vote for, by name. Now, this same freedom is affirmed for any corporation, without first granting it a license and distinction as a “media corporation”.

        Corporations are formed by people. It is the free speech of people which is upheld by Citizens United.

    • 

      Mr. Berner

      1) It seems to me that you criticisms are very inconsistent. You don’t object that shareholders don’t have to sell shares in their firm or that Murdoch hires his sons and daughters. I make this point to illustrate the deeper truth about unions. Your friends want in these unions because the unions have leverage, but what have your friends done that gives them a right to benefit in that leverage.Income distribution is a function of leverage, not what is right or just or fair. No one is paid what is just. You are paid what you can leverage someone into paying you. This “truth,” which everyone refuses to accept, is what is behind our problems. Ross Perot was right.

      2) As for work rules, etc.I would go far beyond some of your comments, but my approach has an entirely different direction. When they write the history of the USA one of the great sins will be the failure of the Demo Party to make unions work. The agency problems in unions are as bad as they are for corporations; the inmates run the asylum. But that is not the worst problem. The worst problem is the Persian Messenger syndrome. Union officials face the loss of everything (being voted out of office) when they deliver bad news.This leads to an extraordinary similarity between union officials and republican candidates for public office. A good example are taxes. Just as Republicans have pledged never to raise taxes, union officials basically pledge never to agree to a wage or benefit cut or an increase in productivity. Newt just made a contract with America to cut taxes more, but our taxes are at an all time low. Everyone was in a snit with GM workers were talking about wanting higher wages. I cannot see any difference between Newt and the UAW officials who didn’t have the spin to cut that line off at the knees.

      You want to plan someone about jobs going overseas. It is people like the writers of this blog who supported globalization and “trade,” both of which are nothing more or less than tools to reduce middle class incomes.

  5. 

    Observer,
    The Bush tax cuts were across the board. I specifically remember my lower socioeconomic daughter recieving a healthy check. And…how many people on government subsidy are willing to take “any job” to help themselves? We are fostering our second generation of people who refuse to “climb the ladder”. They deserve everything now and without earning it. They don’t even understand what it means to earn it, because they don’t have to. Our government will take care of them cradle to grave. By the way,,, I have just been laid off from my job as a geologist and I’m not going to spend my time slamming the rich or conniving to take their wealth. I’m looking for one of those American Dream success stories to hire me. If not, they’re are plenty of jobs I can do until I can work in my field of expertise again. What jobs are and have you been willing to do??

    • 

      Laura:

      1) What do you plan on doing about the rich who have been and who continue to connive to take away your wealth?

      2) I am an oligarch. However, since I sell products and services to the 99% of American’s whose income has been failing the last 35 years due to the conniving of my fellow oligarchs, I long ago realized that fair income distribution is the key to a healthy society

      • 

        With all due respect, Observor, how do you have fair income distribution when Nancy Pelosi’s brother-in-law can get a half a billion dollar guaranty just by calling his sister-in-law? Now the average taxpayer will have to pony up for that crock. Despite the rhetoric, “progressives” just get government to fatten their paqychecks at the expense of the rest of us.

        Unfair distribution of income is indeed a serious problem, but it is caused by crony capitalism and if you think otherwise, you drank the Kool-Aid. It’s not your fellow oligarchs who you should worry about – there is always someone with a better mousetrap who can topple them from their perch, if they are given a chance – it is their relationship to the goodie dispensers in Washington that should get you angry.

      • 

        Mr. Berner:

        What’s your objection to unions, other than jealously because union members have higher wages and enjoy a better standard of living than non-union employees. My city was once a great union town—we were all better off.

        You have expressed this theory that all of life’s problems arise out of “crony capitalism.” Who are the captains, lieutenants, and fellow travelers of this conspiracy. When Boeing moves a factory to South Carolina so that it can page wages about 50% lower, is that crony capitalism. Obama, it is charged, is trying to correct this. Are you saying he is or is not a crony of Boeing?

        You seem confused and contradictory

    • 

      Tom

      Does you post mean that you will join me in supporting the efforts to over turn Citizens United, to get corporate money out of politics?

      • 

        It’s not just corporate money. It’s union money, too and they are the biggest beneficiaries of the ruling.

  6. 

    What a bunch of class envy idiots. If the wealthy few are wise enough to produce jobs and support the many poor, why are they not privileged to a larger vote?…. Better put…, why are dependents of the evil rich who pay no tax but suck up the bulk of tax costing services allowed to vote? Voting is not a right, it;s a privilege. Almost half of this country is on government subsidy. If food stamps and welfare didn’t exist,we would have homeless and food lines across this nation and these same class envy idiots would see just how important the job producing tax payers are. 20/20 vision would set in quickly and everyone would see we are in recession teetering on depression.

    • 

      Laura,

      Since our taxes on the wealthy are at there lowest ever and their incomes are the highest ever, why are we in the Lesser Depression?

      Where are the jobs?

      Real incomes of the top .5% have grown 450 + percent in the last 30 years, while the income of 99% of our population has declined.

      Where are the jobs?

      Or, as many are asking, Where are all the jobs that we supposed to be created by the Bush tax cuts for the wealthy?

      Did you ever make room for the possibility that distribution of income is only a question of leverage and that our mal distribution of income has caused our problems?

  7. 

    Thanks, Josh, although I don’t mind. I went to the University of Wisconsin, so I know how lefties debate.

  8. 

    Paternalism always kills people ultimately. Hitler, Stalin and Mao all were devoted to taking care of one class of people and all were willing to kill others to further their goals. If you don’t understand the ideology behind pretty words, you should stay out of the voting booth

  9. 

    I think we have located the ground zero of the debate: MGM doesn’t have a clue what he’s talking about. The right is about freedom, the left is about paternalism. The south of the Confederates were as paternalistic as the left of today is and at their best they are genuinely concerned about their charges. Most slave holders were concerned about the well being of their slaves. But they were still slaves.

    It is the left which wants to prevent you from smoking and using trans-fats. There is nothing wrong with that, but it deprives people of deciding for themselves. The only time that the right tries to intervene in personal lifestyle, it is because, rightly or wrongly, they believe that the “little platoons of society” – the phrase used by the very rightwing Burke – need to put some limits on freedom. Rightly or wrongly, they see certain types of behavior as detrimental to the needs of society to perpetuate themselves.

    It is always the poorer and more vulnerable factions of society who pay the price for misguided paternalism. In 1960, marriage rates and legitimacy rates in African-American communities were not significantly different than the rates in the white community, but white paternalism has emasculated the African-Ameican community. In 1930, there were six African-American owned and managed banks in Richmond Virginia alone. Now there is only one.

    Anyone who thinks that all the great works of art ever created were created by liberals is a fool, but if MGM is willing to take the blame for Wagner, he is welcome to it.

  10. 

    MGM

    Today’s labels are meaningless. What matters is whether the acts and ideas, when done, were liberal, for Modernity, or conservative, against Modernity. Great minds are not hard to pigeon-hole; they exhibit great ideas.

    All of Modernity is Liberalism, nothing more or less. Conservatives have had no positive role in making Modernity, never have never will. Property rights are not conservative. Free speech is not conservative. The right to a fair trial is not conservative. These are all essential attributes of Modernity. It is self evident that rights are not absolute and can appear or actually conflict. Almost always when that happens you will find conservatives asserting a right, not because they believe in rights, but for propaganda purposes in support of real agendas. Last night “conservatives” heckled a gay solider, serving in Iraq. They will justify such as religious freedom and free speech but what is really is intolerance and a stand against Modernity.

    The right, today, is totally intellectually illegitimate, as illegitimate as the South was on the eve of the Civil War. It offers nothing. Lift away the veil and there is nothing but incentive caused bias. Read Charlie Munger on that subject.

    What you forget, but those of us who study “men” know ( in the way Truman suggested) is that times often require one to be intolerant of intolerance. That was the intellectual foundation to the forces in society in England under Henry and Elizabeth that took off Mary’s head and assured Modernity in that age. The struggle in the Civil War was the same. More recently, WWII was total war based on the intolerance of intolerance. The question to me is not liberal v. conservative, it is whether one is for or against Modernity. Modernity is upset with Obama for foolishly having been tolerant of intolerance. I am intolerant of the right, for it has no ideas, none.

    Liberalism has other problems, starting with the fact that is current office holders have forgotten that tax dollars are trust funds.I could go on and on, but that is not the point. In large measure, Liberals have become that way because the right is so opportunistic. Any error is seized upon not to correct but for power to drive the agenda of the rich and powerful. The hidden news, today, is that a state supported Chinese solar company of some sort is opening a factory in California, while the right here is cutting $$$ for state support and launching an investigation into a bad guarantee, like it was Watergate.

    This isn’t my blog, so I am stopping, ending with this comment. You failed to meet my challenge. I am right on this one

  11. 

    John,

    Note the distinction generally between the left and the right: the right wants to prevent as much as possible the possibility of bad (threats to individual freedom, market wealth, status quo, etc.), while the left wants to achieve as best it can its conception of the good.

    You might, I think, find great peace in that insight. At the very least, you should not be so upset with the Right — their perspective is just different from your own.

    • 

      MGM

      the right will use any means or method available to obtain power and protect the rich. they have no ideas of any use. I pay no attention to what they say, do, propose, etc., except to try to stop their worst excesses

      I’ll wait all weekend for you to list one important thing done in the History of the World by a conservative

      Here are a few great Liberal accomplishments:

      Christianity

      All great Art

      Shakespeare

      All our great minds (Smith, Locke, Burke, etc.)

      All the Founding Fathers

      Declaration of Independence

      Constitution

      Hamilton–sound Treasury and National Bank

      Jefferson–Louisiana Purchase

      Emancipation Proclamation

      Lincoln

      13th, 14th, 15th Amendments, which made us a Nation

      FDR administration

      Truman administration

      Soviet Union rejection of Communisim: Gorbachev

      • 

        John,

        I do like your zeal, but I would just point out that it is somewhat anachronistic (and misleading) to identify many of those civilizational achievements you listed as belonging exclusively to the “leftist” agenda. Just to give one example, I am sure that if I were to suggest to you that the creation of the American constitution was a conservative achievement, you would very forcefully object, and you would be absolutely right. But it cuts both ways, does it not? To describe it as being entirely a liberal achievement would also be somewhat incorrect. Of course, we are using these terms liberal and conservative very loosely, and that is why I would go back to my original *attitudinal* distinction, which, as I pointed out, is something more than just a political heuristic. Liberals have to stop identifying conservatives as being consumed by perverse incentives (the world is not that simple); and conservatives, similarly, have to stop identifying liberals as being hopelessly naive (again, the world is just too complicated to accurately characterize a political philosophy in quite this way). Also, I would encourage you to look more at the ideas facilitating these achievements than the achievements itself. You will see that the greatest minds are so hard to pigeon-hole into a certain political category. Locke, for example, exhibited extremely conservative strains (property rights) and very liberal ones (human tolerance). And Burke, who is a personal hero of mine, is also very difficult to classify. The New Republic magazine had a great piece on Burke a few months ago — a very liberal magazine, while conceding his conservative outlook, also explored his more liberal views. It was really good.

  12. 

    I was asked for my figures. Every year CBO prints a history of the federal budget. It is free, online. I don’t Google for others. Wiki is a pretty good placed to start on most economics—it has the basic definitions and arguments pretty much laid out.

    Regardless of one’s faith, the Bible is a pretty good on economics: Where there is no vision the people perish. Where is the vision in Hayek? Properly lead, by people of vision, passion, intensity and energy, man is capable of extraordinary acts. Like most American’s, today, I am totally fed up with the Right (there is no vision or passion there) and deeply disappointed in Obama. Hayek doesn’t answer why.

    • 

      To John,
      I was the one who asked you for the reference to your data.

      I occasionally see your avoidance statement, “I don’t Google for others”. You presented historical data to support your argument, but are unable or refuse to give the citation. This is sometimes an attempt to gain the credibility of historical fact without allowing the data and source to be verified by others. That is a neat trick.

      Should people discuss economics only from memory, with no references to the data?

      Citing the Bible as an economics text is puzzling to me.

      • 

        I posted the link at 7:10, tonight, below. Apparently your strengths include an inability to read

        The cold hard facts show I am right and you are wrong, but you will never admit such.

        If you don’t understand why I referred to the Bible then you don’t know anything about either Economics or the Bible.

      • 

        http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf

        That link is to a collection of tables of all sorts of current and historical information. Possibly, your facts are in there somewhere. It is a bit of a joke, yes, that you want to convince people by making statements, then pointing to a database without specifically extracting and citing the data you rely on. Again, a neat rhetorical trick.

        You say, in effect. “Here is the database. I am right, and all of your facts and premises are wrong”. Alas, I haven’t found you to be a good source of information.

        Everyone to their own style. How many people will you educate by making pronouncements, then pointing to a large database and saying that you are right?

  13. 

    Garland,

    For being snarky, well it is hard for me to take people who are opposed to paved roads as being serious.

    Beyond that, I will help you this much. In effect, a gov’t bond is money. The person who buys the bond can pledge it for a loan, if there really is an opportunity for a private investment. Thus your entire premises is false. Gov’t borrowing does not crowd out private investment–it is what it is—the printing of money,in effect. Read Ben Franklin on the importance of Gov’t printing money. He was far wiser than you or I and advocated Gov’t printing of money.

    Great Britain’s debts reached 240% of GDP in the early 1800s. Federal debt declined to 40% of GDP under Carter. My point is that Federal debt, by itself is meaningless. What is important are all the intangibles: confidence, community, trust, honesty, opportunity—all the human characteristics. In sum, it is the character of mankind that is the measure of an age, not BS from economists who are lead by incentive caused bias.

    Second, read John Kay, Financial Times, end of August 2011.

    • 

      John,

      I would agree one-hundred percent with your lovely and succient summarization. Really, it was very good. For what it is worth, in my own experience I have noticed that free-market minded economists (i.e. chicago, GMU, etc.) do not think very realistically about money. Compare any paper of the Monetarist school, for example, with any paper by somone like Hyman Minsky, and the differences are mind-numbing. Incidentally, that is why Mr. Minsky always labeled neoclassical economics the “village fair paradigm,” while his own approach he stylized as the “wall street paradigm.”

    • 

      (1) You did not link to your sources and analysis. Your suggestion is to read some general articles. I infer that your purpose is to present your high state of knowledge, not to inform others about the details that underlie your pronouncements.

      I wanted to know where you obtained your GDP and spending figures in your comment of September 22, 2011 at 4:12 pm

      (2) I suppose you can’t control your snark, because you repeat it and defend it. You applied snark in your interpretion of my statement, “that roads are useful, but less useful than the other things that would be created by the private citizens who are forced to give their resources to the government.”

      Your conclusion was that I hate paved roads. Too funny.

      It certainly is easier to misinterpret a statement and apply snark, than reply to it. You often take that shortcut. And you change the subject, rather than reply to substantive questions.

      (3) You say “Gov’t borrowing does not crowd out private investment – it is what it is — the printing of money, in effect.” That seems wrong, and here is why.

      The Treasury sells a bond for cash. No money is created or destroyed by that transaction. The Treasury uses the cash to aquire resources and direct work. Those resources and workers are then not available for use by others who would like to build their own projects. That competes with private investment. The negative term is “crowding out”.

      If I borrow against a government bond, no money is created or destroyed by that transaction. I can use that cash to build a project, but only in competition with the government’s plans.

      So, government borrowing is not “the printing of money, in effect”, and the crowding out is an effect of expanded government action, not the result of a restriction or expansion of the money supply. How is this wrong?

      • 

        where there is a surplus of plant, labor, materials, as we have now (we are operating, at best, at 75% of capacity) there is no crowding out.

  14. 

    MGM

    Having an economics degree, I guess I could consider myself an economist. Having worked on more than 10 bank failures, I believe I have a far better idea about the real world and that economics is not advanced at all beyond Smith and Keynes

    You have my thoughts about Hayek. As additional support, I offer this recent talk of Niall Ferguson at TEDS. Hayek doesn’t show up in his necessary conditions for prosperity.

  15. 

    Mr. Garland thinks that gov’t spending didn’t end the great depression.

    Like everyone who is opposed to paved roads, he doesn’t know his facts.

    Total Federal spending in 1939 was 9.14 billions

    Total Federal spending in 1945 was 92.7 billions of which 47 billion was borrowed—that’s right the US borrowed more than 5 times what it had spent 6 years earlier.

    Federal spending fell to 29.7 billion in 1948 but more than doubled to 67.6 billion by 1952. Taxes were not lowered in 1948, resulting in a surplus of $12 b.

    • 

      Would you link to your sources and the analysis?

      Are you saying that the economy stagnated between 1948 and 1952 (due to lowered government spending), then began increasing rapidly soon after 1952 (due to increased taxing and spending)?

      Why wasn’t there a new recession in 1949 due to the huge decrease in government spending from the end of the war?

      Which do you like better, more paved roads or more factories? In general, I prefer factories, rather than make-work government projects.

      Also, do you think that snark helps your argument?

  16. 

    For those who do not understand, the Ricardian equivalence is a thought experiment. It argues that taxpayers will alter their behavior and spend less, when gov’t spending rises, because they know that in the long run they will have to pay more taxes to pay off the gov’t spending. Its cousin is that, when the gov’t borrowers and spends, it means that private investors, who otherwise would have invested, will not make their planned investments.

    As I say, these are “thought” experiments, for which there is no proof and which have been disproved by actual events, over and over.

    Keynes key insight was that the key to all private investment, etc., was demand. Supply does not create its own demand, which is why we still have un and under-employment of 20/25%. Keynes argued that to create demand the gov’t should print money–literally, if you print enough it will force businesses to buy supplies and hire employees. Otherwise, their shelves will be bear and they will go out of business. Keynes did not believe, nor do I, that this ought to be a “routine” happening. He would be appalled at our pre-Obama deficits, especially the spending and tax cuts by Reagan and Bush II. Keynes argued that in good times you had to run a surplus. This was because of his insights into men, psychology, not economics. I would argue that anyone who knows men, as Truman argued, knows why.

    Keynes would also say that you do not scientifically measure how much to print. Since the event is hopefully rare, you just pour on all the water you need to put out the fire. Keynes and Truman would argue it makes a lot of difference on what you spend the money. This goes back to the knowing men thing. Obama’s stimulus was horrible because it was so poorly designed and had deep basic psychological flaws. For example, paying school teachers about whom public jealously was already high was really stupid. Designing a program in such willful disregard of the basic emotion of jealously was just nuts.

    • 

      John,

      You will also be pleased to learn that next to Hayek, I consider Keynes to be one of the most imporant thinkers of the 20th century (note that I am an economist). Please consult my blog, which I referenced above, if you would like to read about my thoughts of Keynes (and the Post Keynesian research programme).

    • 

      Your argument is that private spenders and investors do not alter their behavior and expectations according to massive government actions. They are sheep, doing whatever they would have done, not minding the gorilla behind the curtain.

      However, when government borrows (sells bonds), it at least takes dollars and directs resources which become unavailable to alternate uses and investments. That is reality, not a thought experiment. That certainly alters spending and investment behavior, regardless of what the supposed sheep think.

      Possibly you could provide examples of how these “thought experiments” have been disproven by actual events.

  17. 

    MGM

    1) You should write a blog. I may not agree with you, but your style and tone and much much more informative than this blog.

    2) As to Hayek, he is too me as useless as Noam Chomsky, and a great deal of others who never offer anything.

    We don’t have perfect knowledge when we get up in the morning.

    Thus, according to Hayek we should never get out of bed. That is Hayek’s information problem, not mine. I contrasted Hayek with Franklin and Smith for a reason. If the reader doesn’t understand why they need to study these two men, a lot.

    One would be many times better off reading Drucker than Hayek. Both thought about the same problem—Drucker had insights; Hayek none.

    My two cent is that those who read Hayek frame the problem in order to reach their own incentive biased judgments. As Truman said, “The Republicans believe that the power of government should be used first of all to help the rich and the privileged in the country. With them, property, wealth, comes first. The Democrats believe that the power of government should be used to give the common man more protection and a chance to make a living. With us the people come first.” Amazingly, every one who cites Hayek is in the camp of the rich.

    Life gives us no choice but to manage its challenges. The problems, as Truman well understood, arise out of human character, which never changes. He counseled to “Study men, not historians”‘ Lincoln read Shakespeare (hopefully Obama is doing the same). Truman concluded, “There is nothing new in the world except the history you do not know.” He read Shakespeare

    Almost 5 thousand years ago man built the Great Pyramids. Since then, there has been no task which man cannot accomplish, if properly organized and governed. The task today is the same as it was when the first stone was laid—how to give confidence too, organize, and motivate. I can only imagine the skeptical words, “Right,” by the workers who built the Great Pyramid of Giza, when first told of the plans. Had they listened to Hayek, they would never have chiseled the first stone—too little information.

    Truman argued, “The human animal cannot be trusted for anything good except en masse. The combined thought and action of the whole people of any race, creed or nationality, will always point in the right direction.” Truman was in far better position to judge this question than Hayek. Franklin and Smith where of Truman’s mindset. For example, Franklin could foresee what an incredible resource a national postal service would be. It has served us well for better than 200 years, is the envy of the World, and yet this Blog wants to tear it. To be sure, the Postal Service must change (and likely substantially shrink) but its core mission, assuring that Americans can communicate with each other, is more vital today than ever before.

    But I have said enough.

    John

    • 

      I did once have a blog. You may be interested in reading through it. Note that I dealt with exclusively libertarian subjects from a decidedly non-libertarian point of view. I recently revived the blog for reference purposes:

      http://austrianomnibus.blogspot.com

      Many topics deal with Hayek (albeit in a specialized Austrian context).

  18. 

    “World War II spending ended the depression” is an amazing myth serving politicians who love big government.

    Dollars are not magic fairies spreading wealth wherever they sprinkle their dust. Dollars only arrange an exchange between people having something to trade. First, a worker trades his personal production for dollars, then he trades the dollars for food. The interconnection of a free market economy delivers goods to the farmer in exchange for the food he grows.

    Our government is borrowing money to “stimulate the economy” by spending it to buy projects like road repair. Roads are useful, but less useful than the other things that would be created by the private citizens who are forced to give their resources to the government. And, government is wasteful, using a lot of resources for little result.

    Why aren’t private citizens expanding business and creating jobs? Because the government is threatening them with regulation and taxes to pay for the “stimulus” it is borrowing. Businessmen worry about the future, about who will buy things from them after they produce them. Government threat and action is making this impossible to predict, so there is little private investment. Unfortunately, government “stimulus” is an extremely poor, laughable attempted substitute.

    Leftists claim that the government spending of World War II, rationing, and the conscription of soldiers (giving everyone a “job”) somehow produced prosperity. But, what possible mechanism produces prosperity out of war? People can’t eat or enjoy tanks, and shooting people produces nothing of value beyond winning.

    In reality, WWII interrupted FDR’s plans and changed the mood of the American people to reject big government. It was the post-war reaction of the people against FDR’s policies that resulted in good policies and renewed prosperity.

    Spending did not end the Great Depression
    Reduced spending and lowered tax rates did it.

  19. 

    I’m not much of Obama fan, but allowing free market geniuses such as Dick Fuld and jimmy Cayne to allocate resources did not work so well, except for some rich white people.

    A pox on both political parties, and a pox on Wall Street corruption capitalism.

  20. 

    This is all well and good, bet let us not miss the point here. Hayek was right that attempts at centralizing knowledge are problematic; to suggest otherwise is to commit “The Fatal Conceit.” But this does not conclusively establish that decentralized decision-making will always be successful, or that it will invariably outperform centralized regulations. It is true that, as Hayek suggests, knowledge is never given to anybody in its entirety, and that people, dispersed as they are in the economy, respond to certain “signals” embodied in prices. But it is taking Hayek too far to suggest that this dispersed knowledge operates efficiently, or that these signals approximate efficiency standards. That was not his point, although it is often the point of libertarians. Hayek’s point must not be lost: all actions by individuals are “predictions” of how best to conduct their activities. The problem with centralized government regulation, contra market competition, is that it “standardizes” and “homogenizes” what would otherwise be divergent and heterogeneous activity. This increases the likelihood not only of error but also of mass market failure because if the government’s prediction is incorrect, then everyone suffers.

    Let me end by quoting who is perhaps the only real Hayekian out there:

    “The whole point of regulation is to homogenize capitalists’ behavior in a direction the regulators predict will be prudent or otherwise desirable. If the regulators are wrong, the result is a system-wide failure. “Systemic risk regulation” may be a contradiction in terms.

    Neither capitalists nor regulators can use crystal balls to avoid making bad bets. That highly rated mortgage-backed securities would be prudent turned out to be a very bad bet. But we all suffered because this bet was imposed by financial regulators on the whole system.”

    This quote, which I think is just great, does not suggest that free-markets are more desirable for efficiency reasons. It simply suggests, as Hayek did, that free-markets are more desirable because they “spread the risk” or “disperse various predictions” made by different capitalists. Yes, most of them will be wrong, but the point is this: it does not direct everyone to conform to one single prediction that is presumed to be the correct one: that is the fatal conceit.

    • 

      With good fortune, we have the recent testimony of Rand follower Greenspan that this entire intellectual facade had collapsed. Spreading risk was what the free market in CDOs, synthetics, etc. was supposed to do.

      It don’t work that way, at all.

      Economics is a paradox, never understood by Hayek, or the writers and (unfortunately) the readers of this blog. What is good for the individual or firm is bad for the economy and (often) vice versa.

      Thus, social safety nets are good for the economy, because they increase risk taking. We should be increasing our social safety net, not collapsing such.

      Easy bankruptcy is good. In fact, there is an excellent study just out that the changes in the Bankruptcy laws directed toward alleged credit card abuse, are largely responsible for the horrible rate of new business formation since those Republican “reforms” were passed.

      There are excellent studies showing that laws prohibiting deficiencies and enforcement of covenants not to compete promote growth and competition.

      I could go on, but when people take Hayek (as opposed to Ben Franklin and Adam Smith) seriously—we have problems

      • 

        John, you are really making two different arguments here, and we must, I think, be clear exactly about what we are arguing. Hayek was showing that government planning is vulnerable to knowledge problems (ie it is an epistemological problem). He is not endorsing free market ideology here. Now your arguments against neoclassical price theory, if that is what they are, come at the argument from a different angle. On this point, I would suggest you read the more radical Keynesian theorists for further vindication of your views. In fact, taken to its extreme, some of these radical Keynesians have even argued for an infinite supply of money because, as you suggested, what is bad for the individual is not necessarily bad for the economy (there are also more theoretical points that go along this line, viz. the MV=PY equation is fundamentally wrong because what matters is not the money supply but instead the velocity (ie the rate at which money circulates) — the Chicago school just assumes “V” to be constant). So it is a mistake to identify Hayek as a proponent of this neoclassical theory which is the object of your own attack. Both Hayek and your own views are attacks on this theory; they just emphasize different points (remember that neoclassical theory just assumes the knowledge problem away — and that was Hayek’s objection). Now, I would caution you on this point: using radical Keynesian theories to attack neoclassical price theory is great, but you must also heed Hayek’s knowledge problem argument, because it applies just as well to goverment regulation. In fact, I would challenge you to suggest why government regulation is immune to this knowledge problem.

        So to summarize: I am on board with you that economics, as you say, “is a paradox.” But government regulation cannot be used as an alternative *unless* we somehow manage to avoid or answer Hayek’s knowledge problem argument.

  21. 

    I would have to say this is the best analysis I have seen to date on Obama’s latest proposal. No one has yet tried to put the spending and taxes into higher level categories and then shown this redirection of money from the private sector to the public sector. Nicely done!

    • 

      Kenih

      The Ricardian equivalence is a false premise. John Kay had an excellent recent piece (August 28) in the financial times if you have an interest in learning what the premise is false.

      • 

        The current economic crisis was the result of a massive debt bubble which burst. Governments and individuals were living way beyond their means with consumption financed by artificially cheap money and artificially high home values (due to artificially cheap money and government intervention bound and determined to have everyone own a home).

        No matter how much “stimulus” we attempt, governments and individuals will be forced (Something that can’t go on won’t.) to delever and bring consumption in line with output. No two ways around it.

        As the author says, millions of men and women on the spot will allocate capital more efficiently than all the smartest bureaucrats in Washington.

  22. 

    The two replies just prove Mr. Lambert’s point about the arrogance of intellectuals. Just to point out two flaws in their obviously well educated but inside the box statements:
    1. Scritor says that government spending is better than money in an investment account, but where does he think the government gets the money to spend except from borrowing it from people’s savings? And by keeping interest rates artificially low, the Fed is not only squeezing spending by people who count on their savings to survive, but it is also taking money that would otherwise be loaned to businesses while also dooming us in the future when interest rates will break their shackles and the interest on government debt soaks up much more of the GDP than it does when rates are zero.
    2. As for John, it certainly would give us 25/30 good years if, like World War II, we destroyed the rest of the world’s production capacity, but I don’t see anyone proposing that.

    The fact is that, like the economy of the 1850’s and of the 1920’s, the underlying premises of the current economy no longer apply and intellectuals are fighting the last war, which is totally inapplicable to the current one. I agree with John that we need a massive change in the way we do business, but it is crony capitalism, not capitalism, which is not self-healing or correcting. So prepare for some very lean years with the rich getting richer and the poor getting poorer until someone sees the light.

    • 

      Well said Tom. You prove that context is key.

    • 

      Mr. Berner:

      As I wrote, the Ricardian equivalence on which you rely is a false premise. No one believes it to be true. It is, at best, a thought experiment which has repeatedly been disproved. It is being disproved, today, as we speak, as the world is buying our bonds and dollars. What you omit is risk, but I won’t go into the details for long ago you had an opportunity to learn and clearly choose another path

      Second, we did not have 25/30 good years after WWI because of what we destroyed. We had 25/30 goods years because of the capital investments we had made in plant and people.

      The policies you advocate and which this blog advocate have been the economic orthodoxy of this country for the last 35 to years, during which the rich keep getting richer and the poor getting poorer. This blog advocates no corporate responsibility of any kind, no accountability for fraud or dishonesty, it is wide open full bore short term greed here. This blog advocates that firms be a mean, ugly and power with as much leverage as possible over customers and workers. That is crony capitalism.

      Just a few days ago we got more of the same—the total BS on ATT’s acquisition of T-Mobile being so great. Having had to do business with ATT for years, I know that nuts and that the writers have incentive caused bias to favor ATT, but what company is a better example of crony capitalism than ATT? How did ATT react to justice? It ran to Congress with a promise of 5000 jobs—what a farce.

      • 

        Utopia is a false premise.

      • 

        What is the Ricardian Equivalence that underlies everything false? Could you explain?

      • 

        Those good years were facilitated because we had almost no competition. There is not a single sector in the us economy that was heavily unionized in the 40s that is now a Global leader save the heavily subsidized (directly and through military spending) aerospace industry. Once our competion caught up our flaccid industrial sectors were exposed and decimated.

  23. 

    1) It is very plain that Obama has more than failed the expectations of those of us who voted for him. But, like Democracy, he beats all other alternatives hands down. The reaction of Confidence Men and the threat to Modernity of present circumstances means that everything that was done wrong will be studied for a long time. The contribution that lawyers could make to this is to understand how laws work in the real world. Central Bank of Denver opened the doors to now 16 years of financial fraud. Those of us on the ground, handling cases every day, know that this case alone is responsible for much of what has happened. Second, reading Confidence Men it is plain that permitting the Senate to confirm executive officers is a luxury that may have killed us. A point that comes through loud and clear is that Treasury was rudderless because the Senate had not confirmed people. In sum, in large part we may be where we are because of how hard it is to govern through a transition of administrations.

    2) it seems to me your premise is a false one—you assume money is in the hands of productive people. There is a pretty good view that is not the case, best made by UMAIR HAQUE, here

    http://blogs.hbr.org/haque/2011/03/the_capitalists_paradox.html

    3) third, you are merely restating the Ricardian Equivalence in another way, which is another false premise

    In sum, Keynes was right. You need to deal with the grief that, like Greenspan, all your intellectual premises are wrong.

    WWII proved that once you have the kind of collapse that we have had that it takes a massive amount of government action to heal and economy. Here, I am not talking about spending. The ships, planes, tanks, and trucks were all written off within 5 years. But we had 25/30 good years following because of the investment in plant and equipment to build such and the education that was imparted to the millions of people in the service.

    In my home town they needed a factory building in 1946, to offer a location for anyone to come into the town and offer jobs. The factory was designed and built by all the returning service people, using all the skills accumulated in the various branches. Today, the building is being retro fitted to a new use. There is no local contractor or labor that can do the work, which is really much easier. Think about that skill loss.

    We need a massive change in how business is done in this country. It is not going to happen because of all the barriers to change. Capitalism is not self-healing or correcting, except at the margin,and then only sometimes. As Haque writes, our system is full of barriers to real growth and renewal, most all of which are promoted and sustained by this blog

    • 

      Ww2 left our competitors literally and financially in ruins. They lived very meager lives in the couple of decades afterwards while we sold them the goods and financed them (charging them interest) to facilitate their rebuilding – all the while having almost nil competition that allowed unions and management to get fat and lazy. Are you arguing that We should flatten much of the world again?

      • 

        Gord

        The only economic theory that sees competition as an impediment to growth is Marxism. Are you a Marxist.

        The premise of the writers of this Blog is that managers and management are Angels here on earth whose stuff doesn’t stink. That is why Ribstein, et al worship at the alter of the business judgment rule. If you have complaints about management, take it up with them.

        As for Unions, I am reasonably confident I know more about unions than anyone close to this blog. All I will say on the subject is that no better example exists of the Biblical truth: Where there is no vision the people parish.

        As for what would I do? Simple, I would let American business bring its trillions off shore home, tax free, with the income earned on the investment being tax free, on the condition that all the money be invested in entirely new businesses and research (no investment in existing business, no stock purchases, no leakage of any kind) all new and I mean all new. I would have a short time fuze and I would permit immigration of anyone from anywhere in the world to work in such firms, with assurances that the firms and people would stay. IOW, I would raid Europe, Israel, China, and India of all the talent possible at the same time.

  24. 

    Scritor believes, or at least says, that money in investment accounts is “locked up.” This is either a clear lack of understanding or a deliberate innaccuracy regarding what happens with deposits in savings and investment accounts. Where does the interest income derive from if the money justs sits there locked up?
    Those with an agenda tend to distort the truth to atttain their goals. Or they are willfilly ignorant.

  25. 

    To the extent that taxes are too low for the rich and they tend to lock up the money in investment accounts that roll over, that money is much more useful circulating within the economy. Money that goes through the government is paid out again in the form of government services that touch every corner of the country and provide the demand that ignites “animal spirits” to help the economy out of recession. In this way, the income tax functions more like a tax on outsize economic rents once you get to the point where increases to someone’s taxable income no longer affect their capacity or ability to spend the money.

    BUT . . . if you need to think of it in IRS-CBO terms, then it’s better to imagine that people who pay effective tax rates that are less than statuatory as receiving tax credits from the government. (cf. GE in 2010; the surprisingly large minority of Warren Buffett-like upper income earners who pay rates lower than upper middle income earners) Of course, those tax credits are the functional equivalent of a government program. So arguing that we should cut vital services but preserve needless fat like carried interest to people who earn millions of dollars a year is ludicrous. And it’s ludicrous in a way that screams that some sort of reverse class war is going on.

    • 

      So, we are to believe that the rich have idle money, in passive investment, that does not enter the real economy thereby depriving poor souls of government benefits and employment opportunities. Hence, the role of government is much like a thug employed to appropriate (steal) saved production from the “lucky” few to support the “not so lucky” many. First, this is a Keynesian myth that did not work for FDR nor is it working for Obama; it only works in liberal think tank seminars. Second, and perhaps more importantly, it is immoral to steal, even with government agency, from your rich neighbor who already provides the entirety of your govenment transfer payment.

      • 

        It’s not the nobility of having their investment monies working in the economy that is at issue. It’s what happens when they take their monies out of the economy (sell their stocks) and the profit becomes their own income. That’s what should be taxed on par with everyone else. Regarding theft, who’s stealing from whom?

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