Wednesday, February 4, 2009

What Would Hayek Do?

The problem with socialism is that you eventually run out of other people's money. Margaret Thatcher
The Government is running out of money. Yesterday's Exchequer Returns for January were grim. Overall tax returns were down nearly 20% year-on-year: while some categories - such as Capital Gains Tax and Stamp Duties - were down 72%. Today's shocking rise in unemployment towards 10% means that the Budget deficit is threatening to become a chasm.

There has been lots of discussion about what the Government should do - whether through tax increases, borrowing or spending cuts. Or all three. David McWilliams proposes in today's Irish Independent that the Government should engineer things so as to 'force people to spend'. Keynesianism in one country, if you will. I think David has called it right more often than he has called it wrong, but I think we're beyond the point of just reflating spending to get us back on track. The economy doesn't have a flat tyre: the wheels have been removed and it's now resting on bricks.

One of Keynes fiercest (though respectful) critics was Friedrich Hayek. Hayek understood that the microeconomics of prices, risk taking and productivity were at the heart of economic growth - and economic recovery from recessions. The latter were the consequences of monetary mismanagement and malinvestment during speculative booms funded by the wrong monetary policy (think German savings being channelled by tax relief chasing Irish property developers to build apartment blocks in Leitrim).

As I've said before: recessions are a macroeconomic phenomenon; recoveries are a microeconomic phenomenon. The genius of Hayek was to understand that the only path to sustainable economic growth is one in which economic decision making and actions are distributed widely throughout society, with a limited role for central government (who in turn could never possibly know more than the distributed wisdom of the crowd - that was his main criticism of Keynesianism as it evolved to become an excuse for politicians to spend other people's money).

A Hayekian response to those calling on the Government to borrow (even more) money to spend now is best captured in this essay by Dick Armey:
The problem with government attempts to manipulate the economy through fiscal policy -- spending that takes resources away from those who are productive and redistributes it to politically favored interests -- is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families' best interest.

"The real question," according to Hayek, "is not whether man is, or ought to be, guided by selfish motives but whether we can allow him to be guided in his actions by those immediate consequences which we can know and care for or whether he ought to be made to do what seems appropriate to somebody else who is supposed to possess a fuller comprehension of the significance of these actions to society as a whole."

In reality, no one spends someone else's money better than they spend their own.
We are now living with the consequences of a massive malinvestment of resources in property in Ireland, exacerbated by the global economic downturn. There is no magic wand (aka: government spending) to get us back to the status quo ante. There is no going back to 'normal' because what we have experience over the past 7-8 years was grossly abnormal.

It will take some time to unravel the damage done by the speculative binge we all lived through. What we do not need are actions that make things worse by massively inflating public debt to add to the grotesquely high level of private debt. We owe it to future generations not to lumber them with the consequences of the mess we have made in this generation.

But there are things the Government can do to enable and empower individuals and firms to use their resources more wisely and more productively. Among these I would include:
  • Suspend employers PRSI: it is insane to tax jobs by forcing employers to pay out 11.5% on top of the costs of their employees wages and salaries.
  • Suspend the DIRT tax on savings: record low interest rates mean that those dependent on interest receive next-to-nothing minus tax.
  • Suspend the minimum wage in order to price the 71,000 young men and women aged under 25 now rotting on the dole back into work.
  • Go beyond yesterday's pensions levy and 'benchmark' public sector wages down to their private sector equivalent values in order to drastically reduce the weight of tax now being imposed on a shrinking economy (and avoid massive public sector redundancies before it is too late).
We are a small country, with a genuine sense of our collective identity, history and future. Ní neart go cur le chéile as Hayek didn't say - but he would have understood the sentiment of letting the distributed genius of the people work for the greater good of us all.

4 comments:

  1. Hi Gerard,

    Great post. Borrowing to spend is part of the problem - not the solution, I really agree. I also agree, we have to reduce wages to increase competition. We have a high value currency, we should be able to buy things for less (should!). I also think we have this huge National Res. Pension Fund - we could take a billion or so out to invest in new businesses - we dont have startup capital in Ireland and the Banks won't provide it!

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  2. That's a funny quote from Thatcher. But look what Robert Higgs says about countries turning socialist in a link from one of your other posts: Everyone knows that doing so is a one-way ticket to widespread poverty, which leaves precious little surplus for the political kingpins to rip off.
    My guess is the latter is more accurate.

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  3. You say

    "There is no going back to 'normal' because what we have experience[d] over the past 7-8 years was grossly abnormal."

    Spot on !

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  4. Oh dear. Do we ever learn?!
    Who cares what Hayek would do is the more appropriate question!

    What the current global economic meltdown has taught us is that Hayek and his intellectual heirs from the "Chicago School", notably Milton Friedman are intellectually and morally bankrupt - along with having financially bankrupting most Economies, specifically Britain and the US.

    It is intellectually disingenuous Ger to allude to Hayek to the the policies that Thatcher and Regan advocated without giving a full account of what has happened where they were tried.

    In numerous economies that were "laboratories" for such harsh polices, where there were savage social cuts and an assault on the social contract, the results have been nothing short of cataclysmic: in the case of Chile lowering of GDP, an increase in inflation, an increase in disparity between the haves and have nots and glaring social differences.

    In the example of Argentina, such policies have resulted in the total collapse of the economy in 2001.
    On a global level,The Chicago School has been nothing short of an unmitigated disaster. These policies have been tried and failed under Bush. They simply don't work in the real world.

    Indubitably,supply side, laissez fare Economics did bring a degree of prosperity and economic growth for a period of 20 years or so to certain economies in the globe. Yet little of this wealth "trickled down" in any meaningingul way. Moreover, it was all illusory - a chimera if you will.
    Nothing more than an illusion which arose from an orgy of greed.
    Growth based on speculation, whilst simultaneously attacking the fabric of the social contract, whilst real wages stagnate and those in the upper end of the social spectrum have mushroomed.

    "The middle classes could become a revolutionary class, taking the role envisaged for the proletariat by Marx," says the report. The thesis is based on a growing gap between the middle classes and the super-rich on one hand and an urban under-class threatening social order: "The world's middle classes might unite, using access to knowledge, resources and skills to shape transnational processes in their own class interest". Marxism could also be revived, it says, because of global inequality.
    http://www.guardian.co.uk/science/2007/apr/09/frontpagenews.news

    The legacy of Hayek,Friedman and Thatcher is a rotting carcass and social devastation.

    The pendulum of history has swung back towards Marx and socialism.

    There is growing anger and an increasing thirst for social justice,equality and a saner approach towards how we create the world we want our children to live in.
    In light of run away Climate Change to continue on a path of pursuing continuous economic growth will result in the destruction of the planet and the human race.

    According, to the a UN Report from 2006, Two percent of the world's adult population possesses *half* of the world's household wealth.

    The study also found out that the other half of the world's population have access to only 1% of the world's riches.

    Is such an imbalance in wealth distribution sustainable in the long run? History tells us that it is not. Far from having arrived in 1989 at what Francis Fukuyama erroneously and comically called "end of history", we are shifting inexorably towards what Marx predicted as an "historical inevitability"- Socialism. Yes, Socialism is sexy again.

    Hayek, Friedman, Thacther, Regan, neo-conservatism and right wing, supply side economics should be consigned to the dustbin of history. Keynesianism is the band-aid urgently needed now on the gaping wound.
    However we needed a more long lasting and permanent cure.

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