“We have indeed at the moment little cause for pride: as a profession we have made a mess of things.” –Friedrich Hayek, 1974 Nobel Lecture
In a series of op-ed columns, letters to the editor, and even full page ads, free-market economists and think tanks have taken on President Obama, the Democrats, and the Keynesians in opposing the $900 billion “stimulus” package.
I agree 100% with their assessment of the dangers of this socialistic measure, but is "do nothing" the best response? Judging from the overwhelming passage of the bailout "stimulus" package yesterday by the Senate, it wasn’t enough to change their minds.
In a Christian Science Monitor column, “Instead of Stimulus, Do Nothing — Seriously,” Robert Higgs (Independent Institute) warns Congress, “The stimulus is unconstitutional. History shows that the economy can recover strongly on its own, if politicians stay out of the way.”
Jeff Miron, a libertarian economist at Harvard (yes, a libertarian at Harvard!), wrote a paper along the same lines under the title, “A Libertarian Perspective on the Financial Crisis of 2008: In Defense of Doing Nothing.”
“We do not believe that more government spending is a way to improve economic performance,” declares over 100 free-market economists in full-page ads sponsored by the Cato Institute.
Words are a dangerous thing, and when too many libertarian economists repeat the words "Let’s do nothing," the public sees us in a negative, callous light. Clearly, it wasn’t enough to stop Congress from making this blunder.
Unfortunately, this isn’t the first time free-market advocates have made this mistake. In the 1930s, the Austrian economists Ludwig von Mises and Friedrich Hayek were hailed as heroes for predicting the 1929 crash and Great Depression. Hayek was invited to teach at the prestigious London School of Economics, specifically to “fight Keynes.”
But when asked what to do to encourage recovery during the worst financial crisis of the 20th century, Hayek merely said, “Do nothing. The economy will recover on its own.”
When the economy didn’t recover for years, Hayek and the Austrians lost the war of ideas to Keynes. All the best and brightest economists (John Hicks, Paul Samuelson, and even Milton Friedman and other future Nobel Prize winners became Keynesians….For the full story, see my book, “The Making of Modern Economics,” available from Eagle Publishing, 1-800-211-7660 — 2nd edition just published at only $28.95 postpaid.)
Hayek might have won the battle if he had responded with a positive program for laissez faire. He could have referred to Lionel Robbin’s excellent book, "The Great Depression," which outlined a long list of "positive" ways to end the depression sooner, including cutting taxes, tariffs, and regulations. But his book was ignored because the public only saw the words of Hayek, "do nothing."
Today, are we making the same mistake? How can you fight a bad idea with nothing? As Ben Franklin says, “An empty bag can’t stand up.”
How do you fight a bad idea? With a better idea!
What should we do? First, I’d say “Yes, Mr. President, we free market advocates do support a ‘recovery plan" that is a lot better than yours or Congress’s."
Then we could make our own list of positive solutions:
1. Make sure the recovery legislation by Congress “does no harm” by spending money wastefully, raising taxes on wealthy entrepreneurs, and increasing the debt load on our children and grandchildren.
2. Suspend counterproductive accounting rules and regulations, such as SEC-imposed "mark-to-market" rules (which unfairly weakened banks and investment firms like Lehman Brothers), and Sarbanes-Oxley reporting requirements (which did nothing to expose the Madoff scandal and other frauds).
3. Cut corporate tax rate to same levels in Europe (from 34% to 20% or less).
4. Make the Bush tax cuts permanent, especially for investors (15% maximum tax rate on dividends and capital gains).
5. Create long-term stable monetary and fiscal policies, so that investors, business and consumers can make long-term plans.
6. Last but not least, a fiscal stimulus package is no substitute for financial clean-ups. Let the federal regulatory bodies (Federal Reserve, FDIC, etc.) avoid the "moral hazard" of the future by forcing the banks and financial institutions to eliminate toxic investments, and get their act together, and use the bankruptcy laws as appropriate.
Right now the government is only making matters worse, and I’m sure that’s one reason Wall Street dropped sharply on the news. One of the reasons why banks and financial institutions have been slow to lend money to legitimate businesses is that they fear more government controls or even outright nationalization.
The full-ad by Cato included a positive statement at the end of the ad: “To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.”