Monthly Archive for January, 2009

Will Fiscal Stimulation Work? [Or Were the Austrians Right?]

With most of the major governments on earth planning large spending increases, and most economists in favour, it must still be noted that there are a number of commentators who oppose these measures. They do so for a variety of reasons, some practical, some analytical and some ideological.  

This debate of course returns focus to the “Austrian” School, a body of thought that argues against the effectiveness of governmental intervention in the economy.  From this point of view, individuals should make their own decisions with only minimal interference.  This view does not representthat of mainstream economics.  Essentially, it is an assertion, with little empirical evidence to back it up.  They can draw attention to examples of governmental intervention that failed spectacularly; but there are equally compelling examples of where it works.

While the non-interventionists are fond of  historical analysis, they seem oblivious to the history of commerce.  Again and again, in societies recent and long past, unregulated markets boom and then collapse.  Some of the earliest European markets gained competitive advantage by enforcing standards of weights and measures.  Indeed, market participants have long sought out regulated markets precisely because they facilitate exchange.   

Ironically enough, while the non-interventionist approach calls for maximum individual freedom, they do it in the name of group welfare.  Individuals working according to their own inclinations produce a continually advancing society. The cost of individuals who are trashed by market failures apparently carries little concern. 

There are two key objections to this non-interventionist view. First, significant levels of intervention, well beyond what the Austrians would recommend, are the long established norm of the industrial world. However, over the past century, the world has seen a historically unprecedented rise in individual and social prosperity.  Moreover, the benefits of a rising standard of living are now being shared more widely.  In other words, the present model of appropriate intervention works.

Second, the non-interventionist seems oblivious to the fact that individual decisions are very often affected by ignorance, misinformation and fraudulent intent. Individuals are quite capable of making decisions that harm them and others in their society.  Apparently we are just supposed to learn from these mistakes and make better decisions tomorrow.  But some mistakes are catastrophic, like those affecting the environment.  And there are mistakes from which recovery is impossible.

Of  course governmental intervention can be unwise.  It too can produce disastrous results. It can  be corrupted and reward the lazy or the greedy.  And on occasion, it may simply not work.  But this is not a generic argument against intervention.  It is a argument to think very carefully, plan very carefully and learn from experience.  Thisis a messy process, like the reality with which we all cope.  The non-interventionist seeks a simple single answer, a magic incantation to make reality less real.

Again and again, in issue after issue, there is the futile pursuit of a single answer to the complex challenges of our world.  And so some claim that If only money were backed by gold, we would eliminate global poverty! The beguiling lure of the simple and easy will be with us for a long time yet.

The majority view is that large scale stimulation is necessary since the banking system has been so badly impaired.  It would be dangerous and produce great social disadvantage to just wait for the banking system to be re-constituted, as it must. Therefore, whenconsumers and business reduce their spending, goverment leans against the trend and increases its spending. The logic is rock solid.

The principal scholarly objection to this increased spending is that it may crowd out business spending. but it cannot crowd out has has already fallen. Of course, as it economy revives, crowding out becomes a real danger.  And future inflationary pressures are also a concern. But that just means that these stimulations need to be reversed quickly as circumstances change.

Given the haste and scale of the spending underway [together with the other financial assistance to the banks], money will surely be wasted and/or spent to no purpose.  But this is the price we must pay for the meltdown of the financial sector.

The analogy is overworked, but it stands. When the house is ablaze, pour water everywhere to put out the flames.  Then the hard part begins: pump out the basement and repair the structural damage.


The Age of Radical

The age of radical is upon us.  While this disruptive turning point will be clear only in retrospect, there can be little doubt that a period of dramatic change is about to begin.  The pace of globalization and the acceleration of technological innovation has rendered more and more of society’s social, economic, educational and political norms both irrelevant and inappropriate.

The disconnect between what all of our organizations are doing and and what they are challenged to do grows daily.  Adaptation to the change that has already occurred is slow and fitful. The result is wasted talent and opportunity, leaving far too many distressed, cynical and adrift.  As the gale force of change rises, the adaptation lag threatens to imperil any measure of progress.

The danger was a continuing slow erosion of social function – the very kind of insidious disease to which society’s response has always been thoroughly inadequate.  We would have then wandered in the wilderness for decades.  Fortunately, we are faced with so spectacular a failure that the logjam of deferred problems can no longer be held back.  We may now be able to break free of old ideas, solutions, and organizational forms, as conventional thought and unexamined assumptions visibly fail. 

From the perspective of history,  the present crisis is almost ideal. The failure is systemic, affecting the young and the old, the large and the small, the traditional and the new, the democratic and the authoritarian in all the major countries on earth.  The financial losses are of unprecedented scale and falling real output drives down the standard of living . The pain is felt by tens of millions.

The disadvantage is both real and psychological. The latter of course strikes to the heart of culture and the ultimate source of social norms.  We look at our world and now know for sure that nothing is too big to fail. Names the lasted a century collapse in mere weeks. Markets abruptly stop clearing transactions. Governments cast budgets aside and commit billions they do not have. Private enterprises beg for state support and get state invention. Nationalizations occur without debate. Central banks use new tools they have never studied. 

Experimentation and flexibility are forced upon all of us. Collective assumptions and conventional answers are swept aside. The straitjacket of past responses disintegrates. New perspectives are unleashed, as the force of inertia and vested interests weaken.

Finally, we may actually start to address the myriad of problems that have long faced us, from the environment to the transformation of work. To suggest that after a few years when “the dust settles”, we will go back to the old norms is implausible. The genie of change is out and about, unlikely to be re-bottled any time soon.

As a consequence, the President of the United States faces a stark choice.  Either he is a new man of a new age, prepared to offer radical solutions to America’s challenges – the only kind of answers that are feasible after so long a period of neglect. Or he is a new man with conventional views, happy to have won and anxious to avoid controversy?  But social security, income disparity, health care cost and accessibility, employment, innovation and the deficit cannot be solved with evolutionary alterations.

Does the President understand this?  Does he ask for patience to implement far-reaching change, or to let a few “adjustments” run their course?  Does he surround himself with experience to carefully implement refined ideas from the past, or as cover for a coming transformation?  Does he try to co-opt the Republicans to reveal the bankruptcy of their policies, or to craft a watered-down mush of compromise?  His words give no guidance, offering no hint of imaginative scope.

Yet he has won the presidency with unconventional means, using the internet  to raise vast amounts of money and an army of volunteers . He aggressively deploys the dramatic arts to speak in both words and symbols.  His message is of engagement and hope – exactly what would be needed if true change were on the agenda.  Clearly, he intends government by theatre, even if on occasion the theatre of the absurd. 

Are the rallies of tens of thousands intended only to make Americans feel confident in their future?  Or is it perhaps also a warning to those who might oppose him that he could bury them with email and public protest?  We shall see.

The age of radical is upon us.