ECO 481: Public Choice Theory Week 12: Macroeconomic Instability & the Climate for Liberty Dr. Dennis Foster

Economic Instability Marx & Keynes - an inherent flaw in capitalism. Schumpeter - inherent, but advantageous. Austrians - not inherent nor advantageous. Highly valued; rarely seen. Why? Economic ignorance. Self-interest of political decision-makers.

Economic Ignorance Economists are not physicists. Agreement on variables doesn’t matter. Data - not current; not complete; uncertain; costly to collect; unreliable. Has stimulus kept Ur under 8%? Macro policy - offer with humility. Can we tell the fool from the demagogue?

Humility Explained, or not … “If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months.”

Instability = f (self-interest) Wealth, income, power, status come from: Having more to do. (“Getting the job done.”) Not getting the job done. “Fighting” unemployment is esp. rewarding: cut taxes and raise spending! Appear to fight deficits; do so is political suicide. “[M]arket fluctuations, in turn, provide rhetorical ammunition for politicians wanting to inject the government still more into economic life.”

Political Business Cycles  money supply in last 2 years of term. SR gains - reduced unemployment. LR costs - inflation; deal with later. Evidence from U.K. and U.S. Even Keynesian prescriptions are not followed: raise taxes and cut spending during recovery. Is Obama a Keynesian? “And, of course, deficits are at all time highs.”

Deficits

The Problem w/Macro Policy Ignores micro principles. People make choices & respond to incentives. Macro aggregates ignore the individual. Provide $ to bridge unemployment gap. Now - incentivizes people to stay unemployed. Policies discourage saving/investment. Tax exempt mortgage; crowding out.

GDP (2011) = $18.3 tr. vs. $13.3 tr. 1990 - 2011 net gain = $34.6 tr.

Reducing Deficits Three choices - taxes, spending, MS. Text on Paul Ryan’s plan!! Current dilemma - $4 b. or $60 b. or $100 b. on a $500 billion deficit? AZ experience - sell & lease; defer payments. Can we even hope for a 19% solution?

A Climate for Liberty Limiting Government Let Markets Handle It Coase – regulations make things worse. Invisible hand of politics does not lead to collective good. The problem is not about electing “good” people. Let Markets Handle It One size doesn’t fit all; probably not any. Contracts coordinate activity not planning. Be wary of market failure.

A Climate for Liberty Try Freedom Establish the Rule of Law It’s not about democracy. Highly correlated with health & wealth. Establish the Rule of Law The world is full of “dead” capital. Does foreign aid help? It’s all about property rights.

ECO 481: Public Choice Theory Week 12: Macroeconomic Instability & the Climate for Liberty Dr. Dennis Foster