Thursday, January 17, 2008

Optimism Abounds

The Campbell Apartment at Grand Central Station.

My good friend Cortes DeRussy is optimistic about our economic future. In contrast to my pessimism over drinks and dinner two nights ago at the Campbell Apartment at Grand Central Station and Cafe Centro in the MetLife Building, Mr. DeRussy sent me the following quote from Alex Tabarrok writing in Forbes:

"People used to think that more population was bad for growth. In this view, people are stomachs--they eat, leaving less for everyone else. But once we realize the importance of ideas in the economy, people become brains--they innovate, creating more for everyone else.

"New ideas mean more growth, and even small changes in economic growth rates produce large economic and social benefits. At current income levels, with an inflation-adjusted growth rate of 3% per year, America's real per capita gross domestic product would exceed $1 million per year in just over 100 years, more than 22 times higher than it is today. Growth like that could solve many problems."

The Campbell Apartment and Cafe Centro illustrate free market change. The Campbell Apartment had been built as John W. Campbell's office and reception hall in Grand Central Station in the 1920s. Now it is a public bar and reception hall. Cafe Centro used to be Pan Am's airline ticket office. Now it is an excellent restaurant.

But is there reason for optimism? The past 40 years have seen the Fed's unrelenting expansion of the money supply despite reputed monetary policy change*; an increasing addiction to publicly manufactured credit; and virtually no movement toward repeal of the Progressive and New Deal regulatory regime. While liberals have mostly won on free trade, there is a strong impulse to revoke the gains and even stronger resistance to further progress. On balance, liberals have been successful on trade but failures with respect to money, permitting the Federal Reserve Bank to reallocate real resources in debtors' interest, in turn causing income inequality that the progressive-liberals now emphasize in agitating for additional taxes and regulation. Yet there is little movement toward further deregulation. The reason for lack of public debate about monetary inflation, which has caused serious disruption in countries like Germany, may be interest group capture of the Republican Party. The nation is reaching a stale mate. Future progress will require new strategies.

The US has been able grow, but there is no guarantee that growth can continue. How much misallocation is too much?

In New York, Mayor Michael Bloomberg has conceptualized a new scope for government regulation: personal wellness and fitness. Nationally, the emphasis is on adding environmental regulation. There is no impulse this year to discuss elimination of the massive waste in government in areas like the department of education.

Like Mr. DeRussy, David Boaz, head of the Cato institute, is optimistic. In response to my blog this morning on Mugwumps and libertarian strategy Mr. Boaz writes:

"I think Bill Niskanen would disagree with your suggestion that libertarians and conservatives haven’t had any effect. A couple of years ago he wrote, 'after a decade or so of gestation, almost all of the major economic policy proposals made during the past 30 years originated on the libertarian right'."

While I do not doubt that Messrs. Boaz and Niskanen are correct (and the Cato Institute has certainly been a crucial voice for reform), the reason is in no small part the Democratic Party's incompetence, with a resulting dearth of ideas. Naturally, the few good ones have come from the libertarian right, Milton Friedman and the Cato Institute.

Michael Cannon, director of health policy studies of the Cato Institute, also kindly responds to my blog. Mr. Cannon writes that the repeal of all campaign finance laws and instant-runoff voting are two changes that could improve libertarians' voice. He also notes a second Cato article by William Niskanen who 18 months ago offered the same idea that I proposed yesterday (although the Mugwumps beat Mr. Niskanen by 122 years):

"Increased outrage about the state of American politics and the prospect for a larger number of close elections increases the potential effectiveness of a different libertarian party — one that sometimes endorses one or the other major party candidate but does not run a party candidate for that position."

"The Libertarian Party’s efforts to promote their policy positions by running Libertarian candidates is counter-productive when they reduce the vote for their favored major party candidates. A disciplined group that is prepared to endorse one or the other major party candidate in a close election, however, can have a substantial effect on the issue positions of both major party candidates... conditions must be met to achieve this effectiveness...This is a strategy to increase the approval of libertarian policy positions rather than the usually counter-productive effort to increase the number of votes for Libertarian candidates. Maybe it is better to term the organization that I have described as a libertarian political action group, not a libertarian party."

Mr. Niskanen's idea is similar to what the Mugwumps did in the 1880s. It is true that there have been some policy successes, and perhaps I am unfairly pessimistic.

But where is the liberal momentum in this year of increasing inflation and monetary instability?

*Despite considerable PR about monetary targets, the inflation rate since 1979 has averaged 3.7%, considerably higher than it was before the establishment of the Fed in 1913. The 3.7% inflation rate may be understated because of exclusion of home purchase prices. At the same time, several foreign governments have acquired dollar denominated assets each equaling the total US money supply of $1.4 trillion.

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