My friend and former business manager John Mauldin has become an economist. I hate to see this.
He is a good analyst. He is a good commentator on business trends. His site is a veritable clearing house of insights of famous market analysts. But now he has wandered astray. He has become an economist.
His most recent newsletter begins with these insights:
In this business we spend a lot of time thinking about problems. What if we could wave a magic wand and make them all go away? Maybe we can.The wand isn't made from wood. You don't need Latin phrases or a special incantation learned at Hogwarts to make it work, either. It's a simple six letter word: growth.
Get the economy growing at a decent pace again, and most of our problems will get better. Conversely, they'll only get worse if we stay in slow-growth mode. And don't even think about what a recession will do to the markets in this environment.
Fortunately, there are things we can do to bring growth back. We just have to decide to do them.
He has now adopted the defining outlook of all academic economists, except for Austrian School economists. It is a four-word phrase: "If pigs could fly."
He does not literally say this. Economists never do. He substitutes a shorter phrase: "if we just."
I wish to focus here on the key concept: "We."
The term "we" is best understood in this context in terms of the punch line of a famous hypothetical exchange between the Lone Ranger (a Chicago School economist) and Tonto (a member of Congress): "What you mean 'we,' paleface?"
The Austrian School outlook is best seen in the response of Ludwig von Mises to this question: "Professor Mises, if you were given complete power over the economy, what would you do?" His one-word answer defines the Austrian School: "Resign."
If the political reformer has enough power to reform the economy, he has the power to make it worse.
Think of these words: "Alan Greenspan" and "Federal Reserve System."
FLYING PIGS
Mauldin cites John Cochrane, a former economics professor at the University of Chicago. He is now on the staff of the Hoover Institution. He cites a paper -- an ancient term relating to the pre-Internet world, comparable to "rewind" and "video footage" -- by Cochrane on economic growth. You can read it here:
Cochrane offers this assessment:
Our economy is like a garden, but the garden is choked with weeds. Rather than look for some great new fertilizer to throw on it, why don't we get down on our knees and pull up the weeds? At least we know weeding works! For another metaphor, our economy has become like a hoarder's house. For a while he could get through the passages and keep life going, but now the junk is closing in. Well, rather than read the architectural magazines about just what the perfect house will look like, let's get to work cleaning up the mess.
Notice the term "our." It implies ownership. Therein lies a problem. This problem was best formulated by economist F. A. Harper back in 1949: "The corollary of the right of ownership is the right of disownership. So if I cannot sell a thing, it is evident that I do not really own it." [F. A. Harper, Liberty: A Path to Its Recovery (Irvington-on-Hudson, New York: Foundation for Economic Education, 1949), p, 106.]
I can make changes in whatever I own. I can even sell it.
I therefore have a problem with the concept, "our economy." So did Mises, when he said: "Resign."
In what way do "we" own "our economy"?
How can "we" get together to reform it?
Dr. Cochrane has a plan.
PoliticsAlas, such a common-sense, weed-the-garden program has little attraction to many ambitious politicians. Many politicians want a big new program, big new laws and initiatives -- a New Deal, a Fair Deal, a Great Society. They don't see cleaning up the mess left behind by their predecessors as the way to getting one's face carved on Mt. Rushmore, let alone to win an election. Economists like big new ideas and programs too. Nobody got a Nobel prize for saying, let's take Adam Smith's 250 year old classics to heart.
But it is a big idea, a big program, and one that needs and will reward the courageous leadership of great politicians.
We have now come to the economists' world-famous flying pig: "the courageous leadership of great politicians."
He goes on . . . always under the assumption of "our economy."
Everybody has to give up their little deal, protection, tax break and subsidy; everyone has to allow their businesses or profession to be open to competition. Each person must understand that the small loss that he or she will experience directly will be more than made up by everyone else giving up theirs. Politically, rather than fall back on "I'll support your little deal, you support mine," everyone has to become part of the coalition that supports reform -- "no, I'm not getting mine, so I'm not going to support you getting yours."
This assumes an articulate coalition of politicians who speak in the name of determined, well-informed constituents, who can "weigh" -- a favorite term of non-Austrian economists -- objective costs against objective benefits. These voters have somehow come up with index numbers of benefits and costs which can guide politicians in establishing bilateral exchanges of government wealth-extraction programs. "You give up your program of theft by ballot box, and I'll give up mine."
But, it turns out, there are tens of thousands of these programs, with each represented by at least one federal agency. There has yet to be discovered a political way to trade off any set of benefits (funding) to these agencies, which are 100% losses from their point of view. These agencies represent entrenched political constituencies, especially constituencies of multi-billion dollar benefit-seekers in the business community. Think "PAC."
It is not possible to get bilateral exchanges of reduced costs. There are too many beneficiaries who know their interests. Change one federal budget, and this change will have negative secondary effects throughout the economy. Or, as economists also affirm, "you can't change just one thing."
The beneficiaries see their opportunities, and they take them. This is the specialization of knowledge. Those vast numbers of uninterested and uninformed people who pay for the specialized benefits to specific groups do not organize to call a halt to specialized programs. The benefits of political looting are concentrated. The costs are diversified and essentially invisible. A theory of information costs, when coupled with a theory of political mobilization costs, reaches this conclusion: the cost-cutting pigs cannot fly.
Then how can the system be reformed? By bankruptcy, which is the pathway of political looting. The unfunded liabilities of the U.S. government, discounted to the present, is over $210 trillion.
PIG LATIN
Mauldin says: "you don't need Latin phrases." On the contrary, no economist can operate without two key Latin phrases: "ceteris paribus" (other things remaining the same) and "caveat emptor" (let the buyer beware).
I am curious: When in the history of post-Adam Smith mass democracy have courageous politicians gotten together to begin to make any bilateral exchanges? "I'll vote against one well-organized group of my constituents' major self-interests in exchange for your sacrifice of your well-organized constituents' major self-interests."
I suggest a preliminary answer: "The next time will be the first."
An individual owner can make trades and trade-offs in his allocation of resources. So can two individual owners. So can three. These are exchanges between or among individual owners. They key term here is "owners."
The absence in history of any such series of political trade-offs described by Cochrane brings to mind a famous story.
Did you hear the one about a physicist, a chemist, and an economist who were stranded on a desert island without any food, when all of a sudden a can of beans was washed ashore? The physicist identifies the pressure points in the can and proposes pounding it with a rock until there's an opening. The chemist wants to put the can in a fire and wait for it to explode. No, no, no, says the economist, that's not necessary: Let us assume a can opener.
Dr. Cochrane assumes that most rare of can openers: courageous politicians. In Congress. I regard this as a flying pig.
Then he escalates the degree of unreality: a majority vote in Congress.
Then he assumes a courageous President, who will sign such legislation, which will reduce the funding going to the executive branch.
He also assumes the compliance of entrenched constituencies.
In short, he assumes flying pigs.
COMMITTED PIGS
There is another pig story worth considering. Wikipedia summarizes the story of the chicken and the pig:
A Pig and a Chicken are walking down the road.The Chicken says: "Hey Pig, I was thinking we should open a restaurant!"
Pig replies: "Hm, maybe, what would we call it?"
The Chicken responds: "How about 'ham-n-eggs'?"
The Pig thinks for a moment and says: "No thanks. I'd be committed, but you'd only be involved."
This story is silly, of course. The pig would not think for a moment.
But in Dr. Cochrane's hypothetical world, pigs and chickens can and perhaps someday will make tens of thousands of these trade-offs . . . in Washington.
Cleaning out the weeds also needs a large effort of simple governance. The President has to revisit and rewrite the mass of executive orders and memos. The Congress has to get serious and pass laws that are actually laws, not thousand page instructions for agencies to figure things out. It has to get around to repealing laws everyone understands are bad -- the Jones act restricting shipping, the ban on oil exports, and so on -- and reforming laws that everyone understands need to be reformed. It needs to actually follow its own budget law. The heads of agencies will have to renew the staff and reorient them to growth-oriented policy, and undertake a sweeping house-cleaning of regulations and procedures. They will have to implement managerial techniques such as pervasive cost-benefit analysis, regular retrospective review, and sunsets.All of this is hard too. But it is the basic work of competent, growth-oriented government.
Government is indeed growth-oriented. It favors perpetual growth . . . of government. That is why "we" have "our" economy.
Dr. Cochrane invokes the Chicago School's golden rule:
The golden rule of economic policy is: Do not transfer incomes by distorting prices or slowing competition and innovation. The golden rule of political economics seems to be: Transfer incomes by distorting prices and regulating away competition. Doing so attracts a lot less attention than on-budget transfers or subsidies. It takes great political leadership to force the political process to obey the economic rule.
The rare pig keeps reappearing: great political leadership.
Warning: these pigs are much rarer than black swans.
DR. COCHRANE'S LIST OF FLYING PIGS
Dr. Cochrane devotes many, many words to the following reforms:
Regulation
Finance
Health
Energy and Environment
Taxes
Debt and deficits;
Social Security and Medicare
Social programs
Labor law and regulation
Immigration
Education
Free trade
Price supports
Criminal justice reform
Faster FDA approval of drugs
Patent law
Infrastructure
National Labor Relations Board reform
Equal Opportunity Employment Commission reforms
I have been reading economists ever since 1958. This is the most impressive list of flying pigs I have ever seen. Congratulations, Dr. Cochrane!
But, sad to say, Dr. Cochrane is a still Chicago School economist. He skips over the abolition of the Federal Reserve System. They always do. In their view, not only should this pig never fly, it should not be allowed to fly. It must simply reform itself.
Mauldin lists some of these, but not all of them. He does not give sufficient credit to the creativity and comprehensive nature of Dr. Cochrane's list.
3% GROWTH PER YEAR
Mauldin's article offers these as ways to restore economic growth in the United States. He wants it to go back to 3%.
I regard 3% growth in today's financial, fiscal, regulatory, and political world as a pig unlikely to fly in the United States until after the Great Default of the federal government, when the pigs will be slaughtered. For as long as voters depend on the U.S. government to bring home the bacon, the political pigs will keep their snouts in the trough. That's what pigs do.
RECESSION
Finally, as Mauldin cogently observes, "And don't even think about what a recession will do to the markets in this environment."
But I do think about it. I think about it a lot.
So should you.
© 2022 GaryNorth.com, Inc., 2005-2021 All Rights Reserved. Reproduction without permission prohibited.