What the economics of illusion does is continually paper over economic disturbances with short run policies that provide the appearance of economic viability, but with the cost of distorting incentives for long run economic growth. This was hidden for a few of the decades after WWII because of technological innovations. As I have repeatedly argued here and elsewhere, if the Smithian gains from trade, and the Schumpeterian gains from innovation continue to outpace the stupidity of government policies, then economic growth will continue to happen to such an extent that tomorrow's trough will be higher than today's peak. But tomorrow's prosperity will not be as great or as generally shared as it otherwise would have been. In short, the economics of illusion just kicks the granade down the road.Read it at Coordination Problem
Is This How the Myth of the Laissez Faire Herbert Hoover Was Invented?
By Peter Boettke
On Friday Chris Dillow (Stumbling and Mumbling) provided an argument in defence of austerity touching on a similar idea:
The focus of policy should be upon long-term prosperity, not the here and now.There is widespread agreement that the economic situation today across the globe is far from ideal. Unemployment is high, especially compared to several years ago. Income inequality, though often exaggerated, is above many people’s comfort zone. Most economists will probably even agree that, in the short-run, further government stimulus could improve these factors.
Where the austerity and stimulus camps differ is their respective views of how short-term actions will affect long-run prosperity. Those pushing for greater stimulus seem to believe that the benefits from relieving current economic strains (namely unemployment) greatly exceed any costs from the “stupidity of government policies.” Dillow argues the reverse, noting that:
in the long-run, social norms matter. The persistence of big government threatens to create a norm in which young people to look for safe public sector jobs in sclerotic hierarchies, which would divert talent away from the private sector towards low-productivity-growth work. This could choke off future growth.Those who argue for austerity now (generally) do not maliciously wish to raise unemployment or increase inequality. The argument for austerity is that some economic pain is inevitable, but it is far better to get accept a little pain today than a lot of pain tomorrow.
Some people may counter that the future is uncertain and therefore it is our responsibility to act now, if we can. I’d point out that uncertainty runs in both directions and that by acting now, there is equally good reason to believe future prosperity will be reduced or less dispersed. My natural tendency is to think in what Robin Hanson (Overcoming Bias) calls “far mode.” I recognize that others may think differently and hold different values. Either way, I think understanding this distinction between the two sides is critical to coming to one’s own conclusions.