Valuing the Future Over the Here and Now

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.

Quote of the Week

...is from page 5 of Milton and Rose Friedman’s classic book, Free to Choose: A Personal Statement:

In the government sphere, as in the market, there seems to be an invisible hand, but it operates in precisely the opposite direction from Adam Smith's: an individual who intends only to serve the public interest by fostering government intervention is "led by an invisible hand to promote" private interests, "which was no part of his intention."

News headlines over the past few weeks have been rife with examples of the invisible hand in reverse that the Friedman’s highlight. The Jumpstart Our Business Startups (JOBS) Act that was signed into law this week exempts small, newly public companies (those with less than $1 billion in revenues...seriously?!) for 5 years from disclosing executive compensation, having “an auditor attest to their internal financial controls” and “comply[ing] with all the accounting rules required of public companies today.” Further, “banks underwriting their IPOs may be able to issue research reports on the stocks ahead of the offerings, a practice prohibited a decade ago after analysts pumped dot-com stocks their firms were helping take public.” While this bill may encourage more companies to become public, it also promotes several types of fraud that have cost investors dearly over the years.

Apart from the JOBS Act, the current debate over the individual mandate is in part due to the stranglehold on Congress held by private health insurance companies. Instead of creating a single-payer health care system, the current bill protects and improves the position of health insurance companies by mandating the entire population by their products.

These are just two recent examples but there are countless others that include special tax breaks for oil companies, bailouts of automotive companies and lax capital requirements for banks. This is not to suggest that individuals’ in government purposefully seek to promote the interests of a few over the many, but rather that the structure of the institutions and personal desire for re-election lead to this outcome.

From an economic perspective, I agree with many individuals on the left that large budget deficits currently continue to play an essential role in reducing unemployment and promoting economic growth. However, in light of this view, it is important to remember that big government increases the returns to and proliferation of crony capitalism. Weighing the benefits and costs of these options is rarely easy, but the wonderful aspect is that we remain “free to choose.”