Friday, July 29, 2011

Why "Central Planning Lite" Failed

Beyond the sound and fury of the debt-ceiling debate is a signification that means something. It is "The Failure of Central Planning Lite," as Robert Tracinski puts it.

It is the failure of the faith that the Fed and the Treasury could manage the business cycle and avoid big swings with properly timed economic interventions.

This system can be thought of as Central Planning Lite. By the time Communism collapsed in 1989, it was no longer plausible to claim that full-blown socialism or full-blown central planning were the wave of the future. But our political and intellectual leaders were not quite willing to give up on the dream, so they insisted that we could have a watered down Third Way between capitalism and communism.

No we can't. The Crash of 2008 and the pathetic recovery of 2009-11 give the lie to that conceit. But what is the real problem? What went wrong?

The problem is that the Fed and the Treasury actually have an impossible task. Their job is to mitigate the distortions that politics inserts into the economy.

Politicians are politicians. Their trade is winning elections, and they win elections by promising benefits and subsidies and cheap credit to their supporters. These actions distort the economy in various ways, and so the politicians need economists to tell them how to get out of a jam when all the bases are loaded and the count is 0 and 2. Keynesian economics is a way of trying to game the economic system in a downturn to minimize the damage to the beneficiaries of government largesse. It is, therefore, not a way of structuring the economic system to make it safe, but a way to game the system in the hopes of minimizing the consequences of government interventions. The trouble is that it doesn't work very well.

Ludwig von Mises writes that a recession is the period of adjustment for the liquidation of the malinvestments of the previous boom. Keynesian economics wants to slide out of the recession with bridge loans and printed money--but without actually fixing the problem, the malinvestments encouraged by the cheap credit in the previous boom.

So the experts end up advising the government how to cheat, rather than setting up the parameters for a fair and just economic system.

You can call this the Treason of the Clerics, or the Co-optation of the Experts. Either way it is a big problem. Ever since Wilhelm von Humboldt set up the first research university in the early 19th century, governments have looked to academic experts to support and advise them. The result is that our academic friends have ended up in the pockets of the politicians, using their expertise to advise the politicians on how to maximize their power. Whether it is physicists helping build H-bombs, sociologists helping organize the welfare state, economists helping government game the credit system, or climate scientists inventing hockey sticks, the problem is clear. The professors have entered into a pact with the devil. In return for grants and funding and fame they have danced to the politicians' tune. They have helped build the big government state and helped to damage the health of civil society, the space between government and the individual.

We do not know whether the ordinary people are ready to tell the government to stop gaming the economic system, although the Tea Party gives us cause for hope. But the time is long past for honorable experts to stop feeding the beast, from Central Planning Lite to the whole corrupt bargain of the modern authoritarian welfare state.

After all, the first responsibility of an expert is to do no harm.

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