Thursday, January 23, 2014

"Managing" An Economy Without Statistics

One way to do it is just to do it:
Cowperthwaite was a humanist in a field that had fallen victim to social science. I have no great confidence that Chairman Yellen will follow his lead—even if I advise her to do so—and banish statisticians from her cold marble temple on Constitution Avenue. As a highly decorated economist, she has reached the top of a trade that considers statistics indispensable to its own functioning. 

But Cowperthwaite didn’t believe it. Stripped of his numbers an economist would have to resort to the old home truths about how the world works: If you tax something you get less of it; as a general rule an individual manages his own affairs better than his neighbor can; it’s rude to be bossy; the number of problems that resolve themselves if only you wait long enough is far larger than the number of problems solved by mucking around in them. And the cure is often worse than the disease:
In the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster.
Somehow the most successful practical economist of the twentieth century knew this was true, and he didn’t have to work out a single equation.


maxutils said...

Economic theory, properly applied, can't really predict anything beyond a micro level ... and, while it is possible to get a general sense of a policy's magnitude of effect on an individual market, it is likely to be fairly inaccurate. On a macro level? Forget about it. The potential for a president, or even congress to have a significant, positive effect on the economy is minimal. I haven't read this particular economist, but I agree completely...

allen (in Michigan) said...

On the contrary, it's easy for a president or Congress to have a significant, positive impact on the economy. All that's necessary is to come to grips with the truth that government isn't a positive force in the economy. Ever.

Where government works to expand the economy is where government does as little as necessary and puts that "necessary" continually under a microscope.

maxutils said...

"Ever" is simply wrong ... but, on a macro level it usually is. You leave out the possibility, however that government could improve the economy by removing itself from the process ... or providing tax incentives that encourage growth rather than stagnation. NY has been running ads in CA (I don't know if you've seen them in MI) offering tax free status for new businesses for 10 years ...the theory, obviously is you don't tax the business, but you did just create jobs ... and those employees pay taxes. I'll be interested to see if it works.

allen (in Michigan) said...

"Ever" is a starting point. It's the assumption, in a single word, that government's always a drag on the economy and that extraordinary circumstances make the cost worthwhile. The assumption stands in polar opposition to the rather widely-held belief that all government expenditures are a good idea until forcefully proven otherwise and even then, it's no big deal.

As for "tax incentives that encourage growth rather than stagnation", please.

New York's running those ads (in Michigan as well) because New York's rightly earned a reputation as business-hostile. New York will probably get some takers but the campaign is tacit proof of that hostile business environment.

Further, tax incentives, as the steady drumbeat of bankruptcies among "green" businesses proves, inevitably results in "crony capitalism". There may be a legitimate business here or there that benefits from those tax incentives but human nature ensures that those with fraud in their hearts will thrust aside those trying to run a legitimate business when pursuing government money.

Lastly, the number of successful interventions which I can think of pales in comparison to the number of failures.

The only two that come immediately to mind are the Kelly Act of 1925 that authorized the transportation of mail via aircraft kickstarting, it's assumed, the commercial air industry although I have serious reservations about that claim and the interstate highway system via the Federal Aid Highway Act of 1956.

Both are based on legitimate, government responsibilities - transporting the mail and defending the nation and they've worked out relatively well although a case can be made that both would have been accomplished without government aid. Outside those two feel free to suggest some candidates because I'm just not seeing any.

maxutils said...

I'm not arguing against your starting point ... but there are recognized areas where government need to become involved, or the consequences will be worse than the inefficiency (which, allen, you are entirely correct about) that will inevitably result. Fire protection .. police... national defense ... power... all pads, not just highways ... sewer systems ... pollution control ... product liability enforcement ...