lecture 16 economic stability and growth
TRANSCRIPT
-
8/13/2019 Lecture 16 Economic Stability and Growth
1/36
A Libertarian Perspective on
Economic and Social Policy
Lecture 16
Economic Stability and Growth2009 Jeffrey A. Miron
-
8/13/2019 Lecture 16 Economic Stability and Growth
2/36
Introduction
Traditional libertarianism is most often associated withmicroeconomic issues, and the standard libertarianinsights might seem better suited for addressing thosekinds of policies.
Macroeconomic policies are important too, however; These policies affect the entire economy, so the potential for
benefits or costs are greater than for many micro policies.
And, bad economic times often give rise to bad economicpolicies generally.
So, even libertarians might consider intervention to improve the
overall functioning of the economy if this intervention works andpromotes better policies in other areas.
This lecture examines a range of macroeconomicpolicies from a libertarian perspective.
-
8/13/2019 Lecture 16 Economic Stability and Growth
3/36
Introduction, continued
Despite the fact that issues of rights,
externalities, and the like are less obviously
relevant for macroeconomic issues, I will
suggest that the version of libertarianism I havepresented in this course thoughtful cost-benefit
analysis is just as useful for examining macro
policies as it is for examining micro policies:
And this approach leads to similar conclusions:
Most interventions do more harm than good.
-
8/13/2019 Lecture 16 Economic Stability and Growth
4/36
Outline
Stabilization Policy
Deficits
Central Banks and Money
Fixed Versus Floating Exchange Rates The Exchange Rate as a Target
The Balance of Trade
Free Trade Immigration
Foreign Aid
-
8/13/2019 Lecture 16 Economic Stability and Growth
5/36
Stabilization Policy
Until the Great Depression of the 1930s, thefocus of most economics was micro: The idea that the overall economy could suffer a
general, coordinated decline was not given much
attention.
Instead, analysis addressed the behavior and failuresof individual markets, assuming that with a largenumber of individual markets, some growing and
others declining, overall economic progress would bereasonably steady, and any fluctuations would reflectexogenous, unavoidable events such as weather ordisease (e.g., the bubonic plague).
-
8/13/2019 Lecture 16 Economic Stability and Growth
6/36
Stabilization Policy, continued
The Great Depression changed this view:
Many economists concluded that capitalist economies
could suffer substantial, prolonged downturns from
which they would not quickly recover on their own. Macroeconomists therefore developed two
things:
A theory of cycles and recessions (based on sticky
prices); A theory of how policy could reduce or eliminate
these cycles, i.e., stabilize the economy.
-
8/13/2019 Lecture 16 Economic Stability and Growth
7/36
-
8/13/2019 Lecture 16 Economic Stability and Growth
8/36
Problems with Stabilization Policy:
The Lags are Long and Variable
A basic problem with stabilization policy is
that it affects the economy with a lag:
This is partly because it takes time to
recognize that the economy is going into a
recession;
This is partly because it takes time to choose
and implement an appropriate policy; This is party because it takes time for the
chosen policy to affect the economy.
-
8/13/2019 Lecture 16 Economic Stability and Growth
9/36
Long and Variable Lags,
continued The lags would not be an issue if forecasting were easy
and if the lags were of fixed or highly predictable length: Under these assumptions, policymakers can simply start
adjusting policy in anticipation of an expected downturn, therebysmoothing out the cycle.
In practice, however, forecasting is an inexact science,and the lags in policy are long and variable.
Thus, attempts at stabilization can easily be counter-productive, i.e., destabilize the economy.
The evidence on whether policy has stabilized or destabilizeddoes not make a compelling case in either direction.
But it certainly fails to indicate that policy has on average been astabilizing force.
-
8/13/2019 Lecture 16 Economic Stability and Growth
10/36
Aside: What did We Learn from the
Great Depression? The Great Depression was regarded at the time as proof
that economies are inherently unstable and thatstabilization policy is needed.
In fact, later research (Friedman and SchwartzsAMonetary History of the United States) argues that amodest recession became the Great Depressionbecause the Fed allowed the money stock to fallsubstantially: Thus, F&S claim the Great Depression resultedfrom bad policy,
rather than being evidence that active policy is desirable.
There is a range of opinion among reputable economistsabout the FS hypothesis. But few deny the possibility that policy contributed substantially
to the outcome.
-
8/13/2019 Lecture 16 Economic Stability and Growth
11/36
Long and Variables Lags,
continued A possible response to the long and variable lags is that
policy should attempt to stabilize, but cautiously: That is, only take action in response to large, obvious shocks,
rather than attempting to fine-tune.
In fact, there is no longer much support for fine-tuning, despite
continued support for some degree of activism. A second possible response is that, over time, the
uncertainty about policy and the difficulties in forecastingwill diminish; Plus, there will be learning by doing, so its useful to practice.
These arguments are not totally silly, and if there wereno other costs to stabilization policy, they might bepersuasive.
But there are substantial other costs.
-
8/13/2019 Lecture 16 Economic Stability and Growth
12/36
-
8/13/2019 Lecture 16 Economic Stability and Growth
13/36
Problems with Stabilization Policy:
Growth versus Stabilization
A related problem with the focus on
stabilization policy is that it distracts from
thinking about growth:
There is a reasonable case that the benefits
of even slightly faster growth swamp any
benefits of reduced fluctuations.
The stabilization view therefore encouragesthinking about the less important issue.
-
8/13/2019 Lecture 16 Economic Stability and Growth
14/36
Problems with Stabilization:
Adding Uncertainty
A different effect of stabilization policy is thatthe private sector expends resources forecastingwhat policy is going to do, instead of justforecasting what the economy is going to do.
This is wasted effort; the extra uncertaintycomplicates life for the private sector.
Indeed, there is a plausible case that some
instability arises from the private sector trying tofigure out what policy is going to do, rather thanfrom inherent instability.
-
8/13/2019 Lecture 16 Economic Stability and Growth
15/36
Problems with Stabilization Policy:
Microeconomic Considerations One standard tool of stabilization policy is increased or
decreased deficits: Cutting taxes or raising expenditure expands the economy, and
vice versa, so policy can attempt to offset fluctuations byadjusting taxes or expenditure.
The problem is that taxes and expenditure havemicroeconomic implications, independent of any impactson stabilization. That is, Deficit = G T
And we should care about the levels and composition ofG and T separately, not just the difference.
It is possible that policy should consider both effects: But it certainly should not ignore the micro side.
-
8/13/2019 Lecture 16 Economic Stability and Growth
16/36
Deficits and Debt
The conventional view of budget deficits and governmentdebt is that these are bad things:
In particular, the standard claim is that when thegovernment runs a deficit it must borrow from the
public, which raises interest rates and crowds outprivate investment.
This view is reasonable, but it is not the only possiblescenario:
Under Ricardian equivalence, deficits have no effect.
Existing evidence suggests the U.S. economy is some-where between the extreme views.
-
8/13/2019 Lecture 16 Economic Stability and Growth
17/36
Deficits, continued
How should libertarians feel about deficits?
The first reaction should that expenditure is toohigh in most economies and should be reduced,independent of the deficit.
If this occurs, deficit issues become moot. A second reaction might be that, even if
expenditure is not cut right away, starving thebeast helps control expenditure over time:
Thus, (virtually) all tax cuts are a good thing, even ifthey raise the deficit.
In fact, the evidence does not support STB.
-
8/13/2019 Lecture 16 Economic Stability and Growth
18/36
Central Banks
If stabilization policy is undesirable, is there agood reason for a central bank?
No. Once a central bank exists, it will intervene.
The only intervention that is necessary in connectionwith money (i.e., the means of payment) is thatgovernment must establish what form of payment itaccepts in those transactions it conducts.
This may establish a default money.
But everything else can be done privately.
Note that the U.S. got along quite well without acentral bank until 1914.
-
8/13/2019 Lecture 16 Economic Stability and Growth
19/36
Fixed Versus Floating
Exchange Rates
A different macroeconomic question that
economies confront is whether to have a
fixed or floating exchange rate.
Eliminating the central bank does not
avoid this issue, since Treasuries can and
do attempt to peg exchange rates.
And its an important question for countries
that do have central banks.
-
8/13/2019 Lecture 16 Economic Stability and Growth
20/36
Fixed Versus Floating
Exchange Rates, continued
This is an easy issue: There is no sensible case for fixed rates.
The negative things people associate with
exchange rates (e.g., currency crises) can onlyhappen under fixed rates: Under floating, the rate simply adjusts to changes in
the demand and supply, just like for any other good.
Moreover, much of the uncertainty aboutdemand and supply occurs because offluctuations in government policy towardexchange rates and related issues.
-
8/13/2019 Lecture 16 Economic Stability and Growth
21/36
-
8/13/2019 Lecture 16 Economic Stability and Growth
22/36
The Current Account Deficit
In addition to worrying about the exchange rate,
countries worry about current account deficits.
The balance of trade of any country is the record
of all its transactions with the rest of the world. This balance of trade has two pieces:
The current account, which records trade in goods
and services. It equals exports minus imports and is
often referred to as net exports.
The capital account, which records trade in assets.
-
8/13/2019 Lecture 16 Economic Stability and Growth
23/36
The Current Account Deficit,
continued
An inescapable fact of accounting is that thebalance of payments always balances: CA + KA = 0.
In words, if I buy a bottle of wine from France, theU.S. has a CA deficit but an offsetting KA surplus:
Goods flowed into the U.S. but an asset (the dollars Ispent on the wine) flowed out.
NB: if I first bought francs from France, that was a
wash in the KA. The CA and KA do not necessarily balance
individually and in fact are zero only rarely.
-
8/13/2019 Lecture 16 Economic Stability and Growth
24/36
The Current Account Deficit,
continued The question is, should a country care whether its CA is
positive or negative?
If the CA is negative, it means the country is borrowingfrom the rest of the world.
There is nothing inherently bad about that. A CA deficit might be a reflection of underlying problems:
A CA deficit occurs when domestic saving is low.
So, if there are policies that inappropriately discouragesavings, it makes perfect sense to undo those. But this would be true in a closed economy.
The CA deficit plays no independent role.
-
8/13/2019 Lecture 16 Economic Stability and Growth
25/36
Free Trade
Of all the propositions in economics, the view that freetrade is best is perhaps the most widely held. And forgood reason: Barriers to trade such as tariffs or quotas reduce or prevent
Pareto-improving exchange;
And trade has additional benefits, such as providing competitionfor domestic industry.
Are there reasonable arguments for restrictions? In theory, perhaps, but in practice, no.
This does not mean trade is always good for everyone: It adversely impacts low-skill labor in high-wage countries.
But it also helps low income workers through standard channels,and it makes more sense to redistribute directly, if warranted.
-
8/13/2019 Lecture 16 Economic Stability and Growth
26/36
Free Trade, continued
The libertarian view, therefore, is that any
country with trade barriers should remove them,
unilaterally and immediately.
The one possible argument against thisapproach is that, by threatening to retain its
trade barriers, a country like the U.S. might
convince other countries to reduce theirs.
This is possible in principle:
In practice, it simply seems to be an excuse for further
delay in removing existing barriers.
-
8/13/2019 Lecture 16 Economic Stability and Growth
27/36
Immigration Restrictions
Until the end of the 19th century, the U.S.had virtually no regulation of immigration.
During the early 20th century, there was
some regulation and a few notoriousrestrictions enacted (in particular, theChinese Exclusion Act of 1882).
But overall, immigration was barelyregulated by todays standards, andimmigration rates were high.
-
8/13/2019 Lecture 16 Economic Stability and Growth
28/36
-
8/13/2019 Lecture 16 Economic Stability and Growth
29/36
Immigration
Most (rich) economies restrict immigration
substantially.
There is no good efficiency argument for this; in
fact, restrictions reduce global efficiency. The only argument is distributional:
Existing low-wage workers are likely to lose out as a
result of immigration, which fits with the fact that
unions and other low-wage groups strongly opposerelaxed immigrations restrictions.
-
8/13/2019 Lecture 16 Economic Stability and Growth
30/36
Immigration, continued
The libertarian position is that income effects are bestaddressed, if at all, using other policies such as an NIT.
Thus, libertarians tend to favor eliminating all barriers toimmigration.
The only possible caveat is that one significant group ofbeneficiaries the immigrants are not (yet) citizens orresidents of the country allowing the immigration. So, some would argue they deserve less weight in the social
welfare calculation.
If there were no costs of immigration restrictions, thismight be a tough issue.
But there are such costs.
-
8/13/2019 Lecture 16 Economic Stability and Growth
31/36
Costs of Immigration Restrictions
Like all prohibitions, those on immigration
generate black markets, with all the standard
negative effects:
Violent dispute resolution Disrespect for the law
Rewarding the relatively dishonest
Corruption
Reduced product quality
Plus, there are direct costs of enforcement.
-
8/13/2019 Lecture 16 Economic Stability and Growth
32/36
Immigration and Security
A different argument for restricting immigration is
that this is necessary to keep out terrorists.
But the restrictions do not work particularly well:
Tons and tons of illegal drugs enter every year Hundreds of thousands of illegal immigrants enter
every year
It is hard to see how a determined terrorist is
affected by any enforcement regime we canimagine.
-
8/13/2019 Lecture 16 Economic Stability and Growth
33/36
Foreign Aid and Lending
In addition to trying to manage their own
economies, some countries (the rich ones)
attempt to manage developing economies.
The main mechanism is organizations like
the IMF and the World Bank, which lend to
poor countries conditional on adoption of
the right economic policies.
-
8/13/2019 Lecture 16 Economic Stability and Growth
34/36
Foreign Aid and Lending, continued
This policy sounds sensible in theory; thepractice is much tougher.
First, stabilization policy is difficult at best, asdiscussed above.
Second, ensuring that the recipient countriesfollow these policies is hard.
Third, there is much scope for diversion of the
funds to bad purposes. Fourth, the incentives of the IMF, WB are to
keep making loans, not to be tough.
-
8/13/2019 Lecture 16 Economic Stability and Growth
35/36
-
8/13/2019 Lecture 16 Economic Stability and Growth
36/36
Conclusions
Eschew active stabilization policy.
Choose spending levels and tax programsbased on efficiency considerations.
Eliminate the Fed; fix the money stock atwhatever it is now (or adopt a rule).
Let the exchange rate float.
Ignore the exchange rate and the CA deficit in
making policy. Free trade, unrestricted immigration.
Leave other countries alone.