Saturday, January 17, 2009

Just What We All Needed...

A tax increase:

Several states are considering the rare step of raising gasoline taxes to help fill growing budget gaps and potholed roads.

Politicians in California, Massachusetts, New Hampshire, Illinois and Oregon, for example, are introducing bills that would raise gasoline taxes for road and bridge repair, as state legislatures around the country begin their new sessions.

No, this is not going to help. There's been a lot of talk about what the government should do to help fix the mess, and an awful lot of disagreement. Most talk centers around "stimulus." Unfortunately, the discussion is mostly about exactly what the stimulus should look like, i.e., who are to be the "beneficiaries" of the government largesse, instead of a debate about the efficacy of the policy of profligate government in a period of recession. The short answer from the Austrian school is that it actually makes the situation worse. For more detail, Robert Murphy of the Mises Institute does an excellent job of explaining why. The reasons are pretty straightforward: resource misallocation and the "crowding out effect," where government competes with private enterprise for limited resources. He relates a particularly good analogy given by the late, great Milton Friedman for explaining the "waste" of capital that is nonetheless idle:
In the comments of a recent blog post, Mario Rizzo relates how in class Milton Friedman used the example of dress shirts on the shelves of department stores. Adopting Krugman's viewpoint, these shirts are "idle" inventory and are clearly being wasted in the sputtering private sector. Clearly the government ought to raise the deficit and spend a few billion dollars buying up these shirts, even if just to use them as rags on construction sites. Some critics might object that this is a "waste" of precious resources, but what good is a shirt on a store shelf?
Basically, if it doesn't make sense to shred a bunch of expensive dress shirts to use as industrial rags just because they are sitting idle on a store's shelf, it doesn't make sense to employ highly skilled workers at just anything to keep them busy. They are valuable. They need to find the best place for themselves in the economy, producing goods that people actually want to buy and being as productive as possible. Flooding the market with arbitrarily allocated government expenditures doesn't accomplish that. It is a waste, and it hurts the private sector as well, which tends to be far more sensitive to the needs of consumers (and less sensitive to political interest groups and vote-mongering!) So what's a good government to do? Several things:
  • Cut spending
  • Stop the confounded money printing
  • Reduce taxes
  • Resist the urge to interfere in markets, especially price fixing, large public works projects, etc.
  • Reduce regulation
All of these help make the painful adjustments which are necessary to find more stable economic footing more rapid and efficient. Even better, it could adopt the more permanent solutions:
  • converting to gold as money
  • outlawing fractional reserve banking
  • dissolve the Federal Reserve System
But I'm not holding my breath on any of these. Vox Day, in his infinite wisdom, has pointed to another, less harkened to, point in history which has parallels to today in his blog post for the most recent reading of Voxiversity:
Immigration, higher taxes, larger government, vast public works, increased government spending, and even currency devaluations didn't suffice to get the economy back on track in Constantine's day. Depending upon your perspective, it's either fascinating or depressing to note that central government's response to economic crisis has changed so little in 1,700 years. The jargon and the justifications may differ, but the fundamental actions remain the same.
Yes, he's talking about the 4th century, near the time of the fall of Rome. One particular part of a passage of a Medieval history text that he cites is hauntingly similar to things I have written in the not-so-distant-past:
Serious economic difficulties have moral causes, and there was no radical cure short of a complete change in the temper of society.
As I have said before, ultimately this is an ethical problem, not an economic problem. All the knowledge and understanding of how to fix the situation is worthless in the face of a population that is dead set against doing any such thing. If it is politically impossible then it is just not going to happen. It's the people that we have to somehow fix. On this, I must admit, I am somewhat confounded, though I do have a few ideas which I have yet to lay out. Someday, someday... In the meantime, any thoughts from others?

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