Economic Ignorance Is Something You Have to Learn


Cato Institute Executive Vice President David Boaz trembles for a nation that believes Keynesian gobbledegoop:

Just when you thought economic ignorance couldn't sink any lower, a letter in the Washington Post criticizes Mitt Romney for repairing a brick walkway at his house rather than hiring a contractor — and thus "cheating people out of jobs."

Uh-oh. I just made myself a sandwich, thus cheating a deli employee out of a job. I drive myself to work instead of using a chauffeur, thus putting chauffeurs out of work. I do my own laundry — well, this could go on all day.

Of course, the writer's argument isn't really any different from the usual complaints about trade, outsourcing, and shutting down unprofitable businesses. Everyone seeks to produce as much output for as little expenditure as possible. That's why we trade with each other, so as to improve our standard of living. 

The point is well made, but this is a case where the real problem is the things people know that ain't so. For that you have to go not to the Wash Post's letters page but to its actual professional content. Sunday's paper contains a double shot of beard stroking on macroeconomics under the rubric "Did they do enough?" 

The question has two possible answers: Either the much-depleted Obama brain trust did enough or they should have done more. 

Taking the first option is Greg Ip, who alarmingly is identified as the U.S. economics editor of the Economist. Pressing the not-obscure insight that variations in economic vitality do not neatly follow the timeline of a four-year presidential term, Ip predicts that in 2014 our jet-pack-flying descendents will be pluperfectly enjoying "the economic rebound for which Barack Obama had worked so hard." Growth will be "humming," unemployment will be "steadily dropping" and the stock market will be "hitting one record high after another," but the ignorant voters will be giving all the credit to President Romney. Ip backs this up with some potted history that inevitably conceals more than it reveals: Jimmy Carter, who appointed Paul Volcker as Fed chairman and began large-scale deregulation (but who also, not noted here, rejected all the wooing of the supply-siders) gets credit for the boom on Ronald Reagan's watch. The boom that American enjoyed in Bill Clinton's time turns out to be the result of George H.W. Bush's decision (you guessed it!) to raise taxes in 1990. And so on. 

Simon Johnson takes up the didn't-do-enough theme in his double review of Noam Scheiber's The Escape Artists and Michael Grunwald's The New New Deal. (Here's Peter Suderman's review of the former book and my review of the latter.) Johnson briefly considers the central problem with the Post's dichotomy: 

As Scheiber's economists know all too well, activist fiscal policy got bad reputation in the decades before 2008, and for a good reason. It is very hard to fine-tune an economy using big and small changes in government spending and taxes. 

Half credit! It's "very hard to fine-tune an economy" using any tools. That seemed to be a clear lesson of the twentieth century workers' paradises, and it is implicit when politicians claim (usually following up with a "but") that the free market is the least-bad system for creating wealth. Spending and taxes can, however, have very destructive effects, and the best way for government to further an enterprise is by the alacrity with which it gets out of its way. As the Clinton-era example shows, you can have a boom even if you just slightly reduce the rate of spending growth. That's not fine-tuning, it's slightly easing the heavy hand of the state. The Post's rhetorical question leaves out such options as "Did they screw it up?" or "Did they do too much?" 

You get to this level of fantasy not by knowing too little economics but by knowing too much, by being persuaded that the same math you use when you shop around for bargains or balance your checkbook does not apply at the level of the macroeconomy. Unfortunately, Keynesian logic is like Videodrome: Once exposed to it you can never get rid of it, no matter how much trouble it causes. Nobel Laureate Paul Krugman recently claimed that brisk sales of the iPhone 5 will spur economic growth, thus proving the broken-window theory of economics. In fact, it's the opposite: People who buy the new phone think it will add value to their lives, not replace an equal amount of value that has been destroyed. As the Apple maps fiasco, the purple glare controversy, and this Jimmy Kimmel video suggest, they may be wrong about that. But that Krugman (who last year called for a hoax invasion by space aliens to spur spending) is down to such a transparently absurd argument suggests the time has never been riper to jettison both the new and old Keynesianism. 

Just don't look for either presidential candidate to do that. Right now the big question is whether Mitt Romney or Barack Obama will use his presidential job-creating powers to create more jobs. Mitt Romney is promising to create 12 million jobs, which strikes me as a strategic error. All Obama has to do is promise to create 13 million jobs and he'll obviously be the better candidate, because that's a lot more jobs.