ECO 481 Public Choice Theory Week 12 Macroeconomic

ECO 481: Public Choice Theory Week 12: Macroeconomic Instability & the Climate for Liberty Dr. Dennis Foster

Economic Instability • Marx & Keynes - an inherent flaw in capitalism. • Schumpeter - inherent, but advantageous. • Austrians - not inherent nor advantageous. • Highly valued; rarely seen. Why? • Economic ignorance. • Self-interest of political decision-makers.

Economic Ignorance • Economists are not physicists. • Agreement on variables doesn’t matter. • Data - not current; not complete; uncertain; costly to collect; unreliable. • Has stimulus kept Ur under 8%? • Macro policy - offer with humility. • Can we tell the fool from the demagogue?

Humility Explained, or not … “If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. ”

Instability = f (self-interest) • Wealth, income, power, status come from: • Having more to do. (“Getting the job done. ”) • Not getting the job done. • “Fighting” unemployment is esp. rewarding: cut taxes and raise spending! • Appear to fight deficits; do so is political suicide. • “[M]arket fluctuations, in turn, provide rhetorical ammunition for politicians wanting to inject the government still more into economic life. ”

Political Business Cycles • money supply in last 2 years of term. • SR gains - reduced unemployment. • LR costs - inflation; deal with later. • Evidence from U. K. and U. S. • Even Keynesian prescriptions are not followed: raise taxes and cut spending during recovery. • Is Obama a Keynesian? • “And, of course, deficits are at all time highs. ”

Deficits

The Problem w/Macro Policy • Ignores micro principles. • People make choices & respond to incentives. • Macro aggregates ignore the individual. • Provide $ to bridge unemployment gap. • Now - incentivizes people to stay unemployed. • Policies discourage saving/investment. • Tax exempt mortgage; crowding out.

GDP (2011) = $18. 3 tr. vs. $13. 3 tr. 1990 - 2011 net gain = $34. 6 tr.

Reducing Deficits • Three choices - taxes, spending, MS. • Text on Paul Ryan’s plan!! • Current dilemma - $4 b. or $60 b. or $100 b. on a $500 billion deficit? • AZ experience - sell & lease; defer payments. • Can we even hope for a 19% solution?

A Climate for Liberty • Limiting Government Coase – regulations make things worse. Invisible hand of politics does not lead to collective good. The problem is not about electing “good” people. • Let Markets Handle It One size doesn’t fit all; probably not any. Contracts coordinate activity not planning. Be wary of market failure.

A Climate for Liberty • Try Freedom It’s not about democracy. Highly correlated with health & wealth. • Establish the Rule of Law The world is full of “dead” capital. Does foreign aid help? It’s all about property rights.

ECO 481: Public Choice Theory Week 12: Macroeconomic Instability & the Climate for Liberty Dr. Dennis Foster