Unfortunately there is an inevitable bias against many of the insights that sound political economy has to offer. For example, when working on the Katrina project with The Mercatus Center I was often frustrated with how dissatisfied many policy workers were with the basic recommendations of pure economics. Pure economics does little more than to point out that many of the consequences of Katrina could have been avoided or less catastrophic had it not been for certain policies. Because of the national flood insurance program people were encouraged to live below sea level, they were un-inclined to privately invest in flood insurance, and they were never encouraged to innovate private flood remedies, so on and so forth…
The motivated policy activist is unsatisfied with this sort of analysis. Just saying “don’t pay people to live at the bottom of a soup bowl,” does not tell us what to do – here and now. Right now (at the time of Katrina) people are dieing, drowning, starving, lacking goods and services. Cannot economics help us with anything?
My first response (which I think is the right first response) was to calmly repeat the original insights with more clarity and to emphasize the more subtle implication of the backward-looking pure economics. What do we do now? Well we certainly avoid doing more of the same, so we don’t end up here again. This is good advice even if it’s hard to swallow. But it also has a future looking component even if it’s hard to recognize. Pure economic reasoning tells us that central planning inevitably faces knowledge and incentive problems. No matter what we plan to do in the future, we should be aware that government planning may not know how to solve the problem nor provide the necessary incentives to solve the problem. Pure economics forces us to be skeptical of policies that promise the moon in their effects. With timely and progressive solutions we may be invoking unintended and undesirable consequences.
The motivated policy activist is still unsatisfied and perhaps more frustrated at this point. But still what do we do now? In the Katrina context I was admittedly low on ammunition at this point. “Doing” is really about emergency response; it’s a logistical challenge. How do we rescue people, how do we re-direct flood waters, how do we distribute goods and services, how do we rebuild? Again we repeat the basic insights with a little more specificity. Don’t restrict free entry, let the private helpers past the coast guard line. Recognize that helicopters in Iraq are helicopters not in Louisiana. I’m no EMT nor coast guard expert. I’m an economist, at some level I have to admit I don’t know what to do, but I still recommend policies (or lack thereof) that promote incentives, information and innovation rather than inhibit them.
This was not meant to be a post about Katrina but instead another post about the current financial crises. This past weekend at The Wirth Conference “What is so Austrian about Austrian Economics,” participants had a brief round table discussion about the current financial crises. This discussion paralleled the same argumentative structure as these old Katrina discussions. “What do we do here and now? Complete laissez faire may not be politically viable, we are looking for the policy that does the least harm,” – were the common refrain.
Several comments were recommended around the room. Again I believe the pure economics is worth reiterating. This problem is the result of bad policies, we should at least avoid doing them again in the future. But as we are seeing unfold, many free market economists and supposed libertarians are making compromising suggestions regarding the bailout and other admittedly temporary fixes. I’m less confident in such proposals for both economic and libertarian reasons. I’m often unconvinced they will do more good than harm and I’m also skeptical that anyone should have the legitimate authority to make such decisions over the lives and well-beings of others.
After thinking more and more, I’ve settled on what I think I can be most comfortable with as a suggestion to the proactive – free – market policy activist. In short my suggestion is to deregulate labor markets. If I take as given that capital market regulation is a political inevitability – laissez faire capital markets are out of the question, then I argue for deregulated labor markets.
In terms of the possible recession we are concerned with the real levels of production and output in the economy. We are concerned with the real quality of living for those people enduring the hard times. We don’t want depression style unemployment, shortages, or wandering. But remember there are always two ways to skin a cat. For any tangible good or service there are capital intensive methods of production and labor intensive methods of production. What used to be accomplished by workers through time consuming processes is now done by machines and computers. With a capital crunch we can expect less roundabout investment in labor saving machines and computers. In order to avoid the harsh effects of lower consumption rates and lower living standards that fall out of lower production rates we should allow labor to substitute for capital on the margin.
Admittedly these margins may be few and far between. Relatively speaking labor markets in the US for one are very free. But this is an international recession and we should think in terms of what policies can generally allow for and accommodate the free mobility of labor and promote the free exchange of labor services where ever they are being suppressed. Whether this means liberalizing border policies, eliminating minimum wages or relaxing licensing policies I am not sure, but am confident that the effect will on net be positive more so than I am comfortable signing on for liquidations, bailouts, or monetary injections. If you insist that I advise something for the future, I recommend open labor markets.