Issues 2008: Economic Policy

I do not have the answers to solving our economic problems and, judging by their performances in Tuesday evening’s presidential debate, neither do the candidates. I do believe that it has taken us a long time to dig our way into this hole and that it will take a long time to dig our way out.

Over the last thirty years or so we’ve seen a real sea change in our economy. For a variety of reasons including technology, globalization, policy, and just plain luck capital has become enormously more efficient in producing wealth relative to labor. In some ways that’s just a fancy way of saying that for most people real wages aren’t enormously higher than they were thirty years ago.

That situation may be coming to an end with the current financial crisis. We certainly shouldn’t be making any major policy decisions under the assumption that it will continue.

Some say that education is the solution to our economic problems. That’s certainly been a mantra for a number of administrations but I’m not sure we can conclude that unless we disaggregate education, the distorting effect of a handful of gateway institutions which, because of their small total size but, possibly, high earnings of their graduates, make education appear to be more important than it really is, ability, and market restrictions from one another. Education certainly doesn’t determine wages—unless you can get the government to restrict the market for you the market determines wages.

A number of our economic sectors including health care, technology, and entertainment seem to believe that the key to success is getting the government to restrict the market for you. If that’s the case, it’s hard to see how why the Soviet Union isn’t the world’s foremost economic powerhouse.

In more recent years we’ve seen several boom and bust cycles, first the dot com bubble, then the housing bubble, and hard on the heels of the end of the housing bubble the financial crisis, during which we’ve seen different sectors grow completely out of proportion to their underlying roles in the economy, buoyed by a combination of policy and domestic and international cash chasing the next big thing.

Is health care another such bubble? I think there’s reason to believe it is. I’d have more confidence that the size of its underlying role in the economy matched its current size if it weren’t for the 50% plus of the revenues that sustain the sector coming from government in one form or another.

I’m old-fashioned enough to be concerned about so much manufacturing leaving our shores for cheaper labor. I think that engineering will inevitably follow manufacturing whle management and ownership follow engineering. I don’t know what can be done about it but I’m concerned about it.

I’m concerned that the spider’s web of market distortions caused by government subsidies and regulation and the herd effect of money chasing money is making it increasing difficult for the industries that might sustain us in the future to get enough sunlight to flourish. I don’t know what to do about that, either, other than to remove the market distortions that give the beneficiary sectors their edge. Unfortunately, established industries have the bucks and the motivation to use them to hold onto their influence.

There’s one more point I want to make in this section. I believe sincerely that liberalizing international trade is good for us and good for the world but real international trade means not just buying and selling good from other countries here and other countries buying and selling our good but abandoning our reflexive xenophobia and allowing foreign companies to buy and sell American ones while we do the same with theirs. As I’ve said before we need to insist on a policy of reciprocity.

Finally, if our economy is to be global we need international institutions robust enough to deal with that and should be starting to think about a code of international civil law.

So, such as they are here are my recommendations for changes to our economic policy:

  1. The province of the Federal Reserve is the health of the banking system, generally, through regulation of the money supply, specifically. Managing the economy, broadly, is not the Fed’s job. Ensuring that the stock market keeps going up is not the Fed’s job. Keeping the unemployment rate low is not the Fed’s job. If there’s one thing that’s clear from the crisis in the financial sector, it’s that the Fed has more than enough on its hands in ensuring the health of the banking system without meddling in the broader economy. The empowering legislation and the charter of the Fed should be amended to give it broader power in regulating the banking sector as needed by today’s banking system and explicitly ruling out these other roles. The Fed needs to stick to its knitting.
  2. It is not the federal government’s job to ensure that recording companies, pharmaceutical companies, and other companies that depend on monopolies for their viability stay profiitable. The intellectual property laws should be reformed to suit their constitutional purposes and the needs of today. Copyright terms should be shortened. Software and business process patents should either be abolished or reserved for genuine innovations.
  3. I’ll deal with health care (15% of the economy) in my post on health care policy.
  4. Other prescriptions for the economy will appear in my post on energy policy.
  5. We need to continue the liberalizing of international trade.
  6. We need a more robust system of international civil law than exists now.

Others participating

Tom Traina at Heretical Ideas has a straightforward post on economic policy that I mostly agree with.

10 comments… add one
  • I think you should run for office. You’d have my vote.

    But it would have to be for President, because I don’t live in Illinois any more.

  • The Fed’s primary job is regulating the money supply, keeping banks healthy is at best a side effect of that job. The FDIC is more directly involved in keeping banks healthy.

    When looking at regulation of the money supply, factors like stock market performance and unemployment are how you determine if you need more or less. If the markets are contracting and employment is falling, that is a sign that their is probably not enough money in the system, if there is very low employment and strocks are rising, it is a sign that there is too much.

    I think that their is some room for fixing intellectual property, particularly in the length of copyright, but that is fairly small economic potatoes. Generally speaking, in an information age economy, intellectual property is what the economy is all about. We need better international agreements on enforcing IP, which would help us compete globally. Patents are copyright is a means of rewarding creativity and ingenuity. We want as much of that as possible.

  • I think that the intellectual property issue is bigger than you might suspect due to the distortive effects. There are hundreds of billions, maybe even trillions being invested in the pursuit of intellectual property for the monopoly of copyrights or patents that would be going elsewhere were it not for the copyrights or patents. Where would it be going? We’ll never know.

    Generally speaking, in an information age economy, intellectual property is what the economy is all about.

    I think that’s an effect as much as a cause.

  • I was refering to the copyright portion of intellectual property. I don’t particularly like that Disney will have copyright on their works until the end of time, but in comparison to the economy that is pretty small.

    “I think that’s an effect as much as a cause.”

    If by that you mean technological information innovation is able to be translated in profit largely because of intellectual property laws then you are largely correct. If you mean that technological information innovation is not really valuable and shouldn’t be encouraged then I disagree.

  • I definitely think that technological innovation is valuable and should be encouraged. In a global economy for at least half which “intellectual property” is a meaningless noise and will remain so because the countries concerned simply do not have the societal infrastructure to deal with the notion, we need to think a little harder about the form that intellectual property law will take.

  • Searched 2008 economic policy in msn but for some reason found this page.great info

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