bubble

I must vociferously disagree with Aaron Marks here. He’s right that we must let market forces sort out the mess caused by the distortive practices of government. The problem is, his prescription (a la one Dr. Meltzer) is yet more of the same distortive intervention. In short, what Marks is claim as a “free market solution” is not. Let me explain. 

Marks basically wants more tax-breaks (subsidies) for housing. But anybody who knows anything about this problem (like free market economists) know that it’s not temporary tax breaks, subsidies or any other government-style epicyclical policies that will clean up the mess. It’s about government getting the fundamentals right by NOT privileging industries—including housing. It’s about getting the rules of the game set, normalized and predictable. It’s not about more Keynesian tweaks, which targeted tax breaks most certainly are.

This is exactly how the left is able to demonize free markets. Because partisan Republicans bastardize the concept. Marks’s suggestion is the intellectual equivalent of W's suggestion that the free market be abandoned to save it. Unless we understand free markets, let us not use the term like blunt instrument, applying it to whatever policy suggestion that happens to include a tax break. This is just more attempts to clean up government messes with muddy mops. Or as Peter Klein writes: 

Another aspect of journalists’ remarkably credulous and fatuous attitude towards policymakers is their view that rhetoric, not substance, is what matters. Hence the constant references to the Bush Administration’s “dedication to free-market principles,” its “aversion to regulation,” its “belief in letting markets work by themselves.” This is of course sheer balderdash and piffle, virtually the reverse of the truth. Bush and Paulson and Greenspan and their clique are “free marketeers” in the same way (to borrow from A. J. Jacobs) that Olive Garden is an Italian restaurant. They adopt the language, and some of the form, of market advocacy without any of the content. The Bush Administration was already, before the “financial crisis,” the most economically interventionist since LBJ; it now ranks with Hoover and FDR as the most aggressively anti-market in US history. 

Aaron Marks, I believe, is merely giving fodder to a confused MSM and lunatic left. It’s no wonder we’re losing. Until our folks understand what free market means from a broadly institutional perspective, we are lost. Jack in Michigan nails it in the comments of Marks's post:

Basic bubble economics 101: The healing only can begin when the bubble-inflated prices return to the level that's in equilibrium with the real economy, ie, that can be justified by actual income levels. Are we there yet? No, not yet, but gettin' there. The temporary tax credit only delays that, and so prolongs the agony. It's like a hard core alcoholic taking a drink the morning after so he doesn't feel so rotten.

Partisan Republicans had best stop wearing the free market hat if they're confused about free markets. That sends real free marketeers into fits. It also confuses the masses and lets lefties blame the market for the goofy government policies. In short, we need to stop subsidizing people to invest in housing. Period. Prices must reflect economic reality and the rules of the game must be established so that the market can adjust. Tweaking the rules to adjust to distortions caused by prior tweaks the the self-same prescription that keeps our economy in rollercoaster business cycles and wacky volatility. (For an antidote to interventionist thinking of all kinds, see this.)

The Freedom Coalition is scrambling. Bipartisan bailouts and a profligate Republican Party seem not only to have conjured up the specter of Keynes but the American Left in force. The left has outsmarted the center-right Freedom Coalition in all the ways that count. That is, our democratic republic is, and always has been, about getting that 50 percent plus one. The left has figured this out and put the bulk of its investments behind this fact. And while we may like to tell ourselves that 'politics goes in cycles,' no one may credibly doubt the effort and organization of Democrats and progressives and the failure of the Freedom Coalition to adapt.

Meanwhile, as libertarians smugly explained the irrationality of voting – you know, clustering problems, paradoxes and the improbability of the tie-breaking vote – leftwing activists have spent a fortune in time and money getting people to do something irrational. And it worked. Aging right-wingers have been content to jockey their wingback chairs and will their estates to AEI, Cato or Heritage, so these goliath think tanks can print up yet more high-quality policy reports 250 people will read. This is a problem.

The Think Tank Bubble

F.A. Hayek is known among freedom lovers as describing the structure of production. The idea is often rendered as a triangle cut into thirds, like a simple hierarchy: At the top are the raw materials (say, silicon). The second slice is the capital goods (assembly line). Then come the consumer goods (iPod, marketing). The idea is of a production process whereby resources pass through each stage before finally satisfying human wants and needs.  Likewise, we can imagine socio-political change going through a similar process. First, you have some abstract academic theory, which filters down to the think tanks and policy shops, finally to be run through the legislative sausage grinder or presented to voters as talking points. That's the 30,000 foot view. From ideas to policy to implementation (or from academia to think tanks to ordinary politics). Obviously, the structure of social change is much more complicated than this simplified model reveals. But it's largely correct. The devil, as they say, is in the details.

Now, if we look at the average "freedom portfolio" we're going to see something that will go very far in explaining the Freedom Coalition's most recent voting booth humiliations—an investment bubble. Too many resources are going to think tanks—that is, that second slice of the structure. (The left has put most of its resources into implementation, never mind academia, which it has always owned.) Any renaissance of the Freedom Coalition will require freedom-lovers to divest themselves of legacy think tanks and start putting their freedom investments into something else. But where?

First, the Freedom Coalition is going to have to play catch-up on the one hand and tit-for-tat on the other. To figure out how to compete, it will have to look at the competition for benchmarks. What are they doing right? If the Freedom Coalition does its due diligence, it will find a second-mover advantage. Then, the right is going to have innovatively to reconfigure itself around what it has learned: new media; mass media, branding and marketing and get out the vote (GOTV)—and any other unseemly aspect of deadweight activism. Individualist-types may find this unsavory. We prefer ideas and analysis to groupish activism. We relish the holistic logic of market solutions and believe the world must kneel to rational argument. Tough. That's not the world in which we find ourselves. So unless we're prepared to argue with the machine or take up arms and rebel, we've got to play the implementation game and play it better. (Part Two here - Max Borders, Free to Choose Network)