Free Market

BOTTOM LINE UP FRONT: It's time for the Right to become smarter in places where we're typically uncomfortable.

Hat tip to Jon Henke who tweeted this post from Dan Mitchell of the Cato Institute:

I don’t know whether this belongs in the comic-relief category or the future-threats category, but the Harvard Law School is having a conference to analyze the “free market mindset.” The basic premise of the conference seems to be that people who believe in limited government are psychologically troubled.

The conference schedule features presentations such as “How Thinking Like an Economist Undermines Community” and “Addicted to Incentives: How the Ideology of Self Interest Can Be Self-Fulfilling.” The most absurd presentation, though, may be the one entitled, “Colossal Failure: The Output Bias of Market Economies.” According to the description, the author argues that the market “delivers excessive levels of consumption.” Damn those entrepreneurs for creating so much wealth!

I came out of Harvard with an undergraduate and graduate degree. This is one of the few times where I was shocked and not surprised at the same time when I read the introduction to this conference:

What is it about free markets that proves - and still continues to prove - so alluring to economists, scholars, and policy-makers alike?

The March 7 conference to take place at Harvard Law School, brings together leading scholars in law, economics, social psychology, and social cognition to present and discuss their research regarding the historical origins, psychological antecedents, and policy consequences of the free market mindset. Their work illustrates that the magic of the marketplace is partially an illusion based on faulty assumptions and outmoded approaches.

Fortunately, there are a few folks at Harvard, like economics professor Robert Barro, who keep people honest. Here's what he says in a recent Tax Foundation podcast:

The economy did very well for the next several years after the tax cuts of 2003. And it's very unfair that Obama has blamed that program for part of the current financial collapse. There's really no linkage between the tax rate cutting program of 2003 and the financial and housing collapse we've seen in recent months.

Yes, the concept of this conference at Harvard Law School is crazy. But there's a larger point to be made here. On this blog, we've talked a lot about the way forward for conservatives and the GOP. When it comes to elections, the argument has been made that we have to reach out to new places (places that we have ignored) to grow our base and communicate a new conservative message: urban areas, African-American churches, ethnic community meetings, etc. When it comes to public policy, the argument has been made that we need use principles of old to come up with new solutions for new times and new crises.

The point is that we must argue for our free market principles and new solutions in places where we feel most uncomfortable: i.e. the academic arena. We can't be afraid of taking on the liberal supermajority in academia, nor should we be afraid of trying to cultivate conservative intellectuals at colleges and universities. It isn't enough to have think tanks that act as safe havens of intellectual freedom for conservatives. And sure, we need to find creative ways to explain the complexities of the free market. The fact is that (1) more conservatives need to welcome intellectual thought and debate, and (2) more conservatives need to take the fight to the academic world. The Right needs to make itself relevant in places where it is currently seen as irrelevant, instead of sticking to places where we feel comfortable.

Oddly enough, I say this on the eve of the biggest kumbaya/"singing to the choir event" for the Right: CPAC.

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.)

Two days ago, Jon Henke posed the question, "What policy should Republicans be advocating and pursuing to limit government and regain popular support?"

With Barack Obama and the Democratic Congress proposing new bailouts and a significant amount of additional government spending to create jobs and restore the economy, Republicans have a phenomenal chance to reinforce our earnest belief in limited government.  I propose a simple policy that will allow us to both "limit government and regain popular support": Republicans must fight Democratic efforts to build a nanny state to solve the economic woes. Instead, our policy should be offering solutions to revive the economy that are rooted in free market principles.

Indeed, Thomas Sowell points out that government intervention may actually be harmful to the economy:

Even in the case of the Great Depression of the 1930s, increasing numbers of economists and historians who have looked back at that era have concluded that, on net balance, government intervention prolonged the Great Depression.

I recently had a unique chance to discuss the economy with renowned economist and monetary policy expert Dr. Allan Meltzer (which you can read at length here).  Meltzer and other leading economists have observed that the big problem plaguing the economy is the housing crisis, and that the government's efforts to breathe life into the economy have neglected this issue.  Meltzer proposes a free market solution to the housing crisis that could be immensely effective as a step toward getting the economy back on track:

To address the housing problem, Congress and the administration should take actions that increase the current demand for housing. For a limited time, say up to the end of 2009, allow buyers to use the value of their down-payment (or some part of it) as a tax deduction. Or, reduce the tax rate for qualified buyers who purchase a house between now and January 2010. Or do both. Give the benefit to all home buyers, including those buying a second or third house.

The bottom line is that the battle of free markets versus government control is one Republicans can – and should – win.  Dr. Meltzer noted that he often says, "Capitalism without failure is like religion without sin."  Yes, the free market will inevitably fail on occasion – and Republicans, as champions of capitalism, must pursue a policy that ensures that the free market is given the chance to fix itself as it has many times before.  If Republicans can identify innovative free market solutions to the economic woes like the proposals outlined by Dr. Meltzer, we can help ensure limited government while making real progress toward economic recovery.

While some pundits and media, such as the Pittsburgh Post-Gazette, point to the proposed bailout as demonstration of the failure of the free market, in fact it is a failure of government.

Part of the failure lies with the government-sponsored enterprises Fannie Mae and Freddie Mac, by attempting to increase home ownership by encouraging subprime loans, as discussed in the Wall Street Journal today. In fact, even the New York Times - hardly the defenders of the free market - cautioned against Fannie and Freddie's actions, given their taxpayer backing, back in 1999 (HT to Carpe Diem), writing:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.

Normally, I don't mind someone making themselves look silly. The entertainment value is high and I'm on a budget so I find my entertainment where I can.

But when someone both looks silly and tries to drag me into the entertainment by association, if I have the time I'm generally disposed to comment. Which brings me to Russ McBee's post 'Slapped by the Invisible Hand' wherein he blames Libertarians for the SubPrime crisis and the resultant problems. While not a Libertarian, I am a Free Market guy. From my perspective, Russ doesn't understand how we got into the mess in the first place nor has he a clue as to how we're getting out. As a result, like most Liberals, he is incapable of preventing it from happening again.

Per McBee, the subprime housing crisis is entirely the fault of Alan Greenspan, Ayn Rand and anyone else tarred with a Libertarian brush, even lightly. Ditto the failure of Bear Stearns, Lehman Brothers, Merrill Lynch and Countrywide. It would appear McBee believes adherence to Free Market Economics automatically results in the worst possible human behavior from others. People don't choose their behavior. The mere proximity of a Libertarian means bad economic choices.

But Libertarians and Free Marketers are brutally Darwinian economically. They believe businesses behave in their own best interest and won't willingly destroy geese laying big, golden eggs. For instance, they will take less profit over 50 years and remain viable as opposed to going for huge profits for 5 years to then collapse. Such was the case with the vast majority of businesses which did not speculate in subprime paper, or, if they did, did so in a properly balanced portfolio. Libertarians and Free Marketers look to self interest to regulate the market.

That's not ignorant or unrealistic as Russ surmises. Free Marketers understand all too well that despite the warnings, the data and historical precedent which counsel otherwise, some businesses think they can ignore proven Market wisdom and get away with it. They can even point to the odd exception proving the rule. They abandon self interest for self destruction. They abandon sound fiscal rules and practices; it catches up with them; they pay the price. Well, they did until recently. More on that in a moment.

Free Market, Libertarian self interest is simple. Don't spit into the wind! Bad things will happen if you do. It should be obvious to McBee, but isn't, that that is exactly what happened to Countrywide and others. The market self policed and self corrected. In a serious manner. Total destruction would seem a fairly high price to pay, but pay it they did. I'd say the Market did an excellent job of teaching, training, warning and finally policing itself. And I'd be correct.

Except the Market hasn't been allowed to work it's magic for years. It won't correct the bad behavior everyone, McBee and me included, doesn't like because when business screws up, Government rides in like a White Knight to save the day. Such White Knights used to be other businesses who played by the rules and now snapped up the competition at bargain prices. Today Government bureaucrats sweep in to position cushy, white pillows so a fall from grace is as soft and painless as possible.

McBee evidently sees this as a good thing. He says

How telling it is that the abject failure of the bankrupt and corrupt libertarian mindset requires what amounts to socialism to bail it out when its superficial, simplistic, and naive world view inevitably collapses.

Excuse me? The Market is working exactly as the "libertarian mindset" wants it to. It does not desire or require Socialism to bail it out. In fact, Libertarian thought isn't being bailed out at all, it is being proven correct. The only "superficial, simplistic and naive world view" is the one saying you can remove consequences from bad behavior and trust you won't get more bad behavior! When the Market punishes it's economic apostates, the next guy thinks twice. He sees the smoldering wreckage of CountryWide and Lehman Brothers and pauses to consider a different course of action. The system, if allowed to, will work just like Libertarians and Free Marketers say it will.

Socialism is the option which needs bailing out. Championing a few people experiencing pain from a few business failures, Socialism practically guarantees far worse pain for far more people when their meddling causes an Economy to fail. There is a reason for the non-existence of even a single long-term Socialist success anywhere in the world. Government started bailing out a few failed businesses years ago. Today, more and more failures need bailing out and at higher and higher costs. You get more of what you pay for. Yet another Economic reality Libertarians and Free Marketers understand that Socialists don't. Properly dealing with painful realities now prevents future pain of greater intensity and scope. McBee would have us abandon responsibility to chase the Socialist dragon, numbing ourselves with the opiate of Government largesse until the entire house of cards comes tumbling down.

Trading proven, Free Market, Libertarian wisdom and experience for Socialist, pie-in-the-sky, Kumbaya, hand holding is precisely the sort of change Russ McBee, Democrats and Barack Obama want for our country. My response is one gaining daily popularity with Americans: "No thanks, Obama - Keep the Change!"

Blue Collar Muse

PS: By the way, I didn't forget the examples of Fannie Mae, Freddie Mac or AIG. I ignored them as they're irrelevant here. I guess Russ doesn't understand Fannie and Freddie are failed Government programs, not Private sector efforts. Libertarians and Free Marketers would never have allowed the Government into the Market like that. That's what Socialists are for. AIG is an insurance company still sorting out the factors behind its failure. While the subprime market may have played a part, so did the insurance industry losses in the wake of 9/11, Katrina and other large disasters. Including these in efforts to pile on Libertarians is either ignorant or disingenuous. Either way Russ loses ...