Saturday, August 09, 2014

Wrong cure, wrong disease

There will always be business cycles. Even the wisest and best intentioned investors will make mistakes. The open question is whether the know-how and the tools we have to manage macro-economic ups and downs make things better or worse.  There is no slam-dunk answer to the question but I lean to the "worse."  Would the recent downturn have been less severe without the monetary and fiscal and housing and countless other interest-group inspired policies in place before 2008? The slow recovery is now explained (more macro-economic know-how) by "stagnationist" explanations. We last saw those during another period of abysmal recovery, the New Deal years.

Joel Mokyr's op-ed ("What Today's Economic Gloomsayers Are Missing") in today's WSJ is on point. (1) Our welfare is all about growth, so get the growth right; (2) Its all about the new technologies that prompt growth; (3) We do a poor job measuring and identifying the effects because they are mainly about increased consumer surplus; we cannot accurately measure improved productivity.

Mokyr offers this example: "If telecommuting or driverless cars were to cut the average time Americans spend commuting in half, it would not show up in the national income accounts--but it would make millions of Americans substantially better off." Even worse, some would point to how few jobs will have been created by these innovations.

Finally, there is the big irony: we would probably get more growth if we backed off from the many policies now aimed at dampening business cycles. Growth is natural. Investors and savers seek each other -- and find each other because their plans mesh with the plans of credit market middlemen. But again this is where ham-fisted policy interventions (Dodd-Frank, etc.) can cause real damage. 


Timothy Taylor and Arnold Kling re Dodd-Frank: it's a work in progress.