Let’s face it, we are in the midst of an extended international economic slowdown, if not a continuing downturn in the long-term economic cycle, and no one really knows when this trend-line will turn. While most GOP leaders are focused on changes to tax policy as the primary answer from government, I want to back-up for a second and look at the whole matter from a wider perspective to see if this is the right conservative approach at this time.
First, I am going to start with an observation that shouldn’t be controversial, but I think it may be today: the economic activity of firms, industries, nations and the world are subject to boom and bust cycles. Although 19th Century critics of capitalism tried to blame the existence of such cycles on capitalism itself, these cycles have occurred with some regularity since the beginning of human history. Over the course of the last two centuries, as economic activity across industries and nations has become more global in scope, the scope of these cycles has tended to enlarge to become international, and to envelope entire economies—not just specific industries or sectors. That is why, today, the public debt in Greece, or a slight slowdown in manufacturing in China, can create or worsen negative economic consequences here.
My second observation is that the fundamental cause of a boom-bust cycle is a dislocation of resources between what is produced and what is demanded, which is primarily a function of an inadequate and delayed information flow between consumers and producers at each stage of the economy, and the perceptions created by the inadequate information. For example, by the time a producer of cereal realizes that people who eat breakfast have come to prefer scrambled eggs over Wheaties and have stopped buying Wheaties, it is too late to shift resources to egg production and marketing to avoid an over-supply of Wheaties (and the ingredients that go into its production). So, egg producers make money with an inflated price for scarce eggs until more eggs are produced; while wheat farmers, their bankers and commodities investors in wheat, and cereal producers lose money unless they either shift their resources, capital and productive capacity to production of food consumers want, or go out of business. People who are affected by the loss of jobs stop eating eggs, too, and the whole breakfast-food sector begins to slow down. Play this story out across an entire economy, and you have a boom-bust cycle.
My third observation is related to the second: only improvements in the amount and velocity of the flow of relevant, accurate information between the consumer and the producer, and in the ability of both to use such information wisely and efficiently, can have any real impact on the occurrence of a boom-bust cycle. Until such improvements reach the point of perfection, there will be cycles, though their severity and length can shorten with every significant improvement in information flow.
My fourth observation is that each boom-bust cycle cleanses the economy of inefficiencies, while providing experiences that teach us how to reduce the risks and consequences of the next cycle. But there are real consequences for industries that have to change, for firms that disappear, for workers who lose jobs, and for families and communities that have to cope with these setbacks.
My fifth observation is that most governmental policies that have been enacted to try to avoid the onset of cycles do not directly address either the cause of the cycle—information flow—or the needs created by the consequences flowing from the cycle. Instead, governments have tried to avoid the cycles, or manage them when they occur, by using different tactics that address economic factors that affect the severity, velocity and length of the cycles. We have attempted to avoid or manage these cycles largely by tinkering with the value of our currency, with interest rates charged throughout the credit system, with debt-financed stimulations to demand and employment, and/or with changes to tax policy. Invariably, these tactics have, at best, had no impact on the cycles, or they have made the cycles worse by prolonging them and by keeping the economy from cleansing itself of inefficiencies.
If these observations are correct, then what is it that government at any level can or should do to address the occurrence of a boom-bust cycle, and the risks and consequences each cycle creates?
Here are my suggestions to think about:
• Create incentives for the continuous improvement in the flow of relevant, accurate economic information, to get as close to a real-time exchange of data as possible; and to promote private investment in economic production techniques throughout the vertical economy that take advantage of such real-time exchanges, in order to significantly minimize the response times and of dislocation of resources that lead to the boom-bust cycle. Tax policies, commercial regulations, and spending priorities should focus on what government can competently provide: a modern economic and physical infrastructure to accommodate an enhanced information flow, and the movement of goods and services that it will facilitate; and a secure environment for new private investments that will be needed to meet these objectives.
• Change our approach to economic policy to achieve a neutral and fair playing field in which government policy allows for constructive economic activity without further distorting the allocation of resources through micromanagement. The value of our currency, the level of our interest rates, the size of our debt, and our tax and spending policies should be designed to provide this neutral and level playing field.
• Focus on how communities can address the consequences of each cycle. Those who took the risks in the good times and made the wrong bet—either through the wrong investment, the wrong training, or the wrong employment—should be responsible to rebuild their own lives, but local communities and private organizations, as well as a basic public safety net, should be available to make sure that those people, as well as the families and communities that depend on them, can rebuild, retrain, and re-invest.
Having said all of this, let me focus the rest of this post on the last two points, because the first point, though self-explanatory, could be the topic of its own book. The rapid development of new technologies, and the application of those technologies to address information access and flow, already is revolutionizing how we live and work, and it will be the most important tool to use to avoid or reduce cycles in the future, if only government can keep from distorting and prolonging them.
As for those government distortions, for years we focused too often on the treatment of a never-ending set of symptoms of economic problems, rather than on treating the real disease. Government regulations dislocate economic resources, and that dislocation usually worsens the effects of a boom-bust cycle. Even those policies that improve the economy in the long-term, often come too late because of that pesky information-flow problem to do any good with the cycle. What is needed is stable, consistent, and predictable policies that maintain a neutral and level playing field, and the courage not to tinker with those policies when a cycle starts. So, how can we get there from here? Here are some ideas, many of which GOP leaders are already discussing in bits and pieces:
• We need a stable, consistent and predictable currency to provide a level playing field for trade at all levels within the economy, and to minimize the risk of inflation. Our founders, both Federalists and Anti-Federalists, agreed that creating money, or debt instruments, that had no intrinsic remittance value based on a measurable standard—what they called “paper money”—would doom the economy of the nation. Until the 1970s, such stability was commonly achieved during peacetime by tying the value of the dollar to a measurement of gold (and, sometimes, silver), though the standard was changed radically in the 1930s. Since the 1970s, there has been no such remittance standard at all, and currency has been allowed to float on open markets. Milton Friedman championed controlling the money supply, and thereby its value, based on a complex formula of economic components, and this approach was largely followed and provided some stability during the 1980s and early ‘90s. Although it may be too late to return to a currency value based on gold or silver, it is not too late to stop our obsession with interest-rate manipulation and return to properly managing the money supply. However we do it, we need to make currency stability a primary part of our economic policy. One need only look to the problem that Europe is having with its structural inability to provide support for the Euro, to see that this issue must be addressed.
• Currency stability based on controlling the supply of money, either by pegging its value to a scarce commodity or through a formulaic standard, would necessarily reduce the risk of inflation, and reduce the ability of the government to continue to increase the national debt. Moreover, currency stability will minimize the ability of speculators in the future to create worthless investment vehicles and bubbles derived, directly or indirectly, from the existence of a floating currency. However, there is a downside to this approach. It is fair to note that the worldwide scope and velocity of economic growth since the 1970s was at least indirectly fueled by the increased financial capacity created by floating exchange rates. By creating a more stable currency, we may reduce the size and speed of future economic advancement.
• To minimize the risk of this downside, we need a stable and relatively low tax burden, so that money can continue to move through the economy through private investments and spending. The velocity of such private transactions should offset any loss of financial capacity from stabilizing the dollar, which should allow for continued growth and prosperity. Such tax rates should raise enough revenue to fund the operation of government without the need to incur further debt, except in cases of emergency or war, and should be as low and as flat as possible.
• Finally, safety-net programs could be continued, but should be re-structured to channel tax-collected dollars into the private economy to allow for investment returns to the taxpayers’ accounts and more capital for investment and growth. Consistent with this approach, over the next generation Social Security should be converted to a private, 401(k)-type program, and Medicare and Medicaid tax dollars should provide premiums that purchase private insurance for the beneficiaries. The tax dollars held in private investment accounts, or paid as insurance premiums would be available as private investment capital to fund further economic growth.
Now, let’s finish this post by referring to the one thing that Republicans hate to talk about—concern for the plight of our fellow man. Yes, we know we are compassionate—we give to charities and to our churches, and we volunteer throughout our communities. But, believe it or not, because we don’t talk about it or seek to address issues that affect people in their daily lives, most voters don’t see us the way we perceive ourselves. The biggest way we can address this problem is not to call ourselves “compassionate” or to wring our hands about our neighbor’s plight, but to acknowledge that there are consequences to our neighbors from economic downturns and to address those consequences—not with hand-outs, but with access to opportunities and community support. We need to openly explore policy alternatives that provide incentives to local governments, community college systems, and private organizations to address the needs of workers to retrain for new jobs, and for families and communities to adjust to the loss of financial support that comes from lost jobs, lost firms and lost industries.
If we pursue this type of economic agenda, the GOP will not only improve its chances for winning the next election, but it actually will address the real cause and effects of the boom-bust cycle in ways that are consistent with our Constitution and our values, and that will improve economic opportunity in the long-run.