20 February 2014

No Crystal Ball Needed to Forecast Fundamentals of Sound Economics

Who wouldn’t want a crystal ball to forecast the route to economic prosperity? For while the fundamentals are available to all who care to study the basics of catallaxy, only charlatans will claim to have foreknowledge of consumer choice.

In reflexions about the likely course of global economies in the new year, Cato Institute senior fellow Richard Rahn agrees, acknowledging that ‘the reason so many forecasters miss the mark is because there are too many unknowns to be captured by mathematical models, particularly those unknowns dealing with human responses to changing events.’

But there are some things which can be known, based on the praxeological logic of human nature and social behaviour. Wealth is created by individual endeavour and shared through voluntary exchange. Another certainty is that when governments intervene in this process and aim at redistribution, both initiative and wealth are adversely affected, to society’s peril.

Rahn presents this as a case of wealth producers versus wealth destroyers — ‘the productive are those who add more value and wealth than they consume, and the destructive are those who destroy more value and wealth than they create’ — and their effects upon the dynamic market: Effects whose full consequences cannot be known in advance, cannot be ‘foretold’, given the individual choices of millions of participants in free markets and their subsequent reactions to government interventions, whether in the form of taxation, regulation, or too-generous welfare provisions.

In coming weeks, for instance, just wait for the debate in the U.S. Congress over increasing the minimum wage and extending unemployment payments: Each a government intervention into socio-economics, each counterproductive as a measure to promote wealth generation, and instead examples of wealth diversion and destruction. Better efforts would be focussed on the causes of employment impediments, whether through lowering punitive tax rates that hamper growth or removing regulations which touch on everything from competition to healthcare and serve as brakes on business development. By removing the barriers imposed by government, entrepreneurial activity will enjoy renewed impetus that will respond through increased employment opportunities, that will in turn redound to the State by way of reduced support burdens and heightened revenues.

But no statist applauds when the economy is allowed to heal itself from the cack-handed cures of physicians past; so social democrats will pride themselves on their enlightened, progressive policies, irrespective of the long-term economic or social ramifications. But these politicians are immune from the extravagance (and consequences) of ‘pretended’ charity, even if they are not entirely ignorant — thankfully! — of the folly of their prescriptions: For if the minimum wage were truly an antidote to income inequality, why limit its increase to $10.10 an hour, and why extend long-term unemployment benefits a mere three months? The reason is that economic laws of wages and incentives rout fiat government, and no amount of sleight-of-hand will mask the market meltdown if these progressive measures are given full rein.

Given the predominance of this State interference, then, Rahn confidently hazards one prediction for 2014: another financial downturn to come.

I am reasonably confident in saying the world is headed for a major financial crisis, because the numbers show that most large economies are projected to further increase their debt-to-gross domestic product ratios this year, which are already at record-high global levels. However, I cannot forecast with a high probability (nor do I know others who can) when this financial crisis will occur.

Regardless of ‘when’, the ‘why’ of crisis are the old, tried-and-failed distractions from the welfare economists’ bag of tricks: top-down central government planning; stimulus spending; regulatory excess; quantitative easing and interference with the natural rate of interest (with ensuing boom and bust cycles); and, of course, minimum wage laws and extended unemployment benefits, among other social security largess. What surprises is that there is still an audience for these maladroit manipulations.

It seems that only amongst the progressive élite, whose blind faith in their own prescience obscures the underlying dynamism of markets, is the crystal ball of economic reality either wanted or necessary. They may try to pull the wool over our eyes, but in the end, economic laws trump political prestidigitation.