Tuesday, 7 April 2009

Abandoning the pillars of sound policy

In the Boston Globe Edward L. Glaeser writes on Abandoning the pillars of sound policy. There are, in Glaeser's view four pillars of sound policy:
  1. fiscal restraint,
  2. the rule of law,
  3. free trade, and
  4. privatization
Seems hard to argue with those. But I'm not sure any of them have really been believed in by any recent government in New Zealand. Half-hearted support for some of them, at the odd time, is the best we have seen in recent years.

When discussing the current policy responses coming out of Washington Glaeser writes,
This year's deficit is projected to be $1.7 trillion, and this may be appropriate. But given the vast scale of this debt, the nation must husband the rest of its resources, to permit some chance of meeting our obligations. Protectionism, public ownership, and a breakdown in property rights will make it far harder for the future entrepreneurship of ordinary people to pay for today's deficits.
Glaeser goes on to say
The government is trying desperately to find a middle ground between bankruptcy and nationalization, but I fear that middle does not exist. Little good comes from allowing private entrepreneurs to bet with public funds, so public funding leads inexorably to public control. The problem with large subsidized, nationalized companies isn't just that those entities will be run inefficiently. If GM is split up in a bankruptcy court, this will provide an opening for competitors, many of whom will buy up pieces of the company. If GM is kept whole and public, then taxpayers will pay heavily to crowd out entrepreneurship.

Worse, public enterprises will engender new policies, such as trade barriers, aimed at protecting those enterprises. The experience of the 1930s reminds us that protectionism leads to global conflict, not economic comeback. Today, the "Buy American" clause in the Recovery Act takes its cue from the Smoot-Hawley Tariff Act, and it has already been matched by protectionism elsewhere.
He then goes on to point out the dangers of regime uncertainty,
The most disturbing trend may be an increased taste for arbitrary expropriation. People don't invest if the government rewrites the rules to take their earnings. When the House of Representatives voted a 90 percent tax on bonuses, economic populism trumped responsibility. Allowing bankruptcy judges to cram down mortgages expropriates lenders and creates more uncertainty and lawyers' fees.
and adds
Few variables are as reliably correlated with economic growth as respect for private property. America's economic strength reflects, in part, the fact that investors have historically found this a legally reliable place. That reputation is a golden goose, and destroying it would be like adding trillions to the debt.
The basic message is that if we eliminate all four of the pillars of sound economic policy we will impose too much of a cost on tomorrow for too little benefit today. We can only hope that this is a message that our current government will take to heart. But I'm not hopeful.

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