Dusting off ancient Chinese wisdom: No quick fix to a moral problem(Read article summary)
A proper market economy is moral in this way: It gives people what they deserve, not necessarily what they want or expect.
In the reign of Emperor Zhao, in 81 BC, 60 Confucian scholars were asked to consider the effect of government meddling in the economy. The Middle Kingdom was in a fix. Mongol raiders were pressing it from the East; the government was going broke. Taking the advice of Sang Hongyang, the feds of that era had put in place various state monopolies and price controls. The result?
âPeople live in houses with badly-made beams and shoddy thatched roofs. They wear clothes of rough fabric and eat out of bowls made of dirt,â the sages explained. âWe waste our time on vain effortsâŚand lack the essentials, food and clothing.â
The scholars gave their advice in moral terms: âAbove all, emphasize virtue and suppress get-rich-quick speculations.â Too bad they didnât have The Financial Times or The New York Times to guide them! These journals offer a world without wickedness or moral lessons. Economy in a funk? Forget the real cause. Stimulate it! We can worry about the real problem âafter the economy has recovered,â writes Paul Krugman in The New York Times. âOnly those who believe the economy is a morality play,â would want to suffer the pain of a correction, adds Martin Wolf at the FT.
Readers are urged to focus on the hilarity of the scene rather than on its gravity. It is as if a fat man were bending over. The further over he goes, the more his seams split. First to go was the subprime seam in the backâŚthen the Greek seam on the side. But no one wants to say the obvious thing: that he should stand up straight and lose weight. Instead, the FT and the NYT want the government to buy him a larger pair of pants.
You have read a number of unpopular views in our Daily ReckoningsâŚ
That this was not a typical post-war recession; it is a Great Correction. Over-indebted American and British economies need to de-leverage.
âŚThat no recovery is possible, because the preceding model of debt-fueled consumption was unsustainable.
âŚThat âstimulusâ efforts were not only a waste of time and money, but also harmful; people who made bad bets should take their losses with dignity instead of trying to get others to pay.
In the 10 million or so years since our ancestors have walked on two feet, many were the challenges that arose. We learned to hunt and gatherâŚto build shelterâŚto clothe our bodies and to kill each other. We made tools and were able even to split atoms and remove body tattoos. We evolved into a practical, problem-solving race. But never could we solve the problem of an economic downturn.
Why? Because the Confucian scholars were right. A properly functioning market economy gives people neither what they want nor what they expect, but what they deserve. In that sense it is âmoralâ not mechanical. You canât pull levers nor turn screws to stop a correction. Like old age, the best you can do is to endure it with good grace; the alternative is worse.
Central planners donât create wealth. They can only move it around, robbing Peter to pay Paul. This only âstimulatesâ an economy if Paul uses the resources better than Peter. Donât make us laugh. In most cases, Paul is the same clown who made the bad bets in the first place.
In the present instance, instead of robbing Peter to pay Paul, the feds judged it prudent to borrow from Peter. But Peter is no dope. First, he turned his eyes on Greece. Then, he noticed all the other peripheral players in the EurozoneâŚ Then, he put his wallet back in his pocket. It became obvious that the jig was up. As Nouriel Roubini put it, we reached the point where âausterity is not optional.â
Stoicism went out of style in the economics profession 100 years ago. Activism paid. Stoicism did not. Since then, busybodies have advised presidents, headed central banks, run multi-national agencies, appeared on covers of TIME magazine, won the Legion dâHonneur and the Enron PrizeâŚand run billion-dollar hedge funds. And now, after 18 monthsâŚand approximately $12 trillion worth of stimulus, bailouts and debt guaranteesâŚwe see the results of a live test. Have our modern economists done better than Sang Hongyang?
The latest evidence came in last week, from the US. The biggest source of employment lately is the US government itself, which has hired hundreds of thousands of census takers. Obviously, if you could make people better off by having them count things, why not hire more of them and have them count the hairs on our heads? Employment in the private sector is still going down. One in ten Americans is officially unemployedâŚone is six is working at less than capacity. Twice as many people have been out of work for more than 27 weeks this year than the year before. Not surprisingly, real incomes are going down too. Meanwhile, one of every 8 houses is delinquent or in default on its mortgage. Statistically, 7.2 million of them will be foreclosed, most likely leading to another drop in housing pricesâŚand a drop in household wealth.
Prices are falling too. M3 fell at a 5% rate in May. Consumer prices, officially, are increasing at the slowest pace since 1966. Unofficially, adjusting for the real cost of housing, the actual cost of living is in outright deflation.
In short, the ârecoveryâ is a flop.
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