Keep Asking the Big Questions

Compared to what? At what cost? Who pays? And, what happens next?

It’s the responsibility of economists to ask and answer questions like these—and the job of economics columnists to relate and explain the discussion. I’ve been doing that for a quarter-century as the proprietor of this column, and now have a what-next message of my own: I will soon be leaving Barron’s, with a plan to write long-form articles and books. But first, a few thoughts about the economics lessons I’ve learned.

No Solutions, Only Trade-Offs

Economists often shirk the big questions because the answers can bring unwelcome news. Since many economists yearn to sit at the tables of power, they avoid discouraging talk, the better to preserve their standing with politicians who can appoint them to powerful jobs.

They’re the worst way to allocate capital investment, except for all the others. When economist Milton Friedman told President Richard Nixon that Nixon’s price controls were a bad idea, Friedman was permanently banished from Nixon’s presence. Similarly, economist and outsider Thomas Sowell once wrote that, when it comes to society’s problems, “There are no solutions. There are only trade-offs.”

But once you face those trade-offs, a look at recent and distant economic history allows you to bring quite welcome news. Bred in the socialist tradition (my mother was a card-carrying Communist—I have her FBI file to prove it), I grew up to ask the most fundamental compared-to-what question: capitalism or socialism? I eventually learned that prosperity for the masses depends on free-market capitalism. Apart from the fundamentals of economic reasoning that support this claim, the evidence stares you in the face.

The stunning leap in general living standards from 1870 to 1920 took place in the U.S. despite two facts: Both labor unions and government intervention in the labor markets played a negligible role, and tens of millions of poor immigrants were flooding the markets in search of work. In the past few decades, the turn toward freer markets in the poor countries of the world has coincided with lifting more than a billion people out of grinding, one-dollar-a-day poverty.

I often paraphrase Winston Churchill on democracy when confronting a critic of the financial markets: They’re the worst way to allocate capital investment, except for all the others. The markets will always be magnets for charlatans and irrational investors. But if allowed to operate, they tend to punish the irrational with losses, reward the careful with profits, and steer capital investment to its most urgent uses.

The Options

At-what-cost, and who-pays, are questions related to Milton Friedman’s quip that there is no such thing as a free lunch. Call unfettered financial markets alternative A. While fraud will remain an actionable offense in any civil society, proponents of alternative B go much further, claiming that financial markets must be heavily regulated by government to curb mistakes and abuses. But this falls into the philosopher-king fallacy and its corollary, 20-20 hindsight. Are the human beings put in charge of the regulatory agencies immune to the corruption and lust for power that pervades some of the worst elements they aim to control? Economist George Stigler has put the term “regulatory capture” into economists’ vocabulary, showing that regulatory agencies almost inevitably get captured by powerful interests.

Had regulators at the Consumer Financial Protection Bureau asked the what-happens-next question, they might have considered that curbing payday lending at high interest rates might force many borrowers to go back to loan sharks, who use physically unpleasant means of collecting on their own high-interest loans. More damningly, when it comes to the causes of the Great Recession of 2008-09, government’s key role took place in plain sight.

The downturn wouldn’t have happened without the aggressive policies of government, starting in the early 1990s under President George H.W. Bush, which turned private mortgages into risky instruments. Regulators offered incentives to banks to load up on mortgages based on the view that nothing had changed to alter the relative safety of mortgage assets. Then the housing market collapsed.

At-what-cost, and who-pays, are questions related to Milton Friedman’s quip that there is no such thing as a free lunch. Sometimes the answer to who chips in for the lunch is rather subtle. For example, taxes on corporate profits aren’t paid solely by those who own the corporation. Since corporations often move their operations to countries with lower taxes, part of the burden of this tax is borne by workers who lose the opportunity for work at firms that flee. If the U.S. corporate income tax is cut, companies may respond by offering more job opportunities in the U.S.

When the late, great Barron’s Editor-in-Chief Alan Abelson approached me to write a weekly column on the economy (I had been covering commodities and doing occasional economic pieces), I balked. I doubted there was enough to say about the economy every week. I hope readers agree with me that I was wrong about that.

The day before the column was launched, Alan told me that, rather than Behind the Numbers, the column would be called Economic Beat. I loved that. The economy has been my beat. And the beat goes on.

Reprinted from Barron's