The Lady Gaga Economy
In the convoluted way things occur to me, I thought of the contrast between our limping general economy, and her thriving fame-monster micro-economy.
In macroeconomics we’re taught that recessions and depressions occur because of overproduction and a general glut of things that no one can buy.
She reminds us (well, probably only me) that (as “Say’s Law” in economics holds) there are no general gluts; instead there is only relative overproduction in particular sectors of the economy. Yet stimulus proposals like those of today are premised on the existence of general gluts.
Say’s Law in economics is the proposition that supply creates its own demand. A relative overproduction of certain goods may occur, implying that too many scarce inputs have gone into the production of unwanted items relative to inputs for desired goods. But general overproduction — to which demand stimulus would allegedly provide relief — is not the core economic problem.
Right now, there’s lots of demand for Lady Gaga, say; but maybe too many houses, cars for sale, and hokey Internet startups.
Economic recovery requires massive spending cuts, deregulation, privatization, tax-cutting, avoidance of monetary inflation, and elimination of government-granted monopolies and favors. But, more importantly, economic recovery requires allowing prices and wages to adjust to market clearing levels. Politicians don’t allow that, so downturn is deliberate policy in a sense. Politicians instead stimulate demand in random, whim-driven ways that create new distortions that harm us later (when they’re out of office, or their earlier misdeeds are forgotten or forgiven).
Such policy prescriptions foster political ends that have little to do with actual economic recovery. Recession is already inevitable if government does not perform its core function of preventing the interest group manipulation that distorts smooth economic enterprise. It’s doubly so when politicians deliberately distort the economy’s workings.
Beyond performing its “classical” functions of maintaining order and thwarting contrived scarcity, government can only serve as a transfer mechanism. Inherently limited in what it can contribute to the real economy, it can certainly subtract a lot.
One immediate form of stimulus is to cut marginal tax rates to facilitate economic activity via increased supply. With returns to enterprise increasing and workers and investors certain that present efforts will be penalized less, the economy will begin expanding owing to reduced effective tariffs on the creation of supply. Similarly, a sustained program of reducing governmental regulatory interventions in the economy, and invigorating institutions to keep such interventions minimal, point the way toward prosperity and wealth creation, and to an economy that can finally eschew damaging appeals to political stimulus. Rather than spending stimulus, we desperately need a campaign to “Liberate to Stimulate.”
For more detail on all this, see Still Stimulating Like It’s 1999. Meantime, here’s a bumper sticker version: Good Government; Good Government. Sit. Stay.