Stimulating Demand Misses the Point
A top summer's-end story on the Drudge Report laments Ben Bernanke's inferences that the air is pretty much out of the Federal Reserve balloon with respect to stimulating the economy. Bernanke is deferring to Congress, whose supercommittee on debt reduction promises relief.
But at this point many of us wouldn't believe Congress if it said there was sand at the beach.
What pundits and political practitioners still lack is any appreciation of Say's Law of Markets, reverentially referred to by another unappreciated market economist, William H. Hutt, as the "most fundamental economic law" in all economic theory. It enunciates the principle that "demands in general" are "supplies in general"--different aspects of one phenomenon."
Anyone who endured Macroeconomics 101 was taught that recessions and depressions occur because of insufficient demand or from overproduction and a general glut of things that no one can buy. This explains the still popular Washington economic cure, which involves artificially generating more economic demand via federal outlays.
The opposite perspective emerges from Say's Law (named after Jean-Baptiste Say): the proposition that supply creates its own demand when economies are unshackled. The very notions of "fine-tuning," "pump priming," "stimulating," fiscal social-and-economic engineering policies all exemplify this. We've still yet to "liberate to stimulate," as Say's Law would command.
The preconditions for competitive enterprise and wealth creation are legal and regulatory stability, and passive rather than interventionist governmental institutions.
Right now there's lots of demand for Apple iPads and Amazon Kindles and Google Android phones, say, or for Katy Perry and Bruno Mars downloads. Lady Gaga's "fame-monster" microeconomy thrives, needing no artificial boost. Even Britney Spears is back, with Ke$ha and Nicki Minaj.
But on the other hand, there seem to be too many houses, Chevy Volts, BlackBerrys and Rihanna tour dates. Still, there is no general glut; everything has some market-clearing price. Instead there is relative overproduction in particular sectors to which prices must adjust.
For housing and labor, say, to recover, some prices and wages must fall. But policymakers face political difficulties by permitting prices to fall to the market-clearing levels that enable recovery. Nearly all policy tries instead to hold prices at unsustainable levels and create still more "demand" in defiance of Say.
Artificially stimulating demand can also foster cynical political ends that have little to do with economic recovery (think "green energy"). They divert resources and human energy and create pressure groups. They tee up new fake booms and subsequent recessions.
Today recovery requires politicians statesmanlike enough to come to Washington not to "get things done" but to get things undone. Or put more simply: Reduce the artificial barriers to production and you get more demand.
Yes, recovery requires entitlement-spending discipline. So get to it, supercommittee. But it also requires far broader economic liberalization of energy, manufacturing, health care, finance, communications, science and technology from disruptive political interventions. It requires sweeping privatization, marginal tax rate reductions, a strong, stable dollar, and elimination of government-granted monopolies and favors. Government-manipulated prices and wages must adjust to market-clearing levels.
And when consenting adults can commit capitalism--when workers, investors and entrepreneurs know they will not be penalized for daring to drill a well or unearth coal, hire someone or open a manufacturing plant in the South, for example--recovery can begin.
Without such liberalization from today's aggressive regulatory policies, stagnation is deliberate policy in a sense. Government's "classical" functions are maintaining order and thwarting contrived scarcity (i.e., the holding of prices above market-clearing levels), rather than stomping around as the transfer-and-regulate behemoth it has become.
Our economic problem was never insufficient demand and a need for artificial stimulus; it remains the ceaseless and deliberate political constraints on the creation of supply through overintervention, overtaxation and overregulation.