The S&P Downgrade Last Friday Night vs. Katy Perry

[F]airly interpreted, “Say’s law of markets” survives 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.

––William H. Hutt, A Rehabilitation of Say’s Law, 1974.

When governments neglect their core function of preventing the pressure group manipulation and sweeping wealth transfers that distort economic enterprise, recessions naturally follow.

But rather than prevent that manipulation, most governments enable it and prolong downturns.

The very notions of “fine tuning” and “pump priming” exemplify this—whether bailouts, the Federal Reserve’s monetary policy, Congress’s distortionary fiscal social-and-economic engineering policies–all remain largely uncontested by the political parties, academia or the media.

Long before the past week’s Dow meltdown and the S&P credit-rating downgrade for the U.S., throwback market-liberals like me thought stimulus should consist of the liberalization of energy, manufacturing, health care, finance and technology from disruptive political interventions. The preconditions for competitive enterprise and wealth creation are legal and regulatory stability, and passive rather than interventionist governmental institutions.

Alas, the prevailing perspective remains something else entirely; markets are regarded as the most disruptive element in society. And the still-preferred response, three years after “spendulus”—yet more government intervention, political transfer schemes and pump-priming by those certain they’re smarter than others.

In a new Los Angeles Times article, Michael Hiltzik claims, in the face of global entitlement-state crises in which the majority collects transfer payments, ”A new economic stimulus package is nonetheless needed to put people to work.” He calls the U.S. budget crisis a “sideshow debate,” “a fight that can wait for another day.” Paul Krugman likewise thinks record-high spending is the wrong worry.

Hiltzik’s prescription: “more economic demand.” He wants to “puts people to work for state and local governments and on a wide range of public initiatives that improve education, transportation and the quality of life for millions of Americans.”

My fantasy prescription would be a little more unhinged than that; a mandate that these gentlemen start new businesses themselves and hire people and personally insure them and educate them, and only then write another column about how government should spend others’ money.

But maybe they can’t help it.  In macroeconomics we are all taught that recessions and depressions occur because of insufficient demand, or, overproduction and a general glut of things that no one can buy.

The opposite viewpoint is that of Say’s Law in economics (named after Jean Baptiste Say); the proposition that supply creates its own demand. A relative overproduction of certain goods certainly may occur, meaning 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 like that proposed by the east and west coast Times writers would allegedly provide relief — is not the core problem that economies face, nor is it the problem we face now.

Right now, there’s lots of demand for Apple iPads and Amazon Kindles or Google Android phones, say, or for Katy Perry’s new song, Justin Bieber or Lady Gaga (her “fame-monster” micro-economy thrives). 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, Blackberries and Rihanna tour dates.  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 to recover, some prices must fall further; for labor markets to recover, some wages must fall. But policymakers have a difficult time  allowing prices to fall to market-clearing levels so that recovery can begin.  Most policy aims at holding prices at unsustainable levels and creating still more “demand” unreflective of real wants in defiance of J. B. Say.

That’s why the demand-stimulus, Hiltzik and Krugman proposals are so damaging. They stimulate demand in artificial ways that knowingly or not foster cynical political ends that have nothing to do with actual economic recovery. They divert resources and human energy and create future pressure groups. They tee up new recessions.

Recovery requires politicians statesmanlike enough to come to Washington, not to “get things done,” but to get things undone.

Recovery requires entitlement spending restraint, economic liberalization, privatization, tax-cutting, avoidance of inflation, and elimination of government-granted monopolies and favors.  It requires allowing today’s already highly manipulated prices and wages to adjust to market clearing levels. Without these, stagnation is deliberate policy in a sense. The maintenance of unsustainable, non-market-clearing prices is exacerbated by regulatory policies such as deliberately barred access to the massive energy and mineral resources central to all production.

Saying “no” more than “yes” is the essence of sound government, and judging by the state of world economics, is the hardest thing in the world to do. Government’s “classical” functions are maintaining order and thwarting contrived scarcity (the holding of prices above market-clearing levels), rather than the transfer mechanism it has become.

When consenting adults can commit capitalism–when workers, investors and entrepreneurs know they will not be penalized for daring to hire someone, recovery can begin.

Our problem was never insufficient demand;  it remains the ceaseless political constraint of the creation of supply.