Economists vs the Public

They don’t agree:

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My responses:

Question 1 — Agree

Economists in Sapienza and Zingales’ study resolutely agreed that it is hard to predict stock prices. A majority of the public agreed with the statement, but not so resolutely. Stock prices are the culmination of transactions between humans, and human behaviour is hard to predict because it is often irrational and informed by cognitive fallacies.

Question 2 — Agree, with a bitter taste in my mouth.

Economists were vastly more bullish on the stimulus’ effect on unemployment than the general public. And the data is actually quite unkind toward the economists’ view — the real unemployment path was far worse than the path projected by those in the Obama administration who promoted the stimulus. However, this is more of a symptom of the stimulus’ designers underestimating the depth of the economic contraction that the financial crisis caused. There is no doubt that the stimulus created jobs and lowered the unemployment rate in the immediate term. Whether the jobs created were really useful and beneficial — and to what extent the stimulus was a malinvestment of capital  — is another question entirely, and one which can only be answered in the long run.

Question 3 — Agree

Economists overwhelmingly agreed that market factors are the chief cause behind variation in petrol prices. The public agreed, but to a lesser extent. Presumably, the dissenting public and dissenting economists see government intervention as a more significant force? Certainly, the present global oil market is a precarious pyramid of supply chains balanced on the back of the petrodollar empire. But the market reflects these factors.  When governments start a war, that is reflected in the oil price. That’s a force that the market responds to. If a central planner was directly setting the oil price (rather than merely influencing it) — as is the case in communist countries — that would be a price determined by non-market forces.

Question 4 — Uncertain

Economists were broadly certain that a carbon tax is less costly than mileage standards. I think this is far too general a question. Without nuts-and-bolts policy proposals, it is not really possible to assess which would be more costly.

Question 5 — Uncertain, leaning toward Disagree.

This was the only question where economists and the public were largely agreeable — and economists were largely split. As I stated above, the “success” of the stimulus package can only really be assessed in the longer run, and even then there are difficulties with measurement. Generally, I suspect very much that the various interventions in 2008 onward have preserved and supported economically unsustainable and inefficient sectors and industries that ought to have been liquidated and rebuilt (especially the financial industry, but also other sectors, e.g. Detroit). Had the government in 2008 followed the liquidationary trend in the market, the slump would have been much deeper, unemployment would have risen much higher, but the eventual rebound may have been much quicker and stronger.

Question 6 — Agree

This is where economists and the public disagree the most. It is the point on which the public was the most bullish, and economists almost unanimously bearish. Economists in general seem to believe that what they define as free trade is best, even when it destroys domestic supply chains and drastically decreases manufacturing employment. To economists, this means that the American government should not discriminate against foreign products but buy for the best product and the best price. This ignores some important externalities. Buying American certainly supports American jobs, because money goes to American companies, and toward American salaries. This might foster inefficient and otherwise-unsustainable industries, but if the American public chooses to favour American products for their government, that is their right. And a strong domestic manufacturing base is no bad thing, either.

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The Return of Mercantilism

Mercantilist trade policies have returned in a big, big way.

Dani Rodrik:

The liberal model views the state as necessarily predatory and the private sector as inherently rent-seeking. So it advocates a strict separation between the state and private business. Mercantilism, by contrast, offers a corporatist vision in which the state and private business are allies and cooperate in pursuit of common objectives, such as domestic economic growth or national power.

The mercantilist model can be derided as state capitalism or cronyism. But when it works, as it has so often in Asia, the model’s “government-business collaboration” or “pro-business state” quickly garners heavy praise. Lagging economies have not failed to notice that mercantilism can be their friend. Even in Britain, classical liberalism arrived only in the mid-nineteenth century – that is, after the country had become the world’s dominant industrial power.

A second difference between the two models lies in whether consumer or producer interests are privileged. For liberals, consumers are king. The ultimate objective of economic policy is to increase households’ consumption potential, which requires giving them unhindered access to the cheapest-possible goods and services.

Mercantilists, by contrast, emphasize the productive side of the economy. For them, a sound economy requires a sound production structure. And consumption needs to be underpinned by high employment at adequate wages.

These different models have predictable implications for international economic policies. The logic of the liberal approach is that the economic benefits of trade arise from imports: the cheaper the imports, the better, even if the result is a trade deficit. Mercantilists, however, view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports.

Today’s China is the leading bearer of the mercantilist torch, though Chinese leaders would never admit it  – too much opprobrium still attaches to the term.

I have three things to add.

First, states around the world including in the West, and especially America, have massively adopted corporatist domestic policies, even while spouting the rhetoric of free trade and economic liberalism publicly. One only has to look at the growth trend in American Federal spending to see that America has drifted further and further and further away from its free market rhetoric, and toward a centrally planned economy.

Second, the key difference between a free market economy, and a corporatist command economy is the misallocation of capital by the central planning process. While mercantile economies can be hugely productive, the historic tendency in the long run has been toward the command economies — which allocate capital based on the preferences of the central planner — being out-innovated and out-grown by the dynamic free market economies, which allocate capital based on the spending preferences of consumers in the wider economy.

Third, these two facts taken together mean that the inherent long-term advantage of the free market system — and by implication, of the United States over the BRICs — has to some degree been eradicated. This means that the competition is now over who can run the most successful corporatist-mercantilist system. The BRIC nations, particularly China, are committed to domestic production and employment, to domestic supply chains and domestic resource strength. America continues to largely ignore such factors, and allow its productive base to emigrate to other nations. And the production factor in which America still has some significant advantage — design, innovation, and inventions — has been eroded by the fact that the BRIC nations can easily appropriate American designs and innovations, because these designs are now being manufactured predominantly outside of America, and because of (American) communication technologies like the internet. This is the worst of both worlds for America. All of the disadvantages of mercantilism — the rent-seeking corporate-industrial complex, the misallocation of capital through central planning, the fragility of a centralised system — without the advantage of a strong domestic productive base.