How to unravel economic complexity – the simple citizen’s guide

Economic Perspectives 48

Emile Woolf, Going Postal

Here’s a clue: if there are things that you, as a rational citizen, would never choose to do, it’s almost certain that government should stay clear of them too.

But governments rarely act rationally, and the result is usually disastrous. How does this happen?

The answer is obvious. It is the difference between (i) the individual and (ii) the impersonal machine. Factors that motivate your own actions in the world you inhabit are personal to you; they are based on your preferences, your choices, and depend for fulfilment on your own abilities and resources, on what you know you can afford, for example. They also take account of the impact of your actions on other people, your family, and your neighbours.

Government is also run by people, of course, but their motivation deviates from anything that you or I would experience as “real”. It is alien for the very reason that politicians and civil servants, whose careers and livelihoods depend on their involvement with government, are dominated by factors such as getting re-elected, abiding with party “groupthink” and, in the case of civil servants, rank, ambition, pension entitlements and a host of factors in the jobs-for-life circus. In other words, their actions are sullied by being remote from the needs and values of most citizens.

Blighting the actions of local government

Take a simple example, one that you encounter almost daily. You are driving to work and the traffic just stops. Half an hour later you can see why. You and hundreds of others in buses, lorries and cars, are being held up because the local council has employed a contractor to repair 20 yards of roadside paving, and a set of temporary traffic lights has now converted your busy two-way road into a one-way road – for a mere 20 yards.

But the effect is to create a mile-long tailback in both directions, and every day for a week people are late for work, trains are missed, flight connections are missed, and children are late for school. A fast-flowing highway has become a sluggish crawl by diktat of a petty official in the council’s roads department without a thought for the lives of the people who use it.

While you rage and fume, your only wish is that the government’s Transport Secretary is right behind you in the queue – not out of spite, but because he has the clout to do something about it. Even he can see that someone on the council needs a severe bollocking and a dose of community service to boot!

If the council’s bureaucratic mindset had permitted a tiny shaft of intelligent light to penetrate, and for one moment considered the needs of real people, someone in authority would have made a different decision: that little stretch of sidewalk paving would, of course, be repaired – but in the early hours of the morning rather than at rush hour.

Inconvenient to the workers? Well, pay them extra – the cost is insignificant compared with the social and financial cost of the disruption that is wrought on the community, day in and day out, by unthinking local government routines.

After all, whose money is it anyway? Council employees’ pay, payments to contractors they engage, and the inescapable cost to society caused by blocking the roads – all are ultimately borne by private capital, if not directly, then through taxes on the wealth-creating sector of the community. Can you think of any other source of funds? We certainly pay the piper – but do not call the tune.

Central government too

Nor is it fundamentally different at the level of central government, where policy makers are immune to correction and appear guiltless in the face of the most monumental abuses of public trust. Infrastructure projects, which would never get past the drawing board of any private business, are launched to flatter a failing government’s public standing.

The scale of wasted and misallocated resources is beyond comprehension – whether we are talking about paying for transport enhancement in the form of new airplane runways that replace housing land; “high-speed” rail when existing networks have slowed to standstill. Or public policy decisions like subsidising manufacturers to produce cars that run on diesel fuel; or imposing taxes on single-use plastic bags to cut their use, thereby increasing the use of alternative paper and cotton bags that will literally fall apart from over-use long before they can yield a benefit, all factors considered.

Contrast this with the economic decisions you make as a private individual, or as the proprietor of a small business – decisions intended to benefit you, your family and your customers while causing no harm to others. This can be thought of as the realm of “microeconomics”. The moment government begins to invade this space, watch out.

Italian finances

Consider a current example of its “macroeconomic” counterpart. Italy is experiencing a financial crisis right now, and many so-called “experts” are blaming the easy target of its currency, the euro. Here’s a recent quote: “Italy suffers because the exchange rate of the euro is disproportionately influenced by economic conditions in Germany, and Italy is given no opportunity to revive its economy by allowing its currency to fall, to be devalued.”

Are you convinced? After all, this commentator must surely know what he is talking about and the same message is popularly voiced in respectable media.

But remember my warning: this is the voice of macroeconomic thinking. It recognises that a crisis point in Italian finances has been reached, presumably triggered by last month’s cessation of a decade-long programme of money printing by the European Central Bank, and hence there is now no money for bailouts. Reasons or causes or neither addressed nor considered. It doesn’t ask why these Southern European states repeatedly find themselves in a financial pickle.

Reinstating the lira

This is then followed by calls for the reinstatement of Italy’s very own currency of old, the lira. Note that in the macroeconomic world any suggested strategy is always the very antithesis of rational action, and leads to conclusions at the level of the state that would never be reached in the circumstances of individual citizens.

Reversion to the lira will never give Italy what it really needs, which is a sound currency that it cannot debase in the expectation of an economic rebound. You need only look at what has happened in countries that do have their own currency and ask yourself why they didn’t revive their economies by “allowing their currencies to fall”. The Nigerian naira lost 50 per cent of its purchasing power last year and 85 per cent in the last two years, making its exports dirt-cheap. But its economy didn’t revive.

Consider what has happened in South Africa, Venezuela, Zimbabwe and others. None of them chose to allow their currencies to fall as a technique for achieving economic revival. They had no choice – their central banks, those guardians of financial probity everywhere, simply destroyed their currencies! Yet their leaders were following the same macroeconomic recipe for recovery.

And that is exactly what would happen in Italy if they reverted to an undisciplined lira. The macroeconomic notion that an ability to devalue the currency is good for the economy is of course derived from the idea that a “cheaper” currency will boost exports – which the pundits insist is a “good thing”.

The myth of “exports good – imports bad”

This does not stand up to logical scrutiny. Just as we produce in order to consume, so do we export in order to import. If we debase our currency in order to boost our exports, we merely render our imports more expensive.

What Italy needs (and what all these other countries with lapsed currencies need) is a sound medium of exchange with which to do business internationally. It doesn’t matter which one but, to maintain the essential quality of trust, it must be kept out of the reach of central banks that, almost by definition, turn everything they touch to dross whenever their indigent masters have emptied the state’s coffers.

And to complete this analysis, they should also be content with low regulation, low taxes and strict enforcement of private property rights. This latter requirement is the sine qua non of economic prosperity – enforcement relying on independent, honest courts.

Property rights the key

Before you downplay the importance of property rights, just take another look at the wretched countries mentioned above – their economic downfall has in every instance been accompanied by theft of private assets or nationalisation of resources in one form or another – land expropriation, seizing of successful businesses, formation of state oil or energy companies headed by deeply corrupt presidential puppets, ultimately leading to rigged elections and automatic reselection of presidents-for-life.

The thoroughly sickening spectacle of this rapid descent from prosperity to extreme poverty is witnessed over and over again, and destruction of an independent judiciary is always high on any dictator’s  “to do” list. In fact it is being repeated right now, as I write, in supposedly reformed Zimbabwe.

Conclusion

Italy, Spain and Greece are some way from the human calamities being enacted in Africa and South America, but there is no case for complacency – especially now that the ECB backstop has stopped grinding out its fiat bailout funds.

Don’t let the message get lost in the story: be guided by the economics of the simple man, not the state-run colossus.
 

© Emile Woolf January 2019 (website)
 

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