In a rather involved discussion here, Jeff asked me,

If you were king for a day, how would you modify the way extra-market interventions are done in the U.S.? What changes would you make? And how well do you think government would do at those? (Or do you think the extra-market intervention needs to be something other than government?).

So, if I were king for a day…

First, I would get the money out of politics.

As far back as Plato’s Republic, Plato recognized that the problem with democracy was its susceptibility to manipulation by the tyrant (could be a tyrannical group as well). It is a brute reality that marketing counts on the fact that people are easily manipulated. If the goal of a political organization is to manipulate in order to achieve more power, then money is the way to get the job done. To the degree that it is possible, I would like to see politics out of the spotlight, off the stage, off television (with the exception of perhaps candidate debates), mass mailings and robo-calls. I would also like to see campaign finance reform so only individuals could contribute up to a fixed amount (like $2,500). I think it would be acceptable to have parties and candidates post their planks and positions on line (with references to research data preferably). I think folks should vote because they are actively interested and not passively manipulated into voting. An informed electorate is what makes democracy work. Being informed takes work and time. To the degree that manipulation is taken out of politics and educated voters are encouraged is to the same degree that I think democracy works.

Second, I would take the ‘lawyerly’ approach out of politics and put the engineering approach into politics. Lawyers, as Socrates would agree, are about the art of persuasion, sophistry. When governing becomes a product of rhetoric it loses. In particular, I would make a constitutional requirement that any government programs that exist and get incorporated into law have charters. The charters would clearly lay out the purpose of the program, the criteria for its continued existence in the form of how the success of the program is to be measured and by law continued and the end of life requirements. Some programs might be into perpetuity like Children’s Health Insurance Program, programs for the elderly, severely disabled folks etc. However, even those programs should have time bound charters that need updating and renewing on a periodic basis including cost reductions and efficiency requirements that are measured and invoke certain legal consequences if they are not met. Other programs should be designed so that they encourage transition to the private sector. One program that worked well in this regard was the Federal program that paid the tuition cost of migrant workers children and produced much more in new tax revenues and private business creation than the government paid for the program. Government programs of this type should not institutionalize recipients but make it possible for transition to more lucrative, private (non-government subsidized) enterprise. If folks are on the public payroll I do not think that having them have to perform something in return to the public sector is too much to ask in many cases. I think the private market does many things well but it has also not performed well historically in other areas such as health care (insurance company cheery picking, barriers to entry or pushing riskier customers out) and I think it is a bit simplistic to blame it all on the government for non-performance. When profit is the goal, certain endeavors should not be optional or put off for decades. They have to be addressed by an organizational system where profit is not the sole criteria. Adam Smith would agree with this. However, all this has to be a healthy balance between private and public sectors where the private sector is the preferred vehicle if possible. Additionally, I am not against block grants. In a perfect world I would love for Republicans to have 10 years at demonstrating their ideology and the Democrats have a 10 year shot at it. Since that will not happen, I think that if states and localities administered programs with block grants, over time, we would see which states folks migrated from and which states they migrated to. I think this would shed light on the viability of various ideologies. In some ways, I regret that Obama won the last election because I would have preferred to have the wizards of Republican economics continue their foray until voters could make a clear distinction of where that path leads.

Third, I would have the government involved in more long term R&D that could be handed off to private businesses in the form of patent free technology. We are doing this already in the areas such as health care and defense and it has worked well. Other countries, China comes to mind, are doing this reaping huge rewards in the national economy. To compete globally we will have to do this in the future. Long term private market R&D is costly and risky and therefore, makes a lucrative business model rarer and harder to achieve without this kind of public sector support.

Forth, with regard to government intervention here are my tentative ideas (as I know that I am not as well informed on these areas):

Government bonds to finance public debt – I think this has proven itself over time to be not only a good way to finance public debt but also to exercise a stable and alternate investment strategy to equities and commodities over time. I know there are pros and cons for callable public sector bonds but it would be a way for the government to ‘re-finance’ its debt to a lower service amount. I know the Fed can already to this to some extent by buying and selling government securities but that is really not their primary mission. I think callable bonds may have more pros than cons but I do not know for certain. The problem with public debt as an absolute number is that effective debt can rise or fall precipitously with economic stagnation or economic growth. I think this is one reason Keynes saw debt as more of a relative trade-off between private debt and public debt. When the private sector is accumulating more debt he thought it was ok at a certain critical point for the public sector to intervene and take on more public debt thereby exercising a ‘governing’ effect to keep the private sector from imploding. He also saw that when the private sector was growing, the boost in the economy meant more tax revenue and therefore an opportunity for the government to off-load public debt; in effect, due to the strength of the private sector. Of course, this depends on fiscal responsibility in good economic times and fair and consistent taxation. I do not think that the service obligation on public debt is something that lends itself to snapshot analysis due to its variability over time but this kind of analytic problem is not something alien to science and mathematics and should be rigorously monitored and on the average kept as low as possible to real GDP over time.

Monetary interventions (the Fed) – Let me preface this by focusing the perspective on international realities. Whether we like it or not, believe it is ‘free-market’ or not, the reality is that almost all other countries (and the Euro conglomerate) manipulate their currencies. They subsidize businesses and whole market segments to their advantage. If we cannot or will not play that game we will lose. We live in a world economy where such historical and simpler models such as the gold standard would put us at a huge disadvantage relative to the rest of the world. If you are playing with dirty poker players you better be up on your dirty game or you will lose the majority of the time. For this reason we need a Federal Reserve that can devalue our currency relative to other large economic powers such as the Euro and Chinese Renminbi. This makes our exports more attractive and stimulates growth in our country. The Fed has multiple functions historically but some of these like overnight deposits for local banks are not as important as they used to be and others like the ‘elasticity’ of money, the money supply available at a given time in the economy, are much more important than they used to be. The Fed has to strike a balance between putting too much money into circulation and increasing inflation or not putting enough in and driving the cost money up with higher interest rates thereby making credit harder to come by and growth slower. The flip side of putting more money in circulation is that our currency gets devalued relative to the rest of the world and our exports are stimulated. The Fed achieves the elasticity of money through buying and selling U.S. securities from the Treasury department (which is the agency actually responsible for ‘printing’ money). If we got rid of the Fed our currency would be at the mercy of the rest of the world economic powers. Therefore, we can control our monetary destiny or hand it to over to other powerful economies. This is where the real debate over the Fed needs to be centered. For this reason, I believe we need the Fed and our central banking system. Also, let’s not forget that the Fed is responsible for setting the reserve amounts that depository institutions (i.e., banks) must keep on hand so they do not over leverage themselves and set us up for a ‘run on the banks’ that we, the taxpayer, would have to cover through federally insured deposits (FDIC). They also give more assurance to the consistency and lowest possible rate that banks get charged when they borrow money from the Fed Bank (the discount rate). For those that would get rid of the Fed in favor of the unfettered ‘free market’ they would be sacrificing the elasticity of our money supply relative to other country’s un-free market like behavior, allowing banks and financial institutions to over leverage themselves (as has happened in recent history) and be at the mercy of inconsistent and regional, highest loan rates banks can get – do you really want to bet it would be lower than the discount rate (currently at 0.75%). If banks pay higher to borrow money where do you think that cost will ultimately reside and what do you think the effect will be?

private company bail outs – historically includes many companies and industries including railroads, Lockheed, banks, savings and loans, auto industry, financial institutions and insurance corporations to name a few. Generally, I am not in favor of this. Neither am I in favor of government loans to private companies as many presidents (and would-be presidents) have done. As I mentioned before, I prefer the government be involved in long term R&D over this kind of direct assistance.

regulations (including anti-piracy, monopolies, environmental, etc.) – this is an absolute must. Adam Smith took over a hundred pages in “An Inquiry into the Nature and Causes of the Wealth of Nations”) to recommend banking regulations. He knew the problems with over regulation but he also knew what could happen with under-regulation of the private market. For me, regulations are a no-brainer but good regulations actually involve a massive amount of gray matter.

market subsidies – In a perfect world I would be against this but as I previously discussed, we would be at a serious disadvantage relative to the rest of the world if we gave this up. One example is farming. If we did not subsidize our farmers as China does, farming products would chiefly be an import. We can see how well that has worked with the oil industry. We used to have puppet governments in the rest of the world to assure that we had cheap energy but that is no longer a viable method for us. Subsidizing certain industries is not an option in a world economy that will not play by our rules (or the rules of the ‘free market’).

If there were a one world ‘Fed’ of some type that may facilitate how all payers play by the same rules but it would also usher in a whole new set of problems. Would we really be able to fully trust the ‘free market’ that would result from such an organization? – I doubt it. In any case, it could be argued that the IMF, consolidations like the Euro, the UN and World Court could be taking us in that direction. I believe Gorge Bush Senior coined the term – new world order.

 

To conclude, I would also add that I think there is no such thing as a ‘pure’ free market if by ‘pure’ you mean only certain kinds of interventions are deemed ‘pure’ and other kinds are deemed ‘corrupt’. For me, the notion of a ‘pure’ free market is a residue of what we philosophers call metaphysics. We live in a world where these kinds of artificial designations have outlived their usefulness and we have learned that it is better to let the “order [get] defined in the process of its emergence.” If we pay attention to how things are without imputing an other-worldly, God-like, meta-language to them our rationality and systems can be organized according to the ‘things themselves’ (as phenomenology would suggest or the scientific method attempts). I see the parochial idea of a ‘pure’ free-market similar to a belief in God in that we impose our idea of what the free-market should be in opposition to what it is.

Yes, we should strive to make it better but from what ‘it is’ and not what it should be according to a micro-economic perspective (if indeed that perspective canonizes certain unfettered free market truths and demonizes certain free market corruptors in advance). What ‘it is’ is a way of organizing human commerce, economy, limited resources to our advantage; -the key word being ‘our’. Is ‘our’ the few or the many? If rewarding the few will trickle down to the many then by all means we should do it. However, if the few reap more and more rewards and the many sow less and less rewards and reap more and more hardships then we are ultimately faced with a value decision…and that has a lot to do with what group you actually belong to (not what group you aspire to belong). The ‘free market’ will get rigged one way or another. My determination (as king) is if we do nothing to rig the system for the many then the rich and powerful will rig the system in a way that benefits them. There is no ‘pure’ in this sense. Yes, competition is good for equal competitors but what do you think the Vegas odds would be on a best out of x number of David and Goliath match ups?