Posted by: bmeverett | August 20, 2010

Friedman Watch August 20, 2010


Tom Friedman’s August 17th column in the New York Times does us a great service by nicely framing the debate about current economic policy. The last paragraph of Mr. Friedman’s piece says it all, “The president needs to take America’s labor, business and Congressional leadership up to Camp David and not come back without a grand bargain for taxes, trade promotion, energy, stimulus and budget cutting that offers the market some certainty that we are moving together — not just on a bailout but on an economic rebirth for the 21st century.”

Simple, right? Let’s get the big shots together and make them do the right thing. The problem here is that no “grand bargain” can actually make the economy grow. Only the free market can do that. The approach Mr. Friedman is proposing has gone by many names, including Industrial Policy, State Capitalism and Dirigism – all terms designed to confuse, not to clarify. The correct name for this view is Central Planning, the belief that governments can allocate capital more efficiently than the market can.

The Obama Administration, Tom Friedman and others on the political left seem to regard central planning as wonderful a new idea – way forward into the 21st century. In fact, it’s an old idea, with a long and ugly pedigree, including the Soviet Union, Fascist Italy and Germany, Cuba and North Korea. Does any of these countries seem worthy of emulation? As a nation, we discussed the merits of central planning at great length during the 1930s, when Hitler, Mussolini and Stalin seemed to be on the rise. Fascist and communist economics had many admirers in Washington. The complete debasement of these regimes into violence, corruption and collapse put the debate on hold – but only for a while.

The economic woes the US faced in the 1970s and early 1980s, following two decades of growth and prosperity, rekindled the debate. This time, Japan was regarded as the great economic dynamo of the world. Finally, a democratic, pacifistic state was showing how central planning could really work. Between 1970 and 1990, the Japanese economy grew at an average annual rate of 4.2% compared to a measly 3.4% in the US. The conventional wisdom in Washington was that Japan’s success was a direct result of its “industrial policy” (i.e., central planning) and that Japan would quickly overtake the US if we continued our archaic reliance on free markets. But in 1992, before we could put our economy on the centrally planned track, the Japanese economy hit a brick wall. Growth over the next 15 years averaged about 1.3% per year, less than half the US rate of 3%. Oops, never mind.

After another decade’s rest, enter China – the new darling of central planners, including Mr. Friedman. China, a Communist country, has had higher growth rates (above 8%) than any of the major western countries for a number of years now. QED. Central planning works. But be careful with this argument. China is still a desperately poor country. Its large GDP is due only to its vast population, not to their productivity. China started to modernize and grow rapidly only when it abandoned central planning and turned to the marketplace. Those parts of the Chinese economy free from central direction are doing well, but hundreds of millions of people, mainly in the interior of the country, still languish in the poverty of government-run enterprises and agriculture.

The core of the central planning argument has been unchanged for at least 200 years: Hobbes was right, and Locke was wrong. Government is not a social contract formed by the consent of the governed. It is instead a control mechanism to keep the ignorant, greedy, bigoted population from killing each other. Only the smart people (like Mr. Friedman) can truly understand society’s needs and make the proper decisions about the economy. The unwashed masses will ultimately be much happier if the people who really know what they are doing make decisions on how we live, how much and what type of energy we consume, what kind of health care we get, what we eat, where we live, how we are educated, etc.

There are two basic problems with this approach. First, once democratic institutions are gone, the power inevitably goes to the most ruthless, not to the smartest. Second, even if smart people ran the country, they have no idea what to do. A modern economy is extraordinarily complex and requires millions of transactions carried out in real time. Mr. Friedman may think he knows it all, but the rest of us ought to be wary.

Nobody in his right mind believes that elected officials, corporate CEOs and labor bosses are out for anything other than their own interests. Giving them the authority and the opportunity to form a “grand bargain” would only give them an opportunity to line their pockets at our expense. Which leads me to an important Catch-22. People, like Mr. Friedman, who think that smart people ought to run the economy, are clearly not smart enough to run the economy.

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