Tuesday, May 19, 2009

Rogoff Runoff

I completely agree with Kenneth Rogoff's little piece about the "new normal" for economic growth post apocalypse.  The US consumer is up to his eyeballs in debt and China can't turn into a Gucci society overnight.  But the guy is still captive to the idea that the fancy financial system of the last several years was a good thing for growth.

I have trouble seeing how the US and China, the main engines of global growth for two decades, can avoid settling on a notably lower average growth rate than they enjoyed before the crisis.

Let's start with the US, the epicenter of the financial crisis, and still the most important economy in the world. In the best of worlds, the US financial sector will emerge from the crisis smaller and more heavily regulated. Not to worry, some economists, say. The US grew rapidly in the 1950's and 1960's with a relatively heavily regulated banking system. Why not again?

Sure, but the early post-war financial sector wasn't called upon in those days to support nearly as diverse and sophisticated an economy as it is today. If authorities set the clock back several decades on banking regulation, can we be so sure they will not also set the clock back on income?

This remains the party line.  God knows we wouldn't want to threaten "financial innovation".  Woe is us if you can't buy credit default swaps on a company that trades Zimbabwean bean futures leveraged 80 to 1.  That would restrict growth. 

The truth is that the drivers of real economic growth have not changed at all since the 50's and 60's, and the monster parasite of a financial system that we have now is no more necessary for our current growth than it was in the past.  From the man in the black pajamas:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.

Sure, you could add a few more things about technology and education and the invention of social technologies like the joint-stock corporation, but these are indeed the natural course of things.  Adam Smith doesn't mention FDIC insurance, Fed liquidity facilities, or the inalienable right to credit that these backstop.  These alleged 'innovations' are of dubious value, and if the word 'natural' is going to have any falsifiable meaning at all, we will have to make it stand for things that arise from the bottom-up, in a decentralized fashion, rather than for things invented by the big bang of highly centralized government regulation of credit and money. 

In fact, the dirty secret of capitalism, and what distinguishes it from a market economy, is that the government has always controlled the capital stock -- whether this was early bronze age know-how, arable land and seed stocks, naval ships for risky but profitable long distance trade, or, in the modern incarnation, fiat money and credit.  So there is nothing natural or market based about the recent spate of financial innovation.  Our current banking industry is just government by other means.  It is another piece in a long history of the centralization and abuse of power, and a perfect example of what classic liberals like Smith railed against as an impediment to (long term) growth.  Setting the clock back on banking regulation (like back to 1776) would be a grand idea, and it won't do a damn thing to harm our 'diverse and sophisticated' incomes. 

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