More on Central Planning versus Free Markets

Posted by Jeff Carter
on October 26th, 2010

These people int he Obama administration just don’t get it. They are so committed to the notion that they can think for everyone else, and that markets are puppets to be played with.

John Cochrane is a distinguished economist at the University of Chicago. He wrote a brilliant editorial today in the Wall Street Journal. He is a “freshwater” Chicago style economist.

The battle being waged in economics is between freshwater free market guys, and saltwater guys like Austan Goolsbee, that think central planning, targeted spending, and targeted tax rates do better. Free markets can certainly be messy-but they are the most efficient way out of any economic mess.

In this case, Cochrane takes Treasury Secretary Tim Geithner to task over trade imbalances and currency valuations. This assumes that trade imbalances are “bad” or “good” and that a bunch of guys in a smoke filled room can figure out what currency rates should be. This assumes that the smoke filled room can do it better than a free market that trades well over 3 Trillion in a single day.

It bugs the crap out of me when I hear about jobs being exported to China. It’s a statement with no data behind it. That type of statement shows ignorance, because it assumes global economics is a zero sum game.

It further galls me when I hear politicos stamp their feet over Chinese and other foreign investors taking their money and buying assets in America. Really? Who cares? Recall how much the Japanese invested in the US in the early 1980′s. Everyone was going to be speaking Japanese. We know how that turned out. By the way, it’s good for foreigners to invest in the US. It gives them incentives to make sure those investments pay off-thus making things better for indigenous US citizens.

In the book Fault Lines, by Raghu Rajan, another freshwater guy, he talks extensively about economies that only base their GDP growth on foreign export. Eventually, they fall apart.

In summary, Professor Cochrane takes Secretary Geithner out to the woodshed and gives him some well deserved smacks,

“What’s the right policy toward China? They put a few trillion dollars worth of stuff on boats and sent it to us in exchange for U.S. government bonds. Those bonds lost a lot of value when the dollar fell relative to the euro and other currencies. Then they put more stuff on boats and took in ever more dubious debt in exchange. We’re in the process of devaluing again. The Chinese government’s accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort. The right policy is flowers and chocolates, or at least a polite thank-you note.

Yet Mr. Geithner thinks that the Chinese somehow hurt us. There is at work here a strange marriage of Keynesianism and mercantilism—the view that U.S. consumers supported the world economy by spending beyond our means, so that other people could have the pleasure of sending things in exchange for pieces of paper.

This is all as fuzzy as it seems. Markets and exchange rates are not always right. But it is a pipe dream that busybodies at the IMF can find “imbalances,” properly diagnose “overvalued” exchange rates, then “coordinate” structural, fiscal and exchange rate policies to “facilitate an orderly rebalancing of global demand,” especially using “medium-term targets” rather than concrete actions. The German economics minister, Rainer Brüderle, called this “planned economy thinking.” He was being generous. Planners have a clearer idea of what they are doing.”

Cochrane hits the nail on the head in the last paragraph. Busybodies don’t know. People that interact for their own self interest in a broad market as buyers and sellers know much better. The entire agenda of the Obama administration, even the Democratic Party is that of the busybody. We need to tell Mrs. Kravitz to go home.

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