More Central Planning Please!

Undeterred by Failure

It is in the nature of bureaucrats to want to see their bureaucracies grow, both in size as well as in power. One of the phenomena often encountered in the unsustainable mixture of socialism and capitalism known as the modern regulatory State is that failure produces a clamor to expand what has failed.

For instance, after it was demonstrated in Japan for almost three decades running that massive deficit spending and monetary pumping failed to revive the economy, the failing strategy hasn't been abandoned, but has simply been redoubled in size. The complete incompetence of the 'national security' apparatus that was so vividly on display on occasion of the WTC attack in 2001, has led to a large increase in the powers and size of the security bureaucracy and the creation a vast overarching additional bureaucracy.

It does not matter which service the State provides: over time, the cost will inexorably increase and the quality will at the same time just as inexorably decline. This is the inevitable result of a monopoly that lacks the ability to engage in economic calculation and judge the opportunity costs of its actions.

The policies instituted by the Federal Reserve have produced ever larger oscillations in the boom-bust cycle and dramatically undermined the economy. In a rational world, one would expect the debate to by now have moved on to the topic of how to replace the cartelized banking system as quickly and efficiently as possible with a free market alternative, i.e., a free banking system.

In reality, the opposite has happened: the regulatory powers of the Fed have been increased. Now the newest appointments to the Federal Reserve board argue that the central planners must become even more 'activist'.

US Economy Must be 'Managed' by the Fed

A recent report by Reuters informs us that an expansion of the Fed's role in 'managing the US economy' is allegedly needed:

“The two new nominees to the Federal Reserve's Board of Governors are expected to push for an expanded Fed role in managing the U.S. economy, working to replace the current raft of programs that resulted from the financial crisis with more permanent tools.

The arrival of former Bank of Israel Governor Stanley Fischer and former U.S. Treasury official Lael Brainard will add two strong voices to back Chair Janet Yellen's view that loose monetary policy needs to be extended to turn around a slack labor market.

Fischer intervened directly in Israel's mortgage market to tackle a real estate bubble, while Brainard pushed EU governments hard for more aggressive action from the European Central Bank during the euro zone crisis.

Interviews with former colleagues and a review of their public statements and published material also suggest both will want the Fed to remain in activist mode long after its current programs wind down and its bloated balance sheet shrinks.

How they influence the U.S. central bank is a critically important question for investors, who are searching for clues on when the Fed will lift interest rates from near zero, where they've been since late 2008. It is a debate that may well be the defining one of Yellen's tenure.

In coming months, the Fed may have to remake the tools it uses to control interest rates, choose whether to liquidate or hold the $4 trillion of investments it has on its balance sheet, and decide when to begin pushing borrowing costs higher. It will also need to make longer-term decisions about how closely it wants to be involved in monitoring and shaping financial markets to guard against another systemic crisis.

Fischer, who is nominated to be Fed vice chairman, is expected from day one to pursue his belief that central banks need to develop new powers and tools to prevent future crises.

"What Fischer can bring to the table is some very valuable practical experience guided by a strong analytical framework," said David Stockton, the Fed's former research director and now a senior fellow at the Peterson Institute for International Economics.

Fischer, 70, sees "a lot of work to be done" to get central banks to integrate concerns about financial stability into their monetary policy decisions, said Stockton. "As he has looked at the crisis and thought about the advanced economies, he has seen there are some serious lapses."

The most 'serious lapse' is undoubtedly the very existence of a central economic planning agency like the Fed. Its members can 'develop new tools' all day long, in the end it always comes down to the same thing: price fixing – the manipulation of interest rates by manipulating the money and credit supply. Economists disagree on a great many things, but there are many areas of broad agreement, regardless of the economic school they subscribe to. That price fixing is bound to fail is one such area of agreement. And yet, most mainstream economists make an exception when it comes to the Federal Reserve (or other central banks).

The reason for this is two-fold: economists who wholeheartedly support a free market cannot expect to be called upon to provide advice to the State's interventionists and central planners. In fact, in order to be consistent, they would have to follow in the footsteps of Ludwig von Mises, who when asked what he would do first if he were appointed 'economy minister' drily replied: “Resign”.

As an aside to this, even many supporters of the free market mistakenly believe that the State is at the very least needed to protect property rights. This ignores the reality that the State is continually used by rent-seeking interests to do the exact opposite, namely weaken the  property rights of some to enable rents to flow into the pockets of others. There is no proof whatsoever that a monopolistic supplier of 'protection' will do a better job than competing suppliers in a state-less society would provide. On the contrary, if one thinks this properly through, one soon realizes that the alleged need for a force monopolist is a complete myth.

Most of today's intellectuals, and that includes of course economists, are either directly or indirectly dependent on the State, which provides them with incomes far above the value they would command in a free market. The Federal Reserve in fact has practically 'bought off' almost the entire economics profession, which as a result is not very likely to bite the hand that feeds it. As Hans-Hermann Hoppe's has put it:

“Almost completely protected from the vagaries of consumer demand ("tenured"), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen.

What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today's intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the State, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.”

Consequently, there will only be token resistance, if any, to the proposal to increase 'management of the economy' by the Fed. Never mind that it can be demonstrated both theoretically and empirically that central planning always fails to achieve its purported goals. No-one in the mainstream of the economics profession is likely to challenge the  proposal at a fundamental level, in spite of the fact that it is (or at least should be) well-known why it cannot work. Beginning with the socialist calculation debate set into motion by Mises' monograph 'Economic Calculation in the Socialist Commonwealth' (published in 1920), to Hayek's and Polanyi's examinations of the spontaneous order and the 'knowledge problem' in the 1930s and 1940s, there exists a vast literature on the topic, the contentions of which have yet to be refuted.

 

Michael Polanyi, whose work on widely dispersed tacit knowledge that cannot be communicated to a central planning organization inspired Hayek's investigations into the knowledge problem and the spontaneous order of the free market.

(Photo via gestiondelconocimientoelectivaiv.blogspot.com / Author unknown)

F.A. Hayek and L.v. Mises. Mises first wrote about the socialist calculation problem in 1920. He pointed out that a planned economy cannot possibly be rational – central planning inevitably leads to chaos.

(Photo via mises.org / Author unknown)

Growing Divisions

There are a number of regional Fed presidents who want to see the central bank's activism reduced. However, it appears highly unlikely that their views will prevail. A few more excerpts from the Reuters article on the new appointments:

“Divisions within the Fed over how long to extend its activist approach are likely to increase. A number of officials, including Kansas City Federal Reserve Bank President Esther George and Richmond Fed chief Jeffrey Lacker, have warned about the threats that might develop if current policy is kept in place too long, arguing it should shift back to a more traditional, less interventionist role.St. Louis Fed President James Bullard said last week he felt inflation was starting to gain traction, raising the risks of keeping easy monetary policy in place too long.

Fischer and Brainard are unlikely to back any proposals to push the Fed back into a corner.

According to colleagues who have worked closely with him, Fischer's concerns over financial stability have become steadily more important to his thinking – to the point where he feels central banks should stand ready to intervene in markets in a way likely to draw opposition from those who prefer a hands-off approach.

[…]

Brainard, 52, reached the upper ranks of the U.S. Treasury as undersecretary for international affairs, but does not have as deep a background in monetary policy as Fischer.

Her work in Washington has been less that of a technical economist and more about the political economy of globalization and international institutions.

But during the crisis that threatened to break up the euro zone while she was at Treasury, she voiced an expansive faith in what central banks can and ought to do, often serving as the point person in the Obama administration's efforts to goad Europe into stronger action.

European officials who worked with her during that period, as well as U.S. government colleagues, describe a tough bureaucratic infighter – someone not prone to easy compromise once she has made up her mind. In sometimes heated meetings, Brainard encouraged European officials to throw out their existing rule book and radically expand the European Central Bank's role.”

Mises has always argued that an economic order that increasingly suppresses the market is just as bound to eventually founder as outright, full-scale socialism was. Only as long as the remnants of the market economy still produce more wealth than is squandered by the effects of central planning can economic progress be expected to continue.

How formidable the market economy's wealth creation capabilities are is in fact demonstrated by the fact that economic progress has thus far continued even though the percentage of the population that is involved in genuinely productive activities has become quite small. In spite of all the obstacles that are thrown in the market's way by a growing and ever more powerful army of bureaucrats, economies in the regulatory democracies have continue to exhibit real growth. There is however an unknown threshold, a tipping point that once it is crossed will see a reversal of the process – when capital consumption finally exceeds new wealth creation. Intervention cannot be incessantly increased without exacting an ever greater price. One day, the price will become too big for the economy to bear.

The Rube Goldberg machine of central planning by government agencies.

(Cartoon via goldseek.com / Author unknown)