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Tuesday October 14 2008

The conclusion that Antoine and Michael arrived at in this conversation was that there should be no more inflation, but that there should be public spending cuts, but that whatever was done there would be huge grief in the short run.  The only question was how soon the grief could be got out of the way, and something like normal service resumed.

Thinking about this some more, I think we libertarians are in a position to be a bit more upbeat about all this, because we have the only real answer to this mess.  Serious public spending cuts and serious tax cuts are how you get an economy to go from mediocre to good.  We know this.  And this is also how you get an economy to go from disastrous to non-disastrous.  Politically, getting people to want better than mediocre is hard.  But getting people to prefer non-disastrous to disastrous is automatic.  You only have to say it.  It’s the difference between most people having an okay life and you threatening to poke them with the stick of economic dynamism, and most people having a seriously depressing life and you promising to wave the magic wand of economic dynamism.  Similar policies, but opposite politics.

That’s one reason to be optimistic about the immediate prospects for libertarian-ish ideas, certainly in Britain.  Another is that as soon as measures like these are even talked about, the prospect of economic improvement, which would definitely be perceived by “the markets” if not immediately by the general public, becomes an economic fact in its own right, now.  Announcing measures like these is the only feasible way for the government to effect any improvement in the economy, now, and it would indeed achieve benefts now.  The politicians are all running around bleating that they must somehow, anyhow, restore “confidence”.  This is the way to do it.  Even shouting from the touchline that this is the way to do it will improve things a bit.  So, we should shout as loud as we can.

In terms of such things actually being done any time soon, everything hinges on the difference between what people who matter would like to be true, and what they actually think is true, the latter being the important thing, as George Stigler (I think it was) explained long ago in a particular good essay (link anyone?).  Many people, including some very powerful people, would like nationalisation to work.  They would like to be able to command the economy to become more dynamic, in fact they would love it.  They would love to believe that they possess the power to micromanage the world into being a better place.  But far fewer such people any longer believe that such things are actually possible.  The evidence is now in that if you want to get an economy to motor some more, or in this case to motor at all, you have to cut public spending and cut tax rates.  Whether you like these policies does not matter.  Reality does not care what you think of it.

Some now fear a depression, basically because, then as now, the answer to the problems caused by inflation was widely believed to be more inflation, at least in the short term.  Which is what has just happened.  But there are, thank goodness, differences between now and circa 1930, one huge difference in particular.  Then, the option existed greatly to expand government spending, government regulation and government interference in markets local, national and international, and there were an appallingly large number of people who thought that such interference would improve matters.  But we now live in a world in which such illusions are far harder to sustain.  We’ve tried all that nonsense, and look what happened.  Those delusions were what created the Great Depression, and the great war which followed.  The Crash only caused the Depression in the sense that it provoked idiots into doing these idiotic things.  I think think that policy makers are now still rather foolish, but not this foolish.

The bad news is that this open goal for libertarian measures only exists because things have become seriously worse than adequate, not because there is any widespread hunger for things to be seriously better than adequate.  The public would still be content for us to jog along at the top of the Laffer Curve.  All that has happened is that we have now, very suddenly, been revealed to be sliding down the far side, the right hand side, of the Laffer Curve, the bit where tax rates are seriously more than the economy can survive, and the public demands whatever corrective action will work.  But correcting the mere mediocrity of life at the top of the Laffer Curve, by demanding a slide down the left hand side of it, to tax rates and tax yields that are seriously lower than the economy could manage, resulting in life that would in most ways be seriously better, is something that electorates don’t yet seem to be ready to accept.