Who Should Run Our Economy?

The October 14th issue of the Economist magazine says, “The American economy has left other rich countries in the dust,” and adds, “Expect that to continue.” That was from the lead article in a special Economist issue titled, The Envy of the World. But presidential candidate Donald Trump asserts that the American economy is in the toilet and only he can save it. And many Americans agree with Mr. Trump. A recent Gallup poll says the Economic Confidence Index remains negative at -26 with 52% of Americans saying they are worse off than they were four years ago.

But the Economist has a point. US economic growth was 3.0 percent in the second quarter. Not especially great but a lot better than most of Europe. China reported GDP growth of 4.7%, better than the US but awful for them. And China, which has notoriously untrustworthy economic data, has millions of empty apartments, skyrocketing youth unemployment and a rapidly ageing population dragging down economic growth. All those empty apartments added to China’s GDP. So will tearing them down. The Economist reported that over the last thirty years the US economy has grown from 40% of the G7 nations to 50%. And remember all the dire predictions that China’s economy would soon surpass that of the US? No longer.

Both President Joe Biden and Vice President Kamala Harris are touting the success of Bidenomics even if no one seems to believe them. But the real story of America’s economic success is that the country is doing so well in spite of Bidenomics. Keep in mind that shutting down fossil fuel power plants, while spending trillions of dollars to build solar and wind facilities, adds to GDP even though it doesn’t add to the power we can generate. Add an industrial policy of switching to electric vehicles even though we lack the charging stations and electrical grid to support that increase in demand may increase GDP while courting an economic disaster. Remember that it was China’s industrial policy to build millions of high-rise apartments that is causing so much pain in China now. Mr. Biden’s industrial policy is aimed at pleasing his progressive base, not making America stronger.

Ms. Harris boasts that her economic plan for the future is 82 pages long. That’s 82 pages of benefits, subsidies, tax expenditures and other giveaways directed toward this or that group of voters or other special interest groups that will not be paid for by billionaires and corporations no matter how much she tries (sort of like Mexico paying for the border wall).

Mr. Trump’s plan is to take the US economy back to the nineteenth century along with tax breaks for tips and overtime that even non-economists realize will distort the economy into something unrecognizable. With everyone looking for tax-free overtime, there will be fewer jobs for everyone else. And if you are annoyed with everyone putting out their hands for tips now, just wait.

These people have no business running an economy. Luckily a lot of this nonsense will disappear after the election is over just like most other campaign promises. Besides, the stock market thinks that the Fed is running the economy anyway. But the Fed’s actions seem to perversely affect how markets are supposed to work. Good economic news, like more jobs and lower unemployment, drives the market down on fears that the Fed will have to raise interest rates. Bad economic news that means the Fed may have to cut rates sends the market up. I remember when business news media would report on the thickness of Alan Greenspan’s briefcase on the way to FOMC meetings because the reporters thought a bulging briefcase implied imminent changes in the interest rate. If the Fed did its job as originally intended, nobody except a few economists would know what the Fed was doing. The only reason the Fed is so important to our economy is that the government is doing too little of the right things and too much of the wrong things.

Here's an idea. Let’s get the government out of the business of trying to run the economy. They are doing a pretty lousy job. American taxpayers pay more per pupil than almost any country on Earth but get, at best, only mediocre results. Many Americans must dig even deeper into their pockets to find alternatives to failing public schools. And a tax benefit meant to help people, letting employers deduct health insurance expenditures while not taxing the benefit to employees, has distorted the economics of healthcare in the US and resulted in the most expensive health system in the world with, again, mediocre results.

Maybe the private sector can do a better job of running an economy than the government. It’s in their interest that the economy grow and improve. Elon Musk has developed better rockets than NASA at a fraction of the cost. The cost of Lasik surgery, which is not covered by the US healthcare system, has plummeted. Moore’s Law, that computer chip power will double every two years, is the result of free market economics, not some law passed by politicians. As Adam Smith noted in his book the Wealth of Nations, the production of a simple product such as a straight pin involves the participation of tens of thousands of economic actors.

It has been economic freedom that has driven all the scientific, technological and medical advancement that has allowed people across the globe to live longer, healthier and more productive lives. And, as noted in the Economist article, the fact that the United States has more economic freedom and less regulation than other advanced economies, is what has accelerated American growth and made us, as the Economist says, the envy of the world. But Ruchir Sharma writes in his book, What Went Wrong with Capitalism, American economic freedom has been in decline for decades. The Heritage Foundation ranks the economic freedom of the United States as 25th in the world, down from 7th in the year 2000. That’s the wrong direction.

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I don’t think most politicians understand how the public sector and the private sector are supposed to interact. Progressives believe that the greedy private sector seeks to serve only its own self-interest and not the common good despite the fact that the private sector has provided all the scientific, technological, medical and other benefits that makes modern life so much better. Progressives believe that only government can serve the common good despite the fact that governments dedicated to serving the common good, such as the Soviet Union, Cambodia, Cuba and Venezuela, have made the lives of their peoples miserable.

The truth is that the public sector and the private sector should not be adversaries, but partners. Each has a role to play. The Founders created a government that provided a framework within which citizens had the freedom to act in their own self-interest as long as those actions did not infringe on the freedoms of other citizens. They created a system of justice that could sort out disagreements between citizens and some rules and regulations to assure citizens that the economic activities of other citizens would not harm them or infringe their liberties. The goal of such a government is to build trust among citizens so they can interact freely and without fear with other citizens. That kind of trust accelerates economic growth.

Such a free market economy would be wonderful but it requires a peaceful world in which to operate. Trust among citizens is vulnerable to criminal elements within a country’s border, and to foreign adversaries beyond its borders, so government must also address these concerns as well. These malefactors require that we have a stronger government than might be ideal but we must remember two things; that the private sector is not the enemy but a partner and that malefactors exist in both the public and private sectors. So we need a balance between a government strong enough to insure the trust among citizens and limited enough to not infringe on their liberties.