Wednesday, February 13, 2013

We should be concerned about the trust limit

From What if Stimulus Works--But Only in Theory? by Megan McArdle.

I think there are good reasons to doubt the Keynesian stimulus model on theoretical grounds. Regardless of the theory, there are even more reasons to doubt it based on empirical grounds. In the past five years virtually all OECD economies have struggled. A small handful such as Ireland and Iceland have taken the real austerity road, actually shrinking government expenditures in real terms. Many, such as Britain, have taken the mock austerity road by continuing to grow government expenditures but just not as fast as they used to do. And then there are plenty of countries who have attempted to restart growth by very high levels of government deficit spending such as US, France, Italy, etc.

Nobody has demonstrated that any one set of policies has been successful. The Germans have probably weathered the storm the best and they are much closer to the austerity model than the stimulus model.

The pro-stimulus, deficit spending team has argued that the stimulus spending has been too small in individual countries (close to a trillion dollars in the US), too prolonged (spread out over too many years to have an effect in one year), of the wrong sort (consumption spending rather than strategic infrastructure spending which might have positive productivity impacts later), or have been hostage to the global macro-economy. Addressing any one of these criticisms takes you into budget amounts of a size to make your eyes water. McArdle concludes:
In short, I'm wondering if rather than being tried and found wanting, Keynesianism hasn't been found impossible and left untried. Whether the amount of stimulus needed to jolt the economy back to trend isn't simply too large to pass political muster. It's hard to see a situation short of total war where that kind of money could be authorized or spent in the requisite period of time.
Perhaps. But I think there is something further to her analysis. A political system is at its most basic, a flawed mechanism for coordinating individual interests into aggregate action. It is marginally effective when it comes to existential threats such as natural catastrophes, war, etc. It is decidedly inadequate for quotidian decisions which are usually better handled via the mechanism of free choices made in the free market.

The political system, it seems to me, is much less well-equipped to deal with chronic problems that are not tactically threatening. We go from year to year making do, but don't face a clear and present tactical threat of a hurricane or an invasion. We have to make some big decisions of a strategic nature that touch on issues such as fairness, intergenerational contracts, incremental health affects, etc.

In a system predicated on free agents making individual choices, there are even greater constraints on the types of actions which an elected government can take. As McArdle says, the issues are "too large to pass political muster." It seems to me that this implies something even more fundamental. We are a nation that is rich in financial and human capital. There is little that, where there is a clear course of action towards a goal with which all agree, we cannot accomplish. But the more heterogeneous we are in terms of our goals, the less likelihood there is that we can agree on a course of action and shared sacrifice.

That is one huge barrier but one which can be theoretically overcome through argument and persuasion. I think the even greater implication is that we have reached a Trust ceiling. Forget the debt limit, we should be concerned about the trust limit.

Whenever a body, whether a charity, or business or one such as Congress, asks for my resources, I have to assess the request in light of whether I trust that body to use that money well and wisely and with little rent seeking, regulatory capture or outright corruption. If the amounts being asked for are small, then I will likely not go through an elaborate review. The more material the amounts asked for, the more I will call those questions in to play. If the requests are of such an amount that they affect not only my financial well-being but that of my children and grandchildren as well, then those questions are paramount.

The amounts being bandied about by the Keynesians are now so large, not just a trillion but many trillions, that the question of trust is the real limiter of action. I think we have hit the trust ceiling. We all may agree that we are in the midst of great change and that there is a role for government in easing the change and that there are good objectives on which most can agree. But we all are likely to have such grave reservations about the intelligence, competency, integrity and effectiveness of our political leaders that regardless of the need and worthiness of goals, we will not extend that level of trust to them. We have hit the trust limit.

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