Freedom New Mexico
Economics may be called the “dismal science.” But, boy, when government gets it wrong, untold misery results — as we’re seeing as the Great Recession keeps rolling on like a four-year Halloween horror show.
The co-winners of this year’s Nobel economics prize are two Americans whose work shows how important their discipline can be to public policy. They are Thomas Sargent of New York University and Christopher Sims of Princeton University. The Nobel committee cited them “for their empirical research on cause and effect in the macroeconomy.” Put another way, they showed that even small changes in public policy can affect the overall economy — for better or worse.
Working independently, the two men were major proponents of the “rational expectations revolution” in economics. Sargent is the best-known and is the 17th-most-cited living economist in journals in his field.
This sometimes complex theory was explained to us by Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University. “The bottom line is that, if you introduce a policy — monetary or fiscal — using their reason, people will see the effect of it. They will see if, in some way, it will not work.”
He pointed to the Keynesian economic theory that government spending stimulates an economy, which underpins the economic policies of recent years, such as President Barack Obama’s $787 billion stimulus of January 2009. “People are not stupid,” Adibi said. “If the stimulus leads, over the long term, to higher taxes to pay back the stimulus, then people won’t spend the stimulus money; they’ll save it to pay the taxes.”
Indeed, in January 2009, Sargent warned, “The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research.” That ignorance was costly. The stimulus was passed, but did not induce a robust recovery. Indeed, U.S. unemployment has risen to 9.1 percent in September 2011 from 7.6 percent in January 2009.
All the “stimulus” did was stimulate the national debt, which now approaches $15 trillion. And President Obama now is calling for a $447 billion tax increase as part of his latest jobs proposal.
“Sargent also argues that monetary policy without sound fiscal policy probably won’t be effective,” Adibi explained. “Low interest rates are supposed to stimulate the economy. But if there are persistent budget deficits, in the long run that will lead to higher interest rates” because too much debt reduces one’s creditworthiness. That’s just what’s happened, with Standard & Poor’s downgrading U.S. debt last August.
We like this “rational expectations” school because it affirms what most sensible people know: Too much spending and debt — by governments, businesses or people — leads to ruin. As Thomas Jefferson advised, “A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned — this is the sum of good government.”