Friday Interview: Avoiding ‘Emergency Room Economics' | Eastern North Carolina Now

    Publisher's note: This post was created by the staff for the Carolina Journal, John Hood Publisher.

George Mason economist pans policies focusing only on short run

    RALEIGH - Basic economics can help us make better decisions for our families and for public policy. But some people believe economic principles should be set aside during emergencies. Dr. Peter Boettke, university professor of economics and philosophy at George Mason University, doubts the merits of so-called "emergency room economics." He discussed the issue with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

    Kokai: This idea of having some sort of emergency economic thinking that would replace basic economics in times of emergency, is this a flawed idea?

    Boettke: Yeah, I mean, the way you have to think about this is that if you're trading off long-term economic growth and vitality for short-run economic relief, that's a bad trade-off. And so, in our families, for example, we oftentimes violate prudent economic rules because of a crisis that hits. But what happens is, once normal times return, we then balance our activity out.

    So we might draw from our savings because we had a flood in our house, but then when we repair the flood, we then start filling the coffers back in. But in the cauldron of politics, we tend not to do that. And so what happens is, is that what we do in the short run is we try to provide all kinds of things for relief, but then we never really balance it. And so as a result, we destroy our long-term economic growth.

    So that's just the nature of politics, which is to concentrate benefits on the well-organized and well-informed in the short run, and disperse the costs on the unorganized and ill-informed in the long run. What we do in emergency room economics is we simply embrace that nature of politics, and we end up by always picking policies that give us too much short-run relief and not enough long-run economic vitality.

    Kokai: Now one example of this is one that you covered in a paper you co-authored that dealt with the onset of the 2008 financial crisis. How did emergency economic thinking make what happened in the crisis worse?

    Boettke: ... If you look at the policies in 2008 - TARP [Troubled Asset Relief Program] and sort of all the ones that follow through, coming all the way up to Dodd-Frank - what they have done is they have short-run policy justifications. But the long run, unintended, undesirable consequences of them, we have yet to see them actually, in terms of their impact on the U.S. economy.

    Dodd-Frank is a classic example of that. We want to try to get more oversight and more competition in the financial service industries. So as a result, we end up passing Dodd-Frank legislation, which raises the compliance - legal compliance - cost of the firms, which ends up by being that the only firms that can survive that are the ones who are the bigger firms.

    So we're supposed to have smaller, more competitive firms, and instead what we get is less, larger firms as a product of that. And that will affect our ability to have vibrant financial markets - financial intermediation, financial investment markets, all that stuff, gets restricted by Dodd-Frank in a way that the regulators, at least in the short run, didn't think it would.

    Kokai: In spelling this process out, I'm thinking in the back of my head about politicians and the fact that they're looking at the short term in meeting people's demands, listening to the people who have complaints. Getting them to think long-term is going to be pretty tough, isn't it?

    Boettke: Oh, yeah. It's the real hard thing to do. ... Because the nature of democratic politics is that they have to get elected. And in order to get elected, they need votes and they need campaign contributions. So that's why they concentrate the benefits of their policy in the short run, on the well-informed and well-organized interest groups. Because those are the ones that are going to show up to vote.

    Who are the ones that are not going to show up to vote, right? Those are the unorganized and ill-informed mass of voters. So what you do is, you have this concentrated-benefit, dispersed-cost logic. What we as economists try to do, in our analysis of politics, is to demonstrate that activity to people so they can, in fact, become informed participants within the democratic process and challenge the idea of concentrating these benefits just on the well-organized.

    And instead, try to bind your politicians by rules. So part of the argument ... is really an argument of politics by binding the rulers: rule of law. Let's say just a consistent rule-of-law approach to public policy as opposed to the discretion of political authorities. And so it's a classic debate about rules versus discretion, and we make an argument for the benefit of rules and the costs associated with political discretion.

    Kokai: You mentioned Dodd-Frank, which would give people some example of some of these unintended consequences. I imagine that just as difficult, or even more, though, are these policies that have long-run, negative economic consequences that you really can't point to.

    Boettke: Yeah.

    Kokai: I mean, we're dealing now with bad policies that were made 30 or 40 years ago that are stunting our economy, but how can you point to them? Because it's hard to say what caused the economic doldrums we've had now.

    Boettke: Well ... that's right. I mean, Frank Knight, the great Chicago economist, once said the problem with economics is we don't have the equivalent of a wrecking ball, right? So if I wanted to demonstrate the negative consequences of smashing a wrecking ball into a building, all you have to do is watch it, and it happens right away. The problem in economics is that the policy - the wrecking ball - hits the building and then the building crumbles 10 years later. What happens is the wrecking ball weakens this foundation and weakens that, and then the consequences are fully seen 10 years [later], but there's a lot of things in between.

    So how do I know that it was the wrecking ball that caused it? Minimum wages are a classic example of that. Rent controls - another classic example, where push a rent control and then 20 years later, you have a decline in the quality of the housing that's there because people haven't made the investments and whatnot.

    I think in our current situation, what we have to look at, for example, one shining thing is the changing role of the Fed [Federal Reserve]. So the Fed has deviated considerably from its original intent and, as well, from the rule of law, over this period of time. What are the long-run consequences for the quality of the Fed to be able to do sound money? Can we actually get a sound monetary policy? It's unclear that we can, so maybe actually something like an auditing of the Fed is called for right now because we actually don't know all of the things that are on the Fed and, let alone, on the Fed's balance sheets. And we should actually have that.

    Normally, I might be against completely an idea of an auditing of the Fed because that would really politicize monetary policy, which in theory, it's not supposed to do. But we've politicized monetary policy, and so now, calling for a public auditing of the Fed actually might be a very valuable policy for us.