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Action is what politicians are all about, especially in a crisis. So you can be sure that Treasury Secretary Timothy Geithner's Public-Private Investment Program to restructure troubled banks will hardly be the last rescue plan — as they inevitably, heroically, are labeled — to emerge.
The G-20 meeting in London is all about international action: coordinating stimulus, coordinating regulatory police work among capitals, expanding regulation into new areas of the finance. “More action” seems the economic rule in what many are already calling the “post-capitalist era.”
Some skeptics, including yours truly, are looking for an alternative response that could translate into policy, at least some day. They are finding there is one serious institution making the case for less action. That is a group of free-market economists and policy makers known as the Mont Pelerin Society. In this storm of activism, their arguments deserve a special review.
MPS held its first meeting on a Swiss mountain back in another seemingly post-capitalist year, 1947. In those days, Clement Attlee was nationalizing U.K. utilities and health care and Josef Stalin was solidifying gains in Eastern
Europe. John Maynard Keynes had created a modern movement that recommended government action, fiscal or monetary, as the cure to economic troubles.
Keynesian skeptics
Two scholars who rejected Keynes, Ludwig von Mises and Friedrich von Hayek, led the new group in talking about whether there might be an alternative to the social welfare state. One of those colleagues was young Milton Friedman.
In the years that followed, Mises, Hayek and others made the case for less government wherever they could. Sometimes what they said mattered: Friedman, for example, advised Barry Goldwater, Richard Nixon and Ronald Reagan. Vaclav Klaus, who led economic liberalization in the Czech Republic, is a member of the society. Margaret Thatcher took advice from some MPS types.
These days, the movement stands out again — if only because the views of its members differ so much from the “all-action” mode of Western governments. “We are all Keynesians now” goes the saying oft-quoted by commentators. Mont Pelerin Society members have been replying, “Not.” Impressed at their conviction, I recently joined MPS.
Earlier this month, the group convened what might be labeled a “Less Action” conference in New York City. There, the Nobel Prize-winning economist Gary Becker, a professor at the University of Chicago, unfolded an argument unusual for today. Rather than practice traditional activist economics, Becker suggested, U.S. lawmakers might try out a rule from another profession, medicine.
“There's nothing more important than the rule, 'Do no harm,'” Becker said. “We heard many economists say doing something is better than doing nothing. That's exactly backwards. Doing nothing is much better than doing something random. Making policies at random will make the economy worse.”
This line can be taken as criticism of both George W. Bush and Barack Obama.
As soon as Fannie Mae and Freddie Mac began to tremble, or even before, the Bush administration lurched into action mode. It demanded and got a stimulus package from Washington, though, as economist John Taylor of
Stanford University has shown, the stimulus failed since most consumers didn't spend the extra money.
The Bush administration also created the Troubled Asset Relief Program, or TARP, which will be remembered at least in part for making the word “trillion” part of our active vocabulary.
Obama following Bush
The Obama administration, of course, took up where the Bush team left off, passing its own stimulus package, with more likely to come. Then there is the continuing stimulative action of the Federal Reserve.
What to make of it all? Becker criticized the very notion that the public sector can stimulate the private sector. Economists, he pointed out, have argued that federal spending has a multiplier affect, “so that $100 billion will create $150 billion in GDP. To me, that number is just drawn out of thin air.”
Becker continued, “My fear is that these policies, and here I speak about the short run, will not simply have no effect but will delay recovery, steepen declines in output and raise unemployment.”
Robert Barro of Harvard University recently argued that government attempts to prop up the world's financial systems might be worthwhile, but that spending stimulus must “pass muster from the perspective of cost-benefit analysis.”
How many in Washington are turning to these radicals? Not many, as yet. Nor even many on Wall Street. The stock market bulls stampeded yesterday in response to Geithner's highly activist plan.
Still, it took decades for the original MPS members to see their work realized in government policy. A safe bet today is that over the longer term, policy makers will find themselves turning to the minimalists' RX again.
Amity Shlaes is a senior fellow at the Council on Foreign Relations and a Bloomberg News columnist.
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