Too Smart to ThinkThese days everything must be smart. There are smart cities, smart grids, smart policies, smart TVs, smart cars, smart phones, smart watches, smart shoes, and smart glasses. There’s even something called smart underwear. Before long everything around us will be so smart we’ll no longer have to do one critically important thing. We’ll no longer have to think; smart algorithms will think for us. What’s more, the possibilities for not thinking are seemingly limitless. Just this week, for instance, in an effort to sound smart, Chicago Fed President Charles Evans indirectly advised President elect Donald Trump that fiscal policy must be “smart.” Presumably, what Evans means by this is that fiscal policy must not be “stoopid.” |
 Modern-day wedgie-proof thinking drawers. How was life even possible before them? An area of the body not usually known for its thinking prowess is suddenly smarting up! - Click to enlarge |
Fortunately, New York Fed President William Dudley clarified how smart fiscal policy would work. According to Dudley, smart fiscal policy would include spending programs that are automatically triggered by a recession. Specifically, Dudley said
The beauty in all this, you see, is that smart fiscal policy would be automatic. Congress wouldn’t have to think. They’d be mere automatons. |
William Dudley New York central banker William Dudley. Look at him, he looks smart! And now he’s coming up with plans on how to best spend other people’s money. Photo credit: Maxppp / Zuma Press - Click to enlarge |
What Could Possibly Go Wrong?Of course, Dudley’s smart fiscal policy proposal is the sort of thing that sounds really smart in the forgiving world of a Fed policy influencer. It’s as easy as pie, don’t you see? During an economic downturn unemployment checks would be automatically mailed out for a longer duration. Similarly, less earned income would be automatically confiscated from people’s paychecks. This automatic fiscal stimulus would give the economy the juice it needs to return to growth. Then, when the economy recovers, the loose fiscal policy would be automatically tapered back. What could possibly go wrong? Naturally, it all seems so clever and symmetric. With some simple parameters, the programming could be outsourced to India and the automatic triggers could be coded into the federal budget for under $5 bucks. Could policy be simpler? Still, we have some further questions. How does Dudley know in advance of a recession what fiscal stimulus would be most effective? Can he peer into the future and tell us what tomorrow will bring? Does he know where the transfer payment moneys will go, aside from cheap malt liquor? What about smart infrastructure or defense spending? Don’t spending programs that funnel the money to infrastructure and defense offer more bang for your buck? |
 It is not widely known, but Dudley has a secret identity. He is also known as Zoltar, an adept wielder of the crystal ball. For us mere mortals the future may be shrouded in a nigh impenetrable fog, but he can see right through it. On a more serious note: the superficially attractive Keynesian idea that the government should boost or reduce its spending “anti-cyclically” makes no sense whatsoever – even if it is “done right” (as is well known, modern governments spend, and then spend even more… economic cycles only impact the revenue side of the equation). This is actually even less widely known than Dudley’s secret identity. Even many otherwise sensible people believe in anti-cyclical fiscal policy, but it does not stand up to rational scrutiny. - Click to enlarge |
Smart Programs of Capital DestructionMaybe so. As opposed to direct transfer payments, at least infrastructure and defense spending produce something. Unfortunately, in many instances, the something this fiscal spending produces is unwarranted. The late economist and author Murry N. Rothbard explains:
Fiscal stimulus via infrastructure and defense spending are what the forthcoming administration says they are after. We’ve heard there are plans to spend $1 trillion on infrastructure over the next decade. The goal of the spending is to accelerate economic growth. Perhaps it will accelerate activity. It will crank up the economic treadmill. But will it get us to a place we want to be. One can only wish. For the acceleration of malinvestment through deficit based fiscal spending is ultimately a program of capital destruction. We wish it weren’t so. We wish fiscal stimulus was the economic panacea. But unless market forces are allowed to freely direct where capital investments are made, any economic growth will quickly flame out like a cardboard matchstick. Moreover, what growth the deficit spending provokes, the corresponding inflation will cancel out. The debt, on the other hand, will be here to stay. Unless, of course, it’s inflated away too… along with the accumulated savings, hopes, beliefs and dreams of three generations. |
 Murray N. Rothbard, here seen at a chalkboard in the process of apprising students of one of the greath economic trail-blazers of the past. Contary to most post-war economists, he consistently advised against government intervention of any kind. “Infrastructure spending” is widely regarded as a panacea, something that can only be good. Who can be against more or better infrastructure? It is one of the great myths of our time. In reality, a variant of the socialist calculation problem ensures that such spending will invariably waste scarce resources when the government bureaucracy directs it. While the bureaucrats in a nominally capitalist economy are at least not completely unaware of prices, the lack of a profit motive is still an insurmountable obstacle. Not only will capital allocation be misdirected because they cannot possibly judge the associated opportunity costs, but genuine wealth creators will be deprived of the opportunity to make use of the capital the government appropriates for its schemes. In short, it is double whammy. Photo via mises.org - Click to enlarge |
Image captions by PT
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