Why Friedrich Hayek is Making a Comeback

By Russ Roberts

This article originally appeared in the Wall Street Journal on June 28, 2010.

He was born in the 19th century, wrote his most influential book more than 65 years ago, and he's not quite as well known or beloved as the sexy Mexican actress who shares his last name. Yet somehow, Friedrich Hayek is on the rise.

When Glenn Beck recently explored Hayek's classic, "The Road to Serfdom," on his TV show, the book went to No. 1 on Amazon and remains in the top 10. Hayek's persona co-starred with his old sparring partner John Maynard Keynes in a rap video "Fear the Boom and Bust" that has been viewed over 1.4 million times on YouTube and subtitled in 10 languages.

Why the sudden interest in the ideas of a Vienna-born, Nobel Prize-winning economist largely forgotten by mainstream economists?

Link • February 7, 2011 • Competition and Emergence
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Is the Dismal Science Really a Science?

By Russ Roberts

This article originally appeared in the Wall Street Journal on February 26, 2010

For an economist, these are the best of times and the worst of times. We live in the best of times because everyone wants to understand what happened to the economy and what's going to happen next.

Is the mess we're in a market failure or a government failure? Is the stimulus plan working? Would tax cuts for small business spur employment? When will the job market improve? Is inflation coming? Do deficits matter?

So many questions and so little in the way of answers. And so it is the worst of times for economists. There is no consensus on the cause of the crisis or the best way forward.

There were Nobel Laureates who thought the original stimulus package should have been twice as big. And there are those who blame it for keeping unemployment high. Some economists warn of hyperinflation while others tell us not to worry.

It makes you wonder why people call it the Nobel Prize in Economic Science. After all, most sciences make progress. Nobody in medicine wants to bring back lead goblets. Sir Isaac Newton understood a lot about gravity. But Albert Einstein taught us more.

Link • February 27, 2010 • Crisis of '08
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Congressional Testimony, December 10, 2009

By Russ Roberts

This is the text of my testimony before the Joint Economic Commitee on December 10, 2009. It differs from the text in the Congressional Record that was submitted in advance. This is the actual text I delivered. Video of my testimony (along with Joseph Stiglitz's testimony, opening statements by the committee members, and the Q and A) is available here. My testimony starts at 58:15.

A man once asked his doctor how much weight he’d lose if he skipped his daily breakfast of a bagel with butter, about 350 calories. The doctor said if you can do that every day for a month, you’ll lose three pounds.

After ten days of skipping breakfast, the man came in to see how he was doing. To the doctor’s surprise, the man’s weight was unchanged. The doctor said good thing you stopped eating breakfast. Otherwise you’d have gained a pound. When I made my prediction, I didn’t realize how bad your situation was.

Unfortunately, the doctor’s analysis was flawed. He didn’t realize the man was eating a bigger lunch because he was hungry after skipping breakfast.

I think about that doctor when I think about the CBO estimates of the impact of the American Recovery and Reinvestment Act of 2009, the stimulus package. The CBO estimates that there are between 600,000 and 1.6 million extra jobs in the economy compared to what would have happened in the absence of the stimulus.

That’s an embarrassingly imprecise estimate. But it’s not really an estimate at all. It’s just a repeat of the forecast that the CBO made at the beginning of the process, like the doctor who predicts that skipping breakfast reduces your weight.

We have no idea of how many jobs have been created or lost because of the stimulus. As the CBO admits, to know the real impact of the stimulus, we’d have to know the path of the economy in the absence of the stimulus. And that is unknown to the CBO just as the lunch habits and metabolism of the patient might be unknown to the doctor.

What we do know is that since March, the economy has lost another 2.7 million jobs. When the stimulus was passed, we were told that without it, unemployment would reach 8.8%. Well, with the stimulus, unemployment went over 10%.

Link • December 10, 2009 • The Great Recession
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Congressional Testimony, October 28, 2009

By Russ Roberts

What follows is my testimony before the House Committee on Oversight and Government Reform, delivered October 28, 2009. The topic was executive compensation and the Special Master for TARP Compensation, Kenneth Feinberg, who was determining compensation at the firms who had not repaid their TARP funds.

Chairman Towns, Ranking Member Issa, and Distinguished Members of the Committee:

Americans are angry about executive compensation.

Rightfully so.

The executives at General Motors and Chrysler don’t deserve to make a lot of money. They made bad products that people didn’t want to buy.

The executives on Wall Street don’t deserve to make a lot of money. They were reckless. They borrowed huge sums to make bets that didn’t pay off. And they wasted trillions of dollars of precious capital, funneling it into housing instead of health innovation or high mileage cars or a thousand investments more productive than more and bigger houses.

Everyday folks who are out of work through no fault of their own want to know why people who made bad decisions not only have a job but a big salary to go with it.

No wonder they’re angry at Wall Street,

But if we keep getting angry at Wall Street, we’ll miss the real source of the problem. It’s right here. In Washington.

We are what we do. Not what we wish to be. Not what we say we are. But what we do. And what we do here in Washington is rescue big companies and rich people from the consequences of their mistakes. When mistakes don’t cost you anything, you do more of them.

When your teenager drives drunk and wrecks the car, and you keep give him a do-over—repairing the car and handing him back the keys—he’s going to keep driving drunk. Washington keeps giving bad banks and Wall Street firms a do-over. Here are the keys. Keep driving. The story always ends with a crash.

Capitalism is a profit and loss system. The profits encourage risk-taking. The losses encourage prudence. Is it a surprise that when the government takes the losses, instead of the investors, that investing gets less prudent? If you always bail out lenders, is it surprising that firms can borrow enormous amounts of money living on the edge of insolvency?

I’m mad at Wall Street. But I’m a lot madder at the people who gave them the keys to drive our economy off a cliff. I’m mad at the people who have taken hundreds of billions of taxpayer money and given it to some of the richest people in human history.

I’m mad at President Bush and President Obama and Secretary Paulson and Secretary Geithner and Chairman Bernanake. And I’m mad at Congress. You helped risk-takers continue to expect that the rules that apply to the rest of us don’t apply to people with the right connections.

You have saved the system, but it’s not a system worth saving. It’s not capitalism but crony capitalism.

Using a Special Master for Compensation to get our money back is too little, too late.

Many people argue that because the government handed out the money, the government has a right to dictate how it is spent. It’s a reasonable thought in personal relations. If I offer you money, I have a right to attach strings to my generosity. But in a constitutional democracy like ours, it is not the government that has rights. We, the people, have rights. The Constitution exists to restrain government, not to empower it.

Whether government has the right to limit pay isn’t the question. The question is whether it’s a good idea for the government to have the power to set compensation. Despite our anger, the answer is no.

F. A. Hayek, the Nobel Laureate economist, said: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The Special Master imagines he can design compensation packages that “align incentives” while “retaining key talent.”

But it is impossible for any one person—no matter how wise—to anticipate the consequences of such decisions. Certainly the Special Master does not possess that knowledge.

The Special Master doesn’t even know who is key and who is not. Some of that talent should leave and some of those firms need to disappear. But he does not know enough to decide correctly.

Nor does he have any incentive to acquire that knowledge. He has no skin in the game.

A single individual has been given enormous arbitrary power with insufficient accountability or transparency. This is not good for the rule of law, democracy or capitalism.

By focusing on those who owe the government TARP money, the Special Master distracts us from other firms that benefited from government rescue such as Goldman Sachs and JP Morgan Chase.

The comfort we receive from seeing compensation reduced distracts us from the policies that created the problem in the first place—the rescue of Wall Street from its own recklessness.

It is a charade of political window dressing to make crony capitalism look respectable.

I want my country back.

Let’s get the government out of the auto business, out of the banking business and out of the compensation design business. We need explicit timetables to disengage from government ownership including a plan for how the Federal Reserve will draw down its balance sheet. Most of all, we need to stop trying to imagine we can design housing markets and mortgage markets and financial markets and compensation.

I want my country back.

I want a country where responsibility still means something. Where rich and poor, Main Street and Wall Street live by the same rules. We don’t need a Special Master to level the playing field. We just need to take the crony out of crony capitalism so we can get back to the real thing.

Link • November 25, 2009 • Crisis of '08
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How Little We Know

By Russ Roberts

Here is my take on financial reform from the latest issue of The Economists' Voice.

Download file

Link • November 24, 2009 • Crisis of '08
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Will Time Prove Ben Bernanke Wrong?

By Russ Roberts

(This piece appeared on NPR.org on 8/25/09)

President Obama has reappointed Federal Reserve Chairman Ben Bernanke, praising his creativity in preventing another Great Depression.

Talk about damning with faint praise.

It's true that we appear to have avoided the worst-case scenarios of the last year, but at what price?

Back in March of 2008, Bernanke and Treasury Secretary Henry Paulson engineered a rescue of Bear Stearns. A single suitor, JP Morgan Chase, was chosen to receive a sweetheart deal in the name of avoiding a credit freeze. The freeze came anyway. The Bear Stearns rescue was the beginning of an unprecedented expansion of power in the hands of the Fed and the Treasury with a level of opaque decision-making that is not appropriate for a democracy.

Even today we have heard little justification for the expansion of the Fed's power and the Fed's balance sheet.

Yes, we have avoided a depression. But let us count the costs.

Financial firms that made irresponsible and imprudent decisions have been rescued, propped up and bailed out.

AIG has received about $180 billion. That is almost $2,000 for every American household. That money has gone to sustain the bonuses of AIG and the financial health of its counterparties, such as Goldman Sachs. This is an obscene travesty.

The Fed currently holds $600 billion worth of Fannie, Freddie and Ginnie mortgage-backed securities. I am not optimistic about how that will turn out.

The Fed has injected hundreds of billions of reserves into member banks. This will fuel future inflation unless Bernanke is willing to raise interest rates when the recovery begins. There will be tremendous political pressure on him not to do so. So inflation is likely to come along with any recovery.

Worst of all, Bernanke, Paulson and Timothy Geithner have continued the disastrous policy of sustaining bondholders and creditors of reckless financial institutions. Capitalism is a profit-and-loss system. The profits encourage risk-taking. The losses encourage prudence. The bondholders and creditors are the single most important check on imprudence. They care only about one thing: solvency. By making them whole, their incentive to restrain recklessness has been greatly weakened. This sows the seeds of the next financial crisis.

I feel sorry for Bernanke. In one sense, as the world's greatest living authority on the Great Depression, he is the best man for the job. But because he is the world's greatest living authority on the Great Depression, another catastrophic economic debacle of a similar magnitude would be particularly embarrassing were it to occur on his watch. I believe he has gone too far in the other direction.

The Great Depression was caused, or at least greatly worsened, by too little liquidity. Bernanke has avoided that mistake. He has instead committed the opposite mistake of too much liquidity and too few failures. Obama has praised him. How history judges him will be the real test.

Link • August 25, 2009 • Crisis of '08
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Halve The Deficit? Good Luck, Obama

By Russ Roberts

(This piece appeared on NPR.org on 2/25/09)

In his first address to a joint session of Congress, President Obama pledged to cut the federal budget deficit in half in four years.

Keeping that pledge won't be easy.

The Congressional Budget Office is forecasting a deficit for this year of $1.2 trillion.

That forecast does not include the spending package Congress just passed and Obama signed that will add hundreds of billions of dollars to the deficit over the next four years. And that doesn't include unforeseen spending increases in further bailouts for Fannie and Freddie or AIG or Bank of America or GM or the state of California or whoever else shows up in Washington with a hand out.

So Obama probably needs to cut spending or raise taxes by at least $700 billion a year. To give you an idea of how much money that is, that's about the amount the payroll tax currently collects. The payroll tax is about 15 percent, shared between employer and employee. Doubling that rate to 30 percent would add an extra $700 billion if — and it's an impossible if — if a tax rate of 30 percent didn't lead employers to reduce their number of employees or force workers to reduce their hours.

Link • March 2, 2009 • Taxes
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