Thursday, May 9, 2013

Finding Our Economic Sweet Spot

Competing extremes miss the middle

With a skittish economy that teeters between recovery and recession, there's no dearth of suggestions for putting it on solid footing. As I wrote in a previous post, most suggestions fall into two camps: "cut taxes" and "spend more" with different flavors and degrees in these camps. The one variant that drives me crazy – you know who you are – is the "conservative" advocating smaller, less intrusive government yet calling for "pro-business" policies and "incentives" to help businesses grow the economy. Really?

More than a few years ago I bought a book because of its intriguing title and the accolades it received. On the shelf next to some old grad school textbooks I notice it occasionally, promising to dust it off and crack it open. In Anarchy, State, and Utopia, Robert Nozick argues for a government "limited to the narrow functions of protection against force, theft, fraud, enforcement of contracts, and so on." Mr. Nozick contends that this type of government evolves naturally from anarchy.

I'm not an proponent of Mr. Nozick's minimalism, but I tend to land on the side of restraint. This restraint arises from my faith in the free market and a democratic economy, my prudent nature, and my experience with government clients. If you put something in place, you better get it 80 percent right at the start because it'll be really hard to get rid of – no matter how worthless, wasteful, or redundant.

Financial Times columnist Janan Ganesh wrote a good piece about "doing things to free up the economy for real enterprise," not just creating a cozy environment for "corporatism". Similar to the theories of economist Mancur Olson whom I wrote about in my last post, Mr. Ganesh presses the idea that entrenched interests are holding the economy back and that the future lies in "popular capitalism that aggressively backs the consumer and the entrepreneur over the cartel and the state."

Restraint in economic policy favors no one while requiring full disclosure by all market participants. Restraint in fiscal policy issues debt when the economy needs a kick and money is cheap then retires debt when the economy is hot and money expensive. Restraint in tax policy establishes an equitable, transparent, simple tax code that doesn't vacillate with political whim. Restraint in the regulatory environment seeks to level the economic playing field for all participants while managing systemic risk and requiring complete accountability.

Recent political strategy beckons to the extremes, aiming to divide the electorate into competing factions only to call for cooperation and compromise once elected. I prefer cooperation, restraint, and honesty from the start.