The Trump economy grows as the Krugman economy vanishes. @RichardAEpstein @HooverInst

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The Trump economy grows as the Krugman economy vanishes. @RichardAEpstein @HooverInst

Krugman’s basic mistake is that he wants to use monetary and fiscal policy to shift income and wealth away from investment to consumption, or indeed vice versa. The theory is that only government stimulation can make up for the chronic shortage of private investment, given the general lack of confidence in market institutions. This approach falsely assumes that some omniscient policymaker knows best how to make and implement a collective decision about the appropriate balance between investment and consumption. But there are several errors with this way of thinking.

First, this approach ignores the uncertainty that comes when a government agency makes a policy decision that is later reversed by a change in leadership, such as when Obama succeeded George W. Bush. The inevitable discontinuities in public policy complicate the efforts of private firms to engage in long-term planning. The resulting uncertainty permeates all market transactions.

Second, the Krugman approach insists that major investment decisions in new technologies, roads, bridges and tunnels should be made collectively, not separately, even though each individual has far greater knowledge of his or her personal preferences, which can, if need be, implemented through professional advisors. There is no dangerous collective action problem from bottom-up decisions that needs to be countered by some supposed government expert. Even, perhaps especially, on macroeconomic affairs, policymakers should heed the Hayekian injunction that dispersed sources of private knowledge will outperform centralized diktats.

Third, many Keynesians belittle the importance of low taxation as a means to drive economic growth. In truth, all income, capital gains, and excise taxes take a chunk out of the gains from a voluntary exchange, which the government then gives to some third party. Taxation thus slows down the frequency and velocity of these transactions, resulting in an immediate reduction in output, which can be offset socially only if the taxes in question bolster the sensible infrastructure needed to support these transactions—not just more government pork. The initial round of corporate cuts have already produced the desired effect by spurring repatriation of cash held overseas by American corporations, stimulating foreign investment in search of greater profits, and resulting in wage and employment boosts as companies hire more personnel to fund their anticipated expansions. One can quibble about the size of these effects, but not about their overall direction.

Fourth, the Krugmans of the world overlook the importance of systematic deregulation in the overall scheme of things. Taxation and regulation should be understood as close substitutes for each other. Thus, regulations that stabilize business transactions, like those requiring certain transactions that are binding to be in writing and publicly recorded, will generally advance commerce. But other forms of regulation will block and distort private transactions without producing any offsetting gains. Changes in the regulatory climate are quickly reflected in overall stock market performance.

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