Source: AP Photo/Andrew Harnik
President Trump’s trade war with the rest of the world has energized new conservatives and inflated their egos. They see the future in an economy directed by Washington, D.C. And like their socialist counterparts, they must trash the science of economics in order to promote their goals.
Oren Cass’ article “Hayek’s Broken Promise” is the latest example. Cass, a senior fellow at the Manhattan Institute for Policy Research, claims that Hayek promised a trade balance if we allowed the market to work. Because the US has experienced decades of imports larger than exports, Cass concludes that Hayek broke his promise. But Cass only advertises his ignorance of economics and Hayek by publishing such claims.Cass misunderstands Hayek at the most fundamental level. When Hayek wrote that trade will balance, he always referred to a free market in the long run. That’s what good economists do. As Mises wrote, the average businessman is better at seeing what will happen in the short run to specific groups. Economists contribute to society only if they take the long view and consider the effects on consumers, not just producers.
Hayek would have been the first to tell Cass that a highly regulated market like that of the US will never have a trade balance because the state intervenes too much. Unions protected by the federal government drove wages too high for most manufacturing to survive. High health care costs dictated by government policies, high taxes and massive regulations mean it takes a miracle for manufacturers to hang on in the US.
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But something Cass will never understand because he refuses to learn basic economics is that Federal Reserve monetary policies punish exports and reward imports. It does that through its credit expansion that it intends to “save” us from recessions. When the Fed prints more money (through credit expansion) than people want to hold, they spend it. That’s what the Fed wants. But when the Fed prints more money than the entire nation wants, we spend it on imports.
In addition, the federal government is borrowing $1 trillion every year to keep American socialism afloat. American don’t save that much, so the feds need to borrow from the only people who do, the Chinese. But Chinese don’t save in dollars; they use yuan. How will they get the dollars to loan to the feds? The only way is for them to sell us goods then buy our debt with their savings. Thus, we have a huge trade deficit with China due to the federal budget deficit. Those are fundamental laws of economics and no amount of regulation, dictation, legislation or exhortation from Cass or D.C. will change them.
The next thing Hayek would tell Cass is that the federal government is no smarter than the market; real conservatives understand that the state is dumber. And the market isn’t a monster lurking outside of society waiting to crush us; the market is us. Each American takes part in the market as both consumers and producers.
Cass and the new conservatives place so much faith in bitter bureaucrats that they would trust our entire economy to them. This is the same government that has failed at almost everything it has attempted for a century. It has turned the drug problem into an international disaster. Our “war” on drugs is destroying every country between the Rio Grande and the Panama Canal. Poverty is worse than before Johnson launched his “war” on it 50 years ago. The US ruined Iraq, Afghanistan, Libya, and Syria with endless wars. Taxes and regulations have driven manufacturing out of the country. Monetary and fiscal policies have created the worst economic disasters in history. State regulations have made US healthcare the most expensive in the world and unaffordable for many Americans.
Yet, Cass wants the politicians and bureaucrats who produced these disasters to control our entire economy. Where is the logic? Hayek would tell Cass that even with good intentions (a dangerous assumption), politicians and bureaucrats can never have the information they need to effectively direct something as large as the economy. The great French economist Frederick Bastiat wrote that he would gladly turn control of his life over to someone wiser and with better motives, but politicians and bureaucrats have proven they are worse.
Cass has been reading some really bad economists who do little more than defend the status quo. They seem to believe that this is the best world that can exist. But Cass is right to lament persistent trade deficits, the destruction of manufacturing, and low paying service jobs. Good economists should not defend the heavily regulated, highly taxed, democratic socialist US economy.
Any ideology that depends for its success on trashing an entire field of science, and the best developed of the social sciences, as Cass and the new conservatives do, should frighten all Americans. Conservatives should never be anti-science. Instead, Cass and the new conservatives need to learn sound economics of the Austrian variety, the kind Hayek actually taught, instead of reading the short, easy essays and interpreting them out of context. Then they would discover that a state-directed economy without changes to monetary and fiscal policies will produce the same outcomes that they loathe.
And new conservatism will only lead to more socialism.
First published at Townhall Finance.
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