Always Remember ‘Rob’s Rule’ Trumps the ‘Science’ of Economics
I don’t agree that economics is really a “hard” science. Economics is a function of human behavior, period. Now, if you go to a fancy Ivy League university, major in economics and then go on to get a economics PHD and teach at Harvard, do you really know more than I do about how to run the country? I doubt it. My observation is the more elevated someone’s academic status is, the more impressed policy makers are in that someone’s opinions. You’ve heard of the Phillips Curve, Moore’s Law and Occam’s Razor. Well here is a new axiom to consider that should be part of your economic vernacular, the “Rob Rule.” The more celebrated the expert, the more likely he is to be a self-aggrandizing, bloviating fool. Take Anthony Fauci. I had him pegged 14 months ago as a modern day. Funny, how so-called experts are so stunningly wrong all the time. Let’s face it, when we fawn over “experts,” they get big heads and after a while they think of themselves as demi-gods.
The same is true with rock star economists, especially ones making public policy. They substitute their over inflated opinions of their expertise for those of the individual. They ignore market signals for they think they are smarter than markets. As excellent book on this subject isby Alex Pollock. He asserts that the Federal Reserve is the most dangerous financial institution in the world, and he lampoons its members as “Philosopher Kings.” He gives a detailed history of their hubris, and how often they have been 180 degrees off base with their policy decisions. He lists a long history of mammoth, systematic bank failures that occur every 10 years. In other words, they think they can manage the economy, but they can’t. The Federal Reserve has and always will be made up of a gaggle of Anthony Fauci’s. Instead of wearing stethoscopes, they carry calculators, but the effect is the same, they assume they know what they don’t know and can never know.
I will be the first to admit that I have an over-sized ego, but guess what, I am not smarter than the market. I know that one cannot predict or control financial markets, much less can a committee of Philosopher Kings. Economics bubble up from the ground which is why Chairman Mao’s 5-year plans trying to manage the economy from the top resulted in starvation on a massive scale. The slobbering sloths in Washington who think they can dole out trillions of dollars in stimulus money to “grow” the economy are not much more sophisticated than Chairman Mao. It doesn’t work that way. It will never work that way. Economic growth is not and never will be based on robotic top down mandates. All growth is based on the fundamentals of human behavior. The American economy is made up of 330 million people making hundreds of economic decisions every day. Moreover, these decisions are not like Congress voting to give away someone else’s money, these trillions of daily economic decisions are people voting their own property. No one is a better or wiser steward of resources than the one who owns those resources. This person votes with his property, and there is no better allocation of capital than this. Capital, efficiently deployed creates wealth, and wealth creates investment that improves people’s lives and lifts society to new zeniths. This activity, what Adam Smith called the “invisible hand” of the marketplace, bubbles up from the ground. There is no manna that falls from the sky (stimulus bills) that does anything positive for the economy. Top down economic decisions from experts almost always misallocate wealth. Take the Clinton Administration’s 1995 misuse of the Community Reinvestment Act, when Andrew Cuomo was Assistant Secretary and then Secretary of HUD. Here the government forced the private sector to allocate capital to where the government thought capital should be allocated as opposed to what the owners of such capital wanted. Banks were forced to make bad loans because “experts” thought it was a good idea. We want capital to be allocated efficiently because when it is, it drives growth and productivity. The proverbial “Rising Tide” lifts all boats. In assessing whether economic policy will make the tide rise, the answer always is how will people react to the policy.
Let’s take trade. There are few economic issues that are demagogued as much as free trade. But if it is reduced to its simplest terms, it is easy to understand. The fallacy of tariffs is such an issue. Trade is between people, not governments, and people make decisions based on their best interests. Does anybody want to pay more for an item than they have to due to a tariff? Does your trading partner want you to waste your money on paying a tax, thus reducing the number of widgets that you can buy from him? All trade is voluntary, both sides want it, but a tariff on this voluntary transaction imposes something that both sides don’t want and have not agreed to. Trading partners are rowing in the same boat, working together. It hardly serves their interest to shoot a hole in the boat.
Does making people poorer help the economy? Tariffs make it more expensive for people to live. When people have more money, what do they do with it? It gets invested back into the economy and spurs economic growth. More people get rich and these rich people put their capital to work creating new jobs and technologies. What happens if you pay your children an allowance in return for household chores, and they don’t do their chores? Why you cut their allowance off. But a business protected by tariffs is not subject to competition, no one can cut off their allowance. They get it no matter how rotten and inefficient they are (see the American auto industry in the 70s). These businesses are like spoiled children. They are economic brats. Yet, when they must compete against businesses around the world, they innovate and deploy their capital in efficient ways that provide goods and services that people want to buy voluntarily.
Take the economics of crime. In San Francisco, the District Attorney, Chesa Boudin will not prosecute larceny crimes of $1,000 or less. What does your understanding of human behavior tell you the consequences of this idiotic policy is? If you guessed criminals are going to walk into retail stores in broad daylight and steal $999.99 of stuff, go to the head of the class.
Hospitals and health care. If the government is going to pay hospitals $35,000 for each Covid patient that the hospital treats, do you think the hospital will classify more patients as having Covid or less? What about health insurance? If the patient does not pay the doctor directly, but through a third-party insurance service where the patient never negotiates the prices, will health care costs go up or down?
Regulation. If a farmer owns a large, expensive tract of land that he wants to develop and the federal government tells him he can’t because there is a rare Purple Freckled North American Tweety Bird on the property, do you think there is a more or less likelihood that there might be a shotgun blast and no further signs of the bird?
Human beings act in predictable ways, especially when they vote their own capital. Rock star experts are humans too. They also act in self-serving, predictable ways. The problem, however, is they vote YOUR capital in ways that serve their constituencies and reward themselves, but not necessarily you. They have different incentives. Beware!
Always remember “Rob’s Rule.”