Monday, May 21, 2012

What is the Economy for, Anyway

Here's a book I wanted to like, but just couldn't -What's the Economy For, Anyway?: Why It's Time to Stop Chasing Growth and Start Pursuing Happiness by John De Graaf and David Batker. It's one of those books which asks some of the right questions, but doesn't get very far with answers. They say in their introduction:

The authors of this book have been activists for reforms that, in their minds, would make the United States a more livable, just and sustainable society. ..And yet, for any economic, environmental or social improvement either author has suggested, there seems to be a common rebuke: What will that do to the economy?

.. In our view, there is a question that should take precedence over What will that do to the economy. It's the question What's the Economy for, Anyway? .. Successful economic policy in this country requires attention to non-economic values such as quality of life, fairness and opportunity.

So far, so good. And they have a good first chapter which discusses the limitations of GDP as a measure of activity (let alone welfare), which I - and indeed most economists - would agree with. I remember reading plenty of doubts about GDP even when I did economics in the late 1980s.

They talk about the development of national income accounting by Kuznets in the 1930s. And they talk about a recent scheme which was included in the Obamacare bill, "Key National Indicators System (KNIS)" which I hadn't come across, but should look at.

I also agree with their emphasis on time shortage and time balance as a key problem in modern Western economies, especially the US. Intriguingly, they suggest that one of the main explanations Western Europe and the US diverged on working hours since the 1960s was not so much higher taxation in Europe, as Nobel-winning economist Edward Prescott argues.

Instead, they say, the US made a conscious decision starting in the Kennedy administration to promote increased production rather than increased leisure because production had defense benefits during the cold war, and shorter working hours did not. They argue the AFL backed down on a 35 hour workweek in 1963 because of Kennedy Administration opposition. ( p103) Europe had more ability to turn increased productivity into shorter hours because of the US defense umbrella. I suspect this is a bit too conspiratoriial to be true, but it is worth some attention.

But the rest of the book turns into a cartoonish and partisan argument between what they call "nineteenth century laisez-faire" and noble progressives who want a more European-style social democratic state with more government regulation and higher taxation. They tick all the standard liberal boxes - more egalitarian redistribution, single-payer healthcare and stronger unions, even high-speed trains. It reads like a Democratic Party activist platform rather than an original take on the issue.

I just feel these arguments about laissez-faire versus regulation are stale and outdated. The deeper issue is technology is altering possibilities. We can't go back to the progressive era of Theodore Roosevelt, even if we wanted to.

It is true, as they argue, that the economy ought to be ultimately about life, liberty and the pursuit of happiness. But one look at Europe this week ought to tell us that their favored continental social democracy and the unfettered welfare state has its own problems. The left tends to be blind to the problems of legitimacy and negative incentives created by its policies.

They are right to question the more extreme versions of laissez-faire and libertarianism. But I don't really believe many people hold to that quasi-nineteenth century view any more, outside Ayn Rand admirers. Progressivism was necessary at one stage in history. Anti-trust laws, child-labor laws, deposit insurance, even the EPA were all necessary advances over robber baron gilded age capitalism. But the next stage of evolution of the economy is going to require different thinking. And we won't find it in this book at all.


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