Dear Conservatives, Market Interventions Never, Never Work
It’s hard to imagine now, but there was a time when Robert Downey Jr. couldn’t get a movie made. Though now the highest paid actor in the world, past substance abuse problems made the financing of any film he was attached to a non-starter. There was no realistic interest rate at which a film with Downey could be financed. Too risky.
Downey’s past came to mind last week amid all the worry about the presumed economic implications of Covid-19, otherwise known as Coronavirus. With fear of contagion spreading, business travel and business gatherings are being canceled, not to mention that factories and public places (Disneyland Tokyo is as of this writing shuttered for a month) are people scarce either by choice, or by decree. Not surprising in consideration of an expected economic slowdown born of reduced commercial activity, certain economists, policy types, and politicians have been calling for governmental action to allegedly soften the blow of an expected global economic retreat.
So while there’s nothing notable about policy figures seeking a role for their alleged sagacity amid predictions of economic crisis, it’s been a bit surprising or disappointing to witness self-proclaimed conservatives making their cases for governmental interventions in the marketplace. One would think they would know better. Isn’t the point of conservativism that governments lack even a fraction of the information necessary to intervene in the workings of economies that are a consequence of infinite decisions made every millisecond of every day?
It seems conservative rhetoric about the horrors of government meddling is just that: rhetoric. David Beckworth, a self-described “market monetarist,” wrote a piece for National Review titled “It’s Time for the Fed to Take On the Coronavirus Threat.” As readers can likely imagine, Beckworth doth protest too much…with the “markets” part. Were he really for economic activity of the unfettered kind, he wouldn’t describe himself as a market anything. In truth, Beckworth naively believes the Federal Reserve can plan economic outcomes, or artificial economic outcomes economists worship at the altar of like GDP.
So while there will always be conservatives who’ve forgotten the central-planning failures of the 20th century, former Federal Reserve Board member Kevin Warsh is not one whom readers would expect to walk away from basic market principles. Except that he unexpectedly did with an opinion piece in the Wall Street Journal in which he called for the Federal Reserve to “take the lead” ahead of “the world’s central banks” acting “together in the common interest.” Warsh, the former Fed official who’s long preached reduced expectations about the Fed’s ability to rewrite economic reality, is now calling for it to lead the world’s central banks in a vain attempt to do just that.
Reading Warsh’s piece, it was impossible not to ask what he could possibly mean by “policy action.” Really, what could the Fed do to arrest economic decline, or more fancifully, stimulate actual growth?
Beckworth of course believes the mere creation of money is itself economic growth, but Warsh isn’t the monetary fabulist that Beckworth’s long been. He’s reasonable. Warsh deep down knows that individuals and businesses don’t borrow money as much as they borrow what money can be exchanged for. This simple truth in mind, the Fed certainly can’t increase credit when it’s remembered that credit is an explicit consequence of real resource creation. To repeat, no one borrows money.
And with global investment and production set to decline assuming predictions about Covid-19 come true, global credit will decline no matter what. Central banks can’t create resources as much as they can ever so slightly redirect where existing resources go.
Considering stimulus in a broad sense, no doubt governments can spend with stimulus in mind, but the mildly sentient among us know there’s no such thing. Governments can only spend insofar as the private sector creates resources for them to. Government spending is the opposite of stimulus, which is a statement of the obvious. The growth already happened, thus enabling rather blind, politicized government consumption that shrinks the supply of resources that would otherwise be made available to private sector producers.
Which raises a basic question: is so-called Fed or “central bank” stimulus any different? If we accept what’s fact, that the Fed can in no way create credit, the “policy action” called for by Warsh is no different from government spending in terms of impact. The Fed can only act insofar as the private sector creates resources that economic actors would seek in the marketplace, so “policy action” by the Fed is by definition intervention on the part of non-market actors that pushes resources to where they wouldn’t otherwise go in a free economy helpfully free of government meddlers. Just as government spending happens to the detriment of private investment, production, and growth, so do Fed or central bank machinations take place at the expense of private, market-disciplined lending and investment, production, and growth. In short, the intervention called for by Warsh will almost as a rule blunt any recovery from Covid-19.
Back to the Robert Downey example that began this piece, it rated mention as evidence of the essential truth that in the real economy, credit sources operate as though the Fed doesn’t exist. Some like the Downey of old rate no credit no matter the rate of interest the Fed would like to decree, and others (think Jeff Bezos) could borrow for next to nothing even if they gave away all their worldly possessions, and even if the Fed were aiming for an interest rate of 20%. Interest rates are set in markets, not by central bankers operating under the delusion that artificial prices can be decreed by central planners.
Market forces will thankfully mitigate the certain damage wrought by the Fed and other central banks full of the juvenile belief that they can alter economic reality. In other words, bad economic ideas and wasteful ones won’t attain easy credit on account of the Fed moving its rate lower. Market rates of interest are a consequence of real economic factors, not the Fed’s childish desire to make cheap what is expensive.
And expensive credit will be, assuming a Covid-related economic downturn. Precisely because investment and production will shrink, so will the availability of credit shrink regardless of what the Fed or any other central bank does. Real rates of interest will reflect this truth. Thank goodness they will. The last thing an economy needs during a downturn is artificial prices that lead to sub-optimal allocation of precious resources.
Translated, the Fed will pursue “policy action,” but market actors will thankfully ignore those actions to the economy’s betterment. Warsh intuitively knows this. He should leave the money spriritualism to the Beckworths of the world, and other monetary mystics convinced money is an instigator, rather than a consequence of real production.
Market intervention never, never works. Conservatives know this, or at least used to.
