Thursday, December 24, 2015

Why Do Economies Prosper?

You would think that economists would provide a good answer to the question as to why one economy does better than another.  A simple enough question.

Is it really that one country has a better Fed policy than another?

Does monetary policy really matter at all?

Prior to the twentieth century, there wasn't much serious "monetary policy."  Yet, some countries managed very high rates of economic growth while others remained stuck in the mire.  The US, as it surged to world prominence in the latter half of the nineteenth century didn't have a central bank, much less any kind of monetary policy.  Yet, the US grew far faster than Germany and the UK, in spite of no monetary (or fiscal) policy.

So, economies can grow at differing rates, without regard to monetary or fiscal policy -- certainly they did so in time periods when there was no real monetary or fiscal policy to speak of.

The pitiful economic results of the developed world since 2009 are often discussed  in terms of monetary and fiscal policy.  Why?  Could different monetary and fiscal policies have made any real difference?

If it takes three years to get the various levels of approvals to open a new business and get appropriate zoning and licensing accomplished, what difference does it make what the target federal funds rate happens to be? 

If a young ghetto resident in Baltimore wanted to open a "legal" lemonade stand in West Baltimore, how many months would it take to get the appropriate approvals in Baltimore, assuming it could be done at all?  If that same ghetto resident approached a business asking to trade hours of labor for job training, how long before the federal and state officials would put both in jail for violating the minimum wage laws.  Where, in this discussion, does monetary and fiscal policy come into play?

If regulators intervene to prohibit certain transactions because they don't fit their imposed guidelines (think mortgages, consumer credit), then who cares what monetary and fiscal policy is doing.

Economists seem to think that if government prohibits all economic transactions of any kind, that the economy can hum right along anyway so long as monetary and fiscal policy are tuned to the right dials.

In short, according to modern economists, real world conditions of laws, regulations or the lack of the rule of law, just don't make any difference.  If banks are prohibited from lending, somehow commercial loans should expand anyway, so long as the funds rate is set appropriately.  If workers are forbidden by law to take a job that pays less than some politician thinks it should, then who cares as long as the target funds rate is sufficiently low.  If punitive restrictions on certain industries (coal comes to mind) creates massive pockets of unemployment and hardship, what difference does it make so long as the Fed is accomodative.

Why some countries prospered in the 17th, 18th, and 19th century, while others didn't, must be a great unfathomable mystery to the modern economist who lives or dies by monetary and fiscal policy, since monetary and fiscal policy were non-existent way back them.  Nevertheless, in the real world, some countries prospered while others stagnated long before economists invented monetary and fiscal policy.  Not much has changed.

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