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New president and the economy


There has been a lot of speculation about what effect the new presidency will have on the economy. One thing I find quite frustrating is that few stop to think about what a president's and the government's roles are, and what is theirs to fix?

I'm still trying to answer that question myself. On one side, government's spending policies are just redistributing taxed money (present and future), which often creates unintended side effects and produces waste in the process (perverted incentives, bureaucracy, signal distortion). On the other hand, the state seems useful to set the rules for the market and enforce them.

In this context, fixing the economy can only mean improving the system, not simply implementing bailouts or social policies. But doing so requires long-term thinking and resisting pressure to act in the heat of a crisis.

The trouble is that many things that are beneficial to the economy long-term are not popular politics. For example, removing tariffs on foreign trade, stop subsidizing farmers or car makers, not facilitating home ownership with poor people, or not lending with artificially low interest rates. It's often unpopular, not because they are bad ideas, but mostly because too little time is spent trying to educate the country about how it works and basic economic principles.
That and it often goes against the vested interested of an influential few and some corporations who have built expertise at lobbying our government.

Presidential debates and other media are boring in that way: they try to convince you with bursts of short arguments but rarely offer an analysis or deepen your understanding. It is understandable for traditional media, and the internet fares a bit better, yet I am surprised that no solution has appeared to fill that gap.
The most recent financial bailout (700 billion dollars for the financial sector) was a typical example. Little was presented about what it would actually do, what it would prevent, how it would work and what it would cost. Instead we had blanket menaces about the dire consequences of inaction, urging congress to take some (any?) action immediately. What action we can and we ought to take was barely in question. Whether the parties involved had conflicts of interests was lost in the rush to pass the bill too.
By the way, it's funny to hear in the news this week (2008-11-11) that Amex negotiated the status of a bank holding company to benefit from this pool of money and the large US automakers are begging for some pie too.

This illustrates two things that are very important in my mind: making the government be as independent as possible and think about the long-term (see Change Congress), and have sufficiently educated individuals to allow an effective democracy.

Since this post does not go into in-depth analysis, I'd like to share some further readings which I enjoyed and recommend. Many economics books which focus on the qualitative don't require a PhD ;-)
Henry Hazlitt's Economics in one lesson
I like Hazlitt's summary for his book: "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

Steven Landsburg's Armchair Economist

Tim Harford's The Undercover Economist

David Cay Johnston's Free Lunch

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