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Introduction
Traditional libertarianism is most often associated with microeconomic issues, and the standard libertarian insights might seem better suited for addressing those kinds of policies. Macroeconomic policies are important too, however;
These policies affect the entire economy, so the potential for benefits or costs are greater than for many micro policies. And, bad economic times often give rise to bad economic policies generally. So, even libertarians might consider intervention to improve the overall functioning of the economy if this intervention works and promotes better policies in other areas.
Introduction, continued
Despite the fact that issues of rights, externalities, and the like are less obviously relevant for macroeconomic issues, I will suggest that the version of libertarianism I have presented in this course thoughtful cost-benefit analysis is just as useful for examining macro policies as it is for examining micro policies:
And this approach leads to similar conclusions: Most interventions do more harm than good.
Outline
Stabilization Policy Deficits Central Banks and Money Fixed Versus Floating Exchange Rates The Exchange Rate as a Target The Balance of Trade Free Trade Immigration Foreign Aid
Stabilization Policy
Until the Great Depression of the 1930s, the focus of most economics was micro:
The idea that the overall economy could suffer a general, coordinated decline was not given much attention. Instead, analysis addressed the behavior and failures of individual markets, assuming that with a large number of individual markets, some growing and others declining, overall economic progress would be reasonably steady, and any fluctuations would reflect exogenous, unavoidable events such as weather or disease (e.g., the bubonic plague).
Problems with Stabilization Policy: The Lags are Long and Variable
A basic problem with stabilization policy is that it affects the economy with a lag:
This is partly because it takes time to recognize that the economy is going into a recession; This is partly because it takes time to choose and implement an appropriate policy; This is party because it takes time for the chosen policy to affect the economy.
In practice, however, forecasting is an inexact science, and the lags in policy are long and variable. Thus, attempts at stabilization can easily be counterproductive, i.e., destabilize the economy.
The evidence on whether policy has stabilized or destabilized does not make a compelling case in either direction. But it certainly fails to indicate that policy has on average been a stabilizing force.
A second possible response is that, over time, the uncertainty about policy and the difficulties in forecasting will diminish;
Plus, there will be learning by doing, so its useful to practice.
These arguments are not totally silly, and if there were no other costs to stabilization policy, they might be persuasive. But there are substantial other costs.
This is the Real Business cycle view; if it is even partly right, then smoothing might have a cost especially when successful.
The problem is that taxes and expenditure have microeconomic implications, independent of any impacts on stabilization. That is,
Deficit = G T
And we should care about the levels and composition of G and T separately, not just the difference. It is possible that policy should consider both effects:
But it certainly should not ignore the micro side.
Deficits, continued
How should libertarians feel about deficits? The first reaction should that expenditure is too high in most economies and should be reduced, independent of the deficit.
If this occurs, deficit issues become moot.
A second reaction might be that, even if expenditure is not cut right away, starving the beast helps control expenditure over time:
Thus, (virtually) all tax cuts are a good thing, even if they raise the deficit. In fact, the evidence does not support STB.
Central Banks
If stabilization policy is undesirable, is there a good reason for a central bank? No.
Once a central bank exists, it will intervene. The only intervention that is necessary in connection with money (i.e., the means of payment) is that government must establish what form of payment it accepts in those transactions it conducts.
This may establish a default money. But everything else can be done privately. Note that the U.S. got along quite well without a central bank until 1914.
The negative things people associate with exchange rates (e.g., currency crises) can only happen under fixed rates:
Under floating, the rate simply adjusts to changes in the demand and supply, just like for any other good.
Moreover, much of the uncertainty about demand and supply occurs because of fluctuations in government policy toward exchange rates and related issues.
The CA and KA do not necessarily balance individually and in fact are zero only rarely.
So, if there are policies that inappropriately discourage savings, it makes perfect sense to undo those.
But this would be true in a closed economy. The CA deficit plays no independent role.
Free Trade
Of all the propositions in economics, the view that free trade is best is perhaps the most widely held. And for good reason:
Barriers to trade such as tariffs or quotas reduce or prevent Pareto-improving exchange; And trade has additional benefits, such as providing competition for domestic industry.
Immigration Restrictions
Until the end of the 19th century, the U.S. had virtually no regulation of immigration. During the early 20th century, there was some regulation and a few notorious restrictions enacted (in particular, the Chinese Exclusion Act of 1882). But overall, immigration was barely regulated by todays standards, and immigration rates were high.
Immigration
Most (rich) economies restrict immigration substantially. There is no good efficiency argument for this; in fact, restrictions reduce global efficiency. The only argument is distributional:
Existing low-wage workers are likely to lose out as a result of immigration, which fits with the fact that unions and other low-wage groups strongly oppose relaxed immigrations restrictions.
Immigration, continued
The libertarian position is that income effects are best addressed, if at all, using other policies such as an NIT. Thus, libertarians tend to favor eliminating all barriers to immigration. The only possible caveat is that one significant group of beneficiaries the immigrants are not (yet) citizens or residents of the country allowing the immigration.
So, some would argue they deserve less weight in the social welfare calculation.
If there were no costs of immigration restrictions, this might be a tough issue. But there are such costs.
It is hard to see how a determined terrorist is affected by any enforcement regime we can imagine.
Conclusions
Eschew active stabilization policy. Choose spending levels and tax programs based on efficiency considerations. Eliminate the Fed; fix the money stock at whatever it is now (or adopt a rule). Let the exchange rate float. Ignore the exchange rate and the CA deficit in making policy. Free trade, unrestricted immigration. Leave other countries alone.