Opinion

The Great Debate

from Nicholas Wapshott:

Not in the spirit of Hayek

It has been a bad couple of weeks for conservative social scientists. First a doctoral student ran the numbers on the study by Harvard’s Carmen Reinhart and Kenneth Rogoff that underpins austerity and deep public spending cuts as a cure for the Great Recession and found it full of errors. Then a policy analyst, Jason Richwine, who angered Senate Republicans trying to pass immigration reform with a one-sided estimate of the cost of making undocumented workers citizens, was obliged to clear his desk at the Heritage Foundation when it became known his Harvard dissertation suggested Hispanics had lower intelligence than “the white native population.”

It makes you wonder what Friedrich Hayek would have to say about such aberrant research. Hayek has become the patron saint of conservative intellectuals – and with good reason. He went head to head with John Maynard Keynes in 1931 in an effort to stop Keynesianism in its tracks. Hayek failed, but his attempt gave him mythical status among thinkers who deplore big government and central management of the economy.

Hayek became a conservative hero a second time with publication of his Road to Serfdom  (1944) that suggested the larger the state sector, the more there was a tendency to tyranny. Many of today’s Hayekians harden up Hayek’s carefully expressed thoughts to declare that all government is potentially despotic, while also ignoring his arguments in favor of governments providing a generous safety net for the less advantaged, including a home for every citizen and universal health care – perhaps because Americans were first introduced to Serfdom in a much truncated Reader’s Digest edition. They would do well to re-read the original.

The rest of Hayek’s vast oeuvre doesn’t get much notice, even from those who boast of their devotion to the master. But it is not a stretch to say that the very notion of conservative think tanks grew out of his plea for an ideology that would inspire and unite the right as effectively as socialist theory continues to inspire the left.

In the aftermath of World War Two, when Western governments adopted Keynesianism wholesale and Social Democrats with big spending agendas won landslide elections, Hayek assembled a ragbag of nonconservatives and maverick thinkers to a summit in an off-season ski resort on Mont Pelerin, Switzerland. He set them a task: Come up with an ideology to inspire conservatives and arm them with cogent arguments to counter socialists and Keynesians. He warned them the effort could take 25 years.

The late conversion of a famous monetarist

The death of Anna Schwartz has been marked with reverential obituaries. Her contribution to economics was making sense of historical facts to offer a guide to what should be done today. Posterity will know her as the co-author, with Milton Friedman, of Monetary History of the United States, 1867–1960, which revolutionized our understanding of the Great Depression. The pair concluded that, contrary to conventional wisdom, the slump was caused by the Federal Reserve not pumping enough money into the economy.

From this Friedman and Schwartz led a monetarist revolution that claimed that inflation, which had been thought to be caused by either insufficient supply or too much demand, was in all cases and solely caused by too large a supply of money. They led a counterrevolution against Keynesianism, which over three booming decades had driven economies into stagflation – a marriage of runaway inflation and stagnant growth that Keynesians were at a loss to explain or cure.

Although Friedman took much of the credit for the new orthodoxy, and won the Nobel Prize in 1976 for his efforts, Schwartz was more than the midwife of monetarism – she was an equal partner in its conception. When asked why she had not been awarded credit equal to the extrovert Friedman, she modestly responded: “I’m not a media person.” Like the winemaker Luigi Rossi, whose name appears second on Martini bottles, she was an important, if largely silent, partner. Just as no one ever asks for a dry Rossi, so few today remember Schwartz.

The myth of the rational education market

By Peg Tyre
The opinions expressed are her own. 

In this excerpt from “The Good School: How Smart Parents Get Their Kids the Education They Deserve,” author Peg Tyre explains how the educational “free market” created by the charter school system doesn’t guarantee parents will pick the best schools for their kids. In fact, with objective information hard to come by, even more pressure is on parents to gain — and exploit — data about school quality in order to outperform the educational market.

The idea that school choice is automatically better than no choice has recently been reinforced again, with the “Parent Trigger” in California. Under a law passed there last year, parents whose children attend underperforming public schools can get together, and if 51% of them sign a petition, they can demand their district change the school administrators or convert the school to a charter. So far, a parent group from Compton “pulled the trigger,” but parents from poor urban schools and well-funded suburban schools have been seeking information on how to use the Parent Trigger law to improve their schools.

Similar bills, which are supported by education reformers on both sides of the political aisle, have been passed in Connecticut, Ohio and Mississippi. About a half dozen state legislatures—including New York — are expected to consider Parent Trigger type bills this year.

from MacroScope:

Political economy and the euro

The reality of  'political economy'  is something that irritates many economists -- the "purists", if you like. The political element is impossible to model;  it often flies in the face of  textbook economics;  and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow.  And political economy is all pervasive in 2010 -- Barack Obama's proposals to rein in the banks is rooted in public outrage; reading China's monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring's UK election. The list is long, the outcomes uncertain, the market risk high.

But nowhere is this more apparent than in well-worn arguments over the validity and future of Europe's single currency -- the new milennium's posterchild for political economy.

For many, the euro simply should never have happened --  it thumbed a nose at the belief that all things good come from free financial markets; it removed monetary safety valves for member countries out of sync with their bigger neighbours and put the cart before the horse with monetary union ahead of fiscal policy integration. But the sheer political determination to finish the European's single market project, stop beggar-thy-neighbour currency devaluations and face down erratic currency trading meant the  currency was born and has thrived for 11 years.

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