^{Democracy & Technology Blog} Visible Handout vs. Invisible Hand

Originally featured in The Claremont Review:
In the current financial and political circus, with Fabian fantasists and climate cranks in control of economic policy, the mainstream media join Ivy League sages in condemning Adam Smith’s invisible hand. Free market ideology has blinded conservatives, say many sophisticates, to a crime wave on Wall Street, as Adam Smith gives way to Bernie Madoff as the epitome of capitalism.
For perspective on what is going on, however, we should contemplate the view of Richard Armey, the crusty cowboy who long served as Republican majority leader and economic guru in the House, who pointed out to me more years ago than I want to recall, that economics has more hands and feet, visible and invisible, than the media imagines. Confounding the market’s invisible hand during the past decade’s financial follies were the government’s very visible handouts. These outlays massively and conspicuously supported popular causes and constituents: low income mortgage seekers, affirmative action litigators, failed farmers, US automakers, ethanol junkies, sugar beet shysters, hustlers of solar power and windmills, socialist educators, climate cranks, and other altruistic but addled government dependents, plus all the interventionist CRAP (Community Reinvestment Act programs) that mandated the suspension of credit rules for politically favored home buyers. With much of this murky activity guaranteed by the government, it prompted orgies of overreach, with the “assets” of Fanny Mae and Freddy Mac rising from a few hundred million to five trillion in a decade or so. Democrats fervently celebrated all these visible handouts and wish to expand them hugely.
Meanwhile (in perhaps Armey’s best trope), the invisible foot of government went to work. This millipedal regulatory force covertly kicks at the underpinnings of private economy activity by capriciously debauching the dollar; imposing onerously progressive tax rates on successful economic ventures but making investors eat the losses; fostering anti-business law suits and class action rackets; restricting access to energy resources; snarling international trade; and enacting ever more intricate mazes of contradictory laws and regulations with ever more acute moral hazard, which assures that the results of the intervention will be the opposite of its goals. The effect of these relatively inconspicuous activities is to unleash the visible foot of the market–all those bankruptcies and foreclosures–and increase demand for the visible hand of government largesse.
In general, to rectify the situation, the invisible foot of government must be removed–regulations retrenched, tax rates reduced, tariffs eliminated, the value of the dollar restored. But instead conservatives focus most of their energies attacking Leviathan at its strongest and most popular point: the visible handouts of government spending–earmarks, subsidies, and such–which matter relatively little if the invisible assaults are suppressed. Since the visible handouts cannot be reduced in a recession, the only spending cuts that actually happen as a result of the Republican complaints are in defense.
A few decades ago, supply side economists, such as Arthur Laffer and Robert Mundell and inspired journalists such as Jude Wanniski and Steve Forbes pointed out the politically feasible remedy. Lower tax rates and retrenched regulations result in more revenues for the government and less need for visible handouts. Because this footloose outcome allows the expansion of government and the defense of the country while the private sector grows even more rapidly, it was extremely popular for a few years.
Its truth, demonstrated globally (look it up), is incontrovertible. Supply side policies enable the otherwise impossible combination of guns and butter: large defense efforts with low tax rates and rapid economic growth. Countries with low or declining tax rates can increase their government spending three times faster than countries with high or rising tax rates, because the low tax countries grow six times faster than the high taxers.
Why then is this truth controverted today by all reputable economists?
Even the disreputable supply siders seem to concede to the Democrats that it is possible to increase revenues by increasing tax rates from current levels or to sustain social security and medicare without reducing the payroll tax. The reason is that all economists have been tied to the procrustean bed of existing national models which exclude all the factors–economic growth, tax shelters, entrepreneurial innovations, transnational and interstate investment flows and demographic migrations–that register the supply side effects.
Meanwhile, the profession upholds the phantasmagorical models of demand side economics. Because these models find no confirmation in reality–as Jean Baptiste Say proved centuries ago, demand is always and only a side effect of real supply–established economic theories are extremely difficult to learn and remember. You get Nobel prizes for minor and obvious insights in economic geography. Thus the exponents of the standard model are deeply threatened by any reality-based economics.
These experts are now completely in control of Washington, attempting to spend their way to political dominance, while taking well over half the voters off the federal tax rolls and giving actual taxpayers a greater incentive to hide and shuffle existing wealth than to earn or create new wealth. These measure will retard recovery from the recession and reduce revenues. But globalization means that entrepreneurial creativity–in which the United States is increasing it lead–can survive by adopting foreign locales and resources. Countries such as Israel (a global center of innovation) and Ireland (a low tax haven), China (a manufacturing dervish) and India (ascendant in software), are taking the lead and will help capitalism survive the Lilliputians currently trying to ruin it in the United States. What will matter, after all, is not whether President Obama approves of markets but whether markets approve of President Obama, who may think he has protected his future by buying off the middle class with tax rebates but will soon discover that his future will be decided by global markets for currencies and stocks.
To any socialist revival, the invisible hand will still deliver the final finger.