The Pelican Post

On Thursday, February 8^th the Loyola University Economics Club hosted Dr. Christopher Coyne, assistant professor of economics at West Virginia University and author of “After War.”

In “After War: The Political Economy of Exporting Democracy”, Coyne uses the tools of economics to analyze the ability of the US to export democracy abroad. He analyzes the American intervention in Iraq and Afghanistan, arguing that the US failed to establish democracy by falling into traps of reconstruction:

The Credible Commitment Trap: “Without a binding commitment to reforms that is credible, policymakers may have an incentive to renege in future periods.” In other words, the lack of consistency in policy decisions lowers the credibility and efficiency of the powers exporting democratic principles.

The Fatal Conceit Trap: Reconstruction is based on the idea that authorities have the knowledge necessary to identify and implement an efficient master plan that would provide a solution for all sectors of a country. This concept ultimately limits the development of the occupied country.

The Political Economy Trap: Crucial to Coyne’s argument is the distinction between democracy and liberal democracy. As explained in the book:

Democracy deals with the method of selecting government officials, while liberal democracy deals with the goals of government: the protection of individual rights, the rule of law, and so on. (p. 11)

In other words, limiting the goal to the implementation of democracy did not lead to constitutional democratic societies.

The Bureaucracy Trap: The United States failed to export liberal and constitutional democracy because of too much reliance on bureaucratic agencies and the public sector. According to the author, bureaucratic agencies compete over scarce resources and limited budgets while depending on inefficient information flows.

Due to these constraints, Coyne argues that “reconstruction efforts are least likely to work precisely where they are needed most”. The author proposes the following steps in order to effectively promote liberal democracy abroad. The US should:

• Disengage from current military occupations
• Refrain from future military occupations to establish liberal democratic institutions
• Reduce trade barriers with the ideal goal of reducing them to zero with as many countries as possible

In his conclusion Coyne identifies non-intervention and free trade as the viable means to overcome the four traps and effectively promote liberal democracy.

The prosperity of a country is tied to the effective usage of its available resources, i.e. capital and labor. The amount of capital and labor in any society is limited, therefore efficient resource allocation is essential for economic growth.

Capital and labor are not homogeneous resources. Certain types of capital workbest with a certain types of labor, and vice versa. We cannot force capital or labor to efficiently work in conjunction with any arbitrary resource.

Unfortunately, what the government has done through the stimulus package is to stimulate growth and production by forcing capital and labor to collaborate without taking into consideration their specific purposes and characteristics.

In a Nightly Business Report blog post Steven Horwitz explains this concept:

To see this, I borrow an analogy from the economist Peter Boettke. Stimulus proponents seem to view resources as if they were Play-Doh that could be shaped into any form desired. […] If capital and labor were like Play-Doh, then it wouldn’t matter what government spent on as the idle capital and labor would be equally productive in whatever use was demanded. Unfortunately, capital and labor are more like Legos than Play-Doh. What kids can build with Legos depends on the particular shapes and sizes of the pieces they have and whether and how those pieces can fit together. Any two hunks of Play-Doh can be combined to make a desired object. That is not true for Legos, and it’s not true for capital and labor.

Horwitz concludes that the current pattern of resource allocation should be reevaluated.

Government should not determine the economy’s resource allocation. This task should be left to markets and economic actors. Free markets may appear chaotic, but they do a better job than a centralized bureaucracy of distributing knowledge and allocating resources through competitive prices.

The Times-Picayune reports on the mismanagement of another public agency. After FEMA, Fannie Mae and Freddie Mac it’s now time for The Housing Authority of New Orleans.

HANO defines itself as a “state created public agency dedicated to providing safe, sanitary and affordable housing for low-income residents.” The latest analysis by the Department of Housing and Urban Development found that the agency continues to perform poorly.

The Operational Assessment of the Housing Authority of New Orleans shows that out of the 3,212 available public housing units, 815 are vacant. As Katy Reckdahl from TP reports, there is “no clear indication that the services or the approach meet the needs of residents.”

Unfortunately, HANO’s financial mismanagement and poor customer service are qualities often found in government agencies. These public agencies lack the incentives that encourage organizations to provide quality service at a lower price. In fact, by spending most of their budgets, agencies de facto communicate their need for further (and increased) funding.

A private company, on the other hand, is incentivized to provide better service at a better price. Most investments made by the private sector involve a cost-benefit analysis that aims at efficiently allocating resources in order to maximize profits. This aspect is often neglected by the public sector.

When the government identifies a failing public agency it implements more planning and strives for better collaboration. And it usually spends more money. We should rely less on government agencies and instead seek opportunities to make use of the private sector. This would promote economic growth and provide better services to the recipients of housing assistance.

As Diana Furchtgott-Roth of the Manhattan Institute points out, there is widespread hostility towards the financial sector even though:

• 140 banks failed in 2009
• regulators and Congress encouraged banks to make high-risk loans
• many banks were required by Hank Paulson to take the TARP money in 2008
• all but one large bank repaid TARP funds with interest

In order to regulate banks, President Obama is adopting both the Volcker Rule and the Financial Crisis Responsibility Fee. However, the consequences of having both regulations simultaneously interfering with the financial industry are highly uncertain.

Jason Zweig believes that the Volcker rule would distort banks’ behavior. But Diana Furchtgott-Roth argues that it “would restrict banks to core customer-based activity, strengthening the banking system.”

Obama’s proposed bank fee, which is actually a tax, could discourage intra-bank lending, hinder the banking system, and reduce the supply of credit available to customers. The likely effects of the after-TARP fee may undermine Obama’s plan to expand lending programs for small businesses.

Will the after-TARP tax along with the Volcker Rule effectively stabilize the banking system? It doesn’t seem likely. Reform is necessary, but the recovery will not be advanced by taxing institutions that play a key role in generating economic growth.

One of the major goals of US education reform has been to establish higher academic standards. An improved K-12 curriculum and higher standards have been constant themes in recent years. But is imposing uniform standards across the states a productive and appropriate role for government?

Many policymakers have argued that a common goal encourages coherence and uniformity in educational practices. Also, by setting expectations students learn more and people have a clear understanding of what students should know and be able to accomplish.

But the Cato Institute’s Neal McCluskey makes a strong argument against top-down control. McCluskey points out:

“Setting high standards and getting American students to hit them is extremely difficult. Politically powerful interest groups must be overcome. Crippling conflicts between different religious, ethnic, and ideological factions must be avoided. And a culture that is generally averse to an intense focus on academics must be transformed.”

McCluskey concludes his argument by stressing the role of free market in producing high standards, accountability, and optimal education outcomes.

“The key appears to be to give education funding to parents, allow schools autonomy, and as a result make schools respond to the needs and demands of parents and children. That would solve the asymmetrical power problem, forcing educators to satisfy customers rather than use politics to get their way”.

In other words, give parents more freedom to decide what option is best for their children, and schools will be begin addressing the demands of the marketplace. This will drive innovation, expand choice and lead to better schools.