Excerpts from Summers testimony to the IDB Conference on Development Thinking and Practice, Sept. 4, 1996, highlight five crucial lessons for economic prosperity.
It’s clear that there are no short-cuts in development. We have learned some profound lessons from those countries that have tried them.So how are we doing?
The first is that inflation produces no enduring output benefit but carries a wide variety of costs...
The second lesson is that price and exchange controls inevitably create harmful economic distortions. Both the distortions and the economic damage get worse with time...[A]ttempts to preserve price controls induce otherwise avoidable rationing schemes and goods shortages...
A third lesson is that closed markets lock in inefficiencies and, in the long run, suppress real wages. Import substitution has been discredited as an approach to development. It has led to protection that often has been used not to nurture nascent industries but to safeguard the interests of the wealthy and well-connected...I would even include in this last group the relatively well-off labor groups that work for protected enterprises.
A fourth lesson is that state-run enterprises, including state-owned banks, have a disappointing record of performance. While there are exceptions, the reality is that politics usually intrude in the operation of a public enterprise, and efficiency, financial performance and quality of service are often sacrificed...
A fifth lesson is that excessive and inappropriate regulation can strangle an economy and corrupt markets. Even if they start small and are well-intentioned, regulations tend to propagate, as both the regulated and the regulator start to see mutual advantages in their relationship...
To boil down these five lessons, we must: One, avoid inflation -- macro stabilization is an essential first step; Two, let markets set prices for goods, services and currencies; Three, open trade regimes and allow economic integration; Four, privatize state-owned companies; Five, reduce the size of government by eliminating excessive regulation. (Emphasis added.)
Lesson One: Inflation
The recession has brought us dropping prices for most of 2009 with a slight uptick (1.84%) for November, the last month for which there is available data. But that statistic is referring to price inflation *--which tells us nothing about the presence of an underlying monetary inflation which degrades the purchasing power of our currency. The extremely low Fed target rate (0.0-0.25%), along with the astronomical increase in the monetary base during 2008, indicate that an increased money supply is in fact keeping prices artificially high (e.g. falling less than they would have with a stable money supply) and interest rates artificially low.
Remember this graph? (The smaller graph magnifies the change from 2007 to now.)
Lesson Two: Price and exchange controls
What about letting the market set prices for goods...ummm like executive compensation, or doctor's and hospital charges, or insurance premiums? How's does that reconcile with cap-and-trade for fossil fuels, or subsidies for alternative energy?
Lesson three: Open Markets
How does the imposition of duties on Chinese-made steel pipe and tires, or the “Buy American” Section 1605 of Obama's first stimulus package, the American Recovery and Reinvestment Act of 2009, fit with Summers' advice?
Lesson four: State-run enterprises
What would you call these? GM. Health Insurance Exchange. Public Option. Fannie Mae/Freddie Mac. Banks. Banks. And more Banks.
Lesson Five: Excessive and inappropriate regulation
Banks again: FDIC, Federal Reserve Board, Basel I and Basel II, Bank Secrecy Act, Real Estate Settlement Procedures Act of HUD, etc.
And Health Care: HIPAA, ERISA, JCAHO, CMS (formerly know as HCFA), ASTM, all licensing of hospitals, practitioners, devises, FDA, ASTM, CCHIT, EHR/IM, HIPSS--to name a few.
Looks like we'll have to learn those lessons all over again, because those currently in power clearly weren't paying attention.
* For an interesting look at how the meaning of inflation has altered in the past few decades, check out this brief article:"What is the Real Definition of Inflation?" Because economic texts and common usage now define inflation as a rise in the general price level, it is necessary to clarify just which "inflation" you are referring to.
Update on Money Aggregates:
See today's Carpe Diem on M2 and M3. It's going to be another interesting year.