Sunday, October 21, 2012

A Dangerous New Book from the Head of the Cato Institute

The new president of the Cato Institute, John A. Allison, is out with a book, The Financial Crisis and the Free Market Cure.

The book's cover includes an endorsement from the billionaire Charles Koch:
Required reading...Shows how our economic crisis was a failure, not of the free market, but of government.
One wonders if CK actually read the book or if he has forgotten or ignored the economics he learned during his Rothbard years. While the book is full of praise for free markets, at key points the book veers away from free markets and contains muddled thinking in other parts.

Tyler Cowen provides the most generic endorsement of the book, suggesting that perhaps he did not waste time in actually reading it:
[Allison's] take on the financial crisis is not to be missed. 
Peter Boettke also endorses the book:
You will not find a more readable and straightforward explanation of how government policies are the cause of the Great Recession and the slow recovery than John Allison's The Financial Crisis and the Free Market Cure.
I hope Boettke didn't read the book because Allison's explanation of how government policies are the cause of the Great Recession is not only not a straightforward explanation, but it is also wrong.

Allison's confusion starts on page 10 of the book, where he spins business cycle theory on its head to end up with a theory that has never been advanced by anyone ever since the start of economics as a science. He writes:
When you shift capital (money) from production to consumption, you reduce your future standard of living...if artificial incentives cause this redistribution from production to consumption, our future standard of living will be reduced.
It is true that money spent on consumption goods rather than capital goods means less consumer goods down the road. However, no one has ever suggested (before) that the distortions caused by central bank money printing result in a move from capital goods toward consumption goods. Indeed, Austrian business cycle theory says just the opposite, that the boom-bust cycle is caused by distortions in favor of the capital goods sector.

Allison quotes Hayek in this chapter, but he has an ass backwards understanding of what Hayek is saying.

Allison then goes further into muddied thinking by suggesting that the financial crisis would not have occurred if only the types of capital goods funded would have been others, instead of housing:
In other words, by investing too much in housing, we invested too little in manufacturing capacity, technology, education, agriculture and other such areas.
I emphasize that Allison was a head of a multi-billion dollar bank. Does he not realize the funding distortions that have gone on in the education sector? Is he not aware of the collapse of the internet bubble?

He simply doesn't get that the business cycle problem is not because funds were specifically directed to the housing sector, but that newly printed money directed anywhere in the capital goods sector is a problem. Education and housing are both  part of the capital goods sector, since they supply benefits over many years.This appears to be another concept Allison doesn't get, since he writes that the funds that went into housing, went into the "consumer" sector.

Despite this early disaster, things only get worse. He calls for an intermediate move to a voucher system for education, to get government out of the education business, but never once addresses the fact that a voucher system must come along with government regulations as to where vouchers can be spent.

This supposed free market advocate then writes that he is fine with either a "fair tax," "neutral tax" or even the "flat tax."

He even comes out against the "homeownership deduction."

He hails all these programs as good plans because over time he says (my bold):
Steve Forbes's flat tax and the equally compelling case for the fair tax are clear examples of tax structures that create more tax revenue in the long term by helping to create an environment of greater growth and less focus on avoiding taxes by high-income individuals.
Some small government advocate this guy is. He hails increased revenue for the government and  cheers on the fact that under the plans he advocates it will be more difficult for high-income individuals to avoid some of the tax bite.

Finally, you can't have a book on the economy from a member in good-standing of the Ayn Rand Institute with out a hint that we should go to war with Iran:
...we should be concerned about Islamic terrorism and the states that sponsor terrorism (beginning with Iran)...America is saddled with a dysfunctional foreign policy. Iran is developing nuclear weapons and delivery systems...We have made gestures of friendship to countries that hate us and alienated out allies.
Is Allison serious that we are making gestures of friendship to Iran, when we continue to intensify sanctions against the country? Some gesture of friendship. And just who are these allies that Iran has alienated? Does Allison not have the balls to come out and tell us?

Bottom line: This is a very dangerous book from the head of a supposed libertarian institute. Despite, its free market rhetoric, it is a confused book at key points, that indicates no true desire to present a plan for shrinking  government. In fact, it does the opposite, hailing greater government revenue and promoting war.

Sadly, this is very likely the direction in which the Cato Institute is turning, now that Allison is in charge. Perhaps, it should not be a surprise that Koch is endorsing this book since it is becoming all to obvious that the Koch brothers have taken an odd turn in support of a fanatical war mongering wing of Ayn Rand followers.

Cowen and Boettke should, on the other hand, be embarrassed to have endorsed this book.


  1. Fantastic points, Robert. Allison and his ilk are the most dangerous types of people - they distort the free market message, all the while claiming they are free market.

  2. Bob should do the readings for the audiobook version of the book.

  3. Isn't there a case to be made for vouchers being a good thing compared to the current system? You make the mistake of comparing Allison's voucher proposal to your fantasy of getting government completely out of the education business. But your fantasy isn't going to happen any time soon...probably not in my lifetime. Vouchers, on the other hand, have actually helped thousands of kids get better educations than they would have received had the vouchers not been available. In addition, they add a bit of competition to what is otherwise a near monopoly for gov't schools (especially for the poor).

    But I forgot, Allison is from CATO, so he must be evil.

    1. This post is critical but rightly so. It doesn't call Allison or CATO evil though the overall tenor is a bit harsh. As for education vouchers there is a case against them and if favor of them. I see the short term benefits. I also see that there are serious long term problems with it (government control).

  4. Which books would you recommend instead, Robert?

    1. I read this one.

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