The deceptions of false prosperity

By , Guest blogger

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    A 1952 aerial photo shows the Ford Motor Company assembly plant in Dearborn, Mich. It was easy to point to unionized Detroit in the 1950s and say labor unions brought prosperity. But did they?
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Crowding Out: A Cartoon That's Making the Rounds, via Cafe Hayek (and a bunch of other places). I'm reminded of other ventures that create "prosperity," such as when rural Chinese peasants were melting down useful pots, pans, tools, and doorknobs to meet iron and steel production quotas under Chairman Mao (of course, most of the metalthey ultimately produced was worthless) and when Hurricane Katrina created prosperity by wrecking New Orleans.

Identifying good policies can be really difficult, and appearances can be deceiving. It's easy to point at unionized Detroit during the 1950s and 1960s and say "see? Labor unions brought us prosperity!" It's also easy to point at European welfare states and national health care programs and say "see? Socialized medicine can work!" As my adviser said about the French welfare state, they can enjoy such high standards of living now because "they've spent the next two generations' incomes."

Imagine that I were to pawn the title to my car, take out a home equity loan, and claim prosperity by counting only the cash in my wallet and the new deposits in my checking account. I could then wallow in apparent prosperity for a while. Eventually, it will come time to pay the bills, and there's a limit to the amount of time you can spend liquidating capital before it runs out. Like James Buchanan, I'm optimistic when I look at the past; however, when I see people suffering around me and when I anticipate the suffering that our current policies will produce, I'm filled with a deep sadness at the fact that it could have been prevented.

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Here are a couple of (sort of) related links:

1. Tyler Cowen asked an interesting question a few days ago and offered a few answers: the United States is on an unsustainable fiscal path, but it isn't reflected in long-term interest rates. Why not?

2. Francisco d'Anconia's money speech, which deserves a careful reading every so often.

3. The utterly amazing Keynes-Hayek rap battle, which deserves to be watched again and again. Unfortunately, we're pursuing a series of short-run policies that will hasten the onset of the Keynesian long run, all else equal, and we know what happens then.

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