A Crisis in Prices

Dick Armey wrote an op-ed in today's WSJ applying the lessons of Hayek to the financial crisis. In this case, Hayek provides the right diagnosis - the problem we have is in the price system. Government spending can and usually does distort the price system in unintended and counter-productive ways. And it does little to address the immediate problem of flagging confidence.

The present crisis is marked by the distortion and uncertainty of prices that has instigated a lack of confidence in risk-taking behavior. When prices readjust, confidence will slowly return, but we can't wait that long. A stimulus bill focused on demand will not correct prices and affect the crisis in confidence until it affects the real economy a year or two out, but we can't wait that long. Think how long it took for New Deal policies to have a positive effect on the Great Depression. Anybody want to wait that long?

Policy should be directed at those signals that will have an immediate psychological impact: permanent reductions in taxes on productive activity. Commitment to compensate for the dislocation costs of this economic correction through automatic stabilizers can also help alleviate consumer and employment fears. The system's imbalances need to correct, but it's the continued uncertainty that will exact a greater cost.

Our current crapshoot politics and best-guess economic policy may be the worst alternative that may come all too soon.