This essay discusses Wheelan’s use of Mankiw principles seven and nine: governments can sometimes improve market outcomes (Mankiw 7), and that prices rise when the government prints too much money (Mankiw 9). It illustrates these principles with examples, examining four distinct conclusions the author has drawn. Of these two are singled out for further thought beyond the author’s scope.
THE POWER OF ORGANIZED INTEREST: Government can sometimes improve market outcomes.
In Chapter 8, Wheelan’s thesis is that Government can sometimes improve market outcomes, and sometimes they cannot. This thesis is developed through an exploration of the role of special interest groups and their influence in government. Wheelan draws several conclusions to support this.
His first conclusion is that occupational licensure is a result of special interest groups desire to set up barriers to entry for other seeking to enter the occupation: “The best predictor of whether or not a professional is licensed in Illinois is the size and budget of its professional associations (p. 143).” He cites teacher certification and the teacher’s union. The union is always strongly in favor of teacher certification that enforces rigorous testing and scrutiny for teachers. However, that same policy exempts existing teachers from needing to recertify. This is illogical at best, even disingenuous, as Wheelan states, “If doing certain things is necessary in order to teach, then presumably anyone standing at the front of a classroom should have to do them.” (p. 142) He argues that the real motive for the licensure is to create a barrier to entry in the teaching profession. This is good for existing teachers but, not for the education market.
The second conclusion is that we are the special interest groups. He argues that each of us belongs to some group that is unique. Examples of such groups are developed from professions, ethnicities, demographics, or neighborhoods. Wheelan cites an old saying, “Where you stand depends on where you sit (p. 147).” From an economic standpoint it is easier for the countless masses to pay a few extra cents in taxes to be used for the benefit of the relative few. As a result, “the democratic process will always favor small, well organized groups at the expense of large diffuse groups (p. 147).” This is good for the special interest group but, not for the whole of the governed.
THE FEDERAL RESERVE: Prices rise when the government prints too much money.
Wheelan states point of fact that, “the Federal Reserve controls the money supply and therefore the credit tap for the country (p. 168).” He goes on to illustrate that “prices rise when the government prints too much money. (Mankiw 9)” He shows that if interest rates are too low then prices will rise but, GDP will ‘hit a wall’. (p. 170) This by definition is inflation. Wheelan draws several more conclusions, based on his second thesis.
The first, conclusion is that the great depression was the result of botched monetary policy. The Fed did not intervene as the money supply dried up. Money was hoarded; banks failed and people lost confidence in the banking system. This meant that there were no deposits available for loans. (p. 186) Nobel Prize winner, Robert Mundell, argued that monetary policy in the 1920s led to the great depression, and by extension, the Nazi revolution and World War II. The reason, central banks choose to adhere to gold standard in light of the falling price of gold. They should have chosen a policy emphasizing price stability. Thus, the severity of the Great Depression could have been reduced.
His second conclusion, is that governments can cut their own debts by purposefully causing inflation. His argument is based on three logical points. First, governments often have large debt particularly when facing difficulties. Second, inflation favors debtors as it erodes that value of money they must pay back. Third, government controls the inflation rate. A small unstable government may deliberately cause inflation as a short term solution to buy time. (p. 182) This is not always the motivation. In 1980, US inflation climbed from 3%, in 1972, to 13.5%. Paul Volcker, lead the Fed to raise interest rates to 16%. This resulted in the recession of 1981-82, GDP shrunk by 3% and unemployment climbed to 10%. By 1983 inflation was back to 3%. (p. 172) So governments can intentionally cause inflation.
SUPPORT FOR SPECIAL INTERESTS
We are the special interest groups: “Where you stand depends on where you sit (p. 147).” In addition to an economic standpoint, from a mathematical standpoint it is easier for the general population to pay a few extra cents in taxes to be used for the benefit of the relative few. As a result, “the democratic process will always favor small, well organized groups at the expense of large diffuse groups (p. 147).” Holding all of these as true, maybe the problem is that there are too few special interests groups. Maybe we needs more. Data that models the effect of larger segments of the population organizing into a variety of burgeoning special interest might be quite informative in demonstrating how democracy would become more democratic from the increase in varied coordinated voices.
CHALLENGING MOTIVATION FOR GOVERNMENT INSTIGATION OF INFLATION
Governments can cut their own debts by purposefully causing inflation for the reasons that Wheelan stated earlier. In Wheelan’s example the government printed money and paid its citizen’s with this money. In this respect Wheelan is right. However, what if this nation owes a debt to the IMF, the World Bank or the US? These loans are likely payable in U.S. dollars. In this instance inflating the local currency would not affect their responsibility to this debt. It is rare that a country could secure a loan payable in their own currency. Data that would further support this would be a breakdown of government debt and it’s debtors.
In summary, this essay showed that governments can sometimes improve market outcomes (Mankiw 7), and that prices rise when the government prints too much money (Mankiw 9). It illustrated these principles using as examples: occupational licensing as encouraged by the teacher’s union, special interest group, since where we stand depends on where we sit, fouled monetary policy and the great depression, and Paul Volker’s anti inflationary monetary policy that lead to the recession of 1981. It looked at several conclusions that Wheelan drew, specifically: support for the special interests and challenging motivation for government instigation of inflation. It drew parallels between the motives for government to purposefully instigate inflation.