Wednesday, September 1, 2021

The Afghanistan War Was a 20-Year Failure in Central Planning

The Afghanistan War/nation-building project is now confirmed as a complete failure—and a costly one, in both lives and resources.

Brown University’s Watson Institute estimates the US spent $2.2 trillion over the 19 years, increasing the tax burden of every American by $6,000. Further, the Watson Institute estimates “241,000 people have died as a direct result of this war. These figures do not include deaths caused by disease, loss of access to food, water, infrastructure, and/or other indirect consequences of the war.”

Yet, in the end, it was all for nought. The US-sponsored Afghan government collapsed shortly after the lethally botched US military withdrawal, and the Taliban are once again in power. Only now, they are armed with billions of dollars worth of US military gear.

Who’s to blame?

In a recent speech, President Biden laid much of the responsibility for the failure of the regime on the Afghani forces for being unable to hold off the Taliban. The administration has also been quick to place blame on the peace agreement the Trump administration made with the Taliban before he left office.

However, the failure of liberal democracy in Afghanistan isn’t the fault of the Afghani military, the Biden Administration, or the Trump Administration. In reality, the failure of US nation building is a failure of central planning which was doomed to be a disaster from the very beginning.

In 2007, Professor Chris Coyne of George Mason University published a book titled After War: The Political Economy of Exporting Democracy. The subject of the book surrounded the inherent problems of trying to export liberal democracy. Dr. Coyne broke these problems into two categories: knowledge problems and incentive problems.

The knowledge problem of centrally planning the establishment of other governments is that, despite the fact that politicians know what democracies look like superficially, they don’t know what underlying conditions are necessary to foster a healthy liberal democracy. For example, differing belief systems and cultures may be incompatible with any familiar form of liberal democracy. The US Constitution, for example, rose up within a specific context. Merely “airdropping” a constitution into a country doesn’t mean the underlying context will match with the constitution. It turns out airdropping political institutions is more difficult than airdropping supplies.

Gen. Stanley McChrystal, a former top commander in Afghanistan, once boasted, "We’ve got a government in a box, ready to roll in.” By now it should be obvious to everybody how much hubris was wrapped up in that claim.

Similarly, Dan Sanchez pointed out in 2016 that US central planners miss out on important local knowledge which cannot be codified. This decentralized knowledge is referred to by Nobel Prize-winning economist F.A. Hayek as the knowledge of, “the particular circumstances of time and place.” While central planners may like to believe they can access this knowledge, there is simply no way for them to centralize all this disparate, uncodified knowledge to serve the central plan.

Coyne continues by explaining the incentive problem associated with nation building. Even if central planners were able to solve the knowledge problem in theory, it’s unlikely they’d be able to implement their solution. Why? The implementation of the plan is controlled by US politicians who face incentives incompatible with successful nation building.

Consider the incentives of the bureaucracies associated with reconstruction efforts. Bureaucrats improve their position by taking on more roles and by increasing their bureau’s budget. Since there is a limited amount of funding available, this means bureaucrats have to compete with one another for funding.

So, despite the fact that successful nation building may call for different bureaus to work together, there is no guarantee that doing so will be to the benefit of bureaucrats.

It’s also important to note that US politicians are subject to the incentives provided by special interest groups. Through campaign contributions and lobbying funds, special interest groups influence policy.

Perhaps, for example, the path to liberal democracy in Afghanistan involves the US troops gaining citizens’ trust by not using indiscriminate drone bombing. In this case, drone bombing would be bad for the prospect of liberal democracy, but it would still be good for the bottom line of military weapon manufacturers. In that case, that special interest group may exert pressure on politicians to use these unhelpful tactics.

Ultimately, the assumption that America can spread liberal democracy via military action was wrong. It relied on conceptualizing state central planners as both being able to collect the requisite knowledge and being immune to conflicting interests in implementing plans. However, in the real world, this assumption does not bear out. Knowledge and incentive problems abound.

So there’s no need to play the blame game with Trump or Biden. The blame for the disaster in Afghanistan falls squarely on the experts in Washington, DC, who began this crusade nearly 20 years ago.

The question is now, how should we hold these experts accountable for this disaster?

Peter Jacobsen
Peter Jacobsen

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his PhD in economics from George Mason University, and obtained his BS from Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics. 

This article was originally published on FEE.org. Read the original article.

Why Inflation Is at a 12-year High

Yesterday, the Bureau of Labor Statistics (BLS) released numbers indicating that the average price level of consumer goods has risen 4.2% since this time last year. This is the highest rate since 2008. In other words, the average consumer making the same salary this year has taken a pay cut when you consider what their paycheck can actually buy.

How does the BLS know this? One way the BLS keeps track of inflation is by using the consumer price index (CPI). The CPI uses some of the common goods urban consumers buy, and they keep track of the prices of these goods each year.

A CPI growth of 4.2% means this “basket” of goods the average urban consumer buys has gotten 4.2% more expensive. Economists call this measure inflation.

The CPI is by no means a perfect measure of inflation, nor could any measure be, but it provides some kind of benchmark to compare how much prices are changing over time.

Why is inflation increasing now? It’s all about the money. Imagine tomorrow that suddenly all US money becomes a 10x larger number. Ten dollar bills become 100 dollar bills, bank accounts with $10,000 turn into accounts with $100,000, and the four quarters in your cup holder transform into a 10 dollar bill.

This might sound nice at first, but consider what happens next. If prices stay the same, suddenly people rush out to buy new things. Suddenly, a student with a $7000 student loan can buy a Porsche. Someone can afford a down payment on a house who was months away before. A kid with a generous allowance buys a flat-screen TV.

But now the problems appear. All cars for sale are being driven off the lot. TV shelves are empty. House offers pour in only minutes after listing. There is more money, but the exact same amount of goods exist. With so many customers demanding new goods, sellers have 10 customers fighting over one product. So what happens? The price is bid up.

In fact, prices in this world will make, on average, the same change as bank accounts. One dollar candy bars become $10, average quality TVs cost thousands of dollars, and the $100,000 two-bedroom in Kansas becomes a million-dollar purchase.

If more dollars chase the exact same goods, prices will rise.

Although the above example is simplified, the general idea holds in the real world. Unfortunately, not everyone has gotten 10x more money, but new money has been introduced to the economy.

The quantity of money (measured as “M2” by the Federal Reserve) has increased more than 32.9% since January 2020.

That means nearly one-quarter of the money in circulation has been created since then. As the following graph shows, a change like this is unprecedented in recent history.

Image Source: Federal Reserve Bank of St. Louis Series M2SL

The newly printed money helps fund the slew of trillion-dollar coronavirus spending which benefitted massive corporations. It also is an attempt to satisfy consumers’ demand to hold money so they will be comfortable spending again. And spending they are.

As lockdowns end and finally allow consumers to return to normal economic activity, the new money begins to move through the economy more quickly. Banks have more money to lend out and people are building new homes. As more homes are built, the demand for wood increases. As the demand for wood increases, the price of wood goes up. Sound familiar?

Although the new money won’t hit all markets at the same time, and it may take some time for demand to return to pre-lockdown levels, the inflation numbers indicate this process has begun. In order for inflation to slow down, either spending would have to slow down, or the government would have to lower the money supply.

None of this means hyperinflation is coming tomorrow or ever. In fact, it could be a blip caused by a low CPI benchmark. But given all the new money floating around, it shouldn’t surprise anyone if this rate of inflation were to persist or increase.

The Federal Reserve members aren’t worried, and, in fact, they claim to not be considering contractionary monetary policy until inflation is this level for some time. Many economists argue inflation would need to be much higher to be worth worrying about. But inflation need not be hyperinflation to be harmful to many. Inflation’s effects are not equal.

After a year of lockdowns leading to job losses and pay cuts, many Americans aren’t in a position to pay 4.2% higher prices. It’s easy for someone with a comfortable job or nest egg to scoff at these price increases, but working-class and poor Americans feel the difference.

At a time when Americans work to rebuild their savings to protect their families from future uncertainty, is it wise to ignore a policy that slowly eats away at their savings while they scramble to find new coupons for groceries or consider taking a much longer public transit route to save on gas? These struggles are worth consideration.

So will inflation rise? Will it fall? No one can say for sure. But we can say for sure that inflation doesn’t need to be in the double digits to hurt.

Peter Jacobsen
Peter Jacobsen

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his PhD in economics from George Mason University, and obtained his BS from Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics. 

This article was originally published on FEE.org. Read the original article.