All Commentary
Sunday, December 1, 1996

Hands Off: Why Government Is a Menace to Economic Health

Government Should Limit Itself to Creating a Friendly Economic Environment

Economist and author Susan Lee possesses a wonderful talent for making economics enjoyable to read. She also lays claim to a rather healthy skepticism of government economic activism. These two gifts combine to make Hands Off: Why Government Is a Menace to Economic Health worth reading.

Two points that Lee makes in the introduction set the tone for the entire book. First, she characterizes economics as a way of interpreting the effect of incentives on behavior. Then she explains why government cannot fix economic problems: Government activism often results in regulatory gridlock, produces unintended consequences, and/or creates an environment of uncertainty . . . at best, it can create a congenial climate for us to fix things. Once we get that through our heads and our hearts, economic life will be a lot more tolerable.

The remainder of Hands Off fleshes out these points through various means. Lee offers anecdotal accounts of businesses and individuals beaten up by misguided economic policies. For example, real faces and stories underscore the effects of the 1990 luxury tax and later efforts for a government takeover of the health-care industry.

The author wades into economic theory as well, though she leaves the reader wanting more in this particular area. Lee accurately identifies Keynesian economics as the source of our economic woes in the late twentieth century and explains some of the many flaws of Keynesian thought. Indeed, the book excels when Lee explains the results of, as she calls it, big, busy government—such as inflation, high taxes, budget deficits, and regulation, and their commensurate woes.

As for alternatives to Keynesian activism, Lee is generally friendly toward supply-side economics. Indeed, she criticizes supply-siders for lacking a coherent theory. Lee continues: Nor was [supply-side] a new way of looking at the world. The importance of incentives in economic behavior was well-trod territory. There is some legitimacy to the idea that supply-side lacks a certain coherency, but as for the incentives aspect, Lee’s book illustrates that incentive economics suffered neglect under the Keynesian yoke and needed some impetus for rebirth, which supply-side economics undeniably helped to provide.

Lee favors rational expectations, or New Classical Economics. Cutting through the mathematical haze that normally engulfs rational expectations economics, Lee summarizes the central tenets of the rational expectations school: (1) the key principle in microeconomics—that markets work—is no less true for macroeconomics; and (2) that [p]eople very quickly form expectations about the future that are accurate and are, as well, rapidly updated as new information becomes available. According to Lee, the bottom line for rational expectations is that government could not `manage’ people’s behavior in a predictable, constant fashion.

In a few rare instances, Lee does falter. She needs some clarity on the issue of the welfare state and its ills. For example, while arguing against the evils of big government and high taxes throughout the book, she drops in the following sentence without explanation: The redistribution of income was a great success, at least in terms of the data: there was a sharp reduction in poverty, from 22 percent of the population in the early 1960s to 12 percent in 1979.

However, granting a few instances where the author’s reasoning slips, Hands Off is generally sound and highly readable. Lee concludes by arguing that government limit itself to creating a friendly economic environment for the private sector to be innovative, produce and employ people. How? The model is familiar to all free-market students of the economy, including low marginal tax rates, less regulation, gold-based money, less government spending, and free trade.