Many Americans think that our prosperity is a top-down phenomenon. The people in Washington (especially those who run the Fed) are in control of the key policy levers such as interest rates, federal spending, and trade policy. When things are going well, they deserve the credit; when things are not going well, it’s their fault.
One economist who disagrees is Arnold Kling, who explains here that prosperity is a bottom-up phenomenon. He writes, “I think of NGDP as built from the bottom up, not from the top down. Households and businesses create patterns of specialization and trade. That is real output, or real GDP. They make pricing decisions. Once you have prices and real output, you have NGDP.”
What about the Fed? Kling argues that it is ineffective. He’s right. The Fed is like the Wizard of Oz, a huge reputation but feeble in actuality.
To bolster Kling’s case, I would point out that the American economy was the world’s most robust back in the days when there was almost no federal involvement. Since the creation of the Fed in 1913 and the burgeoning of government economic policy during the Depression (first by Hoover and then much more under FDR), the economy has grown more slowly. More decisions are now made by politicians and bureaucrats (who don’t suffer adverse consequences when they’re wrong) and more resources have been drawn into the wasteful maw of state and thus denied to the private sector.
Hat tip: Don Boudreaux