The fields are different. Law is composed of rules and regulations. Law is about controlling human behavior. Economics is composed of incentives and guidelines. Economics is about unleashing human behavior. Laws are absolute rules with penalties. The Law is a written rule of Government. Economics is composed of norms and procedures. The objectives of each field are different. Law demands compliance to a system of rules. Police and courts are used to enforce compliance. Penalties and punishment are used to forcefully compel adherence to a set of laws. The range of penalties is set by legislative mandate. Economics works differently. Legislatures do not mandate penalties. Compliance is enforced by the marketplace. The marketplace enforces compliance in a in a couple of different ways. The prominent method is through a system of rewards. The rewards are typically monetary. The marketplace also uses removing monetary gain to enforce compliance. These costs are applied by the marketplace for failure to convince consumers to buy a company’s products or services. Successful participation in the market is based on performance. The objective of Economics is to create wealth for participants. The objective of Law is to enforce compliance with the laws of society. Economics uses rewards to manage behavior. Law uses punishment to control behavior.
Would it make sense to have the economic system subject to the legal system? Not from my perspective as an economist. The structural differences of the two systems are composed of irreconcilable differences. Norms in Economics is a concept outside of legal concepts. Recently, David Rubinstein asked Federal Reserve Chairman Jerome Powell, why the Fed was so insistent on seeking a return to a 2% inflation rate? Powell said, “Because that is the generally accepted rate, here and internationally.” Generally accepted standards play a key role in economics. Jerome Powell is stating 2% inflation is the accepted standard for countries developed over hundreds of years. The Fed Chairman is saying, we should not deviate from that standard. These types of standards are the foundation of the economic system.
If 2% inflation is the standard then the causes of inflation need to be adjusted not to produce more than 2%. Fortunately, the brilliant American economist, Milton Friedman explained that inflation is from public sector spending. So it is simply a matter of finding a period when inflation was 2% and dividing public-sector spending by GDP. This result is the maximum allowable amount of public spending tolerated to stay under a 2% inflation rate. The inflation rate in 2019 was 1.81% or about 2%. Only federal spending equaled 20.8% of GDP. That means federal government spending was 20.8% of the total economy. The next year, 2020 was the beginning of the covid crisis, so lets look back at 2018 and 2017 to get some comparable spending levels. In 2017 spending was a flat 20% and in 2018 spending was 20.4% of GDP. Total federal spending was about 20% of GDP in the preceding three years. The annual inflation rate for 2017 was 2.13, 2.44 in 2018 and 1.81 in 2019. Roughly, 2% during a period when the federal government spent 20% of the total economy on their needs. Twenty percent of GDP on government spending is twice the historical norm of 10%. This shows that there is some wiggle room in these norms, but not an excessive amount. This type of spending is called fiscal, because it is controlled by the budget-setters, the President and Congress. Using fiscal restraint is the direct way to control inflation. Using this approach would negate the need for any interest rate increases. If the U.S. federal government showed spending restraint, young families in the United States could get a 3% mortgage.