Economics – Growth & Decline

Every Silver Lining Has a Cloud

Today’s big economic news is the decline in real GDP reported by the Department of Commerce’s Bureau of Economic Analysis (BEA): an annualized rate of minus 2.9 percent from the fourth quarter of 2013 to the first quarter of 2014. Except for times when the economy was in or near recession, that’s the largest decline recorded since the advent of quarterly GDP estimates:

Quarterly vs annual changes in real GDP - 1948-2014
Derived from the “Current dollar and real GDP series” issued by BEA. See this post for my definition of a recession.

What’s the silver lining? Quarter-to-quarter changes in real GDP are more volatile than year-over-year and long-run changes. Some will take solace in the fact that real GDP rose by (a measly) 1.5 percent between the first quarter or 2013 and the first quarter of 2014. (Though they will conveniently ignore the long-run trend, marked by the dashed line in the graph.)

What’s the cloud? Well, as I pointed out above, the quarter-to-quarter decline in the first quarter of 2014 is unprecedented in the post-World War II era. Unless the sharp drop in the first quarter of 2014 is a one-off phenomenon (as suggested by some cheerleaders for Obamanomics), it points two possibilities:

  • The economy is in recession, as will become evident when the BEA reports on GDP for the second quarter of 2014.
  • The economy isn’t in recession — strictly speaking — but the dismal performance in the first quarter presages an acceleration of the downward trend marked by the dashed line in the graph. (For those of you who care about such things, the chance that the trend line reflects random “noise” in GDP statistics is less than 1 in 1 million.)

Even if there’s a rebound in the second quarter of 2014, the big picture is clear: The economy is in long-term decline, for reasons that I’ve discussed in the following posts:

The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
The Causes of Economic Growth
In the Long Run We Are All Poorer
A Short Course in Economics
Addendum to a Short Course in Economics
The Price of Government
The Price of Government Redux
The Mega-Depression
As Goes Greece
Ricardian Equivalence Reconsidered
The Real Burden of Government
The Illusion of Prosperity and Stability
Taxing the Rich
More about Taxing the Rich
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Unemployment and Economic Growth
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
The Real Multiplier
The Commandeered Economy
We Owe It to Ourselves
In Defense of the 1%
Lay My (Regulatory) Burden Down
The Burden of Government
Economic Growth Since World War II
The Economy Slogs Along
Government in Macroeconomic Perspective
Keynesianism: Upside-Down Economics in the Collectivist Cause
The Price of Government, Once More
Economic Horror Stories: The Great “Demancipation” and Economic Stagnation
Economics: A Survey (also here)
Why Are Interest Rates So Low?
Vulgar Keynesianism and Capitalism
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now
The Keynesian Multiplier: Phony Math
The True Multiplier
The Obama Effect: Disguised Unemployment
Obamanomics: A Report Card

See especially “Regime Uncertainty and the Great Recession,” “Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth,” and “The True Multiplier.”

The Obama Effect: Disguised Unemployment

This is a companion to “Obamanomics: A Report Card.”

By the measure of real unemployment, the Great Recession is still with us. Nor is it likely to end anytime soon, given the anti-business, anti-growth policies and rhetoric of the Obama administration.

Officially, the unemployment rate stands at 6.3 percent, as of April 2014. Unofficially — but in reality — the unemployment rate stands at 12.5 percent. This real rate has remained almost unchanged since October 2009. And it is significantly higher than the real rate of 10.0 percent that Obama “inherited” from G.W. Bush in January 2009.

No amount of “stimulus” or “quantitative easing” will create jobs when employers and entrepreneurs are loath to take the risk of expanding and starting businesses, given Obama’s penchant for regulating against success and taxing it when it is achieved. The job-killing effects of Obamacare will only worsen the situation. And, of course, taxing “the rich” is a sure way to hamper economic growth by stifling productive effort, innovation, and investment.

How can I say that the real unemployment rate is above 12 percent, even though the official rate is only 6.3 percent? Easily. Just follow this trail of definitions, provided by the official purveyor of unemployment statistics, the Bureau of Labor Statistics:

Unemployed persons (Current Population Survey)
Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

Unemployment rate
The unemployment rate represents the number unemployed as a percent of the labor force.

Labor force (Current Population Survey)
The labor force includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary.

Labor force participation rate
The labor force as a percent of the civilian noninstitutional population.

Civilian noninstitutional population (Current Population Survey)
Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

In short, if you are 16 years of age and older, not confined to an institution or on active duty in the armed forces, but have not recently made specific efforts to find employment, you are not (officially) a member of the labor force. And if you are not (officially) a member of the labor force because you have given up looking for work, you are not (officially) unemployed — according to the BLS. Of course, you are really unemployed, but your unemployment is well disguised by the BLS’s contorted definition of unemployment.

What has happened is this: Since the first four months of 2000, when the labor-force participation rate peaked at 67.3 percent, it has declined to 62.8 percent:

Labor force participation rate_Jan 2000 - Apr 2014
Source: See next graph.

Why the decline, which had came to a halt during G.W. Bush’s second term but resumed in late 2008? The slowdown of 2000 (coincident with the bursting of the dot-com bubble) and the shock of 9/11 can account for the decline from 2000 to 2004, as workers chose to withdraw from the labor force when faced with dimmer employment prospects. But what about the sharper decline that began near the end of Bush’s second term?

There we see not only the demoralizing effects of the Great Recession but also the lure of incentives to refrain from work, namely, extended unemployment benefits, the relaxation of welfare rules, the aggressive distribution of food stamps, and “free” healthcare” for an expanded Medicaid enrollment base and 20-somethings who live in their parents’ basements. Need I add that both the prolongation of the Great Recession and the enticements to refrain from work are Obama’s doing? (That’s on the supply side. On the demand side, of course, there are the phony and even negative effects of “stimulus” spending, the chilling effects of regime uncertainty, which has persisted beyond the official end of the Great Recession, and the continued expansion of government spending.)

If the labor-force participation rate had remained at its peak of 67.3 percent, so that the disguised unemployed was no longer disguised, the official unemployment rate would have reached 13.1 percent in October 2009, as against the nominal peak of 10 percent. Further, instead of declining to the phony rate of 6.3 percent in April 2014, the official unemployment rate would have stayed almost constant — hovering between 12.4 percent and 13.5 percent.

In sum, the real unemployment rate was 3.1 points above the nominal rate in October 2009; the real rate is now 6.2 points above the nominal rate. The growing disparity between the real and nominal unemployment rates is evident in this graph:

Actual vs nominal unemployment rate_Jan 2000 - Apr 2014
Derived from SeriesLNS12000000, Seasonally Adjusted Employment Level; SeriesLNS11000000, Seasonally Adjusted Civilian Labor Force Level; and Series LNS11300000, Seasonally Adjusted Civilian labor force participation rate. All are available at BLS, Labor Force Statistics from the Current Population Survey.

Related posts:
Are We Mortgaging Our Children’s Future?
In the Long Run We Are All Poorer
Mr. Greenspan Doth Protest Too Much
The Price of Government
Fascism and the Future of America
The Indivisibility of Economic and Social Liberty
Rationing and Health Care
The Fed and Business Cycles
The Commandeered Economy
The Perils of Nannyism: The Case of Obamacare
The Price of Government Redux
As Goes Greece
The State of the Union: 2010
The Shape of Things to Come
Ricardian Equivalence Reconsidered
The Real Burden of Government
Toward a Risk-Free Economy
The Illusion of Prosperity and Stability
More about the Perils of Obamacare
Health Care “Reform”: The Short of It
The Mega-Depression
I Want My Country Back
The “Forthcoming Financial Collapse”
The Deficit Commission’s Deficit of Understanding
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid
The Stagnation Thesis
Taxing the Rich
More about Taxing the Rich
Understanding Hayek
Money, Credit, and Economic Fluctuations
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
Don’t Just Stand There, “Do Something”
The Commandeered Economy
Stocks for the Long Run?
We Owe It to Ourselves
Stocks for the Long Run? (Part II)
Bonds for the Long Run?
The Real Multiplier (II)
The Burden of Government
The Rationing Fallacy
Progressive Taxation Is Alive and Well in the U.S. of A.
The Economy Slogs Along
The Stock Market as a Leading Indicator of GDP
Government in Macroeconomic Perspective
Where We Are, Economically
Keynesianism: Upside-Down Economics in the Collectivist Cause
The Economic Outlook in Brief
Is Taxation Slavery? (yes)
Taxes Matter
Economic Horror Stories: The Great “Demancipation” and Economic Stagnation
Economics: A Survey (also here)
Why Are Interest Rates So Low?
Vulgar Keynesianism and Capitalism
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now
The Keynesian Multiplier: Phony Math
The True Multiplier
Some Inconvenient Facts about Income Inequality
Mass (Economic) Hysteria: Income Inequality and Related Themes

Obamanomics: A Report Card

This is a companion to “The Obama Effect: Disguised Unemployment.”

I begin with this dismal picture of GDP crawling along at bottom edge of the 99-percent confidence interval around the long-term trend:

Real GDP 1947q1-2014q1
Source for this and the following charts: Bureau of Economic Analysis, Current Dollar and “Real” Gross Domestic Product, April 30, 2014.

Here is a closer look at the state of affairs since World War II. Note the steady decline in the rate of growth — a decline that has been exacerbated by Obamanomics:

year-over-year change in real GDP 1948-2014

It should not surprise you to learn that we are in the midst of the weakest recovery of all post-war recoveries:

Annualized rate of real growth_bottom of recession to onset of next recession
See this post for my definition of a recession.

Nor should you be surprised by the stickiness of unemployment, when it is measured correctly. The real unemployment rate is several percentage points above the nominal rate. For details, see “The Obama Effect: Disguised Unemployment.”

The sad but simple explanation for all of the bad economic news: Employers and employees remain discouraged because Europeanism has arrived in America and regime uncertainty persists. It all adds up to this: punish producers, reward non-producers, and stagnate.

*     *     *

Related posts:
The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
The Causes of Economic Growth
In the Long Run We Are All Poorer
A Short Course in Economics
Addendum to a Short Course in Economics
The Price of Government
The Price of Government Redux
The Mega-Depression
As Goes Greece
Ricardian Equivalence Reconsidered
The Real Burden of Government
The Illusion of Prosperity and Stability
Taxing the Rich
More about Taxing the Rich
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Unemployment and Economic Growth
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
The Real Multiplier
The Commandeered Economy
Stocks for the Long Run?
We Owe It to Ourselves
Stocks for the Long Run? (Part II)
In Defense of the 1%
Bonds for the Long Run?
The Real Multiplier (II)
Lay My (Regulatory) Burden Down
The Burden of Government
Economic Growth Since World War II
The Economy Slogs Along
The Stock Market as a Leading Indicator of GDP
Government in Macroeconomic Perspective
Where We Are, Economically
Keynesianism: Upside-Down Economics in the Collectivist Cause
The Economic Outlook in Brief
The Price of Government, Once More
Economic Horror Stories: The Great “Demancipation” and Economic Stagnation
Economics: A Survey (also here)
Why Are Interest Rates So Low?
Vulgar Keynesianism and Capitalism
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now
The Keynesian Multiplier: Phony Math
The True Multiplier
Some Inconvenient Facts about Income Inequality
Mass (Economic) Hysteria: Income Inequality and Related Themes

Unsurprising News

John Taylor writes that “New Research Bolsters Policy Link from Uncertainty to Economy“:

Last week a joint Princeton-Stanford conference held in Princeton focused on policy uncertainty and showcased new findings on connections between policy uncertainty and political polarization and on patterns in different states, countries and time periods.

Danny Shoag, for example, presented new work “Uncertainty and the Geography of the Great Recession,” co-authored with Stan Veuger, showing that  policy uncertainty across the United States has been highly and robustly correlated with state unemployment rates. As the authors explain, their “paper serves to counter such claims” as those made by Atif Mian and Amir Sufi that “an increase in business uncertainty at the aggregate level does not explain the stark cross-sectional patterns in employment losses” which had cast doubt on the role of policy uncertainty. Scott Baker, Nick Bloom and Steve Davis had written extensively on this at the national level and also presented new work at the conference.

I’ve written about Baker, Bloom, and Davis’s work here.

Ross Douthat comments about “Diversity and Dishonesty“:

Earlier this year, a column by a Harvard undergraduate named Sandra Y. L. Korn briefly achieved escape velocity from the Ivy League bubble, thanks to its daring view of how universities should approach academic freedom.

Korn proposed that such freedom was dated and destructive, and that a doctrine of “academic justice” should prevail instead. No more, she wrote, should Harvard permit its faculty to engage in “research promoting or justifying oppression” or produce work tainted by “racism, sexism, and heterosexism.” Instead, academic culture should conform to left-wing ideas of the good, beautiful and true, and decline as a matter of principle “to put up with research that counters our goals.”

Which reminds me of the story behind Robert Putnam’s “E Pluribus Unum: Diversity and Community in the Twenty-first Century,” which I recount here. In short, Putnam withheld publication of his paper because it refutes the leftist mantra “diversity is good.”

Finally, we are told by David Z. Hambrick and Christopher Chabris that “Yes, IQ Really Matters“:

The SAT does predict success in college—not perfectly, but relatively well, especially given that it takes just a few hours to administer. And, unlike a “complex portrait” of a student’s life, it can be scored in an objective way…. In a study published in Psychological Science, University of Minnesota researchers Paul Sackett, Nathan Kuncel, and their colleagues investigated the relationship between SAT scores and college grades in a very large sample: nearly 150,000 students from 110 colleges and universities. SAT scores predicted first-year college GPA about as well as high school grades did, and the best prediction was achieved by considering both factors. Botstein, Boylan, and Kolbert are either unaware of this directly relevant, easily accessible, and widely disseminated empirical evidence, or they have decided to ignore it and base their claims on intuition and anecdote—or perhaps on their beliefs about the way the world should be rather than the way it is.

Furthermore, contrary to popular belief, it’s not just first-year college GPA that SAT scores predict. In a four-year study that started with nearly 3,000 college students, a team of Michigan State University researchers led by Neal Schmitt found that test score (SAT or ACT—whichever the student took) correlated strongly with cumulative GPA at the end of the fourth year. If the students were ranked on both their test scores and cumulative GPAs, those who had test scores in the top half (above the 50th percentile, or median) would have had a roughly two-thirds chance of having a cumulative GPA in the top half. By contrast, students with bottom-half SAT scores would be only one-third likely to make it to the top half in GPA….

[I]t is clear that [socioeconomic status] is not what accounts for the fact that SAT scores predict success in college. In the University of Minnesota study, the correlation between high school SAT and college GPA was virtually unchanged after the researchers statistically controlled for the influence of SES. If SAT scores were just a proxy for privilege, then putting SES into the mix should have removed, or at least dramatically decreased, the association between the SAT and college performance….

What this all means is that the SAT measures something—some stable characteristic of high school students other than their parents’ income—that translates into success in college. And what could that characteristic be? General intelligence….

IQ predicts many different measures of success. Exhibit A is evidence from research on job performance by the University of Iowa industrial psychologist Frank Schmidt and his late colleague John Hunter. Synthesizing evidence from nearly a century of empirical studies, Schmidt and Hunter established that general mental ability—the psychological trait that IQ scores reflect—is the single best predictor of job training success, and that it accounts for differences in job performance even in workers with more than a decade of experience. It’s more predictive than interests, personality, reference checks, and interview performance. Smart people don’t just make better mathematicians, as Brooks observed—they make better managers, clerks, salespeople, service workers, vehicle operators, and soldiers.

IQ predicts other things that matter, too, like income, employment, health, and even longevity. In a 2001 study published in the British Medical Journal, Scottish researchers Lawrence Whalley and Ian Deary identified more than 2,000 people who had taken part in the Scottish Mental Survey of 1932, a nationwide assessment of IQ. Remarkably, people with high IQs at age 11 were more considerably more likely to survive to old age than were people with lower IQs. For example, a person with an IQ of 100 (the average for the general population) was 21 percent more likely to live to age 76 than a person with an IQ of 85. And the relationship between IQ and longevity remains statistically significant even after taking SES into account. Perhaps IQ reflects the mental resources—the reasoning and problem-solving skills—that people can bring to bear on maintaining their health and making wise decisions throughout life. This explanation is supported by evidence that higher-IQ individuals engage in more positive health behaviors, such as deciding to quit smoking….

[T]he bottom line is that there are large, measurable differences among people in intellectual ability, and these differences have consequences for people’s lives. Ignoring these facts will only distract us from discovering and implementing wise policies.

Given everything that social scientists have learned about IQ and its broad predictive validity, it is reasonable to make it a factor in decisions such as whom to hire for a particular job or admit to a particular college or university. In fact, disregarding IQ—by admitting students to colleges or hiring people for jobs in which they are very likely to fail—is harmful both to individuals and to society. For example, in occupations where safety is paramount, employers could be incentivized to incorporate measures of cognitive ability into the recruitment process. Above all, the policies of public and private organizations should be based on evidence rather than ideology or wishful thinking.

As I say at the end of this post, “life just isn’t fair, so get over it.”

Mass (Economic) Hysteria: Income Inequality and Related Themes

It seems as though everyone’s talking and writing about stagnant wages, growing income inequality, gender discrimination in pay, concentration of wealth, no/less/too-little upward mobility, shrinking middle class, foreclosure of opportunity, end of the American Dream, higher mortality rates (due to income inequality), and on and on and on. (Insert exclamation marks to heighten the sense of outrage.)

All of these complaints — which emanate from the left and resound loudly in the media — presuppose the existence of several Platonic ideals; for example: correct wage levels, correct degrees of income and wealth inequality, correct rates of upward (and downward) mobility, an actually identifiable and permanent middle class, a measurable and optimum amount of opportunity, a definition of the American Dream that is more than pablum, and on and on.

All such ideals, of course, exist only in the minds of those who complain about stagnant wages, etc. But no matter — any excuse for further government intervention in the economy will do. And further government intervention will only harm those persons whom it is meant to help, by further reducing the rate of economic growth.

But nothing daunts true believers — Paul Krugman, Brad DeLong, Joseph Stiglitz, and their ilk — who always want government to “do something.” Their preachings bolster the pro-government-spending biases of most pundits and a large fraction of politicians. One aim of the true believers is to shape the fickle mood of the general public and garner support for government action.

Anyway, the various manifestations of economic hysteria listed in the opening paragraph can be met with logic and facts — and often are. (See the list of readings at the bottom of this post.) It’s unlikely that logic and facts will sway those who are emotionally committed to the exaction of redistributive justice, and who have no interest in its infeasibility, high costs, and perverse consequences. But until that lucky day when legitimate government is restored to the United States, its defenders must rely on logic and facts.

Consider income inequality. Not only is there inequality — which should be unsurprising, given inequality of ability, ambition, etc. — but there is supposedly a growing gap between America’s “haves” and “have-nots.” A do-gooder would leave it at that. Not being one of them, I’ll ask the questions that they’re unwilling/afraid/too-jejune to ask:

  1. What is a have? Is it someone/a household whose income exceeds the median for all persons/households? Is in the top 20 percent of all such incomes? The top 5 percent? The top 1 percent? The top 0.1 percent? (Pick your favorite point along the continuous curves in the graphs here.)
  2. Or is a have defined by his/her/its wealth? And, if so, how? (See preceding bullet.)
  3. Do haves “rig the game” so that they are, in effect, stealing from have-nots?
  4. If haves are clever and determined enough to do that, isn’t it likely that they’d still be haves without “rigging the game”?
  5. Is one’s economic status a permanent thing, or do people in fact move up and down the economic ladder during their lifetimes?
  6. Are the have-nots of today — who, mostly, aren’t the have-nots of yesteryear — really worse off than their predecessors, or are they really better off?
  7. Are they worse off relatively?
  8. Will tomorrow’s have-nots be better off if the haves are deprived of income/wealth through redistributive actions taken by government?
  9. Or will redistributive actions simply make haves worse off and less likely to do the things that make have-nots better off (e.g., give huge sums to charity, invest in growth-producing investments)?

Questions 1 and 2 are unanswerable; the distinction between a have and a have-not is purely arbitrary. (It has been said, with some accuracy, that a rich person is someone who has more more money than you.) The answers to the other questions are: (3) only to the extent that some of them are aided by government through perverse regulations favored by do-gooders; (4) yes; (5) not permanent, plenty of movement; (6) better-off absolutely than earlier have-nots; (7) probably about the same, relatively, but they’re mostly different people; (8) worse off; (9) yes, redistributive actions make have-nots worse off by hindering economic growth. (For more, see the list of readings, below.)

Before signing off, I want to say a bit more about haves, have-nots, rigging the game, and hypocritical politicians:

Most of the haves — given their ambition, intelligence, and particular skillswould succeed famously, even without rigging the game in their favor. In any event, government does most of the rigging — mainly to “protect” the have-nots from “ruthless” operators. For example, there’s licensing and regulatory barriers to entry to high-paying professions, such as the creation and trading of financial instruments, doctoring, lawyering, and making licensed, patented drugs. The entire left-leaning entertainment industry thrives on government-granted copyrights

In free markets, there would be no rigging, or it wouldn’t last long because the high profits generated by rigging would entice competition. So, if you want to blame rigging for the advantages enjoyed by the haves, blame their cronies in government, many of whom make a career of crying (all the way to the bank) about inequality. (Relevant aside: It is no coincidence that in 2012, five of the top-six counties in median household income were in the D.C. area.)

Isn’t is strange that most of the pissing and moaning about inequality emanates from people who are either in high-income brackets or whose political rank enables them to live as if they were? (Obama, Biden, and members of Congress, I’m looking at you.) Isn’t it evident that the pissing and moaning results mainly from economic illiteracy, guilt, and political opportunism? It should be evident, unless you’re a complete naïf of the kind who still believes in the tooth fairy and free lunches.

I must add that I have yet to meet a pro-equality “liberal” who pays more taxes than demanded of him by the IRS, opens his house to the homeless, or associates with the unwashed masses. As Victor Davis Hanson observes, there are no (true) socialists among the powerful and affluent lefties who spout egalitarian slogans.

I’ve addressed income inequality and related matters in several posts, including “The Last(?) Word about Income Inequality,” “Taxing the Rich,” “More about Taxing the Rich,” “In Defense of the 1%,” and “Progressive Taxation Is Alive and Well in the U.S. of A,” “How High Should Taxes Be?,” and “Some Inconvenient Facts about Income Inequality.” (See also the links embedded in and appended to those posts.)

There’s much more on the web. The following is a small sample of the vast trove of reasoned, fact-filled writings that leftists ignore because they prefer myths to facts.

Income inequality, wealth inequality, and economic mobility
Diana Furchtgott-Roth, “The Myth of Increasing Income Inequality,” The Manhattan Institute, Issues 2012, March 2012
James Pethokoukis, “Obama’s Fact-Challenged Inequality Speech,” AEIdeas, July 26, 2013
James Pethokoukis, “3 Charts That Show What’s Really Going On with Economic Mobility in the U.S.,” AEIdeas, December 12, 2013
James Pethokoukis, “If All You Know about Income Inequality Is This Famous Chart, You Really Don’t Know Much,” AEIdeas, December 23, 2013
Don Boudreaux, “Questions about and for Those People Obsessed with Income Inequality,” Cafe Hayek, December 24, 2013
Raj Chetty, et al., “Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility,” Working Paper 19844, National Bureau of Economic Research, January 2014 (related: N. Gregory Mankiw, “How Much Income Inequality Is Explained by Varying Parental Resources?,” Greg Mankiw’s Blog, January 24, 2014)
John Goodman, “Myths about Inequality,” John Goodman’s Health Policy Blog, January 15, 2014
Thomas Sowell, “Fact-Free Liberals (parts I, II, and III),” creators.com, January 21, 2014
James Pethokoukis, “Does Obama Know That Wealth Inequality Is Lower Now Than 25 Years Ago?,” AEIdeas, January 21, 2014
Ironman, “Debunking Income Inequality Theory,” Political Calculations, January 23, 2014
David Harsanyi, “State of the Union: Maybe You’re Not As Screwed As They Think You Are,” The Federalist, January 27, 2014
David Henderson, “Why Income Mobility Is Larger in the Middle,” EconLog, February 10, 2014
Linda Gorman, “More Accurate Measures Suggest Declining Income Inequality [not that it matters, one way or the other],” John Goodman’s Health Policy Blog, March 14, 2014
Mark R. Rank, “From Rags to Riches to Rags,” The New York Times, April 18, 2014

Executive pay, the “undeserving” rich, and the “1%”
James Pethokoukis, “Stunning New Study Dismantles Obama’s ’1% vs. 99%’ Inequality Argument,” AEIdeas, August 16, 2013
James Pethokoukis, “Why Steven Kaplan Says Brad DeLong Is Wrong about CEO Pay, the Superstar Theory, and Income Inequality,” AEIdeas, August 19, 2013
James Pethokoukis, “Why the Much-Hyped Oxfam Study on Global Inequality Is Misleading,” AEIdeas, January 21, 2014
Don Boudreaux, “Deidre McClosky on Oxfam’s Calculation of World Wealth ‘Distribution’,” Cafe Hayek, January 27, 2014
Walter E. Williams, “Politics of Hate and Envy,” creators.com, January 29, 2014
Robert J. Samuelson, “Myth-Making about Economic Inequality,” RealClearPolitics, February 3, 2014
N. Gregory Mankiw, “Yes, the Wealthy Can Be Deserving,” The New York Times, February 15, 2014
N. Gregory Mankiw, “CEO’s Are Paid for Performance,” Greg Mankiw’s Blog, February 17, 2014
Mark J. Perry, “‘Rich America Is Not the ‘Idle Rich’, but rather a Working America, an Educated America, and a Married America,” Carpe Diem, February 19, 2014

Rigging the system: “our” government at work
Bruce Yandle, “Bootleggers and Baptists,” Regulation, May/June 1983
Bruce Yandle “Bootleggers and Baptists in Retrospect,” Regulation, Fall 1999
Richard K. Vedder, “Federal Government Has Declared War on Work,” Commentary Articles, The Independent Institute, January 20, 2014

The effect of assortative mating on household income
Henry Harpending, “Class, Caste, and Genes,” West Hunter, January 13, 2012
Henry Harpending and Gregory Cochran, “Assortative Mating, Class, and Caste,” manuscript, December 1, 2013
Jeremy Greenwood et al., “Marry Your Like: Assortative Mating and Income Inequality,” Population Studies Center, University of Pennsylvania, January 12, 2014
Ironman, “In Which We’re Vindicated. Again.,” Political Calculations, January 28, 2014

The non-war on the middle class, women, and blacks
Mark J. Perry, “Yes, the Middle Class Has Been Disappearing, but They Haven’t Fallen into the Lower Class, They’ve Risen into the Upper Class,” Carpe Diem, July 12, 2013
Steve Sailer, “Breakthrough Study: Poor Blacks Tend to Stay Poor, Black,” Vdare.com, July 24, 2013
John B. Taylor, “The Weak Recovery Explains Rising Inequality, Not Vice Versa,” WSJ.com, September 9, 2013
John B. Taylor, “My Take on the Middle-Out View,” Economics One, September 9, 2013
James Bessen, “No, Technology Isn’t Going to Destroy the Middle Class,” The Washington Post, October 21, 2013
Bryan Caplan, “Is Average Over? Two Equivocal Graphs,” EconLog, January 4, 2014
N. Gregory Mankiw, “Does Income Inequality Increase Mortality?,” Greg Mankiw’s Blog, January 29, 2014
Christina Hoff Sommers, “No, Women Don’t Make Less Money Than Men,” The Daily Beast, February 1, 2014

The Fall and Rise of American Empire

Most Americans don’t like the idea of empire. It smacks of power, which is comforting and enriching when you have it, though few like to admit it. In short, empire can be a good thing. Lawrence W. Reed opens “The Fall of the Republic” with this:

For nearly five centuries, Res Publica Romana—the Roman Republic—bestowed upon the world a previously unseen degree of respect for individual rights and the rule of law. When the republic expired, the world would not see those wondrous achievements again on a comparable scale for a thousand years.

Reed summarizes the decline and fall of Rome:

The Roman Republic died a death of a thousand cuts. Or, to borrow from another, well-known parable: The heat below the pot in which the proverbial frog was boiled started out as a mere flicker of a flame, then rose gradually until it was too late for the frog to escape. Indeed, for a brief time, he enjoyed a nice warm bath….

Writers from the first centuries B.C. and A.D. offered useful insights to the decline. Polybius predicted that politicians would pander to the masses, leading to the mob rule of an unrestrained democracy. The constitution, he surmised, could not survive when that happened. Sallust bemoaned the erosion of morals and character and the rise of personal power lust. Livy, Plutarch, and Cato expressed similar sentiments. To the moment of his assassination, Cicero defended the Republic against the assaults of the early dictators because he knew they would transform Rome into a tyrannical despotism.

Ultimately, the collapse of the political order of republican Rome has its origins in three developments that took root in the second century B.C., then blossomed by the end of the first. One was foreign adventure. The second was the welfare state. The third was a sacrifice of constitutional norms and the rule of law to the demands of the other two.

The American equivalent of the Roman Republic didn’t last nearly as long — only about a century, from the Spanish-American War of 1898 through 1991, which marked the end of the Cold War and victory in the Gulf War. The relative peace and prosperity of the next several years masked America’s underlying decline, which has since became evident in the military, political, and economic events of the 21st century.

The causes and symptoms of America’s decline bear a strong resemblance to the decline of Rome. Let’s start with foreign adventure. By the end of 1991, America’s influence in the world seemed assured, given collapse of the USSR and the easy victory over Iraq in response to Saddam Hussein’s grab of Kuwait. But those two events proved to be the American Empire’s last gasp.

The dust had barely settled on the Gulf War when Somalia joined the list of post-World War II military misadventures, namely, the Korean War, the Vietnam War, the lame response to the bombing of Marine barracks in Lebanon, and the jurisprudential reaction to the 1993 bombing of the World Trade Center. (Some would argue that America’s entry into World War I was also a misadventure because of the imperial origins and tragic aftermath of the peace, namely, the rise of totalitarianism. But, at least, World War I ended decisively and in a clear-cut victory for America’s side — a victory that wouldn’t have been possible without the intervention of American forces.) The seeming disinclination of American leaders to stay the course and to wreak vengeance was duly noted in Osama bin Laden’s 1996 fatwa against the United States. As if to endorse that view, the 1998 bombings of U.S. embassies in Africa were met with ineffectual missile strikes.

And then came 9/11, and in its wake the wars in Afghanistan and Iraq. Both were cast in the mold of Korea and Vietnam: not enough firepower, not enough willpower. Barack Obama’s subsequent foreign policy misadventures and general retreat from effective leadership have only cemented America’s place as a declining, feckless, no-longer-fearsome power. Whence Obama’s fecklessness? Some argue that it is evidence of a deliberate effort to debase the United States.

So much for military misadventures. Let us turn to the growth of the welfare state and the sacrifice of constitutional norms. These go hand-in-hand, and both began before America’s military misadventures after World War II.

Consider the judicial betrayal of the constitutional scheme of limited government, and of order and traditional morality. There is no way, in the course of a blog post, to assess the full scope of the betrayal, in which the U.S. Supreme Court was a willing co-conspirator. Some examples will have to do:

Home Building & Loan Association v. Blaisdell (1933) allowed governmental suspension of creditors’ remedies (i.e., foreclosure), thus undermining contractual relationships.

National Labor Relations Board v. Jones & Laughlin Steel Corporation (1937) validated the Wagner Act, which vastly expanded the ability of labor unions to extort employers, to restrict commerce, and to fatten the paychecks of union members at the expense of everyone else.

Helvering v. Davis (1937) found Social Security to be constitutional, despite the plain words of Article I, Section 8 (the enumerated powers of Congress).

Wickard v. Filburn (1942) gave Congress unlimited power to regulate anything remotely connected with interstate commerce.

Miranda v. Arizona (1966) stigmatized and hindered the efforts of police to protect the public. On the basis of “intuitive empiricism” (i.e., judicial guesswork), Miranda imposed an overly broad interpretation of the Fifth Amendment. (A subsequent empirical analysis suggests that Miranda was unwisely decided.)

Griggs v. Duke Power Company (1971) enshrined disparate impact as evidence of racial discrimination, and put the burden of proof on the accused employer.

Lemon v. Kurtzman (1971) gave judges an easy way (the “Lemon test”) to rule against any government action that might incidentally benefit religion.

Roe v. Wade (1973) authorized murder in the name of privacy.

Goss v. Lopez (1975) made it more difficult for school authorities to discipline disruptive and destructive behavior, and (in my view) established — beyond hope of reversal — the interference of the central government in matters that ought to be handled and disposed of locally.

Coker v. Georgia (1977) outlawed the death penalty in cases of rape, thus contributing to the erosion of the death penalty as a serious deterrent to the commission of heinous crimes and a just penalty for same.

Tennessee Valley authority v. Hill (1978) gave the snail darter — and as a result, all kinds of critters — precedence over human beings, under the Endangered Species Act.

Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (1984) vastly increased the power of regulatory agencies by decreeing “deference” toward rules made in the absence of specific congressional authorization, as long as the rules are “reasonable.”

Garcia v. San Antonio Metropolitan Transit Authority (1985) confirmed the hollowness of the Tenth Amendment and the States’ ability to exercise any power without the permission of the central government.

Kelo v. City of New London (2005) affirmed the right of any government in the United States to seize anyone’s property, at any time, for any use — even non-governmental.

National Federation of Independent Business v. Sebelius (2012) granted the federal government power to tax anyone for any purpose, even for not doing something.

Hollingsworth v. Perry (2013) left standing a federal district court judge’s self-serving declaration that California’s duly adopted ban on same-sex “marriage” was unconstitutional, thus opening the door to similar holdings by other federal judges about other States’ duly adopted bans on same-sex “marriage.”

The judiciary didn’t instigate the vast expansion of the regulatory-welfare state and the overthrow of social norms, but the judiciary abetted them.

What does the regulatory-welfare state amount to? Huge federal welfare schemes, including but not limited to Social Security, Medicare, and Medicaid; the addition of nine cabinet-level departments to the executive branch in the preceding 100 years; the creation of the cabinet-level Environmental Protection Agency (EPA); the delegation of legislative power to the EPA and other federal agencies, and ensuing accretion of rules made and enforced by those agencies; and the pervasive centralization of power in Washington, “thanks” to judicial misfeasance of the kinds listed above, and to political sleight-of-hand (e.g., “cooperative” federal-State programs like Medicare, and grants of “federal” money — i.e., taxpayers’ money — to State and local governments).

As for constitutional norms, the courts of the United States have become perversely “libertarian.” They seem driven to overturn long-standing, time-tested behavioral norms that guide individuals toward peaceful, constructive coexistence with their compatriots. Thus the “right” to an abortion in the first trimester, based on a non-existent general right of privacy, has become the right to kill a nearly born and newly born child. The “right” to practice sodomy has become an obligation to purvey goods and services to those who practice sodomy, regardless of one’s personal views about the practice. The “right” of a male student of confused gender to use the girl’s bathroom in a Maine school threatens to evolve into the “right” to walk into any damn bathroom at any time, regardless of one’s actual gender. And on and on, down the slippery slope and into unreason, barbarity, and oppression.

Where stands the Empire today? Clearly, America has less influence in the world than it had just after World War II and even after the Gulf War. What a joke it is when the American president must be rescued from the consequences of his own (possibly deliberate) haplessness by Russia’s leader, when Iran plays rope-a-dope with Obama in the matter of nuclear weapons, and when China flexes its new-found and growing military muscle without drawing a serious response from the U.S.

American power abroad could be restored in fairly short order, given the will to do so. But the hollowing out of America’s liberty and prosperity – which began in earnest with the New Deal — threatens to be permanent, given the decades-long transformation of the nation’s legal and bureaucratic infrastructure. Government — mainly the central government — now exerts financial control over 40 percent of the economy (here, see first graph), and arguably exerts regulatory control over almost all of it.

That control has long since passed from the elected “representatives” of the people to technocrats who are bent on dictating how Americans’ conduct their lives and earn their livelihoods. Thus:

In an FDA office building in suburban Maryland, the bureaucrats gather over coffee to draft rules meant to squeeze the trans fat out of snack foods.

Four blocks from the White House, in an EPA conference room: more bureaucrats, more meetings, more drafting of rules, these aimed at forcing industrialists to spend billions cutting carbon to fend off global warming.

Congress? Who needs Congress?

Americans heard President Barack Obama declare this week that he intends to bypass the gridlocked Hill to get things done on his own. What they didn’t hear: just how far he’s actually pushing his executive authority.

An in-depth examination of the administration’s actions and plans, agency by agency, regulation by regulation, reveals an executive power play that’s broad and bold — and intensely ambitious. Far more than he let on in the State of the Union, the president has marshaled the tools of his office to advance policies, many unabashedly liberal, that push deep into everyday life for tens of millions of Americans.

He wants to change how power plants operate. And what we buy for lunch. How we travel to work. And how our kids learn math. How our gasoline is formulated. How we light our aquariums.

Already, the president’s team has enacted 300 economically significant regulations, far more than Bill Clinton, George W. Bush or Ronald Reagan did in comparable periods. Some of those rules are driven by the Affordable Care Act and Dodd-Frank banking reform, the two big laws Obama pushed through Congress early in his first term, when he had Democratic majorities in both houses. But there is far more.

Follow the link and read the rest, if you have the stomach for it.

The Empire lives, but it’s a different Empire than the one that enjoyed its last hurrah in the early 1990s. The Empire now exists not to make Americans safe and prosperous, but to dominate Americans in the name of overblown and non-existent threats (e.g., sexism, racism, endangered species, global warming), out of ersatz compassion, and with the aim of attaining the impossible: equality for all. Well, equality for all but that minority of minorities — the hard-working, tax-paying, straight, white person of European or Asian descent who minds his own business and not everyone else’s. If you are one of those, and religious as well, you are a particular object of persecution and prosecution.

In sum, a new Empire has arisen on America’s shores. If it had a motto, it would be* “trillions for the regulatory-welfare state and its clients, but not enough for defense.”

*     *     *

Related reading:
Bill Gertz, “Putin’s July 4th Message,” The Washington Free Beacon, July 6, 2012
Dean Cheng, “South China Sea: China Drops a Bombshell,” The Foundry, July 7, 2012
Walter Russell Mead and staff, “Putin Tells His Ambassadors: The West Is All Washed Up,” The American Interest, July 9, 2012
Erica Ritz, “Troubling? Putin Oversees Largest Nuclear Tests since the Cold War,” The Blaze, October 20, 2012
Norman Podhoretz, “Obama’s Successful Foreign Failure,” WSJ.com, September 8, 2013
Melanie Phillips, “Putin Checkmates America,” Melanie’s Blog, September 15, 2013
Walter Russell Mead (and staff), “Mixed Messages from Washington Confuse Allies,” The American Interest, December 3, 2013
Lawrence W. Reed, “The Fall of the Republic,” The Freeman, January 8, 2014
doriangrey1, “The Iranian Rope-a-Dope,” The Wilderness of Mirrors, January 20, 2014
Bill Vallicella, “The Decline of the West: How Long Can We Last?,” Maverick Philosopher, January 21, 2014
Adam Garfinkle, “Obama’s Middle East Recessional” in four parts (here, here, here, here), The American Interest, January 21, 2014
Victor Davis Hanson, “Obama’s Recessional,” RealClearPolitics, January 22, 2014
Elise Cooper, “Barack Obama’s Foreign Policy: An Utter Failure,” American Thinker, January 26, 2014
Dan Roberts, “White House Warns Obama Ready to ‘Bypass on 2014 Agenda,” The Guardian, January 26, 2014
Alexander Boltin, “Cruz: Putin Plays Chess, Obama Plays Checkers on Foreign Policy,” The Hill, January 28, 2014
Stephanie Simon, “Obama’s Power Play,” Politico, January 31, 2014
Tom Blumer, “Is It Over and We Just Don’t Know It? Have We Lost Our Founders’ Government?,” PJ Media, February 10, 2014
Victor Davis Hanson, “An Orwellian Nation of Obamathink,” Jewish World Review, February 13, 2014
Angelo M. Codevilla, “Do We Deserve the Constitution of 2014?,” Library of Law and Liberty, February 16, 2014
Richard Winchester, “Left-Wing Totalitarianism in America,” American Thinker, February 17, 2014

Related posts:
The Near-Victory of Communism
Tocqueville’s Prescience
The Left
Our Enemy, the State
“Intellectuals and Society”: A Review
The Left’s Agenda
Rating America’s Wars
Transnationalism and National Defense
The Left and Its Delusions
The Destruction of Society in the Name of “Society”
September 20, 2001: Hillary Clinton Signals the End of “Unity”
The War on Terror, As It Should Have Been Fought
The Spoiled Children of Capitalism
Politics, Sophistry, and the Academy
Subsidizing the Enemies of Liberty
Well-Founded Pessimism
Defense as an Investment in Liberty and Prosperity
Liberty and Society
Tolerance on the Left
America: Past, Present, and Future
The Barbarians within and the State of the Union
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now
The World Turned Upside Down
“We the People” and Big Government
The Culture War
Defense Spending: One More Time
Parsing Political Philosophy (II)
__________
* A mockery of the words of Robert Goodloe Harper, who as a member of the U.S. House of Representatives in 1797, said “Millions for defense, but not one cent for tribute.” The remark was occasioned by a demand from France for tribute (a bribe) in exchange for the release of American ships that had been seized by the French.

Progressive Taxation Is Alive and Well in The U.S. of A.

THIS IS A RE-POSTING OF THE ORIGINAL, WHICH APPEARED ON JULY 20, 2012

Will Wilkinson, in the course of a good post about Obama’s big lie, writes:

I’d like to thank my colleague [a blogger who goes by D.R.] for helping me see how to make my case stronger. Of the comprehensive American tax system, he writes:

The fact of the matter is that the American tax code as a whole is almost perfectly flat. The bottom 20% of earners make 3% of the income and pay 2% of the taxes; the middle 20% make 11% and pay 10%; and the top 1% make 21% and pay 22%. Steve Forbes couldn’t have drawn it up any better.

I happen to agree with Steve Forbes that a flat tax best reflects our intuitions about proportionality and fairness, so I’m tickled to see that our system is so fair!

The link attached to “almost perfectly flat” leads to this:

The source is a “sister organization” of the union-dominated lobbying organization, Citizens for Tax Justice, which is responsible for a graph that I reproduced in “Elizabeth Warren Is All Wet“:

As I said in “Elizabeth Warren…,” Citizens for Justice

acknowledges (backhandedly) that “the rich” pay their “fair share” of all taxes — federal, State, and local….

[G]iven the source, this [graph] can be taken as a “worst case” depiction of the distribution of the total tax burden. “The rich” are paying their “fair share,” and then some, unless you believe (as leftists seem to believe) that  “the rich” are supposed to take care of everyone else.

Not surprisingly, the statistics for 2011 yield a graph that looks much like the one just above:

What puzzled me, briefly, is why the Citizens for Tax Justice and Institute for Taxation and Economic Policy split the top quintile into chunks. Then it occurred to me that those left-wing outfits are trying to suppress the fact that taxpayers in the top quintile pay a disproportionate share of all taxes. Thus:

Further, the effective tax rate isn’t quite as flat as the left-wing outfits would like gullible readers to believe. Thus:

If that isn’t the picture of a progressive tax structure, I’ll eat my external hard drive.

The innumerate reader might say something like “Gee willikers, people who make more ought to pay more in taxes.” Think about it for a minute. If someone earning $100,000 pays taxes at the same rate as someone earning $10,000, the person earning $100,000 does pay more in taxes. For example: $100,000 times a tax rate of 15 percent is greater than $10,000 times a tax rate of 15 percent — 10 times greater, to be precise. Raise to 30 percent the tax rate on the person making $100,000 and, voila, his tax bill is 20 times greater than that of the person making $10,000.

A progressive tax structure penalizes success, which inhibits economic growth, which means fewer jobs and lower incomes for the low-income persons who are the supposed beneficiaries of progressive taxation. I say “supposed” because the “house” (high-paid office holders and bureaucrats, all with cushy health insurance and pension plans) takes its very large cut before any of the money extorted from those who earn it trickles down to those who don’t earn it.

Related reading:
Greg Mankiw, “The Progressivity of Taxes and Transfers
Steve Landsburg, “Charting the Tax Plans

Related posts:
A True Flat Tax
Taxing the Rich
More about Taxing the Rich
In Defense of the 1%
The Burden of Government
Economic Growth Since World War II
Economics: A Survey
The Barbarians Within and the State of the Union
Why Are Interest Rates So Low?
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now

Obamanomics: A Report Card (Updated)

Here.

The good news? There is none.

The bad news? Sluggish growth persists, despite the hype about an unexpected “jump” in third-quarter GDP. The U.S. remains in the midst of the worst post-World War II “post-recession recovery,” which is neither post-recession nor a recovery.

The liberals want the U.S. to be European? Their dreams have come true, politically as well as economically.

The View from Here

You know what happens when a law is enacted to protect a “minority,” don’t you? The minority acquires privileged status in the eyes of the law. Any action that is claimed to deprive the “minority” of its rights brings the wrath of the state down on the purported offender. And the same law enables members of the “minority” to attain jobs, promotions, and university admissions for which they are otherwise unqualified.

My opening paragraph is prompted by the likely passage of a “gay rights in workplace” bill by the U.S. Senate. The bill is unlikely to be approved soon by the U.S. House of Representatives, but I won’t say “never.” Many members of the GOP are eager to seem “nice,” and enough of them might vote with Democrats to pass the bill and send it to B.O. for signature. Such an act of appeasement will, of course, go unrewarded by voters of the left. But panicked lawmakers are immune to logic, and devoid of principles.

The “gay rights” issue is only a symptom of America’s decay. The official elevation of gays to privileged status is of a piece with several other developments: the very possible failure of efforts to derail death-dealing Obamacare, the equally likely failure of efforts to curb murderous abortion (the gateway to involuntary euthanasia), the ever-growing dependence of Americans on an unaffordable welfare state, an unchecked regulatory apparatus, feminized and gutted defenses, groveling before enemies, and the suppression of dissent in the name of “rights,” “social justice,” “equal protection,” and other Orwellian catch-phrases.

It is altogether evident that America soon will be an irreversibly effete, statist, inhumane, and appeasing realm. In it, every truly beneficial impulse — like those that energized America’s revolution against Britain, the framing of a Constitution that promised the preservation of liberty, the defeat of oppressive regimes in wars hot and cold, and the creation of the world’s most dynamic and productive economy — will be squelched.

The barbarians within, and their willing dupes, are in the saddle. It can happen here, and it is happening here. America is about to become the land of the unfree and the home of the weak-kneed.

*     *     *

Related reading: Joe Herring, “I Am Now a Dissident (and You Should Be Too!),” American Thinker, November 6, 2013

Related posts:
Diversity
Putting Hate Crimes in Perspective
The Cost of Affirmative Action
Why Not Just Use SAT Scores?
The Face of America
Affirmative Action: A Modest Proposal
Race, Intelligence, and Affirmative Action
Affirmative Action: Two Views from the Academy
Affirmative Action, One More Time
Libertarianism, Marriage, and the True Meaning of Family Values
Same-Sex Marriage
“Equal Protection” and Homosexual Marriage
The Course of the Mainstream
A Contrarian View of Segregation
Much Food for Thought
Guilty Until Proven Innocent
After the Bell Curve
A Footnote . . .
Schelling and Segregation
Law, Liberty, and Abortion
Black Terrorists and “White Flight”
Positive Rights and Cosmic Justice: Part IV (with links to earlier parts of the series)
Timely Material
Affirmative Action: Two Views from the Academy, Revisited
It’s the Little Things That Count
A Footnote to a Footnote
Let Me Be Perfectly Clear…
FDR and Fascism
An FDR Reader
“Family Values,” Liberty, and the State
Is There Such a Thing as Society
The People’s Romance
Intellectuals and Capitalism
Fascism
Conspicuous Consumption and Race
An Honest Woman Speaks Out
Fascism with a “Friendly” Face
The Interest-Group Paradox
Parsing Political Philosophy
Is Statism Inevitable?
Inventing “Liberalism”
Civil Society and Homosexual “Marriage”
A New, New Constitution
Fascism and the Future of America
The Indivisibility of Economic and Social Liberty
Rights, Liberty, the Golden Rule, and the Legitimate State
The Perils of Nannyism: The Case of Obamacare
More about the Perils of Obamacare
Health-Care Reform: The Short of It
The Real Constitution and Civil Disobedience
The Near-Victory of Communism
Tocqueville’s Prescience
First Principles
The Shape of Things to Come
Accountants of the Soul
Invoking Hitler
Is Liberty Possible?
The Left
Perry v. Schwarzenegger, Due Process, and Equal Protection
The Constitution: Original Meaning, Corruption, and Restoration
Rationalism, Social Norms, and Same-Sex “Marriage”
A Moral Dilemma
A Conversation with Uncle Sam
Society and the State
I Want My Country Back
The “Forthcoming Financial Collapse”
Undermining the Free Society
Our Enemy, the State
Pseudo-Libertarian Sophistry vs. True Libertarianism
“Intellectuals and Society”: A Review
Government vs. Community
The Evil That Is Done with Good Intentions
The Destruction of Society in the Name of “Society”
About Democracy
Externalities and Statism
Taxes: Theft or Duty?
Bounded Liberty: A Thought Experiment
More Pseudo-Libertarianism
The Meaning of Liberty
The Left’s Agenda
Substantive Due Process and the Limits of Privacy
In Defense of Marriage
The Left and Its Delusions
The Destruction of Society in the Name of “Society”
A Declaration of Civil Disobedience
Crimes against Humanity
Abortion and Logic
The Myth That Same-Sex “Marriage” Causes No Harm
The Spoiled Children of Capitalism
Politics, Sophistry, and the Academy
Subsidizing the Enemies of Liberty
Society and the State
Are You in the Bubble?
Defense as an Investment in Liberty and Prosperity
Our Perfect, Perfect Constitution
Abortion, Doublethink, and Left-Wing Blather
Race and Reason: The Derbyshire Debacle
Race and Reason: The Victims of Affirmative Action
Not-So-Random Thoughts (III)
Race and Reason: The Achievement Gap — Causes and Implications
Don’t Use the “S” Word When the “F” Word Will Do
Liberty and Society
Tolerance on the Left
The Eclipse of “Old America”
The Capitalist Paradox Meets the Interest-Group Paradox
Genetic Kinship and Society
How Not to Cope with Government Failure
Riots, Culture, and the Final Showdown (revisited)
Where We Are, Economically
The Economic Outlook in Brief
Is Taxation Slavery?
Obamanomics: A Report Card
Well-Founded Pessimism
A Declaration of Independence
The 80-20 Rule, Illustrated
America: Past, Present, and Future
Defending Liberty against (Pseudo) Libertarians
America: Past, Present, and Future
Restoring Constitutional Government: The Way Ahead
Economic Horror Stories: The Great “Demancipation” and Economic Stagnation
The Fallacy of the Reverse-Mussolini Fallacy
“Conversing” about Race
Economics: A Survey
IQ, Political Correctness, and America’s Present Condition
The Barbarians Within and the State of the Union
Why Are Interest Rates So Low?
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now
The World Turned Upside Down
“We the People” and Big Government: Part I
“We the People” and Big Government: Part I (continued)
“We the People” and Big Government: Part II (first installment)

America’s Financial Crisis Is Now

A REISSUE (WITHOUT UPDATES) OF THE ORIGINAL POST DATED MAY 1, 2011

*     *     *

INTRODUCTION

Three Economic Charts That Will BLOW YOUR MIND,” at RightWing News, offers some tantalizing statistics about the relationship between federal tax receipts and GDP. The bottom line:

The key thing to take away from this is that the amount of revenue the government can bring in via the income tax is, for whatever reason, more inelastic than most people think. That’s yet another reason to put more emphasis on balancing the budget via spending cuts as opposed to trying to fix the problem with tax increases.

Now, if Hauser’s law is as spot-on as it has been in the past … it’s going to be difficult to raise the government’s revenue level much beyond the 20% mark….

I have no quibble with the proposition that the U.S. government has made unaffordable, unilateral “promises” about Social Security, Medicare, and Medicaid benefits. But I must take issue with the focus on the income tax and Hauser’s law, which is

the proposition that, in the United States, federal tax revenues since World War II have always been approximately equal to 19.5% of GDP, regardless of wide fluctuations in the marginal tax rate.

It is necessary to step back from a myopic focus on the federal government and look at all government receipts and expenditures in the United States. The need to do so arises from two facts: (1) State and local spending is substantial, and (2) federal, State, and local finances have become tightly bound together since the advent of revenue sharing and block grants, and with the explosion of federal statutory and regulatory commands to the States.

I begin by looking at the historical record of government income and outgo. That leads me to the future, in which “entitlements” loom unaffordably large . There are three broad paths along which to proceed: cut “entitlements,” borrow considerably more, or tax considerably more. I explain why the second and third options are untenable and economically destructive. The only viable alternative is to cut “entitlements,” and to begin cutting now.

GOVERNMENT SPENDING AND RECEIPTS: THE HISTORICAL RECORD

Here is how State and local spending stacks up against federal spending:

Federal vs state and local spending pct GDP
Sources: Derived from U.S. Department of Commerce, Bureau of Economic Analysis (BEA), National Income and Product Accounts (NIPA) Tables: Table 3.2 Federal Government Current Receipts and Expenditures (lines 26 and 40-45) and Table 3.3 State and Local Government Current Receipts and Expenditures (line 33).

State and local spending is not insubstantial, and has risen in recent decades, with a lot of help from the federal government. Federal grants to State and local governments have risen steadily from almost zero in 1929 to upwards of 4 percent of GDP in recent years. (I have excluded those grants from federal spending to avoid double-counting.)

Here is an aggregate picture of federal, State, and local spending and receipts.

Combined government spending and receipts
Source: Derived from NIPA Table 3.1 Government Current Receipts and Expenditures (lines 7, 19, 30, and 33-39).

Despite Hauser’s “law,” government receipts, as a percentage of GDP, rose steadily from 1929 until 2000, peaking at 32 percent. The post-2000 decline can be attributed to slow economic growth (capped by the recession of 2008-2010) and the so-called Bush tax cuts (which Congress approved initially and again in 2010). I have nothing against the tax cuts, except for the fact that they were not matched by spending cuts. The real burden of government is measured by spending, which diverts resources from productive uses to ones that are less-productive (e.g., public education), counter-productive (e.g., regulation), and downright destructive (i.e., growth-retarding and inflationary). The fact that lenders have increasingly borne the monetary cost of the burden of government has not offset its egregious economic effects. And, as I discuss below, without drastic spending cuts (relative to GDP) there will come a day when lenders will shrug off the burden or demand a much higher price for bearing it.

In any event, regardless of generally diminishing receipts in the first decade of the 21st century, government spending rose as a percentage of GDP, for several reasons. First, there was (and is) slower economic growth, due in no small part to the preceding decades of governmental interference in economic affairs. On top of that, there was Obama’s “stimulus package,” which was meant to end the recession of 2008-2010 but did not (because it could not); the recession ended in the normal way, through the recovery of “animal spirits” and consumer confidence. Then there was (and is) a growing population of persons eligible for Social Security, Medicare (supplemented by “free” or “cheap” prescription drugs), and Medicaid — a population made all the more eager to claim its “entitlements,” given the state of the economy. Finally, and almost incidentally, two foreign wars were fought simultaneously (though with varying degrees of intensity) throughout the decade.

To focus only on federal spending, as I say, is myopic because State and local governments have a habit of raising State and local taxes when so-called federal grants are cut back. (I say “so-called” because the money for those grants is provided largely by taxpayers who are, of course, denizens of the States and their political subdivisions.) In addition to the possibility of higher State and local spending in reaction to cuts in federal largesse, taxpayers — not public-sector unions — should be up in arms about the above-market compensation of government employees. A significant portion of that above-market compensation comes in the form of cushy pension plans, which allow “public servants” to receive high fractions of their salary (sometimes as much as 100 percent) for life, and to begin receiving those payments when they are in their 40s and 50s, after having held a government job for 20 years or so. As a result of these obligations and other undisciplined spending habits, State and local governments have liabilities of more than $7 trillion.

Which brings me to the 500-pound gorilla: the federal government.

“ENTITLEMENTS”: THE SOURCE OF OUR PRESENT AND PROSPECTIVE WOES

Perhaps the most interesting lines in the second graph (above) are the three at the bottom. The gap between the cost of social programs (green line) and “contributions” to those programs (gold line) has risen markedly since the late 1990s. By 2010, the size of that gap — 8.5 percent of GDP — accounted for most deficit spending (red line) — 10.6 percent of GDP. And that is but a hint of things to come. The internet abounds with graphs and tables that depict future federal spending and revenues under various assumptions. They all point to the same conclusion: Spending “commitments” must be cut — and cut drastically — in order to avoid (a) economically disabling tax increases and (b) a day of reckoning in credit markets.

The online offerings include these from the Congressional Budget Office (CBO): “Impact of the President’s Proposals on the Budget Outlook” (blog summary), and “Long Term Analysis of a Budget Proposal by Chairman Ryan” (blog summary). The CBO analyses are somewhat dense and must be read in juxtaposition. They are neatly conjoined by the Committee for a Responsible Federal Budget’s “Analyzing the President’s New Budget Framework.” Here is an informative graphic from that analysis:

Debt projections under various fiscal reform plans

Obama’s “framework,” as the report emphasizes, is short on details. It is obviously a slap-dash response to Paul Ryan’s detailed plan (labelled “House Republicans” in the graphic), which is a serious proposal for long-term deficit reduction. To understand the bankruptcy of Obama’s actual budget and current law, which are about the same, one must look beyond 2021.

Drawing on CBO’s work, Cato Institute’s Michael Tanner take the long view in “Bankrupt: Entitlements and the Federal Budget.” Tanner leads off with this:

The U.S. government is about to exceed its statutory debt limit of $14.3 trillion. But that actually underestimates the size of the fiscal time bomb that this country is facing. If one considers the unfunded liabilities of programs such as Medicare and Social Security, the true national debt could run as high as $119.5 trillion.

Moreover, to focus solely on debt is to treat a symptom rather than the underlying disease. We face a debt crisis not because taxes are too low but because government is too big. If there is no change to current policies, by 2050 federal government spending will exceed 42 percent of GDP. Adding in state and local spending, government at all levels will consume nearly 60 percent of everything produced in this country. Whether financed through debt or taxes, government that large would be a crushing burden to our economy and our liberties. (p. 1)

Government spending now consumes almost 40 percent of everything produced in this country. Imagine the lives of your children and their children if and when government spending consumes almost 60 percent of everything produced in this country. But wait — it can get worse. Here, Tanner projects federal spending under current law, through 2080:

Long-term spending projections (Tanner)

Add State and local spending and, by 2080, you have an economy whose entire output is claimed by government entities. Some of that output would be directed to individuals for their sustenance, of course. But the form of that sustenance — along with everything else — would be dictated and allocated by politicians and bureaucrats. They — and their favored intellectuals, artists, and athletes — would live reasonably well (though not nearly as well as they could in a free-market system), while the proles would lead lives of hard work, hard drink, and hard deaths. It would be the USSR all over again. And, as with the USSR, the misdirection of economic activity by politicians and bureaucrats would ensure economic stagnation.

It may not come to that, if there are enough voters who understand the consequences of unbridled government spending, and who put liberty and true prosperity above the illusory promises of security offered by the big-government crowd. But as time goes by and more voters become accustomed to handouts, they will become “European” in their embrace of the welfare state. Slippery slopes and death-spirals lead to the same slough of despond (second definition).

That said, is there a way to have “our” cake and eat it, too? Can the U.S. government raise enough money through borrowing or taxation to fend off the day of reckoning and attain the left’s dream of attaining “Europeanism”?

BORROWING A SEA OF TROUBLES

In fact, financial markets may help to reign in government spending by sending signals that cannot be ignored — if the U.S. government borrows money from willing lenders instead of just printing it. (Economist Karl Smith explains why printing money — deliberate inflation — is an unlikely course of action. He refers to “structured default,” which is explained here.) As government spending rises, and as voters and politicians (in the main) reject significant tax increases, government debt will rise to unprecedented heights. Here, from The Heritage Foundation’s 2011 Budget Chart Book, is a retrospective and prospective look at the size of the federal government’s debt in relation to GDP:

National debt set to skyrocket

Financial markets will reject U.S. government debt — or charge a lot for carrying it — long before it reaches the levels shown above. The events of year ago, when Greece’s financial bind came to a head, gave a hint of the likely reaction of markets to continued fiscal profligacy. Then, earlier this month, there was a sharp, brief stock-market sell off in response to an announcement by Standard & Poor’s about U.S. government debt (“‘AAA/A-1+’ Rating On United States of America Affirmed; Outlook Revised To Negative“):

  • We have affirmed our ‘AAA/A-1+’ sovereign credit ratings on the United States of America.
  • The economy of the U.S. is flexible and highly diversified, the country’s effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
  • Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
  • We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

If there is no serious effort to control the growth of the U.S. government’s debt by scaling back “entitlements,” two things will happen: Interest rates will rise, thus compounding the problem, and lenders will back away. Megan McArdle outlines a plausible scenario:

Right now, when Treasury goes to sell new bonds, it enters a fairly robust market, with not just the Fed but a bunch of fairly price-inelastic Asian central banks who are willing to take on our bonds at whatever the market offers. If China exits the market, we will either need to borrow less, or attract new lenders by offering higher interest rates. Even a noticeable decrease in volume would force us to pay more for our deficits….

… A lot of people tend to assume that there will be warning signs telling us that we need to get our fiscal house in order: China will slow down its bond purchases, interest rates will gradually rise. But in fact, the lesson of fiscal crises is that the “warning signs” we’re watching for often are the crisis. Unless interest rates increase (or debt buying decrease–which is really the same thing) in a very gradual, orderly fashion, then by the time your interest rates rise, it is already too late to do anything easy; your debt service burden forces you into dramatic fiscal measures, or default.

According to economist Carmen Reinhart, who has made an intensive study of crises, there’s no reason to expect the change to be orderly and gradual. She says the lesson of history is pretty unequivocal: interest rates are not a good predictor of who is about to tip into a crisis. People are willing to lend at decent rates, until suddenly they’re barely willing to lend at all.

When you look at how much of our debt comes due by the end of 2012, it’s easy to see how fast higher interest rates could turn into a real problem for us. To be sure, we’re no Japan–but that’s not necessarily a happy thought, because Japan finances something like 95% of its debt from its pool of thrifty (and nationalistic) savers. Their stock of lenders probably isn’t going anywhere. Ours might.

Lawrence Kotlikoff agrees:

…CBO’s baseline budget updates suggest the date for reaching what Carmen Reinhart, Kenneth Rogoff and other prominent economists believe is a critical insolvency threshold — a 90 percent ratio of federal debt held by the public to gross domestic product — has moved four years closer, in just nine months!…

And if foreigners balk at buying U.S. debt, why would Americans fill the breach? Is there a patriotic duty to finance socialism?

In summary, it seems unlikely that the U.S. can erect a full-blown welfare state on the backs of lenders. Can it be done on backs of taxpayers?

TAXING “THE RICH” — AND A LOT OF OTHERS, TOO?

The short answer to the preceding question is “no.” In evidence, I return to Michael Tanner’s “Bankrupt: Entitlements and the Federal Budget“:

Many observers suggest that we can simply tax the rich. For example, the Center for American Progress has recommended, among other things, imposing a 5–7 percent surtax on households with incomes above $500,000 per year, eliminating the cap on Social Security payroll taxes, increasing the estate tax, and raising the top marginal tax rate on capital gains and dividends.60 That would potentially raise the total marginal tax burden on some people to well above 50 percent.

Setting aside the simple immorality of government taking such an enormous portion of anyone’s income, there are many reasons to be skeptical of such an approach, starting with the fact that it may not actually generate any additional revenue….

…[I]ncentives matter. At some point taxes become high enough to discourage economic activity and therefore produce less revenue than would be predicted under a more static analysis….

But even if one assumes that taxes can be raised without having any impact on economic growth, taxing the rich still wouldn’t get us out of our budget hole—because the hole is quite simply bigger than the amount of revenue we could raise from taxing the rich even if there were no disincentives. To put it in admittedly oversimplified perspective: our current obligations, including both implicit and explicit debt, total more than 900 percent of GDP. The combined wealth of everyone in the United States who earns at least $1 million per year equals roughly 100 percent of GDP…. Therefore, you could confiscate the entire wealth of every millionaire in the United States and still barely make a dent in the amount we will owe.

Clearly, therefore, any tax increases would have to extend well beyond “the rich.” In fact, the Congressional Budget Office said in 2008 that in order to pay for all currently scheduled federal spending both the corporate tax rate and top income tax rate would have to be raised from their current 35 percent to 88 percent, the current 25 percent tax rate for middle-income workers to 63 percent, and the 10 percent tax bracket for low-income workers to 25 percent. It is likely, given increased spending since then, that the required tax levels would be even higher today.

Regardless of how one feels about taxing the rich, taxes at those levels would be devastating to future economic growth.

Harvard economist Martin Feldstein points out that the actual loss from tax increases to the private sector is a combination of the confiscated revenue as well as a hidden cost of the actual increase, known as deadweight loss. This hidden cost can be very expensive. Feldstein calculates that “the total cost per incremental dollar of government spending, including the revenue and the deadweight loss, is . . . a very high $2.65. Equivalently, it implies that the marginal excess burden per dollar of revenue is $1.65.” This means that for every 1 percent of GDP needed to be raised in revenue, the equivalent of 2.65 percent of GDP needs to be extracted from the private sector first.

Clearly, tax increases required to finance an increase in spending of more than 40 percent of GDP would place an impossible burden on the private economy. (pp. 13-4, source notation omitted)

One more thing (from Table 1 of the Tax Foundation’s “Fiscal Facts“): For 2008, federal income tax returns with adjusted gross incomes in the top 1 percent accounted for 38 percent of income taxes; the top 5 percent, 59 percent; the top 10 percent, 70 percent; the top 25 percent, 86 percent; and the top 50 percent, 97 percent. Not only that, but the top 10 percent of American taxpayers is taxed more heavily than the top 10 percent in other developed countries, including those “advanced” European countries that American leftists would like to emulate. (See “No Country Leans on Upper-Income Households as Much as U.S.” at the Tax Foundation’s Tax Policy Blog.) And the left has the gall to claim that America’s “rich” aren’t paying enough taxes!

VIVE LA RÉSISTANCE

It will not do simply to put an end to the U.S. government’s spending spree; too many State and local governments stand ready to fill the void, and they will do so by raising taxes where they can. As a result, some jurisdictions will fall into California- and Michigan-like death-spirals while jobs and growth migrate to other jurisdictions. Contemporary mercantilists to the contrary, the “winners” are “losers,” too. Even if Congress resists the urge to give aid and comfort to profligate States and municipalities at the expense of the taxpayers of fiscally prudent jurisdictions, the high taxes and anti-business regimes of California- and Michigan-like jurisdictions impose deadweight losses on the whole economy. If you believe otherwise, you believe in the broken-window fallacy, wherein an economically destructive force (natural or governmental) is credited with creating jobs and wealth because it leads to the visible expenditure of effort and resources.

So, the resistance to economically destructive policies cannot end with efforts to reverse the policies of the federal government. But given the vast destructiveness of those policies — “entitlements” in particular — the resistance must begin there. Every conservative and libertarian voice in the land must be raised in reasoned opposition to the perpetuation of the unsustainable “promises” currently embedded in Social Security, Medicare, and Medicaid — and their expansion through Obamacare. To those voices must be added the voices of “moderates” and “liberals” who see through the proclaimed good intentions of “entitlements” to the economic and libertarian disaster that looms if those “entitlements” are not pared down to their original purpose: providing a safety net for the truly needy.

The alternative to successful resistance is stark: more borrowing, higher interest payments, unsustainable debt, higher taxes, and economic stagnation (at best).

Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth

UPDATED 12/28/11 — This update incorporates GDP and government spending statistics for 2010 and corrects a minor discrepancy in the estimation of government spending. Also, there are new, easier-to-read graphs. The bottom line is the same as before: Government spending and everything that goes with it (including regulation) is destructive of economic growth.

UPDATED 09/19/13 — This version incorporates two later posts “Estimating the Rahn Curve: A Sequel” (01/24/12) and “More Evidence for the Rahn Curve” (05/27/12).

*     *     *

The theory behind the Rahn Curve is simple — but not simplistic. A relatively small government with powers limited mainly to the protection of citizens and their property is worth more than its cost to taxpayers because it fosters productive economic activity (not to mention liberty). But additional government spending hinders productive activity in many ways, which are discussed in Daniel Mitchell’s paper, “The Impact of Government Spending on Economic Growth.” (I would add to Mitchell’s list the burden of regulatory activity, which accumulates with the size of government.)

What does the Rahn Curve look like? Daniel Mitchell estimates this relationship between government spending and economic growth:

Rahn curve (2)

The curve is dashed rather than solid at low values of government spending because it has been decades since the governments of developed nations have spent as little as 20 percent of GDP. But as Mitchell and others note, the combined spending of governments in the U.S. was 10 percent (and less) until the eve of the Great Depression. And it was in the low-spending, laissez-faire era from the end of the Civil War to the early 1900s that the U.S. enjoyed its highest sustained rate of economic growth.

Here is a graphic look at the historical relationship between government spending and GDP growth:

(Source notes for this graph and those that follow are at the bottom of this post.)

The regression lines are there simply to emphasize the long-term trends. The relationship between government spending as a percentage of GDP (G/GDP) and real GDP growth will emerge from the following graphs. There are chronological gaps because the Civil War, WWI, the Great Depression, and WWII distorted the relationship between G/GDP and economic growth. Large wars inflate government spending and GDP. The Great Depression saw a large rise in G/GDP, by pre-Depression standards, even as the economy shrank and then sputtered to a less-than-full recovery before the onset of WWII.

Est Rahn curve 1792 1861

Est Rahn curve 1866 1917

Est Rahn curve 1792 1917

Est Rahn curve 1946-2010

The graphs paint a consistent picture: Higher G/GDP means lower growth. There is one inconsistency, however, and that is the persistence of growth in the range of 2 to 4 percent during the post-WWII era, despite G/GDP in the range of 25-45 percent. That is not the kind of growth one would expect, given the relationships that obtain in the earlier eras. (The extrapolated trend line for 1946-2009 comes into use below.)

There are at least five plausible — and not mutually exclusive — explanations for the discrepancy. First, there is the difficulty of estimating GDP for years long past. Second, it is almost impossible to generate a consistent estimate of real GDP spanning two centuries; current economic output is vastly greater in volume and variety than it was in the early days of the Republic. Third, productivity gains (advances in technology, management techniques, and workers’ skills) may offset the growth-inhibiting effects of government spending, to some extent. Fourth, government regulations and active interventions (e.g., antitrust activity, the income tax) have a cumulative effect that operates independently of G/GDP. Regulations and interventions may have had an especially strong effect in the early 1900s (see the second graph in this post). The effects of regulations and interventions may diminish with time because of  adaptive behavior (e.g., “capture” of regulatory bodies).

Finally, and perhaps most importantly, there is the shifting composition of government spending. At relatively low levels of G/GDP, G consists largely of government programs that usurp and interfere with private-sector functions by diverting resources from productive uses to uses favored by politicians, bureaucrats, and their patrons. Higher levels of G/GDP — such as those we in the United States have known since the end of WWII — are reached by the expansion of the welfare state. Government spending (at all levels) on so-called social benefits accounted for only 7 percent of G and 0.8 percent of GDP in 1929; in 2009, it accounted for 36 percent of G and 15 percent of GDP. The provision of “social benefits” brings government into the business of redistributing income, which discourages work, saving, and capital formation to some extent, but doesn’t impinge directly on commerce. Therefore, I would expect G to be less damaging to GDP growth at higher levels of G/GDP — which is the message to be found in the contrast between the experience of 1946-2009 and the experience of earlier periods.

With those thoughts in mind, I present this empirical picture of the relationship between G/GDP and GDP growth in the United States:

Est Rahn curve 1792-2010

The intermediate points, unfortunately, are missing because of the chronological gaps mentioned above. But, as indicated by the five earlier graphs, it is entirely reasonable to infer from the preceding graph a strong relationship between GDP growth and changes in G/GDP throughout the history of the Republic.

It is possible to obtain a rough estimate of the downward sloping portion of the Rahn curve by focusing on two eras: the post-Civil War years 1866-1890 — before the onset of “progressivism,” with its immediate and strong negative effects — and the post-WWII years 1946-2009. Thus:

Est Rahn curve rough sketch

My rough estimate is appropriately “fuzzy” and somewhat more generous than Daniel Mitchell’s, which is indicated by the heavy black line. In light of my discussion of the shifting composition of G as G/GDP becomes relatively large, I  have followed the slope of the trend line for 1792-2010; that is, every 1 percentage-point increase in G/GDP yields a decrease in the growth rate of about 0.07 percent. That seemingly small effect becomes a huge one when G/GDP rises over a long period of time (as has been the case for more than a century, with no end in sight).

For the record, the best fit through the “fuzzy” area is:

Annual rate of growth = -0.066(G/GDP) + 0.054.

Maximum GDP growth seems to occur when G/GDP is 2-4  percent. That is somewhat less than the 7-percent share of GDP that was spent on national defense, public order, and safety in 2010. The excess represents additional “insurance” against predators, foreign and domestic. (The effectiveness of the additional “insurance” is a separate question, though I am inclined to err on the side of caution when it comes to defense and law enforcement. Those functions are not responsible for the economic woes facing America’s taxpayers.)

If G/GDP reaches 55 percent — which it will if present entitlement “commitments” are not curtailed — the “baseline” rate of growth will shrink further: probably to less than 2 percent. And thus America will remain mired in its Mega-Depression.

*     *     *

Source notes:

Estimates of real and nominal GDP, back to 1790, come from the feature “What Was the U.S GDP Then?” at MeasuringWorth.com.

Estimates of government spending (federal, State, and local) come from USgovernmentspending.com; Statistical Abstracts of the United States, Colonial Times to 1970: Part 2. Series Y 533-566. Federal, State, and Local Government Expenditures, by Function; and the Bureau of Economic Analysis (BEA), Table 3.1. Government Current Receipts and Expenditures (lines 34, 35).

I found the amount spent by governments (federal, State, and local) on national defense and public order and safety by consulting BEA Table 3.17. Selected Government Current and Capital Expenditures by Function.

The BEA tables cited above are available here.

*     *     *

ADDENDUM: THE RAHN CURVE: A SEQUEL

In the original post (above) I note that maximum GDP growth occurs when government spends two to four percent of GDP. The two-to-four percent range represents the share of GDP claimed by American governments (federal, State, and local) throughout most of the 19th century, when government spending exceeded five percent of GDP only during the Civil War.

Of course, until the early part of the 20th century, when Progressivism began to make itself felt in Americans’ tax bills, governments restricted themselves (in the main) to the functions of national defense, public order, and safety — the terms used in national-income accounting. It is those functions — hereinafter called defense and justice — that foster liberty and economic growth because they protect peaceful, voluntary activity. Effective protection probably would cost more than four percent of GDP in these parlous times. But an adequate figure, except in the rare event of a major war, is probably no more than seven percent of GDP — the value for 2010, which includes the cost of fighting in Iraq and Afghanistan.

In any event, government spending — even on defense and justice — is impossible without private economic activity. It is that activity which yields the wherewithal for the provision of defense and justice. Once those things have been provided, the further diversion of resources by government is economically destructive. Specifically, from “Estimating the Rahn Curve” (above):

It is possible to obtain a rough estimate of the downward sloping portion of the Rahn curve by focusing on two eras: the post-Civil War years 1866-1890 — before the onset of “progressivism,” with its immediate and strong negative effects — and the post-WWII years 1946-2009. Thus:

Est Rahn curve rough sketch

My rough estimate is appropriately “fuzzy” and somewhat more generous than Daniel Mitchell’s [in “The Impact of Government Spending on Economic Growth”], which is indicated by the heavy black line. In light of my discussion of the shifting composition of G as G/GDP becomes relatively large, I  have followed the slope of the trend line for 1792-2010; that is, every 1 percentage-point increase in G/GDP yields a decrease in the growth rate of about 0.06 percent. That seemingly small effect becomes a huge one when G/GDP rises over a long period of time (as has been the case for more than a century, with no end in sight).

The following graphs offer another view of the devastation wrought by the growth of government spending — and regulation. (Sources are given in “Estimating the Rahn Curve.”) I begin with the share of GDP which is not spent by government:

Est Rahn curve sequel_priv GDP as pct total GDP

A note about my measure of government spending is in order. National-income accounting purists would insist that transfer payments (mainly Social Security, Medicare, and Medicaid) should not count as spending, even though I count them as such. But what does it matter whether money is taken from taxpayers and given to retired persons (as Social Security) or to government employees (as salary and benefits) or contractors (as reimbursement for products and services delivered to government)? All government spending represents the transfer of claims on resources from persons who earned those claims to other persons, who either did something of questionable value for the money (government employees and contractors) or nothing (e.g., retirees).

In any event, it is obvious that Americans enjoyed minimal government until the early 1900s, and have since “enjoyed” a vast expansion of government. Here is a closer look at the trend from 1900 onward:

Est Rahn curve sequel_private GDP pct total GDP since 1900

This is a good point at which to note that the expansion of government is understated by the growth of government spending, which only imperfectly captures the effects of the rapidly growing regulatory burden on America’s economy. The combined effects of government spending and regulation can be seen in this “before” and “after” depiction of growth rates:

Est Rahn curve sequel_growth rate of private GDP

(I omitted the major wars and the Great Depression because their inclusion would give an exaggerated view of economic growth in the aftermath of abnormally suppressed private economic activity.)

The marked diminution of growth  after 1900 has led to what I call America’s Mega-Depression. Note the similarity between the downward path of private sector GDP (two graphs earlier) and the downward path of the Mega-Depression in the following graph:

Est Rahn curve sequel_mega-depression

What is the Mega-Depression? It is a measure of the degree to which real GDP has fallen below what it would have been had economic growth continued at its post-Civil War pace. As I explain here, the Mega-Depression began in the early 1900s, when the economy began to sag under the weight of Progressivism (e.g., trust-busting, regulation, the income tax, the Fed). Then came the New Deal, whose interventions provoked and prolonged the Great Depression (see, for example, this, and this). From the New Deal and the Great Society arose the massive anti-market/initiative-draining/dependency-promoting schemes known as Social Security, Medicare, and Medicaid. The extension and expansion of those and other intrusive government programs has continued unto the present day (e.g., Obamacare), with the result that our lives and livelihoods are hemmed in by mountains of regulatory restrictions.

Regulation aside, government spending — except for defense and justice — is counterproductive. Not only does it fail to stimulate the economy in the short run, but it also robs the economy of the investments that are needed for long-run growth.

*     *     *

ADDENDUM: MORE EVIDENCE FOR THE RAHN CURVE

Here:

[W]e have some new research from the United Kingdom. The Centre for Policy Studies has released a new study, authored by Ryan Bourne and Thomas Oechsle, examining the relationship between economic growth and the size of the public sector.

The chart above compares growth rates for nations with big governments and small governments over the past two decades. The difference is significant, but that’s just the tip of the iceberg. The most important findings of the report are the estimates showing how more spending and more taxes are associated with weaker performance.

Here are some key passages from the study.

Using tax to GDP and spending to GDP ratios as a proxy for size of government, regression analysis can be used to estimate the effect of government size on GDP growth in a set of countries defined as advanced by the IMF between 1965 and 2010. …As supply-side economists would expect, the coefficients on the tax revenue to GDP and government spending to GDP ratios are negative and statistically significant. This suggests that, ceteris paribus, a larger tax burden results in a slower annual growth of real GDP per capita. Though it is unlikely that this effect would be linear (we might expect the effect to be larger for countries with huge tax burdens), the regressions suggest that an increase in the tax revenue to GDP ratio by 10 percentage points will, if the other variables do not change, lead to a decrease in the rate of economic growth per capita by 1.2 percentage points. The result is very similar for government outlays to GDP, where an increase by 10 percentage points is associated with a fall in the economic growth rate of 1.1 percentage points. This is in line with other findings in the academic literature. …The two small government economies with the lowest marginal tax rates, Singapore and Hong Kong, were also those which experienced the fastest average real GDP growth.

My own estimate (see above) for the United States, is that

every 1 percentage-point increase in G/GDP yields a decrease in the growth rate of about 0.07 percent. That seemingly small effect becomes a huge one when G/GDP rises over a long period of time (as has been the case for more than a century, with no end in sight).

In other words, every 10 percentage-point increase in the ratio of government spending to GDP causes a not-insignificant drop of 0.7 percentage points in the rate of growth. That is somewhat below the estimate quoted above (1.1 percentage points), but surely it is within the range of uncertainty that surrounds the estimate.

Why Are Interest Rates So Low?

A REISSUE (WITHOUT UPDATES) OF THE ORIGINAL POST DATED DECEMBER 7, 2011

Interest rates reflect the supply of and demand for funds. Money is tighter now than it was in the years immediately before the onset of the Great Recession. Tim Congdon explains:

In the three years to October 2008, the quantity of money soared from $10,032 billion to $14,186 billion, with a compound annual growth rate of just over 12 per cent. The money growth rate in this period was the highest since the early 1970s. Indeed, 1972 and 1973 had many similarities to 2006 and 2007, with bubbling asset markets, buoyant consumer spending and incipient inflationary pressures. On the other hand, in the three years from October 2008 the quantity of money was virtually unchanged. (It stood at $14,340 billion in October 2011.) In other words, in the three years of the Great Recession the quantity of money did not increase at all.

But if money is relatively tight, why are interest rates so low? For example, as of October 2011, year-over-year inflation stood at 3.53 percent (derived from CPI-U estimates, available here). In October, Aaa bond yields averaged 3.98 percent, for a real rate of about 0.4 percent; Baa bond yields averaged 5.37 percent, for a real rate of about 1.8 percent; and conventional mortgages averaged 4.07 percent, for a real rate of about 0.5 percent. By contrast, in 1990-2000, when the CPI-U rose at an annual rate of 3.4 percent, real Aaa, Baa, and conventional mortgage rates hovered in the 4-6 percent range. (Real rates are derived from interest rate statistics available here.)

The reason for these (and other) low rates is that borrowers have become less keen about borrowing; that is, they lack confidence about future prospects for income (in the case of households) and returns on investment (in the case of businesses). Why should that be?

If the post-World War II trend is any indication — and I believe that it is — the American economy is sinking into stagnation. Here is the long view:

  • 1790-1861 — annual growth of 4.1 percent — a booming young economy, probably at its freest
  • 1866-1907 — annual growth of 4.3 percent — a robust economy, fueled by (mostly) laissez-faire policies and the concomitant rise of technological innovation and entrepreneurship
  • 1970-2010 — annual growth of 2.8 percent – sagging under the cumulative weight of “progressivism,” New Deal legislation, LBJ’s “Great Society” (with its legacy of the ever-expanding and oppressive welfare/transfer-payment schemes: Medicare, Medicaid, a more generous package of Social Security benefits), and an ever-growing mountain of regulatory restrictions.

(From this post, as updated in this one.)

And here is the post-World War II view:

Annual change in real GDP 1948-2011

This trend cannot be reversed by infusions of “stimulus spending” or “quantitative easing.” It reflects an underlying problem that cannot be cured by those simplistic macroeconomic “fixes.”

The underlying problem is not “tight money,” it is that American businesses are rightly pessimistic about an economic future that is dominated by a mountain of debt (in the form of promised “entitlements”) and by an ever-growing regulatory burden. Thus business investment has been a decline fraction of private-sector GDP:

Non-household GPDI fraction GDP - G
Derived from Bureau of Economic Analysis, Table 1.1.5. Gross Domestic Product (available here). The numerator is gross private domestic investment (GPDI, line 7) less the residential portion (line 12). The denominator is GDP (line 1) less government consumption expenditures and gross investment (line 21).

As long as business remains (rightly) pessimistic about the twin burdens of debt and regulation, the economy will sink deeper into stagnation. The only way to overcome that pessimism is to scale back “entitlements” and regulations, and to do so promptly and drastically.

In sum, the present focus on — and debate about — conventional macroeconomic “fixes” (fiscal vs. monetary policy) is entirely misguided. Today’s economists and policy-makers should consult Hayek, not Keynes or Friedman or their intellectual descendants. If economists and policy-makers would would read and heed Hayek — the Hayek of 1944 onward, in particular — they would understand that our present and future economic morass is entirely political in origin: Failed government policies have led to more failed government policies, which have shackled both the economy and the people.

Economic and political freedoms are indivisible. It will take the repeal of the regulatory-welfare state to restore prosperity and liberty to the land.

Not-So-Random Thoughts (VIII)

I begin with a post of mine, “Civil Society and Homosexual ‘Marriage’“:

[A]s sure as the sun sets in the west, the state will begin to apply the equal protection clause of the Fourteenth Amendment in order to protect homosexual “marriage” from its critics. Acting under the rubric of “civil rights” — and  in keeping with the way that anti-discrimination laws have been applied to date — the state will deal harshly with employers, landlords, and clergy who seem to discriminate against homosexual “marriage” and its participants.

And right on schedule:

[T]he New Mexico Supreme Court has found that a photographer who declined to photograph a gay “wedding” was at fault… (Tom Trinko, “New Mexico Takes a Stab at Nullifying the Constitution,” American Thinker, August 25, 2013)

See also my post “Abortion, ‘Gay Rights,” and Liberty.

*****

Keir Maitland nails the pseudo-libertarian mentality:

Libertarians are being torn apart from within. Two groups are responsible for this: the libertines and the liberal bigots. ‘Liberal bigots’ is a phrase that I have stolen from Peter Hitchens and I am using it to describe a group within the libertarian movement who are more concerned about being politically correct than defending anybody’s right to discriminate. By libertines, I mean simply those who view libertarianism as a rebellion against tradition, hierarchy, morality and authority….

The former, the liberal bigots, in my view are often ‘thin libertarians’ of the worst kind: libertarians who believe in the nonaggression axiom and nothing else. These people can only think in terms of libertarian legal theory and, as cultural Marxists, will defend anybody’s way of life, except, oddly enough, a traditionalist and antiegalitarian way of life. The latter, however, are usually ‘thick libertarians’…. Thick libertarians are libertarians who, in addition to being well-versed in libertarian law, think about how a libertarian society would, could and should function. Thick libertarians judge not only whether or not something is legal, but whether it is conducive to libertarian ends. However, sadly, the modal thick libertarian is a libertine: someone who believes that prosperity, happiness and other good ends, for which we all strive, are achieved not through a ‘sensible’ lifestyle but through a relatively reckless one. (“Libertines and Liberal Bigots,” Libertarian Alliance Blog, August 22, 2013)

Maitland’s assessment harmonizes with my own, which I’ve expressed in several posts, including “Defending Liberty against (Pseudo) Libertarians“:

(Pseudo) libertarians like to demonstrate their bogus commitment to liberty by proclaiming loudly their support for unfettered immigration, unfettered speech, unfettered abortion, unfettered same-sex coupling (and legal recognition thereof as “marriage’), and unfettered you-name-it.. In the minds of these moral relativists, liberty is a dream world where anything goes — anything of which they approve, that is….

Another staple of (pseudo) libertarian thought is a slavish devotion to privacy — when that devotion supports a (pseudo) libertarian position. Economists like Caplan and Boudreaux are cagy about abortion. But other (pseudo) libertarians are less so; for example:

I got into a long conversation yesterday with a [Ron] Paul supporter who took me to task for my criticisms of Paul’s positions. For one thing, he insisted, Paul’s position on abortion wasn’t as bad as I made it out, because Paul just thinks abortion is a matter for the states. I pointed out that in my book, saying that states can violate the rights of women [emphasis added] is no more libertarian than saying that the federal government can violate the rights of women.

Whence the “right” to abort an unborn child? Here, according to the same writer:

I do believe that abortion is a liberty protected by the Fourteenth Amendment….

This train of “logic” is in accord with the U.S. Supreme Court’s manufactured “right” to an abortion under the Fourteenth (or was it the Ninth?) Amendment, which I have discussed in various places, including here. All in the name of “privacy.”…

It is no wonder that many (pseudo) libertarians like to call themselves liberaltarians. It is hard to distinguish (pseudo) libertarians from “liberals,” given their shared penchant for decrying and destroying freedom of association and evolved social norms. It is these which underlie the conditions of mutual respect, mutual trust, and forbearance that enable human beings to coexist peacefully and cooperatively. That is to say, in liberty.

*****

A recent foray into constitutional issues unearthed this commentary about the opinion delivered by Chief Justice Roberts in the case of Obamacare:

Oh, how far we’ve deviated from our Founders in just over 200 years.

The entire country is pouring over an incoherent, internally contradictory, ill-conceived and politically motivated decision by Chief Justice Roberts, which grants Congress the power to regulate anything that moves and the power to tax anything that moves and anything that doesn’t move….

If we take the reasoning of Roberts to its logical conclusion, Congress would be able to coerce individuals to buy broccoli once a week, so long as they levy a tax on those who fail to comply with the law.  Putting aside the facial absurdity of Roberts’s tax power jurisprudence, his opinion on the Commerce Clause is nothing to cheer.  While Roberts clearly stated that the Commerce Clause does not grant the federal government the right to regulate inactivity (although it can evidently tax inactivity), he obliquely upheld their authority to regulate any activity under that misconstrued clause.

Amidst the garrulous analysis from the conservative pundit class on the Roberts decision, there is a one-page dissent from Justice Thomas (in addition to his joint dissent with the other 3 conservatives) that has been overlooked….

Take a look at this paragraph from Thomas’s dissent (last two-pages of pdf):

I dissent for the reasons stated in our joint opinion, but I write separately to say a word about the Commerce Clause. The joint dissent and THE CHIEF JUSTICE cor­rectly apply our precedents to conclude that the Individual Mandate is beyond the power granted to Congress under the Commerce Clause and the Necessary and Proper Clause. Under those precedents, Congress may regulate“economic activity [that] substantially affects interstate commerce.” United States v. Lopez, 514 U. S. 549, 560 (1995). I adhere to my view that “the very notion of a ‘substantial effects’ test under the Commerce Clause is inconsistent with the original understanding of Congress’ powers and with this Court’s early Commerce Clause cases.” United States v. Morrison, 529 U. S. 598, 627 (2000) (THOMAS, J., concurring); see also Lopez, supra, at 584–602 (THOMAS, J., concurring); Gonzales v. Raich, 545

….

Justice Thomas is hearkening back to the Founders.  Not only is every word of Obamacare unconstitutional and an anathema to every tenet of our founding, most of the other programs created in recent years are as well.  The fact that Roberts said the Commerce Clause and the Necessary and Proper Clause don’t apply to inactivity is not a victory for constitutional conservatives.  The implicit notion that the federal government can regulate any activity is appalling to conservatives.

Here’s what James Madison had to say about the Commerce Clause in a letter to Joseph C. Cabell in 1829:

For a like reason, I made no reference to the “power to regulate commerce among the several States.” I always foresaw that difficulties might be started in relation to that power which could not be fully explained without recurring to views of it, which, however just, might give birth to specious though unsound objections. Being in the same terms with the power over foreign commerce, the same extent, if taken literally, would belong to it. Yet it is very certain that it grew out of the abuse of the power by the importing States in taxing the non-importing, and was intended as a negative and preventive provision against injustice among the States themselves, rather than as a power to be used for the positive purposes of the General Government, in which alone, however, the remedial power could be lodged.

….

The reality is that not only is Obamacare unconstitutional, almost every discretionary department, welfare program, and entitlement program is unconstitutional…. (Daniel Horowitz, “Thomas Dissents: It’s All Unconstitutional,” RedState (Member Diary), June 29, 2012)

On the general issue of the subversion of constitutional limits on governmental power, see “The Constitution: Original Meaning, Corruption, and Restoration.” Specifically related to Obamacare and the individual mandate: “The Unconstitutionality of the Individual Mandate,” “Does the Power to Tax Give Congress Unlimited Power?,” “Does Congress Have the Power to Regulate Inactivity?,” and “Obamacare: Neither Necessary nor Proper.”

*****

Also from RedState, a story that reads in part:

Sadly, we have deviated from our constitutional form of government over the past century.  That’s why Mark Levin has written The Liberty Amendments, a set of proposed constitutional amendments that will unambiguously downsize the federal government by targeting specific loopholes that have allowed the statists to adulterate our Constitution.  Far from this being a radically new vision, Levin proves – through founding documents and floor debates at the Constitutional Congress – how his ideas are in line with what the Founders envisioned in our Federal government.  It’s just that after years of deviating from the Constitution, it has become clear that we need very specific limitations on federal abuses – abuses that have gone far beyond the imagination of our Founders – in order to restore the Republic. (Daniel Horowitz, “Mark Levin’s Liberty Amendments,” Red State (Member Diary), August 13, 2013)

The story includes a good summary of Levin’s amendments. Recommended reading.

A New, New Constitution” covers the same ground, and more. It’s long, but it closes a lot of loopholes that have been opened by legislative, executive, and judicial action.

*****

I turn, finally, to a pair of items by James Pethokoukis with self-explanatory titles: “The Great Stagnation: JP Morgan Declares US Potential GDP Growth Just Half of What It Used to Be” (AEIdeas, August 12, 2013) and “Why Wall Street Thinks the Future Isn’t What It Used to Be” (AEIdeas, August 13, 2013). Read those pieces, and then go to “The Stagnation Thesis” (and follow the links therein) and “Why Are Interest Rates So Low?” (which is replete with more links). The latter post concludes with this:

As long as business remains (rightly) pessimistic about the twin burdens of debt and regulation, the economy will sink deeper into stagnation. The only way to overcome that pessimism is to scale back “entitlements” and regulations, and to do so promptly and drastically.

In sum, the present focus on — and debate about — conventional macroeconomic “fixes” (fiscal vs. monetary policy) is entirely misguided. Today’s economists and policy-makers should consult Hayek, not Keynes or Friedman or their intellectual descendants. If economists and policy-makers would would read and heed Hayek — the Hayek of 1944 onward, in particular –  they would understand that our present and future economic morass is entirely political in origin: Failed government policies have led to more failed government policies, which have shackled both the economy and the people.

Economic and political freedoms are indivisible. It will take the repeal of the regulatory-welfare state to restore prosperity and liberty to the land.

Amen.

As for how the regulatory-welfare state might be repealed, read “Restoring Constitutional Government: The Way Ahead.

Economics: A Survey

I have reproduced this post as a separate page. It will always be accessible by clicking the link that appears below the banner.

Until I muster the will to finish a plain-language primer on economics that I began several years ago, this post will have to do. It is an annotated compilation of links to the posts at this blog which, taken together, will enlighten those readers who seek a rounded view of economics, that is, one that is both fundamental and practical. The fundamental posts address the principles of economics without resorting to abstruse mathematical expressions. The practical posts (in the main) address the effects of government policy on economic activity.

Many of the posts cited below are illustrated by statistics that are a few months to several years out of date.  The conclusions remain valid, however.

PRINCIPLES

The place to begin is “Trade.” It explains the benefits of voluntary exchange, which is the essence of economic activity.

Trade, in the jargon of economics, is microeconomic activity. Attempts to aggregate and explain economic activity are called macroeconomics. “Macroeconomics and Microeconomics” addresses the relationship between the two disciplines.

Other foundational posts are “The Rationality Fallacy” and “Income and Diminishing Marginal Utility.” The first exposes an error common among economists, which is to equate wealth maximization and happiness. The second exposes an error common among economists and leftists (but I repeat myself), which is to assume that a person’s marginal utility (gain in happiness) diminishes with income.

A Short Course in Economics” and “Addendum to a Short Course in Economics” state a number of basic propositions about economics and economic behavior. These aren’t rigorous expositions of economic principles, but they will point a neophyte in the right direction — that is, away from the upside-down economics spouted by leftists and “journalists” (but I repeat myself).

Closely related is “The Causes of Economic Growth,” which cuts through the gobbledygook that prevails in academic circles.

All of the above posts are non-mathematical because the principles of economics do not have to be stated mathematically. In fact, the mathematization of economic theory is a scam, as discussed in “Mathematical Economics.” Economics, as a discipline, suffers from “physic envy”; too many of its practitioners believe that a coat of mathematical varnish can turn it into a science. But economics is not a science — or if it is, in is only a “soft science” that relies more on intuition than it does on the scientific method. For more on this subject, see “Science, Axioms, and Economics.”

PRACTICE: THE GENERAL ECONOMIC INFLUENCE OF GOVERNMENT

Minimal government protects citizens from foreign and domestic predators, thus enabling peaceful, mutually beneficial, and voluntary exchange (i.e., free markets). When government goes beyond its minimal role and interferes in the economy it inhibits economic output in three ways. First, government spending and borrowing divert resources from productive uses to (mainly) unproductive and counterproductive ones. Second, taxes penalize success and divert resources from growth-inducing capital creation. Third, regulations inhibit business formation and expansion.  These relationships are explored systematically in “Government in Macroeconomic Perspective.”

You may wish to skip that technical and somewhat plodding post, and go directly to some of my estimates of the scope and economic costs of government intervention. Begin with the qualitative assessment given in “The Real Burden of Government,” then turn to “The Laffer Curve, ‘Fiscal Responsibility,’ and Economic Growth,” “The Commandeered Economy,” “Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth,” “The Mega-Depression,” and “Economic Growth since World War II.” (Another, often overlooked, consequence of government intervention in economic affairs is the resulting diminution of liberty; see, for example, “The Indivisibility of Economic and Social Liberty.”)

The posts cited in the preceding paragraph assess the long-run effects of government interventions. Government policy imposes additional costs in the short run, that is, in the span of years rather than decades. The Federal Reserve, to name the main culprit, can claim responsibility for the Great Depression and the Great Recession, as well as other recessions. See “Mr. Greenspan Doth Protest Too Much,” “The Fed and Business Cycles,” and “Money, Credit, and Economic Fluctuations.”

Then there is a phenomenon known as regime uncertainty, in which entrepreneurship and capital formation are discouraged — temporarily, at least — by the threat of new government interventions. That threat that is more potent now than it has been since the New Deal-Great Society era. I address regime uncertainty in “The Keynesian Fallacy and Regime Uncertainty,” “Regime Uncertainty and the Great Recession,” and “Obamanomics: A Report Card.”

Government interventions in economic affairs are prompted by many interests and impulses — power-seeking, rent-seeking, economic illiteracy, and plain old do-goodism being among them. Among the chief reasons given for interventions is “market failure,” which is among the subjects addressed in “Regulation as Wishful Thinking.” Closely related posts that bear reading are “Socialist Calculation and the Turing Test,” “What Free-Rider Problem?,” and “Don’t Just Stand There, ‘Do Something’.” The political economy of government intervention is treated generally in “Tocqueville’s Prescience” and “Understanding Hayek.” The darker impulses are addressed in “Don’t Use the ‘S’ Word When the ‘F’ Word Will Do.” (The “S” and “F” words are “socialism” and “fascism.”)

Last, but only because I put it here, is the baleful influence of Keynesianism on economic policy. I expose the fallacy of Keynesianism and “stimulus” spending in “The Keynesian Multiplier: Phony Math” and “The True Multiplier.” Also relevant, though superseded by the preceding two posts, are “A Keynesian Fantasy Land,” “Why the Stimulus Failed to Stimulate,” “The Real Multiplier,” “The Real Multiplier (II),” and “Keynesianism: Upside-Down Economics in the Collectivist Cause.”

PRACTICE: SALIENT ISSUES

We’re not through with government, which plays an explicit and implicit role in the following matters (arranged alphabetically):

Government Debt and Deficits. The best posts on this subject were inspired by the Bowles-Simpson Deficit Commission, whose work — flawed as it is — seems to have been ignored. The “can” is still being kicked down the road, and the consequences will be dire. Read on: “The Deficit Commission’s Deficit of Understanding,” “The Bowles-Simpson Report,” “The Bowles-Simpson Band-Aid,” and “America’s Financial Crisis Is Now.”

Income Inequality and Redistribution. Some persons earn more money than other persons because of differences in ability, performance, and the value of their contributions to the well-being of others. This straightforward explanation doesn’t suit idiots like Robert Reich, who are handicapped by economic illiteracy, guilt, and hypocrisy. The inescapable fact of income inequality is often conflated with the so-called “war” on the middle class. (Pending a post on that subject, I refer you to this one by Mark J. Perry.)

I have addressed inequality several times. The brief post, “The Last(?) Word about Income Inequality” provides several links that are worth following. Other posts expose income inequality as a bogus issue and warn of the dire economic consequences of taxing “the rich” more than they are already taxed: “Taxing the Rich,” “More about Taxing the Rich,” “In Defense of the 1%,” and “Progressive Taxation Is Alive and Well in the U.S. of A,” and “How High Should Taxes Be?

If you’re in the mood for a more fundamental treatment of the “inequality problem,” try “Income and Diminishing Marginal Utility,” “Greed, Cosmic Justice, and Social Welfare,” “Positive Rights and Cosmic Justice,” “Utilitarianism, ‘Liberalism,’ and Omniscience,” “Utilitarianism vs. Liberty,” “Accountants of the Soul,” “Rawls Meets Bentham,” “Enough of ‘Social Welfare’,” “Positive Liberty vs. Liberty,” “Social Justice,” “More Social Justice,”  “Luck Egalitarianism and Moral Luck,” and “Utilitarianism and Psychopathy.”

Inflation.  Or the threat of it, seems to be a perennial problem. At root, it is a government problem, as I discuss in “Why Government Spending Is Inherently Inflationary,” “Is Inflation Inevitable?,” and “Does the CPI Understate Inflation?

Interest Rates. Government-induced stagnation, addressed above, reappears in “Why Are Interest Rates So Low?” See also “Bonds for the Long Run?

International Trade and Outsourcing. Start with “Trade” (also cited above) and “Why Outsourcing Is Good: A Simple Lesson for ‘Liberal’ Yuppies.” If you need more, go to “Trade-Deficit Hysteria,” “Trade, Government Spending, and Economic Growth,” and “Gains from Trade.”

Monopoly. It’s a dirty word, on a par with “asbestos.” Monopoly — or the hope of attaining it — is essential to economic growth, as discussed in “Monopoly and the General Welfare.” If you want to see a dysfunctional monopoly, look at government (a central point of “Krugman and Monopoly“). Private monopoly, on the other hand, is preferable to government regulation: “Monopoly: Private Is Better than Public.”

Paternalism. “Libertarian paternalism” is an oxymoron; more accurately, it is dangerous, anti-libertarian treachery. My many posts on the subject begin with an eponymous one, and continue through “The Mind of a Paternalist, Revisited.” Pseudo-libertarians have no corner on paternalism, of course. Witness the wars on smoking and obesity of the past 60 years. My most recent post about paternalism is “Obesity and Statism.” Links to all of my posts on paternalism can be found at “Favorite Posts,” under categories V, VII, X and XI.

Two leading proponents of “libertarian paternalism” are Richard Thaler, an economist, and Cass Sunstein, a law professor and erstwhile “regulatory czar” for Obama. Thaler, given his academic background, might once have been a libertarian, but clearly has lost his way. Sunstein never came close to being one, and is about as anti-libertarian as they come, as you will learn if you read the posts about him, which are listed in category VII of “Favorite Posts.” Begin with this one and continue through this one. See especially (but not exclusively) “Cass Sunstein’s Truly Dangerous Mind.”

Regulation. It is fitting to jump from “Paternalism” to “Regulation,” inasmuch as regulation is paternalism writ huge. Regulation touches every facet of our lives and livelihoods. I have written about it so many times that it is hard to choose a list of representative posts. I began with “Fear of the Free Market — Part I,” and continued with “Part II” and “Part III.” Those three (long) posts make a theoretical and practical case against regulation. “Regulation as Wishful Thinking” makes the same case, though less thoroughly (but in far fewer words). The extent of the regulatory burden, at the federal level, is summarized in “Lay My (Regulatory) Burden Down.” That post includes an estimate of the economic cost of regulation.

“Social Insurance” Schemes.  “Social insurance” is properly called income redistribution. The primary engines of income redistribution — in addition to progressive taxation — are Social Security, Medicare, and Medicaid — as expanded by Obamacare. The monumental government debt that will accrue as a result of these schemes is addressed above, under “Government Debt and Deficits.” I have covered income redistribution, generally, under “Income Inequality and Redistribution.” Posts specifically about “social insurance” schemes include “The Mythical, Magical, Social Security Trust Fund,” “Social Security: The Permanent Solution,” and “Saving Social Security.” Obamacare is treated (not gently) in “Rationing and Health Care,” “The Perils of Nannyism: The Case of Obamacare,” “Health-Care ‘Reform’: The Short of It,”

As a bonus, I offer “Social Security Is Unconstitutional,” “The Unconstitutionality of the Individual Mandate,” “Does the Power to Tax Give Congress Unlimited Power?,” and “Does Congress Have the Power to Regulate Inactivity?.” Yes, Social Security and the individual mandate (along with Medicare and Medicaid) are unconstitutional, various majorities of the Supreme Court to the contrary notwithstanding; no, the power to tax doesn’t give Congress unlimited power (according the Constitution); and no, Congress doesn’t have the constitutional power to regulate inactivity (i.e., to penalize or tax a person for not buying insurance).

Tax Policy. Tax policy is implicated in many of the posts already listed. I also address it, directly, in “Productivity Growth and Tax Cuts,” “A True Flat Tax,” “‘Tax Expenditures’ Are Not Expenditures,” “Taxes: Theft or Duty?,” and “Is Taxation Slavery?” (yes).

Economic Horror Stories: The Great “Demancipation” and Economic Stagnation

UPDATED 08/03/13

Alternate title: “What We Can Learn from the Labor-Force Participation Rate”

The wholesale entry of women into the labor force after 1960 was considered (and still is, by many) to be a key sign women’s “emancipation.” Because of the baleful effects of that “emancipation,” I prefer to call it “demancipation.” What baleful effects? I begin with this, from a post that I wrote more than eight years ago:

Monetary measures of GDP exclude a lot of things that might be captured in the term “quality of life”; for example:

[F]ailing to account for the output produced within households may lead to misleading comparisons of economy-wide production, as conventionally measured. The female labor force participation rate in the United States has grown enormously since the early part of the 20th century. To the extent that the entry of women into paid employment has reduced the effort women devote to household production, the long-term trend in output, as measured by gross domestic product (GDP), may exaggerate the true growth in national output. [Committee on National Statistics (CNSTAT), Designing Nonmarket Accounts for the United States: Interim Report (2003), p. 9 in HTML version]

The “effort that women devote to household production” involves a lot more than shopping, cooking, cleaning, and all of the other activities usually associated with the term “housewife.” Not the least among those activities is the raising of children. Child-rearing (a quaint but still meaningful phrase) includes more than feeding, bathing, and toilet training. Parents — and especially mothers — impart lessons about civility — lessons that are neglected when children are left on their own to disport with friends, watch TV, and imbibe the nihilistic lyrics that pervade popular music.Yet, the apparently robust growth of real GDP per capita between owes much to the huge increase in the proportion of women seeking work outside the home. The labor-force participation rate for women of “working age” (14 and older in 1900, 16 and older in 2000) grew from 19 percent in 1900 to 60 percent in 2000, while the rate for men dropped only slightly, from 80 percent to 75 percent. Who knows how much damage society has suffered — and will yet suffer — because of the exodus into the workforce of women with children at home?

I went on, in that post and in later ones, to address the damage.

As it turned out, both the female participation rate and the overall rate peaked around 2000 (details here, Table 585). Here is a picture of the overall rate since 1960:

Labor force participation rate_Jan 1960 - Jul 2013
Source: Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, Civilian Labor Force Participation Rate (LNS11300000).

The end of demancipation around 2000 wasn’t necessarily an unmixed blessing. Why? Because the graph points to another horror story: economic stagnation.

Look at relationship of the labor-force participation rate and recessions, which are represented by the gray columns in the chart. (The recessionary periods are those defined by the National Bureau of Economic Research, here.) Each recession has marked a reduction or leveling off of the labor force participation rate. This is an unsurprising relationship because dimmed prospects for employment will deter persons from joining or rejoining the labor force.

But the decline since 2000 — and especially since 2009 — is eloquent testimony to a growing lack of faith in the country’s economic prospects. That lack of faith is entirely justified, as I have explained in many of the following related posts:
The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
The Causes of Economic Growth
In the Long Run We Are All Poorer
A Short Course in Economics
Addendum to a Short Course in Economics
The Price of Government
The Price of Government Redux
The Mega-Depression
As Goes Greece
Ricardian Equivalence Reconsidered
The Real Burden of Government
The Illusion of Prosperity and Stability
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
Taxing the Rich
More about Taxing the Rich
America’s Financial Crisis Is Now
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Unemployment and Economic Growth
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
The Real Multiplier
Vulgar Keynesianism and Capitalism
Why Are Interest Rates So Low?
The Commandeered Economy
Estimating the Rahn Curve: A Sequel
In Defense of the 1%
The Real Multiplier (II)
Lay My (Regulatory) Burden Down
The Burden of Government
Economic Growth Since World War II
More Evidence for the Rahn Curve
The Economy Slogs Along
The Obama Effect: Disguised Unemployment
The Stock Market as a Leading Indicator of GDP
Government in Macroeconomic Perspective
Where We Are, Economically
Keynesianism: Upside-Down Economics in the Collectivist Cause
The Economic Outlook in Brief
Obamanomics: A Report Card

Not-So-Random Thoughts (VII)

UPDATED 07/14/13

In “The Reality of the Wartime Economy,” Steven Horwitz and Michael J. McPhillips bang the drum for Robert Higgs’s account of the role of World War II in ending the Great Depression. Horwitz and McPhillips conclude:

The debate over World War II’s role in ending the Great Depression has enormous relevance in connection with the current anemic recovery from the Great Recession. We have offered evidence to support Robert Higgs’s argument that the wartime macroeconomic data significantly overstated the degree of genuine economic recovery. Higgs’s evidence rests on his reinterpretation of several traditional macroeconomic indicators to compensate for the distinct features of a wartime economy. We show that if one digs below the aggregates and looks at how American households lived during the war, as shown in the media, letters, and journals, Higgs’s case appears to be even stronger. Whatever the war’s effects on seemingly booming conventional macroeconomic aggregates, it entailed a retrogression in the average American’s living standards, and that disconnect should alert us to those aggregates’ limitations. Whenever government commands resources, those who finance this acquisition, whether through taxation or purchase of government bonds, incur opportunity costs. Whether the diverted resources go toward building tanks and guns or toward repairing bridges and roads does not alter this fact. As we continue to debate the effectiveness of large-scale government expenditure to speed recovery from the Great Recession, we should not be looking at the wartime experience of the 1940s as a guide.

I quite agree with the bottom line. (See especially my posts “A Keynesian Fantasy Land” and “The Keynesian Fallacy and Regime Uncertainty.”) But there is reason to believe that the glut of saving during World War II helped to fuel the post-war recovery. (See my posts “How the Great Depression Ended” and “Does ‘Pent Up’ Demand Explain the Post-War Recovery?“)

*     *     *

Highly recommended: “What Difference Would Banning Guns Make?” at Political Calculations. The answer is “not much, if any.” Violence will out, especially when the demographics are right (or wrong, if you will). Which leads to my post “Crime, Explained.”

*     *    *

A Bipartisan Nation of Beneficiaries” (The Pew Report, December 18, 2012) suggests (unsurprisingly) that

a majority of Americans (55%) have received government benefits from at least one of the six best-known federal entitlement programs.

The survey also finds that most Democrats (60%) and Republicans (52%) say they have benefited from a major entitlement program at some point in their lives. So have nearly equal shares of self-identifying conservatives (57%), liberals (53%) and moderates (53%).

What choice is there when the state (a) robs us blind and (b) penalizes initiative and success? In those conditions, most of us respond as one would expect — by feeding at the public trough. See, for example, “The Interest-Group Paradox.”

*     *     *

An increasingly regulated economy, that’s what we have, according to “Counting All the U.S. Government’s Regulations” (Political Calculations, October 18, 2012). And a heavy price we pay for it, as I’ve documented in “The Price of Government, Once More,” and the many posts linked to therein.

*     *     *

UPDATES:

Rich Lowry of National Review, famous mainly for having fired John Derbyshire, continues his attack on what Timothy Sandefur calls “Doughface libertarians”:

… Lincoln said, “I have no purpose to introduce political and social equality between the white and black races.” How could he say such a thing? Well, he said it in his debates with Stephen Douglas, when he was playing defense…. (“The Rancid Abraham Lincoln-Haters of the Libertarian Right,” The Daily Beast, June 17, 2013)

Not so fast, Mr. Lowry. Lincoln wasn’t just playing defense. See “The Hidden Tragedy of the Assassination of Abraham Lincoln,” wherein Lincoln’s plan for the colonization of blacks is discussed.

*     *     *

From Michael Ruse’s “Does Life Have a Purpose?” (Aeon, June 24, 2013):

… Today’s scientists are pretty certain that the problem of teleology at the individual organism level has been licked. Darwin really was right. Natural selection explains the design-like nature of organisms and their characteristics, without any need to talk about final causes. On the other hand, no natural selection lies behind mountains and rivers and whole planets. They are not design-like. That is why teleological talk is inappropriate….

This reminds me of Sandefur’s post, “Teleology without God,” which I addressed in “Evolution, Human Nature, and ‘Natural Rights’” and “More Thoughts about Evolutionary Teleology.”