economics

Where We Are, Economically

UPDATED (10/26/12)

The advance estimate of GDP for the third quarter of 2012 has been released. Real growth continues to slog along at about 2 percent. I have updated the graph, but the text needs no revision.

*  *   *

It occurred to me that the trend line in the second graph of “The Economy Slogs Along” is misleading. It is linear, when it should be curvilinear. Here is a better version:


Derived from the October 26, 2012 release of GDP estimates by the Bureau of Economic Analysis. (Contrary to the position of the National Bureau of Economic Research, there was no recession in 2000-2001. For my definition of a recession, see “Economic Growth Since World War II.”)

The more descriptive regression line underscores the moral of “Obama’s Economic Record in Perspective,” which is this:

The claims by Obama and his retinue about O’s supposed “rescue” of the economy from the abyss of depression are ludicrous. (See, for example, “A Keynesian Fantasy Land,” “The Keynesian Fallacy and Regime Uncertainty,” “Why the “Stimulus” Failed to Stimulate,” “Regime Uncertainty and the Great Recession,” The Real Multiplier,” “The Real Multiplier (II),”The Economy Slogs Along,” and “The Obama Effect: Disguised Unemployment.”) Nevertheless our flannel-mouthed president his sycophants insist that he has done great things for the country, though the only great thing that he could do is to leave it alone.

Obama is not to blame for the Great Recession, but the sluggish recovery is due to his anti-business rhetoric and policies (including Obamacare, among others). All that Obama can rightly take “credit” for is an acceleration of the downward trend of economic growth.

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 Rahn Curve at Work
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”
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
The Deficit Commission’s Deficit of Understanding
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid
The Stagnation Thesis
America’s Financial Crisis Is Now
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
Vulgar Keynesianism and Capitalism
Why Are Interest Rates So Low?
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
Economic Growth Since World War II
More Evidence for the Rahn Curve
The Economy Slogs Along
The Obama Effect: Disguised Unemployment
Obama’s Economic Record in Perspective

Economic Growth Since World War II

As we await (probably in vain) the resumption of robust economic growth, let us see what we can learn from the record since World War II (from 1947, to be precise). The  Bureau of Economic Analysis (BEA) provides  in spreadsheet form (here) quarterly and annual estimates of current- and constant-dollar (year 2005) GDP from 1947 to the present. BEA’s numbers yield several insights about the course of economic growth in the U.S.

I begin with this graph:

The exponential trend line indicates a constant-dollar (real) growth rate for the entire period of 0.81 percent quarterly, or 3.3 percent annually. The actual beginning-to-end annual growth rate is 3.2 percent.

The red bands parallel to the trend line delineate the 99.7% (3-sigma) confidence interval around the trend. GDP has been running at the lower edge of the confidence interval since the first quarter of 2009, that is, since the ascendancy of Barack Obama.

The vertical gray bars represent recessions, which do not correspond precisely to the periods defined as such by the National Bureau of Economic Research (NBER). I define a recession as:

  • two or more consecutive quarters in which real GDP (annualized) is below real GDP (annualized) for an earlier quarter, during which
  • the annual (year-over-year) change in real GDP is negative, in at least one quarter.

For example:

Annualized real GDP in the second quarter of 1953 was $2,366.2 billion (i.e., about $2.4 trillion in year 2005 dollars). Annualized GDP for the next  five quarters: $2,358.1, $2,314.6, $2,303.5, $2,306.4, and $2,332.4 billion, respectively. The U.S. was still in recession (by my definition) even as GDP began to rise from $2,303.5 billion because GDP remained below $2,366.2 billion. The recession (i.e., drop in output) did not end until the fourth quarter of 1954, when annualized GDP reached $2,379.1 billion, thus surpassing the value for the second quarter of 1953. Moreover, the year-over-year change in GDP was negative in the first three quarters of the recession.

Unlike the NBER, I do not locate a recession in 2001. Real GDP, measured quarterly, dropped in the first and third quarters of 2001, but each decline lasted only a quarter. But, whereas the NBER places the Great Recession from December 2007 to June 2009, I date it from the first quarter of 2008 through the third quarter of 2011 (at least).

My method of identifying a recession is more objective and consistent than the NBER’s method, which one economist describes as “The NBER will know it when it sees it.” Moreover, unlike the NBER, I would not presume to pinpoint the first and last months of a recession, given the volatility of GDP estimates:

This graph suggests three things: (1) the uncertainty of quarterly estimates, (2) a declining rate of growth since 1947, and (3) some degree of periodicity in economic growth.

The periodicity, though irregular, can be seen more clearly in the following graph, where the vertical gray bars indicate quarters in which growth is below the declining trend line shown in the preceding graph.

The two preceding graphs lead to two observations:

The following statistics underscore the first point:

Inter-recessionary period Annual  growth rate
1947q4 – 1948q4 4.6%
1950q1 – 1953q2 7.5%
1954q4 – 1957q3 3.9%
1958q4 – 1960q1 3.7%
1961q2 – 1969q3 5.1%
1970q3 – 1973q4 4.4%
1975q4 – 1980q1 4.2%
1981q1 – 1981q3 3.3%
1983q2 – 1990q3 4.2%
1991q4 – 2007q4 3.1%

To put a point on it, here are the rates of growth during the three longest periods of above-trend growth since World War II:

  • 1963q1 – 1966q1 — 6.6%
  • 1983q1 – 1986q1 — 5.1%
  • 1995q3 – 1999q4 — 4.5%

It is hard to deny the almost-constant deceleration of growth in the post-war era — especially the sharper deceleration after 1970 — a deceleration that is embedded in the longer downward trend that began in the early 1900s.

In this connection, I note that the “Clinton boom“ — 3.4 percent real growth from 1993 to 2001 — was nothing to write home about, being mainly the product of Clinton’s self-promotion and the average citizen’s ahistorical (if not anti-historical) perspective. The boomlet of the 1990s, whatever its causes, was less impressive than several earlier post-war expansions. In fact, the overall rate of growth from the first quarter of 1947 to the first quarter of 1993 — recessions and all — was 3.4 percent.

What about the lingering Great Recession? It lingers mainly because it has been used — first by Bush, then by Obama — as an excuse for eve more disastrous expansions of the cost and reach of government.

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 Rahn Curve at Work
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”
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
The Deficit Commission’s Deficit of Understanding
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid
The Stagnation Thesis
America’s Financial Crisis Is Now
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
Vulgar Keynesianism and Capitalism
Why Are Interest Rates So Low?
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

Undermining the Free Society

Apropos my earlier post about “Asymmetrical (Ideological) Warfare,” I note this review by Gerald J. Russello of Kenneth Minogue’s The Servile Mind: How Democracy Erodes the Moral Life. As he summarizes Minogue, Russello writes:

The push for equality and ever more rights—two of [democracy's] basic principles—requires a ruling class to govern competing claims; thus the rise of the undemocratic judiciary as the arbiter of many aspects of public life, and of bureaucracies that issue rules far removed from the democratic process. Should this trend continue, Minogue foresees widespread servility replacing the tradition of free government.

This new servility will be based not on oppression, but on the conviction that experts have eliminated any need for citizens to develop habits of self-control, self-government, or what used to be called the virtues.

How has democracy led to “servility,” which is really a kind of oppression? Here is my diagnosis.

It is well understood that voters, by and large, vote irrationally, that is, emotionally, on the basis of “buzz” instead of facts, and inconsistently. (See this, this, and this, for example.) Voters are prone to vote against their own long-run interests because they do not understand the consequences of the sound-bite policies advocated by politicians. American democracy, by indiscriminately granting the franchise — as opposed to limiting it to, say, married property owners over the age of 30 who have children — empowers the run-of-the-mill politician who seeks office (for the sake of prestige, power, and perks) by pandering to the standard, irrational voter.

Rationality is the application of sound reasoning and pertinent facts to the pursuit of a realistic objective (one that does not contradict the laws of nature or human nature). I daresay that most voters are guilty of voting irrationally because they believe in such claptrap as peace through diplomacy, “social justice” through high marginal tax rates, or better health care through government regulation.

To be perfectly clear, the irrationality lies not in favoring peace, “social justice” (whatever that is), health care, and the like. The irrationality lies in uninformed beliefs in such contradictions as peace through unpreparedness for war, “social justice” through soak-the-rich schemes, better health care through greater government control of medicine, etc., etc., etc. Voters whose objectives incorporate such beliefs simply haven’t taken the relatively little time it requires to process what they may already know or have experienced about history, human nature, and social and economic realities.

Why is voters’ irrationality important? Does voting really matter? Well, it’s easy to say that an individual’s vote makes very little difference. But individual votes add up. Every vote cast for a winning political candidate enhances his supposed mandate, which usually is (in his mind) some scheme (or a lot of them) to regulated our lives more than they are already regulated.

That is to say, voters (not to mention those who profess to understand voters) overlook the slippery slope effects of voting for those who promise to “deliver” certain benefits. It is true that the benefits, if delivered, would temporarily increase the well-being of certain voters. But if one group of voters reaps benefits, then another group of voters wants to reap benefits as well. Why? Because votes are not won, nor offices held, by placating a particular class of voter; many other classes of them must also be placated.

The “benefits” sought by voters (and delivered by politicians) are regulatory as well as monetary. Many voters (especially wealthy, paternalistic ones) are more interested in controlling others than they are in reaping government handouts (though they don’t object to that either). And if one group of voters reaps certain regulatory benefits, it follows (as night from day) that other groups also will seek (and reap) regulatory benefits. (Must one be a trained economist to understand this? Obviously not, because most trained economists don’t seem to understand it.)

And then there is the “peace-at-any-price-one-worldcrowd, which is hard to distinguish from the crowd that demands (and delivers) monetary and regulatory “benefits.”

So, here we are:

  • Many particular benefits are bestowed and many regulations are imposed, to the detriment of investors, entrepreneurs, innovators, inventors, and people who simply are willing to work hard to advance themselves. And it is they who are responsible for the economic growth that bestows (or would bestow) more jobs and higher incomes on everyone, from the poorest to the richest.
  • A generation from now, the average American will “enjoy” about one-fourth the real output that would be his absent the advent of the regulatory-welfare state about a century ago.

Americans have, since 1932, voted heavily against their own economic and security interests, and the economic and security interests of their progeny. But what else can you expect when — for those same 78 years — voters have been manipulated into voting against their own interests by politicians, media, “educators,” and “intelligentsia”? What else can you expect when the courts have all too often ratified the malfeasance of those same politicians?

If this is democracy, give me monarchy.

The Illusion of Prosperity and Stability

For reasons I outlined in “The Price of Government,” the post-Civil War boom of 1866-1907 finally gave way to the onslaught of Progressivism. Real GDP grew at the rate of 4.3 percent annually during the post-Civil War boom; it has since grown at an annual rate of 3.3 percent. The difference between the two rates of growth, compounded over a century, is the difference between $13 trillion (2009′s GDP in 2005 dollars) and $41 trillion (2009′s potential GDP in 2005 dollars).

As I said in “The Price of Government,” this disparity

may seem incredible, but scan the lists here and you will find even greater cross-national disparities in per capita GDP. Go here and you will find that real, per capita GDP in 1790 was only 4.6 percent of the value it had attained 218 years later. Our present level of output seems incredible to citizens of impoverished nations, and it would seem no less incredible to an American of 1790. In sum, vast disparities can and do exist, across nations and time.

The main reason for the disparity is the intervention of the federal government in the economic affairs of Americans and their businesses. I put it this way in “The Price of Government”:

What we are seeing [in the present recession and government's response to it] is the continuation of a death-spiral that began in the early 1900s. Do-gooders, worry-warts, control freaks, and economic ignoramuses see something “bad” and — in their misguided efforts to control natural economic forces (which include business cycles) — make things worse. The most striking event in the death-spiral is the much-cited Great Depression, which was caused by government action, specifically the loose-tight policies of the Federal Reserve, Herbert Hoover’s efforts to engineer the economy, and — of course — FDR’s benighted New Deal. (For details, see this, and this.)

But, of course, the worse things get, the greater the urge to rely on government. Now, we have “stimulus,” which is nothing more than an excuse to greatly expand government’s intervention in the economy. Where will it lead us? To a larger, more intrusive government that absorbs an ever larger share of resources that could be put to productive use, and counteracts the causes of economic growth.

One of the ostensible reasons for governmental intervention is to foster economic stability. That was an important rationale for the creation of the Federal Reserve System; it was an implicit rationale for Social Security, which moves income to those who are more likely to spend it; and it remains a key rationale for so-called counter-cyclical spending (i.e., “fiscal policy”) and the onerous regulation of financial institutions.

Has the quest for stability succeeded? If you disregard the Great Depression, and several deep recessions (including the present one), it has. But the price has been high. The green line in the following graph traces real GDP as it would have been had economic growth after 1907 followed the same path as it did in 1866-1907, with all of the ups and down in that era of relatively unregulated “instability.” The red line, which diverges from the green one after 1907, traces real GDP as it has been since government took over the task of ensuring stable prosperity.

Only by overlooking the elephant in the room — the Great Depression — can one assert that government has made the economy more stable. Only because we cannot see the exorbitant price of government can we believe that it has had something to do with our “prosperity.”

What about those fairly sharp downturns along the green line? If it really is important for government to shield us from economic shocks, there are much better ways of getting the job done that they ways now employed. There was no federal income tax during the post-Civil War boom (one of the reasons for the boom). Suppose that in the early 1900s the federal government had been allowed to impose a small, constitutionally limited income tax of, say, 0.5 percent on gross personal incomes over a certain level, measured in constant dollars (with an explicit ban on exemptions, deductions, and other adjustments, to keep it simple and keep interest groups from enriching themselves at the expense of others). Suppose, further, that the proceeds from the tax had a constitutionally limited use: the payment of unemployment benefits for a constitutionally limited time whenever real GDP declined from quarter to quarter.

Perhaps that’s too much clutter for devotees of constitutional simplicity. But wouldn’t the results have been worth the clutter? The primary result would have been growth at a rate close to that of 1866-1907, but with some of the wrinkles ironed out. The secondary result — and an equally important one — would have been the diminution (if not the elimination) of the “need” for governmental intervention in our affairs.

Related posts:
Basic Economics
The Economic and Social Consequences of Government

More about Paternalism

To complement my earlier post, “Beware of Libertarian Paternalists,” I offer the following links:

Pitfalls of Paternalism (Ilya Somin, The Volokh Conspiracy)

Hayek on the Use of Superior Expert Knowledge as a Justification for Paternalism (Ilya Somin, The Volokh Conspiracy)

The Knowledge Problem of New Paternalism (Mario Rizzo, ThinkMarkets)

Little Brother Is Watching You: The New Paternalism on the Slippery Slopes (Mario Rizzo, ThinkMarkets)

New Paternalism on the Slippery Slopes, Part I (Glen Whitman, Agoraphilia)

Be sure to read the posts and articles linked therein.

Does the Minimum Wage Increase Unemployment?

Yes!

I have not a shred of doubt that the minimum wage increases unemployment, especially among the most vulnerable group of workers: males aged 16 to 19.

Anyone who claims that the minimum wage does not affect unemployment among that vulnerable group is guilty of (a) ingesting a controlled substance,  (b) wishing upon a star, or — most likely — (c) indulging in a mindless display of vicarious “compassion.”

Economists have waged a spirited mini-war over the minimum-wage issue, to no conclusive end. But anyone who tells you that a wage increase that is forced on businesses by government will not lead to a rise in unemployment is one of three things: an economist with an agenda, a politician with an agenda, a person who has never run a business. There is considerable overlap among the three categories.

I have run a business, and I have worked for the minimum wage (and less). On behalf of business owners and young male workers, I am here to protest further increases in the minimum wage. My protest is entirely evidence-based — no marching, shouting, or singing for me. Facts are my friends, even if they are inimical to Left-wing economists, politicians, and other members of the reality-challenged camp.

I begin with  time series on unemployment among males — ages 16 to 19 and 20 and older — for the period January 1948 through June 2009. (These time series are available via this page on the BLS website.) If it is true that the minimum wage targets younger males, the unemployment rate for 16 to 19 year-old males (16-19 YO) will rise faster or decrease less quickly than the unemployment rate for 20+ year-old males (20+ YO) whenever the minimum wage is increased. The precise change will depend on such factors as the propensity of young males to attend college — which has risen over time — and the value of the minimum wage in relation to prevailing wage rates for the industries which typically employ low-skilled workers. But those factors should have little influence on observed month-to-month changes in unemployment rates.

I use two methods to estimate the effects of minimum wage on the unemployment rate of 16-19 YO: graphical analysis and linear regression.

I begin by finding the long-term relationship between the unemployment rates for 16-19 YO and 20+ YO. As it turns out, there is a statistical artifact in the unemployment data, an artifact that is unexplained by this BLS document, which outlines changes in methods of data collection and analysis over the years. The relationship between the two time series is stable through March 1959, when it shifts abruptly. The markedness of the shift can be seen in the contrast between figure 1, which covers the entire period, and figures 2 and 3, which subdivide the entire period into two sub-periods.

090725_Minimum wage and unemployment_fig 1

090725_Minimum wage and unemployment_fig 2

090725_Minimum wage and unemployment_fig 3

For the graphical analysis, I use the equations shown in figures 2 and 3 to determine a baseline relationship between the unemployment rate for 20+ YO (“x”) and the unemployment rate for 16-19 YO (“y”). The equation in figure 2 yields a baseline unemployment rate for 16-19 YO for each month from January 1948 through March 1959; the equation in figure 3, a baseline unemployment rate for 16-19 YO for each month from April 1959 through June 2009. Combining the results, I obtain a baseline estimate for the entire period, January 1948 through June 2009.

I then find, for each month, a residual value for unemployment among 16-19 YO. The residual (actual value minus baseline estimate) is positive when unemployment among 16-19 YO is higher than expected, and negative when 16-19 YO unemployment is lower than expected. Again, this is unemployment of 16-19 YO relative to 20+ YO. Given the stable baseline relationships between the two unemployment rates (when the time series are subdivided as described above), the values of the residuals (month-to-month deviations from the baseline) can reasonably be attributed to changes in the minimum wage.

For purposes of my analysis, I adopt the following conventions:

  • A change in the minimum wage  begins to affect unemployment among 16-19 YO in the month it becomes law, when the legally effective date falls near the start of the month. A change becomes effective in the month following its legally effective date when that date falls near the end of the month. (All of the effective dates have thus far been on the 1st, 3rd, 24th, and 25th of a month.)
  • In either event, the change in the minimum wage affects unemployment among 16-19 YO for 6 months, including the month in which it becomes effective, as reckoned above.

In other words, I assume that employers (by and large) do not anticipate the minimum wage and begin to fire employees before the effective date of an increase. I assume, rather, that employers (by and large) respond to the minimum wage by failing to hire 16-19 YO who are new to the labor force. Finally, I assume that the non-hiring effect lasts about 6 months — in which time prevailing wage rates for 16-19 YO move toward toward (and perhaps exceed) the minimum wage, thus eventually blunting the effect of the minimum wage on unemployment.

I relax the 6-month rule during eras when the minimum wage rises annually, or nearly so. I assume that during such eras employers anticipate scheduled increases in the minimum wage by continuously suppressing their demand for 16-19 YO labor. (There are four such eras: the first runs from September 1963 through July 1971; the second, from May 1974 through June 1981; the third, from May 1996 through February 1998; the fourth, from July 2007 to the present, and presumably beyond.)

With that prelude, I present the following graph of the relationship between residual unemployment among 16-19 YO and the effective periods of minimum wage increases.

090725_Minimum wage and unemployment_fig 4

The jagged, green and red line represents the residual unemployment rate for 16-19 YO. The green portions of the line denote periods in which the minimum wage is ineffective; the red portions of the line denote periods in which the minimum wage is effective. The horizontal gray bands at +1 and -1 denote the normal range of the residuals, one standard deviation above and below the mean, which is zero.

It is obvious that higher residuals (greater unemployment) are generally associated with periods in which the minimum wage is effective; that is, most portions of the line that lie above the normal range are red. Conversely, lower residuals (less unemployment) are generally associated with periods in which the minimum wage is ineffective; that is, most portions of the line that lie below the normal range are green. (Similar results obtain for variations in which employers anticipate the minimum wage increase, for example, by firing or reduced hiring in the preceding 3 months, while the increase affects employment for only 3 months after it becomes law.)

Having shown that there is an obvious relationship between 16-19 YO unemployment and the minimum wage, I now quantify it. Because of the distinctly different relationships between 16-19 YO unemployment and 20+ YO unemployment in the two sub-periods (January 1948 – March 1959, April 1959 – June 2009), I estimate a separate regression equation for each sub-period.

For the first sub-period, I find the following relationship:

Unemployment rate for 16-19 YO (in percentage points) = 3.913 + 1.828 x unemployment rate for 20+ YO + 0.501 x dummy variable for minimum wage (1 if in effect, 0 if not)

Adjusted R-squared: 0.858; standard error of the estimate: 9 percent of the mean value of 16-19 YO unemployment rate; t-statistics on the intercept and coefficients: 14.663, 28.222, 1.635.

Here is the result for the second sub-period:

Unemployment rate for 16-19 YO (in percentage points) = 8.940 + 1.528 x unemployment rate for 20+ YO + 0.610 x dummy variable for minimum wage (1 if in effect, 0 if not)

Adjusted R-squared: 0.855; standard error of the estimate: 6 percent of the mean value of 16-19 YO unemployment rate; t-statistics on the intercept and coefficients: 62.592, 59.289, 7.495.

On the basis of the robust results for the second sub-period, which is much longer and current, I draw the following conclusions:

  • The baseline unemployment rate for 16-19 YO is about 9 percent.
  • Unemployment around the baseline changes by about 1.5 percentage points for every percentage-point change in the unemployment rate for 20+ YO.
  • The minimum wage, when effective, raises the unemployment rate for 16-19 YO by 0.6 percentage points.

Therefore, given the current number of 16 to 19 year old males in the labor force (about 3.3 million), some 20,000 will lose or fail to find jobs because of yesterday’s boost in the minimum wage. Yes, 20,000 is a small fraction of 3.3 million (0.6 percent), but it is a real, heartbreaking number — 20,000 young men for whom almost any hourly wage would be a blessing.

But the “bleeding hearts” who insist on setting a minimum wage, and raising it periodically, don’t care about those 20,000 young men — they only care about their cheaply won reputation for “compassion.”

UPDATE (09/08/09):

A relevant post by Don Boudreaux:

Here’s a second letter that I sent today to the New York Times:

Gary Chaison misses the real, if unintended, lesson of the Russell Sage Foundation study that finds that low-skilled workers routinely keep working for employers who violate statutory employment regulations such as the minimum-wage (Letters, September 8).  This real lesson is that economists’ conventional wisdom about the negative consequences of the minimum-wage likely is true after all.

Fifteen years ago, David Card and Alan Krueger made headlines by purporting to show that a higher minimum-wage, contrary to economists’ conventional wisdom, doesn’t reduce employment of low-skilled workers.  The RSF study casts significant doubt on Card-Krueger.  First, because the minimum-wage itself is circumvented in practice, its negative effect on employment is muted, perhaps to the point of becoming statistically imperceptible.  Second, employers’ and employees’ success at evading other employment regulations – such as mandatory overtime pay – counteracts the minimum-wage’s effect of pricing many low-skilled workers out of the job market.

Sincerely,
Donald J. Boudreaux

Fooled by Non-Randomness

Nassim Nicholas Taleb, in his best-selling Fooled by Randomness, charges human beings with the commission of many perceptual and logical errors. One reviewer captures the point of the book, which is to

explore luck “disguised and perceived as non-luck (that is, skills).” So many of the successful among us, he argues, are successful due to luck rather than reason. This is true in areas beyond business (e.g. Science, Politics), though it is more obvious in business.

Our inability to recognize the randomness and luck that had to do with making successful people successful is a direct result of our search for pattern. Taleb points to the importance of symbolism in our lives as an example of our unwillingness to accept randomness. We cling to biographies of great people in order to learn how to achieve greatness, and we relentlessly interpret the past in hopes of shaping our future.

Only recently has science produced probability theory, which helps embrace randomness. Though the use of probability theory in practice is almost nonexistent.

Taleb says the confusion between luck and skill is our inability to think critically. We enjoy presenting conjectures as truth and are not equipped to handle probabilities, so we attribute our success to skill rather than luck.

Taleb writes in a style found all too often on best-seller lists: pseudo-academic theorizing “supported” by selective (often anecdotal) evidence. I sometimes enjoy such writing, but only for its entertainment value. Fooled by Randomness leaves me unfooled, for several reasons.

THE FUNDAMENTAL FLAW

The first reason that I am unfooled by Fooled… might be called a meta-reason. Standing back from the book, I am able to perceive its essential defect: According to Taleb, human affairs — especially economic affairs, and particularly the operations of financial markets — are dominated by randomness. But if that is so, only a delusional person can truly claim to understand the conduct of human affairs. Taleb claims to understand the conduct of human affairs. Taleb is therefore either delusional or omniscient.

Given Taleb’s humanity, it is more likely that he is delusional — or simply fooled, but not by randomness. He is fooled because he proceeds from the assumption of randomness instead of exploring the ways and means by which humans are actually capable of shaping events. Taleb gives no more than scant attention to those traits which, in combination, set humans apart from other animals: self-awareness, empathy, forward thinking, imagination, abstraction, intentionality, adaptability, complex communication skills, and sheer brain power. Given those traits (in combination) the world of human affairs cannot be random. Yes, human plans can fail of realization for many reasons, including those attributable to human flaws (conflict, imperfect knowledge, the triumph of hope over experience, etc.). But the failure of human plans is due to those flaws — not to the randomness of human behavior.

What Taleb sees as randomness is something else entirely. The trajectory of human affairs often is unpredictable, but it is not random. For it is possible to find patterns in the conduct of human affairs, as Taleb admits (implicitly) when he discusses such phenomena as survivorship bias, skewness, anchoring, and regression to the mean.

A DISCOURSE ON RANDOMNESS

What Is It?

Taleb, having bloviated for dozens of pages about the failure of humans to recognize randomness, finally gets around to (sort of) defining randomness on pages 168 and 169 (of the 2005 paperback edition):

…Professor Karl Pearson … devised the first test of nonrandomness (it was in reality a test of deviation from normality, which for all intents and purposes, was the same thing). He examined millions of runs of [a roulette wheel] during the month of July 1902. He discovered that, with high degree of statistical significance … the runs were not purely random…. Philosophers of statistics call this the reference case problem to explain that there is no true attainable randomness in practice, only in theory….

…Even the fathers of statistical science forgot that a random series of runs need not exhibit a pattern to look random…. A single random run is bound to exhibit some pattern — if one looks hard enough…. [R]eal randomness does not look random.

The quoted passage illustrates nicely the superficiality of Fooled by Randomness, and (I must assume) the muddledness of Taleb’s thinking:

  • He accepts a definition of randomness which describes the observation of outcomes of mechanical processes (e.g., the turning of a roulette wheel, the throwing of dice) that are designed to yield random outcomes. That is, randomness of the kind cited by Taleb is in fact the result of human intentions.
  • If “there is no true attainable randomness,” why has Taleb written a 200-plus page book about randomness?
  • What can he mean when he says “a random series of runs need not exhibit a pattern to look random”? The only sensible interpretation of that bit of nonsense would be this: It is possible for a random series of runs to contain what looks like a pattern. But remember that the random series of runs to which Taleb refers is random only because humans intended its randomness.
  • It is true enough that “A single random run is bound to exhibit some pattern — if one looks hard enough.” Sure it will. But it remains a single random run of a process that is intended to produce randomness, which is utterly unlike such events as transactions in financial markets.

One of the “fathers of statistical science” mentioned by Taleb (deep in the book’s appendix) is Richard von Mises, who in Probability Statistics and Truth defines randomness as follows:

First, the relative frequencies of the attributes [e.g. heads and tails] must possess limiting values [i.e., converge on 0.5, in the case of coin tosses]. Second, these limiting values must remain the same in all partial sequences which may be selected from the original one in an arbitrary way. Of course, only such partial sequences can be taken into consideration as can be extended indefinitely, in the same way as the original sequence itself. Examples of this kind are, for instance, the partial sequences formed by all odd members of the original sequence, or by all members for which the place number in the sequence is the square of an integer, or a prime number, or a number selected according to some other rule, whatever it may be. (pp. 24-25 of the 1981 Dover edition, which is based on the author’s 1951 edition)

Gregory J. Chaitin, writing in Scientific American (“Randomness and Mathematical Proof,” vol. 232, no. 5 (May 1975), pp. 47-52), offers this:

We are now able to describe more precisely the differences between the[se] two series of digits … :

01010101010101010101
01101100110111100010

The first could be specified to a computer by a very simple algorithm, such as “Print 01 ten times.” If the series were extended according to the same rule, the algorithm would have to be only slightly larger; it might be made to read, for example, “Print 01 a million times.” The number of bits in such an algorithm is a small fraction of the number of bits in the series it specifies, and as the series grows larger the size of the program increases at a much slower rate.

For the second series of digits there is no corresponding shortcut. The most economical way to express the series is to write it out in full, and the shortest algorithm for introducing the series into a computer would be “Print 01101100110111100010.” If the series were much larger (but still apparently patternless), the algorithm would have to be expanded to the corresponding size. This “incompressibility” is a property of all random numbers; indeed, we can proceed directly to define randomness in terms of incompressibility: A series of numbers is random if the smallest algorithm capable of specifying it to a computer has about the same number of bits of information as the series itself [emphasis added].

This is another way of saying that if you toss a balanced coin 1,000 times the only way to describe the outcome of the tosses is to list the 1,000 outcomes of those tosses. But, again, the thing that is random is the outcome of a process designed for randomness.

Taking Mises and Chaitin’s definitions together, we can define random events as events which are repeatable, convergent on a limiting value, and truly patternless over a large number of repetitions. Evolving economic events (e.g., stock-market trades, economic growth) are not alike (in the way that dice are, for example), they do not converge on limiting values, and they are not patternless, as I will show.

In short, Taleb fails to demonstrate that human affairs in general or financial markets in particular exhibit randomness, properly understood.

Randomness and the Physical World

Nor are we trapped in a random universe. Returning to Mises, I quote from the final chapter of Probability, Statistics and Truth:

We can only sketch here the consequences of these new concepts [e.g., quantum mechanics and Heisenberg's principle of uncertainty] for our general scientific outlook. First of all, we have no cause to doubt the usefulness of the deterministic theories in large domains of physics. These theories, built on a solid body of experience, lead to results that are well confirmed by observation. By allowing us to predict future physical events, these physical theories have fundamentally changed the conditions of human life. The main part of modern technology, using this word in its broadest sense, is still based on the predictions of classical mechanics and physics. (p. 217)

Even now, almost 60 years on, the field of nanotechnology is beginning to hardness quantum mechanical effects in the service of a long list of useful purposes.

The physical world, in other words, is not dominated by randomness, even though its underlying structures must be described probabilistically rather than deterministically.

Summation and Preview

A bit of unpredictability (or “luck”) here and there does not make for a random universe, random lives, or random markets. If a bit of unpredictability here and there dominated our actions, we wouldn’t be here to talk about randomness — and Taleb wouldn’t have been able to marshal his thoughts into a published, marketed, and well-sold book.

Human beings are not “designed” for randomness. Human endeavors can yield unpredictable results, but those results do not arise from random processes, they derive from skill or the lack therof, knowledge or the lack thereof (including the kinds of self-delusions about which Taleb writes), and conflicting objectives.

An Illustration from Life

To illustrate my position on randomness, I offer the following digression about the game of baseball.

At the professional level, the game’s poorest players seldom rise above the low minor leagues. But even those poorest players are paragons of excellence when compared with the vast majority of American males of about the same age. Did those poorest players get where they were because of luck? Perhaps some of them were in the right place at the right time, and so were signed to minor league contracts. But their luck runs out when they are called upon to perform in more than a few games. What about those players who weren’t in the right place at the right time, and so were overlooked in spite of skills that would have advanced them beyond the rookie leagues? I have no doubt that there have been many such players. But, in the main, professional baseball abounds with the lion’s share of skilled baseball players who are there because they intend to be there, and because baseball clubs intend for them to be there.

Now, most minor leaguers fail to advance to the major leagues, even for the proverbial “cup of coffee” (appearing in few games at the end of the major-league season, when teams are allowed to expand their rosters following the end of the minor-league season). Does “luck” prevent some minor leaguers from advancement to “the show” (the major leagues)? Of course. Does “luck” result in the advancement of some minor leaguers to “the show”? Of course. But “luck,” in this context, means injury, illness, a slump, a “hot” streak, and the other kinds of unpredictable events that ballplayers are subject to. Are the events random? Yes, in the sense that they are unpredictable, but I daresay that most baseball players do not succumb to bad luck or advance very for or for very long because of good luck. In fact, ballplayers who advance to the major leagues, and then stay there for more than a few seasons, do so because they possess (and apply) greater skill than their minor-league counterparts. And make no mistake, each player’s actions are so closely watched and so extensively quantified that it isn’t hard to tell when a player is ready to be replaced.

It is true that a player may experience “luck” for a while during a season, and sometimes for a whole season. But a player will not be consistently “lucky” for several seasons. The length of his career (barring illness, injury, or voluntary retirement), and his accomplishments during that career, will depend mainly on his inherent skills and his assiduousness in applying those skills.

No one believes that Ty Cobb, Babe Ruth, Ted Williams, Christy Matthewson, Warren Spahn, and the dozens of other baseball players who rank among the truly great were lucky. No one believes that the vast majority of the the tens of thousands of minor leaguers who never enjoyed more than the proverbial cup of coffee were unlucky. No one believes that the vast majority of the millions of American males who never made it to the minor leagues were unlucky. Most of them never sought a career in baseball; those who did simply lacked the requisite skills.

In baseball, as in life, “luck” is mainly an excuse and rarely an explanation. We prefer to apply “luck” to outcomes when we don’t like the true explanations for them. In the realm of economic activity and financial markets, one such explanation (to which I will come) is the exogenous imposition of governmental power.

ARE ECONOMIC AND FINANCIAL OUTCOMES TRULY RANDOM?

They Cannot Be, Given Competition

Returning to Taleb’s main theme — the randomness of economic and financial events — I quote this key passage (my comments are in brackets and boldface):

…Most of [Bill] Gates’[s] rivals have an obsessive jealousy of his success. They are maddened by the fact that he managed to win so big while many of them are struggling to make their companies survive. [These are unsupported claims that I include only because they set the stage for what follows.]

Such ideas go against classical economic models, in which results either come from a precise reason (there is no account for uncertainty) or the good guy wins (the good guy is the one who is most skilled and has some technical superiority). [The "good guy" theory would come as a great surprise to "classical" economists, who quite well understood imperfect competition based on product differentiation and monopoly based on (among other things) early entry into a market.] Economists discovered path-dependent effects late in their game [There is no "late" in a "game" that had no distinct beginning and has no pre-ordained end.], then tried to publish wholesale on the topic that otherwise be bland and obvious. For instance, Brian Arthur, an economist concerned with nonlinearities at the Santa Fe Institute [What kinds of nonlinearities are found at the Santa Fe Institute?], wrote that chance events coupled with positive feedback other than technological superiority will determine economic superiority — not some abstrusely defined edge in a given area of expertise. [It would come as no surprise to economists -- even "classical" ones -- that many factors aside from technical superiority determine market outcomes.] While early economic models excluded randomness, Arthur explained how “unexpected orders, chance meetings with lawyers, managerial whims … would help determine which ones acheived early sales and, over time, which firms dominated.”

Regarding the final sentence of the quoted passage, I refer back to the example of baseball. A person or a firm may gain an opportunity to succeed because of the kinds of “luck” cited by Brian Arthur, but “good luck” cannot sustain an incompetent performer for very long.  And when “bad luck” happens to competent individuals and firms they are often (perhaps usually) able to overcome it.

While overplaying the role of luck in human affairs, Taleb underplays the role of competition when he denigrates “classical economic models,” in which competition plays a central role. “Luck” cannot forever outrun competition, unless the game is rigged by governmental intervention, namely, the writing of regulations that tend to favor certain competitors (usually market incumbents) over others (usually would-be entrants). The propensity to regulate at the behest of incumbents (who plead “public interest,” of course) is a proof of the power of competition to shape economic outcomes. It is loathed and feared, and yet it leads us in the direction to which classical economic theory points: greater output and lower prices.

Competition is what ensures that (for the most part) the best ballplayers advance to the major leagues. It’s what keeps “monopolists” like Microsoft hopping (unless they have a government-guaranteed monopoly), because even a monopolist (or oligopolist) can face competition, and eventually lose to it — witness the former “Big Three” auto makers, many formerly thriving chain stores (from Kresge’s to Montgomery Ward’s), and numerous other brand names of days gone by. If Microsoft survives and thrives, it will be because it actually offers consumers more value for their money, either in the way of products similar to those marketed by Microsoft or in entirely new products that supplant those offered by Microsoft.

Monopolists and oligopolists cannot survive without constant innovation and attention to their customers’ needs.Why? Because they must compete with the offerors of all the other goods and services upon which consumers might spend their money. There is nothing — not even water — which cannot be produced or delivered in competitive ways. (For more, see this.)

The names of the particular firms that survive the competitive struggle may be unpredictable, but what is predictable is the tendency of competitive forces toward economic efficiency. In other words, the specific outcomes of economic competition may be unpredictable (which is not a bad thing), but the general result — efficiency — is neither unpredictable nor a manifestation of randomness or “luck.”

Taleb, had he broached the subject of competition would (with his hero George Soros) denigrate it, on the ground that there is no such thing as perfect competition. But the failure of competitive forces to mimic the model of perfect competition does not negate the power of competition, as I have summarized it here. Indeed, the failure of competitive forces to mimic the model of perfect competition is not a failure, for perfect competition is unattainable in practice, and to hold it up as a measure of the effectiveness of market forces is to indulge in the Nirvana fallacy.

In any event, Taleb’s myopia with respect to competition is so complete that he fails to mention it, let alone address its beneficial effects (even when it is less than perfect). And yet Taleb dares to dismiss as a utopist Milton Friedman (p. 272) — the same Milton Friedman who was among the twentieth century’s foremost advocates of the benefits of competition.

Are Financial Markets Random?

Given what I have said thus far, I find it almost incredible that anyone believes in the randomness of financial markets. It is unclear where Taleb stands on the random-walk hypothesis, but it is clear that he believes financial markets to be driven by randomness. Yet, contradictorily, he seems to attack the efficient-markets hypothesis (see pp. 61-62), which is the foundation of the random-walk hypothesis.

What is the random-walk hypothesis? In brief, it is this: Financial markets are so efficient that they instantaneously reflect all information bearing on the prices of financial instruments that is then available to persons buying and selling those instruments. (The qualifier “then available to persons buying and selling those instruments” leaves the door open for [a] insider trading and [b] arbitrage, due to imperfect knowledge on the part of some buyers and/or sellers.) Because information can change rapidly and in unpredictable ways, the prices of financial instruments move randomly. But the random movement is of a very special kind:

If a stock goes up one day, no stock market participant can accurately predict that it will rise again the next. Just as a basketball player with the “hot hand” can miss the next shot, the stock that seems to be on the rise can fall at any time, making it completely random.

And, therefore, changes in stock prices cannot be predicted.

Note, however, the focus on changes. It is that focus which creates the illusion of randomness and unpredictability. It is like hoping to understand the movements of the planets around the sun by looking at the random movements of a particle in a cloud chamber.

When we step back from day-to-day price changes, we are able to see the underlying reality: prices (instead of changes) and price trends (which are the opposite of randomness). This (correct) perspective enables us to see that stock prices (on the whole) are not random, and to identify the factors that influence the broad movements of the stock market.
For one thing, if you look at stock prices correctly, you can see that they vary cyclically. Here is a telling graphic (from “Efficient-market hypothesis” at Wikipedia):

Returns on stocks vs. PE ratioPrice-Earnings ratios as a predictor of twenty-year returns based upon the plot by Robert Shiller (Figure 10.1,[18] source). The horizontal axis shows the real price-earnings ratio of the S&P Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-year mean of inflation-adjusted earnings). The vertical axis shows the geometric average real annual return on investing in the S&P Composite Stock Price Index, reinvesting dividends, and selling twenty years later. Data from different twenty-year periods is color-coded as shown in the key. See also ten-year returns. Shiller states that this plot “confirms that long-term investors—investors who commit their money to an investment for ten full years—did do well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low.”[18] This correlation between price to earnings ratios and long-term returns is not explained by the efficient-market hypothesis.

Why should stock prices tend to vary cyclically? Because stock prices generally are driven by economic growth (i.e., changes in GDP), and economic growth is strongly cyclical. (See this post.)

More fundamentally, the economic outcomes reflected in stock prices aren’t random, for they depend mainly on intentional behavior along well-rehearsed lines (i.e., the production and consumption of goods and services in ways that evolve over time). Variations in economic behavior, even when they are unpredictable, have explanations; for example:

  • Innovation and capital investment spur the growth of economic output.
  • Natural disasters slow the growth of economic output (at least temporarily) because they absorb resources that could have gone to investment  (as well as consumption).
  • Governmental interventions (taxation and regulation), if not reversed, dampen growth permanently.

There is nothing in those three statements that hasn’t been understood since the days of Adam Smith. Regarding the third statement, the general slowing of America’s economic growth since the advent of the Progressive Era around 1900 is certainly not due to randomness, it is due to the ever-increasing burden of taxation and regulation imposed on the economy — an entirely predictable result, and certainly not a random one.

In fact, the long-term trend of the stock market (as measured by the S&P 500) is strongly correlated with GDP. And broad swings around that trend can be traced to governmental intervention in the economy. The following graph shows how the S&P 500, reconstructed to 1870, parallel constant-dollar GDP:

The next graph shows the relationship more clearly.

090711_Real S&P 500 vs Real GDP

090711_Real S&P 500 vs Real GDP_2

The wild swings around the trend line began in the uncertain aftermath of World War I, which saw the imposition of production and price controls. The swings continued with the onset of the Great Depression (which can be traced to governmental action), the advent of the anti-business New Deal, and the imposition of production and price controls on a grand scale during World War II. The next downswing was occasioned by the culmination the Great Society, the “oil shocks” of the early 1970s, and the raging inflation that was touched off by — you guessed it — government policy. The latest downswing is owed mainly to the financial crisis born of yet more government policy: loose money and easy loans to low-income borrowers.

And so it goes, wildly but predictably enough if you have the faintest sense of history. The moral of the story: Keep your eye on government and a hand on your wallet.

CONCLUSION

There is randomness in economic affairs, but they are not dominated by randomness. They are dominated by intentions, including especially the intentions of the politicians and bureaucrats who run governments. Yet, Taleb has no space in his book for the influence of their deeds economic activity and financial markets.

Taleb is right to disparage those traders (professional and amateur) who are lucky enough to catch upswings, but are unprepared for downswings. And he is right to scoff at their readiness to believe that the current upswing (uniquely) will not be followed by a downswing (“this time it’s different”).

But Taleb is wrong to suggest that traders are fooled by randomness. They are fooled to some extent by false hope, but more profoundly by their inablity to perceive the economic damage wrought by government. They are not alone of course; most of the rest of humanity shares their perceptual failings.

Taleb, in that respect, is only somewhat different than most of the rest of humanity. He is not fooled by false hope, but he is fooled by non-randomness — the non-randomness of government’s decisive influence on economic activity and financial markets. In overlooking that influence he overlooks the single most powerful explanation for the behavior of markets in the past 90 years.

Beware of Libertarian Paternalists

I have written extensively about paternalism of the so-called libertarian variety. (See this post and the posts linked therein.) Glen Whitman, in two recent posts at Agoraphilia, renews his attack on “libertarian paternalism,” the main proponents of which are Cass Sunstein and Richard Thaler (S&T). In the first of the two posts, Whitman writes:

[Thaler] continues to disregard the distinction between public and private action.

Some critics contend that behavioral economists have neglected the obvious fact that bureaucrats make errors, too. But this misses the point. After all, wouldn’t you prefer to have a qualified, albeit human, technician inspect your aircraft’s engines rather than do it yourself?

The owners of ski resorts hire experts who have previously skied the runs, under various conditions, to decide which trails should be designated for advanced skiers. These experts know more than a newcomer to the mountain. Bureaucrats are human, too, but they can also hire experts and conduct research.Here we see two of Thaler’s favorite stratagems deployed at once. First, he relies on a deceptively innocuous, private, and non-coercive example to illustrate his brand of paternalism. Before it was cafeteria dessert placement; now it’s ski-slope markings. Second, he subtly equates private and public decision makers without even mentioning their different incentives. In this case, he uses “bureaucrats” to refer to all managers, regardless of whether they manage private or public enterprises.

The distinction matters. The case of ski-slope markings is the market principle at work. Skiers want to know the difficulty of slopes, and so the owners of ski resorts provide it. They have a profit incentive to do so. This is not at all coercive, and it is no more “paternalist” than a restaurant identifying the vegetarian dishes.

Public bureaucrats don’t have the same incentives at all. They don’t get punished by consumers for failing to provide information, or for providing the wrong information. They don’t suffer if they listen to the wrong experts. They face no competition from alternative providers of their service. They get to set their own standards for “success,” and if they fail, they can use that to justify a larger budget.

And Thaler knows this, because these are precisely the arguments made by the “critics” to whom he is responding. His response is just a dodge, enabled by his facile use of language and his continuing indifference – dare I say hostility? – to the distinction between public and private.

In the second of the two posts, Whitman says:

The advocates of libertarian paternalism have taken great pains to present their position as one that does not foreclose choice, and indeed even adds choice. But this is entirely a matter of presentation. They always begin with non-coercive and privately adopted measures, such as the ski-slope markings in Thaler’s NY Times article. And when challenged, they resolutely stick to these innocuous examples (see this debate between Thaler and Mario Rizzo, for example). But if you read Sunstein & Thaler’s actual publications carefully, you will find that they go far beyond non-coercive and private measures. They consciously construct a spectrum of “libertarian paternalist” policies, and at one end of this spectrum lies an absolutely ban on certain activities, such as motorcycling without a helmet. I’m not making this up!…

[A]s Sunstein & Thaler’s published work clearly indicates, this kind of policy [requiring banks to offer "plain vanilla" mortgages] is the thin end of the wedge. The next step, as outlined in their articles, is to raise the cost of choosing other options. In this case, the government could impose more and more onerous requirements for opting out of the “plain vanilla” mortgage: you must fill out extra paperwork, you must get an outside accountant, you must have a lawyer present, you must endure a waiting period, etc., etc. Again, this is not my paranoid imagination at work. S&T have said explicitly that restrictions like these would count as “libertarian paternalism” by their definition….

The problem is that S&T’s “libertarian paternalism” is used almost exclusively to advocate greater intervention, not less. I have never, for instance, seen S&T push for privatization of Social Security or vouchers in education. I have never seen them advocate repealing a blanket smoking ban and replacing it with a special licensing system for restaurants that want to allow their customers to smoke. If they have, I would love to see it.

In their articles, S&T pay lip service to the idea that libertarian paternalism lies between hard paternalism and laissez faire, and thus that it could in principle be used to expand choice. But look at the actual list of policies they’ve advocated on libertarian paternalist grounds, and see where their real priorities lie.

S&T are typical “intellectuals,” in that they presume to know how others should lead their lives — a distinctly non-libertarian attitude. It is, in fact, a hallmark of “liberalism.” In an earlier post I had this to say about the founders of “liberalism” — John Stuart Mill, Thomas Hill Green, and Leonard Trelawney Hobhouse:

[W]e are met with (presumably) intelligent persons who believe that their intelligence enables them to peer into the souls of others, and to raise them up through the blunt instrument that is the state.

And that is precisely the mistake that lies at heart of what we now call “liberalism” or “progressivism.”  It is the three-fold habit of setting oneself up as an omniscient arbiter of economic and social outcomes, then castigating the motives and accomplishments of the financially successful and socially “well placed,” and finally penalizing financial and social success through taxation and other regulatory mechanisms (e.g., affirmative action, admission quotas, speech codes, “hate crime” legislation”). It is a habit that has harmed the intended beneficiaries of government intervention, not just economically but in other ways, as well….

The other ways, of course, include the diminution of social liberty, which is indivisible from economic liberty.

Just how dangerous to liberty are S&T? Thaler is an influential back-room operator, with close ties to the Obama camp. Sunstein is a long-time crony and adviser who now heads the White House’s Office of Information and Regulatory Affairs, where he has an opportunity to enforce “libertarian paternalism”:

…Sunstein would like to control the content of the internet — for our own good, of course. I refer specifically to Sunstein’s “The Future of Free Speech,” in which he advances several policy proposals, including these:

4. . . . [T]he government might impose “must carry” rules on the most popular Websites, designed to ensure more exposure to substantive questions. Under such a program, viewers of especially popular sites would see an icon for sites that deal with substantive issues in a serious way. They would not be required to click on them. But it is reasonable to expect that many viewers would do so, if only to satisfy their curiosity. The result would be to create a kind of Internet sidewalk, promoting some of the purposes of the public forum doctrine. Ideally, those who create Websites might move in this direction on their own. If they do not, government should explore possibilities of imposing requirements of this kind, making sure that no program draws invidious lines in selecting the sites whose icons will be favoured. Perhaps a lottery system of some kind could be used to reduce this risk.

5. The government might impose “must carry” rules on highly partisan Websites, designed to ensure that viewers learn about sites containing opposing views. This policy would be designed to make it less likely for people to simply hear echoes of their own voices. Of course, many people would not click on the icons of sites whose views seem objectionable; but some people would, and in that sense the system would not operate so differently from general interest intermediaries and public forums. Here too the ideal situation would be voluntary action. But if this proves impossible, it is worth considering regulatory alternatives. [Emphasis added.]

A Left-libertarian defends Sunstein’s foray into thought control, concluding that

Sunstein once thought some profoundly dumb policies might be worth considering, but realized years ago he was wrong about that… The idea was a tentative, speculative suggestion he now condemns in pretty strong terms.

Alternatively, in the face of severe criticism of his immodest proposal, Sunstein merely went underground, to await an opportunity to revive his proposal. I somehow doubt that Sunstein, as a confirmed paternalist, truly abandoned it. The proposal certainly was not off-the-cuff, running to 11 longish web pages.  Now, judging by the bulleted list above, the time is right for a revival of Sunstein’s proposal. And there he is, heading the Office of Information and Regulatory Affairs. The powers of that office supposedly are constrained by the executive order that established it. But it is evident that the Obama adminstration isn’t bothered by legal niceties when it comes to the exercise of power. Only a few pen strokes stand between Obama and a new, sweeping executive order, the unconstitutionality of which would be of no import to our latter-day FDR.

It’s just another step beyond McCain-Feingold, isn’t it?

Thus is the tyranny of “libertarian paternalism.” And thus does the death-spiral of liberty proceed.

Why Is Entrepreneurship Declining?

Jonathan Adler of The Volokh Conspiracy addresses evidence that entrepreneurial activity is declining in the United States, noting that

The number of employer firms created annually has declined significantly since 1990, and the numbers of businesses created and those claiming to be self-employed have declined as well.

Adler continues:

What accounts for this trend? [The author of the cited analysis] thinks one reason is “the Wal-Mart effect.”

Large, efficient companies are able to out-compete small start-ups, replacing the independent businesses in many markets. Multiply across the entire economy the effect of a Wal-Mart replacing the independent restaurant, grocery store, clothing store, florist, etc., in a town, and you can see how we end up with a downward trend in entrepreneurship over time.

That may be true. It seems to me that another likely contributor is the increased regulatory burden. It is well documented that regulation can increase industry concentration. Smaller firms typically bear significantly greater regulatory costs per employee than larger firms (see, e.g., this study), and regulatory costs can also increase start-up costs and serve as a barrier to entry. While the rate at which new regulations were adopted slowed somewhat in recent years at the federal level (see here), so long as the cumulative regulatory burden increases, I would expect it to depress small business creation and growth.

Going further than Adler, I attribute the whole sorry mess to the growth of government over the past century. And I fully expect the increased regulatory and tax burdens of Obamanomics to depress innovation, business expansion, business creation, job creation, and the rate of economic growth. As I say here,

Had the economy of the U.S. not been deflected from its post-Civil War course [by the advent of the regulatory-welfare state around 1900], GDP would now be more than three times its present level…. If that seems unbelievable to you, it shouldn’t: $100 compounded for 100 years at 4.4 percent amounts to $7,400; $100 compounded for 100 years at 3.1 percent amounts to $2,100. Nothing other than government intervention (or a catastrophe greater than any we have known) could have kept the economy from growing at more than 4 percent.

What’s next? Unless Obama’s megalomaniac plans are aborted by a reversal of the Republican Party’s fortunes, the U.S. will enter a new phase of economic growth — something close to stagnation. We will look back on the period from 1970 to 2008 [when GDP rose at an annual rate of 3.1 percent] with longing, as we plod along at a growth rate similar to that of 1908-1940, that is, about 2.2 percent. Thus:

  • If GDP grows at 2.2 percent through 2108, it will be 58 percent lower than if we plod on at 3.1 percent.
  • If GDP grows at 2.2 percent for through 2108, it will be only 4 percent of what it would have been had it continued to grow at 4.4 percent after 1907.

The latter disparity may seem incredible, but scan the lists here and you will find even greater cross-national disparities in per capita GDP. Go here and you will find that real, per capita GDP in 1790 was only 3.3 percent of the value it had attained 201 years later. Our present level of output seems incredible to citizens of impoverished nations, and it would seem no less incredible to an American of 201 years ago. But vast disparities can and do exist, across nations and time. We have every reason to believe in a sustained growth rate of 4.4 percent, as against one of 2.2 percent, because we have experienced both.

Selection Bias and the Road to Serfdom

Office-seeking is about one thing: power. (Money is sometimes a motivator, but power is the common denominator of politics.) Selection bias, as I argue here, deters office-seeking and voting by those (relatively rare) individuals who oppose the accrual of governmental power. The inevitable result — as we have seen for decades and are seeing today — is the accrual of governmental power on a fascistic scale.

Selection bias

most often refers to the distortion of a statistical analysis, due to the method of collecting samples. If the selection bias is not taken into account then any conclusions drawn may be wrong.

Selection bias can occur in studies that are based on the behavior of participants. For example, one form of selection bias is

self-selection bias, which is possible whenever the group of people being studied has any form of control over whether to participate. Participants’ decision to participate may be correlated with traits that affect the study, making the participants a non-representative sample. For example, people who have strong opinions or substantial knowledge may be more willing to spend time answering a survey than those who do not.

I submit that the path of politics in America (and elsewhere) reflects a kind of self-selection bias: On the one hand, most politicians run for office in order to exert power. On the other hand, most voters — believing that government can “solve problems” or one kind or another — prefer politicians who promise to use their power to “solve problems.” In other words, power-seekers and their enablers select themselves into the control of government and the receipt of its (illusory) benefits.

Who is self-selected “out”? First, there are libertarian* office-seekers — a rare breed — who must first attain power in order to curb it. Self-selection, in this case, means that individuals who eschew power are unlikely to seek it in the first place, understanding the likely futility of their attempts to curb the power of the offices to which they might be elected. Thus the relative rarity of libertarian candidates.

Second, there are libertarian voters, who — when faced with an overwhelming array of power-seeking Democrats and Republicans — tend not to vote. Their non-voting enables non-libertarian voters to elect non-libertarian candidates, who then accrue more power, thus further discouraging libertarian candidacies and driving more libertarian voters away from the polls.

As the futility of libertarianism becomes increasingly evident, more voters — fearing that they won’t get their “share” of (illusory) benefits — choose to join the scramble for said benefits, further empowering anti-libertarian candidates for office. And thus we spiral into serfdom.

HAPPY INDEPENDENCE DAY!

__________
* I use “libertarian” in this post to denote office-seekers and voters who prefer a government (at all levels) whose powers are (in the main) limited to those necessary for the protection of the people from predators, foreign and domestic.

The Indivisibility of Economic and Social Liberty

John Stuart Mill, whose harm principle I have found wanting, had this right:

If the roads, the railways, the banks, the insurance offices, the great joint-stock companies, the universities, and the public charities, were all of them branches of government; if in addition, the municipal corporations and local boards, with all that now devolves on them, became departments of the central administration; if the employees of all these different enterprises were appointed and paid by the government, and looked to the government for every rise in life; not all the freedom of the press and popular constitution of the legislature would make this or any other country free otherwise in name.

From On Liberty, Chapter 5

Friedrich A. Hayek put it this way:

There is, however, yet another reason why freedom of action, especially in the economic field that is so often represented as being of minor importance, is in fact as important as the freedom of the mind. If it is the mind which chooses the ends of human action, their realization depends on the availability of the required means, and any economic control which gives power over the means also gives power over the ends. There can be no freedom of the press if the instruments of printing are under the control of government, no freedom of assembly if the needed rooms are so controlled, no freedom of movement if the means of transport are a government monopoly, etc. This is the reason why governmental direction of all economic activity, often undertaken in the vain hope of providing more ample means for all purposes, has invariably brought severe restrictions of the ends which the individuals can pursue. It is probably the most significant lesson of the political developments of the twentieth century that control of the material part of life has given government, in what we have learnt to call totalitarian systems, far?reaching powers over the intellectual life. It is the multiplicity of different and independent agencies prepared to supply the means which enables us to choose the ends which we will pursue.

From part 16 of Liberalism
(go here and scroll down)

Fascism and the Future of America

Many commentators, including me, have said that our government is either fascistic or well on its way to being fascistic. What I mean when I refer to fascism in America — and what most commentators mean — is this:

[A] system in which the government leaves nominal ownership of the means of production in the hands of private individuals but exercises control by means of regulatory legislation and reaps most of the profit by means of heavy taxation. In effect, fascism is simply a more subtle form of government ownership than is socialism.

The central point is the scope of government power, which in recent months has gone from big to bigger, with the threat of becoming biggest.

Whether the United States has, at last, descended into full-blown fascism (as defined above) is less important a question than whether and how we might ascend to a better place. I will visit the possible future after assessing our present condition and its causes.

FASCISM OR SOFT DESPOTISM?

Soft despotism is simply a more polite term than fascism (or socialism) for pervasive government control of our affairs:

Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by “a network of small complicated rules” might degrade. Soft despotism is different from despotism (also called ‘hard despotism’) in the sense that it is not obvious to the people. Soft despotism gives people the illusion that they are in control, when in fact they have very little influence over their government. (Source: Wikipedia.)

Soft despotism is “soft” only in that citizens aren’t dragged from their houses at night and executed for imaginary crimes against the state — though they are hauled into court for not wearing seatbelts, for smoking in bars, and for various other niggling offenses to the sensibilities of nanny-staters.

Despite the absence of arbitrary physical punishment, soft despotism is despotism, period. It can be nothing but despotism when the state holds sway over your paycheck, your retirement plan, your medical care, your choice of associates, and thousands of other details of your life — from the drugs you may not buy to the kind of car you can’t drive, from where you can build a house to the features that your house must include.

“Soft despotism,” in other words, is too soft a term for the regime under which we live. I therefore agree with Tom Smith: “Fascism” is a good descriptor of our present condition, so I’ll continue to use it.

THE CAUSES OF OUR PRESENT CONDITION

In spite of my preference for “fascism” to describe our present system of governance, I do concede an advantage to Tocqueville’s usage: It suggests the mechanism by which we got to where we are, that is, “overrun by ‘a network of small complicated rules’.” (Well, the rules aren’t small, but we are overrun by a network of them.) By “we” I don’t mean to imply concerted action on the part of the whole populace. There is a more insidious mechanism at work, which I call the interest-group paradox:

Pork-barrel legislation exemplifies the interest-group paradox in action, though the paradox encompasses much more than pork-barrel legislation. There are myriad government programs that — like pork-barrel projects — are intended to favor particular classes of individuals. Here is a minute sample:

  • Social Security, Medicare, and Medicaid, for the benefit of the elderly (including the indigent elderly)
  • Tax credits and deductions, for the benefit of low-income families, charitable and other non-profit institutions, and home buyers (with mortgages)
  • Progressive income-tax rates, for the benefit of persons in the mid-to-low income brackets
  • Subsidies for various kinds of “essential” or “distressed” industries, such as agriculture and automobile manufacturing
  • Import quotas, tariffs, and other restrictions on trade, for the benefit of particular industries and/or labor unions
  • Pro-union laws (in many States), for the benefit of unions and unionized workers
  • Non-smoking ordinances, for the benefit of bar and restaurant employees and non-smoking patrons….

You may believe that a particular program is worth what it costs — given that you probably have little idea of its direct costs and no idea of its indirect costs. The problem is that millions of your fellow Americans believe the same thing about each of their favorite programs….

It is the interest-group paradox which has brought us to our present condition. Since the advent of American fascism in the New Deal, both of the major parties have vied for votes by promising more things to more interest groups. Many interest groups have been mollified, if not satisfied, but most of their members — not to mention the vast, silent minority of unrepresented voters — have in fact been made worse off because the price of their mollification is the mollification of other interest groups.

Thus we have become freighted with massive tax and regulatory burdens. The cumulative effect of the twin burdens is astoundingly large, and is likely to grow under the present regime:

Had the economy of the U.S. not been deflected from its post-Civil War course [by the advent of the regulatory-welfare state around 1900], GDP would now be more than three times its present level…. If that seems unbelievable to you, it shouldn’t: $100 compounded for 100 years at 4.4 percent amounts to $7,400; $100 compounded for 100 years at 3.1 percent amounts to $2,100. Nothing other than government intervention (or a catastrophe greater than any we have known) could have kept the economy from growing at more than 4 percent.

What’s next? Unless Obama’s megalomaniac plans are aborted by a reversal of the Republican Party’s fortunes, the U.S. will enter a new phase of economic growth — something close to stagnation. We will look back on the period from 1970 to 2008 [when GDP rose at an annual rate of 3.1 percent] with longing, as we plod along at a growth rate similar to that of 1908-1940, that is, about 2.2 percent. Thus:

  • If GDP grows at 2.2 percent through 2108, it will be 58 percent lower than if we plod on at 3.1 percent.
  • If GDP grows at 2.2 percent for through 2108, it will be only 4 percent of what it would have been had it continued to grow at 4.4 percent after 1907.

The latter disparity may seem incredible, but scan the lists here and you will find even greater cross-national disparities in per capita GDP. Go here and you will find that real, per capita GDP in 1790 was only 3.3 percent of the value it had attained 201 years later. Our present level of output seems incredible to citizens of impoverished nations, and it would seem no less incredible to an American of 201 years ago. But vast disparities can and do exist, across nations and time. We have every reason to believe in a sustained growth rate of 4.4 percent, as against one of 2.2 percent, because we have experienced both.

These numbers are only a proxy for the loss of liberty associated with the massive growth of government in the U.S. Economic stagnation is the inevitable outcome of punitive taxes and burdensome regulations, all adopted in the name of one or another “good” cause. Those who cannot stand to see others rise above them are doomed to suffer the consequences of leveling, unless they happen to be co-conspirators in the erection of the fascistic state (or whatever you want to call it).

ANOTHER VIEW OF HOW WE GOT HERE, AND WHERE WE’RE HEADED

James V. DeLong, in a recent article (“The Coming of the Fourth American Republic,The American, April 9, 2009), advances a similar view as to the causes of our present condition:

[T[he New Deal ... radically revised the role of government. The process of economic growth was tumultuous, and the losers and dislocated were constantly appealing against the national political commitment to “let us do.” The crisis of the Great Depression provided a great opportunity, and it was seized. Starting in the 1930s, the theoretical limitations on the authority of governments—national or state—to deal with economic or welfare issues were dissolved, and in the course of fighting for this untrammeled power governments eagerly accepted responsibility for the functioning of the economy and the popular welfare.

...Remaining limits on governmental authority were eliminated by the dialectic of the civil rights revolution, in which the federal power over commerce was expanded to meet moral imperatives, and the new standards were then fed back into regulation of commerce.

Inherent in the expansion of governmental power was the complicated question of how this unbridled power would be exercised. As the reach of any institution expands, especially anything as cumbersome as a government, it becomes impossible for the institution as a whole to exercise its power. Delegation to sub-units is necessary: to agencies, legislative committees and subcommittees, even private groups.

The obvious issue is how these subunits are controlled and directed. The theoretical answer had been provided by the Progressive movement (the real one of the early 20th century, not the current faux version). Much of the Progressive movement’s complaint was that special interests, often corporate, captured the governmental process, and its prescriptions were appeals to direct democracy or to administrative independence and expertise on the theory that delegation to technocrats could achieve the ideal of “the public interest.”

The real-world answer imposed by the New Deal and its progeny turned out to be special interest capture on steroids. Control comes to rest with those with the greatest interest or the most money at stake, and the result was the creation of a polity called “the Special Interest State” or, in Cornell University Professor Theodore Lowi’s terms, “Interest Group Liberalism.” Its essence is that various interest groups seize control over particular power centers of government and use them for their own ends.

It is this combination of plenary government power combined with the seizure of its levers by special interests that constitutes the polity of the current Third American Republic. The influence of “faction” and its control had been a concern since the founding of the nation, but it took the New Deal and its acolytes to decide that control of governmental turf by special interests was a feature, not a bug, a supposedly healthy part of democratic pluralism.

In DeLong's analysis, the First American Republic, which lasted until the Civil War, was  the "alliance-of-[S]tates polity.” In the Second American Republic, following the victory of the Unionist cause in the Civil War,

sovereignty belong[ed] to the nation first and the [S]tate second, and … the nation rather than the [S]tate claim[ed] a citizen’s primary loyalty…. The shift [from the First Republic] was traumatic and took decades to complete, but eventually the [S]tates became largely instruments of federal policy, except for a few areas in which conformity is unnecessary or special interests have managed to preserve [S]tate autonomy for their own purposes.

What lies beyond the Third Republic’s special-interest state? According to DeLong, it goes like this:

This Third Republic has had a good run. It was wobbling in the late 1970s, but got bailed out by a run of good luck—Reagan; the fall of the USSR; the computer and information revolution; the rise of the Asian Tigers and the “BRICs”; the basic dynamism and talent of the American people—that kept the bicycle moving and thus upright.

It could continue. It is characteristic of political arrangements that they go on long after an observer from Mars might think that surely their defects are so patent that they have exhausted their capacity for survival…. The culture, the people, are astonishingly creative and productive, and may demonstrate a capacity to keep the bicycle moving faster than the demands of the Special Interest State can throw sand in the gears.

But it is more likely that the Special Interest State has reached a limit.

This may seem a dubious statement, at a time when the ideology of total government is at an acme, but it is not unusual for decadent political arrangements to blaze brightly before their end. Indeed, the total victory of the old arrangements may be crucial to bringing into being the forces that will overthrow it. In some ways, the grip of the aristocracy on 18th-century France tightened in the decades leading up to 1789, and the alliance-of-states idea could have lasted a while longer had the Confederacy not precipitated the crisis. So the utter triumph of the Special Interest State over the past 15 years, and particularly in the recent election, looks like the beginning of its end.

A catalogue of its insoluble problems includes:

Sheer size. The usual numbers concerning the size of government in the United States are that the Feds spend about 20 percent of GNP and other levels of government at least another 16 percent. These do not reflect the impact of tax provisions, regulations, or laws, however, so an accurate estimate of how much of the national economy is actually disposed of by the government is impossible. Whatever it is, it is growing apace, and the current administration is determined to increase it considerably.

Responsibility. As the government has grown in size and reach, it has justified its claims to power by accepting ever more responsibility for the economy and society. Failure will result in rapid loss of legitimacy and great anger…. And as the government’s reach extends, any chance that it will meet its self-proclaimed responsibilities declines.

Lack of any limiting principles. There is no limit on the areas in which special interests will now press for action, nothing that is regarded as beyond the scope of governmental responsibility and power. Furthermore, special interests are not limited, cynically trying to get an undeserved economic edge or subsidy…. Inevitably, special interests try to convert themselves into moral entitlements to convince others to agree to their claims. The problem is that many have convinced themselves, which means that no half loaf satisfies. The grievance remains sharp, and compromise immoral….

Conflicts. The Special Interest State could get along quite well when it simply nibbled at the edges of the society and economy, snipping off a benefit here and there, and when the number of victorious interests was limited. But the combination of moral entitlement, multiplication of claimants, and lack of limits on each and every claim is throwing them into conflict, and rendering unsustainable the ethic of the logrolling alliances that control it.

The guiding principle is that no member of the alliance will challenge the claims of any fellow member. But this principle has a limit, in that unlimited claims cannot help but impinge eventually on each other….

We are in a crisis of legitimacy. The concept of legitimacy, the right to rule, is the single most important factor in political life. The particulars of how it is gained and lost are infinitely varied, according to the culture and history of the polity….

In the United States, legitimacy is conferred by elections, but it is not total. Through the ages, the basic question mark about democracy as a form of government has been that 51 percent of the electorate can band together to oppress the minority—“the tyranny of the majority” is a valid concern. To address it, the United States has a formal written Constitution to guarantee basic rights, but it also has an unwritten constitution that sets limits on how far the winners can push their victories….

Over the past few years, political winners have become increasingly aggressive, culminating in President Obama’s recent “We won” as an assertion of an unlimited mandate. Losers have become increasingly restive, ready to attack the legitimacy of the winners’ victory….

[I]f each party is regarded by the other as a principle-free alliance of special interests, eager to claim the government so as to loot the other side, then a large chunk of legitimacy is lost. All that remains of that concept depends on the government’s ability to deliver overall economic prosperity and national defense, and if the rulers falter in either of these realms, they will receive no slack. Nor should they.

Given these trajectories, and the lack of any mechanisms for altering them, it is hard to see how the polity of the Third Republic can continue, and, as former Council of Economic Advisers Chairman Herbert Stein said: “If something cannot go on forever, it will stop.” The question is whether the landing will be hard or soft….

[I]t is difficult to see any self-correcting mechanisms in the Special Interest State. Quite the reverse; the incentives all seem to be pushing the accelerator rather than the brake….

So what will the Fourth American Republic look like, and how will it come about? The answers are shrouded in the mists of a highly plastic future, and depend to a large extent on the outcome of the current economic crisis. If that grows severe, the change will be quick and explosive. As noted, an American government that presides over a depression will immediately lose the Mandate of Heaven—the Lady will reclaim the sword.

If this immediate crisis is alleviated, then change may have to await the next one, which will certainly come as more and more sand gets thrown in the gears of the Special Interest State and the bicycle eventually stops….

Two possibilities for change seem most promising. The first is a third political party that explicitly repudiates the present course and requires that its members eschew the legitimacy of the Special Interest State. This would require a certain almost religious fervor, but the great tides of history and politics are always religious in nature, so that is no bar.

This second would be more bottom-up. The Constitution has a residue of the original alliance-of-[S]tates polity that has never been used. Two-thirds of the [S]tate legislatures can force Congress to call a constitutional convention, and the results of that enterprise can then be ratified by three-quarters of the [S]tates. So reform efforts could start at the grassroots and coalesce around [S]tates until two-thirds of them decide to march on the Capitol….

IS THERE LIFE BEYOND FASCISM?

In my view, the Third Republic is unlikely to end soon, unless:

  • Obama’s “stimulus” policies — including his efforts to nationalize a large part of the auto industry and all of the health-care industry — fail spectacularly (e.g., we slip deeper into recession, there is a massive backlash against health-care nationalization).
  • Obama continues to follow the path of accommodation and appeasement in foreign and defense policy, and the United States suffers a devastating setback (e.g., a terrorist attack on the scale of 9/11 or worse). (The setback need not be a direct result Obama’s policies; it would nevertheless be perceived as such.)
  • One of the preceding occurs on the watch of Obama’s successor — presumably a Democrat, if Obama doesn’t fall on his sword.

Absent a débâcle, the special-interest state will not run its course until some of its main constituencies turn from cooperation to conflict — which they will do when their collective greed for an ever-larger share of an ever-weakening economy turns them against each other.

There is a temptation — perhaps born of conflict-avoidance or a fear of seeming callous — to hope against débâcle and for a graceful dénouement. But there will be no graceful dénouement, just a long, messy descent into harder times, harder despotism, and perhaps even subjugation by an coalition of opportunistic enemies. So, for the sake of my grandchildren, I hope for an early débâcle.

Utilitarianism vs. Liberty

THE UTILITARIAN WORLD VIEW

A utilitarian will favor a certain policy if a comparison of its costs and benefits shows that the benefits exceed the costs — even though the persons bearing the costs are unlikely to be the persons who accrue the benefits. That is so because utilitarians are accountants of the soul, who believe (implicitly, at least) that it is within their power to balance the unhappiness of those who bear costs against the happiness of those who accrue benefits. The precise formulation, according to John Stuart Mill, is “the greatest amount of happiness altogether” (Utilitarianism, Chapter II, Section 16.)

Consider, for example, the relationship between guns and crime, in particular, John Lott’s controversial finding that

allowing adults to carry concealed weapons significantly reduces crime in America. [Lott] supports this position by an exhaustive tabulation of various social and economic data from census and other population surveys of individual United States counties in different years, which he fits into a large multifactorial mathematical model of crime rate. His published results generally show a reduction in violent crime associated with the adoption by states of laws allowing the general adult population to freely carry concealed weapons….

In 2004, the National Academy of Sciences conducted a review of current research and data on firearms and violent crime, including Lott’s work, and found that “there is no credible evidence that ‘right-to-carry’ laws, which allow qualified adults to carry concealed handguns, either decrease or increase violent crime.” James Q. Wilson dissented from that opinion, and while accepting the committee’s findings on violent crime in general, he argued that all of the Committee’s own estimates confirmed Lott’s finding that right-to-carry laws had an effect on murder rate.[19]

Referring to the research done on the topic, The Chronicle of Higher Education reported that while most researchers support Lott’s findings that right-to-carry laws reduce violent crime, some researchers doubt that concealed carry laws have any impact on violent crime, saying however that “Mr. Lott’s research has convinced his peers of at least one point: No scholars now claim that legalizing concealed weapons causes a major increase in crime.”[20] As Lott critics Ian Ayres and John J. Donohue III pointed out: “We conclude that Lott and Mustard have made an important scholarly contribution in establishing that these laws have not led to the massive bloodbath of death and injury that some of their opponents feared. On the other hand, we find that the statistical evidence that these laws have reduced crime is limited, sporadic, and extraordinarily fragile.”[21]

Suppose Lott is right. If more concealed weapons lead to less crime, then the economically efficient policy is for governments to be more lenient in the issuance of concealed-weapon permits. The cost of concealed weapons is borne by the persons who own the weapons (and, presumably, carry them). The benefit of allowing citizens to carry concealed weapons is diffuse, in that it flows not only to persons who carry weapons but also to persons who don’t carry weapons — because of the uncertainty (in the minds of criminals) as to whether a prospective victim is carrying a weapon. The benefit also flows to law-enforcement agencies (and thence to taxpayers)  — in jurisdictions that readily allow concealed-carry — because of lower crime rates.

In sum, the aggregate benefits of concealed-carry outweigh the aggregate costs of concealed-carry, which is all that a true utilitarian needs to know. The bottom line — for the utilitarian — is that concealed-carry permits ought to be issued readily.

Moreover, strict utilitarianism requires that all decisions — not just governmental ones — must yield “the greatest amount of happiness altogether.” For example, if I fail to take your happiness into account when I buy a new car, I might make you less happy by my acquisition (because it makes you envious). And, in the utilitarian calculus, your unhappiness might outweigh my happiness. Ergo, less happiness altogether.

The foregoing example make it easy to see how modern “liberalism,” with its strong appeal to envy (among other unattractive traits), is an outgrowth of utilitarianism. (For more in that vein, see “Inventing Liberalism.”)

UTILITARIANISM VS. LIBERTY

A libertarian* looks at governmental and personal decisions quite differently. A libertarian would say that self-defense is in the realm of personal decision-making, and should not be subject to the utilitarian calculus (which, at any rate, also is invalid for legitimate governmental decisions). Therefore, according to a libertarian, the decision to carry a concealed weapon for self-defense belongs to the individual, who (by his decision) accepts responsibility for his actions. The role of the state in the matter is to deter aggressive acts on the part of gun-carriers by (a) making it known that such acts are verboten and (b) prosecuting persons who commit such acts.

The libertarian perspective reveals the disconnect between utilitarianism and liberty. In fact, utilitarianism compromises liberty because it accords no value to individual decisions about preferred courses of action. Decisions, to a utilitarian, are valid only if they comply with the views of the utilitarian, who feigns omniscience about the (incommensurable) happiness of individuals. Agreement among various utilitarians about the desirability of a particular course of action signifies nothing more than a shared prejudice about the way the world ought to be.

SUMMATION

The core assumptions of utilitarianism are that

  • the happiness of the whole can be measured (at least roughly, in the mind of the person doing the “measuring”), and
  • individual actions must be tailored to maximize the happiness of the whole, regardless of their effect on the welfare of particular individuals.

Libertarians hold that there is no such thing as the happiness of the whole, and that it is up to each of us to make his own happiness, according to his own lights. Making one’s own happiness doesn’t mean doing one’s own “thing,” regardless of the consequences for others. Thinking libertarians — as opposed to reflexive ones who just want to be left alone — recognize that liberty is “peaceful, willing coexistence and its concomitant: beneficially cooperative behavior.”

At what point does an individual’s pursuit of happiness become truly destructive of the happiness of others? The answer to that question is found in the principle of actionable harm, which I will discuss in my next post (here).

__________

* Libertarianism, by my reckoning, spans anarchism and the two major strains of minarchism: left-minarchism and right-minarchism. The internet-dominant strains of libertarianism (anarchism and left-minarchism) are, in fact, antithetical to liberty because they denigrate civil society. (For more on the fatuousness of  the dominant strains of “libertarianism,” see “On Liberty” and “The Meaning of Liberty.”) The less-common right-minarchist is both a true libertarian and a true conservative.

Gains from Trade

I’ve been pondering a bunch of recent posts about international trade by Keith Burgess-Jackson. The posts (dated from March 11, 2009, to June 8, 2009) are at KBJ’s eponymous blog. In the posts, KBJ attacks international trade (or some of it), because (in his view) it affects certain aspects of life in the United States.

I’ve read and re-read the various posts, trying to make sense of them. But I have been unable to do so so because, at every turn, I am confronted by flawed logic and unfounded assertions. I’m left in awe at the chutzpah of a tenured associate professor of philosophy (with a law degree, to boot) who commits the kinds of errors for which (I hope) he would chastise his students.

Anyway, to begin at the beginning, there’s this (March 11):

Free trade has been, and will continue to be, a disaster for this country.

A “disaster for this country” would be an event (or a related set or sequence of events) that inflicts unmitigated harm on great masses of Americans. The Great Depression was a “disaster for this country,” as was 9/11. How is “free trade” a “disaster for this country” when, thanks to the lowering of barriers to trade, but not their abandonment (thus “free trade”), millions of Americans now own better automobiles, electronic gadgets, and other goodies than they had access to before “free trade.” Not only that, but they have been able to purchase those goodies to which they had access before “free trade” at lower real prices than in the days before “free trade.” On top of that, millions of Americans make a better living than than they did before “free trade” because of their employment in industries that became stronger or rose up because of “free trade.”

Okay, so KBJ issues a qualified version on March 12:

Dr John J. Ray, my polymathic friend Down Under, replies to my post about free trade. I should clarify my stance. I’m not saying there should be no trade. That would be crazy. I’m saying that we Americans should protect certain of our industries, such as steel and automobiles. Yes, there is a price to be paid for these protectionist measures, but I, like Pat Buchanan, deem it a price worth paying.

Having recognized that “free trade” may be good for many Americans, KBJ now wants to protect certain industries. But why? KBJ doesn’t say. And I’m at a loss to guess the answer. After all, if we protect an industry we are, in effect, subsidizing those who earn a living in that industry, from the loftiest chairman of the board to the lowliest floor sweeper. Why should Americans be forced, for example, to subsidize people who work for GM and Chrysler when “Japanese” auto makers employ Americans who also make cars?  Even if GM and Chrysler were to go out of business, there would still be an American auto industry — one whose “Big Three” would be Ford, Toyota, and Honda. I’m not so sure about Ford, but Toyota, Honda, and other “Japanese” makes have proved more than adequate to the task of delivering well-made autos at reasonable prices.

I would make the same argument even if “Japanese” cars truly were Japanese, from topsail to keel and stem to stern. Even then, it would not be entirely a question of favoring certain Japanese at the expense of certain Americans. It would also be a question of favoring certain Americans (those employed by auto companies of any stripe) over other Americans (those who would prefer Japanese autos for various reasons, not least of which is value for the dollar). KBJ seems to acknowledge as much in a post of March 16, where he gives a bit more ground:

Free trade is efficient, in the sense that it increases (or even maximizes) aggregate material welfare. The key words are “aggregate” and “material.” As for the first of these words, free trade produces losers as well as gainers. The gainers could compensate the losers, but they are not made to do so. I’m concerned about the losers. In other words, I care about justice (how the pie is distributed) as well as efficiency (how big the pie is). As for the second word, there is more to life than material welfare. Free trade has bad effects on valuable nonmaterial things, such as community, culture, tradition, and family. As a conservative, I care very much about these things.

There’s more of the same on March 17:

Here is a video that explains how free trade increases (or even maximizes) aggregate material welfare. Notice that there is no mention of two things that matter to conservatives: (1) how the increase is distributed; and (2) how free trade affects nonmaterial welfare.

KBJ focuses on American losers, but there are many, many American gainers from free trade, as discussed above. Are their communities, cultures, traditions, and families of no import to KBJ? It would seem so. On what basis does he prefer some Americans to others? Or, to put it more crudely, who died and left KBJ, Pat Buchanan, and their ilk in charge of defending the Rust Belt?

And why should we care whether autos and steel are made in the U.S.? Is it a matter of national pride? What price pride? Whatever the price, it seems that KBJ, Pat Buchanan, and their ilk are willing for millions of Americans to pay it.

Maybe it’s a question of national defense — the bogeyman that is so often conjured in relation to our supposed dependence on foreign oil. Just as those “Arabs” might cut off our oil (though to do so would be to risk our wrath and their wealth), perhaps the Russians, Chinese, or Hottentots will someday amass so much military power that they can cut off all our imports, leaving us poor and powerless — inasmuch as we would no longer possess an industrial base to mobilize for war.

So, maybe their reasoning goes like this: America would be (has been?) deprived of significant chunks of its industrial base by the migration of manufacturing overseas (ignoring the fact that auto-making has migrated mainly from one part of the U.S to other parts of the U.S., while the U.S. remains the number 3 steel-making country in the world). And if our industrial base disappears, we won’t be able to mobilize for a prolonged war — one that would require more military stuff than our puny (hah!) industrial base would be capable of emitting. But our industrial base isn’t disappearing, it’s just becoming smaller in relation to our service sector and far less labor-intensive (i.e., more labor-productive) than it used to be (thus the “loss” of manufacturing jobs over time). See, for example, these Federal Reserve graphs of U.S. industrial capacity and production from the mid-1960s to the present. (The main page is here.) In spite of dips related to recessions, the trends are upward.

Getting back to the question of defense, we already have much larger conventional forces and stockpiles of parts and munitions in relation to the forces and stockpiles of our potential enemies than was the case before we entered WWII. If that demanding war is the benchmark for preparedness, then we have plenty of time to convert existing industrial facilities to war production, and to build new war-production facilities. In any event, you would think that the prospect of a major conventional war would become evident in ample time for mobilization, despite the periodic decimation of our intelligence services.

If unpreparedness for a major conventional war is the bogeyman that haunts the dreams of KBJ and company, their real fear can’t be the loss of our industrial base because of “free trade,” inasmuch as we haven’t lost our industrial base and show no signs of doing so. No, their real fear must be the caliber of our political leaders. Sell-outs will sell us out even when we have strong defenses and the wherewithal to build and maintain those defenses, as we have learned in the decades since the Vietnam War, which devastated our resolve to deal with military problems militarily. Those decades were punctuated only briefly by Reagan’s defense buildup, Bush I’s mistakenly truncated Gulf War, and Bush II’s hamstrung war in Iraq. We are now preparing for future wars (not!) and fighting current ones (while retreating) on terms dictated by an obstructive Congress (one of whose members was our new, Chamberlainesque president), an over-reaching Supreme Court, and other Leftists (to call them American Leftists would be an insult to America). But none of that has anything to do with “free trade.”

Returning to the issue at hand, KBJ seems to ignore the fundamental fact of life that human beings try to better their lot in ways that often, and inescapably, result in change. Human beings do want economic progress, and they have proved that they are willing, at times, to pay for in in “nonmaterial ways,” that is, by allowing it do affect “community, culture, tradition, and family.”

But that fact has never kept sentimentalists from decrying the loss of the “good old days.” KBJ’s tune is an old one, a version of which goes “How ya gonna keep ‘em down on the farm after they seen Paree?”

Perhaps (in KBJ’s view) it was a mistake for early man to have discovered fire-making, which undoubtedly led to new communal alignments, cultural totems, traditions, and even familial relationships. Methinks, in short, that KBJ has been swept away by a kind of self-indulgent romanticism for a past that was not as good as we remember it. (I’ve been there and done that, too.)

If “nonmaterial things” are so important, one wonders why KBJ ever left Michigan. And if he left Michigan for good reasons, as I’m sure he did, why is it bad for others to leave Michigan for the promise of warmth and employment? If “nonmaterial things” are so important, college attendance between ages 18 and 22 ought to be outlawed, for that is where (college) and when (18 to 22 years of age) large portions of the populace lose their attachment to “community, culture, tradition, and family.”

Anyway, how is it that economic dislocation — gradual as it is when an industry shifts its locus from one region to another — devastates “community, culture, tradition, and family”? If there has been any devastation of “community, culture, tradition, and family” in the Rust Belt — where auto- and steel-making once were dominant industries — it has been going on for decades, due to the combined influences of higher education; mobility (as the young seek greener pastures and the old seek warmer climes); the rise of impersonal entertainment and forms of communication (in lieu of family togetherness); and the natural breakdown of old-country cultures and traditions, as generation succeeds generation.

Shifting gears: On March 19, KBJ says this:

Those of you who consider yourselves conservative but support free trade might want to reconsider. The editorial board of the New York Times supports free trade. So does Barack Obama. So do the Clintons. So does Paul Krugman.

KBJ’s (risible) implication seems to be this: Something can’t be good if your political enemies think it’s good; or, you can’t really be a conservative if you agree with certain scurrilous liberals on a particular issue. By such reasoning, I wonder that KBJ can be against “free trade” when its opponents include Leftists:

I’m with Dennis Kucinich on free trade. (March 24)

On March 25, KBJ merely rehashes earlier posts:

There is no mention in this New York Times story of why people are losing their jobs. Can you say “free trade”? Jobs are being outsourced to China and other parts of the world, where labor is cheap. What good are cheap goods if you don’t have a job? Free trade will be the death of the West. A hundred years from now, if the West survives that long, people will look back at this time as the time of idiocy.

There’s more of the same old stuff on March 26, along with a couple of new assertions:

The editorial board of the New York Times is adamantly opposed to “protectionism.” In other words, it adamantly supports free trade. Note the reason given. The board—which is composed of cosmopolitans—is concerned about poor people in other countries. Free trade raises the standard of living for nonAmericans at the expense of Americans, many of whom are suffering terribly as a result of lost jobs, which adversely affects not just them but their families and communities. Free trade is a worldwide leveler of wealth. This is why conservatives (as opposed to libertarians) oppose free trade. In their view, Americans come first. Cosmopolitan progressives and libertarians support free trade, albeit for different reasons. The former support it because it redistributes wealth from rich nations to poor nations. The latter support it because they worship individual liberty. Free trade has been a boon to wealthy American entrepreneurs, who now have a worldwide pool of cheap labor. It has devastated working-class and middle-class Americans.

The notion that “['free trade'] redistributes wealth from rich nations to poor nations” is completely devoid of logical and empirical content. “Free trade” works because there are gains to all participants. If that weren’t the case, Americans wouldn’t buy foreign goods and foreigners wouldn’t buy American goods. Moreover, “free trade” has been a boon to American consumers and workers (though not always the workers KBJ seems to be worried about). To the extent that “wealthy American entrepreneurs” have gained from “free trade,” it’s because they’ve risked their capital to create jobs (in the U.S. and overseas) that have helped people (in the U.S. and overseas) attain higher standards of living. The “worldwide pool of cheap labor” is, in fact, a worldwide pool of willing labor, which earns what it does in accordance with the willingness of Americans (and others) to buy its products.

Finally, on June 8, KBJ says:

Europeans are starting to see the folly of free trade.

Actually, if you read the article, you’ll find that it portrays Europeans as wrong-headedly provincial — just like KBJ and company.

I may have left out a post or two, but I hope that, by now, you get the idea. “Free trade” helps Americans — perhaps not always the Rust-Belt Americans KBJ seems to be fixated on.

It might surprise KBJ to know that everyone’s income can grow, and grow faster, because of trade — not in spite of it. Foreigners earn more now than they used to, in part, because they are employed in more productive pursuits than they were before “globalization.”  The more foreigners earn, the more American-produced products they buy. Many of those same foreigners also help to underwrite our government’s deficits, thus reducing Americans’ taxes.

If “free trade” is such a bad thing, I wonder if KBJ buys anything that’s not made in Texas, where he lives. Trade between the States, after all, is about as “free” as it gets (except when government bans something, of course). Suppose Texas were to be annexed suddenly by Mexico. Would KBJ immediately boycott everything that’s made in the remaining 49 States? Would it have suddently become unclean?

Opposition to “free trade” — of the kind voiced by KBJ and company — is pure, unadulterated, mindless yahooism. It has no more validity than rooting for, say, the University of Texas Longhorns just because you live in Austin (as I do). People who have not the slightest connection with UT can be seen wearing burnt orange (UT’s colors for those of you who are blissfully unaware) and celebrating drunkenly after UT victories. It just makes me want to puke. And so does anti-international trade yahooism, which is like rooting for union-dominated firms like GM and Chrysler, which we are now subsidizing to the nth degree. (I’ll bet that makes KBJ puke.)

Putting an end to “free trade” would make Americans poorer, not richer. And I doubt that it would do anything to halt the natural evolution of “community, culture, tradition, and family” away from the forms sentimentalized by KBJ and toward entirely new but not necessarily inferior forms.

The biggest threat to “community, culture, tradition, and family” lies in the non-evolutionary imposition of new social norms bythe Left. That’s where the ire of KBJ and company should be directed.

Utilitarianism, “Liberalism,” and Omniscience

Utilitarianism is sort of under debate in the blogosphere (see here). But all the hifalutin’ philosophising misses the main point about utilitarianism: Those who practice it are arrogant pretenders to omniscience.

The appeal of utilitarianism rests on two mistaken beliefs:

  • There is such a thing as social welfare.
  • Transferring income and wealth from the richer to the poorer enhances social welfare because redistribution helps the poorer more than it hurts the richer.

Having disposed elsewhere of the second belief, I here address the first one.

The notion of a social welfare function arises from John Stuart Mill’s utilitarianism, which is best captured in the phrase “the greatest good for the greatest number” or, more precisely “the greatest amount of happiness altogether.” From this facile philosophy grew the patently ludicrous idea that it might be possible to quantify each person’s happiness, sum those values, and arrive at an aggregate measure of total happiness for everyone.

Utilitarianism, as a philosophy, has gone the way of Communism: It is discredited, but many people still cling to it under other names — “social welfare” and “social justice” being perennial favorites among the “liberal” intelligentsia.

How can supposedly rational “liberals” imagine that the benefits accruing to some persons (unionized employees of GM and Chrysler, urban developers, etc.) cancel the losses of other persons (taxpayers, property owners, etc.)? There is no realistic worldview in which A’s greater happiness cancels B’s greater unhappiness; never the twain shall meet.  The only way to “know” that A’s happiness cancels B’s unhappiness is to put oneself in the place of an omniscient deity — to become, in other words, an accountant of the soul.

It seems to me that “liberals” (most of them, anyway) reject God because to acknowledge Him would be to admit their own puniness and venality.

The “Big Five” and Economic Performance

The “Big Five” doesn’t comprise Honda, Toyota, Ford, GM, and Chrysler (soon to become the become the “Big Four”: Honda, Toyota, Ford, and GM-Chrysler-Obama Inc.). The “Big Five” refers to the Big Five personality traits: Openness, Conscientiousness, Extraversion, Agreeableness, and Neuroticism.

I discussed the Big Five at length here, and touched on them here. Now comes Arnold Kling, with an economic analysis of the Big Five, which draws on Daniel Nettle’s Personality: What Makes You the Way You Are. Kling, in the course of his post, discusses Nettle’s interpretations of the Big Five.

Regarding Openness, Kling quotes Nettle thusly:

Some people are keen on reading and galleries and theatre and music, whilst others are not particularly interested in any of them. This tendency towards greater exploration of all complex recreational practices is uniquely predicted by Openness….

High Openness scorers are strongly drawn to artistic and investigative professions, and will often schew traditional institutional structure and progression in order to pursue them.

Precisely. For example,  a high Openness scorer (93rd percentile) progressed from low-paid analyst (with a BA in economics) to well-paid VP for finance and administration (with nothing more than the same BA in economics), stopping along the way to own and run a business and manage groups of PhDs. The underlying lesson: Education is far less important to material success than intellectual flexibility (high Openness), combined with drive (high Conscientiusness and Neuroticism), and focus (low Extraversion and Agreeableness).

Kling says this about Conscientiousness (self-discipline and will power):

I think that people with low Conscientiousness annoy me more than just about any other type of people.

Me, too (Conscientiousness score: 99th percentile). I find it hard to be around individuals who always put off until tomorrow what they could do in a minute, who never read or return the books and DVDs you lend them, who are always ready to excuse failings (theirs and others), and who then try to cast their lack of organization (and resulting lack of personal accomplishment) as a virtue: “Life is too short to sweat the small stuff.” Yeah, but you never sweat the big stuff, either; look at the state of your house and your bank account. The small stuff and big stuff come in a single package.

According to Kling, “Nettle thinks of Extraversion as something like lust for life, sensation-seeking, and ambition.” More from Nettle:

We should be careful in equating Extraversion with sociability… shyness is most often due to … high Neuroticism and anxiety….

…The introvert is, in a way, aloof from the rewards of the world, which gives him tremendous strength and independence from them.

Right on, says this introvert (Extraversion score: 4th percentile).

Kling says this about Agreeableness:

To be agreeable, you have to be able to “mentalize” (read the feelings of others, which autistic people have trouble doing) and empathize (that is, care about others’ feelings, given that you can read them. Sociopaths can read you, but they don’t mind making you feel bad.)

On average, women are more agreeable than men. That is why Peter Thiel may have been onto something when he said that our country changed when women got the right to vote. If people project their personalities onto politics, and if agreeability goes along with more socialist policies, then giving women the right to vote should make countries more socialist.

Thiel is on to something. Although socialism gained a foothold in the U.S. during TR’s reign (i.e., long before the passage of Amendment XIX to the Constitution), it’s important to note that women were prominent agitators and muck-rakers in the early 1900s. Among other things, women were the driving force behind Prohibition. That failed experiment can now be seen as an extremely socialistic policy; it attempted to dictate a “lifestyle” choice, just as today’s socialists try to dictate  “lifestyle” choices about what we smoke, eat, drive, say, etc. — and with too-frequent success. If socialism isn’t a “motherly” attitude, I don’t know what is. (Full disclosure, my Agreeableness score is 4th percentile. Just leave me alone and I’ll live my life quite well, without any help from government, thank you.)

Finally, there’s Neuroticism, about which Nettle says:

There are motivational advantages of Neuroticism. There may be cognitive ones too. It has long been known that, on average, people are over-optimistic about the outcomes of their behaviour, especially once they have a plan… This is well documented in the business world, with its over-optimistic growth plans, and also in military leadership, where it is clear that generals are routinely over-sanguine about their likely progress and under-reflective about the complexities….

…Professional occupations are those that mainly involve thinking, and it is illuminating that Neuroticism tended to be advantageous in these fields and not in, say, sales.

Neuroticism (also known as Emotional Stability) is explained this way by an organization that administers the “Big Five” test:

People low in emotional stability are emotionally reactive. They respond emotionally to events that would not affect most people, and their reactions tend to be more intense than normal. They are more likely to interpret ordinary situations as threatening, and minor frustrations as hopelessly difficult. Their negative emotional reactions tend to persist for unusually long periods of time, which means they are often in a bad mood. These problems in emotional regulation can diminish a ones ability to think clearly, make decisions, and cope effectively with stress.

Take a person who is low in Emotional Stability (my score: 12th percentile), low in Extraversion, but high in Conscientiousness and Openness. Such a person is willing and able to tune out the distractions of the outside world, and to channel his drive and intellectual acumen in productive, creative ways — until he finally says “enough,” and quits the world of work to enjoy the better things in life.

Monopoly: Private Is Better than Public

In this discursive post, I use the economic concept of perfect competition as a starting point from which to defend monopoly and to expose the folly and futility of governmental intervention in markets.

PERFECT COMPETITION AS A BOGUS STANDARD

I learned, in the standard microeconomics of my college days, that perfect competition is preferred to these three alternatives:

  • imperfect competition, where there is some degree of product differentiation (real or perceived)
  • oligopoly, where a particular product or service is sold by only a few firms (“product or service” is hereafter called “good,” in keeping with economic jargon)
  • monopoly, where there is only one seller of a particular good.

The theoretical superiority of perfect competition rests on the belief that, compared with the alternatives, it yields the greatest output of goods and, therefore, the greatest degree of satisfaction to consumers; that is, perfect competition maximizes “social welfare.”

The standard analysis has many problems, the most fundamental of which is the observation selection effect. The observer, in this case, is the economist who views the world through the lenses of economic efficiency and “social welfare.”

The construct of economic efficiency involves gross generalizations about economic reality, which are based on ideal firms in an ideal world, not on the behavior of real firms in the messy world of reality. The construct, in other words, sets up an ideal world of perfect competition, divergences from which are judged less than optimal — as if unavoidable, real-world divergences are less valid than the perfections of an imaginary construct. (This is an instance of a Nirvana fallacy, “the logical error of comparing actual things with unrealistic, idealized alternatives.”)

Then there is “social welfare,” which perfect competition is purported to maximize. “Social welfare” is in fact a fictitious device whereby the person who invokes it assumes (implicitly if not explicitly) that the happiness of individuals can be summed, and that he knows just how to do it. The predictable result of “social arithmetic” is a call for some kind of governmental action that effectively redistributes income; for example:

  • Affirmative action, on balance, redistributes income from shareholders, consumers, and more-qualified workers to less-qualified workers.
  • Progressive taxation redistributes income from persons who earn a lot of money (the job-creators of the economy) to persons who earn less money. It also drives out high earners, to the detriment of the rest of us.
  • Trust-busting (which is of particular interest here) amounts to a redistribution of income from the owners of a oligopolistic or monopolistic firm to consumers.

“Social welfare,” in other words, is a phony excuse for playing God — a variant of the Nirvana fallacy. (For more, see this, this, and this.)

HOW GOVERNMENT INTERVENTION DOES MORE HARM THAN GOOD

Why is it not a good thing for government to act in ways that redistribute income from the owners of firms to consumers? There are several reasons, beginning with the artificiality of perfect competition (or something like it) as a model of how markets ought to be organized.

Then, there is the arrogance of a mindset that judges consumers to be more deserving that the owners of businesses — owners who staked a lot of money (and created jobs) on business ventures that might have gone sour (and often do). Is it possible that trust-busting discourages business (and job) formation? You can bet on it.

Related to that, it is necessary to remember that business owners are humans, too — 160 years of communist-populist-”progressive“-”liberal” rhetoric to the contrary notwithstanding. Business owners’ desire for profit is no less legitimate than consumers’ desire for low prices. Government is in the business of penalizing oligopolistic and monopolistic business owners not only because economists have set up a false standard (perfect competition or something like it), but also because the act of penalizing appeals to the envy of many voters and interest groups toward persons with legitimately high incomes. Trust-busting is neither logically nor morally admirable.

It is true that not all industries lend themselves to perfect competition or something like it, but it is neither necessary nor desirable to regulate firms in industries that are characterized by oligopoly and monopoly. (pace Paul Krugman). Oligopoly and monopoly are not iron-clad. Consumers have alternatives: If the price of X is “too high” they can (and will) buy more of Y and Z; if the price of X rises a lot, relative to the prices of Y and Z, the producer of X is likely to find himself with a direct competitor. In the alternative, more consumers will abandon X in favor of Y and Z.

TWO EMOTION-LADEN CASES

What about situations in which there seem to be no ready substitutes for a particular good? Lurking behind this question are fears of private monopolies controlling the supplis of water and medical goods. The case of medical goods is more straightforward, so I will deal with it before considering the supply of water.

Medicine

The supply of medical goods already is artificially low because of government, not in spite of it. Who licenses doctors and grants the A.M.A. a near-monopoly on the accreditation of medical schools? Who licenses and regulates hospitals? Who approves drugs and licenses pharmacists? The list of questions could go on and on, but the answer is always the same: government.

The average person will react along these lines: “Government has to be involved in the provision of medical goods, otherwise we would be taking our lives in our hands every time we go to a doctor or a hospital, and every time we use a drug.” I respond as follows:

The main effect of government regulation of certain goods (including medical ones) is to raise the cost of those goods by imposing costs on their providers and effectively barring additional providers from setting up shop. This unseen cost means that Americans consumer fewer medical goods than they would if government weren’t imposing costs on providers and barring prospective providers. (There is an argument that Americans, on balance, consume more medical goods than necessary because of Medicare, Medicaid, and tax-exempt, employer-subsidized health insurance. But given those distortions, it is true that regulation raises costs and restricts entry.) Is it possible that the net effect of regulations is to make Americans worse off rather than better off? A good case can be made for that proposition. (See this, this, and this.) The case of medical goods exemplifies Bastiat’s axiom that

a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

Water: The Hardest Case

No Inherent Need for Government Intervention

If the debate about government’s role in medicine evokes much emotion and little reason, any discussion of privatizing the water supply is certain to elicit the rawest of emotions: fear. A typical reaction goes like this: “If government doesn’t provide our water, greedy speculators will corner the market and we’ll all be at their mercy.” It is hard to imagine such a reaction in the 1800s, when a large fraction of the population lived in rural areas, where most water came from privately owned wells or was taken, by private means, from rivers and lakes. Government doesn’t have to provide water, and if it couldn’t stop a you from drilling a well in your backyard (which it can, thanks to its “police power”) many urbanites and suburbanites might be able to supply their own water.

In any event, there is no inherent reason for government to supply water. The simple fact is that “municipal water works” has acquired the totemic status of “public schools.” Both institutions have become so embedded that private alternatives (on a large scale) were unthinkable, until (in the case of public schools) failure became so obvious that it could no longer be ignored. (That the dominant solution to the failure of public schools is to throw more money at them is neither a negation of their failure nor of the widespread perception of failure.)

Scenario 1: “Accidental” Private Monopoly

Given that there is no inherent reason for government to provide water, I begin the analysis of water monopolies with the following hypothetical:

We have with a small, settled community of 25 homes, in which every home has a well (and has had one for generations). It is accepted by all members of the community that each homeowner is the owner of his well; that is, wells are not communal property. Further, every well provides an ample amount of water for such purposes as drinking, bathing, cooking, watering lawns and gardens, washing cars, etc.

Suddenly, because of some unforeseeable geological change, every well but one runs dry. And the owners of the  24 homes without functioning wells (the unlucky 24″) have no immediate or easy recourse to another source of water — a spring, stream, or lake — because there are none within a day’s drive of the community. The only convenient source of water is the 25th  home (“lucky 25″), whose well  seems to provide more than enough water for its owner — enough, in fact, to meet the drinking, bathing, and cooking needs of the “unlucky 24.”

Issues Arising from Scenario 1

How should the “unlucky 24″ cope with the near-term problem of obtaining water for drinking, bathing, and cooking? Suppose that they have two practical options:

  • Appeal to “lucky 25″ by offering him a price for water that would just cover the cost of providing it (electricity, pump repairs/replacements, etc.).
  • Buy water in large quantities from an out-of-area vendor — at a much higher price than they would offer “lucky 25.”

“Lucky 25,” the accidental water monopolist, has the following options:

  • Accept the offer made by the “unlucky 24.”
  • Make a counter-offer by setting a price that is somewhere between the offer made by the “unlucky 24″ and the cost, to them, of buying water from an out-of-area vendor.
  • Refuse to sell water to the “unlucky 24,” for one of the following reasons: (1) It is his right to do so. (2) He doesn’t want to be in the water-selling business, with its attendant distractions. (3) He fears that drawing significantly greater amounts of water from his well will cause it to run dry.

(You should understand that this is a law-abiding community whose residents are respectful of  property rights — unlike the typical government — so that the water monopolist doesn’t have to worry about defending his well and himself against a mob.)

I daresay that the average reader would expect “lucky 25″ to accept the offer made by the “unlucky 24.” But why should the accidental water monopolist accept the offer? He might, out of compassion, help the “unlucky 24″ while they make other arrangements. But his help would be given out of compassion, not obligation.

The Permissibility of “Good Luck”

Yes, the water monopolist may have been “lucky” with respect to water, but perhaps he has been “unlucky” in other respects. Why, if “luck” determines one’s obligations to others, shouldn’t the water monopolist’s neighbors compensate him for his episodes of “bad luck” — the dog that was hit by a car, the underground stream which provides him ample water but threatens to undermine the foundation of his house, an errant wife, incorrigible children, etc.? Must “good luck” be penalized or paid for, as an act of “social justice”?

The answer is “no.” Anthony de Jasay explains, in “Economic Theories of Social Justice: Risk, Value, and Externality“:

Stripped of rhetoric, an act of social justice (a) deliberately increases the relative share … of the worse-off in total income, and (b) in achieving (a) it redresses part or all of an injustice…. This implies that some people being worse off than others is an injustice and that it must be redressed. However, redress can only be effected at the expense of the better-off; but it is not evident that they have committed the injustice in the first place. Consequently, nor is it clear why the better-off should be under an obligation to redress it….

Since Nature never stops throwing good luck at some and bad luck at others, no sooner are [social] injustices redressed than some people are again better off than others. An economy of voluntary exchanges is inherently inegalitarian…. Striving for social justice, then, turns out to be a ceaseless combat against luck, a striving for the unattainable, sterilized economy that has built-in mechanisms…for offsetting the misdeeds of Nature.

Scenario 2: Deliberate Water Monopoly

Suppose, now, that our water monopolist came by his monopoly in an entirely different way — a way that (to most of us) seems to draw on entrepreneurship, not “luck.” Suppose that he (and he alone) drilled a well for the purpose of selling water to his neighbors, whom (he knows and they know) cannot (and never could) find water under their properties. What should the water monopolist charge his neighbors for water? Just as much as they are willing to pay, of course. Is there anything immoral in that? If there is, why is it not immoral for an auto dealer to sell you a car for just as much as you are willing to pay, even if you need that car in order to earn a living?

Why should the water monopolist (or car dealer or anyone else) be forced by a legalized mob (i.e., government) to sell his product for a prescribed price, when he is the person who took the financial risk of drilling a well, not knowing for certain that he would strike water, at what rate it would flow, how long it would flow at that rate, and whether another source of water might materialize because of unforeseeable geological or climatological changes?

The answer to the question is found in emotion, not reason. Emotionally, we hold water to be more precious than, say, automobiles. Yet, many persons consume a lot of water for what might be called non-essential reasons (e.g., watering lawns, washing cars, filling swimming pools), and many persons need cars in order to earn a living. Water, stripped of its emotional baggage, isn’t a sacred commodity; it is merely a commodity that has different prices in different places.

Which brings us to the essential question: Who should supply water?

Why a Government Monopoly Is Worse

Perhaps government should be in the business of telling everyone what kind of cars they can have (or not have). (Not far-fetched, admittedly.) Well, then, perhaps government should be in the business of telling us whom to marry, how many children to have, where to live, etc., etc., etc. If that’s an unappealing prospect, why step down the slippery slope toward it by allowing government to dictate the price of water, as it does by controlling most of the nation’s water supply through municipal and regional water authorities?

What can government do that entrepreneurs cannot? The answer is nothing, except to set prices for water that are unlikely to correspond to the prices that would be set by voluntary transactions between private sellers and their customers. Government monopolies prohibit entry where entry would be possible, for example, along large rivers and around large lakes.

Government monopolies cannot respond quickly, if at all, to changes in costs and variations in demand. The prices set by government monopolies must therefore result in the subsidization of some consumers who would be willing to pay more for their water by taxpayers and/or other consumers who are paying more than they would pay if there were private, competing suppliers of water.

What about the poor persons who, without subsidization, could not afford water for drinking, bathing, and cooking, unless they were to forgo other necessities (e.g., medical care)? So, the market for water should be monopolized by government and the price of water should be distorted for the sake of a relatively small fraction of the population? It would be better to rely on (a) private charity and (if you insist) (b) tax-funded vouchers for the purchase of water.

Scenario 3: Government vs. Private Pricing

Which leads to the next objection to the privatization of the water supply (which was mostly private for a long time in the United States). It goes like this: “Water monopolists would bleed their customers dry; they would conspire to control the supply of water and charge whatever the market will bear.”

To test those assertions, let us consider the extreme case in which the residents of a mountainous area have only one potential source of water (other than rain), which is a river that flows through the area. Suppose “greedy speculator” buys the land surround the river’s source and dams the river, at a place on his land. (I am  ignoring, for purposes of this post, the state of the law regarding such a practice.) “Greedy speculator” then pays for the installation of water pipes to various of his customers, meters their use of water, and charges them (perhaps at different rates) in such a way as to maximize his profit.

If you have been following along, you will have realized that there’ is no difference between “greedy speculator” and government, where it declares a local monopoly on the supply of water. There is, of course, a degree of (misplaced) trust in government, that is, trust that will “do the right thing,” which means robbing Peter to pay Paul. That trust amounts to nothing more than wishful thinking about government and misconceptions about the benefits of private action, spurred by the prospects of profit.

In the case of water, for example, government may not build enough capacity (to the detriment of consumers), it may build too much capacity (at the expense of taxpayers), or it may fail to keep its system in good repair (to the detriment of consumers). Private, unregulated providers, in the more usual instances where some degree of competition is possible, can respond more quickly than government to rises in demand, are less likely than government to overbuild, and are more likely than government to keep their systems in good repair.

But the provision of water a natural monopoly, is it not? That question (with its the implied answer: “yes”) arises from the belief that there is no room in a market for more than one supplier where an extensive infrastructure must be duplicated (as in the case of water plants and supply pipes). There are market solutions to such seemingly insurmountable problems, although — in the cases of electricity, natural gas, and cable TV — their implementation generally has been botched by regulatory incompetence and intent.

How could there be competition in a market for water? Consider the extreme case of “greedy speculator” who buy the land from which a river rises, and dams the river. If he sets the price of water too high, three things could happen:

  • Some residents self-ration, reducing or eliminating the use of water for such things as watering lawns, washing cars, and filling swimming pools. (Remember, my example involves a “speculator” who is interested in making a reasonable return on a large investment, which requires that he set up shop in place that isn’t destitute.)
  • Some residents leave the area for places where their total cost of living, relative to income, is lower than it becomes after “greedy speculator” sets up shop.
  • Competition arrives in the form of a supplier who hauls water in large tank trucks and installs a water storage tank for each of the homes and businesses that subscribe to his service.

Lo and behold, “greedy speculator” forestalls competition, and perhaps some departures from the area, by setting his price “just high enough.” Is that fair?

Still No Role for Government

Well, ask yourself if it’s fair of government to keep a private individual from earning a profit by providing a product of value to consumers, or to restrict that profit in the “public interest.” Ask yourself if it is fair that such practices on the part of government lead to a general reduction in the willingness of entrepreneurs to establish and expand job- and growth-producing businesses of all kinds. (Remember “that which is not seen.”) Ask yourself if it is fair of government to circumvent the private sector and provide taxpayer-subsidized goods and services to the residents of an area, just because it lacks “good” supplies of water or electricity, or just because it is frequently and predictably devastated by fires, floods, hurricanes, or tornadoes. Ask yourself if it is fair of government to provide taxpayer-funded insurance against predictable natural disasters when private insurers won’t do so — with the result that the areas prone to natural disasters remain heavily inhabited, at taxpayers’ expense.

In other words, private action — however competitive or uncompetitive — alleviates a host of problems. Government action tends to exacerbate those problems, and to create unforeseen (and unseen) ones.

CONCLUSION

It is written nowhere (but in the imaginations of statists) that government owes us a green lawn, a residence on a flood plain, or anything else but protection from predators, foreign and domestic. As soon as government strays beyond its proper role, it begins to corrupt civil society and its essential mechanisms, which include free markets.

One of the ways in which government strays is to interfere in markets and to provide services that can be and should be provided through markets. Government — at the behest of politicians, bureaucrats, academicians, and meddlers-at-large — interferes in markets and sometimes becomes a provider on the pretext that certain markets (most of them, it seems) are insufficiently competitive or otherwise have “failed” because they fall short of measures of perfection devised by — you guessed it — politicians, bureaucrats, academicians, and meddlers-at-large.

Government intervention in markets exacts a very high price, in liberty and material goods. It strips us of the ability to do for ourselves what we think needs to be done — as opposed to what some politician, other meddler, or “aggrieved” group believes we ought to do or have done to us. It strips us — even the poorest among us — of the means to do for ourselves that which we need to do. It strips us — even the poorest among us — of the fruits of those labors which are permitted to us.  The degree of theft is so vast as to be unimaginable, but unseen and therefore (mostly) unlamented.

The bottom line: Private monopolies are superior to public ones, and should not be persecuted or prosecuted. Government monopolies are for the benefit of politicians, bureaucrats, academicians, meddlers-at-large, and the the majority of citizens who have been conned into believing that government action is preferable to private action.

The Price of Government

UPDATED on 04/17/10, to include GDP estimates for 2009 and slight revisions to GDP estimates for earlier years. The bottom line remains the same: The price of government is exorbitant.

he federal government is mounting an economic intervention on a scale unseen since World War II. The excuse for this intervention is that without it the present recession will turn into a full-blown depression. Yet, with the Democrats’ and RINOs’ “stimulus” barely underway, the economy already shows signs of rebounding from an economic dip that bears no comparison with the calamitous gulch that was the Great Depression.

Despite the horror stories about a financial meltdown, what we have experienced since late 2007 is not much more than the downside of a typical, post-World War II business cycle. (For more on that score, see this post — especially the third graph and related discussion.) Would it have been worse were all failing financial institutions allowed to fail? I doubt it. Hard, fast failure leaves in its wake opportunities for the organization of new ventures by investors who still have money (and there are plenty of them). But those same investors are being shouldered out and scared off by Obama’s schemes for nationalization, taxation, regulation, and redistribution.

What we are seeing is the continuation of a death-spiral that began in the early 1900s. Do-gooders, worry-warts, control freaks, and economic ignoramuses see something “bad” and — in their misguided efforts to control natural economic forces (which include business cycles) — make things worse. The most striking event in the death-spiral is the much-cited Great Depression, which was caused by government action, specifically the loose-tight policies of the Federal Reserve, Herbert Hoover’s efforts to engineer the economy, and — of course — FDR’s benighted New Deal. (For details, see this, and this.)

But, of course, the worse things get, the greater the urge to rely on government. Now, we have “stimulus,” which is nothing more than an excuse to greatly expand government’s intervention in the economy. Where will it lead us? To a larger, more intrusive government that absorbs an ever larger share of resources that could be put to productive use, and counteracts the causes of economic growth.

Can we measure the price of government intervention? I believe that we can do so, and quite easily. The tale can be told in three graphs, all derived from constant-dollar GDP estimates available here. The numbers plotted in each graph exclude GDP estimates for the years in which the U.S. was involved in or demobilizing from major wars, namely, 1861-65, 1918-19, and 1941-46. GDP values for those years — especially for the peak years of World War II — present a distorted picture of economic output. Without further ado, here are the three graphs:

The trend line in the first graph indicates annual growth of about 3.7 percent over the long run, with obviously large deviations around the trend. The second graph contrasts economic growth through 1907 with economic growth since: 4.2 percent vs. 3.6 percent. But lest you believe that the economy of the U.S. somehow began to “age” in the early 1900s, consider the story implicit in the third graph:

  • 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
  • 1908-1929 — annual growth of 2.2 percent — a dispirited economy, shackled by the fruits of “progressivism” (e.g., trust-busting, regulation, the income tax, the Fed) and the government interventions that provoked and prolonged the Great Depression (see links in third paragraph)
  • 1970-2008 — annual growth of 3.1 percent –  an economy 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.

Had the economy of the U.S. not been deflected from its post-Civil War course, GDP would now be about three times its present level. (Compare the trend lines for 1866-1907 and 1970-2008.) If that seems unbelievable to you, it shouldn’t: $100 compounded for 100 years at 4.3 percent amounts to $6,700; $100 compounded for 100 years at 3.1 percent amounts to $2,100. Nothing other than government intervention (or a catastrophe greater than any we have known) could have kept the economy from growing at more than 4 percent.

What’s next? Unless Obama’s megalomaniacal plans are aborted by a reversal of the Republican Party’s fortunes, the U.S. will enter a new phase of economic growth — something close to stagnation. We will look back on the period from 1970 to 2008 with longing, as we plod along at a growth rate similar to that of 1908-1940, that is, about 2.2 percent. Thus:

  • If GDP grows at 2.2 percent through 2109, it will be 58 percent lower than if we plod on at 3.1 percent.
  • If GDP grows at 2.2 percent for through 2109, it will be only 4 percent of what it would have been had it continued to grow at 4.3 percent after 1907.

The latter disparity may seem incredible, but scan the lists here and you will find even greater cross-national disparities in per capita GDP. Go here and you will find that real, per capita GDP in 1790 was only 4.6 percent of the value it had attained 218 years later. Our present level of output seems incredible to citizens of impoverished nations, and it would seem no less incredible to an American of 1790. In sum, vast disparities can and do exist, across nations and time. We have every reason to believe in the possibility of a sustained growth rate of 4.4 percent, as against one of 2.2 percent, because we have experienced both.

We should look on the periods 1908-1940 and 1970-2009 as aberrations, and take this lesson from those periods: Big government inflicts great harm on almost everyone (politicians and bureaucrats being the main exceptions), including its intended beneficiaries. Such is the price of government when it does more than “establish Justice, insure domestic Tranquility, [and] provide for the common defence” in order to “promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.”