welfare state

The Spoiled Children of Capitalism

I am struck by the convergence of two posts that I read recently. The first is by Tim of Angle (he says it’s his real name), the proprietor of Dyspepsia Generation (a blog deserving of a vast readership). This is from Tim’s “The Spoiled Children of Capitalism“:

The rot set after World War II. The Taylorist techniques of industrial production put in place to win the war generated, after it was won, an explosion of prosperity that provided every literate American the opportunity for a good-paying job and entry into the middle class. Young couples who had grown up during the Depression, suddenly flush (compared to their parents), were determined that their kids would never know the similar hardships.

As a result, the Baby Boomers turned into a bunch of spoiled slackers, no longer turned out to earn a living at 16, no longer satisfied with just a high school education, and ready to sell their votes to a political class who had access to a cornucopia of tax dollars and no doubt at all about how they wanted to spend it. And, sadly, they passed their principles, if one may use the term so loosely, down the generations to the point where young people today are scarcely worth using for fertilizer.

In 1919, or 1929, or especially 1939, the adolescents of 1969 would have had neither the leisure nor the money to create the Woodstock Nation. But mommy and daddy shelled out because they didn’t want their little darlings to be caught short, and consequently their little darlings became the worthless whiners who voted for people like Bill Clinton and Barack Obama [and who were people like Bill Clinton and Barack Obama: ED.], with results as you see them. Now that history is catching up to them, a third generation of losers can think of nothing better to do than camp out on Wall Street in hopes that the Cargo will suddenly begin to arrive again.

Good luck with that.

I have long shared Tim’s assessment of the Boomer generation. Among the corroborating data are my sister and my wife’s sister and brother — Boomers all.

It is less clear that all Boomers passed along their generally deplorable traits. Contradictory data include my sister’s three children, my wife’s sister’s child, and one of my wife’s brother’s children. As members of Generation X — a Reactive generation, in Strauss and Howe’s theory of generations — they “tend to be pragmatic and perceptive, savvy but amoral, more focused on money than on art.” (The other of my wife’s brother’s children is of Generation Y, discussed next.)

Gen X’s successors are found in Generation Y. It is they who seem to dominate the ranks of “Occupiers,” and they are, in the main, children of Boomers. But Gen Yers are of a different character than their older siblings. To the extent that they are late children of Boomers, it is likely that they resemble Boomers in having been spoiled. And it shows in the “Occupy” movement, the underlying theme of which is that the world owes them — the “Occupiers” — a living.

So, despite my quibbles about Gen X, I subscribe to Tim’s view that the rot set in after World War II. That rot, in the form of slackerism, is more prevalent now than it ever was. It is not for nothing that Gen Y is also known as the Boomerang Generation.

Which brings me to Bryan Caplan’s post, “Poverty, Conscientiousness, and Broken Families.” Caplan — who is all wet when it comes to pacifism and libertarianism — usually makes sense when he describes the world as it is rather than as he would like it to be. He writes:

[W]hen leftist social scientists actually talk to and observe the poor, they confirm the stereotypes of the harshest Victorian.  Poverty isn’t about money; it’s a state of mind.  That state of mind is low conscientiousness.

Case in point: Kathryn Edin and Maria KefalasPromises I Can Keep: Why Poor Women Put Motherhood Before Marriage.  The authors spent years interviewing poor single moms.  Edin actually moved into their neighborhood to get closer to her subjects.  One big conclusion:

Most social scientists who study poor families assume financial troubles are the cause of these breakups [between cohabitating parents]… Lack of money is certainly a contributing cause, as we will see, but rarely the only factor.  It is usually the young father’s criminal behavior, the spells of incarceration that so often follow, a pattern of intimate violence, his chronic infidelity, and an inability to leave drugs and alcohol alone that cause relationships to falter and die.

Furthermore:

Conflicts over money do not usually erupt simply because the man cannot find a job or because he doesn’t earn as much as someone with better skills or education.  Money usually becomes an issue because he seems unwilling to keep at a job for any length of time, usually because of issues related to respect.  Some of the jobs he can get don’t pay enough to give him the self-respect he feels he needs, and others require him to get along with unpleasant customers and coworkers, and to maintain a submissive attitude toward the boss.

These passages focus on low male conscientiousness, but the rest of the book shows it’s a two-way street.  And even when Edin and Kefalas are talking about men, low female conscientiousness is implicit.  After all, conscientious women wouldn’t associate with habitually unemployed men in the first place – not to mention alcoholics, addicts, or criminals.

Low conscientiousness was the bane of those Boomers who, in the 1960s and 1970s, chose to “drop out” and “do drugs.” It will be the bane of the Gen Yers who do the same thing. But, as usual, “society” will be expected to pick up the tab, with food stamps, subsidized housing, drug rehab programs, Medicaid, and so on.

Before the onset of the welfare state in the 1930s, there were two ways to survive: work hard or accept whatever charity came your way. And there was only one way for most persons to thrive: work hard. That all changed after World War II, when power-lusting politicians sold an all-too-willing-to-believe electorate a false and dangerous bill of goods, namely, that government is the source of prosperity. It is not, and never has been.

Whether that truth will become apparent before America goes the way of Greece is anyone’s guess. I am pessimistic because conscientiousness — which seemed to be on the rise with Gen X — is once again on the decline.

Related posts:
The Residue of Choice
The People’s Romance
The Causes of Economic Growth
A Short Course in Economics
Addendum to a Short Course in Economics
In the Long Run We Are All Poorer
Economic Growth since WWII
The Price of Government
The Commandeered Economy
The Price of Government Redux
The Mega-Depression
Presidential Chutzpah
As Goes Greece
The State of the Union: 2010
The Shape of Things to Come
The Real Burden of Government
Toward a Risk-Free Economy
The Rahn Curve at Work
The Illusion of Prosperity and Stability
Society and the State
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
Undermining the Free Society
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid
Government vs. Community
The Stagnation Thesis
Government Failure: An Example
The Evil That Is Done with Good Intentions
America’s Financial Crisis Is Now
PolitiFact Whiffs on Social Security
The Destruction of Society in the Name of “Society”
The Social Security Trust Fund Is Not a “Get out of Jail Free Card”
Say’s Law, Government, and Unemployment
“Occupy Wall Street” and Religion
Religion on the Left

The Fire This Time

UPDATED 08/10/11

Riots in the UK — especially in London — are drawing much attention from the media. Why are there riots in the UK? It’s the welfare state, stupid. Take away a person’s self-reliance and dignity by putting him on the dole, and he has little in the way of inner resources and skills to draw on when you take him off the dole. (Michael Gove understands this; Harriet Harman does not.)

What about the less-publicized black-on-white “flash mob” attacks taking place in the U.S.? The same answer, with the added indignity of the job-killing minimum wage.

It is my fervent hope that American police forces be allowed to respond to “flash mobs” with force, and that American courts prosecute mobsters vigorously and mercilessly.

It is my fervent hope that American politicians will not throw money at the sector of the populace whence the mobs come, in the vain hope of quelling their anger. As a start on solving this “problem” — another instance of government failure — the minimum wage should be abolished and the rabble should be told to get off the streets and get jobs.

To the end of getting troublemakers off the streets, laws against loitering should be reinstated and enforced. It’s time to stop coddling people who truly aren’t paying their “fair share” of taxes.

UPDATE:

The always-excellent Theodore Dalrymple weighs in (link below); for example:

The riots are the apotheosis of the welfare state and popular culture in their British form. A population thinks (because it has often been told so by intellectuals and the political class) that it is entitled to a high standard of consumption, irrespective of its personal efforts; and therefore it regards the fact that it does not receive that high standard, by comparison with the rest of society, as a sign of injustice. It believes itself deprived (because it has often been told so by intellectuals and the political class), even though each member of it has received an education costing $80,000, toward which neither he nor—quite likely—any member of his family has made much of a contribution; indeed, he may well have lived his entire life at others’ expense, such that every mouthful of food he has ever eaten, every shirt he has ever worn, every television he has ever watched, has been provided by others. Even if he were to recognize this, he would not be grateful, for dependency does not promote gratitude. On the contrary, he would simply feel that the subventions were not sufficient to allow him to live as he would have liked.

At the same time, his expensive education will have equipped him for nothing. His labor, even supposing that he were inclined to work, would not be worth its cost to any employer—partly because of the social charges necessary to keep others such as he in a state of permanent idleness, and partly because of his own characteristics. And so unskilled labor is performed in England by foreigners, while an indigenous class of permanently unemployed is subsidized.

The culture of the person in this situation is not such as to elevate his behavior. One in which the late Amy Winehouse—the vulgar, semicriminal drug addict and alcoholic singer of songs whose lyrics effectively celebrated the most degenerate kind of life imaginable—could be raised to the status of heroine is not one that is likely to protect against bad behavior.

Finally, long experience of impunity has taught the rioters that they have nothing to fear from the law, which in England has become almost comically lax—except, that is, for the victims of crime. For the rioters, crime has become the default setting of their behavior; the surprising thing about the riots is not that they have occurred, but that they did not occur sooner and did not become chronic.

__________

Related reading:
Walter Russell Mead, “American Tinderbox
Bill Vallicella, “Flash Mobs
Victor Davis Hanson, “Paralytic American Society
Bruce McQuain, “London Rioting — Are We Seeing the End of the Welfare State?
Theodore Dalrymple, “British Degeneracy on Parade

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

Does the CPI Understate Inflation?

REVISED AND RE-DATED

A website called Shadow Government Statistics offers an alternative estimate of inflation. According to SGS, “methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.” (Related post, here.) According to a chart at the linked page, year-over-year inflation is now about 9 percent, as opposed to the official government figure of about 2 percent.

The claim by SGS has merit, and not only because the definition of inflation has shifted. Specifically:

  • Government spending (at all levels) rose by 6 percentage points between 1980 and 2009. (See the graph at this post.)
  • Most government spending is inherently inflationary.

The inherently inflationary nature of government spending can be grasped by considering the case where government spending is financed by taxes:

  • Suppose that in the absence of government the GDP of the United States would be, as it is today, about $15 trillion. (Actually, as I show here, GDP would be a lot more than today’s $15 trillion were government to do nothing more than provide defense and justice.)
  • Suppose, further, that a bunch of governors arrives on the scene one fine day to announce: “You Americans need our services, so we’re going to tax you $5 trillion in order to provide things that we want you to have.” About 20 percent of the $5 trillion — the money spent on defense and justice — will be of value to almost everyone because (among other things) it protects economic activity. But most of the things our governors wants us to have — a hodge-podge of programs and regulations — will be valued mainly by those governors (i.e., politicians and bureaucrats) and narrow constituencies. The hodge-podge of programs and regulations, along with our governors’ habit of taxing success, raises the real price of government to far more than the $5 trillion shown in our national income accounts.
  • Our governors’ “generous” confiscation of $5 trillion has the same effect as if the producers of $5 trillion worth of real (non-government) goods and services walk off the job. More accurately, it’s as if they walk off the job and begin to vandalize their capital (homes, commercial buildings, computer networks, etc.). Specifically, according to the chairwoman of Obama’s Council of Economic Advisers, tax increases have a multiplier effect of about 3 (i.e., every dollar of a tax increase yields a 3-fold decrease in GDP). Another economist estimates that the supply of labor declines by 1.9 percent in response to a 1 percent cut in wages (a tax is equivalent to a cut in wages). Even transfer-payment schemes (e.g., Social Security) have a negative economic effect because they penalize producers for the benefit of non-producers.
  • Despite the reduction in real output that accompanies government,our governors pretend that they are producing $5 trillion worth of services, so (1) they levy taxes for those services, most of which taxes fall on the productive sector, and (2) they pay the producers of government services (government employees and contractors)  with those taxes.
  • In sum, government pays the producers of government services in “empty dollars,” which those producers then try to spend on real output. And so we have $15 trillion chasing $10 trillion worth of real goods and services.

That’s real inflation. No deficit spending necessary. And it happens every time our governors commandeer additional resources, thus widening the gap between what the productive sector could produce and what it actually produces.

What if government were to borrow the $5 trillion instead of imposing $5 trillion in taxes? Borrowing doesn’t change the outcome, just the way we get there. There is still $15 trillion chasing real output of $10 trillion.

Now, not all of that government spending is inherently inflationary. The protection of citizens and their property from foreign and domestic predators (defense and justice) is essential to economic growth and the orderly functioning of free markets. Government spending on defense and justice currently accounts for 8 percent of GDP, whereas government spending (at all levels) currently accounts for 36 percent of GDP. Let’s say, for the sake of argument, (1) that the “right” level of government spending is 10 percent of GDP (the level that obtained in the early 1900s), (2) that the 10 percent is funded by a system of taxes which isn’t punitive toward investors and entrepreneurs (e.g., a single, flat, tax rate), and (3) that the 10 percent is not accompanied by burdensome regulations. Even in the absence of punitive taxes and burdensome regulations, the increase in government spending from 10 to 36 percent of GDP caused prices to rise by 25 percent. Inflation of 25 percent, when spread over 80 years and more, may seem inconsequential. But it is real — real theft, that is.

Moreover, the growth of government spending has been accompanied by punitive taxes and burdensome regulations. As a result, real GDP is 68 percent below its potential. In other words, in the absence of the regulatory-welfare state, real GDP would be more than 3 times its present level.

Visible inflation is bad enough; invisible inflation is a real killer.

Can Markets Force Fiscal Discipline?

Today’s market meltdown was triggered by the fear that Greece’s financial problems will spread to other European governments, and then to the United States. Greece’s problems can be described simply: The government cannot afford to pay the debts it owes because it has expanded the welfare state at the behest of its ignorant, greedy citizens. Moreover, the problems of Greece will spread to other Euro-zone nations if and as they incur debt in order to bail out Greece. (Recommended reading: “The Mother of All Bubbles.”)

Now, change “Greece” to the “United States” and you have a perfect description of what is likely to happen in this country if “our” government continues to drive us along the road to Europeanism.

The question of the day is whether the strongly negative response of financial markets to the situation in Europe will cause Europe’s “leaders” — and our own — to re-think their commitment to fiscal profligacy. Or, as seems more likely, will those “leaders” be so fearful of reneging on their irredeemable promises to their political constituents that they fall back on the time-honored “remedy” known as hyperinflation?

Hyperinflation — which is easy enough for central bankers to engineer — “solves” the problem of debt by smothering it under a mountain of new money. The problem with that “solution,” of course, is that it affects not just a government’s creditors but every economic actor. Real economic activity grinds to a near-standstill as vendors raise their prices to unaffordable levels in anticipation of facing even higher prices for their factors of production. Entrepreneurs give up on business formation for the same reason. In the end, a vibrant economy based on money and credit is reduced to a stagnant, near-subsistence economy based on personal relationships and barter.

Which way will Europe and the United States go? I have little confidence that our “leaders” will choose the path of fiscal discipline. They are especially unlikely to choose the path that encourages economic growth by shrinking the welfare state.

The Mega-Depression

In the preceding post, I offered my definition of recession and asked whether the current one has ended. (The answer: not yet, but I may know soon — or sooner than the official score-keepers at the National Bureau of Economic Research.) It since occurred that to focus on the current recession — or any recession — is to ignore America’s mega-depression, which is now more than a century old.

As I explain here, the mega-depression began in the early 1900s, when the economy began to sag under the weight of “progressivism” (e.g., trust-busting, regulation, the income tax, the Fed). Then came the New Deal, whose interventions provoked and prolonged the Great Depression (see, for example, this, and this). From the New Deal and the Great Society arose the massive anti-market/initiative-draining/dependency-promoting schemes known as Social Security, Medicare, and Medicaid. The extension and expansion of those and other intrusive government programs has continued unto the present day (e.g., Obamacare), with the result that our lives and livelihoods are hemmed in by mountains of regulatory restrictions.

The mega-depression is an example of  “that which is not seen,” a coinage of Frédéric Bastiat. In “That Which Is Seen and That Which Is Not Seen,” Bastiat writes:

Have you ever chanced to hear it said “There is no better investment than taxes. Only see what a number of families it maintains, and consider how it reacts on industry; it is an inexhaustible stream, it is life itself.” . . .

The advantages which officials advocate are those which are seen. The benefit which accrues to the providers is still that which is seen. This blinds all eyes.

But the disadvantages which the tax-payers have to get rid of are those which are not seen. And the injury which results from it to the providers, is still that which is not seen, although this ought to be self-evident.

When an official spends for his own profit an extra hundred sous, it implies that a tax-payer spends for his profit a hundred sous less. But the expense of the official is seen, because the act is performed, while that of the tax-payer is not seen, because, alas! he is prevented from performing it.

In the case of aggregate economic activity, what we see is what has been left to us by government. What we do not see is the extent to which the money taken from us by government and the restrictions placed upon us by government have deprived the economy of entrepreneurship, innovation, technology, and productive capacity. The cumulative effect of those deprivations — that which we do not see — dwarfs the Great Depression in depth and extent. The cumulative effect is our mega-depression:

The Perils of Nannyism: The Case of Obamacare

Nannyism is bad, even when it’s good. Suppose, for example, that Obamacare — as finally enacted by Congress — miraculously obtains the following impossible results:

  • No one who had insurance before Obamacare will find the cost of his insurance rising because (for example) the law stipulates that insurers must ignore pre-existing conditions and must cover certain previously uninsured conditions.
  • Everyone who is forced to buy insurance (or, alternatively, pay a tax penalty) will find that the additional cost is offset by insurance benefits.
  • The costs of subsidizing those who cannot afford insurance will be defrayed by eliminating “waste, fraud, and abuse” in Medicare, Medicaid, and various other government programs — “waste, fraud, and abuse” that has heretofore been tolerated because it is a natural concomitant of government programs and cannot be eliminated without eliminated the programs themselves.
  • Insurance subsidies will not be extended to illegal aliens, whose addition to the rolls would burden taxpaying citizens, even though Democrats relish the thought of converting those illegal aliens to Democrat-voting citizens.
  • The prices of various drugs and medical services will not change by more than they would have in the absence of Obamacare. That is to say, the extra demands generated by government mandates and the addition of some 47 million persons to the insurance rolls will somehow be met with additional supplies of drugs and medical services, despite the disincentives created by government control of drug prices and fees for various medical services (via the government-run insurance program).
  • There will be no rationing of medical care by government or government-approved bodies — no “death panels” — even though government control of medicine will choke off the provision of non-approved drugs and medical services.
  • The federal government’s budget deficits will not become larger than they would have been in the absence of Medicare. Nor will federal spending on Obamacare, Medicare, Medicaid, and Social Security swell to well more than 50 percent of GDP in a few generations, thus — in combination with necessarily higher taxes and the usual accretion of regulations — giving government almost absolute control of the American economy.
  • Because the federal government’s deficits will not rise any more than they would have in the absence of Obamacare, further tax hikes (above those already in store) will be unnecessary. It will especially unnecessary to further bleed “the rich,” whose incomes are an especially important source of funding for the business start-ups and capital formation that yield economic growth.
  • The federal government’s almost-absolute control of the American economy, accompanied inevitably by various social dictates favoring certain groups, will not complete the work of undermining true social cohesion (which is attained through voluntary associations), personal responsibility, and entrepreneurial initiative.
  • America, in short, will not be driven into the ranks of economically stagnant, morally bankrupt “social democracies” on the European model.

Given that those miracles occur — because Americans who care about such things have been promised (more or less) that they will occur — what could be wrong with Obamacare? Why are tens of thousands of Americans taking to the streets to protest it? Don’t they know a good deal when it’s offered to them?

Could it be that there are still millions of Americans who know instinctively and through observation (if not education) that those miracles will not occur? Could it be that those millions of Americans understand all too well that Obamacare will be just another well-intentioned program that paves our way to financial and bureaucratic hell?

Or could it be that millions of Americans value true liberty, the kind of liberty that is assured by the observance of social norms within a framework of government-protected negative rights? Is it possible that millions of Americans value true liberty and all it entails: the opportunity to make one’s own way in life, to make mistakes and learn from them, to choose from among alternative goods and services (including medical ones), and to choose even where the resulting choices may not be the “best” ones according to the calculations or preferences of academicians and bureaucrats?*

There’s the answer: Millions of Americans — even after decades of nannyism — simply want liberty because it is of value to them, in and of itself. (How unimaginably retro!) They prefer to decide for themselves what’s good for them, and are tired of having academicians, politicians, and bureaucrats make those decisions. In a phrase, they prefer liberty to nannyism.

(Related reading about “perfect” government oversight of economic affairs is here, here, and here. )

Related posts:
The Perils of Europeanism
Reclaiming Liberty throughout the Land
Secession
Secession Redux
A New (Cold) Civil War or Secession?
Fascism with a “Friendly” Face
Fascism and the Future of America
Selection Bias and the Road to Serfdom
Beware of Libertarian Paternalists
Monopoly: Private Is Better than Public
The Price of Government
Why Is Entrepreneurship Declining?
The Commandeered Economy
Rationing and Health Care
Law and Liberty
Rights, Liberty, the Golden Rule, and the Legitimate State
Parsing Political Philosophy

__________

* It is true, for example, that the portion of GDP going to medical goods and services has been rising, in part, because Americans want, and can afford, more and better medical goods and services. It is also true that prices of medical goods and services have risen, in part, because of government policies: the subsidization of consumption through Medicare, Medicaid, and the tax-favored treatment of employer-paid health insurance; the restriction of supply by the FDA and various licensing agencies, as discussed here, here, and here.)

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.”

Are We All Fascists Now?

David Henderson of EconLog thinks so; that is, he thinks we’ve become the subjects of a fascist regime:

[President Obama] has already, in less than 100 days, moved the U.S. economy further towards fascism. Sean Hannity and other critics keep criticizing Obama for his socialist leanings. But the more accurate term for many of his measures, especially in the financial markets and the auto market, is fascism.

Here’s what Sheldon Richman writes about “Fascism” in The Concise Encyclopedia of Economics:

Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest”–that is, as the autocratic authority conceived it. (Nevertheless, a few industries were operated by the state.) Where socialism abolished all market relations outright, fascism left the appearance of market relations while planning all economic activities. Where socialism abolished money and prices, fascism controlled the monetary system and set all prices and wages politically. In doing all this, fascism denatured the marketplace. Entrepreneurship was abolished. State ministries, rather than consumers, determined what was produced and under what conditions.

I agree wholeheartedly with Henderson and Richman. But I must say that Obama’s latest moves only confirm our long drift to fascism, which is a particular form of statism. As I wrote about 18 months ago:

We were, for decades, poised on the brink of the abyss of statism, which is outright state control of most social and economic institutions (e.g., medicine, notably but far from exclusively). I have concluded that we have gone over the brink and slid, silently and docilely, into the abyss.

Statism may be reached either as an extension of communitarianism or via post-statist anarchy or near-anarchy, as in Stalin’s Russia, Hitler’s Germany, and Mao’s China. We have come to statism via communitarianism, which leads inevitably to statism because the appetite for largesse is insatiable, as is the desire (in certain circles) to foster “social (or cosmic) justice.”

I was once optimistic that our transition to all-out statism would lead, in turn, to overthrow of statism:

[S]tatism is an easier target for reform than communitarianism. The high price of statism becomes obvious to more voters as more facets of economic and personal behavior are controlled by the state. In other words, statism’s inherent weakness is that it creates more enemies than communitarianism.

That weakness becomes libertarians’ opportunity. Persistent, reasoned eloquence in the cause of liberty may, at last, slow the rise of statism and hasten its rollback. And who knows, perhaps libertarianism will gain adherents as the rollback gains momentum.

My optimism has vanished, as I have come to understand that politicians their enablers (voters and contributors) are profoundly irrational. They prefer statism to liberty, regardless of what they say. They (most of them) mean to be benign, but statism is not benign. Statism may seem benign — as it does to Europeans, for example — but it is dehumanizing, impoverishing, and — at bottom — destructive of the social fabric upon which liberty depends.

UPDATE

Megan McArdle takes exception to David Henderson’s observations. She writes:

How is this helpful?  Has clarifying the distinction between fascism and socialism really added to most peoples’ understanding of what the Obama administration is doing?  All this does is drag the specter of Hitler into the conversation.  And the problem with Hitler was not his industrial policy–I mean, okay, fine, Hitler’s industrial policy bad, right, but I could forgive him for that, you know?  The thing that really bothers me about Hitler was the genocide.  And I’m about as sure as I can be that Obama has no plans to round up millions of people, put them in camps, and find various creative ways to torture them to death.

If he does, look, I take it all back.  Use the F-word freely.  Hell, I’ll hide you in our spare bedroom when the state police squads come looking for you.  But until then, can we stick to less inflammatory terms? Surely creative and intelligent adults can find ways to critique Obama without pointing out that Hitler was also a very effective speaker.

It is helpful. Anything that might cause Americans to reject Obama’s policies is helpful. If it takes scaring them by invoking the F-word, I’m all for it. After all, it is fair to say that Obama is a fascist (e.g. this and this), just as it is fair to say that FDR was one, in spades. (Does “Obama youth” ring a bell?)

Fascism is a bad thing. Therefore, why should anyone refrain from calling a fascist a fascist, when the target is a fascist? Leftists and outraged adolescents (much the same thing) like to pin the fascist label on libertarians and conservatives, but in doing so they merely demonstrate their petulance and ignorance of the word’s meaning.

Yes, Hitler was malign compared with Obama, but that doesn’t make Obama benign. In fact, Obama’s policies with respect to embryonic stem-cell research and abortion are steps in the direction of Hitlerian eugenics. If you don’t agree, read this post and all the posts listed at the end of it, plus these:
Singer Said It
The Case against Genetic Engineering
A “Person” or a “Life”?
A Wrong-Headed Take on Abortion

The Perils of Europeanism

Charles Murray speaks eloquently in opposition to our Europe-ward drift; for example:

….If we want to know where America as a whole is headed–its destination–we should look to Europe.

Drive through rural Sweden, as I did a few years ago. In every town was a beautiful Lutheran church, freshly painted, on meticulously tended grounds, all subsidized by the Swedish government. And the churches are empty. Including on Sundays. Scandinavia and Western Europe pride themselves on their “child-friendly” policies, providing generous child allowances, free day-care centers, and long maternity leaves. Those same countries have fertility rates far below replacement and plunging marriage rates. Those same countries are ones in which jobs are most carefully protected by government regulation and mandated benefits are most lavish….

I stand in awe of Europe’s past. Which makes Europe’s present all the more dispiriting. And should make its present something that concentrates our minds wonderfully, for every element of the Europe Syndrome is infiltrating American life as well.

We are seeing that infiltration appear most obviously among those who are most openly attached to the European model–namely, America’s social democrats, heavily represented in university faculties and the most fashionable neighborhoods of our great cities. There are a whole lot of them within a couple of metro stops from this hotel. We know from databases such as the General Social Survey that among those who self-identify as liberal or extremely liberal, secularism is close to European levels. Birth rates are close to European levels. Charitable giving is close to European levels. (That’s material that Arthur Brooks has put together.) There is every reason to believe that when Americans embrace the European model, they begin to behave like Europeans.

Europeanism rests on the fallacy of the “free lunch.” The state, which produces nothing, somehow underwrites the benefits listed by Murray — as well as “benefits” like socialized medicine and month-long vacations. All of these supposed benefits must be paid for, of course; the only question is how they will be paid for.

The illusion of free benefits is a disincentive to work: Why work harder when the state will ‘give” you child care, health care, etc.? The cost of those “free” benefits is a disincentive to hiring, business formation, and capital investment, thus penalizing those Europeans who are willing to work and take the business risks that lead to job creation.

Because of these disincentives, most European nations have long experienced low growth and high unemployment. There is even more of that in Europe’s future (and in ours).

Why? Because the “free” benefits enjoyed by Europeans are not free; they come at a high price. And that price will become even less affordable because of the low birth rate among Europeans. The low birth rate means that future European generations (like our own future generations) will find it harder to bear the burden of supporting their elders (whose numbers will rise disproportionately) while paying for their own “free” benefits.

Europeans are able to enjoy “free” benefits, in part, because they are taxed lightly (relative to Americans) for defense; Europe is a free rider on America’s military strength. As our military budget is tapped to pay for our own adventures in Europeanism, the free ride will end for Europeans. They will then have to pay the price of defending themselves from, say, an aggressive Russia or they will have to succumb to Russia’s territorial and economic demands.

Europeanism, in sum, is a prescription for economic stagnation, unrest, demagogic despotism (as the likely response to unrest), and surrender.