Month: July 2021

Why Should I Worry about Inflation?

What inflation? The spike on the right in this graph:

There are many reasons why inflation (except in moderation) is a bad thing. You can find those reasons by consulting Wikipedia or doing a web search. But there’s one reason that isn’t getting much press right now: Inflation hinders economic growth. Again, I won’t spell out the reasons, but you will find them if you research the ill effects of inflation.

You should be worried about the effect of inflation on economic growth because the effect is negative. Therefore, persistently high inflation means slower economic growth, which means less employment, less lucrative employment, less real output of products and services and — of course — a standard of living that’s lower than it would otherwise be. The top 10 percent won’t have anything to worry about because (a) they probably won’t be affected and (b) even if they are, the effects will be trivial (for them). The other 90 percent will suffer, and the suffering will hit the middle class (hard), the working class (harder), and the truly poor (hardest of all).

How do I know that inflation has an adverse effect on economic growth. Well, it’s among several things that, taken together, have an adverse effect on economic growth: an increase in the fraction of GDP that is commanded by government spending; a decrease in the rate of private, nonresidential investment spending; an increase in regulatory activity (as measured by Federal Register pages), and an increase in the rate of inflation as measured by the CPI-U. (See this for details.) As a result, there has been a steady down-trend in the rate of GDP growth since the end of World War II. (See Figure 2 here; it is slightly out of date but the trend has continued its decline in the two years that have passed.)

The equation presented at the first link above indicates that a persistent rise the rate of inflation by 1 percentage point will cause the rate of real GDP growth to decline by about 0.13 percentage point. That may not seem like much, but it becomes a lot over time because of compounding. Thus, for example, an increase in the rate of inflation from 3 to 4 percent, if sustained over 10 years, will result in a rate of growth that is 88 percent of what it would have the rate of inflation not increased.

But that estimate may be too low. GDP growth, as discussed, has been falling steadily for several decades, with occasional reversals during periods when onerous government policies have been relaxed. Abstracting from the downward trend, I obtained a statistically significant relationship between the year-over-year change in CPI-U and the year-over-year change in the de-trended rate of real GDP growth — with a four-quarter lag between the change in CPI-U and the change in the rate of GDP growth. What this amounts to is a rough estimate of the effect of the change in the rate of inflation on the rate of GDP growth when trend-related factors (government spending and Federal Register pages) are held constant.

Here’s the relationship:

The r-squared may not seem impressive, but it is statistically significant at  the 0.01 level (for those of you who care about such things).

What does the equation mean? It means that an annual rate of inflation above 2 percent generally drives the rate of GDP growth into negative territory. It means, specifically, that a 1 percentage point increase in the rate of inflation will cause the rate of growth to decline by 0.23 percentage point in a year — almost double the effect that I had derived earlier. Yes, there’s a lot of uncertainty about the accuracy of the estimate, but the negative relationship between inflation and GDP growth isn’t in doubt.

A little bit of inflation is a necessary thing in a growing economy because increases in outlays on investments must precede the resulting increases in quantity and quality of economic goods. But a sudden and persistent increase in the price of goods, fueled by government money-printing, is a bad thing. It creates uncertainty, and uncertainty is an enemy of sound economic decision-making.

What we are now experiencing may prove to be a very bad thing.

More Thoughts about the “Marketplace of Ideas”

In “The ‘Marketplace’ of Ideas” I observe that

[u]nlike true markets, where competition usually eliminates sellers whose products and services are found wanting, the competition of ideas often leads to the broad acceptance of superstitions, crackpot notions, and plausible but mistaken theories. These often find their way into government policy, where they are imposed on citizens and taxpayers for the psychic benefit of politicians and bureaucrats and the monetary benefit of their cronies.

The “marketplace” of ideas is replete with vendors who are crackpots, charlatans, and petty tyrants. They run rampant in the media, academia, and government.

Caveat emptor.

 
I have more to say in “Revisiting the ‘Marketplace of Ideas’“.
 
Now comes Tom Smith of The Right Coast:
 
Think [about] Nazism, Communism, various religions, Rastafarianism, and other -isms without number. Millions of people actually believe these things, often without reservation. The marketplace of ideas at best works only, ah, imperfectly, you might say. You also might say it’s always just a half-step away from disaster.
 
I would say that it often leads to disaster. Bringing the U.S. economy to its knees in the name of combating climate change is today’s Exhibit A. (Though it has stiff competition from Critical Race Theory, the transgender fad, abortion-on-demand, and a bunch of other things.
 
Equilibrium in the “marketplace of ideas”, were it ever to be realized, would be a consensus about “truth” of some kind or other. The problem is that even if such an equilibrium could be attained, a lot of damage (often irredeemable) would occur before nirvana arrives.
 
There are many historical parallels he tortuous and often futile search for “truth”, and to the damage that is wrought during that search.. One parallel that springs to mind — and which ought to horrify you — 100,000,000 human beings in the years between Hitler’s rise to power and the defeat of his regime.

Liberty vs. Security

An esteemed correspondent makes some good points in the following message (which I have edited lightly):

Our country is in more dire straits than it has been at any time in my lifetime [he is 85]. Maybe not as bad as when a Vice-President shot and killed a former Secretary of the Treasury or when there was an armed insurrection and each faction tried to take the other’s seat-of-government by force. I think our current divisions and divisiveness are detrimental to the continuation of the “greatest nation the world has ever known”; and I don’t think they can be fixed.

Liberty and security pull in opposite directions. More of one, less of the other. History and common-sense tells us that is so.

I’d like to start with Benjamin Franklin’s saying that is often misinterpreted. He said that our form of government is a republic, if you can keep it. That has been misinterpreted, repeatedly and emphatically by the current speaker-of-the-house to mean that Franklin was warning against a strong executive emulating a monarch. I think he was warning against the opposite, which he had witnessed in France. He also was fearful of our becoming a pure democracy with a people’s parliament becoming a law unto itself. This is similar to the tradeoffs between liberty and security. Either extreme is undesirable.

The geniuses who designed our government provided a number of checks and balances to try to keep things sort of in the middle. We are a federated democratic republic, not a democracy as is so often misstated. The Framers of the Constitution designed a government, but they neglected to explain the relationship of the government to those that were being governed. It took the first ten amendments to the Constitution to make that explicit. Those ten amendments delineate the limits that the federal government has over individuals. The 14th amendment essentially extends that to state governments. I especially like the tenth amendment. It is simply worded and says in plain English, any rights and authorities not specifically given to the federal government in this document belong to the people and/or the states.

Two constitutional issues were settled by the Civil War: slavery was no longer legal anywhere; and secondly, it was not permissible for states to secede from the union. It took later amendments to confirm that Blacks were not property; they are human beings with all rights of other human beings. Unfortunately that didn’t sit well with many Americans and we are still trying to sort out that issue in practice.

I don’t think that our current problems can be solved by appealing to the consent of the governed to be governed, namely by voting. Nor do I think secession (breakup) is feasible.

Voting: A significant fraction of those that voted in the November 2020 election think the the “results” are not honest. You can dismiss that view, but it is necessary to have a buy-in to the results of an election to have an election that conveys the consent of the governed. To me it is beside the point whether there is any evidence of “stealing an election” or not. There were enough irregularities that a demagogue can and did stir up doubts. Elections need to appear incorruptible, and today they are not. Could that be fixed? Not in our polarized society.

Furthermore, and this is more important, there isn’t balanced news coverage leading up to our elections or in analyzing the results. When there is overwhelming bias in the media, or there is no fair representation of both sides of the coin, we don’t have an environment for fair elections. Today one political party and the media are indistinguishable. The “media” is totally biased and deceitful in reporting “facts”. Remember Hamilton and Jefferson, who were arch political enemies. Each funded media that parroted his version of “truth”. But there were two sides. Add to the mix today’s “social media”, controlled by those favoring security over liberty. So the voices of liberty over security are relegated to fringe “nuts”. [The last bit is a gross error on the writer’s part, unless the millions who take my position on the matter are all on the fringe.]

Maybe even more importantly and indicative of a long-term fundamental change in America is the influence of “educators”. Uniformly, from those teaching young minds to the teachers of those teachers, in the formulators of “correct” history they favor security at the expense of liberty and are militant about spreading the “gospel”. They are children of the 1970s. Many grew up at a college their parents paid for and they didn’t have to work when they got out of college. They didn’t have any useful skills and of course the remedy for that is the old saying, “Those who can’t do, teach”.

So I don’t think there is any chance of “voting” to obtain the consent of the governed for their government is achievable. The influences wielded by the media and the educational system can’t be alleviated. There is only one perspective instead of a balance between liberty and security. I have avoided using the words liberal or conservative, or republican or democrat. I think that liberty and security are the two concepts that should be discussed more often as the heart of the country’s differences.

Secession: The possibility of secession, peaceful of not, was foreclosed by the Civil War. Since then the entanglements between the federal entity, the state entities, and the states themselves rule out out any practical solution those bindings.

Bottom Line: We’ll muck around for quite some time until it is realized that our system with all its faults is better than any feasible alternative. If and when it happens, I’ll be long gone.

I responded at length, in two epistles. Here’s the first one:

Your analysis of the present situation in the U.S. is spot-on. And, as you say, it’s not going to get any better on its own. There really are two Americas and they are irreconcilable. There are a lot of Americans — me included — who will not stand for “mucking around” that legitimates the present state of affairs or its ultimate destination: an imperial central government that is beholden to and effectively run by ultra-rich oligarchs and their lackeys and enablers in the bureaucracies, public schools, universities, information-technology companies, and media.

As for secession, the Civil War settled nothing — Justice Scalia to the contrary notwithstanding — except to underscore the fact that the North was able to muster superior forces thanks to its larger (free) population and industrial strength. If you have the time, read my analysis of the Court’s infamous ruling in Texas v. White, on which Scalia founded his baseless dictum: https://politicsandprosperity.com/constitution-myths-and-realities/. Scroll down to Section VI.F. for the bottom line about the legality of secession.

I also discuss in another section the practicality of secession or, rather, its impracticality. But there is another way to skin the cat. It is the nullification of federal edicts by the States. I refer to a new kind of nullification, which — unlike the kind attempted by South Carolina in the early 1830s — doesn’t involve formal declarations by State legislatures and governors. Rather, it involves non-compliance, acts of defiance, and foot-dragging. We saw some of that during Trump’s years, as States and cities declared themselves “sanctuaries” for illegal immigrants and refused to cooperate with ICE. We are beginning to see it from the other side as GOP-controlled States bring suit after suit against various federal actions (e.g., Keystone pipeline, Biden’s immigration fiasco), and GOP-controlled cities and counties declare themselves pro-life and gun-rights “sanctuaries”. This could be the wave of the future, with effective diminution of the central government through non-compliance with federal edicts. Federal courts have no power to enforce the edicts, and must rely on the federal government for enforcement. How many brushfires can the federal government put out? Would it resort to force against a state? I don’t know the answers, but it’s not clear that the federal government will come out on top, especially if it tries to enforce things that are wildly unpopular in some States and regions, such as abortion, strict gun-control measures, vaccine passports, or (the coming big thing) climate lockdowns.

So, unlike the earlier secession and its violent conclusion, there could be a non-violent kind of secession. It wouldn’t involve the formal breakup of the U.S., just a new modus vivendi between the States and the central government. Or, rather, a return to the modus vivendi that was intended by the Framers, enshrined in the 10th amendment, and then frittered away by the central government’s “mission creep”.

There is another, complementary, possibility. It is that Americans in the center turn their backs on the radical direction the country seems to be taking. (Resistance to CRT is a good case in point.) If enough of them do it, the GOP will retake Congress. And if in 2024 the GOP were to nominate someone more like Reagan than Trump, the Democrats could be kept out of power for a while — at least until they come to their senses. In the meantime, the Supreme Court could, without fear of being packed, make some libertarian rulings. A key one would be to find that Big Tech is s state actor (because of its immunity under section 230 of the Communications Decency Act), and therefore acts illegally when it censors views on the pretext that they are “hate speech” or “anti-science”, etc. In the way of the world, such an electoral and judicial turn of events could trigger a “cascade” in the direction opposite the one in which the country has been heading. And so, the “mucking around” might come to a better end than the one foreseen by you.

Here’s the second one:

A further thought about the tension between liberty and security.

It is really a tension between left and right, which is a deep psychological divide, as I discuss here: https://politicsandprosperity.com/2018/05/03/can-left-and-right-be-reconciled/. (The missing figure, which I will have to reconstruct, is derived from polling results that support the point made in the text.)

A point that I don’t make explicitly, but which should be obvious, is that compromise invites further compromise, to the detriment of liberty. The ransomware attacks, for instance, wouldn’t be happening if the U.S. hadn’t long ago abandoned the principle of unconditional surrender by the enemy. The track record of the U.S. government since the Korean War invites aggression. China and Russia know that and are playing the long game while Biden is tilting at global-warming windmills and (overtly and tacitly) endorsing a leftist agenda that will drive the U.S. economy to its knees while ensuring that the U.S. remains irreconcilably divided.

The end result of “mucking around” may well be not the kind of “social democracy” that keeps Eurpeoans fat, dumb, and happy. It may well be something far worse than that. You have been warned.

And I have been among the warning voices for many years.

Related reading on polarization: John Sexton, “The CRT Backlash and Progressives’ Big Lie about the Culture War“, Hot Air, July 8, 2021