Real vs. Nominal Unemployment Rate

The labor-force participation rate peaked in January 2000:

The business-cycle recession of 2008-2011 slammed full-time employment; the temporary closures of 2020 had the opposite effect:

The real vs. nominal unemployment rate (setting the real unemployment rate equal to the nominal rate in January 2000, and adjusting for subsequent changes in the labor-force participation rate and the fraction of employed persons working full-time):

Go here for an explanation of the method and the reasons for the decline in the labor-force participation rate from 2000 to 2016.

Election 2020: Installment 1

I was right about Election 2016. Now I’ll start posting regularly about Election 2020. It will be a while before there is some reliable polling about the presidential race. In the meantime, I’ll post about relevant issues, such as Trump’s popularity, the state of the economy, and the retreat of the COVID-19 outbreak.

There’s good news and bad news in this post. Whether the good news is good and the bad news is bad depends on whether you prefer Trump to Biden (or his replacement).

One piece of good news for Trump is the decided drop in the rate at which COVID-19 cases and deaths are occurring (if you believe the official numbers). Here are my tallies, averaged over 7 days to smooth over delays in reporting:

It’s too soon to know whether the curves will ascend again (or ascend significantly, if they do) as a result of “reopening”, which began in earnest over the Memorial Day weekend. Stay tuned.

Two pieces of very bad news for Trump are the sharp declines in (a) his popularity (as measured by an unbiased pollster, Rasmussen Reports) and (b) Americans’ view of the state of the nation (also as measured by Rasmussen).

This is worrying (or not) because it reflects sharply declining poll numbers for Trump, as against rising poll numbers for Obama at this stage 8 years ago:

And this is worrying (or not) because voters’ assessment of the state of the nation is well below where it was when Obama was reelected:

A piece of provisional good news is the possibility (to which I subscribe) of a quick turnaround in the economy. But don’t take my word for it. Consider this:

In early April, Jason Furman, a top economist in the Obama administration and now a professor at Harvard, was speaking via Zoom to a large bipartisan group of top officials from both parties. The economy had just been shut down, unemployment was spiking and some policymakers were predicting an era worse than the Great Depression. The economic carnage seemed likely to doom President Donald Trump’s chances at reelection.

Furman, tapped to give the opening presentation, looked into his screen of poorly lit boxes of frightened wonks and made a startling claim.

“We are about to see the best economic data we’ve seen in the history of this country,” he said….

“Everyone looked puzzled and thought I had misspoken,” Furman said in an interview. Instead of forecasting a prolonged Depression-level economic catastrophe, Furman laid out a detailed case for why the months preceding the November election could offer Trump the chance to brag — truthfully — about the most explosive monthly employment numbers and gross domestic product growth ever.

Since the Zoom call, Furman has been making the same case to anyone who will listen, especially the close-knit network of Democratic wonks who have traversed the Clinton and Obama administrations together, including top members of the Biden campaign.

Furman’s counterintuitive pitch has caused some Democrats, especially Obama alumni, around Washington to panic. “This is my big worry,” said a former Obama White House official who is still close to the former president. Asked about the level of concern among top party officials, he said, “It’s high — high, high, high, high.”…

Furman’s case begins with the premise that the 2020 pandemic-triggered economic collapse is categorically different than the Great Depression or the Great Recession, which both had slow, grinding recoveries.

Instead, he believes, the way to think about the current economic drop-off, at least in the first two phases, is more like what happens to a thriving economy during and after a natural disaster: a quick and steep decline in economic activity followed by a quick and steep rebound….

Furman’s argument is not that different from the one made by White House economic advisers and Trump, who have predicted an explosive third quarter, and senior adviser Jared Kushner, who said in late April that “the hope is that by July the country’s really rocking again.” White House officials were thrilled to hear that some of their views have been endorsed by prominent Democrats.

“I totally agree,” Larry Kudlow, head of the White House National Economic Council, replied in a text message when asked about Furman’s analysis. “Q3 may be the single best GDP quarter since regular data. 2nd half super big growth, transitioning to 4% or more in 2021.” He called Furman, whom he said he knows well, “usually a straight shooter. Hats off to him.”

“I have been saying that on TV as well,” said Kevin Hassett, a top Trump economic adviser, who pointed to a Congressional Budget Office analysis predicting a 21.5 percent annualized growth rate in the third quarter. “If CBO is correct we will see the strongest quarter in history after the weakest in Q2.”

Peter Navarro, a Trump trade and manufacturing adviser who’s a Harvard-educated economist, called the high unemployment America is currently facing “manufactured unemployment, which is to say that Americans are out of work not because of any underlying economic weaknesses but to save American lives. It is this observation that gives us the best chance and hope for a relatively rapid recovery as the economy reopens.”…

[A] former Obama White House official said, “Even today when we are at over 20 million unemployed Trump gets high marks on the economy, so I can’t imagine what it looks like when things go in the other direction. I don’t think this is a challenge for the Biden campaign. This is the challenge for the Biden campaign. If they can’t figure this out they should all just go home.”…

Between now and Election Day, there will be five monthly jobs reports, which are released on the first Friday of every month. The June report, covering May, is likely to show another increase in unemployment. But after that, Furman predicts, if reopening continues apace, the next four reports could be blockbusters. “You could easily have 1 to 2 million jobs created a month in those four reports before November,” he said.

He added, “And then toward the end of October, we will get GDP growth for the third quarter, at an annualized rate, and it could be double-digit positive economic growth. So these will be the best jobs and growth numbers ever.”…

Furman is an economist, but he had some strategic advice for the Biden campaign. “Don’t make predictions that could be falsified. There are enough terrible things to say you don’t need to make exaggerated predictions,” he said. “The argument that we are in another Great Depression will look like it was overstated. Trump can say, ‘Two million deaths didn’t happen, Great Depression didn’t happen, we are making a lot of progress.’”

The stock market reflects Furman’s (and my) assessment:

Give them jobs and their hearts, minds, and votes will follow.


Related posts:

Is a Perfect Electoral Storm Brewing?
“Give Me Liberty or Give Me Death”

Lockdown or Re-open?

UPDATED 05/03/20

Why are governments forcing businesses to close, costing tens of millions of jobs at least temporarily (and millions permanently), thus causing unemployment compensation claims to soar while tax revenues drop, and therefore causing some states to verge on bankruptcy, while also inflating unemployment compensation payouts and thereby making many workers reluctant to return to work even if they could? Nowhere mentioned in that breathless litany are the social and economic effects of lockdowns and job losses on families, friendships, social circles, etc., etc., etc.

The comfortable and fearful — a set that contains mostly leftists, who tend to be more affluent and more neurotic than the “deplorables” whom they disdain — are wont to worry about the consequence of re-opening “too soon” (i.e., before they are personally affected by lockdowns). That consequence, of course, is the possibility that the rate of COVID-19 infections and deaths will rise rather than fall to zero.

But so what? Suppose that a doctor — of all people — were to reopen his practice, tell patients that he will take every reasonable precaution to shield them from infection, require them to take similar precautions, have them sign releases holding him harmless should they later be found to have contracted COVID-19. Wouldn’t you go to that doctor if you needed to, rather than have him try to diagnose you telemedically? I would.

The same kinds of protocols could be followed by businesses of all kinds, and followed not only with respect to customers but also employees. Aren’t there tens of millions of citizens who would rather shop and work in the real world rather than in the virtual world? There certainly are tens of millions who would rather go to work instead of collecting unemployment compensation and watching their savings dwindle (if they have any to begin with). Moreover, the protocols could be backed by State governments granting to employers immunity from criminal and civil prosecutions if they follow specified procedures and all parties execute standard forms.

Why are governments preventing citizens from taking reasonable, informed risks so that the affluent and neurotic can sleep more easily — and enjoy watching frustrated “deplorables” protest in vain? Oh, that’s it. The suffering of “deplorables” given pleasure to leftists (e.g., this), and they’re in charge in too many places.

Which just goes to show, once again, that there’s no such thing as a social-welfare function. How can the pleasure gained by leftists possibly offset the pain they are causing to tens of millions of real Americans?

P.S. Jay Cost elaborates on the tension between the “haves” and the rest of us. The “haves” keep lecturing the rest of us to think of others. But it’s they who aren’t thinking of others; they’re only thinking of themselves. Well, if they don’t want to be exposed to COVID-19, they can just shelter in place while everyone else makes the economy work for the benefit of them (i.e., the “haves”).

My blue-collar roots are showing.

Why the UBI Is a Bad Idea

There are many reasons to oppose a universal basic income — a guaranteed stipend to be granted to every adult American citizen (or person regardless of age, or resident regardless of citizenship). I won’t enumerate all of the reasons, when one should be enough:

1. Almost every adult citizen (even including many with sever mental or physical handicaps) is capable of producing something of value for others.

2. A UBI is a disincentive to work, that is, to produce.

3. A UBI would nevertheless given its recipients a claim on the output of others.

4. Ergo: a smaller “pie” (total output), shares of which would be given to persons who had no hand in making the “pie” (or less of a hand than would otherwise be the case), and shares of which would therefore be taken from persons who actually had a hand in making the “pie”.

UBI is just another kind of government-enforced form of charity, which — like other forms — disincentivizes work (among beneficiaries and taxpayers alike) and reduces economic output. It also disincentivizes private charity.

Private charity actually incentivizes work (on the part of givers) because it is one of the ends that is served by work, along with affording the necessities and luxuries of life for oneself and one’s family. Private charity is also less likely to disincentivize work by its beneficiaries because it can be more easily aimed at those who need it in order to be capable of work (basic shelter, food, clothing, etc.), and can be tied to the actual performance of work (e.g., Goodwill Industries).

Scrooge, before his conversion to soft-headedness, was right about workhouses. Ironically, they were government-run institutions that had it right: charity in the form of gainful, productive employment. But then charity became a right, and the rest is history.

As the old saying goes, a hand up is better than a handout. Or, as another one goes, give a man a fish, and you feed him for a day; teach a man to fish, and you feed him for a lifetime.

The Economic Damage of COVID-19: A Preliminary Assessment

The Bureau of Economic Analysis today released its advance (first) estimate of GDP for the first quarter of 2020, which is now almost a month in the past. The year-over-year change in real GDP was 0.3 percent (a slight increase). The annualized decline in quarterly GDP was 4.8 percent, the worst since the 8.4 percent decline in the fourth quarter of 2008 (the year of the financial meltdown).

Here’s how the first quarter of 2020 looks in the context of post-World War II changes in GDP:

If, as I expect, the incipient COVID-19 recession of 2020 ends quickly (perhaps in the third or fourth quarter of the year), it will prove to be less damaging (economically) than previous post-war recessions. That won’t be of solace to those who have suffered through the disease, lost loved ones,  lost their jobs and businesses, and seen their investments decline in value.

But (economically) it is better than the alternative, which is something on the order of the Great Recession or Great Depression. The former spanned 3-1/2 years, from the time of its onset until real GDP finally rose above the pre-recession level. The latter spanned 1929-1936, was followed by a recession in 1937-1938, and didn’t end decisively until after World War II.

COVID-19: Public Service Announcement

It has become obvious that COVID-19 stats are unreliable; see this, this, and this, for example. I am therefore withdrawing from the business of reporting official stats and making projections based on them. I leave that endeavor with this thought.

Not-So-Random Thoughts (XXVI)

“Not-So-Random Thoughts” is an occasional series in which I highlight writings by other commentators on varied subjects that I have addressed in the past. Other entries in the series can be found at these links: I, II, III, IV, V, VI, VII, VIII, IX, X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII, XIX, XX, XXI, XXII, XXIII, XXIV, and XXV. For more in the same style, see “The Tenor of the Times” and “Roundup: Civil War, Solitude, Transgenderism, Academic Enemies, and Immigration“.

CONTENTS

Free Trade Rethought

The Death Penalty

State Actors in Action

Red vs. Blue

Serfdom in Our Future?


FREE TRADE RETHOUGHT

My position on so-called free trade:

  • Estimate the amount by which the price of a foreign product or service is reduced by the actions of foreign governments or their proxies.
  • Add that amount to the price as a tariff.
  • Regularly review and adjust the schedule of tariffs.

All other trade would be unencumbered, excepting:

  • the importation of products and services otherwise restricted by U.S. law (e.g., tanks, artillery pieces)
  • the exportation of products and services that are used directly in the development, manufacture, and operation of sensitive military systems (e.g., fighter aircraft, anti-missile defenses).

Selective tariffs, based on actual costs of production, would encourage the efficient use of resources and protect American workers who would otherwise be victimized by unfair trade. But that’s it. Sweeping tariffs on imports — just to “protect” American workers — do more than protect them. They also penalize American consumers, most of whom are also workers.

William Upton, writing in light of current events (“Make America Autarkic Again“, The American Mind, March 13, 2020), would go a lot further:

In our over-globalized world, a policy of total autarky is infeasible. But a degree of autarky should be recognized as self-evidently in America’s national interest.

Autarky, for those unfamiliar, was an economic and industrial policy of self-reliance wherein a nation need not rely on international trade for its economic survival. This is not to say that said nation rejected international trade or isolated itself from the global economic order, rather that it merely could survive on its own if necessary….

[Oren] Cass notes that sound industrial policy has allowed nations like Germany and Japan to retain strong manufacturing sectors. Cass also emphasizes the pivotal importance of manufacturing, not just for the economy, but for American communities:

[M]anufacturing is unique for the complexity of its supply chains and the interaction between innovation and production. One of the most infuriating face-palms of modern economics is the two-step that goes like this: First, wave away concern as other countries with aggressive industrial policies … attract our critical supply chains overseas, explaining that it doesn’t matter where things get made. Second, wait for people to ask “why can’t we make this or that here,” and explain that of course we can’t because all of the supply chains and expertise are entrenched elsewhere. It’s enough to make one slam one’s head into the podium.

There may be something to it.


THE DEATH PENALTY

I was surprised to read the assessment by Theodore Dalrymple, a former prison doctor, of the death penalty (“The Death Penalty’s Demise and the Withering of Authority“, Law & Liberty, February 11, 2020). On the one hand:

If I had been a prison doctor while the death penalty was still imposed in Britain, I should have had the somewhat awkward task of certifying murderers fit for execution….  It was not permitted to execute madmen even if they had been sane at the time of their crime; but with the ever-widening and loosening of psychiatric diagnosis, I should no doubt have been tempted always to find a medical reason to postpone the execution sine die. I would have found it hard to sign what would have amounted to a medical death warrant, all the more so with the man before my very eyes. Nor would I have much relished attending the execution itself, to certify that the execution had worked….

But while I should not have wanted to participate in an execution, I was nevertheless viscerally in favour of the death penalty because it seemed to me that there were crimes (though by no means all of them murder) so heinous, so despicable, that no other penalty was adequate to express society’s outrage at, or repudiation of, them. Moreover — though quite late in my career — I discovered evidence that suggested that the death penalty did in fact act as a deterrent to murder, something which has long been contested or outright denied by abolitionists.

But on the other hand:

Does its deterrent effect, then, establish the case for the death penalty, at least in Britain? No, for two reasons. First, effectiveness of a punishment is not a sufficient justification for it. For example, it might well be that the death penalty would deter people from parking in the wrong place, but we would not therefore advocate it. Second, the fact is that in all jurisdictions, no matter how scrupulously fair they try to be, errors are sometime made, and innocent people have been put to death. This seems to me the strongest, and perhaps decisive, argument against the death penalty.

And on the third hand:

Although, on balance, I am against the death penalty, I do not assume that those who are in favour of it are necessarily moral primitives, which abolitionists often give the impression of believing. For most of our history, the rightness of the death penalty has been taken for granted, and it cannot be that we are the first decent, reflective people ever to have existed. The self-righteousness of the Europeans in this respect disgusts me when they set themselves up to judge others. France, for example, abolished the death penalty only in 1981 – AD 1981, that is, not 1981 BC. When the death penalty in Britain was abolished in 1965 after many decades of campaigning by abolitionists, more than 90 per cent of the population was still in favour of it. Almost certainly it believed, if not necessarily in a fully coherent way, that to abolish the death penalty was to weaken the authority of society and to lessen the majesty of the law. It was also to weaken the prohibition against killing and, though involving the taking of a life (the murderer’s), also lessened the sanctity of life….

In Britain, one of the effects of the abolition of the death penalty, the downward pressure on all prison sentences, has been little remarked. Punishment has to be roughly proportional to the gravity of the crime (exact proportionality cannot be achieved), but if murder attracts only 15 years’ imprisonment de facto, what sentences can be meted out to those who commit lesser, but still serious, crimes? Moreover, the charge of murder is often reduced to the lesser crime of manslaughter, in which sentences – as a consequence – are often derisory….

It is scarcely any wonder that in the years since the abolition of the death sentence, Britain has gone from being a well-ordered, non-violent, law-abiding society to being a society with the highest rate of violent crime in Western Europe. Of course, the abolition of the death penalty was not the only cause, for crime was rising in any case, but it brought its contribution to the festival of disorder that followed.

It seems to me that Dalrymple ends up arguing in favor of the death penalty. He is correct about its deterrent effect (same post). He is wrong to give heavy weight to the possibility of error. And he overlooks a conclusive argument in its favor: there is one less criminal who might be let loose to commit more crimes. All of those points and more are covered in these posts:

Does Capital Punishment Deter Homicide?
Libertarian Twaddle about the Death Penalty
A Crime Is a Crime
Crime and Punishment
Saving the Innocent?
Saving the Innocent?: Part II
More Punishment Means Less Crime
More About Crime and Punishment
More Punishment Means Less Crime: A Footnote
Clear Thinking about the Death Penalty
Let the Punishment Fit the Crime
Another Argument for the Death Penalty
Less Punishment Means More Crime
Crime, Explained
Why Stop at the Death Penalty?
Crime Revisited


STATE ACTORS IN ACTION

Once upon a time I made a case for rescuing the First Amendment from its enemies in

the telecommunications, news, entertainment, and education industries [which] have exerted their power to suppress speech because of its content….  The collective actions of these entities — many of them government- licensed and government-funded — effectively constitute a governmental violation of the Constitution’s guarantee of freedom of speech (See Smith v. Allwright, 321 U.S. 649 (1944) and Marsh v. Alabama, 326 U.S. 501 (1946).)

Leo Goldstein (“Google and YouTube Are State Actors“, American Thinker, March 9, 2020) finds a smoking gun

in the FCC Obamanet orders of 2010 and 2015. The 2015 Obamanet Order, officially called Open Internet Order, has explicitly obligated all internet users to pay a tax to Google and YouTube in their ISP and wireless data fees. The Order even mentions Google and YouTube by name. The tax incurs tens of billions of dollars per year. More specifically, the Order said that by paying ISP fees (including mobile wireless), each user also pays for the services that ISP gives to platforms and content providers like YouTube, even if the user doesn’t use them….

Platforms and content providers are misleadingly called “edge providers” here. Thus, every ISP customer in the US is obligated to pay for the traffic generated by Google, Netflix, Facebook, and Twitter, even if he used none of them!

Off with their heads.


RED VS. BLUE

The prolific Joel Kotkin weighs in on the Red States’ economic and electoral advantages:

Even in a state as deeply blue as [California}, Democrats’ disdain for the basic values and interests of their own base could unravel their now seemingly unbridgeable majority. At some point, parents, artists, minorities, small businesspeople and even sex workers will not be mollified sufficiently by a fulsome expression of good intentions. If more voters begin to realize that many of the policies being adopted are injurious, they may even begin to look again at the Republicans, particularly once the toxic President Trump is no longer on the ballot scaring the masses to toe the line. [“Democrats Risk Blowback with Leftward Turn“, newgeography, March 1, 2020]

* * *

The political and cultural war between red and blue America may not be settled in our lifetimes, but it’s clear which side is gaining ground in economic and demographic terms. In everything from new jobs—including new technology employment—fertility rates, population growth, and migration, it’s the red states that increasingly hold the advantage.

Perhaps the most surprising development is on the economic front. Over the past decade, the national media, and much of academia, have embraced the notion that the future belonged to the high-tax, high-regulation economies clustered on the East and West Coasts. The red states have been widely dismissed, in the words of the New York Times, as the land of the “left behind.”

Yet the left-behind are catching up, as economic momentum shifts away from coastal redoubts toward traditionally GOP-leaning states. Just a few years ago, states like California, Massachusetts, and New York held their own, and then some, in measurements of income growth from the Bureau of Economic Analysis. Now the fastest growth is concentrated in the Sunbelt and Great Plains. Texans’ income in the latest 2019 BEA estimates was up 4.2 percent, well above California’s 3.6 percent and twice New York’s 2.1 percent. The largest jumps—and this may matter a lot in 2020—took place in the Dakotas, Nebraska, and Iowa. [“Red v. Blue“, City Journal, February 7, 2020]

But:

[S]ocialism is gaining adherents even in the upper middle-class and among the oligarchy. One critical component lies in detestation of all things Trump even among CEOs, most of whom, according to a recent Chief Executive survey, want him impeached. Corporate America is increasingly embracing the notion of a guaranteed income and is adopting politically correct positions on such things as immigration, particularly in tech and on Wall Street.

But the most important driver for socialism comes from the burgeoning green movement. Long dominated by the elite classes, environmentalists are openly showing themselves as watermelons — green on the outside, red on the inside. For example, the so called “Green New Deal” — embraced by Sanders, Warren and numerous oligarchs — represents, its author Saikat Chakrabarti suggests, not so much a climate as “a how-do-you-change-the entire-economy thing”. Increasingly greens look at powerful government not to grow the economy, but to slow it down, eliminating highly paid blue-collar jobs in fields like manufacturing and energy. The call to provide subsidies and make work jobs appeals to greens worried about blowback from displaced workers and communities.

Combined with the confused and vacillating nature of our business elites, and the economic stagnation felt by many Americans, socialism in the West is on the rise. An ideology that history would seem to have consigned to Leon Trotsky’s “dustbin of history”, could turn the land that once embraced Adam Smith closer to the vision of Karl Marx. [“The West Turns Red?“, newgeography, February 25, 2020]

I have shown the economic superiority of the Red State model. But that isn’t enough to rescue the country from the perpetual allure of socialism. As I say here,

… States and municipalities governed by Democrats will ever more boldly pursue policies that undermine traditional American culture (e.g., unabated encouragement of illegal immigration, accelerated favoritism toward “identity groups”) and which are broadly destructive of the economic and social fabric; for example: persisting in costly, money-losing recycling and composting programs that do nothing for the environment (taking into account the environmental effects of the vehicles and equipment involved); the replacement of fossil-fuel sources of electricity by unreliable and expensive “renewable” sources; encouragement of homelessness by subsidizing it and making it socially acceptable; discouragement of family formation and stability through the continuation and expansion of long-discredited vote-buying welfare programs; openly persecuting conservatives and conservative institutions.

All of that will intensify the divisions between Red and Blue States, and the divisions between Red State governments and the Blue cities within them. But that is a first-order effect.

The second-order effect is to make living in Blue States and cities more onerous for middle-to-low-income earners (and even some among the affluent), who will seek greener (Redder) pastures outside Blue cities and Blue States. But many (most?) of those refugees will not flee because they have come to believe that big government is the cause of their problems. Rather, they (especially the younger, more mobile, and more “socialistic” ones) will flee because they don’t want to suffer the consequences of big government (high taxes, high housing costs, etc.). But, being addicted to the idea that big government is good, and ignorant of the connection between big government and their woes, they will continue to vote for big-government politicians and policies. Thus will Blue States and Blue cites gradually turn Purple and, in many cases, Blue.

You read it here.


SERFDOM IN OUR FUTURE?

I recently mused about Walter Scheidel’s book, The Great Leveler. Kotkin addresses the thesis of that book in “Who Will Prosper After the Plague?” (Tablet, April 13, 2020):

[T]he wreckage [caused by the Black Plague of the 14th century] created new opportunities for those left standing. Abandoned tracts of land could be consolidated by rich nobles, or, in some cases, enterprising peasants, who took advantage of sudden opportunities to buy property or use chronic labor shortages to demand higher wages. “In an age where social conditions were considered fixed,” historian Barbara Tuchman has suggested, the new adjustments seemed “revolutionary.”

What might such “revolutionary” changes look like in our post-plague society? In the immediate future the monied classes in America will take a big hit, as their stock portfolios shrink, both acquisitions and new IPOs get sidetracked and the value of their properties drop. But vast opportunities for tremendous profit available to those with the financial wherewithal to absorb the initial shocks and capitalize on the disruption they cause….

Over time, the crisis is likely to further bolster the global oligarchal class. The wealthiest 1% already own as much as 50% of the world’s assets, and according to a recent British parliamentary study, by 2030, will expand their share to two-thirds of the world’s wealth with the biggest gains overwhelmingly concentrated at the top 0.01%….

The biggest long-term winner of the stay-at-home trend may well be Amazon, which is hiring 100,000 new workers. But other digital industries will profit as well, including food delivery services, streaming entertainment services, telemedicine, biomedicine, cloud computing, and online education. The shift to remote work has created an enormous market for applications, which facilitate video conferencing and digital collaboration like Slack—the fastest growing business application on record—as well as Google Hangouts, Zoom, and Microsoft Teams. Other tech firms, such as Facebook, game makers like Activision Blizzard and online retailers like Chewy, suggests Morgan Stanley, also can expect to see their stock prices soar as the pandemic fades and public acceptance of online commerce and at-home entertainment grows with enforced familiarity.

Growing corporate concentration in the technology sector, both in the United States and Europe, will enhance the power of these companies to dominate commerce and information flows….

The modern-day clerisy consisting of academics, media, scientists, nonprofit activists, and other members of the country’s credentialed bureaucracy also stand to benefit from the pandemic. The clerisy operate as what the great German sociologist Max Weber called “the new legitimizers,” bestowing an air of moral and technocratic authority on the enterprises of their choosing….

Members of the clerisy are likely to be part of the one-quarter of workers in the United States who can largely work at home. Barely 3% of low-wage workers can telecommute but nearly 50% of those in the upper middle class can. While workers at most restaurants and retail outlets face hard times, professors and teachers will continue their work online, as will senior bureaucrats….

The biggest winners in the fallout from the coronavirus are likely to be large corporations, Wall Street, Silicon Valley, and government institutions with strong lobbies. The experience from recent recessions indicates that big banks, whose prosperity is largely asset-based, will do well along with major corporations, while Main Street businesses and ordinary homeowners will fare poorly….

In the Middle Ages, many former citizens, facing a series of disasters from plagues to barbarian invasions, willingly became serfs. Today, the class of permanently propertyless citizens seems likely to grow as the traditional middle class shrinks, and the role of labor is further diminished relative to that of technology and capital.

In contrast to the old unionized workers, many people today, whether their employment is full-time or part-time, have descended into the precariat, a group of laborers with limited control over how long they can work, who often live on barely subsistence wages. Nearly half of gig workers in California live under the poverty line.

Now comes the payoff:

Historically, pandemics have tended to spark class conflict. The plague-ravaged landscape of medieval Europe opened the door to numerous “peasant rebellions.” This in turn led the aristocracy and the church to restrict the movements of peasants to limit their ability to use the new depopulated countryside to their own advantage. Attempts to constrain the ambitions of the commoners often led to open revolts—including against the church and the aristocracy.

… As steady and well-paying jobs disappear, the demands for an ever more extensive welfare state, funded by the upper classes, will multiply.

Like their counterparts in the late 19th century, the lower-class workforce will demand changes. We already see this in the protests by workers at Instacart delivery service, and in Amazon warehouse workers concerned about limited health insurance, low wages, and exposure to the virus.

As the virus threatens to concentrate wealth and power even more, there’s likely to be some sort of reckoning, including from the increasingly hard-pressed yeomanry.

In the years before the great working-class rebellions of the mid-19th century, Alexis de Tocqueville warned that the ruling orders were “sleeping on a volcano.” The same might be seen now as well, with contagion pushing the lava into the streets, and causing new disruptions on a scale of which we can’t predict.

Something like socialism (for non-elites) may emerge for the rubble. It will be the 21th century equivalent of bread and circuses: share just enough of the wealth to keep the proletariat in line.

The Great Leveler?

A correspondent recently brought Walter Scheidel’s book, The Great Leveler, into a discussion of COVID-19:

[Scheidel] argues persuasively that throughout human history plague has been one of the only four causes of significant reduction in income inequality (along with war, revolution, and state collapse). If the most dire of projections comes to pass (2.2 million deaths in the US), might that radically change our demography? People like the three of us are most likely to be among the departed. Some zip codes in Florida and Arizona would need a lot fewer mailmen. So, might Corona move the national political needle to the left? And even if demography doesn’t change things at the ballot box that much, won’t all this unavoidable reliance on government give the case for more government a boost? Might the possible persistence of Corona or a successor, make that boost even stronger?

My response:

My first reaction to your account of Scheidel’s book is that Scheidel must be some kind of ghoul. Plague, war, revolution, and state collapse (like their biblical counterparts) cause great misery (temporarily, at least) among all economic and social classes. The fact that the upper classes suffer more than the lower classes would be a consolation only to the pathologically envious among the lower classes or the economically ignorant (and self-flagellating) among the upper classes, who seem to believe that inequality arises from greed and not (in the main) differences in talents and accomplishments.

My second reaction is that Scheidel is underscoring the lesson that inequality is a natural phenomenon, whereas equality — the fool’s gold of the envious and the ignorant — can be had only at a price that no one should be willing to pay.

You’ve had the great advantage of reading the book. What say you?

The correspondent hasn’t replied to my question. Perhaps I touched a nerve; he is an affluent San Franciscan.

Preparedness

There’s a five-year-old video making the rounds in which Bill Gates warns about the next big catastrophe. Of course, the next big catastrophe looks like the coronavirus. But what did Bill Gates and various other doom-sayers warn about that hasn’t happened (and probably won’t happen)? Make enough predictions and some of them will come true.

In any event, how prepared was the U.S. for the current crisis? A team assembled under the aegis of Johns Hopkins University studied the problem last year. The report is here.

Scroll down to the ranking of countries by estimated level of preparedness. The U.S. is at the top of the list. Nevertheless, the authors of the study concluded that overall preparedness was weak; the U.S. simply looked like the best prepared among generally ill-prepared countries.

A big gap in such assessments, and in thinking generally about preparedness, is the ability of a country’s private sector (the actual producers of products and services) to respond to and rebound from major shocks. The U.S. certainly ranks high (if not highest) on that score.

Recession, Depression, or Service Interruption?

A few weeks ago, when COVID-19 was just beginning to look like a serious problem in the U.S., I saw a gloating op-ed by a left-winger on the Sunday “left vs. right” op-ed page of my local paper. The thrust of the lefty’s op-ed was that COVID-19 would push the U.S. into recession or depression, and that Trump wouldn’t be able to brag about the strength of the economy during his presidency.

Sick, sick, sick. But there’s a lot of that kind of sickness going around on the left. In yesterday’s NYT, for example, there was a piece by Robert Sharma under the headline “This Is How the Coronavirus Will Destroy the Economy“. Sharma’s piece makes some sense (as I will come to), but it is telling that the leftists at the Times chose to showcase it.

What is it with leftists and doom-saying? Well, doom-saying serves the purpose of justifying more and bigger government. And doom saying comes naturally to leftists, because they are neurotics. (See the section on Psychology at my “Leftism” page.)

In any event, are Sharma and his ilk right, or even close to right, about the economic effects of COVID-19? Sharma hangs his hat on the burden of debt, which will push many businesses and persons into bankruptcy if economic activity is depressed for very much longer. But in this era of government-backed student loans, relaxed standards for low-income and minority mortgagors, and bailouts in general it seems likely that the U.S. government will intervene to prevent defaults by businesses and persons meeting certain criteria for pre-coronavirus solvency. (Bailing out an already-bankrupt business or person would be out-of-bounds but not unthinkable for the political class.)

I therefore assume that the problem of indebtedness will handled in a way that prevents a “black hole” of insolvency from swallowing a large share of the economy. Similarly, “relief checks” will help to replenish the ready cash of persons whose paychecks are reduced or eliminated during the national lock-down.

That leaves the question of what happens when (not if) the coronavirus threat is tamed and Americans return to somewhat normal living and working habits.

The answer to the question lies, I believe, in the resemblance of the national lock-down to a long vacation taken simultaneously by a large fraction of Americans. But in this case almost everyone who was “on vacation” — either as a producer or consumer — will be eager to go back to work and eager to resume mundane activities. The situation will be more like the game of statues and less like the kind of dislocation that occurs when there is a financial panic (e.g., 1929, 2008) or a major industry (e.g., housing) craters because of over-investment (triggered by bad government policies).

This isn’t to say that there won’t be some dislocations and resulting unemployment. Even if every American  comes out of the crisis as solvent as he went into it, there will be some shifts in consumption patterns that require shifts in production patterns. And some productive capacity will be lost (e.g., small businesses — especially non-chain restaurants) and won’t be restored quickly.

The extent of dislocations and unemployment will depend partly on the length of the crisis and the effect that it has on producers. There will also be an effect on the demand side, as consumers shift their spending habits in response to the crisis. The new habits will include, for example, less travel (especially ocean cruises), less time spent in crowded venues (from stadiums and arenas to concert halls to restaurants), even more online shopping, and a shift of purchases (in the next months and years, at least) toward the accumulation and maintenance of stocks of non-perishable and frozen foods, cleaning products, and personal-hygiene products.

But, on the whole, I expect nothing like the Great Recession (unless the crisis drags on for more than another few months) and something on the order of the mild recession of 1990-91. It spanned only 4 quarters and saw real GDP dip by less than 2 percentage points.

What’s amazing to me is the overreaction to the COVID-19 pandemic, which (as yet) isn’t nearly as devastating in the U.S. as the swine-flu pandemic of 2009-10. There were 59,000,000 (that’s 59 million) cases of swine flu in the U.S., as against the current tally of 6,400 cases of coronavirus, and there were 12,000 swine-flu deaths as against the current tally of 108 coronavirus deaths. Yet, despite the disparity, there was nothing like the kind of panic that is now evident. In fact, I didn’t remember the swine-flu pandemic until it was mentioned recently, in the same context — panicky over-reaction to COVID-19.

The U.S. has changed a lot in the last 10 years, not least in the determination of the media to push “social democracy” and “wokeness”. The U.S. probably will survive COVID-19 with little economic damage — though the media will do its best to maximize that damage. But the U.S. will not long survive the media, that is, not as a relatively free and prosperous nation.

Control vs. Competition: Striking the Balance

Rare is the person who doesn’t have a definite view of how the world should be — at least those aspects of it that are important to the person. Even “libertarians” have proven themselves of dictatorial bent in such matters as the state-enforced redefinition of marriage as between anyone and anyone.

Having held a senior management position that made me responsible for the business side of a think-tank full of prime donne analysts (my customers), I know that control is necessary in any organization which strives to survive and thrive. Control is always there, if not in minute-to-minute micromanagement then in the design of processes and performance standards. The more indirect the ways and means of control the happier (generally) will workers be. (There are, of course, some workers who need and seek close direction, and some who need but reject it. Neither type fared well in my regime.)

If you are intelligent and competent, the urge to control can be very strong in you, especially if you are highly conscientious. You want to get things done, and done right. And you aren’t often sure that the people who work for you are capable of doing things right unless you (a) give them a lot of direction and (b) establish processes that help to ensure that their jobs are performed well.

The urge to control — in the manner I just outlined — may seem to conflict with “libertarian” and free-market principles. The reduction or absence of control is touted as the way to ensure that good ideas, systems, and processes are offered up and adopted through demonstrations of their superiority, which leads to and emulation and further innovation. By the same token, the controllers and their systems are forced to prove their worth, rather than appeal to authority (“Because I say so.”) or use authority (regulation) to maintain control.

There is something to be said for both ways of ordering the world. Chaos and inefficiency would reign if organizations (from families to huge corporations) were anarchic. Order and efficiency might emerge here and there because of the instinct to survive and the pressure of competition, but turmoil and waste would abound.

The spontaneous order of “libertarians” and free markets isn’t necessarily instantaneous order. It may take some disastrous wrecks at busy intersections before drivers generally adopt a stop-and-look-and-yield-to-the-car-on-the-right rule. Government institutionalizes the rule by installing stop signs or traffic lights. Government, on the other hand, doesn’t do much between the stop signs and traffic lights, except to arrest and fine violators of speed limits and reckless drivers often enough (in theory) to procure a relatively safe and steady flow of traffic.

Similarly, individual firms may be tightly controlled — whether overtly through micro-management or covertly through processes that have the same effect. But free markets give those firms room in which to innovate, market, and price their products so that consumers get good value for their money, while badly run firms fall by the wayside. In this instance, government (ideally) polices firms only to ensure that they don’t sell dangerous products and services, don’t despoil the environment, and don’t cheat their customers. Government, of course, doesn’t limit itself to minimal interventions because the urge to dictate is made real, all too often, by the power of government to shape commerce to its liking rather than to the tastes and preferences of consumers.

Putting government aside (and how I wish we could, for the most part), there is a flaw in the picture of controlled firms competing freely for consumers’ favor. The flaw is obvious in this reductio ad absurdum: There is one firm in the United States that produces all products and services. The firm has many subdivisions, each of which operates according to protocols that range from minute micro-management to loose-seeming processes that guide workers in the “right” direction. But the giant firm has no competitors and so its output accords with the wishes of its managers, which mesh with consumers’ wishes only by sheer luck.

The easily recognizable result is equivalent to state socialism. The are two reasons that a self-proclaimed socialist won’t embrace mega-corporatism. The first is that he might not (and probably wouldn’t be) in charge of it. The second is that he believes, beyond reason, that transforming a private person into a government bureaucrat magically transforms him into all-wise, all-knowing, beneficent servants of the people with not wish whatsoever to impose his personal worldview on others.

What about something closer to the current situation, in which important industries are dominated by one firm or a few firms, but those industries compete furiously with each other for consumers’ patronage? That’s a far better situation than the corporate equivalent of state socialism, but it still means that a lot of what becomes available to consumers depends on the whims of corporate bureaucrats and is, at best, sluggishly responsive to consumers’ wants. Overlay it with the heavy hand of government regulation and you get something much closer to state socialism.

The irony of the anti-trust movement of the late 1800s and early 1900s was that it (temporarily) broke up the monopolies of the day, but instituted regulatory agencies that simply (and with greater force) replicated the inefficiencies and unresponsiveness of the monopolies. That is to say, the anti-trust movement (which still has a lot of life in it) brought the U.S. closer to state socialism and the resulting evils of non-competitiveness.

Is there a golden mean of sorts, a combination of orderliness in the small that yields order and efficiency in the large? Classical microeconomic theory posits the perfectly competitive market as the golden mean. The theoretical result of perfect competition is more of everything, which is another way of saying that competition pushes costs down because it squeezes out inefficiency and “excess” profits. But economists recognize that perfect competition is a theoretical ideal that is seldom if ever attainable in the real world, and then only in isolated cases.

Various kinds of less-than-perfect competition — and even monopolies in some industries — are therefore not only inevitable but also desirable from the consumer’s point of view. The massive deadweight losses inflicted by regulation cannot conceivably be worth the theoretical losses resulting from less-than-perfect competition. And regulation is just one aspect of a burdensome control apparatus — government — that has robbed Americans of trillions of dollars over the decades.

The moral of the story: Control what you can if it makes you feel better. Control what you can if it makes your business more profitable. But aside from the obvious things, like controlling crime and foreign enemies, don’t use government to make the world conform to your idea of what it should be like. You’ll only make yourself poorer — and less free.

(See also “Economics: A Survey” and “Putting in Some Good Words for Monopoly“.)

The Fed Spreads Panic

Broad stock-market indices began on Friday to rebound from coronavirus panic. The rebound continued yesterday with huge gains. And it was continuing nicely this morning — until the Fed announced a rate cut. Bang! The bottom fell out of the market, for no good reason.

It’s not unusual for a rate cut to send stocks down because a cut implies that the Fed “knows” that the economy needs a boost. In this case the boost was “needed” because of the economic effects of coronavirus. The Fed, of course, knows next to nothing about “managing” the economy, as has been shown time and time again. Chalk up another bonehead play for the Fed.

See “Mr. Greenspan Doth Protest Too Much“, “The Fed and Business Cycles“, and “Money, Credit, and Economic Fluctuations“.

All-Volunteer Rhetoric

David Henderson of EconLog recounts a recent lecture about the demise of military conscription in the United States:

On Thursday, February 20, I gave a guest lecture in the classroom of Ryan Sullivan at the Naval Postgraduate School. This is the third year in a row I’ve given this lecture. It’s titled “How Economists Helped End the Draft,” and the readings for it are David R. Henderson, “The Role of Economists in Ending the Draft,” Econ Journal Watch, August 2005, Christopher Jehn, “Conscription,” The Concise Encyclopedia of Economics, and David R. Henderson and Chad W. Seagren, “Time to End Draft Registration,” Defining Ideas, February 10, 2016. Almost all the students were U.S. military officers.

During the discussion, I highlighted the stormy, and illuminating, interaction between Milton Friedman, a prominent critic of the draft, and General William Westmoreland, a prominent proponent of the draft, at some hearings held by the Gates Commission on the All-Volunteer Force, appointed by President Richard Nixon.

I quoted Friedman’s telling of the story in his and Rose Friedman’s autobiography, Two Lucky People:

In the course of his testimony, he made the statement that he did not want to command an army of mercenaries. I stopped him and said, ‘General, would you rather command an army of slaves?’ He drew himself up and said, ‘I don’t like to hear our patriotic draftees referred to as slaves.’ I replied, ‘I don’t like to hear our patriotic volunteers referred to as mercenaries.’ But I went on to say, ‘If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general; we are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher.’ That was the last that we heard from the general about mercenaries.

I drove the point home by saying, “Let me ask you, and I’m asking you to be honest here: Who, when you first thought of joining, looked at what the pay in the military was at the rank you would have?” Almost all of the students raised their hands. “You mercenaries, you,” I said, laughing. That got a few laughs and smiles.

I have long been a lukewarm supporter of the anti-conscription movement.

I am unpersuaded by the libertarian aspects of the movement. As a typical economist will tell you, conscription is a form of taxation, in that the conscriptee is forced to provide labor to the U.S. government at a wage rate that is (presumably) less than the wage rate he could earn through civilian employment. Thus conscription is (presumably) unfair to conscriptees.

But defense, itself, must be subsidized through taxation, which effectively makes conscriptees of all Americans who pay federal income taxes. I am unaware, however, of a suggestion by any serious economist (which excludes Paul Krugman) that Americans shouldn’t be taxed to defray the cost of defending the nation. So the anti-conscription movement among economists must be viewed with suspicion. Specifically, academic economists — being highly educated and therefore (relatively) highly paid — cringe at the though of being lowly-paid, bossed-around draftees, so they assume that other Americans share their distaste for servitude in the service of America.

The effort to end the draft became serious during the Vietnam War, when the anti-war movement was driven mainly by anti-draft sentiment. Fighting a distant enemy who seemed to pose no direct threat to America didn’t stir patriotic fervor in the way that the sinking of American merchant ships and the bombing of Pearl Harbor had in 1917 and 1941.

Will the draft ever be revived? Possibly, in the event of a major land war to protect vital American interests. But such things are unpredictable, so I won’t venture a prediction about the possibility of such a war. I will only predict (quite safely) that the general response of young American men to a draft will depend on two things:

  • whether the enemy of the time seems capable of mounting a direct threat on the liberty and well-being of Americans, and
  • whether the young people of that time still think of themselves as Americans.

(See also “Whither (Wither) Classical Liberalism — and America?” and the comments on that post.)

Economics Explained — Part IV: Loose Ends and Finishing Touches

This is the fourth installment of a long post. I may revise it as I post later parts. The whole will be published as a page, for ease of reference. In Parts I, II, and III I necessarily omitted many topics that might seem relevant to the principles of economics and their application in the real world. I address a few of those topics in this coda.

Macroeconomics

Macroeconomic aggregates (e.g., aggregate demandaggregate supply) are essentially meaningless because they represent disparate phenomena.

Consider Chuck and Debbie, who discover that, together, they can have more clothing and more food if each specializes: Chuck in the manufacture of clothing, Debbie in the farming and cultivation of foodstuffs. Through voluntary exchange and bargaining, they find a jointly satisfactory balance of production and consumption. Chuck makes enough clothing to cover himself adequately, to keep some clothing on hand for emergencies, and to trade the balance to Debbie for food. Debbie does likewise with food. Both balance their production and consumption decisions against other considerations (e.g., the desire for leisure).

Chuck and Debbie’s respective decisions and actions are microeconomic; the sum of their decisions, macroeconomic. The microeconomic picture might look like this:

  • Chuck produces 10 units of clothing a week, 5 of which he trades to Debbie for 5 units of food a week, 4 of which he uses each week, and 1 of which he saves for an emergency.
  • Debbie, like Chuck, uses 4 units of clothing each week and saves 1 for an emergency.
  • Debbie produces 10 units of food a week, 5 of which she trades to Chuck for 5 units of clothing a week, 4 of which she consumes each week, and 1 of which she saves for an emergency.
  • Chuck, like Debbie, consumes 4 units of food each week and saves 1 for an emergency.

Given the microeconomic picture, it is trivial to depict the macroeconomic situation:

  • Gross weekly output = 10 units of clothing and 10 units of food
  • Weekly consumption = 8 units of clothing and 8 units of food
  • Weekly saving = 2 units of clothing and 2 units of food

You will note that the macroeconomic metrics add no useful information; they merely summarize the salient facts of Chuck and Debbie’s economic lives — though not the essential facts of their lives, which include (but are far from limited to) the degree of satisfaction that Chuck and Debbie derive from their consumption of food and clothing.

The customary way of getting around the aggregation problem is to sum the dollar values of microeconomic activity. But this simply masks the aggregation problem by assuming that it’s possible to add the marginal valuations (i.e., prices) of disparate products and services being bought and sold at disparate moments in time by disparate individuals and firms for disparate purposes. One might as well add two bananas to two apples and call the result four bapples.

The essential problem, as discussed in the next section, is that Chuck and Debbie derive different kinds and amounts of enjoyment from clothing and food, and that those different kinds and amounts of enjoyment cannot be summed in any meaningful way. If meaningful aggregation is impossible for Chuck and Debbie, how can it be possible for an economy that consists of millions of economic actors and an untold variety of goods and services? And how is it possible when technological change yields results like this?

Buffalo (NY) journalist and historian Steve Cichon has an article on the Trending Buffalo website (“Everything from 1991 Radio Shack ad I now do with my phone“) featuring a full-page Radio Shack ad from the Buffalo News on February 16, 1991 (see graphic above). Of the 15 electronics products featured in the Radio Shack ad, 13 of them can now be replaced with a $200 iPhone according to Steve’s analysis. The 13 Radio Shack items in the ad (all-weather personal stereo, AM/FM clock radio, headphones, calculator, computer, camcorder, cell phone, regular phone, CD player, CB radio, scanner, phone answering machine, and cassette recorder) would have cost a total of $3,055 in 1991, which is equivalent in today’s dollars to $5,225. Versus only $200 for an iPhone 5S.

In hours worked at the average wage, the 13 electronics items in 1991 would have had a “time cost” of 290.4 hours of work at the average hourly wage then of $10.52 (or 7.25 weeks or 36.3 days). Today, the $200 iPhone would have a “time cost” of fewer than 10 hours (9.82) of work at the average hourly wage today of $20.35, and just one day of work, plus a few extra hours.

The piece is six years old and out of date in its details. But it’s nevertheless representative of almost all goods that have been produced since the founding of the United States, and almost all means of production.

GDP, in other words, is nothing more than what it seems to be on the surface: an estimate of the dollar value of economic output. Even at that, it’s not susceptible of quantitative modeling. (See “Macroeconomic Modeling: A Case Study” at this post.) Nor can real economic output — as opposed to government spending — be pushed upward by government spending, as I explain at length here.

GDP is certainly not a measure of “social welfare”, as most economists will admit — but for the wrong reason. They point to the “intangibles” that aren’t counted in GDP, one of which is the actual amount of happiness that each person derives not only from things counted in GDP but from the many things that aren’t counted in it (e.g., marital happiness, the love of children for parents, the malaise that prevails in times of prolonged international strife). In admitting that much, economists hint at — but fail to mention — the deeper reason that GDP doesn’t measure social welfare is that there is no such thing.

I will explain the non-existence of social welfare after tackling its running-mate: social justice.

Social Justice

This discussion covers a lot of ground. Little of it fits within my strict definition of economics — the voluntary production and exchange of goods — but it bears directly on two important byproducts of economic activity: income and wealth.

Social welfare (discussed below) is the implicit desideratum of seekers of “social justice”. Thomas Sowell has a better term for it: cosmic justice.

The seekers of cosmic justice are not content to allow individuals to accomplish what they can, given their genes, their acquired traits, their parents’ wealth (or lack of it), where they were born, when they live, and so on. Rather, those who seek cosmic justice cling to the Rawlsian notion that no one “deserves” better “luck” than anyone else. (For a critique of John Rawls’s theory of economic and social justice, see this.)

But “deserves” and “luck” (like “greed”) are emotive, value-laden terms. Those terms suggest (as they are meant to) that there is some kind of great lottery in the sky, in which each of us participates, and that some of us hold winning tickets — which equally “deserving” others might just have well held, were it not for “luck.”

This is not what happens, of course. Humankind simply is varied in its genetic composition, personality traits, accumulated wealth, geographic distribution, etc. Consider a person who is born in the United States of brilliant, wealthy parents — and who inherits their brilliance, cultivates his inheritance (genetic and financial), and goes on to live a life of accomplishment and wealth, while doing no harm and great good to others. Such a person is neither more “lucky” nor less “deserving” than anyone else. He merely is who he is, and he does what he does. There is no question of desert or luck. (I address luck in this post and those linked to therein.)

Such reasoning does not dissuade those who seek cosmic justice. Many of the seekers are found among the “80 percent”, and it is their chosen lot to envy the other “20 percent”, that is, those persons whose brains, talent, money, and/or drive yield them a disproportionate — but not undeserved — degree of fortune, fame, and power. The influential seekers of cosmic justice are to be found among the  “20 percent”. It is they who use their wealth, fame, and position to enforce cosmic justice in the service (variously) of misplaced guilt, economic ignorance, and power-lust. (Altruism — another emotive, value-laden term — does not come into play, for reasons discussed here and here.)

Some combination of misplaced guilt, economic ignorance, and power-lust motivates our law-makers. (Their self-proclaimed “compassion” is bought on the cheap, with taxpayers’ money.) They accrue power by pandering to seekers of cosmic justice and parasites who seek to gain from efforts to attain it. Thus politicians have saddled us with progressive taxation, affirmative action, and a plethora of other disincentivizing, relationship-shattering, market-distorting policies. It is supremely ironic that those policies have made most of persons (including many parasites) far worse off than they would be if government were to get out of the cosmic-justice business.

As Anthony de Jasay writes in “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….

There is the view, acknowledged by de Jasay, that the better-off are better off merely because of luck. But, as he points out,

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.

In fact, “social justice” not only penalizes but also minimizes and ostracizes the kinds of persons who have been mainly responsible for economic (and artistic and social) progress in the Western world, namely, straight, white, heterosexual males of European origin and descent — including, notably, Ashkenzi Jews. Many members of the aforementioned group are themselves advocates of “social justice”, which is just another indication that they are among the spoiled children of capitalism who have lost sight of what got them to where they are — and it wasn’t kow-towing to lunacies like “social justice”.

SOCIAL WELFARE

Some proponents of cosmic justice appeal to the notion of social welfare (even some economists, who should know better) . Their appeal 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 now address the first one. I begin with a question posed by Arnold Kling:

Does the usefulness of the concept of a social welfare function stand or fall on its mathematical properties?

My answer: One can write equations until kingdom come, but no equation can make one person’s happiness cancel another person’s unhappiness.

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 (not Mill’s only one) grew the ludicrous idea that it might be possible to quantify each person’s happiness and, then, to arrive at an aggregate measure of total happiness for everyone (or at least everyone in England). Utilitarianism, as a philosophy, has gone the way of Communism: It is discredited but many people still cling to it, under other names.

Today’s usual name for utilitarianism is cost-benefit analysis. Governments often subject proposed projects and regulations (e.g., new highway construction, automobile safety requirements) to cost-benefit analysis. The theory of cost-benefit analysis is simple: If the expected benefits from a government project or regulation are greater than its expected costs, the project or regulation is economically justified.

Here is the problem with cost-benefit analysis — which is the problem with utilitarianism: One person’s benefit cannot be compared with another person’s cost. Suppose, for example, the City of Los Angeles were to conduct a cost-benefit analysis that “proved” the wisdom of constructing yet another freeway through the city in order to reduce the commuting time of workers who drive into the city from the suburbs. In order to construct the freeway, the city must exercise its power of eminent domain and take residential and commercial property, paying “just compensation”, of course. But “just compensation” for a forced taking cannot be “just” — not when property is being wrenched from often-unwilling “sellers” at prices they would not accept voluntarily. Not when those “sellers” (or their lessees) must face the additional financial and psychic costs of relocating their homes and businesses, of losing (in some cases) decades-old connections with friends, neighbors, customers, and suppliers.

How can a supposedly rational economist, politician, pundit, or “liberal” imagine that the benefits accruing to some persons (commuters, welfare recipients, etc.) somehow cancel the losses of other persons (taxpayers, property owners, etc.)? To take a homely example, consider A who derives pleasure from causing great pain to B (a non-masochist) by punching him in the nose. A’s pleasure cannot cancel B’s pain.

Yet, that is how cost-benefit analysis (utilitarianism) works, if not explcitly then implicitly. It is the spirit of utilitarianism (not to mention power-lust, arrogance, and ignorance) which enables politicians and bureaucrats throughout the land to impose their will upon us — to our lasting detriment.

Conclusion: Politics Trumps Economics

In sum, and despite all of the feel-good rhetoric to the contrary, the United States differs only in degree (but not in kind) from modern communism and socialism. It’s a “social democracy”, in which the demos (mob) dictates the economic (and social) order through its various political patrons. But the political patrons (including the affluent elites who play footsie with them) are in charge, make no mistake about it, and they freely demonize those segments of the demos which turn against them. They are able to do so because the franchise has been so extended (and will continue to be extended by untrammeled immigration) that they won’t run out of votes to advance their essential agenda, which is control of the social and economic affairs of all Americans.

Despite the advent of Donald Trump, and the lesson that it should have taught high-ranking politicos, most of them (regardless of party affiliation) remain wedded to the patronage system because it’s their path to power and riches.

What this all means, as I once explained to a very smart economist, is that politics trumps economics. Ignoring politics (and being ignorant of it) while trying to understand and explain economics is like ignoring the heart while trying to explain the circulatory system without which there is no life.

Further Reflections on the Keynesian Multiplier

In “Keynesian Multiplier: Fiction vs. Fact“, I piggyback on the insights of Murray Rothbard and Steven Landsburg to show that the fiscal multiplier is fool’s gold. In addition to showing this mathematically and empirically, I address the mechanics of the multiplier:

How is it supposed to work? The initial stimulus (∆G) [an exogenous — unfunded — increase in government spending] creates income (don’t ask how), a fraction of which (b) [the marginal propensity to consume] goes to C [consumption spending]. That spending creates new income, a fraction of which goes to C. And so on. Thus the first round = ∆G, the second round = b(∆G), the third round = b(b)(∆G) , and so on. The sum of the “rounds” asymptotically approaches k(∆G) [where k is the multiplier]….

Note well, however, that the resulting ∆Y [change in real, inflation-adjusted GDP] isn’t properly an increase in Y, which is an annual rate of output; rather, it’s the cumulative increase in total output over an indefinite number and duration of ever-smaller “rounds” of consumption spending.

The cumulative effect of a sustained increase in government spending might, after several years, yield a new Y — call it Y’ = Y + ∆Y. But it would do so only if ∆G persisted for several years. To put it another way, ∆Y persists only for as long as the effects of ∆G persist. The multiplier effect disappears after the “rounds” of spending that follow ∆G have played out.

The multiplier effect is therefore (at most) temporary; it vanishes after the withdrawal of the “stimulus” (∆G). The idea is that ∆Y should be temporary because a downturn will be followed by a recovery — weak or strong, later or sooner.

Further,

the Keynesian investment/government-spending multiplier simply tells us that if ∆Y = $5 trillion, and if b = 0.8, then it is a matter of mathematical necessity that ∆C = $4 trillion and ∆I + ∆G = $1 trillion. In other words, a rise in I + G of $1 trillion doesn’t cause a rise in Y of $5 trillion; rather, Y must rise by $5 trillion for C to rise by $4 trillion and I + G to rise by $1 trillion. If there’s a causal relationship between ∆G and ∆Y, the multiplier doesn’t portray it.

And the clincher:

Taking b = 0.8, as before, the resulting value of kc is 1.25. Suppose the initial round of spending is generated by C instead of G. (I won’t bother with a story to explain it; you can easily imagine one involving underemployed factories and unemployed persons.) If ∆C = $1 trillion, shouldn’t cumulative ∆Y = $5 trillion? After all, there’s no essential difference between spending $1 trillion on a government project and $1 trillion on factory output, as long as both bursts of spending result in the employment of underemployed and unemployed resources (among other things).

But with kc = 1.25, the initial $1 trillion burst of spending (in theory) results in additional output of only $1.25 trillion. Where’s the other $3.75 trillion? Nowhere. The $5 trillion is phony. What about the $1.25 trillion? It’s phony, too. The “consumption multiplier” of 1.25 is simply the inverse of b, where b = 0.8. In other words, Y must rise by $1.25 trillion if C is to rise by $1 trillion. More phony math.

The essential falsity of the multiplier can be found by consulting the equation of exchange:

In monetary economics, the equation of exchange is the relation:

MV = PQ

where, for a given period,

M is the total nominal amount of money supply in circulation on average in an economy.

V is the velocity of money, that is the average frequency with which a unit of money is spent.

P is the price level.

Q is an index of real expenditures (on newly produced goods and services).

Thus PQ is the level of nominal expenditures. This equation is a rearrangement of the definition of velocity: V = PQ/M. As such, without the introduction of any assumptions, it is a tautology. The quantity theory of money adds assumptions about the money supply, the price level, and the effect of interest rates on velocity to create a theory about the causes of inflation and the effects of monetary policy.

In earlier analysis before the wide availability of the national income and product accounts, the equation of exchange was more frequently expressed in transactions form:

MVT = PT

where,

VT is the transactions velocity of money, that is the average frequency across all transactions with which a unit of money is spent (including not just expenditures on newly produced goods and services, but also purchases of used goods, financial transactions involving money, etc.).

T is an index of the real value of aggregate transactions.

(Note the careful — but easily overlooked — qualification that quantities are for “a given period”, as I point out in the first block-quoted passage. One cannot simply add imaginary increases in real output over an unspecified span of time to an annual rate of output and obtain a new, annual rate of output.)

If the values for M, V, P, and Q are annual rates or averages, then MV = PQ = Y, the last of which I am using here to represent real GDP.

If the central government “prints” money and spends it on things (i.e., engages in deficit spending financed by the Federal Reserve’s open-market operations), then ∆G (the addition to the rate of G) = ∆M (the average annual increase in the money supply). What happens as a result of ∆M depends on the actual relationships between M and V, P, and Q. They are complex relationships, and they vary constantly with the state of economic activity and consumers’ and producers’ expectations. Even a die-hard Keynesian would admit as much.

If new economic activity (Y) is relatively insensitive to  ∆G, as it is for the many reasons detailed here, it is equally insensitive to ∆M. For one thing — one very important thing — ∆M may be absorbed almost entirely by an increase in VT without a concomitant increase in Q. That is to say, ∆G necessarily implies (in the short run) an increase in transactions velocity (VT) and it is most likely to be spent on resources that are already employed (i.e, either on things that were already being produced or by displacing private purchases of things that were already being produced).

The equality MV = PQ long predates Keynes’s General Theory, in which he introduces the multiplier, and so it was well known to Keynes. As it happens, the equality is at the heart of his multiplier:

The state of the economy, according to Keynes, is determined by four parameters: the money supply, the demand functions for consumption (or equivalently for saving) and for liquidity, and the schedule of the marginal efficiency of capital determined by ‘the existing quantity of equipment’ and ‘the state of long-term expectation’ (p 246).

Adjusting the money supply is the domain of monetary policy. The effect of a change in the quantity of money is considered at p. 298. The change is effected in the first place in money units. According to Keynes’s account on p. 295, wages will not change if there is any unemployment, with the result that the money supply will change to the same extent in wage units.

We can then analyse its effect from the diagram [reproduced below], in which we see that an increase in M̂ shifts r̂ to the left, pushing Î upwards and leading to an increase in total income (and employment) whose size depends on the gradients of all 3 demand functions. If we look at the change in income as a function of the upwards shift of the schedule of the marginal efficiency of capital (blue curve), we see that as the level of investment is increased by one unit, the income must adjust so that the level of saving (red curve) is one unit greater, and hence the increase in income must be 1/S'(Y) units, i.e. k units. This is the explanation of Keynes’s multiplier.

Here’s the diagram:

If that is the explanation of Keynes’s multiplier, it is even more backward than the usual explanation that I shredded earlier. All it says is that if the real money supply (M̂) is increased (i.e., not translated into higher prices) due to an exogenous increase in government spending, the real interest rate (r̂) decreases. And if the decrease in the real interest rate leads to an increase in investment, Y must rise by enough to preserve the theoretical relationship between Y and saving (S) and investment (I).

In this case, Keynes depicts the multiplier as the effect of an increase in I resulting from an increase in M, which is really an increase in G (∆G) under the condition of less than full employment (whatever that is). The increase in I is made possible by the decrease in the real rate of interest. That’s odd, because the popular view of the multiplier is that it is the rise in real GDP that is directly attributable to a rise in government spending. Will the real multiplier please stand up?

Regardless, the relationship between the increase in I and the increase in Y is no less tautologous than it is in the usual explanation of the multiplier.Simply put, the increase in I is the increase that must result if Y increases, given an ex-post relationship between I and Y. There is no causality, except in the imagination of the proponent of increased government spending.

We are back where we started, with a mythical multiplier that explains nothing.

Economics Explained — Part III: The Principles Illustrated

This is the third installment of a long post. I may revise it as I post later parts. The whole will be published as a page, for ease of reference. If you haven’t read “Part I: What Is Economics About?“ or “Part II: Economic Principles in Perspective“, you may benefit from doing so before you embark on this part.

What follows isn’t meant to depict the historical evolution of economies and the role of governments in them. The idea, rather, is to contrast various degrees of complexity in economic activity, and the effect of government on that activity — for good and ill.

Communism: The Real Kind

Bands of hunter-gatherers roam widely, or as widely as they can on foot, with young children and old adults (perhaps in their 30s and 40s) in tow. The hunters and gatherers share with other members of the band what they catch, kill, and collect. The stronger members of the band presumably catch, kill, and collect more than their dependents do, and so they probably take more than their “share” because doing so gives them the strength to do what they do for everyone else.

This primitive arrangement — in which producers are necessarily consumer more than non-producers so that non-producers are able to survive — operates exactly in accordance with the maxim “from each according to his ability; to each according to his needs”. But that is not the system envisaged by Marxists and Millennials, in which the state takes from producers and given to non-producers because it’s “only fair” and in the spirit of “social justice”. Primitive peoples know on which side their bread is buttered, which is a lot more than can be said for modern “communists”, state socialists, and the parasites who believe that the goose will continue to lay golden eggs after it has been put down.

That’s what happens when people without “skin in the game” (i.e., political theorists, pundits, politicians, bureaucrats, naive students, and layabouts) get their hands on the levers of government power. But I am getting ahead of myself and will have much more to say about it later in this post.

Barter: An Economy of Relatives, Friends, and Acquaintances

Imagine a simple economy in which goods are exchanged through barter. Implicit in the transaction are the existence of property rights and gains from trade: The producers of the goods own them and can trade them to their mutual benefit.

There is, at this point, no money to clutter our understanding of the economy’s workings, though there could be credit. One producer, Arlo, could give some of his goods to another producer, Brenda, with the understanding that Brenda will repay the loan with a specified quantity of goods by a specified time.

Credit can exist in this barter economy because its participants know each other well, either personally or by reputation. Credit is therefore more firmly based on trust and knowledge than it is in economies that are more widely dispersed and involve total strangers, if not enemies. But credit always carries a cost because the creditor (a) usually has other uses for the goods (or money) that he lends, and must forgo those uses by lending, and (b) takes a risk that the borrower won’t repay the loan. The risk may be lower in a barter economy of friends, relatives, and acquaintances than in a dispersed, money-based economy, but it is nevertheless there.

Credit in a barter economy can finance investment. If Arlo is a baker and Brenda is a butter-maker, Arlo could offer to give Brenda additional bread in the future (over and above the amount that she would normally receive for a certain amount of butter) while he rebuilds his oven so that he can produce bread at a faster rate. (Here, we must assume that the capacity of Arlo’s oven is a bottleneck, and that the availability other resources — flour, for example — is not a constraint.)

Barter, whatever its social advantages — which shouldn’t be overlooked — is cumbersome. Even with the use of central marketplaces, much time and effort is required to arrange, in a timely way, all of the trades necessary to satisfy even a fairly simple menu of wants: food (of various kinds), clothing (of various kinds), construction services (of various kinds), personal-care services (e.g., haircuts) and products (e.g., soap). It is time and effort that could be put to better use in the enjoyment of the fruits of one’s labor and in the production of more goods (in order to enjoy even more fruits).

Then, too, there is the difficulty of saving in a barter economy. Arlo might stockpile bread, for instance, but how much bread can he stockpile before it spoils or loses value because Brenda can’t use as much as Arlo has on hand? Producers of services face more serious problems. For example, how would a barber save haircuts for a rainy day?

A Closed, Money-Based Economy

We are still in a close-knit economy, that is, a closed one. But money now enters the picture. It eases the task of acquiring goods by allowing the purchaser to acquire them at his leisure (subject to the risk of non-delivery, of course). This is called saving, which is also a form of credit. The purchaser of goods (who is also a producer of goods) needn’t trade all of his output for the output of others. He can defer his purchases, thus effectively giving credit to those who buy his goods while he puts off buying theirs.

How does it work? If Arlo makes bread and Brenda makes butter, Arlo, with Brenda’s consent, can give her some bread in exchange for money instead of butter. (Maybe Arlo doesn’t need butter at the moment, and would rather buy it from Brenda at a later date.) Arlo, at one stroke, is accepting money (as a measure of the value of the goods he can purchase in the future) and extending credit to Brenda.

The value of the money, to Arlo, depends on his confidence that Brenda will deliver to him the quantity of butter that he would have received by trading his bread for her butter on the spot. If Arlo is unsure about Brenda’s ability to deliver the desired quantity of butter at a future date, he will ask for the monetary equivalent of additional butter. This is equivalent to the issuance of credit by Arlo to Brenda; that is, he is giving her time in which to produce more butter, and getting a share of the additional output in return.

A money-based economy is, perforce, a credit-based economy. And the value of money depends on the holder’s assessment of his ability to get his money’s worth, so to speak.

The existence of money enables producers to save a portion of their income in a non-perishable, fungible form. This facilitates investment by, for example, enabling the investing party to subsist on what he can purchase from the money he has saved while turning his time and effort toward improving the way in which he produces his goods, devising new goods that might yield him more income, or even wandering far and wide to seek new buyers for his goods.

Thus money is a beneficial economic instrument — as long as the terms of its use are established by those who actually produce and exchange goods. This included the “middlemen” (i.e., wholesalers, retailers, bankers, lenders) whose services are sought and valued by producers of other goods. As I will discuss later, outside interference in the creation and valuation money will distort the terms of trade between producers, causing them to make choices that are less beneficial to them than the choices they would make in the absence of such interference.

In an economy where there is no outside interference in the issuance and valuation of money (and credit), defaults aren’t distorting; that is, they don’t change the “normal” flow of economic activity. Those who give and accept credit do so willingly and after balancing the risks involved (including the possibility of unforeseen calamities) against the gains from trade. Moreover, other “middlemen” known as insurers come to the fore. For a fee, which is paid willingly by the participants in this economy, they absorb the costs of losses from unforeseen calamities (personal injury and illness, fire, flood, etc.).

An Open, Money-Based Economy

An open economy is simply one in which goods are exchanged across territorial boundaries. This kind of exchange is inherently beneficial because it enables all parties to improve their lot by giving them access to a wider range of goods. It also fosters specialization, so that a greater abundance of goods is produced, given available resources. Though inter-territorial trade can be conducted through barter, money obviously facilitates inter-territorial trade, inasmuch as it is (by definition) conducted over a wider area, making direct trades even more difficult than they are within smaller area.

Inasmuch as government isn’t yet in the picture, there is practically no downside to inter-territorial trade. It is simply an expansion of what has gone before — voluntary exchanges of goods (usually through the medium of money) for the mutual benefit of the parties to the transactions. With government out of the picture, there are less likely to be distortions of the kind that are caused by tariffs and subsidization, both of which are aimed at benefiting the citizens (or elites) of one territory at the expense of persons in other territories.

An Open, Money-Based Economy with Government

It is time to introduce government. I am not suggesting that government is a necessary or inevitable outgrowth of a money-based economy. Government probably came first, in the guise of a tribal leader to whom certain decisions were referred and who was responsible for settling disputes within the tribe and seeing to its defense from outside force.

The point of introducing government here is to highlight its potential economic value, and to draw attention to the ways in which it can destroy economic value — and liberty as well. I must say, at the outset, that government, when it comes to domestic affairs, can do no better than enforce prevailing social norms that not only bind a people but also protect them from each other. Such norms include the prohibition of — and social punishment of — acts that cause harm, including the disruption of economic activity. They may be summarized as acts of force (e.g., murder, battery, theft, and vandalism) and fraud (e.g., lying and deliberate deception). There is a related peace-keeping function that is best performed by a third party, and that is the settlement of civil disputes, which in some cases must be done by government, as a referee of last resort.

The point of government with respect to such acts is to ensure the enforcement and punishment of prohibitions in an even-handed way by a party that is presumed to be impartial. (I won’t get into the many historical deviations from this ideal, but will later address how those deviations might have been minimized.) With the assurance that government will enforce and punish harmful acts, the populace as a whole — including its economic units — can more freely go about the business of life (and business) and spend less time, effort, and money on self-defense. In this way, government can be a boon to an economy, especially one that spans a large and diverse populace of strangers.

Ensuring that the business of business can be conducted freely (within the constraint that otherwise illegal transactions are prohibited and punished), requires the national government to prevent subsidiary governments from erecting barriers to trade between the territories of the subsidiary governments. The national government may, on the other hand, restrict trade between entities inside the nation and entities outside of it, where such restrictions (a) keep dangerous materials and technologies out of the hands of actual or potential enemies or (b) prevent foreign regimes from undermining parts of the national economy by subsidizing foreign producers directly or through tariffs on imports to the foreign country.

Government can also protect the populace (and the business of business) from attacks by outsiders. The ideal way of doing this is to mount a defense that is robust enough to deter such attacks. Failing that, the defense must be robust enough to defeat attacking outsiders in a way the prevents much of the damage that they might otherwise do to the populace and its economic activities.

(The problematic side of peace-keeping, both domestically and against outsiders, is that its costs must be borne in some manner by the people and economic units it protects. Further, those costs must be borne, in many cases, by persons who have some objection to peace-keeping; for example: outright pacifists, bleeding-hearts who loath to believe that certain classes of human beings are more prone to criminality than others, and yet-to-be-mugged innocents who simply believe the best of everyone. That said, there is no “fair” way to apportion the costs of peace-keeping, but there is a fairer way than the is now the case: the imposition of a truly flat tax.)

A government that is limited as outlined above must be subject to several checks if it is to remain limited:

  • A written constitution that specifies the powers of the national government and subsidiary governments.
  • Onerous provisions for amending the written constitution.
  • A judiciary that is empowered to review all governmental actions to ensure their consistency with the written constitution.
  • A mechanism for rejecting judicial decisions that are inconsistent with the written constitution.
  • Regular elections through which qualified voters pass judgment on government officials.
  • The restriction of voting to persons of mature age who have “skin in the game”.

The failure to institute and maintain any of these checks will result, eventually, in a system of government that routinely does more than defend the populace and ensure that the business of business can be conducted freely. In the United States, the lack of oversight of the judiciary and the expansion of the franchise (rather than its restriction) have proved fatal to the otherwise clever design of the original Constitution.

The result is an badly distorted economy, which produces things (or fails to produce them) in accordance with the desires (mostly) of unelected bureaucrats, and redistributes income and wealth (and such antecedents as jobs and university admissions) in accordance with the desires of persons without “skin in the game” (i.e., political theorists, pundits, politicians, bureaucrats, naive students, and layabouts). The economy isn’t only badly distorted, but as a result of myriad government interventions, it produces far less than it would otherwise produce, to the detriment of almost everyone, including the supposed beneficiaries of government interventions.

Macroeconomics

What I have discussed thus far is microeconomic activity — the actions of individuals and firms that result in the exchange of economic goods, either directly or with the aid of money and credit. I have also addressed the effects of government interventions, but mainly in terms of the microeconomic effects of such interventions.

What I have avoided, except in passing, is the thing called macroeconomics, which is supposed to deal with aggregate economic activity and things that influence it, such as the monetary and fiscal tools wielded by government.

Economics Explained — Part II: Economic Principles in Perspective

This is the second installment of a long post. I may revise it as I post later parts. The whole will be published as a page, for ease of reference. If you haven’t read “Part I: What Is Economics About?“, you may benefit from doing so before you embark on this part.

What Drives Us

Humans are driven by the survival instinct and a host of psychological urges, which vary from person to person. Those urges include but are far from limited to the self-aggrandizement (ego), the need for love and friendship, and the need to be in control (which includes the needs to possess things and to control others, both in widely varying degrees). Economic activity, as I have said, excludes matters of love and friendship (though not calculated relationships that may seem like friendship), but aside from those things — which influence personal economic activity (e.g., the need to provide for loved ones) — there are more motivations for economic activity than can be dreamt of by economists. Those motivations are shaped genes and culture, which are so varied and malleable (in the case of culture) that specific knowledge about them is useful only to the purveyors of particular goods.

Therefore, economists long ago (and wisely) eschewed models of economic behavior that impute particular motivations to economic activity. Instead they said that individuals seek to maximize utility (something like happiness or satisfaction), whatever that might be for particular individuals. Similarly, they said that firms seek to maximize profits, which is easier to quantify because profit is measured in monetary units (dollars in America).

Irrational Rationality

Further, economists used to say that individuals act rationally when they strive to maximize utility. Behavioral economists (e.g., Richard Thaler) have challenged the rationality hypothesis by showing that personal choices are often irrational (in the judgment of the behavioral economist). The case of “saving too little” for retirement is often invoked in support of interventions (including interventions by the state) to “nudge” individuals toward making the “right” choices (in the judgment of the behavioral economist). The behavioral economist would thus impose his own definition of rational behavior (e.g., wealth-maximization) on individuals. This is arrogance in the extreme. All that the early economists meant by rationality was that individuals strive to make choices that advance their particular preferences.

Wealth-maximization is one such preference, but far from the only one. A young worker, for example, may prefer buying a car (that enables him to get to work faster than he could by riding a bus) to saving for his retirement. There are many other objections to the imposition of behavioral economists’ views. The links at the end of “No Tears for Cass Sunstein” (Thaler’s co-conspirator) will lead you to some of them. That post and the posts linked to at the end of it also provide insights into the authoritarian motivations of Thaler, Sunstein, and their ilk.

The Rise of Corporate Irresponsibility

Turning to firms — the providers of goods that satisfy wants — I have to say that the profit-maximization motive has been eroded by the rise of huge firms that are led and managed by bureaucrats rather than inventors, innovators, and entrepreneurs. The ownership of large firms is, in most cases, widely distributed and indirect (i.e., huge blocks of stock are held in diversified mutual-fund portfolios). This makes it possible for top managers (enabled by compliant boards of directors) to adopt policies that harm shareholders’ financial interests for the sake of presenting a “socially responsible” (“woke”) image of the firm to … whom?

The firm’s existing customers aren’t the general public, they are specific segments of the general public, and some of those segments don’t take kindly to public-relations ploys that flout the values that they (the specific segments) hold dearly. (Gillette and Dick’s Sporting Goods are recent cases in point.) The “whom” might therefore consist of segments of the public that the firms’ managers hope will buy the firm’s products because of the firm’s pandering. and — more likely — influential figures in business, politics, the arts, the media, etc., whom the managers are eager to impress.

“Social responsibility” fiascos are only part of the picture. Huge, bureaucratic firms are no more efficient in their use of resources to satisfy consumers’ wants than are huge, bureaucratic governments that (at best) provide essential services (defense and justice) but in fact provide services that politicians and bureaucrats are “needed” in order to buy votes and make work for themselves.

The bottom line here is that the satisfaction of consumers’ wants has been compromised badly. And the combination of government interventions and corporate misfeasance has made the economy far less productive than it could be.

The Flip Side of Economics: Failure to Produce

Economics, therefore, is about the satisfaction of human wants through the production and exchange of goods, given available resources. It is also about the failure to maximize the satisfaction of wants, given available resources, because of government interventions and corporate misfeasance.

The gross underperformance of America’s economy illustrates an important but usually neglected principle of economics: Every decision has an opportunity cost. When you choose to buy a car, for example, you forgo the opportunity to buy something else for the same amount of money. That something else, presumably, would afford you less satisfaction (utility) than the car. Or so the theory goes. But whether it would or wouldn’t isn’t for a behavioral economist to say.

Individuals (and firms) often make choices that they later regret. It’s called learning from experience. But “nudging”, government interventions, and corporate sluggishness reduce the opportunity to learn from experience. (Government interventions and corporate sluggishness also prevent, as I have said, behaviors that are essential to economic vitality: invention, innovation, and entrepreneurship.)

Government interventions also incentivize economically and personally destructive behavior. There are many estimates of the costs of government interventions (e.g., this one and those documented quarterly in Regulation magazine) and a multitude of examples of the personally destructive behavior engendered by government interventions. It is impossible to say which intervention has been the most harmful to the citizenry, but if pressed I would choose the thing broadly called “welfare”, which disincentivizes work and is an important cause of the dissolution of black (welfare-dependent) families, with attendant (and dire) results (educational, occupational, criminal) that bleeding hearts prefer to attribute to “racism”. If not in second place, but high up on my list, is the counterproductive response (by government at the prodding of bleeding hearts) to homelessness.

Thus we have yet another principle: the “law” of unintended consequences. Unintended consequences are the things that aren’t meant to happen — but which do happen — when an actor (be it governmental, corporate, or individual) doesn’t think about (or chooses to minimize or ignore) when it or he focuses on a particular problem or desire to the exclusion of other problems or desires. Individuals can learn from unintended consequences; governments and, increasingly, corporations are too rule-bound and infested by special interests to do so.

None of what I have said about corporations should be taken as an endorsement of governmental interventions to make them somehow more efficient and responsible. (The law of unintended consequences applies in spades when it comes to government.) The only justification for state action with respect to firms is to keep them from doing things that are inimical to liberty and can’t be rectified by private action. In an extreme case, a business that specializes in murder for hire is (or should be) a target for closure and prosecution. A business that sells a potentially harmful product (e.g., guns, cigarettes) isn’t a valid target of state action because the harmful use of the product is the responsibility of the buyer, product-liability law to the contrary notwithstanding.

What about a business that collaborates (perhaps tacitly) with other businesses or special interests to prevent the expression of views that are otherwise protected by the First Amendment but which are opposed by the managers of the business and their political allies? There are good arguments for a hand-off approach, in that markets — if they are allowed to operate freely — will provide alternatives that allow the expression (and wide circulation) of “objectionable” views. If anti-trust actions against purveyors of oil and steel (two take two examples from the past) are inadvisable (as I have argued), aren’t anti-trust actions against purveyors of information and ideas equally inadvisable? There is a qualitative difference between economic rapacity and what amounts to a war that is being waged by one segment of the nation against other segments of the nation. (See for example, “The Subtle Authoritarianism of the ‘Liberal Order’“.) Government action to defend the besieged segments is therefore fitting and proper. (See “Preemptive (Cold) Civil War“.)

Economics and Liberty

This brings me to the gravest economic threat to liberty, which is state socialism and its variants: communism, fascism, and social democracy. All of them vest control of the economy in the state, when not through outright state ownership of the means of production, then through laws and regulations that dictate allowable types of economic output, the means and methods of its production, and its beneficiaries. The United States has long been burdened with what has been called a “mixed” economic system, which is in fact a social democracy — an economy that has many of the trappings of free-market capitalism but is in fact heavily managed by governments (federal, State, and local) in the service of “social justice” and various trendy causes.

The most recent of these is the puritanical, often hypocritical, and anti-scientific effort to rescue the planet from “climate change”. The opportunity cost of this futile undertaking, were it conducted according to the dictates of its most strident supporters, would be a vast share of the economic output of the the Western world (inasmuch as Russia, China, India, and even Japan are disinclined to participate), thus demoting America and Western Europe to Third-World status and rendering them vulnerable to economic and military blackmail by Russia and China. (Old grudges die hard.) You can be sure, however, that even in their vastly diminished state, the Western “democracies” would find the resources with which to cosset the ruling class of politicians and their favorites.

Proponents of state action often defend it by adverting to the paradox of collective action, which is that individuals and firms, acting in what they perceive to be their own interests, can bring about a disaster that engulfs them. “Climate change” is the latest such so-called disaster. What the proponents of state action always omit to consider (or mention) is that state action itself can bring about a disaster that engulfs all of us. The attempt to control “climate change” is just such an action, and it is of the more dangerous kind because government programs, once started, are harder to turn around than the relatively modest and inexpensive projects of individuals and firms.

You may think that I have strayed a long way from the principles of economics. But I haven’t, if you’ve been following closely. What I have done — or tried to do — is put economic activity in perspective. Which is to say that I’ve tried to show that economic activity may be important and even crucial to our lives, but it is not the only important and crucial thing in our lives. Economic activity is shaped by government and culture. If the battle to contain government is successful, and if the battle to preserve a culture of personal responsibility and respect for traditional norms is successful, economic activity will thrive and be worth the striving.

Wicked Problems: The Pretense of Rationality

Arnold Kling points to a paper by Horst W. J. Rittel and Melvin M. Webber, “Dilemmas in a General Theory of Planning” (Policy Sciences, June 1973). As Kling says, the paper is “notable for the way in which it describes — in 1973 — the fallibility of experts relative to technocratic expectations”.

Among the authors’ many insights are these about government planning:

The kinds of problems that planners deal with-societal problems-are inherently different from the problems that scientists and perhaps some classes of engineers deal with. Planning problems are inherently wicked.

As distinguished from problems in the natural sciences, which are definable and separable and may have solutions that are findable, the problems of governmental planning-and especially those of social or policy planning-are ill-defined; and they rely upon elusive political judgment for resolution. (Not “solution.” Social problems are never solved. At best they are only re-solved-over and over again.) Permit us to draw a cartoon that will help clarify the distinction we intend.

The problems that scientists and engineers have usually focused upon are mostly “tame” or “benign” ones. As an example, consider a problem of mathematics, such as solving an equation; or the task of an organic chemist in analyzing the structure of some unknown compound; or that of the chessplayer attempting to accomplish checkmate in five moves. For each the mission is clear. It is clear, in turn, whether or not the problems have been solved.

Wicked problems, in contrast, have neither of these clarifying traits; and they include nearly all public policy issues-whether the question concerns the location of a freeway, the adjustment of a tax rate, the modification of school curricula, or the confrontation of crime….

In the sciences and in fields like mathematics, chess, puzzle-solving or mechanical engineering design, the problem-solver can try various runs without penalty. Whatever his outcome on these individual experimental runs, it doesn’t matter much to the subject-system or to the course of societal affairs. A lost chess game is seldom consequential for other chess games or for non-chess-players.

With wicked planning problems, however, every implemented solution is consequential. It leaves “traces” that cannot be undone. One cannot build a freeway to see how it works, and then easily correct it after unsatisfactory performance. Large public-works are effectively irreversible, and the consequences they generate have long half-lives. Many people’s lives will have been irreversibly influenced, and large amounts of money will have been spent-another irreversible act. The same happens with most other large-scale public works and with virtually all public-service programs. The effects of an experimental curriculum will follow the pupils into their adult lives.

Rittel and Webber address a subject about which I know a lot, from first-hand experience — systems analysis. This is a loose discipline in which mathematical tools are applied to broad and seemingly intractable problems in an effort to arrive at “optimal” solutions to those problems. In fact, as Rittel and Webber say:

With arrogant confidence, the early systems analysts pronounced themselves ready to take on anyone’s perceived problem, diagnostically to discover its hidden character, and then, having exposed its true nature, skillfully to excise its root causes. Two decades of experience have worn the self-assurances thin. These analysts are coming to realize how valid their model really is, for they themselves have been caught by the very same diagnostic difficulties that troubled their clients.

Remember, that was written in 1973, a scant five years after Robert Strange McNamara — that supreme rationalist — left the Pentagon, having discovered that the Vietnam War wasn’t amenable to systems analysis. McNamara’s demise as secretary of defense also marked the demise of the power that had been wielded by his Systems Analysis Office (though it lives on under a different name, having long since been pushed down the departmental hierarchy).

My own disillusionment with systems analysis came to a head at about the same time as Rittel and Webber published their paper. A paper that I wrote in 1981 (much to the consternation of my colleagues in the defense-analysis business) was an outgrowth of a memorandum that I had written in 1975 to the head of the defense think-tank where I worked. Here is the crux of the 1981 paper:

Aside from a natural urge for certainty, faith in quantitative models of warfare springs from the experience of World War II, when they seemed to lead to more effective tactics and equipment. But the foundation of this success was not the quantitative methods themselves. Rather, it was the fact that the methods were applied in wartime. Morse and Kimball put it well [in Methods of Operations Research (1946)]:

Operations research done separately from an administrator in charge of operations becomes an empty exercise. To be valuable it must be toughened by the repeated impact of hard operational facts and pressing day-by-day demands, and its scale of values must be repeatedly tested in the acid of use. Otherwise it may be philosophy, but it is hardly science. [p. 10]

Contrast this attitude with the attempts of analysts for the past twenty years to evaluate weapons, forces, and strategies with abstract models of combat. However elegant and internally consistent the models, they have remained as untested and untestable as the postulates of theology.

There is, of course, no valid test to apply to a warfare model. In peacetime, there is no enemy; in wartime, the enemy’s actions cannot be controlled….

Lacking pertinent data, an analyst is likely to resort to models of great complexity. Thus, if useful estimates of detection probabilities are unavailable, the detection process is modeled; if estimates of the outcomes of dogfights are unavailable, aerial combat is reduced to minutiae. Spurious accuracy replaces obvious inaccuracy; untestable hypotheses and unchecked calibrations multiply apace. Yet the analyst claims relative if not absolute accuracy, certifying that he has identified, measured, and properly linked, a priori, the parameters that differentiate weapons, forces, and strategies.

In the end, “reasonableness” is the only defense of warfare models of any stripe.

It is ironic that analysts must fall back upon the appeal to intuition that has been denied to military men — whose intuition at least flows from a life-or-death incentive to make good guesses when choosing weapons, forces, or strategies.

This generalizes to government planning of almost every kind, at every level, and certainly to the perpetually recurring — and badly mistaken — belief that an entire economy can be planned and its produce “equitably” distributed according to needs rather than abilities.

(For much more in this vein, see the posts listed at “Modeling, Science, and ‘Reason’“. See also “Why I Am Bunkered in My Half-Acre of Austin“.)

Another Look into the Vanished Past

In “Ghosts of Thanksgiving Past” I recall family gatherings of long ago. “The Passing of Red Brick Schoolhouses and a Way of Life” laments the passing of the schoolhouses of my childhood, along with the innocence that was once a hallmark of non-urban America. In “‘Tis the Season for Nostalgia” I recall Christmases past.

I was reminded of those trips into the past by a post at The Federalist by Nathaniel Blake, “What Good Is Cheaper Stuff If It Comes At The Expense Of Community?“. It prompted me to recall other things that meant much to me (in hindsight): the long-vanished locally-owned stores that provided groceries, meat, sundries, haircuts, baked goods, hobby supplies, and more. The owners worked in their stores. They knew you, and you knew them. Many of them were neighbors. Their livelihoods depended not only on providing products and services at reasonable prices — prices that saved you a trip to the big city — but on their friendliness and reputation for honesty.

Of the many stores of that ilk that I remember from early childhood until I went to college, 60 to 75 years ago, only one is still in business. It’s even at the same location, though in a new building, and it doesn’t carry the range of hobby supplies (e.g., model kits and collectible stamps) that it did when I shopped there eons ago.

Here are the sites as they look now (or looked recently), arrayed roughly in the order in which I first saw them (* indicates original building):

Grocery store and gas station*

Dairy store

Grocery store

Bakery

Grocery store and news stand

Grocery store with ice house in back

Meat market*

Meat market

Grocery store

Barber shop (left)* – Grocery store (right)*

Bakery (and owners’ residence)*

Grocery store (and owners’ residence)*

Grocery store

Hobby store*

Hobby store

Grocery store

Grocery store*

Barber shop – Drugstore (two separate buildings)

Grocery store