I ended “Rethinking Free Trade” with this:
To put it bluntly but correctly, the national government exists not for the benefit of the people of the whole world or any part of it outside the United States, but for the benefit of the citizens of the United States.
Yes, some Americans benefit from free trade… But not all Americans do. And it is the job of the national government to serve all of the people. A balance needs to be struck. And those who pay the price of free trade … must be compensated in some way.
How and how much? Those are questions that I will grapple with in future posts.
I must first acknowledge some rather good points that I made in “Gains from Trade“, a nine-year-old post in which I address objections to free trade made by Keith Burgess-Jackson (KBJ):
How is “free trade” a “disaster for this country” [as KBJ puts it] when, thanks to the lowering of barriers to trade, but not their abandonment (thus “free trade”), millions of Americans now own better automobiles, electronic gadgets, and other goodies than they had access to before “free trade.” Not only that, but they have been able to purchase those goodies to which they had access before “free trade” at lower real prices than in the days before “free trade.” On top of that, millions of Americans make a better living than than they did before “free trade” because of their employment in industries that became stronger or rose up because of “free trade.”…
… KBJ seems to acknowledge as much in a [later] post … , where he gives a bit more ground:
Free trade is efficient, in the sense that it increases (or even maximizes) aggregate material welfare. The key words are “aggregate” and “material.” As for the first of these words, free trade produces losers as well as gainers. The gainers could compensate the losers, but they are not made to do so. I’m concerned about the losers. In other words, I care about justice (how the pie is distributed) as well as efficiency (how big the pie is). As for the second word, there is more to life than material welfare. Free trade has bad effects on valuable nonmaterial things, such as community, culture, tradition, and family. As a conservative, I care very much about these things.
… KBJ focuses on American losers, but there are many, many American gainers from free trade, as discussed above. Are their communities, cultures, traditions, and families of no import to KBJ? It would seem so. On what basis does he prefer some Americans to others?…
… KBJ seems to ignore the fundamental fact of life that human beings try to better their lot in ways that often, and inescapably, result in change….
Perhaps (in KBJ’s view) it was a mistake for early man to have discovered fire-making, which undoubtedly led to new communal alignments, cultural totems, traditions, and even familial relationships. Methinks, in short, that KBJ has been swept away by a kind of self-indulgent romanticism for a past that was not as good as we remember it. (I’ve been there and done that, too.)…
“Free trade” works because there are gains to all participants. If that weren’t the case, Americans wouldn’t buy foreign goods and foreigners wouldn’t buy American goods. Moreover, “free trade” has been a boon to American consumers and workers (though not always the workers KBJ seems to be worried about). To the extent that “wealthy American entrepreneurs” have gained from “free trade,” it’s because they’ve risked their capital to create jobs (in the U.S. and overseas) that have helped people (in the U.S. and overseas) attain higher standards of living. The “worldwide pool of cheap labor” is, in fact, a worldwide pool of willing labor, which earns what it does in accordance with the willingness of Americans (and others) to buy its products….
If “free trade” is such a bad thing, I wonder if KBJ buys anything that’s not made in Texas, where he lives. Trade between the States, after all, is about as “free” as it gets (except when government bans something, of course). Suppose Texas were to be annexed suddenly by Mexico. Would KBJ immediately boycott everything that’s made in the remaining 49 States? Would it have suddenly become unclean?…
Putting an end to “free trade” would make Americans poorer, not richer. And I doubt that it would do anything to halt the natural evolution of “community, culture, tradition, and family” away from the forms sentimentalized by KBJ and toward entirely new but not necessarily inferior forms.
The biggest threat to “community, culture, tradition, and family” lies in the non-evolutionary imposition of new social norms by the Left. That’s where the ire of KBJ and company should be directed.
There are a few chinks in my argument.
First, there will be in the short run (and sometimes even in the long run) a downward shift in the demand for labor in some sectors of the economy due to actions taken by foreign governments. Those actions consist of direct subsidies to industries that export goods to the U.S., and indirect subsidies in the form of tariffs and quotas on goods imported from the U.S.
I have seen “libertarian” economists justify direct subsidies because they benefit American consumers. (The same economists are glaringly silent about the disbenefits to American workers whose jobs are lost because of the subsidies.) It is jarring to read justifications of that kind from “libertarians”, who are usually quick to put Americans and foreigners on the same plane; for example, by promoting and praising “open borders” despite considerable disbenefits to some Americans. (I am thinking of those whose neighborhoods are threatened by gangs of illegals. I am also thinking of those who pay higher taxes to subsidize the education, shelter, sustenance, and schooling of illegals — but who, unlike more affluent Americans, don’t engage the services of low-priced nannies and yard workers.)
And I must point out that those foreign-government subsidies aren’t free. They’re paid for, one way or another, by the citizens of foreign countries. Why would a “libertarian” transnationalist overlook such a thing? To justify “free trade” I guess.
It’s only fair to note that the U.S. government subsidizes American industries in ways that harm foreigners, that is, through direct subsidies, tariffs on imports, and import quotas. But any gains to workers in the industries thus subsidized do not offset the harm that foreign-government subsidies do to workers in other American industries.
All in all, international trade is a real mess. (So is domestic trade, given the myriad distortions wrought by taxes and regulations.) But it’s fair to say that some American workers are harmed by what can only be called unfair practices in international trade. The harm to them isn’t offset by the gains to other Americans. Only an economist or socialist would think otherwise.
In sum, I have come around to Mr. Trump’s view of this issue. Free trade should be conducted on a level playing field. Given that that won’t happen soon — if ever — what should be done for American workers who are harmed by unfair trade? Stay tuned.
I have long supported free trade as beneficial. But I have also long derided utilitarianism, which is the doctrinal basis for claiming that free trade is beneficial. And I have long opposed the idea of open borders, in part because of the utilitarian claims of its supporters. It is time for me to resolve these contradictions.
Which way should I go? Should I sustain my anti-utilitarian position and oppose free trade as well as open borders? Or should I become a consistent utilitarian and support both free trade and open borders?
A digression about utilitarianism is in order. Utilitarianism, in this context, implies a belief in an aggregate social-welfare function (SWF) — a mystical summing of the states of happiness (or unhappiness) of myriad persons over an infinite series of points in time. It is the aim of utilitarians (who are mainly leftists and economists, though the categories overlap) to push SWF upward, toward (imaginary) collective nirvana. In so doing, the utilitarian makes himself the judge of whether an increase in A’s happiness at the expense of B (e.g., income redistribution) will result in an increase or decrease in SWF. An argument for this presumption (which is familiar mainly to economists), is based on the hypothesis of diminishing marginal utility (DMU) — a hypothesis that I have refuted at length. Suffice it to say that if A gains pleasure by poking B in the eye, no one — not even a Ph.D. economist — can prove that A’s pleasure outweighs B’s pain. In fact, common sense — which is embedded in eons of tradition — tells us that the act that brings pleasure to A should be punished precisely because of the way in which that pleasure is gained.
How does all of that pertain to free trade and open borders? Like this: Economists defend free trade and open borders because, in the aggregate, such things — in the long run — lead to greater economic efficiency and thus to greater total output (measured in constant dollars). And they are right about that. I have no doubt of it. But, to paraphrase John Maynard Keynes, in the long run we are all dead, and in the meantime some of us pay for the betterment of others.
Moreover, there are economists and others who like to conjoin the economic truth about the long-run consequences of free trade and open borders with statements about liberty: People ought to be free to exchange goods and services voluntarily. People ought to be free to live where they like.
Only a jejune anarchist will take such pronouncements as absolutes. Murder for hire is almost almost universally disapproved, as are many other crimes, even in this “enlightened”age. And I am unaware of a movement among affluent leftists to open their living rooms to the homeless, nor to repeal laws against trespass.
The question is, as always, where to strike a balance between the interests of those who benefit from free trade and open borders, and the interests of those for whom such things mean loss of income or higher taxes. How do the gains that accrue to some (e.g., less-expensive Lexi and abundant, low-priced nanny services) offset the burdens borne by working-class taxpayers whose jobs move overseas and whose school taxes rise to cover the costs of educating migrant children?
I ask these questions in connection with a broader issue: the purpose of our national government. It exists precisely for the reasons stated in the Preamble to the Constitution:
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
To put it bluntly but correctly, the national government exists not for the benefit of the people of the whole world or any part of it outside the United States, but for the benefit of the citizens of the United States.
Yes, some Americans benefit from free trade, and some Americans benefit from massive immigration. But not all Americans do. And it is the job of the national government to serve all of the people. A balance needs to be struck. And those who pay the price of free trade and massive immigration must be compensated in some way.
How and how much? Those are questions that I will grapple with in future posts.
Liberalism and Sovereignty
Utilitarianism, “Liberalism,” and Omniscience
Gains from Trade
Utilitarianism vs. Liberty
Diminishing Marginal Utility and the Redistributive Urge
Utilitarianism vs. Liberty (II)
Not-So-Random Thoughts (XVIII) – third item
Prosperity Isn’t Everything
Bryan Caplan, with whom I often disagree, is quite right about this:
From kindergarten on, students spend thousands of hours studying subjects irrelevant to the modern labor market. Why do English classes focus on literature and poetry instead of business and technical writing? Why do advanced-math classes bother with proofs almost no student can follow? When will the typical student use history? Trigonometry? Art? Music? Physics? Latin? The class clown who snarks “What does this have to do with real life?” is onto something.
The disconnect between college curricula and the job market has a banal explanation: Educators teach what they know—and most have as little firsthand knowledge of the modern workplace as I do. Yet this merely complicates the puzzle. If schools aim to boost students’ future income by teaching job skills, why do they entrust students’ education to people so detached from the real world? Because, despite the chasm between what students learn and what workers do, academic success is a strong signal of worker productivity….
The labor market doesn’t pay you for the useless subjects you master; it pays you for the preexisting traits you signal by mastering them….
Lest I be misinterpreted, I emphatically affirm that education confers some marketable skills, namely literacy and numeracy. Nonetheless, I believe that signaling accounts for at least half of college’s financial reward, and probably more.
Most of the salary payoff for college comes from crossing the graduation finish line….
Indeed, in the average study, senior year of college brings more than twice the pay increase of freshman, sophomore, and junior years combined. Unless colleges delay job training until the very end, signaling is practically the only explanation. This in turn implies a mountain of wasted resources—time and money that would be better spent preparing students for the jobs they’re likely to do….
In 2003, the United States Department of Education gave about 18,000 Americans the National Assessment of Adult Literacy. The ignorance it revealed is mind-numbing. Fewer than a third of college graduates received a composite score of “proficient”—and about a fifth were at the “basic” or “below basic” level….
Of course, college students aren’t supposed to just download facts; they’re supposed to learn how to think in real life. How do they fare on this count? The most focused study of education’s effect on applied reasoning, conducted by Harvard’s David Perkins in the mid-1980s, assessed students’ oral responses to questions designed to measure informal reasoning, such as “Would a proposed law in Massachusetts requiring a five-cent deposit on bottles and cans significantly reduce litter?” The benefit of college seemed to be zero: Fourth-year students did no better than first-year students….
… When we look at countries around the world, a year of education appears to raise an individual’s income by 8 to 11 percent. By contrast, increasing education across a country’s population by an average of one year per person raises the national income by only 1 to 3 percent. In other words, education enriches individuals much more than it enriches nations.
How is this possible? Credential inflation: As the average level of education rises, you need more education to convince employers you’re worthy of any specific job….
As credentials proliferate, so do failed efforts to acquire them. Students can and do pay tuition, kill a year, and flunk their finals…. Simply put, the push for broader college education has steered too many students who aren’t cut out for academic success onto the college track.
The college-for-all mentality has fostered neglect of a realistic substitute: vocational education. [“The World Might Be Better Off without College for Everyone“, The Atlantic, January 2018]
Caplan has been preaching this gospel for years. But he’s not the only one.
Katherine Mangu-Ward, writing in The Atlantic almost eight years ago, observed that
the phrase “higher education bubble” is popping up everywhere in recent months. This is thanks (in small part) to President Obama, who announced in his first State of the Union address that “every American will need to get more than a high school diploma.” But Americans have been fetishizing college diplomas for a long time now — Obama just reinforced that message and brought even more cash to the table. College has become a minimum career requirement, a basic human right, and a minimum income guarantee in the eyes of the American public. [“President Obama Is Not Impressed with Your High-School Diploma. Neither Is Wal-Mart.“]
Mangu-Ward is exactly right when she says this:
If we’re going to push every 18-year-old in the country into some kind of higher education, most people will likely be better off in a programs that involves logistics and linoleum, rather than ivy and the Iliad.
Vocational training, in other words. Which has languished, even as public schools have been dumbed-down.
Don Lee, writing at about the same time as Mangu-Ward, underscores the over-education — more correctly, mis-educaton — of America’s young adults:
[G]overnment surveys indicate that the vast majority of job gains this year have gone to workers with only a high school education or less, casting some doubt on one of the nation’s most deeply held convictions: that a college education is the ticket to the American Dream.
The Bureau of Labor Statistics projects that seven of the 10 employment sectors that will see the largest gains during the next decade won’t require much more than some on-the-job training. These include home health care aides, customer service representatives, and food preparers and servers. Meanwhile, well-paying white-collar jobs, such as computer programming, have become vulnerable to outsourcing to foreign countries.
“People with bachelor’s degrees will increasingly get not very highly satisfactory jobs,” said W. Norton Grubb, a professor at the University of California at Berkeley’s School of Education. “In that sense, people are getting more schooling than jobs are available.”
He noted that in 1970, 77 percent of workers with bachelor’s degrees were employed in professional and managerial occupations. By 2000, that had fallen to 60 percent.
Of the nearly 1 million new jobs created since hiring turned up in January, about half have been temporary census jobs. Most of the rest are concentrated in industries such as retail, hospitality and temporary staffing, according to the Bureau of Labor Statistics. [“Education Loses Its Luster“, reprinted in Akron Beacon Journal, June 21, 2010]
But that’s not news, either, this is from an anonymous piece that ran in The Atlantic almost ten years ago:
America, ever-idealistic, seems wary of the vocational-education track. We are not comfortable limiting anyone’s options. Telling someone that college is not for him seems harsh and classist and British, as though we were sentencing him to a life in the coal mines. I sympathize with this stance; I subscribe to the American ideal. Unfortunately, it is with me and my red pen that that ideal crashes and burns.
Sending everyone under the sun to college is a noble initiative. Academia is all for it, naturally. Industry is all for it; some companies even help with tuition costs. Government is all for it; the truly needy have lots of opportunities for financial aid. The media applauds it—try to imagine someone speaking out against the idea. To oppose such a scheme of inclusion would be positively churlish. But one piece of the puzzle hasn’t been figured into the equation, to use the sort of phrase I encounter in the papers submitted by my English 101 students. The zeitgeist of academic possibility is a great inverted pyramid, and its rather sharp point is poking, uncomfortably, a spot just about midway between my shoulder blades.
For I, who teach these low-level, must-pass, no-multiple-choice-test classes, am the one who ultimately delivers the news to those unfit for college: that they lack the most-basic skills and have no sense of the volume of work required; that they are in some cases barely literate; that they are so bereft of schemata, so dispossessed of contexts in which to place newly acquired knowledge, that every bit of information simply raises more questions. They are not ready for high school, some of them, much less for college. [“In the Basement of the Ivory Tower”, June 2008]
In fact, when I entered college 60 years ago, I was among the 28 percent of high-school graduates then attending college. It was evident to me that about half of my college classmates didn’t belong in an institution of higher learning. Despite that, the college-enrollment rate among high-school graduates has since doubled.
It’s long past time to burst the higher-education bubble. For one thing, it would mean fewer subsidies for the academic enemies of liberty.
School Vouchers and Teachers’ Unions
Whining about Teachers’ Pay: Another Lesson about the Evils of Public Education
I Used to Be Too Smart to Understand This
The Higher-Education Bubble
The Public-School Swindle
Is College for Everyone?
Subsidizing the Enemies of Liberty
A Sideways Glance at Public “Education”
The Dumbing-Down of Public Schools
See Part IV of this post.
My heart bleeds for the people of s***hole countries, cities, and neighborhoods. God knows there are enough of the latter two in the U.S. Why is that? Certainly, there are cultural and genetic factors at work. But those have been encouraged and reinforced by governmental acts.
Government — the central government especially — has long been a silent killer of economic opportunity. Jobs are killed by regulation that hinders business formation and expansion and every government program that diverts resources from the private sector.
How bad is it? This bad:
Because of increases in the rate of government spending and the issuance of regulations, the real rate of GDP growth has been halved since the end of World War II.
If GDP had continued to grow at an annual rate of 4 percent from its 1946 level of $1.9 trillion (in chained 2009 dollars), it would have reached $30 trillion in 2016 instead of $17 trillion.
Given the relationship between employment and real GDP, the cost of government policies is huge. There could now be as many as 207 million employed Americans instead of the current number of 156 million*, were it not for the “helpful” big-government policies foisted on hapless Americans by “compassionate” leftist do-gooders (and not a few dupes in center and on the right).
My heart bleeds.
* The relationship between employment and real GDP is as follows:
E = 1204.8Y0.4991
E = employment in thousands
Y = real GDP in billions of chained 2009 dollars.
An increase in employment from 156 million to 207 million would raise the employment-population ratio from 60 percent to 80 percent, which is well above the post-World War II peak of 65 percent. The real limit is undoubtedly higher than 65 percent, but probably less than 80 percent. In any event, the impoverishing effect of big government is real and huge.
Not yet, based on the CPI-U, to which you may or may not lend credence:
Derived from BLS Series CUUR0000SA0, available here.
See Part V of this post.
is what the Dutch call a geuzennaam—a word assigned by one’s sneering enemies, such as Quaker or Tory or Whig, but later adopted proudly by the victims themselves.
I have long viewed it that way. Capitalism conjures the greedy, coupon-clipping, fat-cat of Monopoly:
Thus did a board-game that vaulted to popularity during the Great Depression signify the identification of capitalism with another “bad thing”: monopoly. And, more recently, capitalism has been conjoined with yet another “bad thing”: income inequality.
In fact, capitalism
is a misnomer for the system of free markets that could deliver abundant prosperity and happiness, were markets left free. Free does not mean unfettered; competition for the favor of consumers exerts strong discipline on markets. And laws against theft, deception, and fraud would serve amply to keep markets honest, the worrying classes to the contrary notwithstanding.
What the defenders of capitalism are defending — or should be — is voluntary, market-based exchange. It doesn’t roll off the tongue, but that’s no excuse for continuing to use a Marxist smear-word for the best of all possible economic systems.
More Commandments of Economics (#13 and #19)
Monopoly and the General Welfare
Monopoly: Private Is Better than Public
Some Inconvenient Facts about Income Inequality
Mass (Economic) Hysteria: Income Inequality and Related Themes
Income Inequality and Economic Growth
A Case for Redistribution, Not Made
McCloskey on Piketty
Nature, Nurture, and Inequality
Diminishing Marginal Utility and the Redistributive Urge
Capitalism, Competition, Prosperity, and Happiness
Economic Mobility Is Alive and Well in America
The Essence of Economics
“Rent” Is Indispensable
Economic rent, which economists simply call “rent”, has nothing to do with the monthly fee that you might pay a landlord in exchange for the use of a dwelling owned by him. Economic rent
means the payment to a factor of production in excess of what is required to keep that factor in its present use. So, for example, if I am paid $150,000 in my current job but I would stay in that job for any salary over $130,000, I am making $20,000 in rent.
The quotation comes from David Henderson’s article on rent-seeking. Henderson continues:
What is wrong with rent seeking? Absolutely nothing. I would be rent seeking if I asked for a raise. My employer would then be free to decide if my services are worth it. Even though I am seeking rents by asking for a raise, this is not what economists mean by “rent seeking.” They use the term to describe people’s lobbying of government to give them special privileges. A much better term is “privilege seeking.”
With that crucial distinction in mind, consider the firm that makes millions of dollars in “rent” because it was the first (and still only or dominant) producer of a gee-whiz widget. The prospect of making “rent” is one of the things that causes inventors, innovators, and entrepreneurs to risk their time and money in devising and bringing to market new and improved products and processes.
The role of “rent” in economic progress has been long understood. The Framers of the Constitution clearly understood it. This is one of the enumerated powers of Congress, from Article I, Section 8, of the Constitution:
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries
The extension of the life of patents and copyrights over the years, and the misuse of patents to block competition, are examples of “privilege-seeking”. It is probably the case that patent and copyright protections have been extended well beyond what is needed to incentivize invention, innovation, and entrepreneurship.
But let us not throw out the baby with the bath water. The prospect of “rent” is a vital to economic progress. “Rent” is good; “privilege” is bad. The trick is to reduce or eliminate the latter without sacrificing the former.
Schadenfreude. That was my reaction to a recent piece by Rick Moran:
A week ago, employees at the Gothamist and DNAinfo were celebrating after a successful vote to join the Writers Guild. The Gothamist is a noted New York City website that is devoted to covering local news. They operate affiliated sites in Washington, D.C., Chicago, Los Angeles and San Francisco.
But the reporters’ celebration was shortlived. Yesterday, the publisher of the Gothamist and its parent website, DNAifno, informed all employees that he was shutting them down.
Joe Ricketts, who founded Ameritrade, made the announcement in an email….
The question isn’t whether Ricketts was justified in pulling the plug. The question is why employees thought the outcome would be any different?
Many unions in 21st century America offer a fantasy. Simple arithmetic would show even the dumbest worker that the dream doesn’t add up and that reality wins in the end. The best example of that is the drive for a $15 an hour minimum wage. When you disconnect the cost of labor from the value of labor, the numbers don’t add up and companies end up losing money or, at best, dramatically reducing profits. In the real world, radically increasing the cost of labor means increasing the price of the products sold. In the case of fast food restaurants, that means a reduction in traffic leading to fewer customers and less profit.
But organized labor has sold the idea that there are no consequences to raising the minimum wage to $15 an hour. We are already seeing franchises moving rapidly to automate their operations as much as possible and reduce the number of employees — leading to job losses and, just as importantly, fewer jobs created.
The Gothamist employees are shocked, shocked I say, to find out that a news website doesn’t make money and even a billionaire can tolerate losing only so much money before throwing in the towel. Unionizing also brings other headaches that are intolerable to management unless they are gluttons for punishment.
The writing was on the wall for these employees, but they were blinded by their own delusions and naivete. [“Publisher Shutters Websites after Journalists Unionize“, American Thinker, November 3, 2017]
Schadenfreude because I have been anti-union for 60 years.
It began while I was in high school. I had a part-time job bagging groceries at a supermarket. The supermarket was unionized, as was the norm in my home State of Michigan. My wage rate was set by a contract between the supermarket chain and the union, which I had to join as a condition of employment.
After I had been on the job for several months, the manager of the supermarket added shelf-stocking to my duties. According to the union contract, I should have received a raise for doing something other than bagging groceries, which was the lowest-paid job in the store. I complained to the manager about my wage rate. He fired me. The head of the local union couldn’t be bothered to defend me because he knew that I was going off to college in the fall. And so I received no benefit for paying union dues out my measly earnings.
Did I owe those measly earnings to the unionization of the store? I doubt it. I was a fast and effective bagger, unlike the baggers who work where my wife does most of her grocery shopping. I filled a grocery bag so that it wasn’t too heavy or too light; I put the heavy items on the bottom and the crushable items on top; I separated produce and frozen foods from soap and other scented items; etc. Given my superior skill as a bagger, the effect of the union contract was to penalize me and transfer some of my earnings to the less efficient baggers who worked with me.
That’s a good enough reason to be anti-union. But there are other reasons, having to do with freedom of association and freedom of contract.
I have nothing against the formation of a union, in principle. The formation of a union as a voluntary organization is an exercise of the unenumerated right of freedom of association, which is contemplated in the Ninth Amendment to the Constitution of the United States. By the same token, when labor laws force a person to join union, that person’s constitutional right to freedom of association is violated.
Moreover, such laws violate the freedom of contract guaranteed in Article I, Section 10, of the Constitution of the United States. The violation impinges on the right of the individual worker to negotiate with an employer. By the same token, the violation impinges on the right of the employer to negotiate with each of his employees, taking into account their particular skills and performance.
Further, forced unionization impinges on the employer’s unenumerated constitutional right to the lawful use of his business property.
There is also the effect of unionization on employment. If the contracted wage rate is set below the wage rate that would obtain in the absence of unionization, workers (or many of them) are underpaid. In the more typical case, where a union strives to set a wage rate higher than the market-clearing rate, employers hire fewer workers than they would absent unionization. (There’s an obvious parallel with the minimum wage.)
I am always gladdened when I read that labor-union membership in the United States has declined, not just as a percentage of the labor force, but in absolute numbers. Personal responsibility isn’t dead in the United States, despite the efforts of most of the nation’s politicians an bureaucrats.
Freedom of Contract and the Rise of Judicial Tyranny
The Upside-Down World of Liberalism
The Interest-Group Paradox
Law and Liberty
Government Failure: An Example
The Left and Its Delusions
Corporations, Unions, and the State
Judicial Supremacy: Judicial Tyranny
Substantive Due Process, Liberty of Contract, and States’ “Police Power”
Why Liberty of Contract Matters
Society, Polarization, and Dissent
Richard Thaler, the newly minted Noble laureate in economics, has published many papers, including one about discounting as a tool of government decision-making. The paper, “Discounting and Fiscal Constraints: Why Discounting is Always Right”, appeared in August 1979 under the imprimatur of the think-tank where Thaler was a consultant. It was also published in the October 1979 issue of the now-defunct Defense Management Journal (DMJ). Given the lead time for producing a journal, it’s almost certain that there is no substantive difference between the in-house version and the DMJ version. But only the in-house version seems to be available online, so the preceding link leads to it, and the quotations below are taken from it.
The aim of Thaler’s piece is to refute an article in the March 1978 issue of DMJ by Commander Rolf Clark, “Should Defense Managers Discount Future Costs?”. Specifically, Thaler argues against Clark’s conclusion that discounting is irrelevant in a regime of fiscal constraints.*
Clark took the position that a defense manager faced with fiscal constraints should simply choose among alternatives by picking the one with the lowest undiscounted costs. Why? Because the defense manager, unlike a business manager, can’t earn interest by deferring an expenditure and investing the money where it earns interest. To put it another way, deferring an expenditure doesn’t result in a later increase in a defense manager’s budget. Or in the budget of any government manager, for that matter.
Viewed in perspective, the dispute between Thaler and Clark is a tempest in a teaspoon — a debate about how to arrange the deck chairs on the Titanic. Discounting is of little consequence against this backdrop:
But the issue is worth revisiting because it reveals a blind spot in Thaler’s view of decision-making.
Thaler begins his substantive presentation by explaining the purpose of discounting:
A discount rate is simply a shorthand way of defining a firm’s, organization’s, or person’s time value of money. This rate is always determined by opportunity costs. Opportunity costs, in turn, depend on circumstances. Consider the following example: An organization must choose between two projects which yield equal effectiveness (or profits in the case of a firm). Project A will cost $200 this year and nothing thereafter. Project B will cost $205 next year and nothing before or after. Notice that if project B is selected the organization will have an extra $200 to use for a year. Whether project B is preferred simply depends on whether it is worth $5 to the organization to have those $200 to use for a year. That, in turn, depends on what the organization would do with the money. If the money would just sit around for the year, its time value is zero and project A should be chosen. However, if the money were put in a 5 percent savings account, it would earn $10 in the year and thus the organization would gain $5 by selecting project B. [pp. 1-2]
In Thaler’s simplified version of reality, a government decision-maker (manager) faces a choice between two projects that (ostensibly) would be equally effective against a postulated threat, even though their costs would be incurred at different times. Specifically, the manager must choose between project A, at a cost of $200 in year 1, and project B, at a cost of $205 in year 2. Thaler claims that the manager can choose between the two projects by discounting their costs:
A [government] manager . . . cannot earn bank interest on funds withheld for a year. . . . However, there will generally exist other ways for the manager to “invest” funds which are available. Examples include cost-saving expenditures, conservation measures, and preventive maintenance. These kinds of expenditures, if they have positive rates of return, permit a manager to invest money just as if he were putting the money in a savings account.
. . . Suppose a thorough analysis of cost-saving alternatives reveals that [in year 2] a maintenance project will be required at a cost of $215. Call this project D. Alternatively the project can be done [in year 1] (at the same level of effectiveness) for only $200. Call this project C. All of the options are displayed in table 1.
Thaler believes that his example clinches the argument for discounting because the choice of project B (an expenditure of $205 in year 2) enables the manager to undertake project C in year 1, and thereby to “save” $10 in year 2. But Thaler’s “proof” is deeply flawed:
So even if there is certainty about everything else, there is no “correct” discount rate, and it is presumptuous of Thaler to prescribe one on the assumption that it will fit every defense manager’s particular circumstances.**
Thaler does the same thing when he counsels intervention in personal decisions because too many people — in his view — make irrational decisions.
In the context of personal decision-making — which is the focal point of Thaler’s “libertarian” paternalism — the act of discounting is rational because it serves wealth-maximization. But life isn’t just about maximizing wealth. That’s why some people choose to have a lot of children, when doing so obviously reduces the amount that they can save. That’s why some choose to retire early rather than stay in stressful jobs. Rationality and wealth maximization are two very different things, but a lot of laypersons and too many economists are guilty of equating them.
If wealth-maximization is your goal, just stop drinking, smoking, enjoying good food, paying for entertainment, subscribing to newspapers and magazines, buying books, watering your lawn, mowing the grass, driving your car (except to work if you have no feasible alternative), and on into the night. You will accumulate a lot of money — if you invest wisely (there’s the rub of uncertainty) — but you will live a miserable life, unless you are the rare person who is a true miser.
* If you are unfamiliar with the background of the Clark-Thaler exchange, and the reference to fiscal constraints, here’s the story: Since 1969 the Secretary of Defense has required the military departments to propose multi-year spending programs that are constrained by an explicit ceiling on each year’s spending. Fiscal guidance, as it is called, was lacking before that. But, in reality, defense budgets have always been constrained, ultimately by Congress. Fiscal guidance represents only a rough guess as to the total amount of defense spending that Congress will approve, and a rougher guess about the distribution of that spending among the military departments.
** Thaler’s example of a cost-saving investment is also a stretch, given how government budgets are decided. I gave it a pass in order to make the point that it wouldn’t save Thaler’s argument even if it were realistic. Here’s the missing reality:
Even if the Secretary of Defense (the grand panjandrum of defense managers) makes the kinds of moves counseled by Thaler, and even if his multi-year program sails through the Office and Management and Budget without a scratch, Congress has the final say. And Congress, though it pays attention to the multi-year plans coming from the Executive Branch, still makes annual appropriations. When it does so, it essentially ignores the internal logic of the multi-year plans (assuming that the Defense plan has an internal logic after it has been subjected to Pentagon politics). Instead, Congress divides the defense budget into various spending programs (see the list for national defense, here), and adjusts each program to suit the tastes, preferences, and moods of staffers, committee members, and committee chairman. Thus it is unlikely that the services’ maintenance and procurement budgets will emerge from Congress as they entered, with cross-temporal tradeoffs intact. A more rational budgeting strategy, from the perspective of the Secretary of Defense, is to submit plans that accord with the known preferences of Congress. Such plans may not incorporate the kind of trivial fine-tuning favored by Thaler, but they will more likely serve the national interest by yielding a robust defense.
I’ve written recently about Richard Thaler’s Nobel prize and my objections to his (and Cass Sunstein’s) cheerleading for “nudging”. That’s a polite term for the use of business and government power to get people to make the “right” decisions. (“Right” according to Thaler, at least.) It’s the government part that really bothers me. Ilya Somin of The Volokh Conspiracy is of the same mind:
Thaler and many other behavioral economics scholars argue that government should intervene to protect people against their cognitive biases, by various forms of paternalistic policies. In the best-case scenario, government regulators can “nudge” us into correcting our cognitive errors, thereby enhancing our welfare without significantly curtailing freedom.
But can we trust government to be less prone to cognitive error than the private-sector consumers whose mistakes we want to correct? If not, paternalistic policies might just replace one form of cognitive bias with another, perhaps even worse one. Unfortunately, a recent study suggests that politicians are prone to severe cognitive biases too – especially when they consider ideologically charged issues….
Even when presented additional evidence to help them correct their mistakes, Dahlmann and Petersen found that the politicians tended to double down on their errors rather than admit they might have been wrong….
Politicians aren’t just biased in their evaluation of political issues. Many of them are ignorant, as well. For example, famed political journalist Robert Kaiser found that most members of Congress know little about policy and “both know and care more about politics than about substance.”….
But perhaps voters can incentivize politicians to evaluate evidence more carefully. They can screen out candidates who are biased and ill-informed, and elect knowledgeable and objective decision-makers. Sadly, that is unlikely to happen, because the voters themselves also suffer from massive political ignorance, often being unaware of even very basic facts about public policy.
Of course, the Framers of the Constitution understood all of this in 1787. And they wisely acted on it by placing definite limits on the power of the central government. The removal of those limits, especially during and since the New Deal, is a constitutional tragedy.
James R. Rogers writes about Richard Thaler and behavioral economics:
[M]edia treatments of Thaler’s work, and of behavioral economics more generally, suggest that it provides a much-deserved comeuppance to conventional microeconomics. Well . . . Not quite….
… Economists, and rational choice theorists more generally, have a blind spot, [Thaler] argues, for just how often their assumptions about human behavior are inconsistent with real human behavior. That’s an important point.
Yet here’s where spin matters: Does Thaler provide a correction to previous economics, underscoring something everyone always knew but just ignored as a practical matter, or is Thaler’s work revolutionary, inviting a broad and necessary reconceptualization of standard microeconomics?…
… No. He has built a career by correcting a blind spot in modern academic economics. But his insight provides us with a “well, duh” moment rather than a “we need totally to rewrite modern economics” moment that some of his journalistic (and academic) supporters suggest it provides….
Thaler’s work underscores that the economist’s rationality postulates cannot account for all human behavior. That’s an important point. But I don’t know that many, or even any, economists very much believed the opposite in any serious way. [“Did Richard Thaler Really Shift the Paradigm in Economics?“, Library of Law and Liberty, October 11, 2017]
I have made the same point:
Even in those benighted days when I learned the principles of “micro” — just a few years ahead of Thaler — it was understood that the assumption of rationality was an approximation of the tendency of individuals to try to make themselves better off by making choices that would do so, given their tastes and preferences and the information that they possess at the time or could obtain at a cost commensurate with the value of the decision at hand.
Highly recommended reading: my previous post about Thaler and the many related posts listed at the end of it.
I am slightly irked by today’s news of the selection of Richard Thaler as the 2017 Noblel laureate in economics. (It’s actually the Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel, not one of the original prizes designated in Alfred Nobel’s will.) Granted, Thaler did some praiseworthy and groundbreaking work in behavioral economics, which is nicely summarized in this post by Timothy Taylor.
But Thaler, whom I knew slightly when he was a consultant to the outfit where I worked, gets a lot of pushback when he translates his work into normative prescriptions. He was already semi-famous (or infamous) for his collaboration with Cass Sunstein. Together and separately they propounded “libertarian paternalism”, an obnoxious oxymoron that they abandoned in favor of “nudging”. Thus their book-length epistle to true believers in governmental omniscience, Nudge: Improving Decisions about Health and Happiness.
It would be a vast understatement to say that I disagree with Thaler and Sunstein’s policy prescriptions. I have recorded my disagreements in many posts, which are listed below.
Sunstein at the Volokh Conspiracy
More from Sunstein
Cass Sunstein’s Truly Dangerous Mind
An (Imaginary) Interview with Cass Sunstein
A Libertarian Paternalist’s Dream World
The Short Answer to Libertarian Paternalism
Second-Guessing, Paternalism, Parentalism, and Choice
Another Thought about Libertarian Paternalism
Sunstein and Executive Power
Another Voice Against the New Paternalism
The Feds and “Libertarian Paternalism”
A Further Note about “Libertarian” Paternalism
Beware of Libertarian Paternalists
Discounting and Libertarian Paternalism
The Mind of a Paternalist
The Mind of a Paternalist, Revisited
Another Entry in the Sunstein Saga
The Sunstein Effect Is Alive and Well in the White House
Sunstein the Fatuous
Not-So-Random Thoughts (XVI) – first item
The Perpetual Nudger
An occasional survey of web material that’s related to subjects about which I’ve posted. Links to the other posts in this series may be found at “Favorite Posts,” just below the list of topics.
Fred Reed, in a perceptive post worth reading in its entirety, says this:
Democracy works better the smaller the group practicing it. In a town, people can actually understand the questions of the day. They know what matters to them. Do we build a new school, or expand the existing one? Do we want our children to recite the pledge of allegiance, or don’t we? Reenact the Battle of Antietam? Sing Christmas carols in the town square? We can decide these things. Leave us alone….
Then came the vast empire, the phenomenal increase in the power and reach of the federal government, which really means the Northeast Corridor. The Supreme Court expanded and expanded and expanded the authority of Washington, New York’s store-front operation. The federals now decided what could be taught in the schools, what religious practices could be permitted, what standards employers could use in hiring, who they had to hire. The media coalesced into a small number of corporations, controlled from New York but with national reach….
Tyranny comes easily when those seeking it need only corrupt a single Congress, appoint a single Supreme Court, or control the departments of one executive branch. In a confederation of largely self-governing states, those hungry to domineer would have to suborn fifty congresses. It could not be done. State governments are accessible to the governed. They can be ejected. They are much more likely to be sympathetic to the desires of their constituents since they are of the same culture.
Tyranny is often justified by invoking “the will of the people”, but as I say here:
It is a logical and factual error to apply the collective “we” to Americans, except when referring generally to the citizens of the United States. Other instances of “we” (e.g., “we” won World War II, “we” elected Barack Obama) are fatuous and presumptuous. In the first instance, only a small fraction of Americans still living had a hand in the winning of World War II. In the second instance, Barack Obama was elected by amassing the votes of fewer than 25 percent of the number of Americans living in 2008 and 2012. “We the People” — that stirring phrase from the Constitution’s preamble — was never more hollow than it is today.
Further, the logical and factual error supports the unwarranted view that the growth of government somehow reflects a “national will” or consensus of Americans. Thus, appearances to the contrary (e.g., the adoption and expansion of national “social insurance” schemes, the proliferation of cabinet departments, the growth of the administrative state) a sizable fraction of Americans (perhaps a majority) did not want government to grow to its present size and degree of intrusiveness. And a sizable fraction (perhaps a majority) would still prefer that it shrink in both dimensions. In fact, The growth of government is an artifact of formal and informal arrangements that, in effect, flout the wishes of many (most?) Americans. The growth of government was not and is not the will of “we Americans,” “Americans on the whole,” “Americans in the aggregate,” or any other mythical consensus.
I am pleased to note that my prognosis for Trump’s presidency (as of December 2016) was prescient:
Based on his appointments to date — with the possible exception of Steve Bannon [now gone from the White House] — he seems to be taking a solidly conservative line. He isn’t building a government of bomb-throwers, but rather a government of staunch conservatives who, taken together, have a good chance at rebuilding America’s status in the world while dismantling much of Obama’s egregious “legacy”….
Will Donald Trump be a perfect president, if perfection is measured by adherence to the Constitution? Probably not, but who has been? It now seems likely, however, that Trump will be a far less fascistic president than Barack Obama has been and Hillary Clinton would have been. He will certainly be far less fascistic than the academic thought-police, whose demise cannot come too soon for the sake of liberty.
In sum, Trump’s emerging agenda seems to resemble my own decidedly conservative one.
But anti-Trump hysteria continues unabated, even among so-called conservatives. David Gelertner writes:
Some conservatives have the impression that, by showing off their anti-Trump hostility, they will get the networks and the New York Times to like them. It doesn’t work like that. Although the right reads the left, the left rarely reads the right. Why should it, when the left owns American culture? Nearly every university, newspaper, TV network, Hollywood studio, publisher, education school and museum in the nation. The left wrapped up the culture war two generations ago. Throughout my own adult lifetime, the right has never made one significant move against the liberal culture machine.
David Brooks of The New York Times is one of the (so-called) conservatives who shows off his anti-Trump hostility. Here he is writing about Trump and tribalism:
The Trump story is that good honest Americans are being screwed by aliens. Regular Americans are being oppressed by a snobbish elite that rigs the game in its favor. White Americans are being invaded by immigrants who take their wealth and divide their culture. Normal Americans are threatened by an Islamic radicalism that murders their children.
This is a tribal story. The tribe needs a strong warrior in a hostile world. We need to build walls to keep out illegals, erect barriers to hold off foreign threats, wage endless war on the globalist elites.
Somebody is going to have to arise to point out that this is a deeply wrong and un-American story. The whole point of America is that we are not a tribe. We are a universal nation, founded on universal principles, attracting talented people from across the globe, active across the world on behalf of all people who seek democracy and dignity.
I am unaware that Mr. Trump has anything against talented people. But he rightly has a lot against adding to the welfare rolls and allowing jihadists into the country. As for tribalism — that bugbear of “enlightened” people — here’s where I stand:
There’s a world of difference between these three things:
- hating persons who are different because they’re different
- fearing persons of a certain type because that type is highly correlated with danger
- preferring the company and comfort of persons with whom one has things in common, such as religion, customs, language, moral beliefs, and political preferences.
Number 1 is a symptom of bigotry, of which racism is a subset. Number 2 is a sign of prudence. Number 3 is a symptom of tribalism.
Liberals, who like to accuse others of racism and bigotry, tend to be strong tribalists — as are most people, the world around. Being tribal doesn’t make a person a racist or a bigot, that is, hateful toward persons of a different type. It’s natural (for most people) to trust and help those who live nearest them or are most like them, in customs, religion, language, etc. Persons of different colors and ethnicities usually have different customs, religions, and languages (e.g., black English isn’t General American English), so it’s unsurprising that there’s a tribal gap between most blacks and whites, most Latinos and whites, most Latinos and blacks, and so on.
Tribalism has deep evolutionary-psychological roots in mutual aid and mutual defense. The idea that tribalism can be erased by sitting in a circle, holding hands, and singing Kumbaya — or the equivalent in social-diplomatic posturing — is as fatuous as the idea that all human beings enter this world with blank minds and equal potential. Saying that tribalism is wrong is like saying that breathing and thinking are wrong. It’s a fact of life that can’t be undone without undoing the bonds of mutual trust and respect that are the backbone of a civilized society.
If tribalism is wrong, then most blacks, Latinos, members of other racial and ethnic groups, and liberals are guilty of wrong-doing.
While we’re on the subject of immigration, consider a study of the effect of immigration on the wages of unskilled workers, which is touted by Timothy Taylor. According to Taylor, the study adduces evidence that
in areas with high levels of low-skill immigration, local firms shift their production processes in a way that uses more low-skilled labor–thus increasing the demand for such labor. In addition, immigrant low-skilled labor has tended to focus on manual tasks, which has enabled native-born low-skilled labor to shift to nonmanual low-skilled tasks, which often pay better.
It’s magical. An influx of non-native low-skilled laborers allows native-born low-skilled laborers to shift to better-paying jobs. If they could have had those better-paying jobs, why didn’t they take them in the first place?
More reasonably, Rick Moran writes about a
Federation for American Immigration Reform report [which] reveals that illegal aliens are costing the U.S. taxpayer $135 billion. That cost includes medical care, education, and law enforcement expenses.
That’s a good argument against untrammeled immigration (legal or illegal). There are plenty more. See, for example, the entry headed “The High Cost of Untrammeled Immigration” at this post.
There’s a fatuous argument that a massive influx of illegal immigrants wouldn’t cause the rate of crime to rise. I’ve disposed of that argument with one of my own, which is supported by numbers. I’ve also dealt with crime in many other posts, including this one, where I say this (and a lot more):
Behavior is shaped by social norms. Those norms once were rooted in the Ten Commandments and time-tested codes of behavior. They weren’t nullified willy-nilly in accordance with the wishes of “activists,” as amplified through the megaphone of the mass media, and made law by the Supreme Court….
But by pecking away at social norms that underlie mutual trust and respect, “liberals” have sundered the fabric of civilization. There is among Americans the greatest degree of mutual enmity (dressed up as political polarization) since the Civil War.
The mutual enmity isn’t just political. It’s also racial, and it shows up as crime. Heather Mac Donald says “Yes, the Ferguson Effect Is Real,” and Paul Mirengoff shows that “Violent Crime Jumped in 2015.” I got to the root of the problem in “Crime Revisited,” to which I’ve added “Amen to That” and “Double Amen.” What is the root of the problem? A certain, violence-prone racial minority, of course, and also under-incarceration (see “Crime Revisited”).
The Ferguson Effect is a good example of where the slippery slope of free-speech absolutism leads. More examples are found in the violent protests in the wake of Donald Trump’s electoral victory. The right “peaceably to assemble, and to petition the Government for a redress of grievances” has become the right to assemble a mob, disrupt the lives of others, destroy the property of others, injure and kill others, and (usually) suffer no consequences for doing so — if you are a leftist or a member of one of the groups patronized by the left, that is.
We’ve already looked at a couple of items from the latest FBI crime report and some of the dark news revealed within. But when you match up some of their numbers with recent historical facts, even more trends become evident. As the Daily Caller reports this week, one disturbing trend can be found by matching up locations recording rising murder rates with the homes of of widespread riots and anti-police protests.
As we discussed when looking at the rising murder and violent crime rates, the increases are not homogeneous across the country. Much of the spike in those figures is being driven by the shockingly higher murder numbers in a dozen or so cities. What some analysts are now doing is matching up those hot spots with the locations of the aforementioned anti-police protests. The result? The Ferguson Effect is almost undoubtedly real….
Looking at the areas with steep increases in murder rates … , the dots pretty much connect themselves. It starts with the crime spikes in St. Louis, Baltimore and Chicago. Who is associated with those cities? Michael Brown, Freddie Gray and Laquan McDonald. The first two cities experienced actual riots. While Chicago didn’t get quite that far out of hand, there were weeks of protests and regular disruptions. The next thing they have in common is the local and federal response. Each area, rather than thanking their police for fighting an increasingly dangerous gang violence situation with limited resources, saw municipal leaders chastising the police for being “too aggressive” or using similar language. Then the federal government, under Barack Obama and his two Attorney Generals piled on, demanding long term reviews of the police forces in those cities with mandates to clean up the police departments.
Small wonder that under such circumstances, the cops tended to back off considerably from proactive policing, as Heather McDonald describes it. Tired of being blamed for problems and not wanting to risk a lawsuit or criminal charges for doing their jobs, cops became more cautious about when they would get out of the patrol vehicle at times. And the criminals clearly noticed, becoming more brazen.
The result of such a trend is what we’re seeing in the FBI report. Crime, which had been on the retreat since the crackdown which started in the nineties, is back on the rise.
It is well known that there is a strong, negative relationship between intelligence and crime; that is, crime is more prevalent among persons of low intelligence. This link has an obvious racial dimension. There’s the link between race and crime, and there’s the link between race and intelligence. It’s easy to connect the dots. Unless you’re a “liberal”, of course.
I was reminded of the latter link by two recent posts. One is a reissue by Jared Taylor, which is well worth a re-read, or a first read if it’s new to you. The other, by James Thompson, examines an issue that I took up here, namely the connection between geography and intelligence. Thompson’s essay is more comprehensive than mine. He writes:
[R]esearchers have usually looked at latitude as an indicator of geographic influences. Distance from the Equator is a good predictor of outcomes. Can one do better than this, and include other relevant measures to get a best-fit between human types and their regions of origin?… [T]he work to be considered below…. seeks to create a typology of biomes which may be related to intelligence.
(A biome is “a community of plants and animals that have common characteristics for the environment they exist in. They can be found over a range of continents. Biomes are distinct biological communities that have formed in response to a shared physical climate.”)
Thompson discusses and quotes from the work (slides here), and ends with this:
In summary, the argument that geography affects the development of humans and their civilizations need not be a bone of contention between hereditarian and environmentalist perspectives, so long as environmentalists are willing to agree that long-term habitation in a particular biome could lead to evolutionary changes over generations.
Environment affects heredity, which then (eventually) embodies environmental effects.
Returning to economics, about which I’ve written little of late, I note a post by Scott Winship, in which he addresses the declining labor-force participation rate:
Obama’s Council of Economic Advisers (CEA) makes the argument that the decline in prime-age male labor is a demand-side issue that ought to be addressed through stimulative infrastructure spending, subsidized jobs, wage insurance, and generous safety-net programs. If the CEA is mistaken, however, then these expensive policies may be ineffective or even counterproductive.
The CEA is mistaken—the evidence suggests there has been no significant drop in demand, but rather a change in the labor supply driven by declining interest in work relative to other options.
- There are several problems with the assumptions and measurements that the CEA uses to build its case for a demand-side explanation for the rise in inactive prime-age men.
- In spite of conventional wisdom, the prospect for high-wage work for prime-age men has not declined much over time, and may even have improved.
- Measures of discouraged workers, nonworkers marginally attached to the workforce, part-time workers who wish to work full-time, and prime-age men who have lost their job involuntarily have not risen over time.
- The health status of prime-age men has not declined over time.
- More Social Security Disability Insurance claims are being filed for difficult-to-assess conditions than previously.
- Most inactive men live in households where someone receives government benefits that help to lessen the cost of inactivity.
Or, as I put it here, there is
the lure of incentives to refrain from work, namely, extended unemployment benefits, the relaxation of welfare rules, the aggressive distribution of food stamps, and “free” healthcare” for an expanded Medicaid enrollment base and 20-somethings who live in their parents’ basements.
An additional incentive — if adopted in the U.S. — would be a universal basic income (UBI) or basic income guarantee (BIG), which even some libertarians tout, in the naive belief that it would replace other forms of welfare. A recent post by Alberto Mingardi reminded me of UBI/BIG, and invoked Friedrich Hayek — as “libertarian” proponents of UBI/BIG are wont to do. I’ve had my say (here and here, for example). Here’s I said when I last wrote about it:
The Basic Income Guarantee (BIG), also known as Universal Basic Income (UBI), is the latest fool’s gold of “libertarian” thought. John Cochrane devotes too much time and blog space to the criticism and tweaking of the idea. David Henderson cuts to the chase by pointing out that even a “modest” BIG — $10,000 per adult American per year — would result in “a huge increase in federal spending, a huge increase in tax rates, and a huge increase in the deadweight loss from taxes.”
Aside from the fact that BIG would be a taxpayer-funded welfare program — to which I generally object — it would necessarily add to the already heavy burden on taxpayers, even though it is touted as a substitute for many (all?) extant welfare programs. The problem is that the various programs are aimed at specific recipients (e.g., women with dependent children, families with earned incomes below a certain level). As soon as a specific but “modest” proposal is seriously floated in Congress, various welfare constituencies will find that proposal wanting because their “entitlements” would shrink. A BIG bill would pass muster only if it allowed certain welfare programs to continue, in addition to BIG, or if the value of BIG were raised to a level that such that no welfare constituency would be a “loser.”
In sum, regardless of the aims of its proponents — who, ironically, tend to call themselves libertarians — BIG would lead to higher welfare spending and more enrollees in the welfare state.
Years ago I was conversing with a hard-core economist, one of the benighted kind who assume that everyone behaves like a wealth-maximizing robot. I observed that even if he were right in his presumption that economic decisions are made rationally and in a way that comports with economic efficiency, government stands in the way of efficiency. In my pithy phrasing: Politics trumps economics.
So even if the impetus for efficiency isn’t blunted by governmental acts (laws, regulations, judicial decrees), those acts nevertheless stand in the way of efficiency, despite clever workarounds. A simple case in point is the minimum wage, which doesn’t merely drive up the wages of some workers, but also ensures that many workers are unemployed in the near term, and that many more workers will be unemployed in the long-term. Yes, the minimum wage causes some employers to substitute capital (e.g., robots) for labor, but they do so only to reduce the bottom-line damage of the minimum wage (at least in the near-term). Neither the employer nor the jobless is made better off by the employer’s machinations. Thus politics (the urge to regulate) trumps economics (the efficiency-maximizing state of affairs that would otherwise obtain).
I was reminded of my exchange with the economist by a passage in Jean-François Revel’s Last Exit to Utopia: The Survival of Socialism in a Post-Soviet Era:
Karl Jaspers, in his essay on Max Weber, records the following conversation between Weber and Joseph Schumpeter:
The two men met at a Vienna cafe… Schumpter indicated how gratified he was by the socialist revolution in Russia. Henceforth socialism would not be just a program on paper — it would have to prove its viability.
To which Weber … replied that Communism at this stage of development in Russia virtually amounted to a crime, and that to take this path would lead to human misery without equal and to a terrible catastrophe.
“That’s exactly what will happen,” agreed Schumpeter, “but what a perfect laboratory experiment.”
“A laboratory in which mountains of corpses will be heaped!” retorted Weber….
This exchange must have occurred at the beginning of the Bolshevik regime, since Max Weber died in 1920. Thus one of the twentieth century’s greatest sociologists and one of its greatest economists were in substantial agreement about Communism: they had no illusions about it and were fully aware of its criminogenic tendencies. On one issue, though, they differed. Schumpeter was still in thrall to a belief that Weber did not share, namely the illusion that the failures and crimes of Communism would serve as a lesson to humanity. [pp. 141-142]
Weber was right, of course. Politics trumps economics because people — especially people in power — will cling to counterproductive beliefs, even despite evidence that they are counterproductive. Facts and logic don’t stand a chance against power-lust, magical thinking, virtue-signalling, and the band-wagon effect.
“Intellectuals and Society”: A Review
The Left’s Agenda
The Left and Its Delusions
A Keynesian Fantasy Land
The Spoiled Children of Capitalism
Politics, Sophistry, and the Academy
Subsidizing the Enemies of Liberty
Income Inequality and Economic Growth
A Case for Redistribution, Not Made
Ruminations on the Left in America
A Dose of Reality
Non-Judgmentalism as Leftist Condescension
An Addendum to (Asymmetrical) Ideological Warfare
The Rahn Curve Revisited
Four Kinds of “Liberals”
The Vast Left-Wing Conspiracy
Leftism As Crypto-Fascism: The Google Paradigm
What’s Going On? A Stealth Revolution
I have just come across two articles about the shrinking number of firms listed on U.S. stock exchanges:
Kathleen Kahle and René M. Stulz, “Is the American Public Corporation in Trouble?”, Journal of Economic Perspectives, Volume 31, Number 3, Summer 2017
Michael J. Mauboussin, Dan Callahan, and Darius Majd, “The Incredible Shrinking Universe of Stocks: The Causes and Consequences of Fewer U.S. Equities“, Credit Suisse, Global Financial Strategies, March 22, 2017
I will refer to the first article as K&S and the second article as MC&M. (Despite the publication dates, K&S predates MC&M.) The articles tell this tale:
Here are some relevant observations from K&S:
If consolidation has nothing to do with being a public firm, we should see the total number of firms decreasing, whether firms are public or private. We don’t. The United States has become an economy dominated by service industries, and so a good way to demonstrate this is to look at the service industries. Even though the number of firms in the service industries increases by 30 percent from 1995 to 2014 and employment increases by 240 percent, the number of public firms falls by 38 percent. A similar evolution occurs in the finance industry, in which the number of firms increases by 18.7 percent from 1995 to 2014, but over the same time the number of listed firms falls by 42.3 percent. Further, … the propensity of firms to be listed … falls across all firm-size categories when size is measured by employment….
The drop in the propensity to be listed suggests that there is a problem with being a public firm…. In the United States, corporate law is governed by state of incorporation, but public firms are subject to federal securities laws. As a result, Congress can regulate public firms in ways that it cannot regulate private firms….
Our data show that the fraction of small public firms has dropped dramatically…. [T]he drop in initial public offerings is particularly acute among small firms. Why are public markets no longer welcoming for small firms?… [R]esearch and development investments have become more important. Generally, R&D is financed with some form of equity rather than debt, at least in early stages before a firm has accumulated lucrative patents. Raising equity in public markets to fund R&D can be difficult. Investors want to know what they invest in, but the more a firm discloses, the more it becomes at risk of providing ammunition to its competitors. As a result, R&D-intensive firms may be better off raising equity privately from investors who then have large stakes….
There are several additional potential explanations for why small firms are staying out of public markets… First, public markets have become dominated by institutional investors…. Investing in really small firms is unattractive for institutional investors, because they cannot easily invest in a small firm on a scale that works for them. As a result, small firms receive less attention and less support from financial institutions. This makes being public less valuable for these firms. Second, developments in financial intermediation and regulatory changes have made it easier to raise funds as a private firm. Private equity and venture capital firms have grown to provide funding and other services to private firms. The internet has reduced search costs for firms searching for investors. As a result, private firms have come to have relatively easier access to funding.
… According to [the economies of scope] hypothesis, small firms have become less profitable and less able to grow on a stand-alone basis, but are more profitable as part of a larger organization that enables them to scale up quickly and efficiently. Thus, small firms are better off selling themselves to a large organization that can bring a product to market faster and realize economies of scope. This dynamic arises partly because it has become important to get big quickly as technological innovation has accelerated. Globalization also means that firms must be able to access global markets quickly. Further, network and platform effects can make it more advantageous for small firms to take advantage of these effects by being acquired. This hypothesis is consistent with our evidence that the fraction of exchange-listed firms with losses has increased and that average cash flows for smaller firms have dropped…. [M]any mergers do involve small firms, so small firms do indeed choose to be acquired rather than grow as public firms.
The increased concentration we document could also make it harder for small firms to succeed on their own, as large established firms are more entrenched and more dominant….
[Gerald] Davis … argues [in The Vanishing American Corporation] that it has become easier to put a new product on the market without hard assets…. When all the pieces necessary to produce a product can be outsourced and rented, a firm can bring a product to market without large capital requirements. Hence, the firm does not need to go public to raise vast amounts of equity to acquire the fixed assets necessary for production… Ford’s largest production facility in the 1940s, the River Rouge complex, employed more than 100,000 workers at its peak. Of today’s largest US firms, only Amazon has substantially more employees than that complex at its peak. With this evolution, there is no point in going public, except to enable owners to cash out.
These explanations imply that there are fewer public firms both because it has become harder to succeed as a public firm and also because the benefits of being public have fallen. As a result, firms are acquired rather than growing organically. This process results in fewer thriving small public firms that challenge larger firms and eventually succeed in becoming large. A possible downside of this evolution is that larger firms may be able to worry less about competition, can become more set in their ways, and do not have to innovate and invest as much as they would with more youthful competition. Further, small firms are not as ambitious and often choose the path of being acquired rather than succeeding in public markets. With these possible explanations, the developments we document can be costly, leading to less investment, less growth, and less dynamism.
This is all consistent with the creeping stagnation of the U.S. economy, as it collapses under the weight of government spending and regulation:
The argument for the provision of public goods by the state goes like this:
People will free ride on a public good like a clean atmosphere because they can benefit from it without contributing to it. Mimi will enjoy more breathable air when others switch to a Prius even if she doesn’t drive one herself. So the state is justified as a means of forcing people like Mimi to contribute: for instance, by creating laws that penalize pollution….
Standard models predict that public goods will be underprovided because of free riding. Public goods are non-excludable, meaning that you cannot be excluded from enjoying them even if you didn’t contribute to them. Public goods are also non-rivalrous, meaning that my enjoyment of the good doesn’t subtract from yours. Here’s an example. A storm threatens to flood the river, a flood that would destroy your town. If the townspeople join together to build a levee with sandbags, the town will be spared. However, your individual contribution won’t make or break the effort. The levee is a public good. If it prevents the flood, your house will be saved whether or not you helped stack the sandbags. And the levee will protect the entire town, so protecting your house doesn’t detract from the protection afforded to other houses.
It’s typically assumed that people won’t voluntarily contribute to public goods like the levee. Your individual contribution is inconsequential, and if the levee does somehow get provided, you enjoy its protection whether or not you helped. You get the benefit without paying the costs. So the self-interested choice is to watch Netflix on your couch while your neighbors hurt their backs lugging sandbags around. The problem is, your neighbors have the exact same incentive to stay home— if enough others contribute to the levee, they’ll enjoy the benefits whether or not they contributed themselves. Consequently, no one has an incentive to contribute to the levee. As a result of this free-rider problem, the town will flood even though the flood is bad for everyone. [Christopher Freiman, Unequivocal Justice, 2017]
The idea is that private entities won’t provide certain things because there will be too many free riders. And yet, people do buy Priuses and similar cars, and do volunteer in emergencies, and do commit myriad acts of kindness and generosity without compensation (other than psychic). These contrary and readily observable facts should be enough to discredit public-goods theory. But I shall continue with a critical look at key terms and assumptions.
What is a public good? It’s a good that’s “underprovided”. What does that mean? It means that someone who believes that a certain good should be provided in a certain quantity at a certain price is dissatisfied with the actual quantity and/or price at which the good is provided (or not provided).
Who is that someone? Whoever happens to believe that a certain good should be provided at a certain price. Or, more likely, that it should be provided “free” by government. There are many advocates of universal health care, for example, who are certain that health care is underprovided, and that it should be made available freely to anyone who “needs” it. They are either ignorant of the track record of socialized medicine in Canada and Britain, or are among the many (usually leftists) who prefer hope to experience.
What is a free rider, and why is it bad to be a free rider? A free rider is someone who benefits from the provision and use of goods for which he (the free rider) doesn’t pay. There are free riders all around us, all the time. Any product, service, or activity that yields positive externalities is a boon to many persons who don’t buy the product or service, or engage in the activity. (Follow the link in the preceding sentence for a discussion and examples of positive externalities.) But people do buy products and services that yield positive externalities, and companies do stay in business by provide such products and services.
In sum, “free rider” is a scare term invoked for the purpose of justifying government-provided public goods. Why government-provided? Because that way the goods will be “free” to many users of them, and “the rich” will be taxed to provide the goods, of course. (“Free” is an illusion. See this.)
Health care — which people long paid for out of their own pockets or which was supported by voluntary charity — is demonstrably not a public good. If anything, the more that government has come to dominate the provision of health care (including its provision through insurance), the more costly it has become. The rising cost has served to justify greater government involvement in health care, which has further driven up the cost, etc., etc., etc. That’s what happens when government provides a so-called public good.
What about defense? As I say here,
given the present arrangement of the tax burden, those who have the most to gain from defense and justice (classic examples of “public goods”) already support a lot of free riders and “cheap riders.” Given the value of defense and justice to the orderly operation of the economy, it is likely that affluent Americans and large corporations — if they weren’t already heavily taxed — would willingly form syndicates to provide defense and justice. Most of them, after all, are willing to buy private security services, despite the taxes they already pay….
… It may nevertheless be desirable to have a state monopoly on police and justice — but only on police and justice, and only because the alternatives are a private monopoly of force, on the one hand, or a clash of warlords, on the other hand.
All in all, the price of “free” government goods is extremely high; government taketh away far more than it giveth. With a minimal government restricted to the defense of citizens against force and fraud there would be far fewer people in need of “public goods” and far, far more private charity available to those few who need it.
A Short Course in Economics
Addendum to a Short Course in Economics
Monopoly: Private Is Better than Public
What Free-Rider Problem?
Regulation as Wishful Thinking
Merit Goods, Positive Rights, and Cosmic Justice
More about Merit Goods
Don’t Just Stand There, “Do Something”
Laurence Kotlikoff draws attention to the Social Security mess in his recent column, “Will Social Security Be There for You?“. He states the problem and poses two stark options for solving it:
Social Security’s trustees just released their annual report. It’s a very long document, with the most important part buried deep in appendix table VIF1.
Table VIF1 shows the system is $34.2 trillion in the red. That’s its unfunded liability. Stated differently, the system’s trust fund needs to be $37 trillion, not its actual $2.8 trillion, to permit Social Security to pay all scheduled benefits into the future. How large is $34.2 trillion? Very large. It’s almost two years of GDP!
There is, of course, more than one way to make ends meet. If we can’t get the good lord to drop $34.2 trillion into Social Security’s coffers as manna from heaven, we can raise taxes. One option is to take 4.2 percent more out of everyone’s paycheck (up to the taxable earnings ceiling, now $127,500) on a permanent basis. Since Social Security’s FICA payroll tax rate is 12.4 percent, we’re talking a 33.9 (4.2/12.4) percent immediate and permanent Social Security tax hike!
Another option is to cut all Social Security benefits (retirement, spousal, divorcee, widow(er), young child, disabled child, child-in-care spousal, mother (father), disability and parent benefits) immediately and permanently by 25 percent!
There are, in fact, other options. One is to keep kicking the can down the road, as long as foreign investors are willing, in effect, to underwrite Social Security’s deficit. They do this by shipping the proceeds of their “trade surplus” (our “trade deficit”) back to the U.S. in exchange for stocks, bonds, and real estate. Some of their money goes directly into U.S. government bonds; the rest helps to relieve the crowding out that occurs when the U.S. government borrows to sustain its profligate spending, which includes Social Security.
Here’s another one. The unfunded liability isn’t a current liability; it’s the present value of future Social Security deficits. Which means that another way of kicking the can down the road is to gradually increase Social Security taxes and/or reduce benefits to a sustainable level while foreigners to underwrite the transition.
I prefer a third option, which is usually considered politically unthinkable: eventual privatization of Social Security. How would that work? Here’s my plan:
1. Abolish Social Security payroll taxes as of a date certain (Abolition Day).
2. Pay normal benefits (those implicitly promised under the present system) to persons who are then collecting Social Security and to all other qualifying persons who have then reached the age of 62.
3. Persons who are 55 to 61 years old would receive normal benefits, pro-rated according to their contributions as of Abolition Day.
4. The retirement age for full benefits would be raised for all persons who are younger than 55 as of Abolition Day. The full retirement age is now scheduled to rise to 67 in 2027. It could rise to 70 by, say, 2025. Moreover, the minimum age for receiving partial benefits would rise from 62 to 65.
4. Persons who are 45 to 54 years old also would receive prorated benefits based on their contributions as of Abolition Day. But their initial benefits would be reduced on a sliding scale, so that the benefits of those persons who are 45 as of Abolition Day would be linked entirely to the CPI rather than the wage index.
5. Persons who are younger than 45 would receive a lump-sum repayment of their contributions (plus accrued interest) at full retirement age, in lieu of future benefits. That payment would automatically go to a surviving spouse or next-of-kin if the recipient dies intestate. Otherwise, the recipient could bequeath, transfer, or sell his interest in the payment at any time before it comes due.
The residual obligations outlined in steps 2-5 would be funded in part by a payroll tax, which would diminish as those obligations are paid off. The U.S. government would continue to borrow as necessary to fund the Social Security deficit, but — unlike the first two options — the borrowing would eventually come to an end. Social Security would be “saved”, there would be less crowding-out in financial markets, and — best of all — everyone’s retirement savings would be plowed into investment-inducing vehicles: stocks, bonds, CDs, savings accounts. This would push up the rate of economic growth and make privatization all the more affordable, and desirable.