Social Security Is an Entitlement

Entitlement has come to mean the right to guaranteed benefits under a government program. In the nature of government programs, those who receive the benefits usually don’t pay the taxes required to fund those benefits.

I recently saw on Facebook (which I look at occasionally) a discussion to the effect that Social Security isn’t an entitlement program because “we (the discussants) paid into it”.

Well, paying into Social Security doesn’t mean that you paid your own way. First, the system is rigged so the persons in lower income brackets receive benefits that are disproportionately high relative to the payments that they (and their employers) made during their working years.

Second, the money that a person pays into Social Security doesn’t earn anything. You are not buying a financial instrument that funds productive investments, which in turn reward you with a future stream of income.

True, there’s the mythical Social Security Trust Fund, which has been paying out benefits that have been defrayed in part by interest earned on “investments” in U.S. Treasury securities. Where does that interest come from? Not from the beneficiaries of Social Security. It comes from taxpayers who are, at the same time, also making payments into Social Security in exchange for the “promise” of future Social Security benefits. (I say “promise” because there is no binding contract for Social Security benefits; you get what Congress provides by law.)

So, yes, Social Security is an entitlement program. Paying into it doesn’t mean that the payer earns what he eventually receives from it. Quite the contrary. Most participants are feeding from the public trough.

Thaler’s Fatuousness

Richard  Thaler, with whom I had a nodding acquaintance many years ago, is one of my least favorite economists — and a jerk, to boot. (See, for example, “The Perpetual Nudger“, “Richard Thaler, Nobel Laureate“, “Thaler’s Non-Revolution in Economics“, “Another (Big) Problem with ‘Nudging’“, and ” Thaler on Discounting“.) What the world needs isn’t a biography of the nudger-in-chief, but that’s what the world now has, no thanks to The Library of Economics and Liberty, where the mercifully brief bio is posted.

In it, the reader is treated to such “wisdom” as this:

Economists generally assume that more choices are better than fewer choices. But if that were so, argues Thaler, people would be upset, not happy, when the host at a dinner party removes the pre-dinner bowl of cashews. Yet many of us are happy that it’s gone. Purposely taking away our choice to eat more cashews, he argues, makes up for our lack of self-control.

Notice the sleight of hand by which the preferences of a few (including Thaler, presumably) are pushed front and center: “many of us are happy”. Who is “us”? And what about the preferences of everyone else, who may well comprise a majority? Thaler is happy because the the host has taken an action of which he (Thaler) approves, because he (Thaler) wants to tell the rest of us what makes us happy.

There’s more:

Thaler … noticed another anomaly in people’s thinking that is inconsistent with the idea that people are rational. He called it the “endowment effect.” People must be paid much more to give something up (their “endowment”) than they are willing to pay to acquire it. So, to take one of his examples from a survey, people, when asked how much they are willing to accept to take on an added mortality risk of one in one thousand, would give, as a typical response, the number $10,000. But a typical response by people, when asked how much they would pay to reduce an existing risk of death by one in one thousand, was $200.

Surveys are meaningless. Talk is cheap (see #5 here).

Even if the survey results are somewhat accurate, in that there is a significant gap between the two values, there is a rational explanation for such a gap. In the first instance, a person is (in theory) accepting an added risk, one that he isn’t already facing. In the second instance, the existing risk may be one that the person being asked considers to be very low, as applied to himself. The situations clearly aren’t symmetrical, so it’s unsurprising that the price of accepting a new risk is higher than the payment for reducing a possible risk.

That’s enough of Thaler. More than enough.

Shaky Trade Talk

Political Calculations has posted “Heavy Toll of US-China Tariff War Continues“.  Two graphs carry the burden of proof of the title’s thesis, namely, that the current tariff “war” is responsible for a “heavy toll” on U.S exports and the total value of trade between the U.S. (rather, entities therein) and China. My take is that the graphs don’t support the conclusions that the writer draws from them.

First:

A trend line through all the points represented by the 12-month moving average wouldn’t rise as sharply as the pre-trade war linear trend. I would be hard-pressed to say that the current decline below the 2008-2019 trend is significant, and so would the writer. Further, the current decline in the 12-month moving average is no greater than the one that began during Obama’s presidency.

Second:

The writer claims that the

year-over-year growth rate of each nation’s exports to each other continues to fall in negative territory, which in previous occurrences, has [sic] coincided with periods of sharply slowing economic growth or recessions.

What I see in the graph is a long-term decline in the year-over-year growth rate. The only significant (and more negative) departure from the trend occurred during the Great Recession.

(See “Rethinking Free Trade III“, which repeats the main points of the first two installments.)

That “Hurtful” Betsy Ross Flag

Fox News has the latest:

Two Democratic hopefuls have expressed their support for Nike after the sportswear company pulled sneakers featuring the Betsy Ross-designed American flag ahead of the Fourth of July holiday. The company did so after former NFL quarterback and Nike endorser Colin Kaepernick raised concerns about the shoes.

Former HUD Secretary Julián Castro told CBS News on Wednesday that he was “glad to see” Nike remove the shoes from the shelves, comparing the “painful” symbol to the Confederate flag.

“There are a lot of things in our history that are still very painful,” Castro explained. As an example, he cited “the Confederate flag that still flies in some places and is used as a symbol.”\

Former Texas congressman Beto O’Rourke also approved of Nike’s decision, noting that “white nationalist groups” have “appropriated” the Betsy Ross flag.

“I think its really important to take into account the impression that kind of symbol would have for many of our fellow Americans,” he said,  according to Jewish Insider senior political reporter Ben Jacobs.

As I understand it, the Betsy Ross flag, which became the symbol of the rebellious, united States (i.e., Colonies) in 1777, is “hurtful” because it dates from an era when slavery was legal in what became the United States. How that historical fact is “hurtful” to anyone is beyond me. The fact of slavery is reprehensible, but a flag that merely denotes America’s struggle for independence from Britain really has nothing to do with slavery, except in the slippery way that “social justice” warriors have just invented. (Clearly, they are running low on ideas.)

Well, if the Betsy Ross flag is “hurtful” to professional virtue-signalers and malcontents, it is certainly — and more legitimately — hurtful to me. I am a direct descendant of a man who, with three of his sons (one of whom I am also directly descended from), fought on the British side in the Revolutionary War. They had settled in the Colony of Pennsylvania in the 1750s and, perhaps not unwisely, chose to defend the Crown against presumptuous rebels like George Washington, Samuel Adams, Thomas Jefferson, and 53 other signatories of the Declaration of Independence — all of whom used to be called patriots. (Washington, Jefferson, and many other signatories owned slaves, but that wasn’t why they rebelled; slavery was then still legal throughout the British Empire.)

In any event, because my ancestors were Loyalists, they fled to Canada at the end of the war. And from then until the birth of my father in the United States more than 130 years later, the ancestors in my paternal line of descent were Canadian and therefore (nominally, at least) subjects of the British monarch.

So if anyone has a right to be offended by the Betsy Ross flag, it is I. But I am not offended by the flag, though I am deeply offended by the useless twits who profess to be offended by it.

“Free Stuff”

Here’s an explainer, which will go over the heads of Democrat presidential hopefuls and most Democrats:

Getting “free” stuff reduces the recipient’s need to work.

Therefore, giving out “free” stuff means that recipients work less than they would otherwise work, where “less” often means “not at all”.

But “free” stuff isn’t really free; someone has to produce it (i.e., work). (The work may be done by machines and computerized systems, but someone has to invent, build, operate, monitor, etc., those machines and computerized systems; and someone has to do some kind of work in order to generate the wherewithal for the invention, construction, and purchase of machines and computerized systems.)

As long as productivity rises fast enough, workers can continue to produce “free” stuff while maintaining or improving their own standard of living.

But if the value of “free” stuff rises faster than the value of the extra output afforded by productivity increases, something has to give. If the something is the real income of workers — what they get after providing “free” stuff for others — they will work less (though they may do so in ways that disguise the slowdown).

Some will argue that workers will just work more in order to maintain their standard of living. But just as companies will offer fewer goods and services as prices decline, so will workers work less as their real wages decline. The ability to buy stuff is an incentive to work, but there are other things to do with one’s time, so if a given amount of work buys less stuff, those other things look more attractive. (Greg Mankiw gives an economist’s explanation here.)

At some point, if productivity doesn’t rise enough (and it has been declining for a long time), while government continues to hand out more “free” stuff, enough workers will have reduced their output (in response to decreases in real wages) that the real (inflation-adjusted) value of total output will decline.

A kind of death-spiral will ensue: lower real wages leads to lower total output which leads to lower real wages (unless the “free” stuff is reduced drastically), etc., etc., etc. In the end, workers will do just enough work to afford a subsistence standard of living, and the actual value of the “free” stuff given to non-workers will be about the same as it is for workers. (In the USSR, most people were nominally employed (though not very productively), but there was so much “free” stuff being handed out — especially to the commissars and their favorites — that the result was the same: low real output and a low standard of living — by Western standards — even for the commissars and their favorites.)

Equality, ain’t it wonderful?

The Price of a Low Unemployment Rate …

… is worse service. It figures, doesn’t it? One of the things that firms must do to boost output is to hire people with lower qualifications than previous hires. That’s good for dumber and less-educated workers. But it’s frustrating for consumers who encounter them in stores and over the phone. The solution, from my perspective as a consumer, is to shop where automation reigns. My Amazon membership of 21 years becomes daily more valuable to me.

Time-Preference: A Shallow Concept

Economists put a lot of stock in the concept of time-preference. Certainly, time-preference has a lot to do with the setting of interest rates. But, as any respectable economist should admit, there no “interest rate” but a plethora of them, including many, many of them that aren’t captured by market activity.

In any event, time-preference is evanescent. It can even reverse itself over time. The time-preference for death is low, or even negative, when one is young. But it can be infinitely positive when one is suffering — at any age. In general, however, it is safe to say that it rises with age, perhaps sharply toward the end of one’s life.

Not with a Bang

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

T.S. Elliot, The Hollow Men

It’s also the way that America is ending. Yes, there are verbal fireworks aplenty, but there will not be a “hot” civil war. The country that my parents and grandparents knew and loved — the country of my youth in the 1940s and 1950s — is just fading away.

This would not necessarily be a bad thing if the remaking of America were a gradual, voluntary process, leading to time-tested changes for the better. But that isn’t the case. The very soul of America has been and is being ripped out by the government that was meant to protect that soul, and by movements that government not only tolerates but fosters.

Before I go further, I should explain what I mean by America, which is not the same thing as the geopolitical entity known as the United States, though the two were tightly linked for a long time.

America was a relatively homogeneous cultural order that fostered mutual respect, mutual trust, and mutual forbearance — or far more of those things than one might expect in a nation as populous and far-flung as the United States. Those things — conjoined with a Constitution that has been under assault since the New Deal — made America a land of liberty. That is to say, they fostered real liberty, which isn’t an unattainable state of bliss but an actual (and imperfect) condition of peaceful, willing coexistence and its concomitant: beneficially cooperative behavior.

The attainment of this condition depends on social comity, which depends in turn on (a) genetic kinship and (b) the inculcation and enforcement of social norms, especially the norms that define harm.

All of that is going by the boards because the emerging cultural order is almost diametrically opposite that which prevailed in America. The new dispensation includes:

  • casual sex
  • serial cohabitation
  • subsidized illegitimacy
  • abortion on demand
  • easy divorce
  • legions of non-mothering mothers
  • concerted (and deluded) efforts to defeminize females and to neuter or feminize males
  • gender-confusion as a burgeoning norm
  • “alternative lifestyles” that foster disease, promiscuity, and familial instability
  • normalization of drug abuse
  • forced association (with accompanying destruction of property and employment rights)
  • suppression of religion
  • rampant obscenity
  • identity politics on steroids
  • illegal immigration as a “right”
  • “free stuff” from government (Social Security was meant to be self-supporting)
  • America as the enemy
  • all of this (and more) as gospel to influential elites whose own lives are modeled mostly on old America.

As the culture has rotted, so have the ties that bound America.

The rot has occurred to the accompaniment of cacophony. Cultural coarsening begets loud and inconsiderate vulgarity. Worse than that is the cluttering of the ether with the vehement and belligerent propaganda, most of it aimed at taking down America.

The advocates of the new dispensation haven’t quite finished the job of dismantling America. But that day isn’t far off. Complete victory for the enemies of America is only a few election cycles away. The squishy center of the electorate — as is its wont — will swing back toward the Democrat Party. With a Democrat in the White House, a Democrat-controlled Congress, and a few party switches in the Supreme Court (of the packing of it), the dogmas of the anti-American culture will become the law of the land; for example:

Billions and trillions of dollars will be wasted on various “green” projects, including but far from limited to the complete replacement of fossil fuels by “renewables”, with the resulting impoverishment of most Americans, except for comfortable elites who press such policies).

It will be illegal to criticize, even by implication, such things as abortion, illegal immigration, same-sex marriage, transgenderism, anthropogenic global warming, or the confiscation of firearms. These cherished beliefs will be mandated for school and college curricula, and enforced by huge fines and draconian prison sentences (sometimes in the guise of “re-education”).

Any hint of Christianity and Judaism will be barred from public discourse, and similarly punished. Islam will be held up as a model of unity and tolerance.

Reverse discrimination in favor of females, blacks, Hispanics, gender-confused persons, and other “protected” groups will be required and enforced with a vengeance. But “protections” will not apply to members of such groups who are suspected of harboring libertarian or conservative impulses.

Sexual misconduct (as defined by the “victim”) will become a crime, and any male person may be found guilty of it on the uncorroborated testimony of any female who claims to have been the victim of an unwanted glance, touch (even if accidental), innuendo (as perceived by the victim), etc.

There will be parallel treatment of the “crimes” of racism, anti-Islamism, nativism, and genderism.

All health care in the United States will be subject to review by a national, single-payer agency of the central government. Private care will be forbidden, though ready access to doctors, treatments, and medications will be provided for high officials and other favored persons. The resulting health-care catastrophe that befalls most of the populace (like that of the UK) will be shrugged off as a residual effect of “capitalist” health care.

The regulatory regime will rebound with a vengeance, contaminating every corner of American life and regimenting all businesses except those daring to operate in an underground economy. The quality and variety of products and services will decline as their real prices rise as a fraction of incomes.

The dire economic effects of single-payer health care and regulation will be compounded by massive increases in other kinds of government spending (defense excepted). The real rate of economic growth will approach zero.

The United States will maintain token armed forces, mainly for the purpose of suppressing domestic uprisings. Given its economically destructive independence from foreign oil and its depressed economy, it will become a simulacrum of the USSR and Mao’s China — and not a rival to the new superpowers, Russia and China, which will largely ignore it as long as it doesn’t interfere in their pillaging of respective spheres of influence. A policy of non-interference (i.e., tacit collusion) will be the order of the era in Washington.

Though it would hardly be necessary to rig elections in favor of Democrats, given the flood of illegal immigrants who will pour into the country and enjoy voting rights, a way will be found to do just that. The most likely method will be election laws requiring candidates to pass ideological purity tests by swearing fealty to the “law of the land” (i.e., abortion, unfettered immigration, same-sex marriage, freedom of gender choice for children, etc., etc., etc.). Those who fail such a test will be barred from holding any kind of public office, no matter how insignificant.

Are my fears exaggerated? I don’t think so, given what has happened in recent decades and the cultural revolutionaries’ tightening grip on the Democrat party. What I have sketched out can easily happen within a decade after Democrats seize total control of the central government.

Will the defenders of liberty rally to keep it from happening? Perhaps, but I fear that they will not have a lot of popular support, for three reasons:

First, there is the problem of asymmetrical ideological warfare, which favors the party that says “nice” things and promises “free” things.

Second, What has happened thus far — mainly since the 1960s — has happened slowly enough that it seems “natural” to too many Americans. They are like fish in water who cannot grasp the idea of life in a different medium.

Third, although change for the worse has accelerated in recent years, it has occurred mainly in forums that seem inconsequential to most Americans, for example, in academic fights about free speech, in the politically correct speeches of Hollywood stars, and in culture wars that are conducted mainly in the blogosphere. The unisex-bathroom issue seems to have faded as quickly as it arose, mainly because it really affects so few people. The latest gun-control mania may well subside — though it has reached new heights of hysteria — but it is only one battle in the broader war being waged by the left. And most Americans lack the political and historical knowledge to understand that there really is a civil war underway — just not a “hot” one.

Is a reversal possible? Possible, yes, but unlikely. The rot is too deeply entrenched. Public schools and universities are cesspools of anti-Americanism. The affluent elites of the information-entertainment-media-academic complex are in the saddle. Republican politicians, for the most part, are of no help because they are more interested on preserving their comfortable sinecures than in defending America or the Constitution.

On that note, I will take a break from blogging — perhaps forever. I urge you to read one of my early posts, “Reveries“, for a taste of what America means to me. As for my blogging legacy, please see “A Summing Up“, which links to dozens of posts and pages that amplify and support this post.

Il faut cultiver notre jardin.

Voltaire, Candide


Related reading:

Michael Anton, “What We Still Have to Lose“, American Greatness, February 10, 2019

Rod Dreher, “Benedict Option FAQ“, The American Conservative, October 6, 2015

Roger Kimball, “Shall We Defend Our Common History?“, Imprimis, February 2019

Joel Kotkin, “Today’s Cultural Engineers“, newgeography, January 26, 2019

Daniel Oliver, “Where Has All the Culture Gone?“, The Federalist, February 8, 2019

Malcolm Pollack, “On Civil War“, Motus Mentis, March 7, 2019

Fred Reed, “The White Man’s Burden: Reflections on the Custodial State“, Fred on Everything, January 17, 2019

Gilbert T. Sewall, “The Diminishing Authority of the Bourgeois Culture“, The American Conservative, February 4, 2019

Bob Unger, “Requiem for America“, The New American, January 24, 2019

A Summing Up

This post has been updated and moved to “Favorite Posts“.

The Good News and Real News about Inflation and Earnings

GOOD NEWS

The CPI isn’t signalling a recession.

Household income, adjusted for inflation, continues to rise to new heights.

BUT . . .

Inflation is in the eye (or wallet) of the beholder. It is arbitrarily estimated by sampling the prices of defined “baskets” of products and services. Your “basket” probably differs greatly from the official ones used by the Bureau of Labor Statistics.

Almost no household is a typical one.

REAL NEWS

Aggregate statistics are almost meaningless. There is no such thing as social welfare. Only you can decide if you’re better off than you were yesterday.


Related posts:
Microeconomics and Macroeconomics
Unorthodox Economics: 2. Pitfalls (especially the third entry about social welfare)
Unorthodox Economics: 5. Economic Progress, Microeconomics, and Microeconomics

Recent Updates

In case you hadn’t noticed, I have in the past few days added new links to the following post and pages:

The Green New Deal Is a Plan for Economic Devastation

Climate Change

Favorite Posts

Intelligence

Spygate

I have also updated “Writing: A Guide“.

The Green New Deal Is a Plan for Economic Devastation

Here’s the essence of the “plan”:

The annual cost of the Green New Deal (GND) is about $5 trillion a year over the first ten years.

At the end of the ten years, government’s share of GDP would rise from about 40 percent to about 60 percent. This assumes, unrealistically, that the prospect and realization of the GND wouldn’t cause a drastic reduction in the size of the private sector.

Even making that assumption, the real rate of economic growth would decline from a weak 2 percent to a devastating minus 5 percent*.

In fact, within a generation what’s left of GDP would consist almost entirely of government spending. The socialist dream would have become reality, complete with long queues (physical and virtual) and rationing of shoddy products and services doled out by the state.

USSR, here we come.

__________

* My rough estimate of the GND’s effect of on the rate of growth is based on the equation presented here.


Related reading:

Erich Wallach’s interview with Deirdre McCloskey, Distinguished Professor Emerita of Economics and of History, University of Illinois-Chicago, February 10, 2019

Douglas Holtz-Eakin, Dan Bosch, Ben Gitis, Dan Goldbeck, and Philip Rossetti, “The Green New Deal: Scope, Scale, and Implications“, American Action Forum, February 25, 2019

The Shutdown Was a Plus for the Economy

The “non-partisan” (but pro-government) Congressional Budget Office has assessed the economic effects of the five-week partial shutdown of the government that started on December 22, 2018, and ended on January 25, 2019. According to CBO,

real (that is, inflation-adjusted) gross domestic product (GDP) in the fourth quarter of 2018 was reduced by $3 billion (in 2019 dollars) in relation to what it would have been otherwise…. In the first quarter of 2019, the level of real GDP is estimated to be $8 billion lower than it would have been….

Although most of the real GDP lost during the fourth quarter of 2018 and the first quarter of 2019 will eventually be recovered, CBO estimates that about $3 billion will not be.

In truth, real GDP will rise as a result of the inactivity of government bureaucrats. By how much? Not a lot, relative to real GDP, which is measured in the trillions of dollars. But it will rise, as I explain in “Keynesian Multiplier: Fiction vs. Fact“, because there is a negative relationship between government spending and real GDP, other things being equal:

kT = ∆Y/∆F = -0.340Y0

Where,

kT = the true multiplier

Y = real GDP

F = fraction of GDP spent by governments at all levels, including transfer payments (e.g., Social Security, Medicare, and Medicaid)

Y0 = real GDP in the period during which F changes

Even a slight decrease in government spending has an out-sized — and beneficial — effect on GDP.

More Stock-Market Analysis (II)

Today’s trading on U.S. stock markets left the Wilshire 5000 Total Market Full-Cap index 17 percent below its September high. How low will the market go? When will it bounce back? There’s no way to know, which is the main message of “Shiller’s Folly” and “More Stock-Market Analysis“.

Herewith are three relevant exhibits based on the S&P Composite index as reconstructed by Robert Shiller (commentary follows):

In the following notes, price refers to the value of the index; real price is the inflation-adjusted value of the index; total return is the value with dividends reinvested; real total return is the inflation-adjusted value of total return.

  • The real price trend represents an annualized gain of 1.8 percent (through November 2018).
  • The real total return trend represents an annualized gain of 6.5 percent (through September 2018).
  • In month-to-month changes, real price has gone up 56 percent of the time; real total return has gone up 61 percent of the time.
  • Real price has been in a major decline about 24 percent of the time, where a major decline is defined as a real price drop of more than 25 percent over a span of at least 6 months.
  • The picture is a bit less bleak for total returns (about 20 percent of the time) because the reinvestment of dividends somewhat offsets price drops.
  • Holding a broad-market index fund is never a sure thing. Returns fluctuate wildly. Impressive real returns (e.g., 20 percent and higher) are possible in the shorter run (e.g., 5-10 years), but so are significantly negative returns. Holding a fund longer reduces the risk of a negative return while also suppressing potential gains.
  • Long-run real returns of greater than 5 percent a year are not to be scoffed at. It takes a lot of research, patience, and luck to do better than that with individual stocks and specialized mutual funds.

More Stock-Market Analysis

I ended “Shiller’s Folly” with the Danish proverb, it is difficult to make predictions, especially about the future.

Here’s more in that vein. Shiller uses a broad market index, the S&P Composite (S&P), which he has reconstructed back to January 1871. I keep a record of the Wilshire 5000 Full-Cap Total-Return Index (WLX), which dates back to December 1970. When dividends for stocks in the S&P index are reinvested, its performance since December 1970 is almost identical to that of the WLX:

It is a reasonable assumption that if the WLX extended back to January 1871 its track record would nearly match that of the S&P. Therefore, one might assume that past returns on the WLX are a good indicator of future returns. In fact, the relationship between successive 15-year periods is rather strong:

But that seemingly strong relationship is an artifact of the relative brevity of the track record of the WLX.  Compare the relationship in the preceding graph with the analogous one for the S&P, which goes back an additional 100 years:

The equations are almost identical — and they predict almost the same real returns for the next 15 years: about 6 percent a year. But the graph immediately above should temper one’s feeling of certainty about the long-run rate of return on a broad market index fund or a well-diversified portfolio of stocks.


Related posts:
Stocks for the Long Run?
Stocks for the Long Run? (Part II)
Bonds for the Long Run?
Much Ado about the Price-Earnings Ratio
Whither the Stock Market?
Shiller’s Folly

Shiller’s Folly

Robert Shiller‘s most famous (or infamous) book, is Irrational Exuberance (2000). According to the Wikipedia article about the book,

the text put forth several arguments demonstrating how the stock markets were overvalued at the time. The stock market collapse of 2000 happened the exact month of the book’s publication.

The second edition of Irrational Exuberance was published in 2005 and was updated to cover the housing bubble. Shiller wrote that the real estate bubble might soon burst, and he supported his claim by showing that median home prices were six to nine times greater than median income in some areas of the country. He also showed that home prices, when adjusted for inflation, have produced very modest returns of less than 1% per year. Housing prices peaked in 2006 and the housing bubble burst in 2007 and 2008, an event partially responsible for the Worldwide recession of 2008-2009.

However, as the Wikipedia article notes,

some economists … challenge the predictive power of Shiller’s publication. Eugene Fama, the Robert R. McCormick Distinguished Service Professor of Finance at The University of Chicago and co-recipient with Shiller of the 2013 Nobel Prize in Economics, has written that Shiller “has been consistently pessimistic about prices,”[ so given a long enough horizon, Shiller is bound to be able to claim that he has foreseen any given crisis.

(A stopped watch is right twice a day, but wrong 99.9 percent of the time if read to the nearest minute. I also predicted the collapse of 2000, but four years too soon.)

One of the tools used by Shiller is a cyclically-adjusted price-to-earnings ratio known as  CAPE-10 . It is

a valuation measure usually applied to the US S&P 500 equity market. It is defined as price divided by the average of ten [previous] years of earnings … , adjusted for inflation. As such, it is principally used to assess likely future returns from equities over timescales of 10 to 20 years, with higher than average CAPE values implying lower than average long-term annual average returns.

CAPE-10, like other economic indicators of which I know, is a crude tool:

For example, the annualized real rate of price growth for the S&P Composite Index from October 2003 to October 2018 was 4.6 percent. The value of CAPE-10 in October 2003 was 25.68. According to the equation in the graph (which includes the period from October 2003 through October 2018), the real rate of price growth should have been -0.6 percent. The actual rate is at the upper end of the wide range of uncertainty around the estimate.

Even a seemingly more robust relationship yields poor results. Consider this one:

The equation in this graph produces a slightly better but still terrible estimate: price growth of -0.2 percent over the 15 years ending in October 2018.

If you put stock (pun intended) in the kinds of relationships depicted above, you should expect real growth in the S&P Composite Index to be zero for the next 15 years — plus or minus about 6 percentage points. It’s the plus or minus that matters — a lot — and the equations don’t help you one bit.

As the Danish proverb says, it is difficult to make predictions, especially about the future.

Not-So-Random Thoughts (XXIII)

CONTENTS

Government and Economic Growth

Reflections on Defense Economics

Abortion: How Much Jail Time?

Illegal Immigration and the Welfare State

Prosperity Isn’t Everything

Google et al. As State Actors

The Transgender Trap


GOVERNMENT AND ECONOMIC GROWTH

Guy Sorman reviews Alan Greenspan and Adrian Wooldridge’s Capitalism in America: A History. Sorman notes that

the golden days of American capitalism are over—or so the authors opine. That conclusion may seem surprising, as the U.S. economy appears to be flourishing. But the current GDP growth rate of roughly 3 percent, after deducting a 1 percent demographic increase, is rather modest, the authors maintain, compared with the historic performance of the postwar years, when the economy grew at an annual average of 5 percent. Moreover, unemployment appears low only because a significant portion of the population is no longer looking for work.

Greenspan and Wooldridge reject the conventional wisdom on mature economies growing more slowly. They blame relatively slow growth in the U.S. on the increase in entitlement spending and the expansion of the welfare state—a classic free-market argument.

They are right to reject the conventional wisdom.  Slow growth is due to the expansion of government spending (including entitlements) and the regulatory burden. See “The Rahn Curve in Action” for details, including an equation that accurately explains the declining rate of growth since the end of World War II.


REFLECTIONS ON DEFENSE ECONOMICS

Arnold Kling opines about defense economics. Cost-effectiveness analysis was the big thing in the 1960s. Analysts applied non-empirical models of warfare and cost estimates that were often WAGs (wild-ass guesses) to the comparison of competing weapon systems. The results were about as accurate a global climate models, which is to say wildly inaccurate. (See “Modeling Is not Science“.) And the results were worthless unless they comported with the prejudices of the “whiz kids” who worked for Robert Strange McNamara. (See “The McNamara Legacy: A Personal Perspective“.)


ABORTION: HOW MUCH JAIL TIME?

Georgi Boorman says “Yes, It Would Be Just to Punish Women for Aborting Their Babies“. But, as she says,

mainstream pro-lifers vigorously resist this argument. At the same time they insist that “the unborn child is a human being, worthy of legal protection,” as Sarah St. Onge wrote in these pages recently, they loudly protest when so-called “fringe” pro-lifers state the obvious: of course women who willfully hire abortionists to kill their children should be prosecuted.

Anna Quindlen addressed the same issue more than eleven years ago, in Newsweek:

Buried among prairie dogs and amateur animation shorts on YouTube is a curious little mini-documentary shot in front of an abortion clinic in Libertyville, Ill. The man behind the camera is asking demonstrators who want abortion criminalized what the penalty should be for a woman who has one nonetheless. You have rarely seen people look more gobsmacked. It’s as though the guy has asked them to solve quadratic equations. Here are a range of responses: “I’ve never really thought about it.” “I don’t have an answer for that.” “I don’t know.” “Just pray for them.”

You have to hand it to the questioner; he struggles manfully. “Usually when things are illegal there’s a penalty attached,” he explains patiently. But he can’t get a single person to be decisive about the crux of a matter they have been approaching with absolute certainty.

… If the Supreme Court decides abortion is not protected by a constitutional guarantee of privacy, the issue will revert to the states. If it goes to the states, some, perhaps many, will ban abortion. If abortion is made a crime, then surely the woman who has one is a criminal. But, boy, do the doctrinaire suddenly turn squirrelly at the prospect of throwing women in jail.

“They never connect the dots,” says Jill June, president of Planned Parenthood of Greater Iowa.

I addressed Quindlen, and queasy pro-lifers, eleven years ago:

The aim of Quindlen’s column is to scorn the idea of jail time as punishment for a woman who procures an illegal abortion. In fact, Quindlen’s “logic” reminds me of the classic definition of chutzpah: “that quality enshrined in a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.” The chutzpah, in this case, belongs to Quindlen (and others of her ilk) who believe that a woman should not face punishment for an abortion because she has just “lost” a baby.

Balderdash! If a woman illegally aborts her child, why shouldn’t she be punished by a jail term (at least)? She would be punished by jail (or confinement in a psychiatric prison) if she were to kill her new-born infant, her toddler, her ten-year old, and so on. What’s the difference between an abortion and murder? None. (Read this, then follow the links in this post.)

Quindlen (who predictably opposes capital punishment) asks “How much jail time?” in a cynical effort to shore up the anti-life front. It ain’t gonna work, lady.

See also “Abortion Q & A“.


ILLEGAL IMMIGRATION AND THE WELFARE STATE

Add this to what I say in “The High Cost of Untrammeled Immigration“:

In a new analysis of the latest numbers [by the Center for Immigration Studies], from 2014, 63 percent of non-citizens are using a welfare program, and it grows to 70 percent for those here 10 years or more, confirming another concern that once immigrants tap into welfare, they don’t get off it.

See also “Immigration and Crime” and “Immigration and Intelligence“.

Milton Friedman, thinking like an economist, favored open borders only if the welfare state were abolished. But there’s more to a country than GDP. (See “Genetic Kinship and Society“.) Which leads me to…


PROSPERITY ISN’T EVERYTHING

Patrick T. Brown writes about Oren Cass’s The Once and Future Worker:

Responding to what he cutely calls “economic piety”—the belief that GDP per capita defines a country’s well-being, and the role of society is to ensure the economic “pie” grows sufficiently to allow each individual to consume satisfactorily—Cass offers a competing hypothesis….

[A]s Cass argues, if well-being is measured by considerations in addition to economic ones, a GDP-based measurement of how our society is doing might not only be insufficient now, but also more costly over the long term. The definition of success in our public policy (and cultural) efforts should certainly include some economic measures, but not at the expense of the health of community and family life.

Consider this line, striking in the way it subverts the dominant paradigm: “If, historically, two-parent families could support themselves with only one parent working outside the home, then something is wrong with ‘growth’ that imposes a de facto need for two incomes.”…

People need to feel needed. The hollowness at the heart of American—Western?—society can’t be satiated with shinier toys and tastier brunches. An overemphasis on production could, of course, be as fatal as an overemphasis on consumption, and certainly the realm of the meritocrats gives enough cause to worry on this score. But as a matter of policy—as a means of not just sustaining our fellow citizen in times of want but of helping him feel needed and essential in his family and community life—Cass’s redefinition of “efficiency” to include not just its economic sense but some measure of social stability and human flourishing is welcome. Frankly, it’s past due as a tenet of mainstream conservatism.

Cass goes astray by offering governmental “solutions”; for example:

Cass suggests replacing the current Earned Income Tax Credit (along with some related safety net programs) with a direct wage subsidy, which would be paid to workers by the government to “top off” their current wage. In lieu of a minimum wage, the government would set a “target wage” of, say, $12 an hour. If an employee received $9 an hour from his employer, the government would step up to fill in that $3 an hour gap.

That’s no solution at all, inasmuch as the cost of a subsidy must be borne by someone. The someone, ultimately, is the low-wage worker whose wage is low because he is less productive than he would be. Why is he less productive? Because the high-income person who is taxed for the subsidy has that much less money to invest in business capital that raises productivity.

The real problem is that America — and the West, generally — has turned into a spiritual and cultural wasteland. See, for example, “A Century of Progress?“, “Prosperity Isn’t Everything“, and “James Burnham’s Misplaced Optimism“.


GOOGLE ET AL. AS STATE ACTORS

In “Preemptive (Cold) Civil War” (03/18/18) I recommended treating Google et al. as state actors to enforce the free-speech guarantee of the First Amendment against them:

The Constitution is the supreme law of the land. (Article V.)

Amendment I to the Constitution says that “Congress shall make no law … abridging the freedom of speech”.

Major entities in the telecommunications, news, entertainment, and education industries 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).)

I recommended presidential action. But someone has moved the issue to the courts. Tucker Higgins has the story:

The Supreme Court has agreed to hear a case that could determine whether users can challenge social media companies on free speech grounds.

The case, Manhattan Community Access Corp. v. Halleck, No. 17-702, centers on whether a private operator of a public access television network is considered a state actor, which can be sued for First Amendment violations.

The case could have broader implications for social media and other media outlets. In particular, a broad ruling from the high court could open the country’s largest technology companies up to First Amendment lawsuits.

That could shape the ability of companies like Facebook, Twitter and Alphabet’s Google to control the content on their platforms as lawmakers clamor for more regulation and activists on the left and right spar over issues related to censorship and harassment.

The Supreme Court accepted the case on [October 12]….

the court of Chief Justice John Roberts has shown a distinct preference for speech cases that concern conservative ideology, according to an empirical analysis conducted by researchers affiliated with Washington University in St. Louis and the University of Michigan.

The analysis found that the justices on the court appointed by Republican presidents sided with conservative speech nearly 70 percent of the time.

“More than any other modern Court, the Roberts Court has trained its sights on speech promoting conservative values,” the authors found.

Here’s hoping.


THE TRANSGENDER TRAP

Babette Francis and John Ballantine tell it like it is:

Dr. Paul McHugh, the University Distinguished Service Professor of Psychiatry at Johns Hopkins Medical School and the former psychiatrist-in-chief at Johns Hopkins Hospital, explains that “‘sex change’ is biologically impossible.” People who undergo sex-reassignment surgery do not change from men to women or vice versa.

In reality, gender dysphoria is more often than not a passing phase in the lives of certain children. The American Psychological Association’s Handbook of Sexuality and Psychology has revealed that, before the widespread promotion of transgender affirmation, 75 to 95 percent of pre-pubertal children who were uncomfortable or distressed with their biological sex eventually outgrew that distress. Dr. McHugh says: “At Johns Hopkins, after pioneering sex-change surgery, we demonstrated that the practice brought no important benefits. As a result, we stopped offering that form of treatment in the 1970s.”…

However, in today’s climate of political correctness, it is more than a health professional’s career is worth to offer a gender-confused patient an alternative to pursuing sex-reassignment. In some states, as Dr. McHugh has noted, “a doctor who would look into the psychological history of a transgendered boy or girl in search of a resolvable conflict could lose his or her license to practice medicine.”

In the space of a few years, these sorts of severe legal prohibitions—usually known as “anti-reparative” and “anti-conversion” laws—have spread to many more jurisdictions, not only across the United States, but also in Canada, Britain, and Australia. Transgender ideology, it appears, brooks no opposition from any quarter….

… Brown University succumbed to political pressure when it cancelled authorization of a news story of a recent study by one of its assistant professors of public health, Lisa Littman, on “rapid-onset gender dysphoria.” Science Daily reported:

Among the noteworthy patterns Littman found in the survey data: twenty-one percent of parents reported their child had one or more friends who become transgender-identified at around the same time; twenty percent reported an increase in their child’s social media use around the same time as experiencing gender dysphoria symptoms; and forty-five percent reported both.

A former dean of Harvard Medical School, Professor Jeffrey S. Flier, MD, defended Dr. Littman’s freedom to publish her research and criticized Brown University for censoring it. He said:

Increasingly, research on politically charged topics is subject to indiscriminate attack on social media, which in turn can pressure school administrators to subvert established norms regarding the protection of free academic inquiry. What’s needed is a campaign to mobilize the academic community to protect our ability to conduct and communicate such research, whether or not the methods and conclusions provoke controversy or even outrage.

The examples described above of the ongoing intimidation—sometimes, actual sackings—of doctors and academics who question transgender dogma represent only a small part of a very sinister assault on the independence of the medical profession from political interference. Dr. Whitehall recently reflected: “In fifty years of medicine, I have not witnessed such reluctance to express an opinion among my colleagues.”

For more about this outrage see “The Transgender Fad and Its Consequences“.

Macroeconomic Modeling Revisited

Modeling is not science. Take Professor Ray Fair, for example. He teaches macroeconomic theory, econometrics, and macroeconometric models at Yale University. He has been plying his trade since 1968, first at Princeton, then at M.I.T., and (since 1974) at Yale. Those are big-name schools, so I assume that Prof. Fair is a big name in his field.

Well, since 1983 Professor Fair has been forecasting changes in real GDP four quarters ahead. He has made dozens of forecasts based on a model that he has tweaked many times over the years. The current model can be found here. His forecasting track record is here.

How has he done? Here’s how:

1. The mean absolute error of his forecasts is 70 percent; that is, on average his predictions vary by 70 percent from actual rates of growth.

2. The median absolute error of his forecasts is 33 percent.

3. His forecasts are systematically biased: too high when real, four-quarter GDP growth is less than 3 percent; too low when real, four-quarter GDP growth is greater than 3 percent. (See figure 1.)

4. His forecasts have grown generally worse — not better — with time. (See figure 2.)

5. In sum, the overall predictive value of the model is weak. (See figures 3 and 4.)

FIGURE 1

Figures 1-4 are derived from The Forecasting Record of the U.S. Model, Table 4: Predicted and Actual Values for Four-Quarter Real Growth, at Fair’s website.

FIGURE 2

FIGURE 3

FIGURE 4

Given the foregoing, you might think that Fair’s record reflects the persistent use of a model that’s too simple to capture the dynamics of a multi-trillion-dollar economy. But you’d be wrong. The model changes quarterly. This page lists changes only since late 2009; there are links to archives of earlier versions, but those are password-protected.

As for simplicity, the model is anything but simple. For example, go to Appendix A: The U.S. Model: July 29, 2016, and you’ll find a six-sector model comprising 188 equations and hundreds of variables.

Could I do better? Well, I’ve done better, with the simple model that I devised to estimate the Rahn Curve. It’s described in “The Rahn Curve in Action“, which is part III of “Economic Growth Since World War II“.

The theory behind the Rahn Curve is simple — but not simplistic. A relatively small government with powers limited mainly to the protection of citizens and their property is worth more than its cost to taxpayers because it fosters productive economic activity (not to mention liberty). But additional government spending hinders productive activity in many ways, which are discussed in Daniel Mitchell’s paper, “The Impact of Government Spending on Economic Growth.” (I would add to Mitchell’s list the burden of regulatory activity, which grows even when government does not.)

What does the Rahn Curve look like? Mitchell estimates this relationship between government spending and economic growth:

Rahn curve_Mitchell

The curve is dashed rather than solid at low values of government spending because it has been decades since the governments of developed nations have spent as little as 20 percent of GDP. But as Mitchell and others note, the combined spending of governments in the U.S. was 10 percent (and less) until the eve of the Great Depression. And it was in the low-spending, laissez-faire era from the end of the Civil War to the early 1900s that the U.S. enjoyed its highest sustained rate of economic growth.

Elsewhere, I estimated the Rahn curve that spans most of the history of the United States. I came up with this relationship (terms modified for simplicity (with a slight cosmetic change in terminology):

Yg = 0.054 -0.066F

To be precise, it’s the annualized rate of growth over the most recent 10-year span (Yg), as a function of F (fraction of GDP spent by governments at all levels) in the preceding 10 years. The relationship is lagged because it takes time for government spending (and related regulatory activities) to wreak their counterproductive effects on economic activity. Also, I include transfer payments (e.g., Social Security) in my measure of F because there’s no essential difference between transfer payments and many other kinds of government spending. They all take money from those who produce and give it to those who don’t (e.g., government employees engaged in paper-shuffling, unproductive social-engineering schemes, and counterproductive regulatory activities).

When F is greater than the amount needed for national defense and domestic justice — no more than 0.1 (10 percent of GDP) — it discourages productive, growth-producing, job-creating activity. And because government spending weighs most heavily on taxpayers with above-average incomes, higher rates of F also discourage saving, which finances growth-producing investments in new businesses, business expansion, and capital (i.e., new and more productive business assets, both physical and intellectual).

I’ve taken a closer look at the post-World War II numbers because of the marked decline in the rate of growth since the end of the war (Figure 2).

Here’s the revised result, which accounts for more variables:

Yg = 0.0275 -0.340F + 0.0773A – 0.000336R – 0.131P

Where,

Yg = real rate of GDP growth in a 10-year span (annualized)

F = fraction of GDP spent by governments at all levels during the preceding 10 years

A = the constant-dollar value of private nonresidential assets (business assets) as a fraction of GDP, averaged over the preceding 10 years

R = average number of Federal Register pages, in thousands, for the preceding 10-year period

P = growth in the CPI-U during the preceding 10 years (annualized).

The r-squared of the equation is 0.74 and the F-value is 1.60E-13. The p-values of the intercept and coefficients are 0.093, 3.98E-08, 4.83E-09, 6.05E-07, and 0.0071. The standard error of the estimate is 0.0049, that is, about half a percentage point.

Here’s how the equation stacks up against actual 10-year rates of real GDP growth:

What does the new equation portend for the next 10 years? Based on the values of F, A, R, and P for 2008-2017, the real rate of growth for the next 10 years will be about 2.0 percent.

There are signs of hope, however. The year-over-year rate of real growth in the four most recent quarters (2017Q4 – 2018Q3) were 2.4, 2.6, 2.9, and 3.0 percent, as against the dismal rates of 1.4, 1.2, 1.5, and 1.8 percent for four quarters of 2016 — Obama’s final year in office. A possible explanation is the election of Donald Trump and the well-founded belief that his tax and regulatory policies would be more business-friendly.

I took the data set that I used to estimate the new equation and made a series of out-of-sample estimates of growth over the next 10 years. I began with the data for 1946-1964 to estimate the growth for 1965-1974. I continued by taking the data for 1946-1965 to estimate the growth for 1966-1975, and so on, until I had estimated the growth for every 10-year period from 1965-1974 through 2008-2017. In other words, like Professor Fair, I updated my model to reflect new data, and I estimated the rate of economic growth in the future. How did I do? Here’s a first look:

FIGURE 5

For ease of comparison, I made the scale of the vertical axis of figure 5 the same as the scale of the vertical axis of figure 2. It’s obvious that my estimate of the Rahn Curve does a much better job of predicting the real rate of GDP growth than does Fair’s model.

Not only that, but my model is less biased:

FIGURE 6

The systematic bias reflected in figure 6 is far weaker than the systematic bias in Fair’s estimates (figure 1).

Finally, unlike Fair’s model (figure 4), my model captures the downward trend in the rate of real growth:

FIGURE 7

The moral of the story: It’s futile to build complex models of the economy. They can’t begin to capture the economy’s real complexity, and they’re likely to obscure the important variables — the ones that will determine the future course of economic growth.

A final note: Elsewhere (e.g., here) I’ve disparaged economic aggregates, of which GDP is the apotheosis. And yet I’ve built this post around estimates of GDP. Am I contradicting myself? Not really. There’s a rough consistency in measures of GDP across time, and I’m not pretending that GDP represents anything but an estimate of the monetary value of those products and services to which monetary values can be ascribed.

As a practical matter, then, if you want to know the likely future direction and value of GDP, stick with simple estimation techniques like the one I’ve demonstrated here. Don’t get bogged down in the inconclusive minutiae of a model like Professor Fair’s.

Economic Growth Since World War II, Updated

Here, using data through September 2018. I will tantalize you with a few tid-bits:

(Note: The first, and brief, post-war cycle is omitted.)

The Rahn Curve depicts the relationship between government spending, as a share of the economy, and the rate of growth. My analysis, which takes into account more than government spending, yields this result:

For a full explanation, go to III. The Rahn Curve in Action.