Category: Economics: Principles and Issues

Whining about Teachers’ Pay: Another Lesson about the Evils of Public Education

I thought I was through with the subject of public schools, but I came across this piece of trash at MotherJones.com. It’s about how little teachers make, which forces them to augment their income in ways the author considers demeaning:

I vividly remember, while growing up in the Chicago suburbs in the ’70s, knowing that my sixth-grade math teacher was also—even during the school year—a licensed and active travel agent, and I recall seeing a number of my high-school teachers, all with master’s degrees or Ph.D.’s, painting houses and cutting lawns during the summer. This kind of thing still happens all over the country, and it’s a disgrace. When teachers are forced to tend the yards of students’ homes, to clean houses, or to sell stereos on nights and weekends, the quality of education is diminished, the profession is disrespected, and we parody the notion that we hold our schools and teachers in the highest regard. Teachers with two and three jobs are tired, their families are frustrated, and the students they teach, who want to —- and should -— consider their instructors exalted figures, learn instead to think of teaching as a part-time gig, the day job for the guy who sells Game Boys at Circuit City.

Socialist psychobabble! What’s worse is that “We pay orthodontists an average of $350,000, and no one would say that their impact on the lives of kids is greater than a teacher’s.” Then there’s this: “[A] San Francisco dockworker makes about $115,000, while the clerk who logs shipping records into the longshoreman’s computer makes $136,000.”

No, “we” don’t pay orthodontists. Orthodontists, who practice a profession the entry to which is controlled by a high-class union and licensing laws, are paid willingly by their patients. As for those dockworkers and shipping clerks, they simply belong to a more rapacious union than the ones that represent teachers. Public-school teachers — unlike orthodontists, dock workers, and shipping clerks — are paid with money that governments coerce from taxpayers. There’s not a moral dime’s worth of difference between any of these professions. They’re just practicing different forms of income redistribution.

But none of that explains why public-school teachers make what they make, which is not too little and — given that many of them are unionized and all of them are feeding at the public trough — is probably too much. After all, those teachers who don’t think they’re making “enough” can always get a second job (as many of them do) or take up a different occupation (as many of them do). But no one’s forcing them to teach. When’s the last time a school district shanghaied a passer-by, dragged him into a classroom, and said “teach, or it’s off to Circuit City with ye”?

Why then, do public-school teachers make what they make? Our old friends Supply, Demand, and Competition have the answer.

Let’s start with Demand. Governments have a virtual monopoly on education through the 12th grade. Through a long process of acculturation and co-option, governments have delegated their monopoly power to the “professional educators” (hereafter, Educators) who run school systems. These Educators, through another long process of acculturation and co-option, have developed a model of the ideal teacher. That model, which they apply ruthlessly, places far greater emphasis on arcane, pseudo-scientific teaching techniques than it does on the substance of what is to be taught. Competence in a subject is far less important than “competence” in the cabbala of education.

Not being content with form over substance, Educators demand low student-teacher ratios, even though the value of low student-teacher ratios is mythical. Educators also demand that taxpayers equip classrooms with the latest gadgets, not because the gadgets are especially useful teaching devices but because other school districts have them. (It’s a pedantic arms race.)

Thus, given the sums that Educators are able to extract from taxpayers without facing outright rebellion, they effectively choose quantity over quality. That is, were it not for low student-teacher ratios and expensive gadgets, they could have fewer but somewhat more competent teachers at a higher average salary. Instead they willingly accept more but somewhat less competent teachers at a lower average salary.

Now comes Supply. Teaching doesn’t attract many of the best and brightest, who have more lucrative options. (As I’ve just said, Educators themselves are to blame for the level of teachers’ salaries.) But there’s more to it than that. Teaching doesn’t attract the best and brightest because they are repulsed by the emphasis on form (pseudo-scientific credentials) over substance. The best and the brightest are often willing to accept lower wages in return for stimulating work. Public-school teaching can be stimulating, but public schools, by and large, insist on ritual conformity to pseudo-scientific educational psychobabble, discourage originality (“here’s the approved textbook and here’s the approved syllabus”), cater mainly to the lowest common denominator in the student body, and tolerate disruptive behavior. Public-school teachers are as much day-care providers as they are teachers. Well, day care isn’t a profession that attracts many of the best and brightest.

Finally enters the wraith of Competition, whose shadow doesn’t darken public schools. And that’s the root of the problem. Educators (the big “E” variety) get away with putting form above substance and quantity above quality because parents have no choice. The tax collector sucks parents dry, and few of them have recourse to vouchers for private education. And it’s all the doing of the Education monopoly, as I’ve explained before.

If vouchers were widely available so that private schools could compete robustly with public schools — and if governments allowed private schools to focus on substance (results), not form (credits in “education” classes) — they would hire more of the best and brightest as teachers. That would draw more and more students away from public schools until public schools were forced to compete with private schools in terms of quality. Then public schools would strive to hire some of the best and brightest for their own classrooms. The next thing you know (well, maybe after a decade or so), America’s children would be getting the world’s best education from relatively well paid teachers. But not many of them would be holdovers from today’s public schools.

Professional Educators and their unions aren’t about to let that happen. They may not be the best and brightest, but they have their priorities: first, jobs for the mediocre; second, baby-sitting (it’s easier than real teaching); third, teaching (to the extent they know enough to teach something).

The Sentinel: A Tragic Parable of Economic Reality

The principles of economics can be illustrated by the tale of a not-so-mythical country. Its history comprises three eras: life gets better, life stays the same, and life gets worse.

Life Gets Better

1. Self-sufficient individuals, families, and clans (economic units) produce their own goods and services.

2. Specialization and barter lead to greater output of all goods and services, which aren’t distributed equally because the distribution of resources (including intelligence, competence, and ambition) isn’t equal. Some economic units are relatively rich; some are relatively poor.

3. Simple accounting through coins and tallies saves time and promotes greater output, to the benefit of all economic units.

4. Investments in new technology (capital) yield more and/or better and/or newer products and services, to the benefit of all economic units (though the investors reap additional rewards for their foresight and the risks they take when they invest).

5. Credit (borrowing to finance consumption and or investment) enable consumers to ride out bad times and producers to increase their investments in new capital.

6. Population growth yields more economic units, whose efforts — as they become skilled (through education and training by their elders) — cause per capita income to rise.

Life Stays the Same

7. Economic units band together in common defense against criminals and foreign marauders. They select one of their own for the job of Sentinel, and share in the cost of his sustenance. Though the cost of keeping a sentinel reduces their incomes, they consider the resulting protection and peace of mind worth it.

8. The Sentinel diligently performs his mission, year after year, for decades. The economic units of the country continue to pay willingly for his sustenance. The country prospers.

Life Gets Worse

9. A drought descends on the country. It isn’t the first drought, but it’s the worst one the country has experienced. Crops wither and game animals die before they can be taken for food. Many economic units survive the drought because they had emergency stores of food. Others suffer hunger, which makes them less able to fend for themselves and exposes them to the ravages of disease. Death becomes more common and begins to strike young as well as old. The toll of hunger, disease, and death is greater among the poorer economic units.

10. Before the drought ends, as it will in time, the Sentinel (responding to the pleas of the poor and the guilt-ridden rich), and ignoring the arguments of those who understand the country’s economy, begins to impose taxes on those with high incomes and give the money to those with low incomes. That the Sentinel isn’t authorized to redistribute income is another argument he disdains, for he has become addicted to power and seizes an opportunity to expand it.

11. Bit by bit, the Sentinel assumes greater control over economic activity — indeed over the lives of those he was hired to protect. He creates new schemes for transferring income from the richer economic units to the poorer ones, which grow increasingly dependent on the Sentinel. He even creates schemes for taxing all economic units and bestowing special benefits on selected economic units, so that the units receiving the special benefits think they are getting something for nothing. More of the rich decide to support the Sentinel, as they come to see that they can use his power to gain special benefits for themselves. Others continue to support him because they believe that they are better off because of the special benefits he bestows on them. Still others arise and mature without having known life without the all-powerful Sentinel; they assume that the Sentinel has always been and always will be the arbiter of their economic fate.

12. Lonely voices try to explain that almost everyone is worse off because of the Sentinel’s meddling in their affairs. Those lonely voices explain logically that the Sentinel has assumed powers that aren’t rightly his, that the country would have recovered from the great drought without the Sentinel’s help, that the Sentinel’s activities actually diminish the country’s wealth and income by stifling commerce and discouraging thrift and initiative, and that the Sentinel’s actions discourage private acts of charity toward those who are truly incapable of caring for themselves.

13. The lonely voices are ignored, for the lonely voices are drowned by the clamor of those who are dependent on the Sentinel, those who cannot understand how the Sentinel makes them worse off, those for whom the Sentinel has become a totem, and those who simply want the Sentinel to tell others how to run their lives.

14. The mythical country nevertheless survives and thrives because even the Sentinel cannot rob it of its resources or blunt the drive and inventiveness of its economic units. Will it ever thrive to the extent of its potential? That’s unlikely. Will it ever stop thriving and go into a long and perhaps irreversible decline, as have other nations that vested too much power in their Sentinels? It might happen.

Global Warming: Realities and Benefits

Climatologists — those who are willing to abandon the guilt-ridden political agenda that has entirely blamed human activity for global warming — are beginning to get somewhere:

The truth about global warming – it’s the Sun that’s to blame
By Michael Leidig and Roya Nikkhah
(Filed: 18/07/2004)

Global warming has finally been explained: the Earth is getting hotter because the Sun is burning more brightly than at any time during the past 1,000 years, according to new research.

A study by Swiss and German scientists suggests that increasing radiation from the sun is responsible for recent global climate changes.

Mmm…just as I was saying, here. In the same post I also pointed to a few other likely causes of global warming that have been neglected by politically correct “scientists”, namely, activity in Earth’s core and reversal of Earth’s magnetic field.

Before anyone commits suicide because we can’t regulate our way out of global warming, consider the possibility that it has beneficial effects as well as harmful ones; for example, warmer winters, longer growing seasons, and more sunny days (therefore more vitamin C intake and less depression). Why do you think that the Sunbelt States have grown much faster than the Rustbelt States?

Maybe Economics Is a Science

This reminds me of economists quibbling about the effects of the minimum wage on employment of unskilled workers (from BBC News, UK Edition):

Hawking backs down on black holes

Stephen Hawking is saying he was wrong about a key argument he put forward nearly 30 years ago about the behaviour of black holes.

The world-famous physicist addresses an international conference on Wednesday to revise his claim that black holes destroy everything that fall into them.

It appears black holes may after all allow information in them to escape.

There’s more, but it’s inconclusive. Oh well, we’re less threatened by black holes than we are by the minimum wage — I think.

School Vouchers and Teachers’ Unions

The American Federation of Teachers — exhibit A in the case against labor unions — is crowing on its web site about the Colorado Supreme Court’s recent 4-3 decision that declared the state’s new school voucher program unconstitutional. The AFT says that the decision marks “an important victory in the union’s ongoing battle against voucher schemes.”

At the bottom of the page about the Colorado decision there’s a link to another page: Find out more about why the AFT opposes private school vouchers at taxpayers’ expense. Here we learn that

The AFT supports parents’ right to send their children to private or religious schools but opposes the use of public funds to do so. The main reason for this opposition is because public funding of private or religious education transfers precious tax dollars from public schools, which are free and open to all children, accountable to parents and taxpayers alike, and essential to our democracy, to private and religious schools that charge for their services, select their students on the basis of religious or academic or family or personal characteristics, and are accountable only to their boards and clients.

There are several whoppers in that quotation. I’ll take them one at a time:

• “Public funds” are, in fact, tax revenues collected through the coercive power of government.

• The phrase “private or religious education” seems calculated to appeal to anti-religious sentiment (especially anti-Catholic sentiment). The distinction is unnecessary because a “religious” school is, by definition, a “private” school.

• Public schools would need fewer “precious tax dollars” if there were fewer students in public schools. Public school systems would probably become even more top-heavy with administrators as the number of public-school students dwindled. Then we’d see just how much they are “accountable to parents and taxpayers.”

• Public schools aren’t “free” and they do “charge for their services” — they just seem free to the naïve among us because they collect their fees in the form of taxes.

• “Private and religious schools” may or may not “select their students on the basis of religious or academic or family or personal characteristics.” So what if some of them do? It’s a two-way street. With vouchers, parents can select their children’s schools on the basis of religious or academic or family or personal characteristics. There’s nothing wrong with that, unless you believe that Johnny should be forced to go to school with a bunch of louts just because they live in his public-school district.

• Public schools aren’t “accountable to parents and taxpayers,” they’re “accountable” to elected school boards, whose members are usually co-opted by public-school administrators. Public schools are not accountable to taxpayers, who must cough up their taxes regardless of the quality of “their” public schools. Most taxpayers take no interest in the quality of public education because they are childless or their children aren’t in school.

• Private schools, on the other hand, have what the AFT sneeringly calls “clients” — that is, parents — who have a direct interest in the quality of their children’s education and who can vote with their checkbooks if they’re dissatisfied with the education they’re paying for. That’s accountability.

But accountability is the last thing the AFT wants for its members, who pay their dues to be protected from true accountability, which they would experience if vouchers were widely available.

It’s no wonder that more and more parents are willing to give of their own time (and some amount of money) to home-school their children. Teachers’ unions care first and foremost about protecting teachers’ jobs. If teachers’ unions really cared about the education of children, they’d go out of business.

Economics as Science

I recently unloaded on Tyler Cowen of Marginal Revolution for his rather weak argument that economics is a science (see here and here). Cowen now says , more reasonably, that economics is a science “but let’s keep in mind that being a science, taken alone, doesn’t get you very far.” That’s more like it.

Many thoughtful economists have considered the question whether economics is a science. A Google search on “economics a science” yields some good hits on the subject. I won’t venture a summary, but I will say that they seem consistent in tone with Cowen’s newly found humility.

Nevertheless, economics — microeconomics in particular — offers useful insights about human behavior. To the extent that those insights are buttressed by statistical evidence — if not precisely quantified by such evidence — they are even more useful. It remains true, however, that economics, in its inchoate form, more closely resembles climatology than physics.

Is Economics a Science?

Tyler Cowen of Marginal Revolution asserts that economics is a science (see here and here). Normally, I would ignore such an assertion, but when a thoughtful blog like The Right Coast points to it, uncritically, I am compelled to comment on it.

Cowen is not alone in claiming that economics is a science, of course. But his claim is especially fatuous; to wit:

We produce empirical knowledge which is subject to process of testing, broadly interpreted, and feedback….We even now have controlled experiments. And look at some of our competitors. String theory is not yet empirical. Environmental science and ecology are rife with ideology. Astronomy doesn’t have controlled experiments. And isn’t chemistry just plain outright boring? There is plenty of empirical economics I don’t trust, but usually it is for quite hackneyed reasons (e.g., data mining), rather than for “intrinsic to economics” reasons.

I’ll come back to Cowen’s first point, that economics produces empirical knowledge, etc. As for the other points, here goes:

• A controlled experiment involving human behavior doesn’t yield valid results if its subjects know they’re participating in an experiment or if their environment is manipulated for the purpose of an experiment.

• So what if string theory isn’t yet empirical? It’s a hypothesis that may, someday, be tested by practitioners of a bona fide science: physics.

• So what if astronomy doesn’t have controlled experiments? A science can be a science without controlled experiments.

• The boringness of chemistry is in the mind of the contemplator. And boringness, of course, is neither here nor there when it comes to science.

• Not trusting “plenty of empirical economics” is a valid instinct. (See my post on economic forecasting, for example.)

Before I attack — no, address — Cowen’s claims about the “empirical knowledge” produced by economics, I want to be clear about the definition of science. Wikipedia says this:

Science is both a process of gaining knowledge, and the organized body of knowledge gained by this process. The scientific process is the systematic acquisition of new knowledge about a system. This systematic acquisition is generally the scientific method, and the system is generally nature. Science is also the scientific knowledge that has been systematically acquired by this scientific process.

The scientific method, according to Wikipedia, amounts to this:

The essential elements of the scientific method are iterations and recursions of the following four steps:

1. Characterization [or observation]
2. Hypothesis (a theoretical, hypothetical explanation)
3. Prediction (logical deduction from the hypothesis)
4. Experiment (test of all of the above)

All of this is overlaid by publication, criticism, and argument. Science cannot be like “cloistered virtue, unexercised and unbreathed, that never sallies out and sees her adversary…” (John Milton, a speech to the parliament of England, 1644, found here). Granted, economists publish a lot, and their lives seem to revolve around criticism and argument. Big deal. The same is true of The New York Times.

So let’s look at Cowen’s assertion that economists “produce empirical knowledge which is subject to process of testing, broadly interpreted, and feedback” — which I take as a clumsy attempt to say that economists follow the scientific method. That’s precisely where Cowen and others who claim that economics is a science are wrong.

Remember what I said about controlled experiments in economics: They’re meaningless. Therefore, the only valid way to test a hypothesis in economics is 1) to make a prediction of future economic behavior that is based on all data from non-experimental events that are relevant and available at the time of the prediction and 2) to test that prediction against data for non-experimental events that occur after the date of the prediction. Any other approach (e.g., “screening” available data or using data for past events to test the validity of a predictive model) is unscientific. (The words “cheating” and “manipulation” come to mind.)

Let’s see if Cowen adduces valid examples of the scientific method in his eight empirical propositions about economics. He says, reasonably enough, that if economics is a science “we should expect to see empirical progress.” He then lists eight “issues where I (and many others) have been swayed by the data,” which he states in the form of untrue claims in which he no longer believes. Here they are, followed in turn by my comments.

1. We can both control the price level and keep interest rates stable by targeting the monetary base. Twenty years ago I believed this, but even the Swiss have not stuck with monetary targeting. A better solution is to broadly target the price level but allow for mild inflation.

This is a case where “science” learns what “real people” already know, as in the case of the recent “discovery” that dogs understand words. Ratifying lessons from experience is more bookkeeping than science.

2. Minimum wage boosts will generally put many low-skilled workers out of work.

I addressed this one in recent posts, here and here. Cowen’s co-Volokh Conspirator, Jacob Levy, has more to say here. In any event, Cowen’s sources (here) are hardly compelling. The bottom line is akin to a shoddy defense summation. In the exact words of one of Cowen’s sources: “Now that we’ve re-evaluated the [spurious: ED] evidence…, here’s what most labor economists believe: The minimum wage kills very few jobs [one, two, thousands?: ED], and the jobs it kills were lousy jobs anyway [says the well-fed economist: ED]. In other words, “My client isn’t guilty, but if he is guilty he isn’t very guilty.”

3. Investment is highly elastic with respect to observed changes in real interest rates. I’ve seen a few good studies that generate significant elasticities, typically using taxes as an exogenous instrument. But more often than not you can’t get this result.

If the “good studies” are good, the other studies must be “bad”. This isn’t science, it’s a fishing expedition.

4. Free capital movements for developing countries should usher in macroeconomic stability. Ask Argentina, Thailand, and Indonesia. Sometimes this proposition will be true, it is simply not as true as we once thought. If you don’t do all your reforms to perfection, and perhaps even if you do, international capital markets may put you through the wringer.

This has elements of the scientific method, in that it represents the refinement of a model based on experience. But the resulting model is merely qualitative; it has no predictive power.

5. Immediate privatization is more important than establishing the rule of law [in ex-Communist countries]. Arguably the jury is still out on this one. We haven’t observed the other sequencing in many cases (when has rule of law come first?) and thus we do not have the relevant counterfactual. But privatization alone is less effective than we used to think, pick almost any ex-Communist country as an example.

First, the proposition isn’t a valid scientific hypothesis because neither “privatization” nor “the rule of law” can be quantified. Second, if the hypothesis was widely believed among economists, that only goes to show the naiveté of economists.

6. It is relatively easy for a disinflation to be credible, provided the government sticks to its guns.

This is another untestable hypothesis, which Cowen “disproves” by referring to a theoretical analsyis. Wouldn’t it be great if science were always so easy?

7. Fairness perceptions, envy, and a stubborn attachment to the status quo have little to do with nominal wage stickiness. OK, this one remains up for grabs. But the evidence is mounting in favor of the importance of fairness perceptions; furthermore this is strongly consistent with my real world experience.

So, the original hypothesis — if you can call it that — hasn’t been disproved, after all. But that doesn’t matter, because if you can disprove a scientific hypothesis with a theoretical analysis (as in number 7), I guess you can disprove it with a few “real world” observations.

8. Human beings maximize expected utility in the same way, regardless of context. But now, alas, I despair as to how general a science economics can ever become.

My point, exactly.

Economics will approach being a science only when its practitioners finally make an unambiguously scientific breakthrough, such as accurately and consistently predicting near-term changes in GDP. Barring that, economics will remain what it is today: a cacophony of competing untestable hypotheses, shaped by ideology, and justified by decorative mathematics and selective statistics.

About Economic Forecasting

In the the previous post I disparaged the ability of economists to estimate the employment effects of the minimum wage. I’m skeptical because economists are notoriously bad at constructing models that adequately predict near-term changes in GDP. That task should be easier than sorting out the microeconomic complexities of the labor market.

Take Professor Ray Fair, for example. Prof. Fair 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, Prof. Fair has been forecasting changes in real GDP over the next four quarters. He has made 80 such forecasts based on a model that he has undoubtedly tweaked over the years. The current model is here. His forecasting track record is here. How has he done? Here’s how:

1. The median absolute error of his forecasts is 30 percent.

2. The mean absolute error of his forecasts is 70 percent.

3. His forecasts are rather systematically biased: too high when real, four-quarter GDP growth is less than 4 percent; too low when real, four-quarter GDP growth is greater than 4 percent.

4. His forecasts have grown generally worse — not better — with time.

How hard can it be to forecast the direction and magnitude of macroeconomic activity given the plethora of relevant data at hand? It can’t be as hard as estimating the employment effects of changes in the minimum wage, where such effects are subtle and perhaps impossible to measure (e.g., employers shave unmandated employee benefits or allow working conditions to deteriorate; businesses are not continued or started that might otherwise continue or start).

By the way, Prof. Fair also has a model of presidential elections that he first published in 1978 and has tweaked six times. (Links are here.) According to the current model, Pres. Bush will receive 51.7 percent of the popular vote even under three extreme conditions: zero percent real GDP growth in the first three quarters of 2004, 5 percent growth in the GDP deflator over the first 15 quarters of the Bush administration, and zero quarters (out of the first 15) with real GDP growth at an annual rate of more than 3.2 percent. In other words, a Republican incumbent is a shoo-in for re-election. Ha!

I rest my case.

On the One Hand…

…Tyler Cowen of Marginal Revolution, quotes Steven E. Landsburg, writing in Slate, who says:

Now that we’ve re-evaluated the evidence…, here’s what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were [sic] lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers.

That’s easy to say if you’re a well-fed economist who thinks it better to kill a “lousy” job than to have such a job filled by a person who’d be glad to have the income.

On the other hand, Landsburg goes on to say:

In fact, the minimum wage is very good for unskilled workers [those who don’t lose their jobs: ED]. It transfers income to them. And therein lies the right argument against the minimum wage….

[T]he minimum wage places the entire burden [of income redistribution] on one small group: the employers of low-wage workers and, to some extent, their customers. Suppose you’re a small entrepreneur with, say, 10 full-time minimum-wage workers. Then a 50 cent increase in the minimum wage is going to cost you about $10,000 a year. That’s no different from a $10,000 tax increase. But the politicians who imposed the burden get to claim they never raised anybody’s taxes.

Which means that the minimum wage causes unemployment among unskilled workers by 1) helping to drive small businesses out of business and 2) shrinking the market for unskilled labor by discouraging the formation of small businesses. Have those effects been measured adequately by our oh-so-clever coterie of economists, whose ilk cannot forecast economic growth from quarter to quarter with anything resembling accuracy? I don’t think so.

Sen(seless) Economics

Cass Sunstein’s penultimate Volokh Conspiracy essay on FDR’s Second Bill of Rights invokes Amartya Sen:

Randy [Barnett] asks whether the Second Bill should be seen as protecting “natural rights.” To say the least, the natural rights tradition has multiple strands; a good contemporary version is elaborated by Amartya Sen (see his Development as Freedom).

In other words, the Bill of Rights (the real one) codified certain natural rights, but not all of them, according to Sunstein and his fellow travelers. The Second Bill of Rights envisioned by FDR would (and perhaps did) codify the Sunstein-Sen version of economic freedom as a natural right on a par with, say, freedom of speech, freedom of the press, and freedom from self-incrimination.

Here’s Dr. Sen (the 1998 Nobel laureate in Economics and a professor at Trinity College, Cambridge) to explain what he means by economic freedom (from an online essay entitled “Development as Freedom”):

We…live in a world with remarkable deprivation, destitution, and oppression….

Overcoming these problems is a central part of the exercise of development. We have to recognize the role of different freedoms in countering these afflictions. Indeed, individual agency is, ultimately, central to addressing these deprivations. On the other hand, the freedom of agency that we have is inescapably constrained by our social, political, and economic opportunities. We need to recognize the centrality of individual freedom and the force of social influences on the extent and reach of individual freedom. To counter the problems we face, we have to see individual freedom as a social commitment….

I view the expansion of freedom both as the primary end and as the principal means of development. Development consists of removing various types of unfreedoms that leave people with little choice and little opportunity of exercising their reasoned agency….

Development requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systemic social deprivation, neglect of public facilities as well as intolerance or overactivity of repressive states.

What’s wrong with this picture? Sen, Sunstein, and their ilk — clever arguers, all — equate economic freedom (delivered in the form of make-work jobs, welfare, the minimum wage, social security, subsidized housing, free medical care, legalized extortion of employers through unionization, etcetera, etcetera) with political freedom (or liberty as it’s better known). The two things are incommensurate. Indeed, they are incompatible.

In order for some persons to enjoy the kind of economic freedom envisioned by FDR and his acolytes, government must impose what Sen would call economic unfreedom and on other persons, through taxation and regulation. “Robbing Peter to pay Paul” still says it best.

Political freedom (liberty) works the other way around. One person’s political freedom — the freedom to speak out, to publish a newspaper, to cast a vote, and so on — doesn’t diminish another person’s political freedom. To the contrary, political freedom is most secure when it is widely held.

True economic freedom flows from political freedom. True economic freedom encompasses such things as pursuing a better education, limited only by one’s ability and financial resources; finding and keeeping a job, without paying union dues or belonging to a minority group; starting a business of one’s own and running it freely, without extorting or cheating others; making a campaign contribution in any amount to any political candidate; not being forced to subsidize candidates one opposes; and saving for one’s old age (in a real savings account) or buying a sports car, as one chooses. These are just a few of the many economic freedoms that government has circumscribed in its typically Orwellian effort to improve us by making us less free.

More importantly, from the Sunstein-Sen point of view, FDR-style economic freedom reduces the range of options available to individuals by significantly diminishing the economy (see “The True Cost of Government”). If the economy hadn’t been stunted by FDR-style economic freedom, and if FDR-style economic freedom hadn’t discouraged the habit of private charity, the poor, infirm, and aged of this land — and many other lands — would be far better off than they are today.

The irony would be amusing if it weren’t tragic.

The True Cost of Government

Americans are far less prosperous than they could be, for three reasons:

• Government uses resources that would otherwise be used productively in the private sector (19 percent of GDP in 2003).

• Government discourages work and innovation by taxing income at progressive rates and by transferring income from the productive to the non-productive (12 percent of GDP for recipients of Social Security, Medicare, Medicaid, etc., in 2003).

• Government regulation stifles innovation and raises the cost of producing goods and services (a net loss of 16 percent of GDP in 2003).

Because of the cumulative, corrosive effects of government spending, progressive tax rates, redistributive welfare schemes, and regulation, GDP is now as much as 45 percent below where it could be.

Here’s what happened: Real GDP began to rise sharply in the late 1870s, thanks mainly to the Second Industrial Revolution. Despite the occasional slump — which the economy worked its way out of, thank you — things continued to go well until 1906. Then the trajectory of GDP growth fell suddenly, sharply, and (it seems) permanently.

Why? First, the regulatory state began to encroach on American industry with the passage of the Food and Drug Act and the vindictive application of the Sherman Antitrust Act, beginning with Standard Oil (the Microsoft of its day). There followed the ratification of Amendment XVI (enabling the federal government to tax incomes); World War I (a high-taxing, big-spending operation); a respite (the boom of the 1920s, which was owed to the Harding-Coolidge laissez-faire policy toward the economy); and the Great Depression and World War II (truly tragic events that imbued in the nation a false belief in the efficacy of the big-spending, high-taxing, regulating, welfare state).

The Great Depression also spawned the myth that good times (namely the Roaring ’20s) must be followed by bad times, as if good times are an indulgence for which penance must be paid. Thus the Depression often is styled as a “hangover” that resulted from the “partying” of the ’20s, as if laissez-faire — and not wrong-headed government policies — had caused and deepened the Depression.

You know the rest of the story: Spend, tax, redistribute, regulate, elect, spend, tax, redistribute, regulate, elect, ad infinitum. The payoff: GDP per capita was almost $38,000 in 2003; without government meddling it might have been as much as $68,000.

The moral: By entrusting our economic security to government, we have lost untold trillions in wealth and income.

Modern Utilitarianism

Jeremy Bentham (English, 1748-1832) devised modern utilitarianism, which is best captured in the John Stuart Mill‘s phrase “the greatest amount of happiness altogether” (Chapter II of Utilitarianism).

From Bentham’s facile philosophy grew the ludicrous notion that it might be possible to quantify each person’s happiness and, then, to arrive at an aggregate measure of total happiness for everyone (or at least everyone in England). Utilitarianism, as a philosophy, has gone the way of Communism: It is discredited but many people still cling to it, under other names.

Modern utilitarianism lurks in the guise of cost-benefit analysis. Governments often subject proposed projects and regulations (e.g., new highway construction, automobile safety requirements) to cost-benefit analysis. The theory of cost-benefit analysis is simple: If the expected benefits from a government project or regulation are greater than its expected costs, the project or regulation is economically justified. Luckily, most “justified” projects are scrapped or substantially altered by the intervention of political bargaining and budget constraints, but many of them are undertaken — only to cost far more than estimated and return far less than expected.

Here’s the problem with cost-benefit analysis — the problem it shares with utilitarianism: One person’s benefit can’t be compared with another person’s cost. Suppose, for example, the City of Los Angeles were to conduct a cost-benefit analysis that “proved” the wisdom of constructing yet another freeway through the city in order to reduce the commuting time of workers who drive into the city from the suburbs.

Before constructing the freeway, the city would have to take residential and commercial property. The occupants of those homes and owners of those businesses (who, in many cases would be lessees and not landowners) would have to start anew elsewhere. The customers of the affected businesses would have to find alternative sources of goods and services. Compensation under eminent domain can never be adequate to the owners of taken property because the property is taken by force and not sold voluntarily at a true market price. Moreover, others who are also harmed by a taking (lessees and customers in this example) are never compensated for their losses. Now, how can all of this uncompensated cost and inconvenience be “justified” by, say, the greater productivity that might (emphasize might) accrue to those commuters who would benefit from the construction of yet another freeway.

Yet, that is how cost-benefit analysis works. It assumes that group A’s cost can be offset by group B’s benefit: “the greatest amount of happiness altogether.”

Here’s the proper “utilitarian” rule: If it must be done by government, it isn’t worth doing unless it is done “to establish Justice, insure domestic Tranquility, [or] provide for the common defence.”

Where Your Tax Dollars Go — Installment 9,999,999,999

From the web site of a taxpayer-funded think tank:

Throughout The X Corporation, employees, in small groups and through individual efforts, are making a difference in the quality of their communities and in the lives of their friends, neighbors, and the many who are in need. Through innumerable acts of kindness and concern and commitments of time and boundless energy, a culture has grown within X that shows that extraordinary acts by ordinary people can make a difference in the world.

Giving back to the community is a priority at The X Corporation….

How about focusing on the work that taxpayers are paying you for? That would be the best way to “give back to the community.”

P.S. This is small potatoes. The real ripoff is in the absurdly high salaries paid by such tax-exempt organizations.

P.P.S. Oh, yes, and what would we do without diversity? Here’s what The X Corporation has to say about its diversity program, which is run by a full-time Diversity Coordinator:

Differing points of view, different frames of reference, and a broad range of life experiences bring an energy to the workplace that has helped X become a world leader in producing effective, insightful analysis. [Actually, if this organization is a “world leader” in anything, it’s b.s. Good analysis requires educated intelligence and perspicacity.]

X maintains an all-inclusive diversity program. Supported by an advisory committee, X’s diversity efforts are designed to ensure that we attract, develop, respect, motivate, and retain highly skilled people without regard to race, ethnicity, gender, personal background, religious beliefs, sexual orientation, education, or position within X. [An all-inclusive diversity program, by definition, ensures the hiring of people — some of them not highly skilled — precisely because of their race, etc., etc.]

See all the great things you get for your tax dollars?

An Extra Day of Freedom

Eugene Volokh objects to “spending about half a billion dollars of taxpayer money for a paid holiday for federal employees.” The half billion dollars is the reported cost of giving federal workers the day off on Friday, in honor of President Reagan.

Here’s how I look at it:

1. They would have been paid anyway, so taxpayers really aren’t shelling out an extra $500 million.

2. We’re better off when federal employees aren’t at work.

I think it’s a very fitting way to honor the memory of Ronald Reagan.

The Cost of Affirmative Action

La Griffe du Lion, in “Affirmative Action: The Robin Hood Effect”, assesses the redistributive effects of affirmative action:

[O]n average a black worker between the ages of 25 and 64 earns an extra $9,400 a year because of affirmative action. Hispanics also benefit to the tune of almost $4,000 a year. However, being a zero-sum game, white workers pay an average of about $1,900 annually to foot the bill.

Working from data for 1999, La Griffe estimates that affirmative action cost white workers a total of $192 billion. But there’s more to it than that.

Because of affirmative action — and legal actions brought and threatened under its rubric — employers do not always fill every job with the person best qualified for the job. The result is that the economy produces less than it would in the absence of affirmative action.

GDP in 1999 was $9.3 trillion. Taking $192 billion as an approximation of the economic cost of affirmative action in that year, it’s reasonable to say that affirmative action reduces GDP by about 2 percent. That’s not a trivial amount. In fact, it’s just about what the federal government spends on all civilian agencies and their activities — including affirmative action, among many other things.

Favorite Posts: Affirmative Action and Race

Disease du Jour

Now it’s obesity. (Before that it was autism and a bunch of other things.) Radley Balko (The Agitator), writing (briefly) in an issue of Time devoted to the proposition that obesity is a public-health crisis deserving of massive government intervention, says this:

The best way to combat the public-health threat of obesity is to remove obesity from the realm of “public health.” It’s difficult to think of a matter more private and less public than what we choose to put in our bodies. Giv[ing] Americans moral, financial and personal responsibility for their own health, and obesity is no longer a public matter but a private one — with all the costs, concerns and worries of being overweight borne only by those people who are actually overweight.

Let each of us take full responsibility for our diet and lifestyle. We’re likely to make better decisions when someone else isn’t paying for the consequences.

As Balko says at the end of his post on this subject: “If you aren’t responsible for what you put into your mouth, chew and swallow, what’s left that you are you responsible for?”

Nothing, it seems. So let’s all get ripped, scarf down some super-size fries, and shoot up the neighborhood. We can always blame it on the fries.

A Bigger Beast

Spending by state and local governments in the United States is five times as large as the federal government’s nondefense spending (about which see my previous post). Real (constant-dollar) spending by state and local governments increased by a multiple of 10 from 1945 to 2003. The population of the United States merely doubled in that same period. Thus the average American’s real tax bill for municipal services is five times larger today than it was in 1945.

It’s evident that not enough of the loot has been spent on courts, policing, emergency services, and roads. No, our modern, “relevant” municipal governments have seen fit to bless us with such things as free bike trails for yuppies, free concerts that mainly attract people who can afford to pay for their own entertainment, all kinds of health services, housing subsidies, support for the arts(?), public access channels on cable TV, grandiose edifices in which municipal governments hatch and oversee their grandiose schemes, and much, much, more.

Then there are public schools…

UPDATE: The good news about state and local spending is that its real rate of growth has dropped since 2000. The bad news is that the slowdown coincided with a recession and period of slow economic recovery. The good news is that municipal spending is a beast with thousands of necks, and each of them can be throttled at the state and local level, given the will to do so.

Starving the Beast

There’s an interesting post by Tyler Cowen of The Volokh Conspiracy as to whether “depriving the government of tax revenue actually limits government spending.” The links in Cowen’s post lead to other VC posts on the same subject (here, here, and here)

and to a paper by Bill Niskanen and Peter Van Doren of the Cato Institute (where I once roosted for a spell).

Here’s the “starve the beast” hypothesis, according to Niskanen and Van Doren:

For nearly three decades, many conservatives and libertarians have argued that reducing federal tax rates, in addition to increasing long-term economic growth, would reduce the growth of federal spending by “starving the beast.” This position has recently been endorsed, for example, by Nobel laureates Milton Friedman and Gary Becker in separate Wall Street Journal columns in 2003.

It seems to me that the notion of starving the beast is really an outgrowth of an older, simpler notion that might well have been called “strangle the beast.”

The notion was (and still is, in some quarters) that the intrusive civilian agencies of the federal government, which have grown rampantly since the 1930s, ought to be slashed, if not abolished. There’s no need for fancy tricks like cutting taxes first, just grab the beast by the budget and choke it.

There’s more than money at stake, of course — there’s liberty and economic growth. The deregulation movement, which finally gained some traction during Carter’s administration, reflects the long-held view that many (most?) civilian agencies have a powerfully debilitating influence by virtue of their regulatory powers and ingrained anti-business attitudes. But I’ll focus on the money that feeds the beast.

Niskanen and Van Doren’s figure of merit is spending as a share of GDP. But it’s the absolute, real size of the beast’s budget that matters. Bigger is bigger — and bigger agencies can cause more mischief than smaller ones. So, my figure of merit is real growth in nondefense spending.

What about defense spending, which Niskanen and Van Doren lump with nondefense spending in their analysis? Real nondefense spending has risen almost without interruption since 1932, with the only significant exception coming in 1940-5, when World War II cured the Depression and drastically changed our spending priorities. Real defense spending, on the other hand, has risen and fallen several times since 1932, in response to exogenous factors, namely, the need to fight hot wars and win a cold one. Niskanen and Van Doren glibly dismiss the essentially exogenous nature of defense spending by saying

that the prospect for a major war has been substantially higher under a unified government. American participation in every war in which the ground combat lasted more than a few days — from the war of 1812 to the current war in Iraq — was initiated by a unified government. One general reason is that each party in a divided government has the opportunity to block the most divisive measures proposed by the other party.

First, defense outlays increased markedly through most of Reagan’s presidency, even though a major war was never imminent. The buildup served a strategy that led to the eventual downfall of the USSR. Reagan, by the way, lived with divided government throughout his presidency. Second, wars are usually (not always, but usually) broadly popular when they begin. Can you imagine a Republican Congress trying to block a declaration of war after the Japanese had bombed Pearl Harbor? Can you imagine a Democrat Congress trying to block Bush II’s foray into Afghanistan after 9/11? For that matter, can you imagine a Democrat-controlled Congress blocking Bush I’s Gulf War Resolution? Well, Congress was then in the hands of Democrats and Congress nevertheless authorized the Gulf War. Niskanen and Van Doren seem to dismiss this counter-example because the ground war lasted only 100 hours. But we fielded a massive force for the Gulf War (it was no Grenada), and we certainly didn’t expect the ground war to end so quickly.

As I was saying, domestic spending is the beast to be strangled. (I’m putting aside here the “sacred beasts” that are financed by transfer payments: Social Security, Medicare, etc.) How has the domestic beast fared over past 30-odd years? Quite well, thank you.

There is a very strong — almost perfect — relationship between real nondefense spending and the unemployment rate for the years 1969 through 2001, that is, from the Nixon-Ford administration through the years of Carter, Reagan, Bush I, and Clinton. Using a linear regression with five pairs of observations, one pair for each administration, I find that the percentage change in real nondefense spending is a linear function of the change in the unemployment rate. Specifically:

S = 1.0315 + 0.11286U

where S = real nondefense spending at end of a presidency/real nondefense spending at beginning of a presidency

U = unemployment rate at end of a presidency/unemployment rate at beginning of a presidency.

The adjusted R-squared for the regression is .997. The t-stats are 228.98 for the constant term and 39.75 for U.

In words, the work of the New Deal and Fair Deal had been capped by the enactment of the Great Society in the Kennedy-Johnson era. The war over domestic spending was finished, and the big spenders had won. Real nondefense spending continued to grow, but more systematically than it had from 1933 to 1969. From 1969 through 2001, each administration (abetted or led by Congress, of course) increased real nondefense spending according to an implicit formula that reflects the outcome of political-bureaucratic bargaining. It enabled the beast to grow, but at a rate that wouldn’t invoke images of a new New Deal or Great Society.

Divided government certainly hampered the ability of Republican administrations (Nixon-Ford, Reagan, Bush I) to strangle the beast, had they wanted to. But it’s not clear that they wanted to very badly. Nixon was, above all, a pragmatist. Moreover, he was preoccupied by foreign affairs (including the extrication of the U.S. from Vietnam), and then by Watergate. Ford was only a caretaker president, and too “nice” into the bargain. Reagan talked a good game, but he had to swallow increases in nondefense spending as the price of his defense buildup. Bush I simply lacked the will and the power to strangle the beast.

Bureaucratic politics also enters the picture. It’s hard to strangle a domestic agency once it has been established. Most domestic agencies have vocal and influential constituencies, in Congress and amongst the populace. Then there are the presidential appointees who run the bureaucracies. Even Republican appointees usually come to feel “ownership” of the bureaucracies they’re tapped to lead.

What happened before 1969?

The beast — a creature of the New Deal — grew prodigiously through 1940, when preparations for war, and war itself, brought an end to the Great Depression. Real nondefense spending grew by a factor of 3.6 during 1933-40. If the relationship for 1969-2001 had been in effect then, real nondefense spending would have increased by only 10 percent.

Truman and the Democrats in control of Congress were still under the spell of their Depression-inspired belief in the efficacy of big government and counter-cyclical fiscal policy. The post-war recession helped their cause, because most Americans feared a return of the Great Depression, which was still a vivid memory. Real nondefense spending increased 2.8 times during the Truman years. If the relationship for 1969-2001 had been in effect, real nondefense spending would have increased by only 20 percent.

The excesses of the Truman years caused a backlash against “big government” that the popular Eisenhower was able to exploit, to a degree, in spite of divided government. Even though the unemployment rate more than doubled during Ike’s presidency, real domestic spending went up by only 9 percent. That increase would have been 28 percent if the relationship for 1969-2001 had been in effect. But even Ike couldn’t resist temptation. After four years of real cuts in nondefense spending, he gave us the interstate highway program: another bureaucracy — and one with a nationwide constituency.

The last burst of the New Deal came in the emotional aftermath of Kennedy’s assassination and Lyndon Johnson’s subsequent landslide victory. Real nondefense spending in the Kennedy-Nixon years rose by 56 percent, even though the unemployment rate dropped by 48 percent during those years. The 56 percent increase in real spending would have been only 8 percent if the 1969-2001 relationship had applied.

As for Bush II, through the end of 2003 he was doing a bit better than average, by the standards of 1969-2001 — but not significantly better. He now seems to have become part of the problem instead of being the solution. In any event, the presence of the federal government has become so pervasive, and so important to so many constituencies, that any real effort to strangle the beast would invoke loud cries of “meanie, meanie” — cries that a self-styled “compassionate conservative” couldn’t endure.

Events since 1969 merely illustrate the fact that the nation and its politicians have moved a long way toward symbiosis with big government. The beast that frightened conservatives in the 1930s, 1940s, and 1950s has become a household pet, albeit one with sharp teeth. Hell, we’ve even been trained to increase his rations every year.

Tax cuts won’t starve the beast — Friedman, Becker, and other eminent economists to the contrary. But tax increases, on the other hand, would only stimulate the beast’s appetite.

The lesson of history, in this case, is that only a major war — on the scale of World War II — might cause us to cut the beast’s rations. And who wants that?

UPDATE: If Bush II wins a second term, might he become the Ike (or even Coolidge) of this decade? As Mike Rappaport of The Right Coast says,

I’ll believe it when I see it, but this is at least a good sign:

The White House put government agencies on notice this month that if President Bush is reelected, his budget for 2006 may include spending cuts for virtually all agencies in charge of domestic programs, including education, homeland security and others that the president backed in this campaign year.

If Bush II wins — and if Republicans retain control of Congress — it’s possible. But don’t count on it.

The timing of this announcement may be intended to whip up enthusiasm for Bush’s re-election among conservative Republicans, who have been wondering what sets Bush apart from a free-spending Democrat, aside from the war in Iraq. And some of those same conservative Republicans, apparently suffering from an overload of media scandal-mongering and defeatism, have begun to wonder about the war, as well.

Trade Deficit Hysteria

Trade deficit hysteria is a psychological illness closely related to budget deficit hysteria (see Wednesday, April 21, 2004). Why do people (e.g., CNN’s Lou Dobbs) get all excited when the value of U.S. imports exceeds the value of U.S. exports? They think we’re shipping “our” money overseas.

Wrong. When the value of U.S. imports exceeds the value of U.S. exports, it means that we’re able to buy more things than we could in the absence of foreign trade.

But where does “our” money (the deficit) go? Well, our deficit is a surplus to foreigners. Guess what they do with their surplus. They invest it in U.S. Treasury bonds, the U.S. stock market, and U.S. real estate. That’s more good news for Americans.

So, if you’re suffering from trade deficit hysteria, calm down and quit watching CNN.

Curing Debt Hysteria in One Easy Lesson

Are you hysterical about the so-called national debt? If you are, you probably keep repeating one or both of these statements:

• We can’t keep piling up debt like this, we’ll go bankrupt.

• We’re making future generations pay for our profligate spending.

Let’s get it straight. The so-called national debt is in fact the debt of the federal government, issued in the form of U.S. Treasury securities. It has nothing to do with your credit card balances, your auto loan, or your mortgage.

The federal government can keep piling up debt, it can’t go bankrupt, and the “future generations” argument is phony. Federal indebtedness does cause real problems, which I’ll come to after I’ve cured your hysteria.

The federal debt isn’t owed to a Simon Legree who’s just waiting for the chance to throw all of us out into the cold if we can’t make the mortgage payment. About 40% of the federal debt is held by agencies of the federal government (notably the Federal Reserve and the Social Security Trust Fund). The rest is held by private investors, including some foreigners (who hold about 20% of the total debt). They can’t demand immediate payment of the debt owed them; they must wait until their holdings mature (in three months to 30 years). And they know they’ll be repaid — that’s why they’re willing to hold U.S. Treasury securities at much lower rates of interest than they could earn on, say, corporate bonds.

Because individuals and institutions are quite willing to lend money to the federal government, it can keep piling up debt indefinitely. In fact the federal government has been able to increase its debt almost continuously since opening for business. From January 1, 1791, to April, 19, 2004, the federal debt rose at an average annual rate of 5.5%. During that period, the debt reached a low of $33,733.05 on January 1, 1835. From then until April 19, 2004, the debt rose at an average annual rate of 11.3%. That’s a much greater rate of increase than we’ve experienced recently or expect to experience in the next several years.

What about those future generations? Well, future generations not only “inherit” the debt, they also inherit an offsetting asset. If you lend the government $10,000 by buying a 10-year Treasury note, and you keep rolling the note over (that is, buying a new 10-year note when the old one matures), the note eventually will pass to your heirs.

Future generations of taxpayers also inherit an obligation to pay interest on the federal debt. But those same future generations receive the interest that is being paid.

Now, let’s find the real problems. The debt exists because the government has borrowed money to cover spending that is in excess of tax receipts. The excess in any given year is called a deficit. The federal debt is the sum of all deficits, less the occasional surplus.

Borrowing isn’t a real problem per se. Rubinomics to the contrary, there’s no strong evidence that government borrowing, in itself, has much effect on interest rates. The main risk is that additional borrowing will be financed by the Federal Reserve, which is tantamount to printing money. That can spur inflationary expectations, which do drive interest rates. The Fed, however, has become rather adept at defusing inflationary expectations through its manipulation of short-term interest rates.

Taxation is a real problem, but it’s a problem whether or not there’s a federal debt. Taxation compels some people to give money to other people. Even though a well designed tax policy might result have beneficial macroeconomic effects (e.g., a lower unemployment rate), the individuals who are net payers of taxes are decidedly worse off — and the harm done to them is not undone by making other individuals better off. Your misery and my happiness do not cancel each other.

This brings me to the real problems with the debt: It represents the diversion of resources from the private sector — from you and me, folks. And it can stifle economic growth by causing inflation.

The debt exists because the government spends money; that is, it purchases goods and services (e.g., missiles, military pay, civil service pensions, leases, computers, and office supplies) and it transfers income from some people to other people (via Social Security, Medicare, and other welfare programs). Government spending, like taxation, is a form of compulsion. It takes resources that could be used for private purposes and puts them to work for “public” purposes — some of which (like national defense) are necessary, some of which seem necessary but are not (e.g., Social Security and Medicare), and most of which are designed to perpetuate the federal bureaucracy and pander to interest groups with lots of votes.

If the federal debt grows year after year because the federal government’s spending keeps growing faster than its tax receipts, prices will tend to rise unless there is a lot of excess capacity in the economy. If the economy is perking along at relatively full employment, however, a growing debt will lead to inflation. Inflation will cause higher interest rates, which will do several bad things: further increase the debt (that is, add to inflationary pressure) by forcing the government make even higher interest payments, stifle investments that improve businesses’ productivity (e.g., better computing systems and software), and dampen interest-sensitive consumer markets (e.g., real estate and autos).

The root cause of these real problems is federal spending. The federal debt is just a symptom.

Now that your hysteria is cured, implore your members of Congress to treat the cause, not the symptom. Ask them to cut spending, then cut taxes some more, then cut some more spending, and so on until we reach nirvana.