Not-So-Random Thoughts (XXIII)


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


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.


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“.)


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“.


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…


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“.


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.


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“.

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.

New Pages

In case you haven’t noticed the list in the right sidebar, I have converted several classic posts to pages, for ease of access. Some have new names; many combine several posts on the same subject:

Abortion Q & A

Climate Change

Constitution: Myths and Realities

Economic Growth Since World War II


Keynesian Multiplier: Fiction vs. Fact




Revisiting the Laffer Curve

Among the claims made in favor of the Tax Cuts and Jobs Act of 2017 was that the resulting tax cuts would pay for themselves. Thus the Laffer curve returned briefly to prominence, after having been deployed to support the Reagan and Bush tax cuts of 1981 and 2001.

The idea behind the Laffer curve is straightforward. Taxes inhibit economic activity, that is, the generation of output and income. Tax-rate reductions therefore encourage work, which yields higher incomes. Higher incomes mean that there is more saving from which to finance growth-producing capital investment. Lower tax rates also make investment more attractive by increasing the expected return on capital investments. Lower tax rates therefore stimulate economic output by encouraging work and investment (supply-side economics). Under the right conditions, lower tax rates may generate enough additional income to yield an increase in tax revenue.

I believe that there are conditions under which the Laffer curve works as advertised. But so what? The Laffer curve focuses attention on the wrong economic variable: tax revenue. The economic variables that really matter — or that should matter — are the real rate of growth and the income available to Americans after taxes. More (real) economic growth means higher (real) income, across the board. More government spending means lower (real) income; the Keynesian multiplier is a cruel myth.

A new Laffer curve is in order, one that focuses on the effects of taxation on economic growth, and thus on the aggregate output of products and services available to consumers.

Let us begin at the beginning, with this depiction of the Laffer curve (via Forbes):

This is an unusually sophisticated depiction of the curve, in that it shows a growth-maximizing tax rate which is lower than the revenue-maximizing rate. It also shows that the growth-maximizing rate is greater than zero, for a good reason.

With real taxes (i.e., government spending) at zero or close to it, the rule of law would break down and the economy would be a shambles. But government spending above that required to maintain the rule of law (i.e., adequate policing, administration of justice, and national defense) interferes with the efficient operation of markets, both directly (by pulling resources out of productive use) and indirectly (by burdensome regulation financed by taxes).

Thus a tax rate higher than that required to sustain the rule of law1 leads to a reduction in the rate of (real) economic growth because of disincentives to work and invest. A reduction in the rate of growth pushes GDP below its potential level. Further, the effect is cumulative. A reduction in GDP means a reduction in investment, which means a reduction in future GDP, and on and on.

I will quantify the Laffer curve in two steps. First, I will estimate the tax rate at which revenue is maximized, taking the simplistic view that changes in the tax rate do not change the rate of economic growth. I will draw on Christina D. Romer and David H. Romer’s “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks” (American Economic Review, June 2010, pp. 763-801).

The Romers estimate the effects of exogenous changes in taxes on GDP. (“Exogenous” meaning tax cuts aimed at stimulating the economy, as opposed, for example, to tax increases triggered by economic growth.) Here is their key finding:

Figure 4 summarizes the estimates by showing the implied effect of a tax increase of one percent of GDP on the path of real GDP (in logarithms), together with the one-standard-error bands. The effect is steadily down, first slowly and then more rapidly, finally leveling off after ten quarters. The estimated maximum impact is a fall in output of 3.0 percent. This estimate is overwhelmingly significant (t = –3.5). The two-standard-error confidence interval is (–4.7%,–1.3%). In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects. [pp. 781-2]

The Romers assess the effects of tax cuts over a period of only 12 quarters (3 years). Some of the resulting growth in GDP during that period takes the form of greater spending on capital investments, the payoff from which usually takes more than 3 years to realize. So a tax cut of 1 percent of GDP yields more than a 3-percent rise in GDP over the longer run. But let’s keep it simple and use the relationship obtained by the Romers: a 1-percent tax cut (as a percentage of GDP) results in a 3-percent rise in GDP.

With that number in hand, and knowing the effective tax rate (33 percent of GDP in 20172), it is then easy to compute the short-run effects of changes in the effective tax rate on GDP, after-tax GDP, and tax revenue:

Effective tax revenue represents the dollar amount extracted from the economy through government spending at the stated percentage of GDP. (Spending includes transfer payments, which take from those who produce and give to those who do not.) Effective tax rate represents the dollar amount extracted from the economy, divided by GDP at the given tax rate. (GDP is based on the Romers’ estimate of the marginal effect of a change in the tax rate.)

It is a coincidence that tax revenue is maximized at the current (2017) effective tax rate of 33 percent. The coincidence occurs because, according to the Romers, every $1 change in tax revenue (or government spending that draws resources from the real economy) yields a $3 change in GDP, at the margin. If the marginal rate of return were lower than 3:1, the revenue-maximizing rate would be greater than 33 percent. If the marginal rate of return were higher than 3:1, the revenue-maximizing rate would be less than 33 percent.

In any event, the focus on tax revenue is entirely misplaced. What really matters, given that the prosperity of Americans is (or should be) of paramount interest, is GDP and especially after-tax GDP. Both would rise markedly in response to marginal cuts in real taxes (i.e., government spending). Democrats don’t want to hear that, of course, because they want government to decide how Americans spend the money that they earn. The idea that a far richer America would need far less government — subsidies, nanny-state regulations, etc. — frightens them.

It gets better (or worse, if you’re a big-government fan) when looking at the long-run effects of lower government spending on the rate of growth. I am speaking of the Rahn curve, which I estimate here. Holding other things the same, every percentage-point reduction in the real tax rate (government spending as a fraction of GDP) means an increase of 0.35 percentage point in the rate of real GDP growth. This is a long-run relationship because it takes time to convert some of the tax reduction to investment, and then to reap the additional output generated by the additional investment. It also takes time for workers to respond to the incentive of lower taxes by adding to their skills, working harder, and working in more productive jobs.

This graph depicts the long-run effects of changes in the effective tax rate, taking into account changes in the real growth rate from a base of 2.8 percent (the year-over-year rate for the most recent fiscal quarter):

Note that the same real tax revenue would be realized at an effective tax rate of 13 percent of GDP. At that rate, GDP would rise to 2.5 times its 2017 value (instead of 1.6 times as shown in Figure 1), and after-tax GDP would rise to 3.3 times its 2017 value (instead of 2.1 times as shown in Figure 1).

The real Laffer curve — the one that people ought to pay attention to — is the Rahn curve. Holding everything else constant, here is the relationship between the real growth rate and the effective tax rate:

Laffer revisited_3

At the current effective tax rate — 33 percent of GDP — the economy is limping along at about one-third of its potential growth. That is actually good news, inasmuch as the real growth rate dipped perilously close to 1 percent several times during the Obama administration, even after the official end of the Great Recession.

But it will take many years of spending cuts (relative to GDP, at least) and deregulation to push growth back to where it was in the decades immediately after World War II. Five percent isn’t out of the question.

1. Total government spending, when transfer payments were negligible, amounted to between 5 and 10 percent of GDP between the Civil War and the Great Depression (Series F216-225, “Percent Distribution of National Income or Aggregate Payments, by Industry, in Current Prices: 1869-1968,” in Chapter F, National Income and Wealth, Historical Statistics of the United States, Colonial Times to 1970: Part 1). The cost of an adequate defense is a lot higher than it was in those relatively innocent times. Defense spending now accounts for about 3.5 percent of GDP. An increase to 5 percent wouldn’t render the U.S. invulnerable, but it would do a lot to deter potential adversaries. So at 10 percent of GDP, government spending on policing, the administration of justice, and defense — and nothing else — should be more than adequate to sustain the rule of law.

2. The effective tax rate on GDP in 2017 was 33.4 percent. That number represents total government government expenditures (line 37 of BEA Table 3.1), divided GDP (line 1 of BEA Table 1.15). The nominal tax rate on GDP was 30 percent; that is, government receipts (line 34 of BEA Table 3.1) accounted for 30 percent of GDP. (The BEA tables are accessible here.) I use the effective tax rate in this analysis because it truly represents the direct costs levied on the economy by government. (The indirect cost of regulatory activity adds about $2 trillion, bringing the total effective tax to 44 percent.)

Presidents and Economic Growth

There’s an old and recurring claim that Democrat presidents produce greater economic growth than Republican ones. I addressed and debunked such a claim nine years ago, saying this (in part):

Given the long, downward trend in the real rate of GDP growth, it is statistical nonsense to pin the growth rate in any given year to a particular year of a particular president’s term. It is evident that GDP growth has been influenced mainly by the cumulative, anti-growth effects of government regulation. And GDP growth, in any given year, has been an almost-random variation on a downward theme.

How random? This random:

Derived from Bureau of Economic Analysis, “Current dollar and ‘real’ GDP,” as of April 28, 2017.

The one-year lag (which is usual in such analyses) allows for the delayed effects (if any) of a president’s economic policies. The usual suspects are claiming, laughably, that the tepid growth rate in the first calendar quarter of 2017 is somehow Trump’s fault.

Anyway, here’s the real story:

This is an updated version of a graph in “The Rahn Curve Revisited.,” from which the following equation is taken:

Yg = 0.0275 – 0.347F + 0.0769A – 0.000327R – 0.135P , 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).

Random, short-run fluctuations in GDP growth have almost nothing to do with the policies of a particular president (see the first graph). But there’s nothing random about the steady growth of government spending, the steadier growth of the regulatory burden, and the combined investment-killing and inflationary effects of both (see the second graph).

The long-run trend in GDP growth reflects the cumulative effects of policies carried out by the “deep state” — the apparatus that churns on with little change in direction from president to president: the special interests represented in the many committees of Congress, the Social Security Administration (which also encompasses Medicare and Medicaid), and the entire alphabet soup of federal regulatory agencies. Most of those entities became committed, long ago, to the growth of government spending and regulation. It will take more than a slogan to drain the swamp.

John H. Arnold characterizes war as “long periods of boredom punctuated by short moments of excitement.” I would say that the economy of the United States has been on a long slide into stagnation punctuated by brief periods of misplaced optimism.

The Rahn Curve Revisited

REVISED 10/18/16, to report a new estimate of the Rahn curve after correcting a slight error in the previous estimate.

REVISED 10/20/16, to add a fourth explanatory variable, which improves the fit of the equation.

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 (2)

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.

In an earlier post, I ventured an estimate of the Rahn curve that spanned 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:

Real GDP 1947q1-2016q2

Here’s the revised result (with cosmetic changes in terminology):

Yg = 0.0275 -0.347F + 0.0769A – 0.000327R – 0.135P


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 0.73 and the F-value is 2.00E-12. The p-values of the intercept and coefficients are 0.099, 1.75E-07, 1.96E-08, 8.24E-05, and 0.0096. The standard error of the estimate is 0.0051, that is, about half a percentage point. (Except for the p-value on the coefficient, the other statistics are improved from the previous version, which omitted CPI).

Here’s how the equations with and without P stack up against actual changes in 10-year rates of real GDP growth:


The equation with P captures the “bump” in 2000, and is generally (though not always) closer to the mark than the equation without P.

What does the new equation portend for the next 10 years? Based on the values of F, A, R, and P for the most recent 10-year period (2006-2015), the real rate of growth for the next 10 years will be about 1.9 percent. (It was 1.4 percent for the version of the equation without P.) The earlier equation (discussed above) yields an estimate of 2.9 percent. The new equation wins the reality test, as you can tell by the blue line in the second graph above.

In fact the year-over-year rates of real growth for the past four quarters (2015Q3 through 2016Q2) are 2.2 percent, 1.9 percent, 1.6 percent, and 1.3 percent. So an estimate of 1.9 percent for the next 10 years may be optimistic.

And it probably is. If F were to rise from 0.382 (the average for 2006-2015) to 0.438, the rate of real growth would fall to zero, even if A, R, and P were to remain at their 2006-2015 levels. (And R is much more likely to rise than to fall.) It’s easy to imagine F hitting 0.438 with a Democrat president and Democrat-controlled Congress mandating “free” college educations, universal “free” health care, and who knows what else.

Not-So-Random Thoughts (XIV)


Links to the other posts in this occasional series may be found at “Favorite Posts,” just below the list of topics.

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Paul Mirengoff explores the similarities between Neville Chamberlain and Barack Obama; for example:

We see with Chamberlain the same curious dynamic present in the Obama presidency. At home, a tough-as-nails administration/political machine that takes no prisoners and rarely compromises; abroad, a feckless operation with a pattern of caving to belligerent adversaries. [Neville Chamberlain and Barack Obama: The Similarities Run Deep,” Powerline Blog, April 15, 2014]

See also John Hinderaker’s Powerline post, “Daniel Pipes: The Obama Doctrine Serves Up One Disaster After Another” (April 6, 2015), and a piece by Eileen F. Toplansky,”Obama’s Three Premises” (American Thinker, April 20, 2015).

What is Obama up to? For my take, see “Does Obama Love America?

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If it were possible to convince a climate alarmist that he is wrong, Christopher Monckton of Brenchley is the man for the job:

What Evidence,” asks Ronald Bailey’s headline (, April 3, 2015), “Would Convince You That Man-Made Climate Change Is Real?

The answer: a rational, scientific case rooted in established theory and data would convince me that manmade climate change is a problem. That it is real is not in doubt, for every creature that breathes out emits CO2 and thus affects the climate.

The true scientific question, then, is not the fatuous question whether “Man-Made Climate Change Is Real” but how much global warming our sins of emission may cause, and whether that warming might be more a bad thing than a good thing.

However, Mr Bailey advances no rational case. What, then, are the elements of a rational, scientific case that our influence on the climate will prove dangerous unless the West completes its current self-shutdown?… [How to Convince a Climate Skeptic He’s Wrong,” Watts Up With That, April 9, 2015]

There follows a step-by-step dismantling of Mr. Bailey’s case for alarmism. Lord Monckton ends with this:

[I]f Mr Bailey does me the courtesy of reading the above, he will realize that temperatures are not rising by much, glacial ice-melt (if occurring) is on too small a scale to raise sea level by much, global sea ice extent shows little change in two generations, ditto northern-hemisphere snow cover, there has been little increase in rainfall and (according to the IPCC) little evidence for “stronger rainstorms”, and the ocean warming is so small that it falls within the considerable measurement error.

The evidence he adduces is questionable at best on every count. The Temple of Thermageddon will have to do better than that if it wants to convince us in the teeth of the evidence….

…[N]o rational scientific or economic case can be made for taking any action whatsoever today in a probably futile and certainly cost-ineffective attempt to make global warming that is not happening as predicted today go away the day after tomorrow.

The correct policy to address what is likely to prove a non-problem – and what, even if it were every bit as much of a problem as the tax-gobblers would wish, could not by even their most creative quantitative easing be cost-effectively solved by any attempt at mitigation – is to have the courage to do nothing now and adapt later if necessary.

The question is why, in the teeth of the scientific and economic evidence, nearly all of the global governing class were so easily taken in or bought out or both by the strange coalescence of powerful vested interests who have, until now, profited so monstrously by the biggest fraud in history at such crippling expense in lives and treasure to the rest of us, and at such mortal threat to the integrity and trustworthiness of science itself. [Ibid.]

My own modest effort to quell climate alarmism is summarized in “AGW: The Death Knell.”

*     *     *

Steve Sailer has some fun with the latest bit of experimental hocus-pocus by the intelligence-isn’t-heritable crowd, as interpreted by a reporter for The Washington Post:

In the last few years, there appears to have been a decision to blame racial differences in intelligence on differences in income level, although, of course, that’s not very plausible. That’s what people said way back in 1965, but then the federal Coleman Report of 1966 showed that affluent black students weren’t setting the world on fire academically on average, and vast amounts of data have accumulated validating the Coleman Report ever since.

But a half century later we’re back to asserting the same untested theories as in 1965….

Allow me to point out that a national newspaper has asked a couple of guys who know what they are talking about to punch holes in the latest bit of goodthink and, as of press time, the American public hasn’t dug up Hitler’s DNA and elected it President. So maybe we’re actually mature enough to discuss reality rather than lie all the time?…

Six decades from now, the Education Secretary of the hereditary Bush-Clinton Administration will be declaring the key periods for federal intervention are the eight months and 29 days before birth … but not a day sooner! [Charles Murray and James Thompson Asked Their Opinions in ‘Post’ Article on Brain Size; World Hasn’t Ended, Yet,” The Unz Review, April 15, 2015]

Along the way, Sailer links to Dr. James Thompson’s post about the article in question. There’s a followup post by Thompson, and this one is good, too. See also this post by Sailer.

Gregory Cochran has a related post (“Scanners Live in Vain,” West Hunter, March 31, 2015), where he says this about the paper and the reporting about it:

There is a new paper out in Nature Neuroscience,  mainly by Kimberly Noble, on socioeconomic variables and and brain structure:  Family income, parental education and brain structure in children and adolescents. They found that cortex area went up with income, although more slowly at high incomes.  Judging from their comments to the press, the authors think that being poor shrinks your brain.

Of course, since intelligence is highly heritable, and since people in higher social classes, or with high income, have higher average IQs (although not nearly as high as I would like), you would expect their kids to be, on average, smarter than kids from low-income groups (and have larger brains, since brain size is correlated with IQ) for genetic reasons.  But I guess the authors of this paper have never heard of  any of that – which raises the question, did they scan the brains of the authors?  Because that would have been interesting.  You can actually do microscopic MRI.

Even better, in talking to Nature, another researcher, Martha Farah,  mentions unpublished work that shows that the brain-size correlation with SES  is already there (in African-American kids) by age one month!

Of course, finding that the pattern already exists at the age of one month seriously weakens any idea that being poor shrinks the brain: most of the environmental effects you would consider haven’t even come into play in the first four weeks, when babies drink milk, sleep, and poop. Genetics affecting both parents and their children would make more sense, if the pattern shows up so early (and I’ll bet money that, if real,  it shows up well before one month);  but Martha Farah, and the reporter from Nature, Sara Reardon, ARE TOO FUCKING DUMB to realize this.

And John Ray points to this:

Quick thinkers are born not made, claim scientists.

They have discovered a link between our genes and the ability to remain mentally on the ball in later life.

It is the first time a genetic link has been shown to explain why some people have quick thinking skills.

Researchers identified a common genetic variant – changes in a person’s genetic code – related to how quickly a person is able to process new information. [Jenny Hope, “Quick Thinkers Are Born Not Made: The Speed at Which We Process New Information Is Written in Our Genes,”, April 16, 2015]

Dr. Ray links to the underlying studies, here.

I’ve probably said more than I should say about the heritability of intelligence in “Race and Reason: The Achievement Gap — Causes and Implications,” “Evolution and Race,” “‘Wading’ into Race, Culture, and IQ,” and “The Harmful Myth of Inherent Equality.”

*     *     *

Speaking of equality, or the lack thereof, Daniel Bier explains “How Piketty Manufactured Rising [Wealth] Inequality in 6 Steps” (Foundation for Economic Education, April 9, 2015):

Piketty’s chart on US wealth inequality displayed a trend that none of its original sources showed. Worst of all, he didn’t tell his readers that he had done any of this, much less explained his reasoning.

But now Magness has deconstructed the chart and shown, step by step, how Piketty tortured his sources into giving him the result he wanted to see….

If your methods can produce opposite results using the same sources, depending entirely on your subjective judgment, you’re not doing science — you’re doing a Choose Your Own Adventure story where you start from the conclusion and work backwards.

Now that you’ve seen how it’s done, you too can “piketty” your data and massage your narrative into selling 1.5 million books — that almost no one will actually read, but will be widely cited as justification for higher taxes nonetheless.

Committed leftists will ignore Piketty’s step back from extreme redistributionism, which I discussed in “Not-So-Random Thoughts (XIII).”

*     *     *

Committed leftists will lament the predicate of “Has Obamacare Turned Voters Against Sharing the Wealth?” (The New York Times, April 15, 2015). The author of the piece, Thomas B. Edsall (formerly of The Washington Post), clearly laments the possibility. (I do not, of course.) Edsall’s article is full of good news (for me); for example:

In 2006, by a margin of more than two to one, 69-28, those surveyed by Gallup said that the federal government should guarantee health care coverage for all citizens of the United States. By late 2014, however, Gallup found that this percentage had fallen 24 points to 45 percent, while the percentage of respondents who said health care is not a federal responsibility nearly doubled to 52 percent.

Edsall’s main worry seems to be how such a mood shift will help Republicans. Evidently, he doesn’t care about taxpayers, people who earn their income, or economic growth, which is inhibited by redistribution from “rich” to “poor.” But what else is new? Edsall is just another representative of the elite punditariat — a member of the “top” part of the left’s “top and bottom” coalition.

Edsall and his ilk should be worried. See, for example, “The Obamacare Effect: Greater Distrust of Government” (the title tells the tale) and “‘Blue Wall’ Hype” which debunks the idea that Democrats have a lock on the presidency.

*     *     *

The question of nature vs. nurture, which I touched on three entries earlier, is closely related to the question of innate ability vs. effort as the key to success in a field of endeavor. “Scott Alexander” of Slate Star Codex has written at length about innate ability vs. effort in two recent posts: “No Clarity Around Growth Mindset…Yet” and “I Will Never Have the Ability to Clearly Explain My Beliefs about Growth Mindset.” (That should be “to explain clearly.”)

This is from the first-linked post:

If you’re not familiar with it, growth mindset is the belief that people who believe ability doesn’t matter and only effort determines success are more resilient, skillful, hard-working, perseverant in the face of failure, and better-in-a-bunch-of-other-ways than people who emphasize the importance of ability. Therefore, we can make everyone better off by telling them ability doesn’t matter and only hard work does.

This is all twaddle, as “Alexander” shows, more or less, in his two very long posts. My essay on the subject is a lot shorter and easier to grasp: “The Harmful Myth of Inherent Equality.”

*     *     *


Obamacare, not unsurprisingly to me, has led to the rationing of health care, according to Bob Unruh’s “Obamacare Blocks Patients Paying for Treatment” (WND, March 6, 2014). And Aleyne Singer delivers “More Proof Obamacare Is Increasing Coverage but Not Access to Health Care” (The Daily Signal, December 9, 2014).

None of this should surprise anyone who thought about the economics of Obamacare, as I did in “Rationing and Health Care,” “The Perils of Nannyism: The Case of Obamacare,” “More about the Perils of Obamacare,” and “Health-Care Reform: The Short of It.”

*     *     *

Ben Bernanke asks “Why Are Interest Rates So Low?” (Ben Bernanke’s Blog, March 30, 2015). His answer? In so many words, business is bad, which means that the demand for capital financing is relatively weak. But in a followup post, “Why Are Interest Rates So Low, Part 2: Secular Stagnation” (Ben Bernanke’s Blog, March 31, 2015), Bernanke argues that the problem isn’t secular stagnation.

I agree that interest rates are low because the economy remains weak, despite some recovery from the nadir of the Great Recession. But, unlike Bernanke, I don’t expect the economy to make a full recovery — and I’m talking about real growth, not phony unemployment-rate recovery. Why Not? See “Obamanomics in Action” and “The Rahn Curve Revisited.” The economy will never grow to its potential as long as the dead hand of government continues to press down on it.


The Slow-Motion Collapse of the Economy

Robert Higgs asks “How Much Longer Can the U.S. Economy Bear the Burdens?” (The Beacon, a blog of The Independent Institute, January 30, 2015). Higgs explains:

These burdens take the form of taxes, regulations, and uncertainties loaded onto them by governments at every level. Each year, for example, federal departments and regulatory agencies put into effect several thousand new regulations. Only rarely do these agencies remove any existing rules from the Code of Federal Regulations. Thus, the total number in effect continues to climb relentlessly. The tangle of federal red tape becomes ever more difficult for investors, entrepreneurs, and business managers to cut through. Business people have to bear not only a constantly changing, ever more complex array of taxes, fees, and fines, but also a larger and larger amount of regulatory compliance costs, now estimated at more than $1.8 trillion annually. Governments at the state and local levels contribute their full share of such burdens as well.

So it is scarcely a wild-eyed question if we ask, as economist Pierre Lemieux does in a probing article in the current issue of Regulation magazine, whether the U.S. economy is now reacting to these growing burdens by undergoing “a slow-motion collapse.”

The article by Lemieux (“A Slow Motion Collapse” (Regulation, Winter 2014-2015) ends with this:

The resilience of markets, especially in a rich and sometimes still flexible economy like the United States, has dampened the effect of regulation. However, it is reasonable to believe that, over the more than six decades since World War II, regulation has deleted a big chunk of potential prosperity. It has not actually cut into the average standard of living, but this is only a consolation prize, for worse could come if the regulatory bulldozer is not pushed back.

As Higgs suggests, the slow-motion collapse of the economy is due not only to regulation but also to taxation and what Higgs elsewhere calls “regime uncertainty.”

The combined effects of regulation, taxation, and regime uncertainty are captured in the Rahn curve, which depicts the long-term relationship between government spending (as a fraction of GDP) and the rate of economic growth. I say that because government spending and regulatory activity have grown apace since the end of World War II. That might be taken as certainty, of a perverse kind, but beleaguered entrepreneurs can never be certain of the specific obstacles that will be thrown in the path of innovation and investment.

The best evidence of the slow-motion collapse of the U.S. economy is the steady, long-run decline in the rate of economic growth, which is evident in the following graphs:

Real GDP 1947-2014

Year-over-year changes in real GDP

Annualized rate of real growth - bottom of recession to bottom of next recession
The graphs are derived from “Current dollar and ‘real’ GDP,” at the website of the Bureau of Economic Analysis of the U.S. Department of Commerce.

As the third graph suggests, the rate of growth has generally declined from business cycle to business cycle.* Thus:

Bottom-to-peak rates of growth

The “Obama recovery” is an anemic thing. Is it any wonder, given Obama’s incessant war on success?

It will take more than a “push back” to restore the economy — and liberty — to health. Obama and his ilk must be driven from office, and kept out of office for good.

*     *     *

Related posts:
The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
The Causes of Economic Growth
In the Long Run We Are All Poorer
A Short Course in Economics
Addendum to a Short Course in Economics
As Goes Greece
Ricardian Equivalence Reconsidered
The Real Burden of Government
The Illusion of Prosperity and Stability
Taxing the Rich
More about Taxing the Rich
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
The Commandeered Economy
We Owe It to Ourselves
In Defense of the 1%
Lay My (Regulatory) Burden Down
The Burden of Government
Economic Growth Since World War II
Obama’s Big Lie
Government in Macroeconomic Perspective
Keynesianism: Upside-Down Economics in the Collectivist Cause
Economics: A Survey (also here)
Why Are Interest Rates So Low?
Vulgar Keynesianism and Capitalism
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now
The Keynesian Multiplier: Phony Math
The True Multiplier
How Libertarians Ought to Thinks about the Constitution
Obamanomics: A Report Card
The Obama Effect: Disguised Unemployment
Income Inequality and Economic Growth
The Rahn Curve Revisited

* Each business cycle runs from the bottom of a recession to the bottom of the next recession. Rather than rely on the National Bureau of Economic Research (NBER), I use my own own definition of a recession, which is:

  • two or more consecutive quarters in which real GDP (annualized) is below real GDP (annualized) for an earlier quarter, during which
  • the annual (year-over-year) change in real GDP is negative, in at least one quarter.

Unlike the NBER, I do not locate a recession in 2001. Real GDP, measured quarterly, dropped in the first and third quarters of 2001, but each decline lasted only a quarter.

My method of identifying a recession is more objective and consistent than the NBER’s method, which one economist describes as “The NBER will know it when it sees it.” Moreover, unlike the NBER, I would not presume to pinpoint the first and last months of a recession, given the volatility of GDP estimates.

Let’s Not Get Too Excited about Recent GDP Growth

According to the U.S. Department of Commerce’s Bureau of Economic Analysis,

Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 5.0 percent in the third quarter of 2014, according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.6 percent.

Sounds great, but let’s put recent quarter-to-quarter and year-over-year changes in context:

Quarterly vs. annual changes in real GDP

Despite the recent gains, welcome as they are, GDP remains in the doldrums:

Real GDP 1947q1-2014q3

Here’s another depiction, which emphasizes the declining rate of growth:

Real GDP 1947-2014

For more, see “The Rahn Curve Revisited” and the list of posts at the bottom.


McCloskey on Piketty

UPDATED 01/07/15

The left loves Thomas Piketty‘s Capital in the Twenty-First Century because it lends pseudo-scientific backing to some of the left’s favorite economic postulates; to wit:

  • Income inequality is bad, even if real incomes are rising across the board. Why is it bad? It just is, if you’re an envious Marxist. But also…
  • Income inequality is bad because wealth usually derives from income. The rich get richer, as the old song goes. And the rich — the super-rich, in today’s parlance — acquire inordinate political power because of their great wealth. (Leftists conveniently overlook the fact that the penchant for statist schemes — redistributionism among them — is positively correlated with income. This is a morally confused stance, based on guilt-feelings and indoctrination at the hands of leftist “educators,” “journalists,” and “entertainers.”)
  • Further, inequality yields slower economic growth because persons with high incomes consume a smaller fraction of their incomes than do persons with low incomes. The result, according to the Keynesian consumption-based model, is a reduction in GDP, other things being the same. And other things being the same, slower growth means that it is harder for low-income persons to rise from poverty or near-poverty. (This is a logically and empirically backward view of reality, which is that economic growth requires more investment and less consumption. And investment spending is stifled when redistribution takes money from high earners and gives it to low earners, that is, persons with a high propensity to consume. Investment is also stifled by progressive taxation, which penalizes success, and burdensome regulation, which deters entrepreneurship and job creation.)

Deirdre McCloskey‘s forthcoming review of Piketty’s book praises it and damns it. First the praise:

Piketty gives a fine example of how to do it [economic history]. He does not get entangled as so many economists do in the sole empirical tool they are taught, namely, regression analysis on someone else’s “data”…. Therefore he does not commit one of the two sins of modern economics, the use of meaningless “tests” of statistical significance…. Piketty constructs or uses statistics of aggregate capital and of inequality and then plots them out for inspection, which is what physicists, for example, also do in dealing with their experiments and observations. Nor does he commit the other sin, which is to waste scientific time on existence theorems. Physicists, again, don’t. If we economists are going to persist in physics envy let’s at least learn what physicists actually do. Piketty stays close to the facts, and does not, say, wander into the pointless worlds of non-cooperative game theory, long demolished by experimental economics. He also does not have recourse to non-computable general equilibrium, which never was of use for quantitative economic science, being a branch of philosophy, and a futile one at that. On both points, bravissimo.

His book furthermore is clearly and unpretentiously, if dourly, written….

That comes early in McCloskey’s long review (50 double-spaced pages in the .pdf version). But she ends with blistering damnation:

On the next to last page of his book Piketty writes, “It is possible, and even indispensable, to have an approach that is at once economic and political, social and cultural, and concerned with wages and wealth.” One can only agree. But he has not achieved it. His gestures to cultural matters consist chiefly of a few naively used references to novels he has read superficially—for which on the left he has been embarrassingly praised. His social theme is a narrow ethic of envy. His politics assumes that governments can do anything they propose to do. And his economics is flawed from start to finish.

It is a brave book. But it is mistaken.

There is much in between to justify McCloskey’s conclusion. Here she puts Piketty’s work in context:

[T]he left in its worrying routinely forgets this most important secular event since the invention of agriculture—the Great Enrichment of the last two centuries—and goes on worrying and worrying, like the little dog worrying about his bone in the Traveler’s insurance company advertisement on TV, in a new version every half generation or so.

Here is a partial list of the worrying pessimisms, which each has had its day of fashion since the time, as the historian of economic thought Anthony Waterman put it, “Malthus’ first [1798] Essay made land scarcity central. And so began a century-long mutation of ‘political economy,’ the optimistic science of wealth, to ‘economics,’ the pessimistic science of scarcity.” Malthus worried that workers would proliferate and Ricardo worried that the owners of land would engorge the national product. Marx worried, or celebrated, depending on how one views historical materialism, that owners of capital would at least make a brave attempt to engorge it…. Mill worried, or celebrated, depending on how one views the sick hurry of modern life, that the stationary state was around the corner. Then the economists, many on the left but some on the right, in quick succession 1880 to the present—at the same time that trade-tested betterment was driving real wages up and up and up—commenced worrying about, to name a few of the grounds for pessimisms they discerned concerning ”capitalism”: greed, alienation, racial impurity, workers’ lack of bargaining strength, women working, workers’ bad taste in consumption, immigration of lesser breeds, monopoly, unemployment, business cycles, increasing returns, externalities, under-consumption, monopolistic competition, separation of ownership from control, lack of planning, post-War stagnation, investment spillovers, unbalanced growth, dual labor markets, capital insufficiency … , peasant irrationality, capital-market imperfections, public choice, missing markets, informational asymmetry, third-world exploitation, advertising, regulatory capture, free riding, low-level traps, middle-level traps, path dependency, lack of competitiveness, consumerism, consumption externalities, irrationality, hyperbolic discounting, too big to fail, environmental degradation, underpaying of care, overpayment of CEOs, slower growth, and more.

One can line up the later items in the list, and some of the earlier ones revived à la Piketty or Krugman…. I will not name here the men … , but can reveal their formula: first, discover or rediscover a necessary condition for perfect competition or a perfect world (in Piketty’s case, for example, a more perfect equality of income). Then assert without evidence (here Piketty does a great deal better than the usual practice) but with suitable mathematical ornamentation (thus Jean Tirole, Nobel 2014) that the condition might be imperfectly realized or the world might not develop in a perfect way. Then conclude with a flourish (here however Piketty falls in with the usual low scientific standard) that “capitalism” is doomed unless experts intervene with a sweet use of the monopoly of violence in government to implement anti-trust against malefactors of great wealth or subsidies to diminishing-returns industries or foreign aid to perfectly honest governments or money for obviously infant industries or the nudging of sadly childlike consumers or, Piketty says, a tax on inequality-causing capital worldwide. A feature of this odd history of fault-finding and the proposed statist corrections, is that seldom does the economic thinker feel it necessary to offer evidence that his … proposed state intervention will work as it is supposed to, and almost never does he feel it necessary to offer evidence that the imperfectly attained necessary condition for perfection before intervention is large enough to have reduced much the performance of the economy in aggregate.

I heartily agree with McCloskey’s diagnosis of the causes of leftist worrying:

One begins to suspect that the typical leftist … starts with a root conviction that capitalism is seriously defective. The conviction is acquired at age 16 years when the proto-leftist discovers poverty but has no intellectual tools to understand its source. I followed this pattern, and therefore became for a time a Joan-Baez socialist. Then the lifelong “good social democrat,” as he describes himself (and as I for a while described myself), when he has become a professional economist, in order to support the now deep-rooted conviction, looks around for any qualitative indication that in some imagined world the conviction would be true, without bothering to ascertain numbers drawn from our own world…. It is the utopianism of good-hearted leftward folk who say, “Surely this wretched society, in which some people are richer and more powerful than others, can be greatly improved. We can do much, much better!”

Piketty’s typically leftist blend of pessimism and utopianism is hitched to bad economic reasoning, ignorance of economic history, and a misreading of his own statistics:

Piketty’s (and Aristotle’s) theory is that the yield on capital usually exceeds the growth rate of the economy, and so the share of capital’s returns in national income will steadily increase, simply because interest income—what the presumably rich capitalists get and supposedly manage to cling to and supposedly reinvest—is growing faster than the income the whole society is getting.

Aristotle and his followers, such as Aquinas and Marx and Piketty, were much concerned with such “unlimited” gain. The argument is, you see, very old, and very simple. Piketty ornaments it a bit with some portentous accounting about capital-output ratios and the like, producing his central inequality about inequality: so long as r > g, where r is the return on capital and g is the growth rate of the economy, we are doomed to ever increasing rewards to rich capitalists while the rest of us poor suckers fall relatively behind. The merely verbal argument I just gave, however, is conclusive, so long as its factual assumptions are true: namely, only rich people have capital; human capital doesn’t exist; the rich reinvest their return; they never lose it to sloth or someone else’s creative destruction; inheritance is the main mechanism, not a creativity that raises g for the rest of us just when it results in an r shared by us all; and we care ethically only about the Gini coefficient, not the condition of the working class. Notice one aspect of that last: in Piketty’s tale the rest of us fall only relatively behind the ravenous capitalists. The focus on relative wealth or income or consumption is one serious problem in the book. Piketty’s vision of a “Ricardian Apocalypse,” as he calls it, leaves room for the rest of us to do very well indeed, most non-apocalyptically, as in fact since 1800 we have. What is worrying Piketty is that the rich might possibly get richer, even though the poor get richer, too. His worry, in other words, is purely about difference, about the Gini coefficient, about a vague feeling of envy raised to a theoretical and ethical proposition.

Another serious problem is that r will almost always exceed g, as anyone can tell you who knows about the rough level of interest rates on invested capital and about the rate at which most economies have grown (excepting only China recently, where contrary to Piketty’s prediction, inequality has increased). If his simple logic is true, then the Ricardian Apocalypse looms, always. Let us therefore bring in the sweet and blameless and omni-competent government—or, even less plausibly, a world government, or the Gallactic Empire—to implement “a progressive global tax on capital” (p. 27) to tax the rich. It is our only hope…. In other words, Piketty’s fears were not confirmed anywhere 1910 to 1980, nor anywhere in the long run at any time before 1800, nor anywhere in Continental Europe and Japan since World War II, and only recently, a little, in the United States, the United Kingdom, and Canada (Canada, by the way, is never brought into his tests).

That is a very great puzzle if money tends to reproduce itself, always, evermore, as a general law governed by the Ricardo-plus-Marx inequality at the rates of r and g actually observed in world history. Yet inequality in fact goes up and down in great waves, for which we have evidence from many centuries ago down to the present, which also doesn’t figure in such a tale (Piketty barely mentions the work of the economic historians Peter Lindert and Jeffrey Williamson documenting the inconvenient fact). According to his logic, once a Pikettywave starts—as it would at any time you care to mention if an economy satisfied the almostalways-satisfied condition of the interest rate exceeding the growth rate of income—it would never stop. Such an inexorable logic means we should have been overwhelmed by an inequality-tsunami in 1800 CE or in 1000 CE or for that matter in 2000 BCE. At one point Piketty says just that: “r > g will again become the norm in the twenty-first century, as it had been throughout history until the eve of World War I (… one wonders what he does with historically low interest rates right now, or the negative real interest rates in the inflation of the 1970s and 1980s). Why then did the share of the rich not rise anciently to 100 percent?

McCloskey gets it right:

With a bigger pie, someone has to get more. In the event what rose were wages on raw labor and especially a great accumulation of human capital, but capital owned by the laborers, not by the truly rich. The return to physical capital was higher than a riskless return on British or American government bonds, in order to compensate for the risk in holding capital (such as being made obsolete by betterment—think of your computer, obsolete in four years). But the return on physical capital, and on human capital, was anyway held down to its level of very roughly 5 to 10 percent by competition among the proliferating capitalists. Imagine our immiserization if the income of workers, because they did not accumulate human capital, and their societies had not adopted the accumulation of ingenuities since 1800, had experienced the history of stagnation since 1800 that the per-unit return to capital has. It is not hard to imagine, because such miserable income of workers exists even now in places like Somalia and North Korea. Instead, since 1800 in the average rich country the income of the workers per person increased by a factor of about 30 (2,900 percent, if you please) and in even in the world as a whole, including the still poor countries, by a factor of 10 (900 percent), while the rate of return to physical capital stagnated.

Piketty does not acknowledge that each wave of inventors, of entrepreneurs, and even of routine capitalists find their rewards taken from them by entry, which is an economic concept he does not appear to grasp. Look at the history of fortunes in department stores. The income from department stores in the late nineteenth century, in Le Bon Marché, Marshall Fields, and Selfridge’s, was entrepreneurial. The model was then copied all over the rich world, and was the basis for little fortunes in Cedar Rapids, Iowa and Benton Harbor, Michigan. Then in the late twentieth century the model was challenged by a wave of discounters, and they then in turn by the internet. The original accumulation slowly or quickly dissipates. In other words, the profit going to the profiteers is more or less quickly undermined by outward-shifting supply, if governmental monopolies and protectionisms of the sort Matt Ridley noted in recent British history do not intervene. The economist William Nordhaus has calculated that the inventors and entrepreneurs nowadays earn in profit only 2 percent of the social value of their inventions. If you are Sam Walton the 2 percent gives you personally a great deal of money from introducing bar codes into stocking of supermarket shelves. But 98 percent at the cost of 2 percent is nonetheless a pretty good deal for the rest of us. The gain from macadamized roads or vulcanized rubber, then modern universities, structural concrete, and the airplane, has enriched even the poorest among us.

But Piketty doesn’t see this because he’s a poor economist and a knee-jerk socialist:

Piketty, who does not believe in supply responses [as discussed below], focuses instead on the great evil of very rich people having seven Rolex watches by mere inheritance. Lillian Bettancourt, heiress to the L’Oréal fortune (p. 440), the third richest woman in the world, who “has never worked a day in her life, saw her fortune grow exactly as fast as that of [the admittedly bettering] Bill Gates.” Ugh, Piketty says, which is his ethical philosophy in full.

*     *     *

[T]he effect of inherited wealth on children is commonly to remove their ambition, as one can witness daily on Rodeo Drive. Laziness—or for that matter regression to the mean of ability—is a powerful equalizer. “There always comes a time,” Piketty writes against his own argument, “when a prodigal child squanders the family fortune” (p. 451), which was the point of the centuries-long struggle in English law for and against entailed estates.

*     *     *

Because Piketty is obsessed with inheritance, moreover, he wants to downplay entrepreneurial profit, the trade-tested betterment that has made the poor rich. It is again Aristotle’s claim that money is sterile and interest is therefore unnatural. Aristotle was on this matter mistaken. It is commonly the case, contrary to Piketty, and setting aside the cheapening of our goods produced by the investments of their wealth by the rich, that the people with more money got their more by being more ingeniously productive, for the benefit of us all—getting that Ph.D., for example, or being excellent makers of automobiles or excellent writers of horror novels or excellent throwers of touchdown passes or excellent providers of cell phones, such as Carlos Slim of Mexico, the richest man in the world (with a little boost, it may be, from corrupting the Mexican parliament). That Frank Sinatra became richer than most of his fans was not an ethical scandal. The “Wilt Chamberlain” example devised by the philosopher Robert Nozick (Piketty mentions John Rawls, but not Nozick, Rawls’ nemesis) says that if we pay voluntarily to get the benefit of clever CEOs or gifted athletes there is no further ethical issue. The unusually high rewards to the Frank Sinatras and Jamie Dimons and Wilt Chamberlains come from the much wider markets of the age of globalization and mechanical reproduction, not from theft. Wage inequality in the rich countries experiencing an enlarging gap of rich vs. poor, few though the countries are (Piketty’s finding, remember: Canada, U.S.A., U.K.)), is mainly, he reports, caused by “the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms.” The emergence, note, has nothing to do with r > g.

How poor an economist? Consider:

Piketty’s definition of wealth does not include human capital, owned by the workers, which has grown in rich countries to be the main source of income, when it is combined with the immense accumulation since 1800 of capital in knowledge and social habits, owned by everyone with access to them. Therefore his laboriously assembled charts of the (merely physical and private) capital/output ratio are erroneous. They have excluded one of the main forms of capital in the modern world. More to the point, by insisting on defining capital as something owned nearly always by rich people, Piketty mistakes the source of income, which is chiefly embodied human ingenuity, not accumulated machines or appropriated land.

*    *     *

The fundamental technical problem in the book, however, is that Piketty the economist does not understand supply responses….

Startling evidence of Piketty’s miseducation occurs as early as page 6. He begins by seeming to concede to his neoclassical opponents…. “To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process [in this case the process of rising prices of oil or urban land leading to a Ricardian Apocalypse]: the mechanism of supply and demand. If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which would lead to a decline in its price.” [This] clearly mix[es] up movement along a demand curve with movement of the entire curve, a first-term error at university. The correct analysis (we tell our first-year, first-term students at about week four) is that if the price is “too high” it is not the whole demand curve that “restores equilibrium” … , but an eventually outward-moving supply curve. The supply curve moves out because entry is induced by the smell of super-normal profits, in the medium and long run (which is the Marshallian definition of the terms). New oil deposits are discovered, new refineries are built, new suburbs are settled, new high-rises saving urban land are constructed, as has in fact happened massively since, say, 1973, unless government has restricted oil exploitation (usually on environmental grounds) or the building of high-rises (usually on corrupt grounds). Piketty goes on—remember: it does not occur to him that high prices cause after a while the supply curve to move out; he thinks the high price will cause the demand curve to move in, leading to “a decline in price” (of the scarce item, oil’s or urban land)—“such adjustments might be unpleasant or complicated.” To show his contempt for the ordinary working of the price system he imagines comically that “people should . . . take to traveling about by bicycle.” The substitutions along a given demand curve, or one mysteriously moving in, without any supply response “might also take decades, during which landlords and oil well owners might well accumulate claims on the rest of the population” (now he has the demand curve moving out, for some reason faster than the supply curve moves out) “so extensive that they could they could easily [on grounds not argued] come to own everything that can be owned, including” in one more use of the comical alternative, “bicycles, once and for all.” Having butchered the elementary analysis of entry and of substitute supplies, which after all is the economic history of the world, he speaks of “the emir of Qatar” as a future owner of those bicycles, once and for all. The phrase must have been written before the recent and gigantic expansion of oil and gas exploitation in Canada and the United States….

Piketty, it would seem, has not read with understanding the theory of supply and demand that he disparages, such as Smith (one sneering remark on p. 9), Say (ditto, mentioned in a footnote with Smith as optimistic), Bastiat (no mention), Walras (no mention), Menger (no mention), Marshall (no mention), Mises (no mention), Hayek (one footnote citation on another matter), Friedman (pp. 548-549, but only on monetarism, not the price system). He is in short not qualified to sneer at self-regulated markets (for example on p. 572), because he has no idea how they work. It would be like someone attacking the theory of evolution (which is identical to the theory the economists use of entry and exit in self-regulating markets—the supply response, an early version of which inspired Darwin) without understanding natural selection or the the Galton-Watson process or modern genetics.

McCloskey continues:

Beyond technical matters in economics, the fundamental ethical problem in the book is that Piketty has not reflected on why inequality by itself would be bad…. The motive of the true Liberal … should not be equality but [says Joshua Monk, a character in Anthony Trollope’s novel, Phineas] “the wish of every honest [that is, honorable] man . . . to assist in lifting up those below him.” Such an ethical goal was to be achieved, says Monk the libertarian liberal (as Richard Cobden and John Bright and John Stuart Mill were, and Bastiat in France at the time, and in our times Hayek and Friedman, or for that matter M’Cluskie), not by direct programs of redistribution, nor by regulation, nor by trade unions, but by free trade and tax-supported compulsory education and property rights for women—and in the event by the Great Enrichment, which finally in the late nineteenth century started sending real wages sharply up, Europe-wide, and then world-wide.

The absolute condition of the poor has been raised overwhelmingly more by the Great Enrichment than by redistribution. The economic historians Ian Gazeley and Andrew Newell noted in 2010 “the reduction, almost to elimination, of absolute poverty among working households in Britain between 1904 and 1937.” “The elimination of grinding poverty among working families,” they show, “was almost complete by the late thirties, well before the Welfare State.” Their Chart 2 exhibits income distributions in 1886 prices at 1886, 1906, 1938, and 1960, showing the disappearance of the classic line of misery for British workers, “round about a pound a week.”

And it didn’t stop there:

In 2013 the economists Donald Boudreaux and Mark Perry noted that “according to the Bureau of Economic Analysis, spending by households on many of modern life’s ‘basics’—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53 percent of disposable income in 1950 to 44 percent in 1970 to 32 percent today.” It is a point which the economic historian Robert Fogel had made in 1999 for a longer span. The economist Steven Horwitz summarizes the facts on labor hours required to buy a color TV or an automobile, and notes that “these data do not capture . . . the change in quality . . . . The 1973 TV was at most 25 inches, with poor resolution, probably no remote control, weak sound, and generally nothing like its 2013 descendant. . . . Getting 100,000 miles out of a car in the 1970s was cause for celebration. Not getting 100,000 miles out of a car today is cause to think you bought a lemon.”

Nor in the United States are the poor getting poorer. Horwitz observes that “looking at various data on consumption, from Census Bureau surveys of what the poor have in their homes to the labor time required to purchase a variety of consumer goods, makes clear that poor Americans are living better now than ever before. In fact, poor Americans today live better, by these measures, than did their middle class counterparts in the 1970s.” In the summer of 1976 an associate professor of economics at the University of Chicago had no air conditioning in his apartment. Nowadays many quite poor Chicagoans have it. The terrible heat wave in Chicago of July 1995 killed over 700 people, mainly low-income. Yet earlier heat waves in 1936 and 1948, before air-conditioning was at all common, had probably killed many more.

There is one point at which McCloskey almost veers off course, but she recovers nicely:

To be sure, it’s irritating that a super rich woman buys a $40,000 watch. The purchase is ethically objectionable. She really should be ashamed. She should be giving her income in excess of an ample level of comfort—two cars, say, not twenty, two houses, not seven, one yacht, not five—to effective charities…. But that many rich people act in a disgraceful fashion does not automatically imply that the government should intervene to stop it. People act disgracefully in all sorts of ways. If our rulers were assigned the task in a fallen world of keeping us all wholly ethical, the government would bring all our lives under its fatherly tutelage, a nightmare achieved approximately before 1989 in East Germany and now in North Korea.

And that is the key point, to my mind. Perfection always eludes the human race, even where its members have managed to rise from the primordial scramble for sustenance and above Hobbes’s “warre, as is of every man, against every man.” Economic progress without economic inequality is impossible, and efforts to reduce inequality by punishing economic success must inevitably hinder progress, which is built on the striving of entrepreneurs. Further, the methods used to punish economic success are anti-libertarian — whether they are the police-state methods of the Soviet Union or the “soft despotism” of the American regulatory-welfare state.

So what if an entrepreneur — an Edison, Rockefeller, Ford, Gates, or Jobs — produces something of great value to his fellow men, and thus becomes rich and adorns his spouse with a $40,000 watch, owns several homes, and so on? So what if that same entrepreneur is driven (in part, at least) by a desire to bestow great wealth upon his children? So what if that same entrepreneur chooses to live among and associate with other persons of great wealth? He has no obligation to “give back”; he has already given by providing his fellow men with something that they value enough to make him rich. (Similarly, the super-star athlete and actor.)

McCloskey gets the penultimate word:

Supposing our common purpose on the left and on the right, then, is to help the poor, … the advocacy by the learned cadres of the left for equalizing restrictions and redistributions and regulations can be viewed at best as thoughtless. Perhaps, considering what economic historians now know about the Great Enrichment, but which the left clerisy, and many of the right, stoutly refuse to learn, it can even be considered unethical. The left clerisy such as Tony Judt or Paul Krugman or Thomas Piketty, who are quite sure that they themselves are taking the ethical high road against the wicked selfishness of Tories or Republicans or La Union pour un Mouvement Populaire, might on such evidence be considered dubiously ethical. They are obsessed with first-[order] changes that cannot much help the poor, and often can be shown to damage them, and are obsessed with angry envy at the consumption of the uncharitable rich, of whom they personally are often examples (what will you do with your royalties, Professor Piketty?), and the ending of which would do very little to improve the position of the poor. They are very willing to stifle through taxing the rich the trade-tested betterments which in the long run have gigantically helped the poor, who were the ancestors of most of the rest of us.

I added the emphasis to underscore what seems to me to be the left’s greatest ethical offense in the matter of inequality, as it is in the matter of race relations: hypocrisy. Hypocritical leftists like Judt, Krugman, and Pikkety (to name only a few of their ilk) aren’t merely wrong in their views about how to help the (relatively) poor, they make money (and a lot of it) by espousing their erroneous views. They obviously see nothing wrong with making a lot of money. So why is it all right for them to make a lot of money — more than 99.9 percent of the world’s population, say — but not all right for other persons to make even more money? The dividing line between deservingness and greed seems always to lie somewhere above their munificent earnings.


As John Cochrane notes,

Most Piketty commentary … focuses on the theory, r>g, and so on. After all, that’s easy and you don’t have to read hundreds of pages.

Cochrane then points to a paper by Philip W. Magness and Robert P. Murphy (listed below in “Related reading”) that focuses on the statistics that Piketty compiled and relied on to advance his case for global redistribution of income and wealth. Here is the abstract of the paper:

Thomas Piketty’s Capital in the 21st Century has been widely debated on theoretical grounds, yet continues to attract acclaim for its historically-infused data analysis. In this study we conduct a closer scrutiny of Piketty’s empirics than has appeared thus far, focusing upon his treatment of the United States. We find evidence of pervasive errors of historical fact, opaque methodological choices, and the cherry-picking of sources to construct favorable patterns from ambiguous data. Additional evidence suggests that Piketty used a highly distortive data assumption from the Soviet Union to accentuate one of his main historical claims about global “capitalism” in the 20th century. Taken together, these problems suggest that Piketty’s highly praised and historically-driven empirical work may actually be the book’s greatest weakness.

I’ve quickly read Magness and Murphy’s paper. It seems to live up to the abstract. Piketty (and friends) may challenge Magness and Murphy, but Piketty bears the burden of showing that he hasn’t stacked the empirical deck in favor of his redistributionist message. Not that the empirical flaws should matter, given the theoretical flaws exposed by McCloskey and others, but Piketty’s trove of spurious statistics should be discredited before it becomes a standard reference.

*     *     *

Related reading:
David R. Henderson, “An Unintended Case for More Capitalism,” Regulation, Fall 2014
John Cochrane, “Why and How We Care about Inequality,” The Grumpy Economist, September 29, 2014
John Cochrane, “Envy and Excess,” The Grump Economist, October 1, 2014
Mark J. Perry, “New CBO Study Shows That ‘The Rich’ Don’t Just Pay Their ‘Fair Share,’ They Pay Almost Everybody’s Share,” Carpe Diem, November 15, 2014
Mark J. Perry, “IRS Data Show That the Vast Majority of Taxpayers in the ‘Fortunate 400’ Are Only There for One Year,” Carpe Diem, November 25, 2014
Robert Higgs, “income Inequality Is a Statistical Artifact,” The Beacon (Independent Institute), December 1, 2014
John Cochrane, “McCloskey on Piketty and Friends,” The Grumpy Economist, December 2, 2014
James Pethokoukis, “IMF Study, ‘No Evidence ‘High-End’ Income Inequality Hurts Economic Growth,”, December 9, 2014
Philip W. Magness and Robert P. Murphy, “Challenging the Empirical Contribution of Thomas Piketty’s Capital in the 21st Century,” Journal of Private Enterprise, forthcoming

Related posts:
Taxing the Rich
More about Taxing the Rich
The Keynesian Fallacy and Regime Uncertainty
Creative Destruction, Reification, and Social Welfare
Why the “Stimulus” Failed to Stimulate
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
In Defense of the 1%
Lay My (Regulatory) Burden Down
Economic Growth Since World War II
Government in Macroeconomic Perspective
Keynesianism: Upside-Down Economics in the Collectivist Cause
How High Should Taxes Be?
The 80-20 Rule, Illustrated
Economics: A Survey
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
The Keynesian Multiplier: Phony Math
The True Multiplier
Some Inconvenient Facts about Income Inequality
Mass (Economic) Hysteria: Income Inequality and Related Themes
Social Accounting: A Tool of Social Engineering
Income Inequality and Inherited Wealth: So What?
Income Inequality and Economic Growth
A Case for Redistribution, Not Made


Income Inequality and Economic Growth

Standard & Poor’s adds fuel the the already raging fire of economic illiteracy with its research report entitled, “How Increasing Income Inequality Is Dampening U.S. Economic Growth, and Possible Ways to Change the Tide.” The S&P paper mines the Marxian-Pikettian vein of “underconsumption,” which (in the Marxian-Pikettian view) leads to economic collapse. (That Marx was wrong has been amply demonstrated by the superior performance of quasi-free economies, which have lifted the poor as well as the rich. Many writers have found grave errors in Piketty‘s reasoning– and data — these among them.)

The remedy for economic collapse (in the Marxian-Pikettian view) is socialism (perhaps smuggled in as “democratic” redistributionism). It is, of course, the kind of imaginary, painless socialism favored by affluent professors and pundits — favored as long as it doesn’t affect their own affluence. It bears no resemblance to the actual kind of socialism experienced by the billions who have been oppressed by it and the tens of millions who have been killed for its sake.

I have read two thorough take-downs of S&P’s screed. One is by Scott Winship (“S&P’s Fundamentally Flawed Inequality Report,” Economic Policies for the 21st Century at the Manhattan Institute, August 6, 2014). A second is by John Cochrane (“S&P Economists and Inequality,” The Grumpy Economist, August 8, 2014). Cochrane summarizes (and demolishes) the central theme of the S&P report, which I will address here:

[I]nequality is bad [because] it is bad for growth, and if the reason it is bad for growth is that it leads to insufficient consumption and lack of demand….

That bit of hogwash serves the redistributionist agenda. As Cochrane puts it, “redistributive taxation is a perennial answer in search of a question.” Indeed.

There’s more:

Inequality – growth is supposed to be about long run trends, not boom and slow recovery.

Professor of Public Policy at U.S. Berkeley Robert Reich argues that increased inequality has reduced overall aggregate demand. He observes that high-income households have a lower marginal propensity to consume (MPC) out of income than other households.

Let us begin at the beginning, that is, with some self-evident postulates that even a redistributionist will grant — until he grasps their anti-redistributionist implications:

  • All economic output is of two distinct types: consumption and investment (i.e., the replacement of or increase in the stock of capital that is used to produce goods for consumption).
  • The output of consumption goods must decline, ceteris paribus, if the stock of capital declines.
  • The stock of capital is sustained (and increased) by forgoing consumption.
  • The stock of capital is therefore sustained (and increased) by saving.
  • Saving rises with income because persons in high-income brackets usually consume a smaller fraction of their incomes than do persons in middle- and low-income brackets.
  • The redistribution of income from high-income earners to middle- and low-income earners therefore leads to a reduction in saving.
  • A reduction in saving means less investment and, thus, a reduction in the effective stock of capital, as it wears out.
  • With less capital, workers become less productive.
  • Output therefore declines, to the detriment of workers as well as “capitalists.”

In sum, efforts to make incomes more equal through redistribution have the opposite effect of the one claimed for it by ignorant bloviators like Robert Reich.

So much for the claim that a higher rate of consumption is a good policy for the long run.

What about in the short run; that is, what about Keynesian “stimulus” to “prime the pump”? I won’t repeat what I say in “The Keynesian Multiplier: Phony Math.” Go there, and see for yourself.

For an estimate of the destructive, long-run effect of government see “The True Multiplier.”

Every Silver Lining Has a Cloud

Today’s big economic news is the decline in real GDP reported by the Department of Commerce’s Bureau of Economic Analysis (BEA): an annualized rate of minus 2.9 percent from the fourth quarter of 2013 to the first quarter of 2014. Except for times when the economy was in or near recession, that’s the largest decline recorded since the advent of quarterly GDP estimates:

Quarterly vs annual changes in real GDP - 1948-2014
Derived from the “Current dollar and real GDP series” issued by BEA. See this post for my definition of a recession.

What’s the silver lining? Quarter-to-quarter changes in real GDP are more volatile than year-over-year and long-run changes. Some will take solace in the fact that real GDP rose by (a measly) 1.5 percent between the first quarter or 2013 and the first quarter of 2014. (Though they will conveniently ignore the long-run trend, marked by the dashed line in the graph.)

What’s the cloud? Well, as I pointed out above, the quarter-to-quarter decline in the first quarter of 2014 is unprecedented in the post-World War II era. Unless the sharp drop in the first quarter of 2014 is a one-off phenomenon (as suggested by some cheerleaders for Obamanomics), it points two possibilities:

  • The economy is in recession, as will become evident when the BEA reports on GDP for the second quarter of 2014.
  • The economy isn’t in recession — strictly speaking — but the dismal performance in the first quarter presages an acceleration of the downward trend marked by the dashed line in the graph. (For those of you who care about such things, the chance that the trend line reflects random “noise” in GDP statistics is less than 1 in 1 million.)

Even if there’s a rebound in the second quarter of 2014, the big picture is clear: The economy is in long-term decline, for reasons that I’ve discussed in the following posts:

The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
The Causes of Economic Growth
In the Long Run We Are All Poorer
A Short Course in Economics
Addendum to a Short Course in Economics
The Price of Government
The Price of Government Redux
The Mega-Depression
As Goes Greece
Ricardian Equivalence Reconsidered
The Real Burden of Government
The Illusion of Prosperity and Stability
Taxing the Rich
More about Taxing the Rich
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Unemployment and Economic Growth
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
The Real Multiplier
The Commandeered Economy
We Owe It to Ourselves
In Defense of the 1%
Lay My (Regulatory) Burden Down
The Burden of Government
Economic Growth Since World War II
The Economy Slogs Along
Government in Macroeconomic Perspective
Keynesianism: Upside-Down Economics in the Collectivist Cause
The Price of Government, Once More
Economic Horror Stories: The Great “Demancipation” and Economic Stagnation
Economics: A Survey (also here)
Why Are Interest Rates So Low?
Vulgar Keynesianism and Capitalism
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now
The Keynesian Multiplier: Phony Math
The True Multiplier
The Obama Effect: Disguised Unemployment
Obamanomics: A Report Card

See especially “Regime Uncertainty and the Great Recession,” “Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth,” and “The True Multiplier.”

Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth

UPDATED 12/13/14 — This update consists of a comment about my estimate of the Rahn curve. I have just published a much better estimate of the curve for the post-World War II era.

UPDATED 12/28/11 — This update incorporates GDP and government spending statistics for 2010 and corrects a minor discrepancy in the estimation of government spending. Also, there are new, easier-to-read graphs. The bottom line is the same as before: Government spending and everything that goes with it (including regulation) is destructive of economic growth.

UPDATED 09/19/13 — This version incorporates two later posts “Estimating the Rahn Curve: A Sequel” (01/24/12) and “More Evidence for the Rahn Curve” (05/27/12).

*     *     *

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 accumulates with the size of government.)

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

Rahn curve (2)

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.

Here is a graphic look at the historical relationship between government spending and GDP growth:

(Source notes for this graph and those that follow are at the bottom of this post.)

The regression lines are there simply to emphasize the long-term trends. The relationship between government spending as a percentage of GDP (G/GDP) and real GDP growth will emerge from the following graphs. There are chronological gaps because the Civil War, WWI, the Great Depression, and WWII distorted the relationship between G/GDP and economic growth. Large wars inflate government spending and GDP. The Great Depression saw a large rise in G/GDP, by pre-Depression standards, even as the economy shrank and then sputtered to a less-than-full recovery before the onset of WWII.

Est Rahn curve 1792 1861

Est Rahn curve 1866 1917

Est Rahn curve 1792 1917

Est Rahn curve 1946-2010

The graphs paint a consistent picture: Higher G/GDP means lower growth. There is one inconsistency, however, and that is the persistence of growth in the range of 2 to 4 percent during the post-WWII era, despite G/GDP in the range of 25-45 percent. That is not the kind of growth one would expect, given the relationships that obtain in the earlier eras. (The extrapolated trend line for 1946-2009 comes into use below.)

There are at least five plausible — and not mutually exclusive — explanations for the discrepancy. First, there is the difficulty of estimating GDP for years long past. Second, it is almost impossible to generate a consistent estimate of real GDP spanning two centuries; current economic output is vastly greater in volume and variety than it was in the early days of the Republic. Third, productivity gains (advances in technology, management techniques, and workers’ skills) may offset the growth-inhibiting effects of government spending, to some extent. Fourth, government regulations and active interventions (e.g., antitrust activity, the income tax) have a cumulative effect that operates independently of G/GDP. Regulations and interventions may have had an especially strong effect in the early 1900s (see the second graph in this post). The effects of regulations and interventions may diminish with time because of  adaptive behavior (e.g., “capture” of regulatory bodies).

Finally, and perhaps most importantly, there is the shifting composition of government spending. At relatively low levels of G/GDP, G consists largely of government programs that usurp and interfere with private-sector functions by diverting resources from productive uses to uses favored by politicians, bureaucrats, and their patrons. Higher levels of G/GDP — such as those we in the United States have known since the end of WWII — are reached by the expansion of the welfare state. Government spending (at all levels) on so-called social benefits accounted for only 7 percent of G and 0.8 percent of GDP in 1929; in 2009, it accounted for 36 percent of G and 15 percent of GDP. The provision of “social benefits” brings government into the business of redistributing income, which discourages work, saving, and capital formation to some extent, but doesn’t impinge directly on commerce. Therefore, I would expect G to be less damaging to GDP growth at higher levels of G/GDP — which is the message to be found in the contrast between the experience of 1946-2009 and the experience of earlier periods.

With those thoughts in mind, I present this empirical picture of the relationship between G/GDP and GDP growth in the United States:

Est Rahn curve 1792-2010

The intermediate points, unfortunately, are missing because of the chronological gaps mentioned above. But, as indicated by the five earlier graphs, it is entirely reasonable to infer from the preceding graph a strong relationship between GDP growth and changes in G/GDP throughout the history of the Republic.

It is possible to obtain a rough estimate of the downward sloping portion of the Rahn curve by focusing on two eras: the post-Civil War years 1866-1890 — before the onset of “progressivism,” with its immediate and strong negative effects — and the post-WWII years 1946-2009. Thus:

Est Rahn curve rough sketch

My rough estimate is appropriately “fuzzy” and somewhat more generous than Daniel Mitchell’s, which is indicated by the heavy black line. In light of my discussion of the shifting composition of G as G/GDP becomes relatively large, I  have followed the slope of the trend line for 1792-2010; that is, every 1 percentage-point increase in G/GDP yields a decrease in the growth rate of about 0.07 percent. That seemingly small effect becomes a huge one when G/GDP rises over a long period of time (as has been the case for more than a century, with no end in sight).

For the record, the best fit through the “fuzzy” area is:

Annual rate of growth = -0.066(G/GDP) + 0.054.

[A revised and more realistic estimate for the post-World War II era is

Real rate of growth = -0.372(G/GDP) + 0.067(BA/GDP) + 0.080 ,

where the real rate of growth is the annualized rate over a 10-year period, G/GDP is the fraction of GDP spent by government (including social transfers) over the preceding 10-year period, and BA/GDP represents business assets as a fraction of GDP for the preceding 10-year period.]

Again, it’s the annualized rate of growth over a 10-year span, as a function of G/GDP (fraction of GDP spent by governments at all levels) in the preceding 10 years. The new term, BA/GDP, represents the constant-dollar value of private nonresidential assets (i.e., business assets) as a fraction of GDP, averaged over the preceding 10 years. The idea is to capture the effect of capital accumulation on economic growth, which I didn’t do in the earlier analysis.

Maximum GDP growth seems to occur when G/GDP is 2-4  percent. That is somewhat less than the 7-percent share of GDP that was spent on national defense, public order, and safety in 2010. The excess represents additional “insurance” against predators, foreign and domestic. (The effectiveness of the additional “insurance” is a separate question, though I am inclined to err on the side of caution when it comes to defense and law enforcement. Those functions are not responsible for the economic woes facing America’s taxpayers.)

If G/GDP reaches 55 percent — which it will if present entitlement “commitments” are not curtailed — the “baseline” rate of growth will shrink further: probably to less than 2 percent. And thus America will remain mired in its Mega-Depression.

*     *     *

Source notes:

Estimates of real and nominal GDP, back to 1790, come from the feature “What Was the U.S GDP Then?” at

Estimates of government spending (federal, State, and local) come from; Statistical Abstracts of the United States, Colonial Times to 1970: Part 2. Series Y 533-566. Federal, State, and Local Government Expenditures, by Function; and the Bureau of Economic Analysis (BEA), Table 3.1. Government Current Receipts and Expenditures (lines 34, 35).

I found the amount spent by governments (federal, State, and local) on national defense and public order and safety by consulting BEA Table 3.17. Selected Government Current and Capital Expenditures by Function.

The BEA tables cited above are available here.

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In the original post (above) I note that maximum GDP growth occurs when government spends two to four percent of GDP. The two-to-four percent range represents the share of GDP claimed by American governments (federal, State, and local) throughout most of the 19th century, when government spending exceeded five percent of GDP only during the Civil War.

Of course, until the early part of the 20th century, when Progressivism began to make itself felt in Americans’ tax bills, governments restricted themselves (in the main) to the functions of national defense, public order, and safety — the terms used in national-income accounting. It is those functions — hereinafter called defense and justice — that foster liberty and economic growth because they protect peaceful, voluntary activity. Effective protection probably would cost more than four percent of GDP in these parlous times. But an adequate figure, except in the rare event of a major war, is probably no more than seven percent of GDP — the value for 2010, which includes the cost of fighting in Iraq and Afghanistan.

In any event, government spending — even on defense and justice — is impossible without private economic activity. It is that activity which yields the wherewithal for the provision of defense and justice. Once those things have been provided, the further diversion of resources by government is economically destructive. Specifically, from “Estimating the Rahn Curve” (above):

It is possible to obtain a rough estimate of the downward sloping portion of the Rahn curve by focusing on two eras: the post-Civil War years 1866-1890 — before the onset of “progressivism,” with its immediate and strong negative effects — and the post-WWII years 1946-2009. Thus:

Est Rahn curve rough sketch

My rough estimate is appropriately “fuzzy” and somewhat more generous than Daniel Mitchell’s [in “The Impact of Government Spending on Economic Growth”], which is indicated by the heavy black line. In light of my discussion of the shifting composition of G as G/GDP becomes relatively large, I  have followed the slope of the trend line for 1792-2010; that is, every 1 percentage-point increase in G/GDP yields a decrease in the growth rate of about 0.06 percent. That seemingly small effect becomes a huge one when G/GDP rises over a long period of time (as has been the case for more than a century, with no end in sight).

The following graphs offer another view of the devastation wrought by the growth of government spending — and regulation. (Sources are given in “Estimating the Rahn Curve.”) I begin with the share of GDP which is not spent by government:

Est Rahn curve sequel_priv GDP as pct total GDP

A note about my measure of government spending is in order. National-income accounting purists would insist that transfer payments (mainly Social Security, Medicare, and Medicaid) should not count as spending, even though I count them as such. But what does it matter whether money is taken from taxpayers and given to retired persons (as Social Security) or to government employees (as salary and benefits) or contractors (as reimbursement for products and services delivered to government)? All government spending represents the transfer of claims on resources from persons who earned those claims to other persons, who either did something of questionable value for the money (government employees and contractors) or nothing (e.g., retirees).

In any event, it is obvious that Americans enjoyed minimal government until the early 1900s, and have since “enjoyed” a vast expansion of government. Here is a closer look at the trend from 1900 onward:

Est Rahn curve sequel_private GDP pct total GDP since 1900

This is a good point at which to note that the expansion of government is understated by the growth of government spending, which only imperfectly captures the effects of the rapidly growing regulatory burden on America’s economy. The combined effects of government spending and regulation can be seen in this “before” and “after” depiction of growth rates:

Est Rahn curve sequel_growth rate of private GDP

(I omitted the major wars and the Great Depression because their inclusion would give an exaggerated view of economic growth in the aftermath of abnormally suppressed private economic activity.)

The marked diminution of growth  after 1900 has led to what I call America’s Mega-Depression. Note the similarity between the downward path of private sector GDP (two graphs earlier) and the downward path of the Mega-Depression in the following graph:

Est Rahn curve sequel_mega-depression

What is the Mega-Depression? It is a measure of the degree to which real GDP has fallen below what it would have been had economic growth continued at its post-Civil War pace. As I explain here, the Mega-Depression began in the early 1900s, when the economy began to sag under the weight of Progressivism (e.g., trust-busting, regulation, the income tax, the Fed). Then came the New Deal, whose interventions provoked and prolonged the Great Depression (see, for example, this, and this). From the New Deal and the Great Society arose the massive anti-market/initiative-draining/dependency-promoting schemes known as Social Security, Medicare, and Medicaid. The extension and expansion of those and other intrusive government programs has continued unto the present day (e.g., Obamacare), with the result that our lives and livelihoods are hemmed in by mountains of regulatory restrictions.

Regulation aside, government spending — except for defense and justice — is counterproductive. Not only does it fail to stimulate the economy in the short run, but it also robs the economy of the investments that are needed for long-run growth.

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[W]e have some new research from the United Kingdom. The Centre for Policy Studies has released a new study, authored by Ryan Bourne and Thomas Oechsle, examining the relationship between economic growth and the size of the public sector.

The chart above compares growth rates for nations with big governments and small governments over the past two decades. The difference is significant, but that’s just the tip of the iceberg. The most important findings of the report are the estimates showing how more spending and more taxes are associated with weaker performance.

Here are some key passages from the study.

Using tax to GDP and spending to GDP ratios as a proxy for size of government, regression analysis can be used to estimate the effect of government size on GDP growth in a set of countries defined as advanced by the IMF between 1965 and 2010. …As supply-side economists would expect, the coefficients on the tax revenue to GDP and government spending to GDP ratios are negative and statistically significant. This suggests that, ceteris paribus, a larger tax burden results in a slower annual growth of real GDP per capita. Though it is unlikely that this effect would be linear (we might expect the effect to be larger for countries with huge tax burdens), the regressions suggest that an increase in the tax revenue to GDP ratio by 10 percentage points will, if the other variables do not change, lead to a decrease in the rate of economic growth per capita by 1.2 percentage points. The result is very similar for government outlays to GDP, where an increase by 10 percentage points is associated with a fall in the economic growth rate of 1.1 percentage points. This is in line with other findings in the academic literature. …The two small government economies with the lowest marginal tax rates, Singapore and Hong Kong, were also those which experienced the fastest average real GDP growth.

My own estimate (see above) for the United States, is that

every 1 percentage-point increase in G/GDP yields a decrease in the growth rate of about 0.07 percent. That seemingly small effect becomes a huge one when G/GDP rises over a long period of time (as has been the case for more than a century, with no end in sight).

In other words, every 10 percentage-point increase in the ratio of government spending to GDP causes a not-insignificant drop of 0.7 percentage points in the rate of growth. That is somewhat below the estimate quoted above (1.1 percentage points), but surely it is within the range of uncertainty that surrounds the estimate.

Why Are Interest Rates So Low?


Interest rates reflect the supply of and demand for funds. Money is tighter now than it was in the years immediately before the onset of the Great Recession. Tim Congdon explains:

In the three years to October 2008, the quantity of money soared from $10,032 billion to $14,186 billion, with a compound annual growth rate of just over 12 per cent. The money growth rate in this period was the highest since the early 1970s. Indeed, 1972 and 1973 had many similarities to 2006 and 2007, with bubbling asset markets, buoyant consumer spending and incipient inflationary pressures. On the other hand, in the three years from October 2008 the quantity of money was virtually unchanged. (It stood at $14,340 billion in October 2011.) In other words, in the three years of the Great Recession the quantity of money did not increase at all.

But if money is relatively tight, why are interest rates so low? For example, as of October 2011, year-over-year inflation stood at 3.53 percent (derived from CPI-U estimates, available here). In October, Aaa bond yields averaged 3.98 percent, for a real rate of about 0.4 percent; Baa bond yields averaged 5.37 percent, for a real rate of about 1.8 percent; and conventional mortgages averaged 4.07 percent, for a real rate of about 0.5 percent. By contrast, in 1990-2000, when the CPI-U rose at an annual rate of 3.4 percent, real Aaa, Baa, and conventional mortgage rates hovered in the 4-6 percent range. (Real rates are derived from interest rate statistics available here.)

The reason for these (and other) low rates is that borrowers have become less keen about borrowing; that is, they lack confidence about future prospects for income (in the case of households) and returns on investment (in the case of businesses). Why should that be?

If the post-World War II trend is any indication — and I believe that it is — the American economy is sinking into stagnation. Here is the long view:

  • 1790-1861 — annual growth of 4.1 percent — a booming young economy, probably at its freest
  • 1866-1907 — annual growth of 4.3 percent — a robust economy, fueled by (mostly) laissez-faire policies and the concomitant rise of technological innovation and entrepreneurship
  • 1970-2010 — annual growth of 2.8 percent – sagging under the cumulative weight of “progressivism,” New Deal legislation, LBJ’s “Great Society” (with its legacy of the ever-expanding and oppressive welfare/transfer-payment schemes: Medicare, Medicaid, a more generous package of Social Security benefits), and an ever-growing mountain of regulatory restrictions.

(From this post, as updated in this one.)

And here is the post-World War II view:

Annual change in real GDP 1948-2011

This trend cannot be reversed by infusions of “stimulus spending” or “quantitative easing.” It reflects an underlying problem that cannot be cured by those simplistic macroeconomic “fixes.”

The underlying problem is not “tight money,” it is that American businesses are rightly pessimistic about an economic future that is dominated by a mountain of debt (in the form of promised “entitlements”) and by an ever-growing regulatory burden. Thus business investment has been a decline fraction of private-sector GDP:

Non-household GPDI fraction GDP - G
Derived from Bureau of Economic Analysis, Table 1.1.5. Gross Domestic Product (available here). The numerator is gross private domestic investment (GPDI, line 7) less the residential portion (line 12). The denominator is GDP (line 1) less government consumption expenditures and gross investment (line 21).

As long as business remains (rightly) pessimistic about the twin burdens of debt and regulation, the economy will sink deeper into stagnation. The only way to overcome that pessimism is to scale back “entitlements” and regulations, and to do so promptly and drastically.

In sum, the present focus on — and debate about — conventional macroeconomic “fixes” (fiscal vs. monetary policy) is entirely misguided. Today’s economists and policy-makers should consult Hayek, not Keynes or Friedman or their intellectual descendants. If economists and policy-makers would would read and heed Hayek — the Hayek of 1944 onward, in particular — they would understand that our present and future economic morass is entirely political in origin: Failed government policies have led to more failed government policies, which have shackled both the economy and the people.

Economic and political freedoms are indivisible. It will take the repeal of the regulatory-welfare state to restore prosperity and liberty to the land.