Economic Questions About the “Temple of Democracy”

Is it true, as House Speaker Nancy Pelosi claimed, that Congress is a temple of democracy (“U.S. Capital Police Officer Brian D. Sicknick, who died after assault on Capitol, Protected With a Kind Touch,” Washington Post, January 8, 2021)? She said:

The violent and deadly act of insurrection targeting the Capitol, our temple of American Democracy, and its workers was a profound tragedy and stain on our nation’s history.

This invites a reflection on how Congress, democracy, and the state work. Any moral value attached to these institutions must be consistent with, although not limited to, their likely functioning and consequences.

Anthony de Jasay is one of the many economists who, over the last eight decades of so, have tried to understand the state (the whole apparatus of government). For him, the state is, in positive reality, a redistributive machine that favors some individuals and harm others. One’s ultimate judgement on the state depends also on moral values related to what the state should do. If it is considered good to harm some individuals in order to benefit others (and if de Jasay’s positive analysis is correct), then the state is good. If coercively harming some for the benefit others is morally rejected, then the state is morally bad.

Could we, de Jasay asked, imagine a sort of state that would not be a redistributive Leviathan, that would not be in the business of redistributing pleasure and pain, happiness and submission, but would instead only aim at preventing invasion by, or evolution of, such a state? A sort of state that would not aim at governing? This minimal state, he calls the “capitalist state.” It has never existed anywhere near its pure form but some systems of political authority have been farther from it than others. Many anarchist theorists such as de Jasay think that the capitalist or minimal state cannot survive because it would, by its very logic, soon grab the redistributive function in order to reward its supporters at the cost of other (less loyal) subjects. The state who democratically steals from Paul to give to Peter because the Peters are more numerous than the Pauls is one instantiation of that.

In this perspective, the temple of democracy appears more like a den of thieves and a gang of bullies. It is often difficult to distinguish the state from an organized and heavily armed mob. Although I have come to believe that Lysander Spooner’s attack on the state on that basis is weak, it is still worth reading his 1870 pamphlet The Constitution of No Authority, which describes the democratic state of being “a secret band of robbers and murderers.”

The economic and philosophical issues involved are more complicated than they may appear at first sight. For example, suppose that the state is far from the capitalist state but does prevent the installation of another state that would be even worse—or that it prevents the descent into violent anarchy, as Thomas Hobbes feared. Many politicians commenting on last week’s troubles seem to believe, strangely, that, hic et nunc, anarchy is a more pressing problem than tyranny. (In the Washington Post, David Ignatius even uses an oxymoron: “the Trump anarchists”!) The mob was in effect calling for more state power even if some of its participants may have been duped into believing the contrary.

Little exercise: Why is it easier to be duped on the political market than on ordinary economic markets?

And all this is not speaking of what sort of democracy Pelosi is referring to. If it is majoritarian democracy, which majority do specific electoral methods and institutions favor? What happens when the majority wants both A and non-A, as the paradox of voting and Arrow’s impossibility theorem show is unavoidable? If it is not majoritarian democracy, which minority rules? Does the specific sort of democracy used pursue an illusory “will of the people”? On these questions, economics and, in its wake, political science have had much to teach over the past few decades. (Many of my Econlog and Econlib pieces have been concerned with these issues.)

At any rate, it is not sufficient to simply assume that glorified individuals (“lawmakers”) voting laws thousands of pages long (without knowing what’s in them except for their pious labels and professed intentions) constitute a temple of democracy.

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Three Economists Walk Into a Discussion, Part 1

On September 15, the Stanford Institute for Economic Policy had a virtual discussion about both Covid-19 and the views of the two major presidential candidates. The moderator was Gopi Shah Goda of SIEPR and the two interviewees were Kevin Hassett, who had been chairman of the Council of Economic Advisers under President Trump and Austan Goolsbee, who had had the same job under President Obama.

I watched it live.

I’ll hit some highlights and make some comments. This is Part 1.

At 4;24, Goda asks: “What are the right economic policies to provide relief to those whose livelihoods have been adversely affected by the pandemic and stimulate the economy? How much spending should we do in the short run on Covid relief issues like extended and extra unemployment and stimulus payments?”

She started with Kevin, and I got my first big disappointment. Notice that she asked two questions. Kevin, though, answered only the second. He gave a big number for spending and didn’t mention any other means of relief: deregulating, letting people work in occupations without having to get a license, allowing restaurants to sell food, allowing restaurants to open, getting the FDA to allow people to use home tests for the coronavirus.

And his number for additional federal spending was big: $1.5 to 2.5 trillion.

Goolsbee’s answer was what I would have predicted: lots more federal spending and a big bailout of state and local government.

14:50: Kevin defines classical liberals like me out of the discussion with “I don’t think there’s anyone who thinks there shouldn’t be state and local aid.”

15:10: Austan gets it right: There are a great number of people who are opposing state and local aid.

17:10: Austan has a funny line that riffs on the old can opener joke: “This is not just ‘assume we have a can opener; let’s assume we have the greatest of all can openers.’” Then he says that you wouldn’t want to use the price system to allocate the vaccine.

23:43: Goda asks about the differences between the two candidates’ tax policies.

24:20: Austan says that Biden wants to raise taxes on high-income people and on corporations. What’s important, he says, is what the money is used for. If the added revenue were used to provide universal child care, that would be very pro-growth, says Austan.

But wait. This is not a discussion between politicians. This is a discussion between economists. What’s the market failure that would justify government provision of child care? Austan doesn’t  even mention one. If my wife and I, when we were younger, had wanted to hire child care so she could work, we would have compared her after-tax income to our net-of-child-care-tax-credit cost of hiring child care. I showed in a piece in the Journal of Policy Analysis and Management in the late 1980s that the structure of the tax credit at the time could be seen as a way of offsetting the distorting high marginal tax rate of the second earner, typically the women. But Austan isn’t making that argument; in fact, for high earners, he wants an even higher marginal tax rate. Moreover, various changes in the tax law have been the tax credit much less pro-growth.

At about the 25:00 point, they get into a real substantive discussion about what happened to real wages and real family incomes after the tax cut. They literally disagreed about what the numbers were. Austan said that the effects of the tax cut on real median family incomes were disappointing. Kevin said that in a debate with Austan in Philadelphia a few years earlier, he had predicted that real median family income would rise by $4,000 and that the data that just came in (which were pre-pandemic), the number was actually a $4,900 gain. Kevin also pointed out that over 6 million people had moved out of poverty, the biggest drop since the War on Poverty had begun under LBJ. Kevin also pointed out that he had predicted that income inequality would fall as a result of the 2017 tax cut and that it had fallen.

Aside for non-economists: Why would reductions in income tax rates on corporations and on high-income individuals even be expected, at a theoretical level, to increase real wages? By increasing the incentive to invest in capital. The greater the capital to labor ratio, the higher are real wages.

29:10: Kevin catches Austan’s characterization of the proposed Biden tax hike as an increase in taxes on billionaires. Kevin points out that it would apply to people making over $400K annually. He then expresses optimism that Biden will hold off on raising marginal tax rates, due to the state of the economy.

31:00: Here is where Austan gives numbers on increases in real median family income that differ dramatically from Kevin’s data.

Aside:  As a viewer, I was able to type a question on line and I did. We learned near the end from Goda that a number of viewers had asked a similar question and it was this: “You two are disagreeing on actual facts; show us your sources.” I asked Mark Duggan, the SIEPR director, for the source and he sent me the link to the Census data that Kevin had cited. Kevin turned out to be right about the large growth in median family income of families, including black and Hispanic families. I’m still scratching my head about what data Austan had in mind.

32:00: Kevin says that growth in median real family income in the first 3 years of Trump vastly exceeded any 3-year period under Obama.

32:10: Goda lays out the deficit issue nicely and asks about the two candidates’ plans.

In Part 2, I’ll cover the rest of the discussion.

 

 

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O’Rourke on the Millennials and Socialism

As soon as children discover that the world isn’t nice, they want to make it nicer. And wouldn’t a world where everybody shares everything be nice? Aw … kids are so tender-hearted.

But kids are broke — so they want to make the world nicer with your money. And kids don’t have much control over things — so they want to make the world nicer through your effort. And kids are very busy being young — so it’s your time that has to be spent making the world nicer.

This is from P.J. O’Rourke, “This is why millennials adore socialism,” New York Post, September 12, 2020.

Lots of good stuff here. I do want to address one error, an error that P.J. seems to agree with “progressives” about. He writes:

That would have been in the 19th century — during America’s first “Progressive Era” — when mechanization liberated kids from onerous farm chores and child labor laws let them escape from child labor.

Actually, it wasn’t child labor laws that let them escape from child labor: it was economic growth. As people grew wealthier, parents no longer needed their children to be productive. Instead, they could support the family without their children’s income and so instead could send their kids to school. And incidentally, as E.G. West showed in Education and the State, the state in Britain was not a major funder of education and yet schooling was widespread.

It is true that child labor laws reduced child labor around the edges. But they’re an instance of what is almost a general law in economic policy. I’m using “general law” in the sense of regularity. The laws that pick up enough support are usually ones that require people to do what the majority are doing already. I believe for example, although I can’t find the source immediately, that the legislated 40-hour work week came about only after it had become standard practice.

Another good excerpt:

Intellectuals like Marxism because Marx makes economics simple — the rich get their money from the poor. (How the rich manage this, since the poor by definition don’t have any money, is beyond me. But never mind.)

This excerpt reminds me of a great paragraph from Paul Krugman’s 1990 book The Age of Diminished Expectations that I used in the first edition of The Concise Encyclopedia of Economics, in a sidebar on the article “Distribution of Income” by Frank Levy:

One reason that action to limit growing income inequality in the United States is difficult is that the growth in inequality is not a simple picture. Old-line leftists, if there are any left, would like to make it a single story—the rich becoming richer by exploiting the poor. But that’s just not a reasonable picture of America in the 1980s. For one thing, most of our very poor don’t work, which makes it hard to exploit them. For another, the poor had so little to start with that the dollar value of the gains of the rich dwarfs that of the losses of the poor. (In constant dollars, the increase in per family income among the top tenth of the population in the 1980s was about a dozen times as large as the decline among the bottom tenth.)

The O’Rourke piece is excerpted from P.J. O’Rourke, A Cry from the Far Middle, 2020.

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Rosewater’s River of Wealth

Second in a #ReadWithMe Series

 

The Rosewater Foundation’s inflation-adjusted $87 million endowment represents roughly $700 million, not billion, in today’s dollars.  Nothing to sneeze at, but I apologize for the error in my first entry.  I must have had federal stimulus bills on my mind…

 

I have now read the second quarter of Rosewater.  Eliot Rosewater has walked away from high culture, a beautiful French wife, and charitable support of the arts – returning instead to small-town Indiana, where he can help “these discarded Americans, even though they’re useless and unattractive.”  “That is going to be my work of art”, he gushes (44).  With the help of Southern Comfort and the Foundation’s millions, Eliot becomes a social worker, therapist, coach, and benefactor to the downtrodden.

 

In this fun and rich continuation, I will focus on three economic themes.

 

First, the human condition has been one of misery:  before the 19th century, everybody was poor (there were no antibiotics, novocaine, or indoor plumbing in the wealthiest of courts).  It is easy to understand despair in the face of famine, low life expectancy, and limited socioeconomic opportunity.  But it is harder to understand why the small percentage of humanity that was able to escape abject poverty feels malaise rather than gratitude.  The portmanteau “affluenza” was coined in the early 1950s to describe either “feelings of guilt, lack of motivation, and social isolation experienced by wealthy people” or “extreme materialism and consumerism associated with the pursuit of wealth and success and resulting in a life of chronic dissatisfaction, debt, overwork, stress, and impaired relationships.”  A decade earlier, Joseph Schumpeter had warned that capitalism might contain the cultural seeds of its own destruction.  Vonnegut writes of “one more kid rotten-spoiled by postwar abundance” (42) and Sylvia Rosewater suffers from samaritophobia, which could be quickly summarized as rich guilt (52).  Why the high rates of depression in rich countries?  Comedian Tom Lehrer joked of a Dr. Samuel Gall (inventor of the gallbladder), who was able to retire at an early age, because he had specialized in diseases of the rich.  He was on to something.

 

Second, a delightful and curmudgeonly friend once described the modern American university as “a country club – with a brothel attached to it.”  As a libertarian, I am not so worried about the students’ after-hours activities… assuming, of course, that there are hours in the first place, and that the students aren’t goofing off around dumbed-down classes with grade inflation.  But add a hearty dose of post-Marxist identity politics, and you’ve got real trouble.  So I was amused when Senator Rosewater appealed to his alma mater.  If the mother is nourishing, she is also a minister of culture, a transmitter of social mores:  “Ask yourself what Harvard would think of you now” (120).  Eliot reassures his father than an annual donation of $300,000 from the Foundation buys him plenty of respect.

 

Third, we have the most interesting economic theme in the first half of the book:  the Money River, Eliot’s theory of income and wealth (122-124).

 

I close with some questions:

  1. What virtues are required to sustain capitalism? Does capitalism indeed contain the seeds of its own destruction?  Is capitalism sustainable if the culture of savings that leads to wealth engenders a culture of consumption?
  2. Why is wealth icky, when capitalism is plainly the greatest anti-poverty program ever? What about the post-1800 growth, or the post-1980 massive drop in extreme poverty – or the 130,000 people around the world who were lifted out of poverty, yesterday and every day, without a fuss or a headline?
  3. There are three actors (or… dare I use the word?…  classes?) around the River of Wealth:  born slurpers, experts who help the slurpers, and the masses who don’t know about the river – and a fourth, rare group, those who are guided to the riverbank.  What do you make of this?  On the one hand, the theory holds that one is simply born into a certain class, and that work and merit are irrelevant.  On the other hand, could we not translate the River of Wealth as the much less romantic “human capital”?  Some acquire it readily, but many are excluded (because of a failed K-12 government monopoly, college tuitions bloated by federal subsidies, regressive job licensing requirements, mass incarceration, and the million other obstacles of the swarms of regulations that harass the poor and eat out their substance).

 

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Stop asking the Fed about inequality (and start asking about inflation)

At a recent press conference, I was dismayed to see a number of reporters asking Jay Powell about inequality—an issue far beyond the scope of monetary policy—while asking few questions about the highly questionable current stance of monetary policy.

A recent Yahoo Finance article illustrates the confusion:

Federal Reserve Chairman Jerome Powell on Wednesday acknowledged economic inequality in the United States but said monetary policy tools can only do so much to narrow the income gap.

Research from within the Fed itself, however, suggests that the central bank may be more effective when policymakers pay mind to income inequality while designing policy tools.

Actually, inequality is a long run issue and the Fed cannot do anything to address the problem.  Money is neutral in the long run.

Pointing to previous economic research, Cairó and Sim note that higher-income groups tend to save more than lower-income groups (or in economic terms, have a lower marginal propensity to consume). The authors argue that higher-income earners can “overaccumulate” financial wealth and sustain high savings rates; lower-income earners are more likely to spend larger shares of their income just to make ends meet.

This presents a dilemma for the Fed, which broadly wants to discourage saving and spur consumption (or in economic terms, drive aggregate demand) to fuel an economic recovery.

This is a common mistake, conflating “consumption” with “aggregate demand”. Most textbooks say the opposite, that monetary stimulus is aimed at boosting investment.  Because saving equals investment, this implies monetary policy is expected to boost saving as well.  Indeed both saving and investment are procyclical, even as a share of GDP.  They both rise faster than GDP during booms and fall faster than GDP during recessions. (Note that I am responding to the Yahoo article and not the scientific paper, which I have not read.)

I also disagree with the standard textbook description of the transmission mechanism.  Aggregate demand equals consumption plus investment plus government output plus net experts, and hence you can think of monetary policy as being intended to boost the sum of those four categories, measured in nominal terms.  Or more simply, boost NGDP.  Thus Zimbabwe monetary policy sharply boosted nominal spending in 2008, even as real consumption and real investment plunged.  (Try explaining this to an MMTer.)

The suggestion: an “optimal” monetary policy prioritizing the reduction in unemployment to improve the welfare of lower-income wage earners – even at the expense of welfare losses to higher-income earners holding onto financial assets.

The monetary policy that boosts employment in the short run is the same policy that boosts real equity prices in the short run—expansionary policy.  In the long run, the optimal monetary policy keeps employment close to the natural rate, and that’s also the monetary policy that’s best for equity prices.

Readers of this blog know that I currently favor a more expansionary monetary policy.  But not because of its effects on inequality.  In the short run, a more stimulative policy would help low wage workers and it would help stockholders.  And in the long run, money is neutral.  If you want to do something about inequality, look elsewhere.

Meanwhile reporters need to ask the Fed why they don’t intend to hit their inflation target in 2022.  And keep asking the question over and over again until Jay Powell provides an intelligible answer.

 

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