Socialism reduces man to a science experiment; Communism reduces man to a number

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Over the last couple of months I have been reading three distinct books that uniquely and richly deal with a societal and political challenge that is ever before us: the tendency of mankind to place too much hope and power in class of rulers, and the tendency of those rulers to work to assume more power and decision-making authority over the ruled.  The books are 19th Century French Economist Claude Frederic Bastiat’s  The Law, Fyodor Dostoevsky’s Crime and Punishment, and Aleksandr Solzhenitsyn’s In the First Circle. The three books represent authors of different time eras, professional and political experiences, and in a couple of cases, imprisonment and exile. Each powerfully attacks these aforementioned societal and political challenges in such a way that still resonates in the modern Western era given our constant flirtation with socialism and of socialism’s growing popularity as a political response to Trumpist populism. I also find it fascinating and tragic that early prophets such as Bastiat and Dostoevsky foresaw the catastrophes that socialism would bring while Solzhenitsyn lived them. They key question for today is: are we still listening?

I begin with Bastiat from a chronological perspective as well as the fact that he served as an early prophet to the ills of socialism. Bastiat, as a French economist, philosopher, and statesman in France in the mid-1800s, is mostly known for his remarkable intellectual stands against mercantilism and protectionism. He also had to contend and argue against pervasive French dirigiste statism and had plenty of exposure and debates with leading philosophers and legislators who espoused Socialism. As such, he forewarns us of the ills of Socialism extensively in his book The Law. Here are a few notable excerpts:

How is it that the strange idea of making the law produce what it does not contain – prosperity, in a positive sense, wealth, science, religion – should ever have gained ground in the political world? The modern politicians, particularly those of the Socialist school, found their different theories upon one common hypothesis; and surely a more strange, a more presumptuous notion, could never have entered a human brain.

They divide mankind into two parts. Men in general, except one, form the first; the politician himself forms the second, which is by far the most important.

In fact, they begin by supposing that men are devoid of any principle of action, and of any means of discernment in themselves; that they have no initiative; that they are inert matter, passive particles, atoms without impulse; at best vegetation indifferent to its own mode of existence, susceptible of assuming, from an exterior will and hand an infinite number of forms, more or less symmetrical, artistic, and perfected….

…the Socialists look upon mankind as a subject for social experiments…the relations between mankind and the legislator appear to be the same as those that exist between the clay and the potter. Moreover, if they have consented to recognize in the heart of man a capability of action, and in his intellect a faculty of discernment, they have looked upon this gift of God as a fatal one, and thought that mankind, under these two impulses, tended fatally to ruin.

Whilst mankind tends to evil, they incline to good; whilst mankind is advancing towards darkness, they are aspiring to enlightenment; whilst mankind is drawn toward vice, they are attracted by virtue. And, this granted, they demand the assistance of force, by means of which they are to substitute their own tendencies for those of the human race. 

Bastiat has a number of retorts to this tendency of politicians to want to treat mankind as their own science experiment:

Truly it would be well if these visionaries, who think so much of themselves and so little of mankind, who want to renew everything, would only be content with trying to reform themselves, the task would be arduous enough for them…

…One of the strangest phenomena of our time, and one that will probably be a matter of astonishment to our descendants, is the doctrine that is founded upon this triple hypothesis: the radical passiveness of mankind – the omnipotence of the law – the infallibility of the legislator: this is the sacred symbol of the party that proclaims itself exclusively democratic: It is true that it professes to be social. So far as it is democratic, it has unlimited faith in mankind. So far as it is social, it places mankind beneath the mud.

Bastiat’s prescience is a marvel to behold, with the tragic exception to date on the part that descendants would scoff at, rather than continually marvel at, the impossible notion resting upon the triple hypothesis that we can achieve utopia through democratic socialism.

As a French statesmen, social scientist, and economist, one might expect Bastiat to have a great amount to say about the subject of Socialism. I am perhaps even more intrigued by what a 19th Century Tsarist era Russian novelist, once imprisoned and then forced to live in exile for “radicalism” (he joined a circle advocating for abolishing Russian serfdom), had to say on the subject given the horrors that would beset Russia a few decades after his eminence. The themes of anti-radicalism in general is a prominent theme throughout Dostoevsky novels. Recency of reading is perhaps the only reason a certain setting within Crime and Punishment resonates with me at present.  The setting itself is the makings of high drama – an investigator, Porfiry Petrovich, has suspicions of the main character, Raskolnikov, as a committer of a recent murder and is feeling him out in a normal social setting. One particular scene that helps Porfiry set the stage for a line of questioning on who has rights to judge and oppress whom on earth is set up by a debate between the investigator and Raskilnikov’s friend, Razumikhin, in which Porfiry goads him into attacking socialist thought in an attempt to get Raskilnikov’s own thoughts on the matter. It was common for Dostoevsky to speak through his characters. I believe Razumikhin speaks for Dostoevsky when he states this regarding socialists:

Their views are well known: crime is a protest against the abnormality of the social set-up – that alone and nothing more, no other causes are admitted…Hence if society itself is normally set up, all crimes will at once disappear, because there will be no reason for protesting and everyone will instantly become righteous. Nature isn’t taken into account, nature is driven out, nature is not supposed to be! With them, it’s not mankind developing all along in a historical, living way that will finally turn by itself into a normal society, but, on the contrary, a social system, coming out of some mathematical head, will at once organize the whole of mankind and instantly make it righteous and sinless.

One can sense not only Dostoevsky’s cynicism related to the “mathematical head” but also skepticism regarding the desire to use government means and rulers to try to reform and direct society in a vain attempt to eradicate human flaws.

Despite the prophecies of Dostoevksy, one can’t imagine he would have foreseen just how pernicious these “mathematical heads” would become in future Russian generations. These molders of mankind into lumps of clay would, to use Bastiat’s phrase, truly place man into the mud. Or as the statement attributed to Stalin goes, more than treating men as clay, men were treated as millions of broken eggs in a tragic attempt to create an omelette concocted in a “great” mathematician’s head. This tragic reality is captured throughout the corpus of Aleksandr Solzhenitsyn’s works with such masterpieces as One Day in the Life of Ivan Denisovich  and The Gulag Archipelago.  Perhaps there is no work in which Solzhenitsyn displays such profound sadness at a vain attempt at utopia gone horrifically wrong combined with clarity of moral purpose and tragic irony and wit as in his novel, In the First Circle.

The epic novel is far too rich and deep for me to describe in detail here (for a great podcast introduction to the book, visit EconTalk), but some key context: the novel’s name itself belies the artist’s craft and wit – the concept of the “First Circle” was adopted as a literary device from Dante’s Inferno. The first circle of hell was the highest and most painless level of hell in which philosophers and other world notables who did good but without knowing the true God were relegated. Similarly, the novel’s prison settings is the sharaska – a forced work-camp for those Russian political prisoners who had some particular skill (engineers, physicists) that allowed them to serve prison sentences in relatively livable conditions compared to the deprivations of the Siberian gulags.

There is a common chilling theme throughout the book, at one point expressed by one of the free women workers who toil alongside the male prisoners by day – “they (the state) can do anything they want to us.” But specifically to the point in my title, there is a powerful and pithy statement made by one of the prisoners that succinctly captures the essence of the horrors of communism. In this context, as new prisoners are brought into the camp, the speaker says to a fellow prisoner who happens to be a still committed communist:

What century are we living in? Numbers sewn on human beings? Tell me, Lev Grigorievich, is this what you call progress?

Indeed, a broader theme of the book is that everyone is trapped in this system – it is a prison to all, and all within the country are mere numbers, whether one was officially in prison or not. One diplomat in the book tells his sister-in-law:

You see this circle? That’s our country. That’s the first circle. Now here’s the second. A circle with a large diameter. That is mankind at large. You would think that the first forms a part of the second, wouldn’t you? Not in the least! There are barriers of prejudice. Not to mention barbed wire and machine guns. To break through, physically or spiritually, is well-nigh impossible. Which means that mankind, as such, does not exist. There are only fatherlands, everyone’s fatherland is alien to everyone else’s….”

I love when I see parallels of themes between books, and indeed, within In the First Circle  Solzhenitsyn echoes the point in the novel made (and captured above) by Bastiat about “reforming society” and whether we should focus on ourselves or of society:

Where should you start reforming the world? With other people? Or with yourself?

In summary – what I find so moving and powerful about the connections between these works of art from great authors is the healthy and much-needed skepticism regarding whether legislators or autocrats will solve humanity’s ills, that these ills are impossible to remove completely, that the best way to reduce them is setting men at liberty, and the captured fear and progression of what men will do to one another once they hold unrelenting and unlimited power over others – man turns into clay, mud, mathematical, numbers, slaves…

It also goes without saying that I recommend all three books for reading.

 

Aleksandr Solzhenitsyn’s Masterpiece – In the First Circle

I try to use the praise of “Masterpiece” sparingly, but Aleksandr Solzhenitsyn’s “In the First Circle” is worthy of the mantle. I have never read anything quite like it. Borrowing from a sentiment I once heard expressed regarding another powerful book, I am envious of those who may read it for the first time, as it is an experience I can never obtain again.
It’s theme is dark and tragic. The title itself is taken from Dante’s Inferno’s description of the first circle of hell. And yet, it is full of humor and irony. It will make you cry. It will make you laugh. It is polyphonic – meaning it has no singular character but captures the essence of the authoritarian prison-state of the Soviet Union through multiple and varied characters representing a wide range of backgrounds and current perspectives – everything from guards, diplomats, Secret Service officers, prisoners, wives separated from prisoners, non-communists, growing skeptics, committed communists, ex-soldiers, Christians, children of powerful men, powerful men thrown from power into prison, prosecutors, and more. It even spends significant text diving into the macabre psyche and motivations of Stalin. It is culturally and artistically rich, introducing well-placed quotes and references from Tolstoy, Turgenev, Hemingway, Liszt, Dostoevsky, Rimsky-Korsakov, to name a few. It is a spy-thriller, as the backdrop of the story that moves the narrative and connects many of the characters is related to the team of imprisoned engineers who are tasked with isolating the voice of a Soviet diplomat who attempts to reveal atomic bomb secrets to the Americans.
I have so many highlighted passages in my personal copy, but here is one snippet, in which one prisoner, who is awakened in prison to the hopeless evil of Communism, argues with one who still believes in the cause:
“Could you kindly explain these socialist ideals that you talk about? They’re nowhere to be seen at present. All right, maybe somebody’s botched the experiment, but when and where can we expect to see them; what do they amount to, eh? Socialism, of whatever variety, is a sort of caricature of the Gospel message. Socialism promotes only equality and a full belly, and that only by means of coercion…you’ll find equality and full bellies in any good pigsty! What a tremendous favor they have bestowed on us! Equality and plenty! Give us a moral society!”
A necessary book shopping tip is to make sure to get the full uncensored version In the First Circle as opposed to the author self-censored (in an attempt to get it past Soviet censors) The First Circle. I also recommend getting a physical copy, since the reader will appreciate the ability to flip back and forth to the notes on characters that begin the book.
Also – this EconTalk podcast is a great place to start to get a quick biography and background for the author as well as the historical context, meaning, and global impact and acclaim of the book at the time it started getting leaked to the West. The podcast also offers great practical tips for getting the most out of this rich and rewarding book. Perhaps most importantly, there are no spoilers in the podcast.

Russ Roberts on the Information Revolution, Politics, Yeats, and Yelling

One of my favorite Americans has long been Russ Roberts due to his towering intellect and the fact that he is a classically liberal/libertarian economist. Perhaps most importantly, he is a kind and thoughtful human being who can conduct an intellectual conversation without falling prey to outrage, which seems to be a lost art in today’s zeitgeist. I highly recommend his podcast EconTalk. In a recent episode, he did a rare monologue on the topic of our current divisive civil discourse in which he attributes our collective descent to a large degree on the information revolution and how we consume and relate to media, and even more troubling – how tribalism leads us as people to not be all that interested in objective truth so much as confirming our own views and biases and feeling outraged at a faceless enemy. He also indicates that today’s society at large lacks the ability to look at information with a healthy degree of skepticism.

In the interest of brevity I skip to his conclusions of how we can improve this situation as individuals while recommending listening to the full episode to get the depth and richness that only a full listen can provide. Still, his practical steps to take are worth posting as a summary for those who can’t devote an hour to the show:

  1. Humility – In Roberts’ words – We don’t know everything we think we do. I’ve learned to enjoy saying, ‘I don’t know.’ Admitting ignorance is bliss. Recognize, as Shakespeare suggested, ‘There are more things in heaven and earth than are dreamt of in your philosophy.’ Roberts is careful to point out with this topic that humility has its own risks if there is something that should be taken on with passion. Again, in Roberts’ words – “There ares some things we know. So we should stand by our principles. But we should be humble and aware of the possibility that some of those principles may not be correct.”
  2. Follow people on Facebook and Twitter who you don’t agree with, but try to make sure they are people who are relatively civil, or you risk sparking your own anger and outrage.
  3. Hold your anger for a day. This is a common theme from Roberts and one I have personally benefited from and adopted. I stand by it. If you feel anger and outrage coming into a post – hold it for a day and return to it. Almost every time I have either decided not to post the comment by modifying it or just ignoring it. It’s all right to ignore and not respond to outrage!
  4. Spend less time on the Internet, more time with human beings. This is my favorite of the advice Roberts gives.
  5. Try to notice when you enjoy outrage. “Just be aware of the fact that you may have that personality trait. I think many of us do. Then, when you find yourself feeling the sweetness of that anger, to realize that that’s a very unhealthy emotion, and that you should keep an eye on it.”

To reduce earnings inequality, we must first reduce healthcare insurance coverage costs

Given the tremendous amount of focus on income inequality these days and the common knee-jerk reaction to push harmful and counterproductive wealth redistribution policies as a palliative, it is timely and important that Mark Warshawsky of the Mercatus Center at George Mason University recently published a working paper exploring the largely heretofore ignored impact to earnings inequality of employer-based healthcare coverage as a component of total compensation.

The punchline is this: healthcare coverage costs have consistently risen faster than wages for most Americans over the past four decades. Given that healthcare coverage is relatively equal across the income ranges (it is roughly the same cost to an employer to cover a family of four in the lower 30th decile of earners as that of a family of four in the highest 10th decile of earners), rising healthcare costs will harm and encroach more grievously on the employer’s ability to increase take home earnings for lower income earners. In other words, increasing healthcare costs, even if growing at the same rate for lower income workers as higher income workers, will eat up more of a percentage of total compensation and restrain actual take-home earnings for lower income workers. Furthermore, most studies, including the high- visibility and high impact to public policy book by Thomas Piketty, Capital in the Twenty-first Century, have used after-tax earnings data to compare wealthy and poor, resulting in loud alarm bells on inequality. The impact? Politicians across the globe, including President Obama, declared income inequality the defining issue of our time, but based upon partially constructed data! Warshawky’s research more appropriately focuses on total compensation, which provides a more comprehensive assessment of what is going on, and in this picture is revealed a more tightly coupled growth between the income poles. This is not to say that inequality in earnings is not a problem we should address, it is more to say that policies to address it should focus on the actual cause – which is not the perceived ability of the wealthy to extract wealth at the expense of the poor, but a direct result of the pernicious impact of rising healthcare coverage costs that crowd out earnings growth for those in lower income categories.

Warshawsky uniquely pulls directly from the Bureau of Labor Statistics, which provides a full assessment of the total compensation aspects of American workers. Contrast that with most studies’ data sources from the IRS and Social Security that only include cash earnings, and one develops an understanding that Warshawsky has the superior data set. In previous research using BLS data from 1999-2006, Warshawsky was able to demonstrate that if it had not been for increases in healthcare coverage costs, earnings growth between income levels would have been roughly the same. In order to understand and present the data more clearly and in layman’s terms, I have taken Warshawsky’s data and plugged in and extrapolated where I could while backing into implicit assumption numbers on baseline earnings, healthcare coverage costs, and fringe benefits for middle decile income and comparing them to top 1% incomes from 1999-2006. The patterns revealed are that while overall total compensation increased in the same percentage range over the course of seven years (34% for middle income earners and 36% for high income earners), the differences were more substantial and divergent within the earnings and healthcare coverage components of total compensation. Whereas for middle income earners wages increased only 3.5% per year, wages increased by 4.4% per year for high-income earners. This may not seem like much for any given year, but over time the differences become pronounced – over the course of seven years, the compounded gain for high income earners was 35% growth in take home earnings compared to only 27% for lower income earners. The key constraint in earnings growth for middle income earners is the fact that healthcare coverage costs rose much faster as a percentage of total compensation – rising at an annual rate of 9.9% compared to a more modest 6% for higher income levels. As Warshawsky indicates, this meant a rise in healthcare coverage as a percentage of total compensation for middle income earners from 7.2% in 1999 to 10.4% by 2006. In comparison, higher wage earners saw a modest increase of 4.0% to 4.3%.Graphs 1 and 2 visually show the impacts. While the slopes of the topline are similar between the two income groups (both rising at annual rates just over 4%), the relative mix of earnings, healthcare coverage, and fringe benefits is dissimilar; healthcare coverage costs are constraining earnings increases for middle income earners. Graphs 3 and 4 represent the percentage of total compensation aspects of the different components of total compensation, further visual evidence of the forces at play here – healthcare coverage increases for middle income earners takes up a larger percentage of total income and constrains earnings growth.

Graph 1

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Graph 2

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Graph 3

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Graph 4

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For anyone interested in a more fulsome review of the examples and scenarios I have created on top of Warshawsky’s values, I have attached the spreadsheet at health-care-costs-inequality. The detailed numbers simply provide another view in support of what Warshawsky states in the working paper, “Though rising healthcare costs eat away at wage growth for everyone, the effects will be largest for the working and middle classes because their healthcare costs are so large relative to the rest of their compensation package.”

In the rest of the paper, Warshawsky provides empirical evidence updates dating through 2014 using the same BLS approach as well as discussing supporting and conflicting studies. The conclusion is the same as the data above that cuts off in 2006, so I won’t drone on at length on it here. The policy implications are much the same as well – relief from healthcare coverage costs and decoupling health insurance from employer-based coverage, allowing American citizens to demand and receive higher wages with which they can then decide how to spend will do more for the lower and middle classes than any economically distorting wealth redistribution program.

 

 

 

“What I learned in 2016”

Since I think that most news is overblown fluff, I have little sympathy for the endless pieces about “What we’ve learned about the world in 2016.”  Against the background of all of human history, 2016 taught us next to nothing.  If you just discovered that horrible people often gain vast political power with widespread popular support, you’re in dire need of remedial history.  If you’ve just discovered that politicians’ personalities matter at least as much as their policy views, you’re in dire need of remedial political science.  If you’ve just discovered that demagogic appeals to national identity work, you’re in dire need of remedial psychology.  I am only a messenger.

Still, if you compelled me to articulate what I learned in 2016, here is the most I’ll admit.

1. American voters are at the moment even more irrational than I thought they were in 2015.

2. Republicans are at the moment even more nationalist than I thought they were in 2015.

3. Democrats are at the moment even more socialist than I thought they were in 2015.

From Economist Bryan Caplan from George Mason University at his Econlog blog. I concur!

 

A Fatuous Defense of the Affordable Care Act

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“There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli

The L.A. Times provides a nice set of cherry picked data to justify the Affordable Care Act. The author is also fond of the word fatuous to describe Republican plans to repeal and replace Obamacare, so I feel compelled to maintain usage of the word my thoughts on the matter.Ignoring the long descent that healthcare has been on for decades now, and then claiming that slowing the growth rate of healthcare spend, while it still moves above the general rate of inflation and much of the decrease in observed to expected growth is related to the recession, is analogous to giving a kid a blindfold and a bat and told to hit the piñata in the tree in your backyard, meantime you have tied the piñata to a forest in the park two miles away. When the kid swings and misses, you take the blindfold off and tell him to try again, and declare success when he at least swings level at the air. The point being, even if Obamacare impacted these selective statistics, it is still miles from being where it needs to be.

To wit, there is many citations of costs decreasing, but the author conveniently ignores that those costs are going back up and projected to once again hit their stride of 6% a year, double the rate of inflation, for the foreseeable future. The recession was a temporary halt in healthcare spend, so it is really convenient to leave that fact out. Consider that in 1946 the average inflation adjusted hospital stay was $30 per day whereas today it is an astounding $2,200, a 70-fold increase. Trumpeting a modest decrease in this awful record is quite a bit like missing the forest for the trees.

Plus, while there is a lot of current debate about the tactics of repeal and replace given the slim Senate majority and how to use arcane Senate rules on budget reconciliation, Paul Ryan and others have come up with plans on replacing Obamacare, all under the banner of the Better Way moniker, which I detail in further detail elsewhere. Apparently this journalist is too lazy to look that up. But yes, I do hope that Republicans don’t take the risk of getting repeal without replace and do both at once. I honestly am not holding my breath given Republican ineptitude in the past.

It’s nice that the uninsured rate is going down, but of course a federal mandate to buy health insurance upon pain of hefty tax penalties is going to increase insurance rates. Would you praise a parent who upon their child spilling a drink or dropping food forced them to do 40 push-ups before eating again and then declaring to Facebook, “my child can do 40 pushups!”? No, I think not. At any rate, the real question is whether this metric on its own is the most important one and decoupled from the irrefutable evidence that healthcare costs and insurance premiums continue to skyrocket at a double-digit pace. Plus, recent research from economist Mark Warshawsky indicates that skyrocketing health insurance premiums have held down take home wages, as health insurance coverage has gone up for the lower and middle classes as a percentage of their total compensation from 4% to 12% in just a couple of decades – meaning they are not getting raises in take home pay because it is getting swallowed up in health insurance. Since inequality is a focus these days, look at the failures in our government run healthcare system as a main culprit.

If we are concerned with people not seeing the doctor, providing a stipend for catastrophic insurance and flexible Health savings accounts would have done the same thing without the enormous bureaucratic bloat that has led to skyrocketing premiums. And uncompensated care is an important gap to close, but this is all a bunch of cost shifting. What used to be covered through disproportionate share payments at the county and state levels, where great board oversight could be applied with local knowledge, is now being soaked up by cross-subsidies through the federal tax code – out of sight, out of mind, no accountability, and requiring hospitals to create a new administrative burden to work through the ACA and all its complexity.

This also ignores the many blatant failures of Obamacare, which I helpfully capture here. https://wordpress.com/post/gymnasiumsite.wordpress.com/117

If we must target wages for poverty reduction, wage subsidies > minimum wages

If we agree that poverty and welfare reduction are valuable goals that government should enact and that we want to supplement wages as a result, then this quick four minute video provides a simple explanation as to why wage subsidies are drastically superior to minimum wage policies. I would add that much of the muddle that we make of poverty reduction – whether it be food purchasing programs or healthcare financing, and all of those programs’ attendant bureaucracy, could be made much more efficient and effective through a wage subsidy. Plus, we could actually target poverty directly while supporting jobs and in turn reducing the rest of the inefficient welfare state.

Of course, those in government always prefer the minimum wage – it gives voters the impression that they did something to reduce poverty while shoving the consequences off of the government liabilities and accounting books, the problem being that it is less effective, drives down employment, and/or increases prices to consumers. In general, Marginal Revolution’s economics videos are always brief but insightful.

No, pumping up demand through government intervention is not “basic macroeconomics.” In the long run, only great ideas in a free market create economic growth.

In a recent social media debate, I found myself engaged in a discussion about whether government regulation and intervention can create economic growth and jobs. Readers here won’t be surprised at which side I am on generally with this topic . My opposite interlocutor ended his closing argument with something to the effect of, “government can help to increase the velocity of money (and therefore GDP). Just basic macro.”

“Just basic macro” is how progressive economists and those in never-ending faith in big government view the “expert” technocratic interventions in the market. The basic concept is one in which during market downturns, there can be a multiplier effect that ripples throughout the economy when government spends money. Thus, a $1 spend out of government (read taxpayer) coffers can magically create $3 out in the broader economy, and at least in theory results in economic growth and a positive return to the taxpayer for their “investment” which happens to have been forced upon them via the government’s monopoly on violence (if this statement seems dramatic to you, try not paying your taxes one year and see what happens). A true win-win! However, while this concept may be “just basic macro” to John Maynard Keynes, Paul Samuelson, and Paul Krugman, to the Austrian school economists and those of us toiling away on Main Street, we can grasp a sense of what the elitists in Ivory Towers can’t. To put an economic term to it, these “prime the pump to multiply” government interventionists inevitably always fail to account for opportunity costs. In layman’s terms, opportunity costs are defined as the next best alternative that was not pursued because of decisions to use scarce resources to pursue some other objective end. Very often, the opportunity cost can be larger than the objective end that was ultimately pursued. To use a simple analogy, think of an investor with $1,000 in 2006 who chose to invest in Microsoft rather than Apple. While the Microsoft investment may very well have been positive, it paled in comparison to the return on the investment in Apple. In this scenario, the cost of a foregone opportunity exceeded the option that was actually pursued.

On this topic, I am gaining some great insights as I am slowly and deliberately making my way through Deirdre McCloskey’s incredible book Bourgeois Equality, which is the final installment of a trilogy in which McCloskey sets out to prove a remarkable thesis that can be broadly summarized as follows: the global outlook and economic growth changed dramatically for the better when some geographic regions’ ethics changed substantially in the direction of valuing and dignifying the bourgeois class of traders, merchants, bankers, businessmen, etc. The slow and deliberate pace is due to my desire to fully absorb all of the insights and jot down and highlight the key sections to commit to memory, so to the extent that this post is one-part book review, please don’t let my pace suggest lack of interest in the book or that it is  a difficult and laborious read, because I assure you wholeheartedly that this is far from the case. The thesis is essentially that all of the conventional notions of what caused rapid economic development since the 1800s, such as sound government institutions, development of the rule of law, property rights, the Industrial Revolution, and so on, are all sideshows, byproducts, and/or elements that had long existed in a world in which for most of history, life was nasty, brutish, and short, and which most of humanity lived on a mere equivalent of $3 a day. McCloskey powerfully asserts, backed by an unparalleled mountain of facts and her own research, along with quotes from the global history of economics, sociology, philosophy, and literature, that it truly was the ethics and growth of the bourgeois engaging in open competition, resulting in what she calls “trade-tested betterments” that catapulted us to over 1,000% economic growth (from the $3 a day base) in developed parts of the world. Trade-tested betterments is a term coined uniquely by McCloskey, and is just one of many examples of the creative and brilliant mind of the author. One might mistakenly call what McCloskey calls trade-tested betterment “innovation,” but McCloskey stresses the importance of innovators being forced to face competition and global trade to truly push remarkable and rapid innovation to fuel economic growth. In essence, innovation at its best occurs when we don’t allow trade restrictions and competition, both forces that are inevitably rife when a government intervenes in the market.

McCloskey’s Chapter 16 in her book is titled, Most Government Institutions Make Us Poorer. This chapter resonates with the point of my blog post today and ties back to the debate in which it was declared that government intervention grows the economy and creates jobs as “Just Basic Macro.” McCloskey begins the Chapter with a quote from 19th Century French Economist Frédéric Bastiat that is apropos:

“The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen….Whence it follows that the bad economist pursues a present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

Again – the bad economist ignores opportunity costs, moral hazards, and tramples on the rights of citizens with their arbitrary wealth redistribution schemes.

But what if government technocrats could prove themselves truly capable of beating the next best alternatives? Here is what McCloskey has to say about that:

“The fact suggests that the projects of betterment enacted by governments, compared with voluntary deals made among consenting adults free of force or fraud, will fail, as they regularly have, because they are directed not at general betterment but at enriching special interests at the expense of generality, or merely spending mindlessly what money the government can appropriate under the threat of violence. The modern social-democratic habit of regarding the government as a wise and honest distributor of public goods ignores the unseen, the contents of Swiss bank accounts and the misdirected expenditures in aid of the prime minister’s second cousin, which practices govern most of the world. It supposes that every government is like Denmark’s, New Zealand’s, or Finland’s (which together govern 2 percent of the world) when most are instead like Russia’s, China’s, or India’s (39 percent). In James Madison’s words in 1787, ‘If angels were to govern men, neither external not internal controls on government would be necessary.’ Angles are rare, if unseen.”

McCloskey closes the chapter with a sweeping declaration comparing government intervention and regulation with a free market:

“The relevant comparison is not of some unattainable utopia of perfect trade-tested betterment with actual, imperfect government regulation. It is the comparison of the actual record of liberated trade, and the betterment it has brought to the powerless of the world, with the actual record of populism, fascism, socialism, and thick regulation bettering a few favored groups of the poor, every Party official, and most of the owners of the bigger enterprises able to corrupt the government, all at the expense of the rest.”

Once again, the ignored opportunity costs, the actual historical record of how bad governments are at market interventions (either through regulation or prime the pump spending), and the abuse of power and moral hazards it creates, means we as citizens should be extremely skeptical of these interventions.

Taking a quote from one my my favorite blogs, Cafe Hayekfurther illustrates the point of how Keynesians fail to capture the true essence of economics when they reduce everything to their formulas and theories.

Quotation of the day is from page 40 of Arnold Kling’s excellent new book, published this year, Specialization and Trade: A Re-introduction to Economics (link added):

[Paul] Samuelson and his successors taught that the economic machine had a gas pedal that could be used to avoid economic slowdowns.  That device was “aggregate demand,” which could be increased by the government’s printing money, running a budget deficit, or both. In this economic subfield, known as macroeconomics, the concept of specialization is forgotten entirely.  Instead, economists employ an interpretive framework in which every worker performs the same job, toiling in one big factory that produces a homogeneous output.  Macroeconomics replaces specialization with that GDP factory.

Indeed, it’s not too much to say that macroeconomics in the Samuelsonian-Keynesian mode abstracts away from most of what is essential in economics.  Market processes and entrepreneurial searches for profit; specialization; the complementarity of different capital goods with each other and with labor; the role of relative prices; the reality and importance of institutions; the reality and importance of the fact that politicians are relatively uninformed and self-interested agents. These important aspects of economic and social reality are either ignored or treated haphazardly in too much of what is called “macroeconomics.”

In short – “Just Basic Macro” is shorthand for legerdemain to justify government abuse, power, and expropriation of citizen wealth that in aggregate would have created higher economic growth (especially in the long run) than all the government experts in the world pumping out formulas could ever achieve.

In praise of decentralized government

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I have lived everywhere from a tiny Texas Panhandle farm community, a turkey farm in the rural Ozarks of Missouri, a college town (Gig ’em!), the West Texas border town of El Paso, all the way to the great northeastern communities of Hanover, NH and Boston (a slight difference in size between them),  Kansas City after a brief tour in Orlando, and recently back down to the West Texas city of Lubbock. I have witnessed and lived with many different communities that ranged quite starkly in their habits, ethics, socioeconomics, religion, and political compositions.This has given me a tremendous sense of appreciation for the diversity our great land possesses and the different strengths, weaknesses, and decision tradeoffs that each unique community dealt with, and how they responded to their own local needs. As a result of these peregrinations, it is a marvel to me that we don’t force governments to allow more of our substantial decisions on taxation, education, health, and welfare to the lowest possible level that reflects the unique natures of these far-flung communities. This post, then, is an attempt at defending the idea of taking back more control from our central government and in the spirit of federalism that this nation was founded upon, devolving more of it to the communities in which we live and therefore can more directly influence.  Whereas most of my topics on this blog focus on limiting government in the aggregate, this post is directed at the virtues of decentralizing the government and reducing it to the lowest possible polity possible. With this concept of fostering greater use of decentralized tax and spend policies I hope to someday appeal to my progressive friends under the guise of more freely allowing you to build communities on the model that suits you and to craft them in direct competition to your more conservative cousins. If you hate that democracy and the federal government can result in a Donald Trump ruling over the spoils and levers of government, then by all means, join hands to limit the power of central government and remain free to build progressive communities of your own making. Make San Francisco even better than you believe it to be, since you will send less money to the centralized coffers and can retain it in your own backyard. Obviously, for my part, I would like to believe that being unyoked from the decisions that progressives have taken centralized government since the FDR era that in turn limited and decentralized government communities would thrive and grow into my idealistic vision for communities – vibrant, dynamic, innovative, growing, and combining virtue and charity with competent and accountable local government, which is able to bring more decision making into its remit on account of what the central government has given up. Even poorer communities could make decisions that are more efficient and optimized for their needs, lifting them up faster than any central planner could ever do.

The cataclysmic and visceral reactions to last night’s election got me to thinking about why the Presidential and other federal elections matter so much to us as a people. The simplest of ways to reduce the problem logically is that the stakes are extremely high given how much the two dominant parties and their core adherents are fighting over the spoils of big government. The desires and end goals are quite different, but too often the centralizing mechanisms and controls over the levers of government are the same. Recognizing that there is tremendous power and centralized decision making in everything from military base posture, entitlements, health, energy, education, environment, and many more, it is little wonder that the controlling levers are so bitterly contested. If we want to get out of this cycle of high stakes gambles, we will necessarily have to devolve more of these fought over powers to lower levels of government. Tying this back to my list of locations that I have lived in, this devolution has the great benefit of allowing each of these municipalities to focus on the tax and spend and regulation policies that make sense given its populations and all its attendant mixture of demographics, ethics and philosophical beliefs. Lubbock,TX may need greater focus on their water access to aid cotton farmers while Granby, MO may need greater focus on Farm to Market road to support turkey transport trucks. Pulling back money blindly sent to state and federal programs allows them greater flexibility to focus on their unique needs. Getting more specific, the deliberate decentralization of government has many benefits that I find completely intuitive:

  • Local government is more responsive and accountable directly to its constituents.
  • Centralized government is able to obfuscate and hide what they spend money on and its impact – complexity and unaccountability is the enemy of good governance and the friend of easy corruption and pet projects that favor the connected
  • Individual communities making a wide diversity of tax and spend decisions promotes tremendous competition, which is good for us individuals as “consumers” of places to live and work
  • Individual communities making a wide diversity of tax and spend decisions promotes tremendous experimentation, giving us real-world learning labs of what policies actually work versus those that fail. Contrast that with central government decisions in which if the decision is a terrible one, as they often are (see the second bullet point and then connect the logical dots to Obamacare for a great example), then we all go down in a sinking ship due to the central government’s large ability to own the “monopoly of violence” which does not allow us to opt out of their decisions. Furthermore, such sinking ships oddly have very few people with which we can directly point to as accountable for the decisions and the failures
  • Decentralized government is much more consistent with liberty and freedom and mobility. In a world in which power and decisions are increasingly centralized, we are all subjected to the same standards (witness Common Core as an example). In decentralized models and with the competition promoted therein, if we don’t like the tax and spend policies of one community, then we can move on to the next that may have a mixture of these that we personally favor.
  • Greater individual liberties as a result of decentralized government allows us to pursue more meaningful charitable work in which we see the direct and tangible impacts in our own communities, and this is of incalculable personal, spiritual, and community value. One of the most fundamental frameworks of economics is to always keep in mind the opportunity costs. An opportunity cost is the foregone opportunity that could not be pursued due to a decision. In a simple example, the fact that Dr. Jones has to send 20% of her income to the federal government to have it spent by much less accountable bureaucrats means that that same 20% was not able to be taxed by her local community, county, or state – lower levels of government who are in a progression more accountable to her tax dollar. Taking this all the way to its opportunity cost extension, it means Dr. Jones also can’t directly spend that 20% in her local business, church, or community and can’t devote that portion to the charity of her choosing, where she could have uniquely observed a direct impact that connects the community to her and her to the community, all the while boosting her spirits.

I suspect all of this seems quite straightforward but still leaves us needing specific examples to debate the points. I think some natural areas, to name but just a few in my limited time, that are ripe for debate for decentralization are education, criminal justice, health systems, health payment (i.e. Medicaid block grants), commerce, agricultural policy, and determining the role of private charity versus local municipality tax and spend decisions. Each of these topics could use its own further paragraph about the key differences in philosophy, strategies, and expected outcomes when comparing centralized versus decentralized models, but that will be a topic for another day.

 

The central government planners behave as conflicted madmen, creating a muddle of healthcare

madman

The federal government created the “Affordable” Care Act, which by this point is a laughable misnomer in the face of never ending premium increases, alongside the creation of payment and delivery reform structures such as Accountable Care Organizations, knowing full well that it would drive health system consolidation. In fact, one might argue this consolidation was a specific goal of the reforms in the government planners belief that newly minted behemoths would drive cost down due to scale and drive care quality up through better coordination across the system continuum up. Meantime, the same federal government is also fighting against that urge to consolidate through the Federal Trade Commission, as this Modern Healthcare Article indicates.

If we were to view a man trying to push the walk button at a busy intersection with his right hand while his left hand tugged it back, we would think him a madman. Well, this is our own government intervention into the healthcare “market” at its finest.