Monday, April 7, 2014

The Left Can be Stupid Too

Paul Krugman, not surprisingly, has a post saying that the right is far more "ignorant" than the left. I don't know of any objective way to measure "ignorance" so it is impossible to say for sure which side has more of it, but I can say that the left has a good deal of ignorance too. Much more than Krugman lets on.

For example:

1.) On economics, I've heard the president deny that the minimum wage has any impact on employment or that unemployment insurance has any negative impact on decision to reenter the labor force. This is not saying that the impact of these policies is small, a reasonable claim that can be defended. Instead, this is saying they have no impact. This denies two of the central points of basic economics: incentives matter and supply and demand matter.

2.) On a related and more general note, there seems to be a willingness on the left to deny that there are any economic costs associated with larger welfare states and tightly regulated labor markets.

3.) Remember when Krugman himself said that 2013, with expansionary monetary policy and restrictive fiscal policy, was a test for market monetarism and market monetarism ended up being right about monetary offset? Did that lead to keynesians and liberals changing their views? Not to my knowledge.

4.) We have the Oregon Medicaid study which liberals touted when it showed statistically significant improvement in self reported health. But, when it was revealed a year later that there was no statistically significant improvement in objective physical health, liberals began denying the same study using some very silly excuses (like pointing to raw numbers and denying the importance of statistical significance).

5.) On the scientific front, we have environmentalists denying modern science on everything from GMOs to chemicals. Indeed, the whole "organic" movement is not scientifically based.

6.) How about evolutionary psychology? The scientific community is pretty clear about the fact that genetics account for a big part of how we behave and achieve in life. This contradicts feminist and egalitarian dogma and, therefore, we see denial of this on the left.

There are plenty more, but those are the ones that happen to be on the top of my mind. I don't know if left wing ignorance is less than, equal to, or greater than right wing ignorance. But, I can sa

Monday, January 27, 2014

The Real War on the Poor

There is a war being waged on the poor in America. Here are some key attacks:

1.) Create high implicit marginal tax rates through means tested programs that were, ironically, created to reduce poverty.

2.) Create barriers to low wage, entry level employment like high minimum wages and employer health benefit mandates.

3.) Create barriers to business creation by implementing draconian occupational licensing laws that create a huge barrier to entry for poor people.

4.) Wage a war on drugs that unfairly targets poor people. The same poor people who have an extremely difficult time navigating the court system if they are a victim of this war.

5.) Instead of using anti poverty public dollars to give direct cash transfers to the poor on the condition that they are either working or seeking employment, direct the dollars towards "feel good", paternalistic programs for things like health care and education that require nothing in terms of work and are proven to do nothing to actually improve health or educational outcomes in the long term (Head Start and Medicaid).

These policies, not modest reductions in the growth rate of anti poverty programs that actually don't do much to help the poor, are the real public policies that are hurting the poor. Remember that next time you hear a politician talking about anti poverty policy.

Update: In case my implication wasn't clear, President Obama is guilty of hurting the poor by worsening #1 (expanding Medicaid and creating means tested subsidies through Obamacare), #2 (mandating health insraunce with employment and proposing raising the minimum wage), and #5 (expanding Medicaid, SCHIP, and trying to create new education programs).

President Obama has also been similar to previous administrations in doing nothing to change #4. I'll give him a break on #3 where state and local governments deserve most of the blame.

Sunday, January 19, 2014

Required Reading on Oregon Medicaid Study

Megan McCardle offers the best explanation of the study: here.

I will remind readers that I did a series of post on the Oregon Medicaid study last October and November. McCardle says everything I tried to say (except she says it more eloquently).

Tuesday, January 14, 2014

The Federal Government Overpays Most and Underpays Management

On the whole, federal workers are overpaid. A common response to this is that the only reason that federal workers are paid more, on average, is because they are better educated and thus higher pay is justified. That is feasible, but it isn't true. Even after taking such differences into account, a significant compensation gap remains (here).

However, there could be a larger problem in public sector compensation. Not only is the public sector, as a whole, overpaid. It is also too compressed. Bryan Caplan reports on this dynamic here. A chart is provided as well:

feds.jpg


Overall, the public sector is overcompensated by 16% relative to the private sector. However, this gap varies widely by education level. For workers with high school diplomas or less, the federal government pays an incredible 36% more. However, for workers with professional degrees or doctorates get paid 18% less in the federal government than the private sector.

To put it simply, a worker with a professional degree or doctorate can expect to get paid about 87% more than a worker with a high school diploma or less in the federal government compared to 210% more in the private sector.

There are two key forces at work here: public sector unions and public opinion. Public sector unions create a huge pressure to overpay low skilled workers. These would be workers with some college or no college. These workers are paid 30 to 40% more in the federal government than the private sector.

Then there's medium skilled workers who tend to have a college degree. These workers are also overpaid in the federal government, but to a lesser degree. Something more to the tune of 5 to 15%. Here there is some pressure from public sector unions as well.

At the top, workers with professional degrees get paid about 20% less in the federal government than the private sector. This is where public opinion plays a big role. I don't know this for fact, but I would think that the private sector tends to pay much better for upper management. The higher the level of management, the better the private sector pays both overall and relative to the public sector.

Case in point is the president of the united states. The pay is "only" $400,000. That may sound like a lot, and it is a lot. But, for the most powerful position in the entire world, it is actually astonishingly low. CEOs of any major company are paid millions, if not tens of millions, every year. By comparison, the commander and chief is very underpaid.

In the private sector, a job like that would pay an incredible amount. Luckily, most people who run for president do it for public recognition, prestige, and (hopefully) to improve the world. However, any large corporation has an entire group of upper management who are paid well above six figures. Indeed, this is necessary for the success of any large organization. Management cannot be undervalued. Most people with that sort of high level managerial experience go to the private sector rather than the federal government simply because of the pay differential as well as mobility.

This is, by the way, why you should ignore people who argue for single payer health care because "administrative costs are lower". Low administrative costs aren't necessarily a good thing. This is especially true if they represent underinvestment in management, which is the case with our federal government and most nationalized health care systems.

How does public opinion lead to underinvestment in management in the public sector?

It's simply because the public would go nuts if there were a large group of federal government employees making six figure incomes. The public won't be too upset if someone who's market wage would be something like $20,000 gets paid $25,000, but there would be outrage if there were a group of people getting paid $200,000 or more in the federal government even if they could command a higher wage in the private sector. The medium skilled workers have both of these pressures on them (public unions and public opinion) which is why they have a smaller (but still significant) wage premium in the federal government.

One could argue that it is the private sector underpays low and medium skilled workers and overpays highly skilled management. Indeed, this is basically the argument that advocates of caps on CEO pay and large hikes in the minimum wage make. I just don't find this very plausible. Individual private sector companies may overpay upper management, but it is hard to imagine that the entire private sector is radically overpaying upper management. It is much more plausible that upper management really is a scarce skill that commands a lot of pay because it is so difficult and important.

Indeed, some evidence suggests that CEOs are underpaid. They get paid a lot, but they may add even more to their firms in value. Even if CEOs are overpaid, pay caps are a bad idea for a lot of traditional economic reasons and practical policy reasons, but that is for a different post.

The point here is that management is really important and the public sector really underpays management relative to other public workers and the private sector. This is one reason that contracting out is necessary for so many projects: the private sector has the managerial talent necessary to run big operations that the public sector just doesn't have.

It is also yet another reason that nationalizing industries like health care or banking are bad ideas. These industries require a lot of managerial talent to run and the public sector can't deliver here.




Wednesday, January 8, 2014

A History of Behavioral Responses to Tax and Transfer Policies

The most fundamental insight required to understand tax and transfer policy is simple: financial incentives affect behavior. That is a point on which basically all thinking people can and do agree, but the agreement stops there. The way and degree to which tax and transfer programs affect behavior is hotly debated and highly relevant given the current debate on the future direction of policy.

It's important to note how important it is that we get an accurate picture of how powerful these effects are. Back in the 1960s and 1970s, our tax and transfer system reflected an academic consensus that vastly underestimated behavioral responses to taxation. Indeed, prior to 1980, we had a tax system with a top tax rate of 70% and welfare system (prior to reform in the 1990s) embedded with truly awful incentives. Since incentives were thought to be small, the effects of these perverse incentives were thought to be small and thus did not play a large enough role in the policy discussion

This underestimation of incentives was not a matter of bad research or baseless assumptions. Instead, it was a matter of incomplete research that was simply not able to capture anywhere near the full behavioral responses to taxation. For instance, the literature looked for relationships between changes in tax rates and hours worked and found none.

By the time the late 1970s came around, new researchers that weren't as ideologically committed to defending the welfare state and progressive tax system were upending previously held assumptions. Eventually, these intellectuals would be proven right and would gain in influence. The late 1970s saw both economic stagnation and a degree of cultural decay. For instance, the share of children born out of wedlock had been rising since 1960. By the late 1970s, this was having real cultural consequences. Welfare rolls were exploding at the same time as dependency was on the rise for a large share of the population. Behavioral responses to government policy were not entirely to blame for these trends of the era, but they certainly played a large role.

The increased recognition of these realities led to significant anger among the middle and working class. These were families that, in an increasingly weak economy with high inflation, were paying ever higher tax rates. Instead of paying for programs that may benefit these workers, tax dollars were flowing, at least in part, to an increasing group of dependents who no longer saw reason to work due to incentives (as well as bureaucrats). These middle and working class families were right to be angry. But, they were wrong to direct their anger at the welfare recipients, who were merely responding rationally to incentives. Instead, the anger should have been directed at a government that overtaxed productive behavior and traditional families while subsidizing non employment and irresponsible behavior.

Charles Murray, in Losing Ground, found that bad incentives made many anti poverty programs self defeating. Martin Feldstein looked at responses to taxes and noted that there are many ways that people might respond to taxes. He created a new measure known as elasticity of taxable income. Instead of trying to find relationships between tax rates and potential areas that behavioral responses might be found, Feldstein looked at total taxable income which would capture all behavioral responses. He found much larger responses than previous research (especially among upper income taxpayers). Arthur Laffer even began arguing that tax rates had become so high that it was possible that some taxes could actually be reduced and still increase revenue (due to behavioral responses).

For a number of reasons, policy began taking incentives into account more. In the 1980s, the top marginal tax rate on business income and certain kinds of capital income fell dramatically from 70% to 28%. There were reductions in taxes on other types on income that were smaller but still quite significant. In the 1990s, in order to tackle the problem of perverse incentives in the welfare system, welfare reform was ultimately passed and signed.

Of course, these policies were part of a larger neoliberal policy revolution that included rollbacks in the regulatory state, a increasingly stable monetary policy, public spending restraint, and free trade. Academic research and practical experience was increasingly suggest the superiority of markets to statism in general. The fact that incentives were found to be much more powerful in many more ways than originally thought was part of this research and experience.

For the most part, these reforms were successful. Welfare rolls were reduced while a booming economy offered increased jobs and opportunities. Resources that had been used on tax avoidance in the past were redirected to more productive uses because lower tax rates made tax avoidance less profitable. Due to behavioral responses, the revenue losses for some of the tax rates cuts were small if there was a reduction in revenue at all.

Later research on ETI would later find that the behavioral responses found in previous literature were almost entirely due to wealthy individuals taking more pains to avoid taxes when tax rates are higher and that income derived from capital and business is much more sensitive to taxation than wage income. The implication here was that the most economically efficient tax reductions were also the least politically popular: reduction in tax rates on wealthy investors and business owners.

Indeed, the political realities surrounding policy have been the biggest constraint on policy that would do a significant amount to correct bad incentives inherent to our tax and transfer system. Welfare reform was only possible when regular, working people saw their own tax bills rise at the same time that dependency on welfare was rising. That stoked the anger necessary to reform the system. Again, some of the anger that should have been aimed entirely at bad government policy was aimed at the recipients of public aid, but there was still a push for reform that ultimately succeeded.

The increasing awareness of behavioral responses in public policy didn't just result in lower taxes and a smaller state. There were also policies that attempted to replace parts of the welfare state with programs that did not create the same bad incentives. The earned income tax credit (EITC) was created in the 1970s and has been expanded numerous times. This is basically an anti poverty program that encourages employment instead of discouraging employment, proving that fighting material poverty and encouraging employment do not necessarily need to be conflicting goals.

The EITC should be seen as a model for the type of program that should be replacing the current programs in the welfare state, as it both fights poverty by both offering material cash benefits to the impoverished and encouraging the kind of behavior required to truly escape poverty.

The early 2000s saw new research that upended previous assumptions about the behavioral responses to public policy. Nobel prize winner Edward Prescott challenged the idea that taxes had little impact on labor supply. Basically, he theorized that previous work looking at the relationship did not take into account all the channels that taxes could effect labor supply.

Prescott compared hours worked in the G-7 countries in the 1970s and 1990s. He found that, in the 1970s, when tax rates were similar in these countries, hours worked were also similar. In the 1990s, when tax rates diverged, countries with lower tax rates also had higher hours worked. This was later backed up by further research (look here).

Public policy in the 2000s showed some awareness of these realities. George W Bush successfully pushed through two major tax reductions. These tax reductions were not ideal if the goal was to encourage productive behavior (or reduce discouragement of productive behavior) because the tax rate cuts were small (although the total cost of the tax cuts were large due to tax cuts that did not cut rates) and not permanent. Still, there were some reductions in marginal tax rates.

Bush also tried to move towards private accounts is social security which would have helped mitigate the work disincentives inherent to entirely government run retirement systems, but that effort proved to be politically futile. Despite some positive efforts, the Bush administration did not do much to incorporate realities about behavioral responses into public policy.

If the Bush administrations efforts were weak, the Obama administration has been flat out counter productive. The ACA does a lot to discourage employment by creating huge implicit marginal tax rates. Indeed, the effects of the means tested subsidies and Medicaid expansion on incentives basically undo much of the good welfare reform did. At the same time, the ACA raises tax rates on investment income and business income at the top which also further discourages productive behavior.

Despite the fact that there has been no evidence that incentive effects are smaller than previous thought, it seems that many of the new policy makers in the post Bush world believe this nonetheless. It took 30 years of gradual policy changes to even make a small dent in the perverse incentives that were created by 50 years of bad policy.

It's only taken the current administration a few years to undo a good deal of the positive reforms. Even worse, there is no empirical basis for the return of high tax rates and bad incentives in anti poverty programs.

There is a way forward, which I'll cover in a follow up post in the near future.

Monday, January 6, 2014

Response to Michael Lind on Libertarianism

Michael Lind wrote a piece last year critical of libertarianism (here). I respond in full here:
"Why are there no libertarian countries? If libertarians are correct in claiming that they understand how best to organize a modern society, how is it that not a single country in the world in the early twenty-first century is organized along libertarian lines?

Lind starts out with a seemingly reasonable premise. However, it is not a correct premise. I can think of a number of countries that are basically "libertarian". Hong Kong is perhaps the most libertarian country. Singapore is fairly libertarian economically (thought not in other respects). 
It also strikes me as incorrect to assume that an absence of countries pursuing a certain policy regime discredits said policy regime. Entrenched interests, for example, could be a blockade to popular libertarian reforms that are obviously good for the population as a whole. Occupational licensing reform strikes me as a fairly obvious libertarian reform that is hard to achieve because of such interests.
Does the fact that occupational licensing is fairly widespread discredit arguments for weakening occupational licensing or speak to the power of special interests?
To me, it seems fairly obvious that it is the latter. Lind's logic suggests he may disagree.

It’s not as though there were a shortage of countries to experiment with libertarianism. There are 193 sovereign state members of the United Nations—195, if you count the Vatican and Palestine, which have been granted observer status by the world organization. If libertarianism was a good idea, wouldn’t at least one country have tried it? Wouldn’t there be at least one country, out of nearly two hundred, with minimal government, free trade, open borders, decriminalized drugs, no welfare state and no public education system?

All of these "libertarian" policies can be found in numerous countries. However, there are not any countries that pursue all of these policies. That, it seems Lind is arguing, discredits libertarianism.
This is simply Lind setting a bar too high and too arbitrary for libertarianism. We do have examples of virtually all libertarian policies being tried to some degree somewhere. Instead of looking at the success or failure of those policy experiments, Lind suggests that the fact that libertarianism isn't more common automatically discredits it. No other ideology has ever been measured by that standard.

When you ask libertarians if they can point to a libertarian country, you are likely to get a baffled look, followed, in a few moments, by something like this reply: While there is no purely libertarian country, there are countries which have pursued policies of which libertarians would approve: Chile, with its experiment in privatized Social Security, for example, and Sweden, a big-government nation which, however, gives a role to vouchers in schooling.

I don't know any well informed libertarians who would give a "baffled" look to a fairly easy question. It is true that most libertarians would explain that, like all modern ideologies, there is no purely "libertarian" country. On the same note, there is no "purely" centre left country.
However, there are countries that are more libertarian than others, and there are countries that are very libertarian in certain respects. The success of these countries and policies are the basis for how libertarianism should be evaluated.

But this isn’t an adequate response. Libertarian theorists have the luxury of mixing and matching policies to create an imaginary utopia. A real country must function simultaneously in different realms—defense and the economy, law enforcement and some kind of system of support for the poor. Being able to point to one truly libertarian country would provide at least some evidence that libertarianism can work in the real world.

This is just Lind setting the bar unusually high for libertarians. There are no purely "anything" countries.
There is something close to a spectrum that countries are on politically. No country is 100% libertarian or 100% social democratic. Lind is essentially saying that the absence of a 100% libertarian country is a huge blow to libertarianism. That just strikes me as a silly excuse for Lind to write off libertarianism.

Some political philosophies pass this test. For much of the global center-left, the ideal for several generations has been Nordic social democracy—what the late liberal economist Robert Heilbroner described as “a slightly idealized Sweden.” Other political philosophies pass the test, even if their exemplars flunk other tests. Until a few decades ago, supporters of communism in the West could point to the Soviet Union and other Marxist-Leninist dictatorships as examples of “really-existing socialism.” They argued that, while communist regimes fell short in the areas of democracy and civil rights, they proved that socialism can succeed in a large-scale modern industrial society.

We had experiments in communism and socialism that failed quite miserably. Lind also fails to mention that socialism and communism ultimately proved unworkable economically. It was not just a matter of civil rights and democracy. Communism and socialism impoverished the people of the nations they were tried in. Not mentioning this in any discussion of these topics does a disservice to all of those who lived in poverty under these systems.
So, we have the failure of these economic systems and the relative success of market based economic systems. It seems that, in this case, the closer a society came to the libertarian ideal economically, the better.

While the liberal welfare-state left, with its Scandinavian role models, remains a vital force in world politics, the pro-communist left has been discredited by the failure of the Marxist-Leninist countries it held up as imperfect but genuine models. Libertarians have often proclaimed that the economic failure of Marxism-Leninism discredits not only all forms of socialism but also moderate social-democratic liberalism.

What if I told you that I know of a country that has no death tax, no wealth tax, a partially privatized social security system, high amounts of free trade, a falling government share of the economy, increasing presence of markets in the health care sector, and universal school vouchers. This sounds pretty close to the libertarian country that Lind says doesn't exist.
Actually, there is a real country like that: Sweden. That's right, Lind's example of the purely "liberal welfare-state left" country has all of the policies I mentioned above in place. 
I don't know what kind of liberals Lind knows, but the liberals I have met would go nuts if Republicans proposed doing some of the things Sweden has already done. To be fair, Sweden is also much less libertarian than the USA in some ways.
But, Lind literally just said that, in order for an ideology to be successful, there has to be examples of it being practiced "purely".

But think about this for a moment. If socialism is discredited by the failure of communist regimes in the real world, why isn’t libertarianism discredited by the absence of any libertarian regimes in the real world? Communism was tried and failed. Libertarianism has never even been tried on the scale of a modern nation-state, even a small one, anywhere in the world.

I wonder if Lind realizes that, at some point in history, all ideologies have not been tried yet. It is absurd to say that an ideology doesn't work because it hasn't been tried yet.
Still, libertarianism has been tried. Hong Kong and Singapore have libertarian economic policies. Netherlands has libertarian social policies. Numerous countries have free trade. From where I stand, libertarianism seems to be doing pretty well from a practical point of view.

Lacking any really-existing libertarian countries to which they can point, the free-market right is reduced to ranking countries according to “economic freedom.” Somewhat different lists are provided by the Fraser Institute in Canada and the Heritage Foundation in Washington, D.C.

Lind is just getting frustrated at this point. Ranking countries based on how free their economy is not an act of frustration. Economic freedom is a vital component of economic development. Measuring it is a good thing.

According to their similar global maps of economic freedom, the economically-free countries of the world are by and large the mature, well-established industrial democracies: the U.S. and Canada, the nations of western Europe and Japan. But none of these countries, including the U.S., is anywhere near a libertarian paradise. Indeed, the government share of GDP in these and similar OECD countries is around forty percent—nearly half the economy.

Just like there is no purely progressive country, there is no purely libertarian country. But, the more libertarian a country is economically, the higher they are on these lists. 

Even worse, the economic-freedom country rankings are biased toward city-states and small countries. For example, in the latest ranking of economic liberty by the Heritage Foundation, the top five nations are Hong Kong (a city, not a country), Singapore (a city-state), Australia, New Zealand and Switzerland (small-population countries).

Just because these countries happen to be relatively small does not mean there is a bias. Also note that all of these countries are fairly prosperous. 

With the exception of Switzerland, four out of the top five were small British overseas colonies which played interstitial roles in the larger British empire. Even though they are formally sovereign today, these places remain fragments of larger defense systems and larger markets. They are able to engage in free riding on the provision of public goods, like security and huge consumer populations, by other, bigger states.

Without saying it, Lind seems to be conceding that the small, relatively libertarian countries are fairly prosperous. But, he argues, this is only because they free ride.
This is silly. All of these countries were relatively poor (except Switzerland) until they moved to pro market, libertarian economic policies. It was not until after these reforms that these countries became wealthy. 
At the same time, most countries in the developed world, including northern Europe, free ride off of defense and innovation from the USA. For whatever that is worth.

Australia and New Zealand depended for protection first on the British empire and now on the United States. Its fabled militias to the contrary, Switzerland might not have maintained its independence for long if Nazi Germany had won World War II.

All of this is entirely beside the point. Australia, for example, was in economic stagnation until it moved towards a more neoliberal economic model with lower taxes and more private sector involvement.
It is now basically an economic success story as a result. The fact that they didn't need a strong military didn't change over time. The fact that they switched from an unsustainable, statist economic model to a freer economic model made all of the difference.

These countries play specialized roles in much larger regional and global markets, rather as cities or regions do in a large nation-state like the U.S. Hong Kong and Singapore remain essentially entrepots for international trade. Switzerland is an international banking and tax haven. What works for them would not work for a giant nation-state like the U.S. (number 10 on the Heritage list of economic freedom) or even medium-sized countries like Germany (number 19) or Japan (number 24).

Again, excepting Switzerland, all of these countries went from poor, statist economies to rich, free market economies. The switch from statism to free market came first in all of these cases.
This is a point that Lind needs to deal with, but he seems to ignore.
Furthermore, if anything, larger nations would need even less government. This is because it is harder to run a large state in a big nation like the USA than a small, homogeneous nation like Singapore.

And then there is Mauritius.
According to the Heritage Foundation, the U.S. has less economic freedom than Mauritius, another small island country, this one off the southeast coast of Africa. At number 8, Mauritius is two rungs above the U.S., at number 10 in the global index of economic liberty.

This is probably the main reason that Mauritius is wealthier than many other African nations.

The Heritage Foundation is free to define economic freedom however it likes, by its own formula weighting government size, freedom of trade, absence of regulation and so on. What about factors other than economic freedom that shape the quality of life of citizens?

The key thing to remember here is that economic freedom is necessary for a high quality of life but not sufficient. That is to say that all countries with high standards of living, with very few exceptions, have economic freedom. But, they also have open cultures and institutions that are conducive to a high living standard.

How about education? According to the CIA World Fact book, the U.S. spends more than Mauritius—5.4 percent of GDP in 2009 compared to only 3.7 percent in Mauritius in 2010. For the price of that extra expenditure, which is chiefly public, the U.S. has a literacy rate of 99 percent, compared to only 88.5 percent in economically-freer Mauritius.

The USA has a much longer history of economic freedom than Mauritius as well as a very different culture. Economic freedom has been good for Mauritius, but it cannot fix all of the problems. 

Infant mortality? In economically-more-free Mauritius there are about 11 deaths per 1,000 live births—compared to 5.9 in the economically-less-free U.S. Maternal mortality in Mauritius is at 60 deaths per 100,000 live births, compared to 21 in the U.S. Economic liberty comes at a price in human survival, it would seem. Oh, well—at least Mauritius is economically free!

Again, absent economic freedom, Mauritius would be a good deal poorer and almost certainly have even higher mortality rates for infants.

Even to admit such trade-offs—like higher infant mortality, in return for less government—would undermine the claim of libertarians that Americans and other citizens of advanced countries could enjoy the same quality of life, but at less cost, if most government agencies and programs were replaced by markets and for-profit firms. Libertarians seem to have persuaded themselves that there is no significant trade-off between less government and more national insecurity, more crime, more illiteracy and more infant and maternal mortality, among other things.

This is where Lind really goes wrong. He gets the tradeoff wrong. The best, and only way, to improve the standard of living is to increase wealth.
The only system conducive to building wealth is a free enterprise system that is, at its core, libertarian. 
There is a tradeoff between government and the things Lind mentions, but, contrary to what Lind says, it is smaller government that leads to better outcomes in these areas. That is because it is smaller government that leads to the wealth creation that makes improvements possible.

It’s a seductive vision—enjoying the same quality of life that today’s heavily-governed rich nations enjoy, with lower taxes and less regulation. The vision is so seductive, in fact, that we are forced to return to the question with which we began: if libertarianism is not only appealing but plausible, why hasn’t any country anywhere in the world ever tried it?"

In fact, the experience of the past few centuries have been an overwhelming rejection of socialism, state meddling, social engineering, and all forms of statism. Libertarianism has been the victor.
Libertarianism isn't a seductive vision, but a practical policy regime that actually has a proven record of success.

Friday, January 3, 2014

The Pro Government Narrative is Factually Bankrupt

This is from about a year and a half ago. Deirdre McCloskey wrote an excellent piece criticizing the modern progressive narrative about needing more government. McCloskey points out that the history of government interventions simply does not square with this narrative. In fact, supposedly well intentioned government interventions have typically benefited the well connected incumbents at the expense of the common man. This, quite literally, hits the nail on the head. Reproduced in full:

"To a discussion by political philosophers a mere fact woman like me, an economic historian trained in the 1960s as a transportation economist, has really only one thing to contribute.  It is, to slightly modify Cromwell’s imprecation to the Scottish Presbyterians in 1650, “I beseech you, in the bowels of Christ, think it possible that you may be [factually] mistaken.”
Factually.  I realize that Kant laid it down that what humans are factually like, or what their history factually was, is forbidden to play a part in ethical reflection.  We are supposed to be looking for principles that any Rational Creature would adhere to, whether a six-headed being in outer space or the man on the Clapham omnibus.  As an economist I can see the charm in assuming a character Max U, or Rational R, and then proceeding.  And I know that most social psychologists (I except among the younger generation Jonathan Haidt, for example, or, Mike CsĂ­kszentmiháyli of my generation, or Jerome Bruner of an earlier generation) find it charming to believe that ethics starts with their own earliest experiments.  Such models and experiments are a lot simpler than reflecting in addition on art and literature and philosophy since the Rig Veda and the Epic of Gilgamesh.  But the modern cleverness after Hobbes and then Kant and Bentham and now with the fierce modernists of freakonomics and hedonic measurement seems less relevant to human experience—which is after all why we would want an ethical theory in the first place—than the virtue-talk of the ages.  We can’t, and shouldn’t, stop being humans, who were once children, and will die, and who reason and love and hope in human ways.  As Will Wilkinson puts itif hammered into reflective equilibrium with the help of clever thought experiments and modeling assumptions” of the political philosophers since Hobbes, we nonetheless, and even (Will observes) in the very rules of our reflections, “are also going to be, to a very large extent, creatures of our environment.”  Kant’s decision to omit anthropology (which he in fact taught every Saturday in term) was a human and rhetorical choice, not written in the starry heavens.
So: I’m from economics and history, and I’m here to help you.  In the factual background assumed in the elegant contributions here by Elizabeth Anderson and Samuel Freemanthere’s a very particular story (less so in Richard Arneson and not at all in Wilkinson), embodied since the late nineteenth century in what Tomasi calls High Liberalism.  The High-Liberal political philosophers such as Anderson and Freeman and Dworkin and Nussbaum rely, against Kant, on a factual story which they take to be so obvious as to not require defense.  I claim that on the contrary their master narrative is mistaken, as anthropology or economics or history.  You can hear versions of it every night on MSNBC (you can hear other mistaken master narratives on Fox News, so understand I am not recommending that)
The story is, in a few brief mottos to stand for a rich intellectual tradition since the 1880s:  Modern life is complicated, and so we need government to regulate.  Government can do so well, and will not be regularly corrupted.  Since markets fail very frequently the government should step in to fix them.  Without a big government ee cannot do certain noble things (Hoover Dam, the Interstates, NASA).  Antitrust works.  Businesses will exploit workers if government regulation and union contracts do not intervene.  Unions got us the 40-hour week.  Poor people are better off chiefly because of big government and unions.  The USA was never laissez faire.  Internal improvements were a good idea, and governmental from the start.  Profit is not a good guide.  Consumers are usually misled.  Advertising is bad.
Thus Anderson: ”Externalities, asymmetrical information, and other collective action problems are . . . pervasive in economic life.  Countless ways of conducting business reap gains for some while imposing unjust costs on others.  Create a cartel.  Stuff rat feces in sausages.”  Thus Freeman: “It is a truism to say that in order to achieve the benefits of an efficient market economy (increasing productivity, greater economic output, increasing productive capital, etc.), the basic rules of property, contract, and exchange must be structured [by government] to realize efficient market relations.”
No.  The master narrative of High Liberalism is mistaken factually.  Externalities do not imply that a government can do better.  Publicity does better than inspectors in restraining the alleged desire of businesspeople to poison their customers.  Efficiency is not the chief merit of a market economy: innovation is.  Rules arose in merchant courts and Quaker fixed prices long before governments started enforcing them.
I know such replies will be met with indignation.  But think it possible you may be mistaken, and that merely because an historical or economic premise is embedded in front page stories in the New York Times does not make them sound as social science.  It seems to me that a political philosophy based on fairy tales about what happened in history or what humans are like is going to be less than useless.  It is going to be mischievous.
How do I know that my narrative is better than yours?  The experiments of the 20th century told me so.  It would have been hard to know the wisdom of Friedrich Hayek or Milton Friedman or Matt Ridley or Deirdre McCloskey in August of 1914, before the experiments in large government were well begun.  But anyone who after the 20th century still thinks that thoroughgoing socialism, nationalism, imperialism, mobilization, central planning, regulation, zoning, price controls, tax policy, labor unions, business cartels, government spending, intrusive policing, adventurism in foreign policy, faith in entangling religion and politics, or most of the other thoroughgoing 19th-century proposals for governmental action are still neat, harmless ideas for improving our lives is not paying attention.
In the 19th and 20th centuries ordinary Europeans were hurt, not helped, by their colonial empires.  Economic growth in Russia was slowed, not accelerated, by Soviet central planning.  American Progressive regulation and its European anticipations protected monopolies of transportation like railways and protected monopolies of retailing like High-Street shops and protected monopolies of professional services like medicine, not the consumers.  “Protective” legislation in the United States and “family-wage” legislation in Europe subordinated women.  State-armed psychiatrists in America jailed homosexuals, and in Russia jailed democrats.  Some of the New Deal prevented rather than aided America’s recovery from the Great Depression.
Unions raised wages for plumbers and auto workers but reduced wages for the non-unionized.  Minimum wages protected union jobs but made the poor unemployable.  Building codes sometimes kept buildings from falling or burning down but always gave steady work to well-connected carpenters and electricians and made housing more expensive for the poor.  Zoning and planning permission has protected rich landlords rather than helping the poor.  Rent control makes the poor and the mentally ill unhousable, because no one will build inexpensive housing when it is forced by law to be expensive.  The sane and the already-rich get the rent-controlled apartments and the fancy townhouses in once-poor neighborhoods.
Regulation of electricity hurt householders by raising electricity costs, as did the ban on nuclear power.  The Securities Exchange Commission did not help small investors.  Federal deposit insurance made banks careless with depositors’ money.  The conservation movement in the Western U. S. enriched ranchers who used federal lands for grazing and enriched lumber companies who used federal lands for clear cutting.  American and other attempts at prohibiting trade in recreational drugs resulted in higher drug consumption and the destruction of inner cities and the incarcerations of millions of young men.  Governments have outlawed needle exchanges and condom advertising, and denied the existence of AIDS.
Germany’s economic Lebensraum was obtained in the end by the private arts of peace, not by the public arts of war.  The lasting East Asian Co-prosperity Sphere was built by Japanese men in business suits, not in dive bombers.  Europe recovered after its two 20th-century civil wars mainly through its own efforts of labor and investment, not mainly through government-to-government charity such as Herbert Hoover’s Commission or George Marshall’s Plan.  Government-to-government foreign aid to the Third World has enriched tyrants, not helped the poor.
The importation of socialism into the Third World, even in the relatively non-violent form of Congress-Party Fabian-Gandhism, unintentionally stifled growth, enriched large industrialists, and kept the people poor.  Malthusian theories hatched in the West were put into practice by India and especially China, resulting in millions of missing girls.  The capitalist-sponsored Green Revolution of dwarf hybrids was opposed by green politicians the world around, but has made places like India self-sufficient in grains.  State power in many parts of sub-Saharan Africa has been used to tax the majority of farmers in aid of the president’s cousins and a minority of urban bureaucrats.  State power in many parts of Latin America has prevented land reform and sponsored disappearances.  State ownership of oil in Nigeria and Mexico and Iraq was used to support the party in power, benefiting the people not at all.  Arab men have been kept poor, not bettered, by using state power to deny education and driver’s licenses to Arab women.  The seizure of governments by the clergy has corrupted religions and ruined economies.  The seizure of governments by the military has corrupted armies and ruined economies.
Industrial policy, from Japan to France, has propped up failing industries such as agriculture and small-scale retailing, instead of choosing winners.  Regulation of dismissal has led to high unemployment in Germany and Denmark, and especially in Spain and South Africa.  In the 1960s the public-housing high-rises in the West inspired by Le Courbusier condemned the poor in Rome and Paris and Chicago to holding pens.  In the 1970s, the full-scale socialism of the East ruined the environment.  In the 2000s, the “millennial collectivists,” Red, Green, or Communitarian, oppose a globalization that helps the poor but threatens trade union officials, crony capitalists, and the careers of people in Western non-governmental organizations.
Yes, I know, you want to reject all these factual findings because they are “right-wing” or “libertarian.”  All I ask you to do is, once in a while, consider.  Don’t believe everything you read in the papers."


Keep this is in mind next time you read someone like Paul Krugman. Krugman, among others, constantly criticizes others for not changing their views in the face of contrary evidence.

Yet, Krugman himself keeps on advocating the same progressive, statist policies despite the overwhelming record of failure.