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 Csíkszentmiháyli 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 it, “if 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 20^th 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 20^th 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 19^th-century proposals for governmental action are still neat, harmless ideas for improving our lives is not paying attention.

In the 19^th and 20^th 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 20^th-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.

Economics From Barack Obama

Here's two very simple, very fundamental economic principles:

1.) Incentives matter.

2.) Supply and demand matters.

You would think that the President of the United States would understand both of these principles. However, he still says things like this:

"And the evidence shows that unemployment insurance doesn’t stop people from trying hard to find work." 

And this:

"But there’s no solid evidence that a higher minimum wage costs jobs."


Both of these statements are incorrect. There is indeed a large amount of evidence that unemployment insurance and the minimum wage have significant, negative impacts on employment. Indeed, such evidence has been discussed on this blog (here and here)

It's also true that such evidence does not necessarily mean that increasing the minimum wage or extending unemployment insurance are bad ideas. It does mean that these policies have real costs that need to be considered.

My real concern with these statements, however, is not that Mr. Obama is misrepresenting the literature on these issues (even though he is). Instead, my real concern is that these statements both are highly illogical from an economic point of view.

One need not look at large amounts of evidence to know that, all else equal, unemployment insurance leads to less employment. All one needs to know to understand this is that incentives are real. If Barack Obama is saying that unemployment insurance has absolutely no effect on employment, he is essentially saying that incentives don't exist.

The same is true of the minimum wage. Wages are determined by supply and demand. Putting a binding minimum on a wage or price, all else equal leads to less demand for that good or service. In the context of wages, that means lower employment. Barack Obama's statement on this is not merely incorrect. It is illogical.

If the literature indeed showed what Barack Obama said it showed (which it does not), the correct way to phrase it would be that these policies do not have large enough effects to make a significant difference in lieu of other factors.

This is not meant as a criticism of Barack Obama, but the fact that our president is saying things like this is a bit disconcerting.

Popularity of Single Payer

In my recent post criticizing the single payer model of health care, I left out an important component of the affirmative argument for single payer: the popularity of such systems where in place. There are two questions to ask here:

1.) Are single payer systems actually popular where in place?

2.) Does this mean that single payer is a successful model?

To the first question, the answer is complicated. I was able to find some data from the Commonwealth Fund that does shed some light. They asked people in various if they thought their respective health care systems needed minor changes, fundamental changes, or total rebuilding.

In Canada, which sports the model of single payer that advocates in the USA often want to emulate, the results indicate that only 10% of Canadians are willing to say they want to completely rebuild their system. Only 38%, however, said only minor changes are needed. That leaves a majority (51%) of Canadians saying that their system needs "fundamental change". That isn't terrible, but it is hardly the picture of a popular health care system.

It only looks popular in comparison to the USA. Here, 27% say complete rebuilding is necessary, 42% say fundamental changes are needed, and 29% say only minor changes are needed. Canada's numbers look a good deal better when put into this context.

However, a study that I linked to in my last post on single payer provides data regarding a different but closely related question: how people feel about the care they personally receive. Here, the numbers are quite different. 51% of Americans aged 18-64 report being very satisfied with the health care services they receive. For Canadians, only 42% of those aged 18-64 report being very satisfied with their health care services. For people over 65, the results are closer but even here the USA comes out on top.

In other words, Canadians like their system more than Americans like their system, but Canadians are less positive about the care that they personally receive than are Americans about the care that they receive.

This moves to the second question I posed above. The popularity of a given system is, in my view, shaped more by perception than reality.

I've been to countries with single payer health care, and there is a sort of "health care nationalism". Criticism of the NHS or Canadian Medicare are seen as unpatriotic. The medias in these countries lavish praise upon these systems constantly. By contrast, within America, criticism of the system is universal. Indeed, defenders of the USA status quo in health care are often seen as contrarians.

The people in countries with single payer generally know that these systems have great flaws which is why, at least in Canada, they aren't keen on the service they personally receive. Despite this, they still tend to believe that their system is pretty good. Another reason for this is that most people never encounter any other health care systems other than their own. So, most people really don't know what other health care models are actually like.

Another simple reality is that in systems of single payer, care is free at the point of delivery. Care still costs money, but most of it is paid through taxes. From the point of view of many people in these systems, I would imagine, the care simply seems "free". There is so little direct connection between the costs of health care and benefits of health care that people in these systems only see the benefits. They still bare the costs through taxation, but the connection is often not made. People are more willing to look past the flaws of a system that they think is "free" than a system that they do see the costs for.

This also explains the popularity of Medicare (USA Medicare). People see the benefits, but they don't see the costs. The costs are there, but they are harder to see for the average American.

Single payer health care systems only seem more popular than other models because of perception among the public and how far removed users of the systems are from the costs of the systems. The argument for single payer from popular opinion can be added to the long list of bad arguments for single payer.

A Few Points on the Minimum Wage

The NYtimes has a couple of articles advocating a hike in the minimum wage (here and here), as do many other news outlets. Scott Winship offers an excellent piece that takes a look at the actual facts in the minimum wage debate. Here's a few thoughts:

1.) First, in my post about the economics of the 1950s and 1960s, I made a point about the minimum wage being around $22 today had it kept up with productivity since the 1960s. This is technically true, but it is an entirely useless piece of data. In fact, to compare the relative minimum wage over time, we should look at the "real" minimum wage that is simply adjusted for changes in cost of living. Winship points out that the historical peak in the minimum wage (1968) would only be $8.32 today using a "chained" price index. That means that, contrary to what I said previously, President Obama's proposal would indeed raise the minimum wage above its historical peak. Even if we use a different measure of inflation, the minimum wage was still under $10 in real terms in 1968.

2.) Only 3% of the workforce is paid the minimum wage today compared to 8% in 1979. Likewise, this 3% has benefited from a greatly expanded EITC. This 3% has also benefited from cheaper goods (Wal Mart). The point is that low wage workers today are probably better off than the low wage workers of 30 or 40 years ago.

3.) The standard economic argument against the minimum wage is that it increases low skill unemployment and raises prices. The standard response to this argument is that the literature finds this effect to be very small if even existent. That is to say, advocates of the minimum wage frequently argue that the costs of the minimum wage are very limited. The fact that only 3% of the work force is paid minimum wage also suggests that the benefits of the minimum wage are quite limited. After all, at most, only 3% of the workforce are paid more because of the minimum wage. When doing a cost/benefit analysis of the minimum wage, we need to weigh the benefits of 3% of the population getting slightly higher wages compared to slightly higher prices for all and a small group that will not find employment because of the minimum wage.

4.) Winship does a good job of summarizing the empirical literature. However, given simple economic logic, even economists that are strong supporters of a higher minimum wage will usually admit the obvious truth that there is at least some cost in terms of employment that comes with a higher minimum wage. The only people who deny even a small impact on employment are advocates and non economists who are typically not very familiar with the empirical literature or economics in general.

5.) Despite claims to the contrary, the empirical literature suggests, with very little ambiguity, that there is at least some negative effect on employment stemming from a higher minimum wage (look here). The size of the effect is, however, much less clear.

6.) For whatever it's worth, Scott also points out that 70% of the workforce today reside in states that have higher minimum wages than the national $7.25. That means that, effectively, the minimum wage is higher than $7.25 for about 70% of the workforce. This was true of virtually nobody prior to 1980.

7.) It's often pointed out that the minimum wage disemployment effects should be low because, unlike manufacturing jobs, minimum wages jobs are usually in the service sector and cannot be outsourced. This line of thought seems to ignore the fact that, also unlike manufacturing, jobs in the service sector can be easily eliminated in favor of "self service". Gas stations, for example, no longer hire people to fill up tanks. Instead, they just have people fill up their own tanks. It's not unthinkable that the minimum wage had at least something to do with this shift. Service sector employment is not necessarily less sensitive to minimum wage hikes. More on this here.

8.) It is often argued that raising the minimum wage would reduce public spending on anti poverty programs by increasing the wages of low income workers to high enough levels to reduce their eligibility for such programs. Of course, this argument entirely ignores the disemployment effects of the minimum wage. If raising the minimum wage decreases employment, that means more people in need of more public assistance. As stated above, the literature is pretty clear about the fact that there are at least some negative employment effects stemming from the minimum wage. The effect on public finances depends on the size of this effect. All things considered, it seems quite unlikely that a higher minimum wage will actually reduce anti poverty spending.

9.) A significant portion of those earning minimum wage (37%) are teenagers living with their parents (look here). That's not exactly the portrait of minimum wage workers that the media often presents.

10.) It's fairly clear that raising the minimum wage increases prices at least somewhat (look here for some evidence on this). However, just like the employment effects, the size of this effect is much less clear.

When all is taken into consideration, my view is that the costs of raising the minimum wage far outweigh the benefits which is why I oppose such an increase. However, other views are welcome as always. Given the ambiguity in the literature, diverging views can exist even among those very knowledgable about the issue.

Greg Mankiw On Pope Francis

I was going to comment on Pope Francis's recent comments on economics, but Greg Mankiw did a much better job expressing the same reaction I had:

"First, throughout history, free-market capitalism has been a great driver of economic growth, and as my colleague Ben Friedman has written, economic growth has been a great driver of a more moral society.

Second, "trickle-down" is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose.  It is equivalent to those on the right referring to the "soak-the-rich" theories of the left.  It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.

Third, as far as I know, the pope did not address the tax-exempt status of the church.  I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down."

I had the exact same reaction that Mankiw had, and, as usual, Mankiw hit the nail on the head.

What Do the 1950s and 1960s Teach Us About Economic Policy?

The 1950s and 1960s economy featured a much stronger role for unions, much higher marginal tax rates on wealthy individuals, much stronger regulation, and a much higher minimum wage (in real terms). What happened?

Well, as progressive economists often tell us, unemployment was fairly low, GDP growth was fairly high, and we had much less income inequality. Is this not a total refutation of neoliberalism and supply side economics?

Perhaps, but I don't see it that way (not surprisingly). To give a bit more perspective, since that time period, union membership has fallen from somewhere around 30 to 35% of the workforce to 10 to 15% of the workforce today. Top marginal tax rates ranged from around 70 to 90% in the 50s and 60s compared to tax rates ranging from 28 to 40% over the past few decades. The minimum wage would something like $22 (that's the number I've heard) had it kept up with productivity since 1960. Instead, it is $7.25 today. Another neoliberal policy, free trade, has also been expanded greatly since the mid 20th century.

On the other hand, the Great Society was not until the 1960s and thus the welfare state was a good deal smaller for most of the 1950s and 60s than it is today. Also, while we've seen many deregulatory initiatives in recent decades, we've also seen expanding regulation in many areas. So, the direction of regulatory policy is more debatable.

Still, all things considered, our economic policy has moved in a decidedly neoliberal direction since the mid century. Despite this, as is often mentioned, there is not a noticeable improvement in economic performance during this period, but there is a large increase in income inequality. 

The way progressives (and indeed most people who look at this issue) interpret this is that neoliberalism ultimately failed to enhance productivity. I think there are two ways to interpret this:

1.) The progressive narrative that neoliberal reforms simply took place due to a political shift and failed.

2.) Another possible explanation is that neoliberal reforms were in response to a bad economic performance and did improve economic performance relative to how the economy would have performed absent the reforms.

The basic disagreement here stems around what would have happened absent any economic reforms. The progressive narrative implies that, absent the reforms, our economy would have continued performing as strongly as it had in the 1950s and 60s. The competing narrative holds that, absent any reforms, there would have been a much more significant growth slowdown than there was.

Luckily, the neoliberal revolution was not strictly an American phenomenon and indeed happened across the developed (and even developing) world. Perhaps more importantly, some countries were much more aggressive in reforming their economies than others while some did not reform at all. This offers us something close to a natural experiment. 

If the progressive narrative is correct, countries with more aggressive reforms should not see any advantage in economic growth over the countries that reformed less aggressively or didn't reform at all. If the competing narrative is correct, the more aggressive reformers should she positive (relative) results.

Scott Sumner wrote a piece in 2010 looking at this very data. He compares the GDP per capita 
(and even provides a chart) over time between various countries and here is what he finds:

"

Country	1980	1994	2008
United States	1.000	1.000	1.000
Australia	.841	.770	.837
Canada	.905	.818	.843
Britain	.688	.705	.765
France	.780	.730	.713
Germany	.803	.812	.763
Italy	.756	.754	.675
Sweden	.868	.777	.794
Switzerland	1.146	.987	.915
Asia
Hong Kong	.547	.845	.948
Japan	.732	.815	.736
Singapore	.577	.899	1.064
Latin America
Argentina	.395	.300	.309
Chile	.210	.251	.311

Note that four countries gained significantly on the United States, two were roughly stable (Australia and Japan) and the rest regressed. The four that gained were Chile, Britain, Hong Kong and Singapore. Of course, many poor countries also gained on the United States, but that's to be expected. As we will see, the relative performance of each of these economies is consistent with the view that neoliberal policies promote economic growth.

Britain: At the time Margaret Thatcher became Prime Minister in 1979, decades of statist policies had turned Britain into the sick man of Europe. The government owned the big manufacturing firms in industries such as autos and steel. The top individual MTRs on income were 83 percent on "earned income" and an eye-popping 98 percent on income from capital. Frequent labor strikes paralyzed transportation and led to garbage piling up in the streets of London. Much of the housing stock was government-owned. Britain had lagged other European economies for decades, growing far more slowly than most economies on the continent. Thatcher's reforms were among the most comprehensive in the world, and by the mid-1980s, Britain was growing faster than the other major European economies. By 2008, it had a higher per capita income than Germany, France, and Italy.

United States: The United States was doing better than Britain in 1980, but not particularly well. We had also been growing much more slowly than Europe and Japan. Unlike Britain, we were still richer than most other developed countries, and so many people viewed this convergence as partly inevitable (the catch-up from World War II) and partly reflective of the superior economic model of the Germans and Japanese. It was widely expected that Japan and Germany would eventually surpass the United States in per capita GDP. Paul Samuelson claimed in 1973 that Soviet GDP might surpass U.S. GDP as soon as 1990.5 Obviously none of this happened, and by the 1990s, the United States was growing faster than most major European economies.

Australia: A traditionally rich country whose commodity export model started to sputter in the 1970s, Australia began free-market reforms in the 1980s (under a left-wing government) and accelerated the reforms after the conservatives took power in 1996. After 1994, Australia's relative decline reversed.

Japan: Japan is just the opposite of Australia. Its free-market export model did very well in the post-war years and didn't hit a wall until about 1990. After that, domestic growth sputtered as Japan's dysfunctional government refused to reform its statist domestic economy.

Hong Kong and Singapore: These two countries top most surveys of "economic freedom" (which include size of government.) Both are in the process of becoming much richer than the United States. Some of that is due to their status as city-states. But even in larger developed economies, the population is mainly urban, and so Hong Kong's and Singapore's success is due to more than just demographics.

Canada: Canada is similar to Australia, except that it was not as statist as Australia in the earlier period, and its reforms occurred in the 1990s, when Canada began shrinking the size of government as a share of GDP, after having, in 1988, adopted free trade with the United States. These reforms were successful, as its decline relative to the United States was reversed, and Canada started catching up after 1994.

France and Germany: Both passed some reforms, but much less than Britain. They suffered a decline relative to both Britain and the United States. Note that the German data for the whole time period include the East, so their relative decline cannot be explained by the 1990 absorption of that less-productive region.

Italy: Italy instituted a few reforms, but has a significantly more statist model than most of Western Europe. Italy fell far behind Britain.

Sweden: Sweden had a bad recession in the early 1990s after having suffered decades of relative decline. It made major cuts in MTRs, privatized, and deregulated during the 1990s, and its relative performance improved after those reforms.

Switzerland: Switzerland has always been regarded as one of the most capitalist countries in Western Europe, but has also been among the least aggressive countries in terms of neoliberal reforms. That pattern would predict high levels of GDP/person, but relative decline vis-à-vis the United States And that is exactly what has occurred."

(There is more here)

The data seems to be much more in line with the neoliberal narrative than the progressive narrative. This, of course, begs another important question: if really high MTRs, really high minimum wages, and related policies hurt relative economic growth after 1980, how did the USA economy do so well with top tax rates in excess of 70% and a minimum wage over $20 in relative terms.

In my opinion, there is an often unacknowledged reality regarding economic policy and culture: a given policy could be good in one country at a certain point in time, bad in another country at a different point time, and really bad in yet another country at yet another point in time.

70% top tax rates and $22 minimum wages are the kinds of policies that are bad wherever tried. However, they would be much worse today than in the 1960s. Why?

I think a few forces since then have made these sort of economic policies go from moderately bad in the 1960s to very bad in the 2010s. One force is globalization. This is things like free trade, immigration, and the elimination of capital controls, all of which offer immense economic benefits.

However, they also make it easier for employers to find labor that is not subject to USA minimum wage laws. That could be foreign labor or (illegal) immigrant labor. It could also be machine labor.

The point is that in the 1960s, employers had fewer options when it came to labor that they valued less than the minimum wage.  That is not true today.

The same is true of taxes. In the mid 20th century, industry was not particularly mobile. People weren't particularly mobile. It was much harder to make investment or living choices based on tax regime. Still, even in in the 1950s and 1960s, there was significant investment in tax avoidance. This is made clear by the discrepancy between the high tax rates and (not so high) revenue as % of GDP. If high tax rates aren't even able to raise a lot of revenue, one wonders exactly what purpose they are serving.

Another issue is the rising role of startups. Back in the good old days (I'm told), there were a few companies that everyone worked for their entire life. They all joined the union and received a steady, stable paycheck.

Today, there is a heavy reliance on entrepreneurs and startups. New enterprises are much more difficult to startup in an environment of high taxes, high labor costs, and a large regulatory bureaucracy. Large, incumbent firms can absorb these costs more easily. An economy relying on these types of firms also involves less mobility.

An entrepreneur starting a new business is much more likely to take tax regime into account when choosing where to do business than an existing large business that already has a substantial infrastructure. In an economy that relies on the continuation of startups, tax regime matters a good deal more.

On a similar note, in the post industrial economy, people are often switching jobs. People are also competing with the entire globe when it comes to jobs. Strong labor unions were likely an inevitable casuality of economic progress.

The main point is that larger economic forces are pushing economic policy in a certain direction. In the modern world, economies with 70% top tax rates, $22 minimum wages, and powerful unions are simply not competitive economies.

People who supported these economic policies see this as a "race to the bottom". I tend to see it more as a "race to the top". Globalization has forced countries to adopt economic policies that are ultimately better for their people.

The 1950s and 1960s were something of a golden age for the American worker. However, all things considered, its a good thing that we left the economic policies of the mid 20th century in the mid 20th century.

UPDATE: I 'd also like to point out how the parameters of our debate have shifted. Even if President Obama could get his minimum wage and tax proposals through, we would be looking at a $9 minimum wage and a top tax rate around 45%. I'm not a fan of either of those proposals, but we are still looking at a minimum wage and top tax rate well below their level in the 1960s.

Republicans accepted the New Deal long ago and began trying to reform it instead of eliminate it. Democrats have done the same with regards to the (necessary) changes in economic policy that have taken place over the past 30 years.

The ACA and Market Based Health Care Reform

What exactly is the ACA?

Many on my side of the political spectrum claim that it is a government takeover of the health care system that will ultimately lead to a disasterous socialized medical system. Others on this side claim it is merely a large expansion of the federal government that will lead to all sorts of practical and unintended problems.

On the other side of the political spectrum we see some claim that the ACA is a heroic (but politically feasible) piece of legislation that reduces many of the injustices present in our current health care system. Another group claims it was a pathetic attempt to achieve a progressive goal (universal health care) largely through private entities. The latter typically support single payer health care. 

So, who's correct?

In my opinion, it is the latter group on the right who claim that the ACA's flaws lie in the practical problems that will come about with it.

Regardless, there is one thing the ACA clearly is not: market based health care reform. As a supporter of market based health reform, I have found that many ACA supporters think that I should support ACA. Indeed, a liberal friend of mine recently asked me why I oppose a bill that is so market oriented. Well, the reason, as I explained to him, is that the ACA does not move us towards market based health care. It moves us in the opposite direction.

From my point of view (an advocate of consumer based health care), there are a number of strong critiques of the ACA:

1.) The insurance regulations are far too comprehensive. If we are to have a health care system with a greater role for market incentives alongside an individual mandate, that mandate has to only mandate catastrophic coverage. I want to go into more detail about the specific benefit mandates in the future. No health care plan that mandates anything more than catastrophic insurance cannot be considered market oriented.

2.) The subsidies are a more complex issue. They don't actually interfere with the workings of the market in any major way. However, the fact that these subsidies are heavily means tested creates the unintended consequence of high implicit tax rates (IMTR). As income rises for individuals with subsidies, the subsidies are phased out which creates a disincentive to work. I support the general concept of subsidies (or tax credits) to help individuals purchase plans and finance health savings accounts (which have been impacted negatively by ACA).

3.) The Medicaid expansion is problematic as well. On top of being a means tested program that also creates higher IMTRs, Medicaid offers extremely low quality coverage. Indeed, the quality of care offered on Medicaid is simply unacceptable for a nation as wealthy as ours. Expanding the program without any major effort to improve the quality of care offered by Medicaid would actually hurt the very people the policy intends to help. One very smart blogger accurately labeled Medicaid a "humanitarian catastrophe".

4.) The employer mandate exacerbates one of the worst features in our current system: the connection between health insurance and employment. This mandate also has the unintended consequence of increasing the cost of employment which will likely lead to reductions in total employment.

5.) The tax increases are another major element that very few advocates of markets in health care would be comfortable with. This is especially true since a major tax increase is aimed at investment income which is an extremely inefficient form of taxation.

6.) I don't have a problem with IPAB per say. However, I do have a problem with the law's assumption that IPAB will save such a large sum of money. Given the nature of our political system and the limits on IPAB, it is unlikely that IPAB will achieve any major cost savings. This means that the health care law will likely add a significant amount to the national debt. This is especially true after we consider lost revenue from the deadweight loss resulting from the hikes in both IMTRs and MTRs.

Having said all of this, the ACA does do do a few things that will truly lead to a more competitive market. The health exchanges, despite their technical problems, have great potential in this respect. Indeed, if the comprehensive mandates and large amount of regulations included in the ACA get rolled back, the health exchanges could offer a path to true consumer based medicine. This would also likely require a rollback of the Medicaid expansion and elimination of the employer mandate.

All in all, I'm not a supporter of the ACA. However, I am also a political realist. Even a Republican president and congress would not be able to repeal the bill come 2017. However, the optimist in me thinks it is possible that a coalition of pragmatic Democrats who recognize that the law has many shortcomings and pragmatic Republicans who realize repeal is no longer a politically viable option may come together to fix the aforementioned problems and, perhaps, bring us something much closer to a consumer driven health care system than we had even before the ACA.