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Is Big Government Inevitable? Desirable? Necessary?

December 16th, 2011 8 comments

Let’s start with two basic facts:

• Governments in all thriving, prosperous countries tax/spend 25–50% of those countries’ GDP (averaging around 40%).

• Governments in non-prosperous countries — those that haven’t suffered a recent crash in the numerator/GDP — are all below that range.

There is not a single thriving, prosperous country that does not tax at these levels, or engage in massive quantities of redistribution. Not one.

For me, this raises the conundrum:

If policies eschewing such redistribution are so economically efficient — as claimed by libertarians/conservatives/Republicans/neoclassical economists — one would expect at least one country to have emerged that eschews those policies, and to see that country surge ahead of all the rest.

It hasn’t happened. Not once.

So it’s easy to jump to the post hoc ergo propter hoc conclusion:

Redistribution is necessary for a prosperous country to emerge and thrive. It is at least a necessary (though of course not necessarily sufficient) cause of that prosperity.

But of course you can argue the opposite causation:

Prosperity causes bigger government.

I see two possibilities there:

1. Government services are “normal goods” — as people get more prosperous, they want more of them. Giving people what they want is not a bad thing.

2. The growth of government is an emergent property of a prosperous economy, and is not actually an expression of, does not provide, what individuals want. It just happens because of the inherent dynamics of the system. (Dynamics that are easy to imagine but that I won’t describe here.)

#2 is, I think, the the argument that libertarians would make to explain the correlation between government size and prosperity.

I don’t know how to adjudicate in any definitive way between these two conclusions, or between [one of them] and the redistribution-“causes”-prosperity conclusion.

Given some correlation (necessary to even assert causation), the only way to convincingly demonstrate causation is to tell a coherent and convincing story about the process by which the causation happens. That’s what I did in my first Angry Bear post (well, you can judge for yourself how convincing it is).

Absent any definitive way to decide, for the time being I’m going to stick with the first-blush conclusion suggested by the correlation, and supported by my theories of causation:

Larger government and a significant dose of redistribution are necessary for a prosperous, modern country to emerge and thrive.

 Cross-posted at Angry Bear.

Now (Also) Blogging at Angry Bear

December 16th, 2011 3 comments

Just a note to my gentle readers to let you know that in future I’ll also be blogging at Angry Bear, where I’ve done a couple of guest posts over the years. It’s a great blog that I’ve been following for a long time, and I’m honored to have been invited to join the Clan of the Angry Bear.

My first post as a Bear is here. I expect to put most of my posts up on both blogs, but on occasion — especially when I’m reprising material from here — I might post to only one or only the other.

But in any case I encourage you to add Angry Bear to your reader. I’ve gotten many remarkable insights from the experts there, and from the excellent community of commenters.

Financialization and the Stripping of the Middle Class, in Twelve Graphs

December 12th, 2011 2 comments

Below are three that I haven’t seen before. Check out the rest.

Takeaway:

The Darwinian struggle to strip the flesh from insolvent consumers before one’s competitors do so is not a thriving economy nor a growing economy; it is a hollowed out economy at a dead-end of financialization and substitution of Federal debt for actual production.

I’d only amend, so: “substitution of private and government debt…” The private runup utterly dwarfed the government runup, and since private debt actually has to be paid back, that’s where the problem arises.

In the heyday, home equity extraction — borrowing — was adding $2.5 trillion a year to household spendables — something like 20% of GDP.

Hat tip to Zero Hedge.

charles hugh smith-The Last Refuge of Wall Street: Marketing To Increasingly Insolvent Consumers.

15 Fatal Fallacies of Financial Fundamentalism

December 11th, 2011 5 comments

File under: “Every brilliant, original thought or formulation that you think you’ve come up with has probably been thought of before, and probably by a Nobel laureate.”

Nanute points us to:

15 Fatal Fallacies of Financial Fundamentalism. William Vickrey, 1996.

Here are the first three paragraphs. As they say in the trade, read the whole thing.

Much of the conventional economic wisdom prevailing in financial circles, largely subscribed to as a basis for governmental policy, and widely accepted by the media and the public, is based on incomplete analysis, contrafactual assumptions, and false analogy. For instance, encouragement to saving is advocated without attention to the fact that for most people encouraging saving is equivalent to discouraging consumption and reducing market demand, and a purchase by a consumer or a government is also income to vendors and suppliers, and government debt is also an asset. Equally fallacious are implications that what is possible or desirable for individuals one at a time will be equally possible or desirable for all who might wish to do so or for the economy as a whole.

And often analysis seems to be based on the assumption that future economic output is almost entirely determined by inexorable economic forces independently of government policy so that devoting more resources to one use inevitably detracts from availability for another. This might be justifiable in an economy at chock-full employment, or it might be validated in a sense by postulating that the Federal Reserve Board will pursue and succeed in a policy of holding unemployment strictly to a fixed “non-inflation-accelerating” or “natural” rate. But under current conditions such success is neither likely nor desirable.

Some of the fallacies that result from such modes of thought are as follows. Taken together their acceptance is leading to policies that at best are keeping us in the economic doldrums with overall unemployment rates stuck in the 5 to 6 percent range. This is bad enough merely in terms of the loss of 10 to 15 percent of our potential production, even if shared equitably, but when it translates into unemployment of 10, 20, and 40 percent among disadvantaged groups, the further damages in terms of poverty, family breakup, school truancy and dropout, illegitimacy, drug use, and crime become serious indeed. And should the implied policies be fully carried out in terms of a “balanced budget,” we could well be in for a serious depression.

The Fed Always Thinks That Unemployment’s Not a Problem

December 4th, 2011 16 comments

A little behind here, but I wanted to post this eye-opener from Mike Konczal:

Their model is obviously telling them that whatever (non-)actions they’re taking at the moment will solve the problem.

And their model is obviously, consistently, and wildly wrong — and always wrong in the same direction.

Altering that model to accurately predict unemployment, of course, would require that they allow more inflation in order to address both of their mandates.

And higher inflation utterly slams the real wealth of creditors.

And the Fed is run by creditors.

Comparing the Federal Reserve’s Reaction to the Financial Crisis Versus the Unemployment Crisis | Rortybomb.

“Freed of the southern incubus…”

December 4th, 2011 14 comments

I’ve been re-reading parts of James McPherson’s Battle Cry of Freedom (thanks Sis!), often billed as the best one-volume history of the Civil War era. While it goes into quite a bit more detail about orders of battle and such than I feel the need for — there’s too much about the war and less than I’d like about the war era — its early chapters do an excellent job of explaining the discord in preceding decades that led up to the conflict (Missouri Compromise, Kansas-Nebraska Act, all that).

But what caught my eye this time was the following passage about the first session of Congress after the southern states seceded (pp. 450-51). Emphasis mine for easy scanning.

The second session of the 37th Congess (1861–62) was one of the most productive in American history. Not only did the legislators revoloutionize the country’s tax and monetary structures and take several steps toward the abolition of slavery; they also enacted laws of far-reaching importance for the disposition of public lands, the future of higher education, and the building of transcontinental railroads. these achievement were all the mroe remarkable because they occurred in the midst of an all-consuming preoccupation with war. Yet it was the war — or rather the absence of southerners from Congress — that made possible the passage of these Hamiltonian-Whig-Republican measures for government promotion of sociaoeconomic development.

… Republicans easily overcame feeble Democratic and border-state opposition to pass a homestead act. …

For years Vermont’s Justin Morrill … had sponsored a bill to grant public lands to the states for the promotion of higher education in “agriculture and the mechanic arts.” … The success of the land-grant institutions was attested by the later development of first-class institutions in many states and world-famous universities at Ithaca, Urbana, Madison, Minneapolis, and Berkeley.

transcontinental railroadFreed of the southern incubus, Yankee legislators highballed forward … Lincoln signed the Pacific Railroad Act granting 6,400 acres of public land (later doubled) per mile and lending $16,000 per mile (for construction on the plains) and $48,000 per mile (in the mountains) of government bonds to corporations organized to build a railroad from Omaha to San Francisco Bay. …

Most Americans in 1862 viewed government aid as an investment in national unity and economic growth that would benefit all groups in society.

By its legislation to finance the war, emancipate the slaves, and invest public land in future growth, the 37th Congress did more than any other in history to change the course of national life. As one scholar has aptly written, this Congress drafted “the blueprint for modern America.”

Do you think we could convince them to secede again?

Capital in the American Economy Since 1930: Kuznets Revisited

December 2nd, 2011 2 comments

James Livingston, author of Origins of the Federal Reserve System plus several other books, has been getting play lately from Megan McArdle and Karl Smith (again among others) for his new book, Against Thrift: Why Consumer Culture is Good for the Economy, the Environment, and Your Soul. (McArdle is typically daft and schmarmy.)

My longer-time readers might remember how taken I have been with some of James’ writings. (Follow Related Posts below to see some of my discussions of his discussions.) So I was pleased when he asked me to collaborate on an appendix to his book, detailing the trends in American capital formation since the time of Simon Kuznets (creator of the national accounts system in the 1930s), and Kuznets’ 1961 work, Capital in the American Economy: Its Formation and Financing.

I’m pleased to make that appendix freely available here (PDF). The spreadsheet from which the figures were generated is here.

The introductory section is all James (with a tweak by me here and there), but the data presentation that follows is all mine. I hope readers find it useful, and valuable enough that it encourages them to buy James’ book.

As a teaser to that teaser, here’s an excerpt from the appendix.

==============

First, let’s look at total national investment in fixed
assets (Figure 1). In this graph and all the others, the depression and war
years, not surprisingly, display very large variations (the annual numbers
often jump around quite wildly). While those variations can be illuminative,
the Kuznetsian emphasis on long-term trends prompts us rather to look to the
right side of the graphs, at the postwar years that are not skewed by such
world-apocalyptic events—the six decades from the 50s through the 00s.

Figure 1.

The most notable and consistent postwar trend is the decline
in net investment, even while gross investment remained mostly flat with slight
decline, and capital consumption increased slightly. Those two small trends
compound to result in the quite large (35%) decline in net investment as a
percent of GDP from the 50s to the 00s.

Before taking a detailed look at the sectors
comprising that total, it’s worth looking just at gross investment for those
sectors (Figure 2). The big postwar trend is the rise in the level of business
investment, and also its share of total investment—from 45% of the total in the
50s to near or above 60% from the 70s through the 00s. By contrast, in 1961
Kuznets identified the increasing share of gvernment investment as a or perhaps
the dominant trend in the decades he was examining. The long-term postwar trend
has moved in the opposite direction.

Figure 2.

Government gross investment as a percent of GDP (not
including defense) has declined or been flat since the 50s; the decline is
significantly more pronounced if you include government defense investment.

The change in defense investment as a percent of GDP has
been an almost mirror image of business investment, declining 53% from the 50s
to the 60s alone, and 80% from the 50s to the 00s. (Since it’s so much smaller
than business investment, the smaller absolute decline yielded a far more
profound proportional decline.)

Also perhaps surprising given recent events in the
residential real-estate market, the share of gross residential investment has
been mostly flat or declining since the 60s, following a postwar surge in the
50s.

The trend for private-sector investment (residential and
non-residential, Figure 3) is similar though somewhat less pronounced than the
trend in total investment: a decline in net investment, effected by both a
decline in gross investment and a somewhat larger increase in capital
consumption.

Figure 3.

This brings us to the largest and arguably most important
investment segment: private non-residential, a.k.a. business investment (Figure
4). These assets are important because they’re used to produce other assets and
consumption goods. They are a crucial component of the national engine of
production and prosperity.

Figure 4.

Again we see a familiar trend, but more pronounced. Gross
investment rises into the 80s and dips slightly thereafter, but net investment,
dragged down by faster capital consumption, declines significantly from the 70s
on. The net investment level in the 00s is 40% below the 70s.

….

==============

Here’s hoping you find it useful…

 

Does Big Gubmint Cause Budget Problems? Doesn’t Look Like It…

December 2nd, 2011 Comments off

Tax-to-GDP ratio and bond yields in OECD countries

Tax-to-GDP ratio and bond yields in OECD countries (excluding Greece)

In fact, governments that tax sufficiently to pay their bills have lower borrowing costs. Go figger.

More here: The welfare state is not to blame for the Euro crisis « We are all dead..

Trends in Intergenerational Mobility: Declining Opportunity Since 1980

December 1st, 2011 2 comments

Ask and ye shall receive. Roger Chittum sent me this:

Estimated correlations between sons’ and parents’ incomes, 1950-2000

Higher correlations, of course, mean lower mobility.

Why do all these inflection points land at 1980 (or just before)?

While you’re there, don’t miss this incredible interactive graphic:

Mobility decreasing in recent decades | State of Working America.

Why Visiting U Chicago is Cool

December 1st, 2011 Comments off

Just arrived, walking to The Pub, two students walking by the other way.

…fading in… “the argument you’re making makes no sense. It’s like saying ‘if all Serbian men were made of cheese…’  …fading out…

Nice to be here.