The Unemployment Depression

This morning Paul Krugman is thrilled to pronounce the start of what he refers to as the Third Depression in American history:

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

and I certainly agree with this pronouncement:

And this third depression will be primarily a failure of policy.

However, I suspect that the policies he’s referring to aren’t the policies that are actually at the root of our problems.

Our present economic downturn isn’t at depression levels for any indicator other than employment. If unemployment were defined the same way now as it was three quarters of a century ago, we would be approaching the levels of unemployment seen then. Don’t let any of my comments fool you into thinking that I’m unconcerned about the plight of the unemployed. That isn’t the case. The question is why isn’t employment growing?

You can’t understand the fix we’re in until you recognize that the late 1990’s were an aberration. Several things, including the enormous capital investments that had been made by governments and businesses over many years in computer and communications technologies finally paying off, the end of the Cold War, the rise of sovereign wealth funds, the centralization of finance, all happened at once. Once you discount the Internet bubble and the sudden and, unfortunately, temporary increase in income it produced it’s clear that income growth (except among the very highest income earners) and job growth have been phlegmatic in the United States for a quarter century or more.

We can’t return to the late 1990’s. It was the exception, not the rule.

What are the factors that are dragging our economy down? Here are a few:

  • We have been investing very heavily in the healthcare sector, a sector which creates fewer jobs per dollar than most others, without being willing to control costs there. The “doctor fix” making its way through the Congress as we speak is the latest example of that lack of willingness.
  • We have persisted in subsidizing things, e.g. housing construction, oil consumption, that are not in our long-term interests. The long-term eventually arrives.
  • We subsidize the incomes of people who don’t need subsidies.
  • We undertake too much with our military and spend too much on it.
  • We have imposed an increasing administrative burden on businesses in the form of regulations, especially the execrable Sarbanes-Oxley. I know of no business that has improved its actual accountability by implementing it. But I know of lots that are bearing substantial costs by doing so.
  • Government at all levels is mired in the 1950’s in business methods, personnel policies and procedures, and, most of all, costs.
  • We should never have admitted China to the WTO or granted it permanent most favored nation trading status without exacting much more stringent actions from the country including abandoning their peg on the dollar and allowing currency to be freely traded in China. China is so vast it can shake the world economy and, since it continues to be authoritarian, it can do so as a matter of policy.
  • The policies of the Fed, contributing to asset inflation, made us think we were better off than we were.

Dr. Krugman may not like what the Europeans are doing but they have little choice. They’re tapped out. Borrowing is drying up for them. And their austerity plans will have the perverse effect of nullifying whatever effect our own fiscal stimulus strategies may have. If the rest of the world concentrates on production while we concentrate on consumption, there will be job creation but it won’t be here. We undertake increasing debt at enormous risk.

I’m not an anarcho-capitalist (maybe not even a minarchist), I think that some government regulations are necessary to keep the market free and make for a civil society, and I don’t think that isolationism will solve our problems. I do think we need to do whatever we do a lot more prudently than we have been. To me that means less influence from Fabian theoreticians who’ve never created a business or made a payroll.

35 comments… add one
  • steve Link

    I am agnostic on the China issue, but mostly agree, except I have doubts, and questions, about this.

    “We have imposed an increasing administrative burden on businesses in the form of regulations,”

    I am thinking we are both old enough to remember the 60s and 70s a bit. The airlines and phone company were regulated heavily or a monopoly. Same with a lot of the energy companies. Same with finance. My sense is that we have heavily deregulated since then. In fact, conservatives and libertarians routinely make the argument that one of the primary reasons for Reagan’s success was deregulation. Even the Clinton administration was fairly pro-business. Certainly a Republican Congress and President would not seem to be pushing regs.

    So, is there any empirical evidence for your claim? I have looked for this before but never found anything. This also ignores the fact that many regs were flat out being ignored. The MMS partying and sexing with those they were supposed to regulate just being the most egregious example. Probably more important was letting industry write the bills, like the 2005 bankruptcy law or the special exemption letting banks increase leverage.

    There needs to be a balance, I just dont know where that should be. My gut feeling is that we should be fairly heavily involved in regulating or right sizing (my preference) the finance and insurance sectors while being light on industrial regs.

    Steve

  • The airlines and phone company were regulated heavily or a monopoly.

    They’re still regulated heavily. Much of the regulation as in finance, insurance, and so on serves to prevent upstart competitors. That some industry was heavily regulated 30 years ago does not mean that it isn’t even more heavily regulated today. Also note that federal regulation isn’t the only government regulation or even in some cases the most onerous.

    From where I sit there’s a lot greater administrative burden today.

    And with healthcare reform it’s about to become even more onerous. There’s a requirement that all businesses send 1099s to every company with which it does more than $600 dollars worth of business. Even for a small business that could mean thousands of dollars in compliance costs. It won’t do that much to large companies—they’re already set up to handle it.

  • steve Link

    IOW, there is no data, just your gut feeling and experience?

    Steve

  • This is so obvious as to scarcely require documentation. Let’s take just a few examples. The Uniform Commercial Code’s current version runs to about 2,300 pages. In 2002 it was under 2,000. In its original version (1972) it was half that length.

    Sarbanes-Oxley, enacted in 2002, is 66 pages of densely-written regulations. Statistics on compliance costs suggest that the average cost for the 150 largest companies is around $1.5 million per year and for the next 250 largest is more—about $2 million per year. There are tens of thousands of companies compelled to comply either by statute (publicly-held companies) or by contract (privately-held companies). See here for info on compliance costs.

    As of 1998 there were a total of 134,723 pages of federal regulations. In 1970 there were 54,834.

    Thirty years ago a typical contract I was faced with had 5 pages. Now they have thirty pages. I’m asked to indemnify my clients against intellectual property violations, privacy violations, and security violations. This is practically all the result of regulation.

  • Michael Reynolds Link

    Dave:

    Those numbers for Sarbanes-Oxley don’t seem terribly large. And citing the number of pages of regs is a kind of shaky approach, isn’t it? Are we to assume that 10 pages is ten times more onerous than 1 page? Not if 9 of those pages are exemptions from the one, or lawyerese boilerplate of no direct affect.

    If we are over-regulated how did we manage to miss the fact that major institutions were slapping Prime Beef labels on packages of loans that smelled to high heaven?

    How did we end up with an apparently unregulated oil well spewing millions of gallons of oil into the gulf?

    And more broadly, do we want less regulation of, let’s say, food and drugs? Meat is still largely contaminated, is there some reason to think even less regulation would result in a better food supply or drug supply?

    Do we want Haiti’s building standards? Do we want Vietnam’s labor standards? How about Russia’s air safety regulations?

    What about the long-term positives of regulation? Take cars. Federal seat belt regulations and safety regulations made cars safer, and then they ignited a consumer-driven concern for safety that improved survivability even further. I remember auto companies screaming that drivers didn’t care and it wasn’t a problem. How many lives are saved by these regs? How many fewer people are in wheelchairs today?

    Finally, are our major competitors in the world less regulated than we are? I doubt Germany is. China may be, but one of the results in a landscape and population that is being poisoned with heavy metals and toxins.

  • Those numbers for Sarbanes-Oxley don’t seem terribly large.

    $30 billion dollars (at the low end) isn’t very much? It’s 600,000 jobs at $50,000 each.

    How did we end up with an apparently unregulated oil well spewing millions of gallons of oil into the gulf?

    Because enforcement is crappy. That’s the essential problem with regulation. When enforcement is arbitrary which is so often the case, only the conscientious bear its burden.

    I don’t object to regulation per se. I think we ought not to micro-manage but we should regulate things things that are of genuine concern, enforce what we regulate, and, if we aren’t willing to enforce it, repeal the regulation.

  • You know what is amusing about all this is that you can clearly see the Austrian complaint about neo-classical economics (of which Krugman is firmly a member of). If you go an read up on the history of the Long Depression, 1873 – 1879 (65 months) you can see two events in the U.S. that played a role.

    1. Massive investment in railroads. This was fueld by huge government land grants. Could this be like the massive investment in housing in recent times? Basically an over-investment that the resulting crash resulted in a permanent shift in unemployment (upwards)? At the time the rail roads were the largest employer in the U.S.

    2. The Coinage Act of 1873 which essentially moved the U.S. to a gold standard (from a gold and silver backed currency). This basically resulted in a contraction in the money supply and a deflationary period causing interest rates to rise.

    Then we had a major banking firm fail…any of this sounding familiar? Jay Cooke & Company which was working towards building a second transcontinental rail road. This lead to subsequent bank/financial institution failures. So with rising interest rates and failing banks firms that wanted to expand and had a legitimate business case couldn’t.

    In other words, we see the government fucking things up yet again. But the government will save us, I’m sure of it. Barry Obama said so.

  • Michael Reynolds Link

    I meant not very large in terms of individual businesses. In the aggregate yeah, but even in the aggregate 30 billion isn’t what it used to be. You can’t blame 30 billion for dragging down a 15 trillion economy. And there’s no way to prove that the 30 billion would translate into jobs. In fact I’d imagine there are a lot of jobs devoted to enforcing and complying with those regs.

    I really wonder if the problem isn’t less about the things you cite and more about the fact that we are a country with fixed borders, with a stable and possibly declining population, in which we have more than enough housing to go around, more than enough cars and planes and restaurants and stores. I compare the American life to what we observed living in Italy and the difference in sheer quantity of stuff is astounding.

    Maybe we’re just all shopped out. Maybe we’re changing our culture so that endless consumption, and the endless race to make more so that we can buy more has reached a sort of saturation level.

    In times past people invested in railroads or cars or planes or computers. New empowering technologies, new ideas. What are the equivalents today? If you eliminated every regulation, where would I invest my money tomorrow? What business would I build? What would I buy?

  • Oh and I’m sure Credit Mobilier didn’t help either which hit in 1872.

    Also, with regards to the regulations and Sarbanes-Oxley the point is we didn’t need it. It was the result of financial scandals back several years ago, but these scandals violated existing law as well. It is like seeing that people are speeding so instead of ramping up enforcement you just add on additional fines/penalties. That might work….if you make the fines really burdensome. Would you speed if the fine was $1,000,000? Probably not. Even a low chance of getting caught would still leave you facing substantial exposure. But if the probability is low (say 5%) and the fine is $250 and you double it the expected value of the fine goes from $12.50 to $25. Will it have an effect? Meh….yeah a very slight one you might have trouble identifying in the data.

    And it isn’t just the cost of SOx (Sarbanes-Oxley), it just slows things down. I use data where I work…sometimes lots of data, and believe it or not when I go extract data SOx comes into play. Used to be we had checks on which table you accessed. Now it isn’t just which table but also which row, and if you are going in and accessing 10 years of data over 200 accounts and you are doing it for every 15 minutes during the year….you can see how much more burdensome that would be in terms of speed of data retrieval. A query that used to take a not inconsiderable amount of time now takes a very large amount of time.

  • In fact I’d imagine there are a lot of jobs devoted to enforcing and complying with those regs.

    Those jobs are not productive, they produce nothing that you can eat, wear, or live in. They merely are concerned with how the economic pie is cut not how to make it bigger.

  • steve Link

    “In other words, we see the government fucking things up yet again.”

    And the alternative is letting AIG, Enron, Lehamn, Bear Stearns, Worldcom, LTCM, etc. run things. We need balance.

    Steve

  • Drew Link

    “In other words, we see the government fucking things up yet again.”

    Same as it ever was.

    “Massive investment in railroads. This was fueld by huge government land grants. Could this be like the massive investment in housing in recent times? Basically an over-investment that the resulting crash resulted in a permanent shift in unemployment (upwards)?”

    This is simply impossible, and makes one look stupid to so suggest. I’ve been told so by experts on this very blogsite.

    “Those numbers for Sarbanes-Oxley don’t seem terribly large.”

    Heh, ‘a billion here and a billion there, pretty soon you’re talking real money,’ right Sen Dirkson? Spoken like an author, not a business manager. And they wonder why government spending is out of control. Actually, perhaps they don’t care.

    “And citing the number of pages of regs is a kind of shaky approach, isn’t it?”

    Many moons ago, in my banking days, I once asked why our standard form loan agreement was so long. The retort: “because every time the bank got effed, a new paragraph went in.” All the words matter, Michael; they are there for a reason.

  • And the alternative is letting AIG, Enron, Lehamn, Bear Stearns, Worldcom, LTCM, etc. run things. We need balance.

    We had such failures during the Panic of 1873….after the government screwed the pooch. We just repeated history. Keeping interest rates too low, government mandated over investment in housing, and then wish-washy response when large financial firms, that are large in part due to government policy, start failing.

    You’ve got the timeline wrong dude.

  • Maxwell James Link

    Like lower-case steve, I mostly agree with the reasoning of this post, and your list above. That said, even if we could correct the policy for every item on that list, I still don’t see where the job growth would actually come from.

    Manufacturing? It’s been bleeding jobs for decades, and not because of government intervention. Same with agriculture. As you’ve written many times before, the services sector has been favored by government policy for decades, yet outside of health care its job growth has been negative over the past ten years. IT is not about to produce a ton of jobs, neither are transportation & utilities. And all the other major industries are among your “handmaidens.”

    I wish I did see where the growth would come from – I’d be a lot more optimistic if I could (plus I might make a mint). But I don’t.

  • Drew Link

    “Those jobs are not productive, they produce nothing that you can eat, wear, or live in. They merely are concerned with how the economic pie is cut not how to make it bigger.”

    Pretty much the core of the argument. Combine that with the defeatist attitude that all conceivable human wants have been satisfied and you see the liberal mindset………..and why we can’t let these people prevail…………….unless we want stagnation as far as the eye can see.

  • Drew Link

    “And the alternative is letting AIG, Enron, Lehamn, Bear Stearns, Worldcom, LTCM, etc. run things.”

    Its summer, steve. I’m concerned all these strawmen might ignite and become a public health hazard.

  • And to hammer home how bad government is look at Europe. Their monetary woes are the result of one government screwing up, it is pretty much all of them over there when they came up with the monetary system.

    Typically if country X goes nuts on borrowing the international credit markets cand drive up interest rates for that country which has negative consequences for that country’s currency and that tends to tick off voters who turn around and take it out on the politicians. Granted a crude and not always effective process.

    Now, the European Union and their currencies all joined you have a situation where country X (Greece) goes nuts borrowing. Now instead of the traditional mechanism kicking it, because all are using a single currency the effects are much more muted for a much longer time. Until everyone says, “Holy fucking shit you borrowed how much?!?!?!!11?!?!elven?!?!twelve” And that is true for just about every country. So you also have country Y (Spain), then Country Z (Portugal), and so on. Now everyone is waiting for the next shoe to drop. And those countries that aren’t in this boat are looking at the uneviable task of having to bail out the bad actors (very much like the responsible home owners bailing out the irresponsible here in the U.S.). And why? Because of LTCM, AIG, and Lehman. No. No. No. The system was designed this way. It was set up with a really bad incentive structure.

    And to make matters worse, there are likely speculators out there right now that are taking positions on when countries like Germany decide “Fuck it! We’re out!” Then the Euro will really tank. Think I’m joking? Consider this post by James Hamilton on why the Gold Standard wont work.

    http://www.econbrowser.com/archives/2005/12/the_gold_standa.html

    After suspending gold convertibility in World War I, many countries stayed off gold and experienced chaotic fiscal and monetary policies in the early 1920’s. Many observers reasoned then, just as many observers reason today, that the only way to restore fiscal and monetary responsibility would be to go back on gold, and by the end of the 1920’s, most countries had returned to the gold standard.

    I argued in a paper titled, “The Role of the International Gold Standard in Propagating the Great Depression,” published in Contemporary Policy Issues in 1988, that counting on a gold standard to enforce monetary and fiscal discipline in an environment in which speculators had great doubts about governments’ ability to adhere to that discipline was a recipe for disaster. International capital flows became more erratic, not less, as doubts were raised about whether first the pound would be devalued and then the dollar. Britain gave in to the speculative attacks and abandoned gold in 1931, whereas the U.S. toughed it out by deliberately raising interest rates in 1931 at a time when the economy was already near free fall.

    […]

    A gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable. And yet a lack of such faith was the precise reason the world returned to gold in the late 1920’s and the reason many argue for a return to gold today. Saying you’re on a gold standard does not suddenly make you credible. But it does set you up for some ferocious problems if people still doubt whether you’ve set your house in order.

    While that deals with the gold standard the logic is essentially the same. There is no real mechanism in place to make sure the problems we are seeing in europe can’t happen again, and again, and again, and again. They’ve set up a system ripe for abuse with no way of stopping it.

    But hey, government….there’s a balance in there somewhere, all we need is just the right leader to find. We’ll elect him and he’ll take care of us all. I know lets just make it a right. We declare that we, the people of the world, have a right to sound currencies. There that should solve the problem in 23 minutes.

  • PD Shaw Link

    I think regulatory compliance jobs pay for themselves to the extent the regulations protect against catastrophic harms or death. I’m thinking OSHA or MSHA or nuclear safety. The regulatory costs are worth maintaining a productive worker or losing cities and areas from use due to radiation.

    The regulations have become more about nudging social policy, such as the OSHA regulations on workplace violence. A good clue that a regulation does not make economic sense is when the regulation does not specify what the regulated entity should do.

    Another clue is that the government exempts itself from the regulation. Michael complains that the BP spill was unregulated; they were regulated under the Oil Pollution Act, which the federal government exempted itself and state and local governments from.

    And the addition of “nudge” type regulations is not without regulatory costs. My State’s government can’t monitor, review or inspect for compliance for all the laws and regulations it’s enacted, so they pick and choose. Some of the stuff they are not looking at is scary, though some of this has been true for a long time.

  • Michael Reynolds Link

    Any time I hear how bad something is I have to ask ‘relative to what?”

    Relative to what does Europe look bad? Africa? South America? Asia? Where are the better-run systems? Where in the real world is the optimum balance between government and free enterprise to be found? Because it sure looks to me as if every single place on earth where any rational human might choose to live has a pretty big government playing a pretty major role.

    So outside of your own heads, Steve V. and Drew, where is this world?

    And if you can’t find any trace of it in the real world, does it not occur to you that it might be because it’s imposssible?

  • Oh I see Michael, becuase other places are worse we should be happy we are getting screwed.

    You sound like Rush Limbaugh. When you, a self declared liberal, is spouting off like Limbaugh, you know you’ve gone seriously off the rails.

    Of course it could be worse, but that doesn’t mean the problems we are facing aren’t serious or could lead to some really rather unpleasant times ahead.

    I have to admit, I find it funny when Michael becomes the conservative here when I talk about trying to reign in the excesses of our corporatist system.

  • Drew Link

    Michael –

    Look at the prosperity of Taiwan. Look at the regulatory environment. Look at the economic system. Look at where it was in 1960.

    Now, look at x, y, z………….
    Compare and contrast.

    Now look at the US. And wonder if we had a similar environment.

  • Drew Link

    Hear Ye, Hear Ye, All Regulators hear Now!!

    Anyone actually experienced in business will enjoy this. Its not a singular incident.

    The Best Is The Enemy Of The Good
    Kevin Costner (seriously!) successfully promoted a slick idea for separating oil from water:

    It was treated as an oddball twist in the otherwise wrenching saga of the BP oil spill when Kevin Costner stepped forward to promote a device he said could work wonders in containing the spill’s damage. But as Henry Fountain explains in the New York Times, the gadget in question — an oil-separating centrifuge — marks a major breakthrough in spill cleanup technology. And BP, after trial runs with the device, is ordering 32 more of the Costner-endorsed centrifuges to aid the Gulf cleanup.

    The “Waterworld” actor has invested some $20 million and spent the past 15 years in developing the centrifuges. He helped found a manufacturing company, Ocean Therapy Solutions, to advance his brother’s research in spill cleanup technology. In testimony before Congress this month, Costner walked through the device’s operation—explaining how it spins oil-contaminated water at a rapid speed, so as to separate out the oil and capture it in a containment tank…

    The device can purportedly take in thousands of gallons of oil-tainted water and remove up to 99% of the oil from it.

    But 99% is not 99.9985%, which is a problem:

    In his congressional testimony, Costner recounted his struggle to effectively market the centrifuge. He explained that although the machines are quite effective, they can still leave trace amounts of oil in the treated water that exceeds current environmental regulations. Because of that regulatory hurdle, he said, he had great difficulty getting oil industry giants interested without first having the approval of the federal government.

    Obviously, what we want is a machine not yet invented that separates the oil and dumps pure water back into the gulf at a high flow rate. But for purposes of the current exercise, Costner’s device ought to be better than nothing; fortunately, the Feds seems to have figured that out.

    (Just One Minute)

  • Michael Reynolds Link

    Steve:

    In other words you have no real world examples. You have a utopian vision. You have ideology. And the fact that nowhere on earth does anything like your utopian vision exist gives you no pause. The fact that every single country any rational person would ever choose to inhabit has a government as onerous or more onerous than our own doesn’t make you wonder whether there exists some fact set that has eluded your analysis.

    I’m all for making the world a better place. I’m sure it could be a better place. But right now 100% of the good places are by any definition, “liberal” places, places where government has a major role in regulating the economy. Weighed against all that very convincing real world evidence I have only your faith to weigh on the other side.

  • Michael Reynolds Link

    Drew:

    Seriously? Taiwan? A country with the population of Texas that exists only because the US Navy and the US taxpayer say they exist?

    Taiwan has a (PPP) GDP per capita of 29.5k. That puts it 42nd, behind Greece, Spain, Italy, France, Germany, Finland, Sweden, Norway, Netherlands and many other socialist hellholes.

    So your problem, Drew, is that the example you chose is outperformed by a long list of countries with more onerous government regulation. Which makes it a pretty weak example. It barely outperforms Equatorial Guinea and Slovenia. Which tends rather to prove my case, not yours.

    Top ranking for GDP per capita? Liechtenstein. Followed by Qatar and Luxembourg. Maybe you should be making the argument that success follows tiny city-states.

    The first nation of any consequence on the list is Norway. The average Norwegian can buy a complete Taiwanese plus a South Korean to use as back-up. And yet, they have national health, a generous welfare state, and high taxes.

    The bottom three are Burundi, Congo and Zimbabwe. No doubt they have too much government. That’s certainly the problem in Congo: too much regulation.

  • If unemployment were defined the same way now as it was three quarters of a century ago, we would be approaching the levels of unemployment seen then.

    Uhhhmmm what? The current method came into existence in 1940. Prior to that I don’t think there was a concentrated effort to count unemployment, hence all the estimates of unemployment at that time.

    In other words you have no real world examples. You have a utopian vision. You have ideology. And the fact that nowhere on earth does anything like your utopian vision exist gives you no pause. The fact that every single country any rational person would ever choose to inhabit has a government as onerous or more onerous than our own doesn’t make you wonder whether there exists some fact set that has eluded your analysis.

    My point Michael isn’t that we should have no government, but that looking to it for solutions is not a viable strategy. It is a rigged game, a suckers game. The difference between Barack Obama and George W. Bush is that one is black the other white. When it comes to policy the differences are at best degrees and at worst non-existent.

    Is Gitmo still holding people? Yes.
    Are we still in Iraq? Yes.
    Are we still in Afghanistan? Yes.
    Has Obama doubled down on Bush’s spending? Yes.
    Has government gotten more responsible? Looks at the news articles on the Gulf oil spill….hmmm…no.

    Yet you keep playing this game like if matters as if it will make things better. We have a list of examples where we see Obama is really carrying out Bush’s third term and you think I’m utopian?

    I’m all for making the world a better place. I’m sure it could be a better place. But right now 100% of the good places are by any definition, “liberal” places, places where government has a major role in regulating the economy. Weighed against all that very convincing real world evidence I have only your faith to weigh on the other side.

    Yes Michael we already get it that you like being taken care of, and that despite being a creative can’t seem to envision an form of tyranny other than the boot in the face kind. No offense, but all your blathering about making things “a right” makes you the perfect example of what de Tocqueville was talking about. What is truly amusing is this quote,

    Thus it every day renders the exercise of the free agency of man less useful and less frequent; it circumscribes the will within a narrower range and gradually robs a man of all the uses of himself. The principle of equality has prepared men for these things;it has predisposed men to endure them and often to look on them as benefits.

    After having thus successively taken each member of the community in its powerful grasp and fashioned him at will, the supreme power then extends its arm over the whole community. It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd.

    As a self described “creative” I’d think you look on that with at least some trepidation, but you seem to actually embrace.

    In fact de Tocqueville notes that this type of despotism combined with freedom in the form of elections and choosing one’s master sets up a type of paradox.

    It is indeed difficult to conceive how men who have entirely given up the habit of self-government should succeed in making a proper choice of those by whom they are to be governed; and no one will ever believe that a liberal, wise, and energetic government can spring from the suffrages of a subservient people.

    Is it utopian, frankly I don’t give a shit. What I see going on is the type of despotism that de Toqueville predicted as being possible about 170 years ago. Is it better than what we see going on in crap-holes like Kyrgyzistan and Burma? Sure, but why do I have to like it?

  • So your problem, Drew, is that the example you chose is outperformed by a long list of countries with more onerous government regulation.

    FFS…

    Look at Taiwan in 1960 look at the other countries you list in 1960 compare the same countries today. Quite a few asian economies took off despite being rather far behind more developed countries.

  • Michael Reynolds Link

    Steve V:

    So, yes, it’s utopianism. Not science, but faith.

    You go to de Toqueville and then mention — as though it were helpful to your case — that he was writing 170 years ago. During that 170 years the government of the United States has managed what no company has: survival and then complete dominance.

    In the last 170 years the USG extended its control from basically the eastern seaboard and Appalachians to its current continental reach. We extended franchise from a small minority to be universal. Survived a civil war. Defeated, or contributed to the defeat of, Naziism, Japanese Imperialism and Communism. Absorbed cultures from the entire human race. We became the richest, most powerful nation on earth, even as we became the freest. All with this same government system.

    It seems to me that de Toqueville missed a bit on his predictions. He missed the fact that as governments go, the government of the United States is a roaring great success. An epic success. Our system has outperformed and outlasted every other, and done so with such convincing force that we now have no ideological opponent of any weight.

    So, granting as I believe you do, that we need some sort of government. And given the historical record which shows this government to have been at the very least one of the great success stories, why exactly should we be in a hurry to perform major surgery on it?

    Is your life miserable? Mine’s not. Most Americans are pretty happy. We almost never see an invading Hun here in Irvine. There are no bombs dropping. There is no Calcutta. Other nations are not sending us CARE packages. The secret police has not hauled me off to jail for expressing my opinions. I’m not censored. If I wanted to believe in a religion I’d have my free choice of a thousand.

    Like most people I would like to see some improvements. But when I look around the world I tend to see those countries that are doing well, are not doing well by following your path.

    If you could show me a direct cause and effect relationship between low-regulation and high incomes or general happiness, I’d listen. But you can’t. That’s the simple fact: you cannot provide evidence that smaller government, lower taxes, and less regulation results in all, or at least most cases, in greater happiness and prosperity. On the nation-state level you can’t provide even single example. In fact, once again, ALL the evidence points to strong, democratic, moderate welfare-state systems as being the best.

    So you have an untested proposition. Unsupported by evidence. In which you choose to believe for reasons of your own. And you may be absolutely right. But right now it’s no more supported than belief in God.

  • steve Link

    Is Gitmo still holding people? Yes.
    Are we still in Iraq? Yes.
    Are we still in Afghanistan? Yes.
    Has Obama doubled down on Bush’s spending? Yes.
    Has government gotten more responsible? Looks at the news articles on the Gulf oil spill….hmmm…no.

    Fair points, except that govt. did not cause the oil spill. BP was acting in an, essentially, unregulated manner. As far as I can tell, the leak is down deep, so even if the well was on land, it would take relief well drilling to stop it. BP had no backup plan for if there was a leak. I would also make the case that when we leave Iraq and Afghanistan, it will need to be done responsibly and safely as possible. It takes longer to leave than deploy.

    As with CHina, it is easier to make large gains when you start at a lower baseline. You are simply incorporating tech and production techniques developed elsewhere. Did you know Taiwan has national health care?

    Drew- Will look for article on it later, but Costner’s tech is old and he has been looking for a buyer a long time. BP may have bought them as a PR measure. The problem is getting them into an are of oil that is concentrated enough to work and they do not work as well if the oil has aged at all (from memory).

    “My point Michael isn’t that we should have no government, but that looking to it for solutions is not a viable strategy.”

    Who then decides basic issues like capital requirements for banks? How do we handle negative externalities when they occur? When the private sector cannot or will not reduce costs in medical care what do we do? Who will pay for basic research? Do we let BP decide what is risky? Who pays when they are wrong? To whom do we look for resolution of issues that do affect the public? W/o govt intervention, we still have massive pollution and acid rain. I am not inclined to trust either govt or business for all solutions. Both make huge mistakes that cost me lots of money.

    Steve

  • steve Link

    “1. Massive investment in railroads. This was fueld by huge government land grants. Could this be like the massive investment in housing in recent times? Basically an over-investment that the resulting crash resulted in a permanent shift in unemployment (upwards)? At the time the rail roads were the largest employer in the U.S.”

    No, this is not like it.

    Steve

  • Michael,

    You go to de Toqueville and then mention — as though it were helpful to your case — that he was writing 170 years ago. During that 170 years the government of the United States has managed what no company has: survival and then complete dominance.

    BFD, when you have a military at your beck-and-call and make the rules this is not surprising, but to be expected. If a business had that kind of muscel behind it Ida Tarbell would have never written a word.

    In the last 170 years the USG extended its control from basically the eastern seaboard and Appalachians to its current continental reach. We extended franchise from a small minority to be universal. Survived a civil war. Defeated, or contributed to the defeat of, Naziism, Japanese Imperialism and Communism. Absorbed cultures from the entire human race. We became the richest, most powerful nation on earth, even as we became the freest. All with this same government system.

    Yes at a tremendous cost in life and even in liberty as well. But you don’t care. In fact, it makes you feel safe.

    It seems to me that de Toqueville missed a bit on his predictions. He missed the fact that as governments go, the government of the United States is a roaring great success.

    I don’t see a problem with this. He didn’t predict that any governments would fail, but was trying to warn people about how despotism can take different forms. Some are brutal in obvious, others less so and for the timid actually are rather comforting.

    So, granting as I believe you do, that we need some sort of government. And given the historical record which shows this government to have been at the very least one of the great success stories, why exactly should we be in a hurry to perform major surgery on it?

    First off we are going in the wrong direction. We’ve practically gutted the Posse Comitatus Act which prevents the deployment of the U.S. military inside the U.S. borders except at times of war. We have people in a big hurry to deploy the military to the U.S. border and who are turning out police forces into paramilitary units. We have a government that has a creeping nanny element to it. We have a federal government that has serious fiscal issues (Medicare and Social Security), and we have state governments that are basically in the same boat with regards to their pension plans.

    Like most people I would like to see some improvements. But when I look around the world I tend to see those countries that are doing well, are not doing well by following your path.

    Which countries would those be? The ones with health care systems that are heading towards the same cliff ours are? Europe with their massive monetary/debt problem? Sure they are developed and doing well…but are they on sustainable paths? The answer is no. How about Japan? Lets see a lost decade economically speaking, massive public debt (200% of GDP) and little hope for strong economic growth, a path we seem absolutely determined to follow.

    Is your life miserable? Mine’s not. Most Americans are pretty happy. We almost never see an invading Hun here in Irvine.

    There you go again…it always has to be the boot in the face despotism with you. You really have little or no imagination it seems. It isn’t an invading hun (although go snap a few pictures of the neighborhood cops, see what happens then and no I wont bail you out).

    If you could show me a direct cause and effect relationship between low-regulation and high incomes or general happiness, I’d listen. But you can’t.

    Actually if you look at the economic freedom index there are some fairly good examples. Ireland has made getting a business license alot easier, 13 days vs. 35 average for the rest of the world. IIRC Singapore has a 3 day average. There economies are indeed robust and grow at decent rates, and in Singapore’s case that is good as it helps keep their health care system sustainable. And yes, the U.S. is fairly high on the list (although it ranks as only mostly free). I know you’ll say something like “these countries in the top 7 don’t have incomes comparable to ours”, yeah so. You do understand that economics is a dynamic process and that capital investment can continue to pay off down the road, right?

    If you look at the trend over time the Eurpoean countries currently in the top 7 are Ireland and Switzerland. In the case of Ireland they made substantial reforms to increase economic freedom. These reforms were in the areas dealing with government corruption and government spending and taxation from 1995 – 2002. Then again in 2001 Ireland also improved their rankings on freedom to invest and financial freedom. In looking at Switzerland they’ve always had a good score mainly due to their scores on propoerty rights, freedom from corruption, and trade freedom. Another country in the top 7 is Canada and in looking at their ranking, again they’ve taken steps to make their economy more free not less.

    steve,

    Who then decides basic issues like capital requirements for banks? How do we handle negative externalities when they occur? When the private sector cannot or will not reduce costs in medical care what do we do?

    But government IS in the medical sector in a huge way. To lay the blame of rising costs solely on private industry is just flat out ridiculous. The problem is that businesses often use government to their advantage to the point that we now have a corporatist economy not a capitalist one.

    How do we handle negative externalities? The textbook answer is via government, problem is that government just doesn’t seem to follow the textbook. For example, supposedly CO2 emissions are causing global warming and this is bad. A negative externality. One way to tackle it is via a pigouvian tax. It is simple and would also address our issue of dependence on foreign oil. Because in the economy the rubber meets the pavement, ALWAYS, via relative prices. A higher price for oil means the substitutes relative price is lower. So a pigouvian tax on oil would:

    1. reduce consumption of oil products and decrease CO2 emissions directly.
    2 Promote use and research in oil substitutes which would decrease CO2 emissions indirectly with a potentially larger payoff down the road.
    3. Reduce our dependence on foreign oil now and possibly moreso in the future.

    To help offset the negative impact on the economy we could then reduce if not do away with the payroll taxes. Which has another nice element, people who don’t earn income via payroll will still have to pay this tax. And if you are poor you can try to reduce the impact of the tax by trying to reduce your consumption of oil based products. Currently the only way to reduce the payroll tax is by not getting paid as much, which sucks far more than taking the bus.

    So we have a really, really good policy here. Its win-win-win-win…unless you are in the oil industry which is very large, very rich and has lots of politicians bought and paid for. But you’d think all those wins would out-weigh the one loss, but that isn’t how it works in democracy. Some really, really smart people have tried to figure out how to have a democratic process solve the above problem and they can’t. And the more you make democracy the means for deciding things the worse it gets.

    Government was supposed to prevent the BP oil spill, but it didn’t. What is the answer? I don’t know. If I did, I’d be considerably richer (what is the Nobel prize payout for economics these days?) and more famous than I am now. What I do know is that our current strategy sure doesn’t seem to be working. Posting a large bond might help, but do you see that kind of solution being suggested anywhere, probably not because that is out of the textbook too.

    “1. Massive investment in railroads. This was fueld by huge government land grants. Could this be like the massive investment in housing in recent times? Basically an over-investment that the resulting crash resulted in a permanent shift in unemployment (upwards)? At the time the rail roads were the largest employer in the U.S.”

    No, this is not like it.

    Sure it is. We have over-investment due to bad incentives and then the resulting crash. This results in a downward reduction in employment in the sector that is over-invested for a considerable amount of time–Dave’s L-shaped recession. In 1873 it was the railroad, in 2008 it was housing. Different sectors, but essentially the same dynamic. If you think it is different please explain how.

  • Drew Link

    steve –

    Please see the last 2 paragraphs of Steve V’s comment, above. He did the work for me.

    Its a free country, you can assert that the situations are not similar. But from where I sit they are an archaic technology: carbon copies.

  • steve Link

    “. One way to tackle it is via a pigouvian tax.”

    Ok, I am severely sleep deprived. How is this not also a government solution? Who will administer this tax and decide how much it will be. Mind you I say this as one who think that this is a good idea. It represents the kind of balance I talk about. It is a solution that cannot be achieved w/o govt intervention, but works through the market. We rely upon neither govt nor business.

    I see the railroad proliferation as direct govt choosing winners. There were legalized monopolies and there were direct grants of land, chosen by govt officials for cronies or “donations”. The mortgage crisis was much more complex, but monopolies were not being granted. Govt was not giving out direct handouts. Low interest rates helped drive the bubble, but w/o the amplification effects of the shadow banking system, we dont get a broad crash. OTOH, I am probably not as well read on the 1873 crisis, so I would yield to your superior knowledge if my readings are incorrect.

    “Government was supposed to prevent the BP oil spill”

    I think BP was supposed to prevent the spill. When a company engages in behavior that could endanger the local population, govt needs to make sure that the company takes adequate precautions. How you do this at a time when people decry the nanny state and want to do away with the EPA is a mystery to me also. At any rate, an accident is inevitable no matter what. Lack of prep for the eventual spill, again a BP responsibility, was the real sin. The government has never drilled a well and has no expertise in stopping leaks.

    Steve

  • Ok, I am severely sleep deprived. How is this not also a government solution?

    It is, I made no claims to the contrary. However, you’ll note that we aren’t considering the policy I outlined. Instead we are looking at cap-n-trade and GHG offsets that will likely make Al Gore a billionaire and probably wont do squat.

    I see the railroad proliferation as direct govt choosing winners.

    You still don’t over-invest in them though, and that is were things went off the rails.

    Govt was not giving out direct handouts.

    Sure it was, we are doing it right now, or were. The new home buyer tax credit? Subsidy for home buyers. Then we had various government programs for buying homes with less thatn 20% down as another example.

    I think BP was supposed to prevent the spill. When a company engages in behavior that could endanger the local population, govt needs to make sure that the company takes adequate precautions.

    And in that government completely failed. There is little to now doubt about this. Yes, BP and the actual owner of the rig, Transocean, also bear responsibility and I imagine some lawyers are going to get really rich trying to dice up the responsibility, but that does not negate the fact that the government set things up to give us this disaster.

    How you do this at a time when people decry the nanny state and want to do away with the EPA is a mystery to me also.

    Well, the textbook solution is to make sure the incentives are right. In th BP case the incentives were not right. What was the limit on fines for a leak? $75 million. Think that might have influenced decision making? What if the requirement was to post a bond worth $1 billion? Might have re-thought the whole drilling issue and taken extra steps to ensure safety/mitigation measures were in place.

    My point isn’t that we can’t craft a good policy/incentive structure, but that the powers that be; politicians and corporations don’t want that kind of structure. If the rig hadn’t had the explosing BP would have saved money and then who cares. Planing for the worse and hoping for the best is no fun, especially if it hits the bottom line and keeps you from getting nice campaign contributions. We keep giving these schmucks power thinking that now….this time with even more power they’ll get it right. But we see time and again they just keep right on pissing in our cheerios.

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