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Throwing The Puppy Into the Class

University of Chicago economist John Cochrane has written one of the most unique and insightful perspectives on inequality in his blog, The Grumpy Economist.  Read Why and how we care about inequality in its entirety.  It is about 6 pages long.


Finally, why is “inequality” so strongly on the political agenda right now? Here I am not referring to academics. Kevin has been studying the skill premium for 30 years. Emmanuel likewise has devoted his career to important measurement questions, and will do so whether or not the New York Times editorial page cheers. All of economics has been studying various poverty traps for a generation, as represented well by the other authors at this conference. Why is there a big political debate just now? Why is the Administration and its allies in the punditry, such as Paul Krugman and Joe Stiglitz, all a-twitter about “inequality?” Why are otherwise generally sensible institutions like the IMF, the S&P, and even the IPCC jumping on the “inequality” bandwagon?

That answer seems pretty clear. Because they don’t want to talk about Obamacare, Dodd-Frank, bailouts, debt, the stimulus, the rotten cronyism of energy policy, denial of education to poor and minorities, the abject failure of their policies to help poor and middle class people, and especially sclerotic growth. Restarting a centuries-old fight about “inequality” and “tax the rich,” class envy resurrected from a Huey Long speech in the 1930s, is like throwing a puppy into a third grade math class that isn’t going well. You know you will make it to the bell. 

That observation, together with the obvious incoherence of ideas the political inequality writers bring us leads me to a happy thought that this too will pass, and once a new set of talking points emerges we can go on to something else.

But if that is our circumstance, clearly we should not fall for the trap. Don’t surrender the agenda. State our own agenda. We care about prosperity. We care about fixing the real, serious, economic problems our country faces and especially that people on the bottom of society face. Globally, we care about the billion on $2 a day, that no amount of tax and transfer will help.

The “solutions,” the secrets of prosperity, are simple and old-fashioned: property rights, rule of law, honest government, economic and political freedom. A decent government, yes, providing decent roads, schools, and laws necessary for the common good. Confiscatory taxation and extensive government direction of economic activity are simply not on the list.

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The Solution is The Problem


Economist John Cochrane writes in the WSJ-  What the ‘Inequality’ Warriors Really Want


Yes, the reported taxable income and wealth earned by the top 1% may have grown faster than for the rest. This could be good inequality—entrepreneurs start companies, develop new products and services, and get rich from a tiny fraction of the social benefit. Or it could be bad inequality—crony capitalists who get rich by exploiting favors from government. Most U.S. billionaires are entrepreneurs from modest backgrounds, operating in competitive new industries, suggesting the former.

But there are many other kinds and sources of inequality. The returns to skill have increased. People who can use or program computers, do math or run organizations have enjoyed relative wage increases. But why don’t others observe these returns, get skills and compete away the skill premium? A big reason: awful public schools dominated by teachers unions, which leave kids unprepared even to enter college. Limits on high-skill immigration also raise the skill premium.

Americans stuck in a cycle of terrible early-child experiences, substance abuse, broken families, unemployment and criminality represent a different source of inequality. Their problems have proven immune to floods of government money. And government programs and drug laws are arguably part of the problem.

These problems, and many like them, have nothing to do with a rise in top 1% incomes and wealth.

Here’s another claim: Inequality is a problem because rich people save too much. So, by transferring money from rich to poor, we can increase overall consumption and escape “secular stagnation.”

I see. Now we need to forcibly transfer wealth to solve our deep problem of national thriftiness.

You can see in these examples that the arguments are made up to justify a pre-existing answer. If these were really the problems to be solved, each has much more natural solutions.

A critique of rent-seeking and political cronyism is well taken, and echoes from the left to libertarians. But if abuse of government power is the problem, increasing government power is a most unlikely solution.

If we increase the top federal income-tax rate to 90%, will that not just dramatically increase the demand for lawyers, lobbyists, loopholes, connections, favors and special deals? Inequality warriors think not. Mr. Stiglitz, for example, writes that “wealth is a main determinant of power.” If the state grabs the wealth, even if fairly earned, then the state can benevolently exercise its power on behalf of the common person.

No. Cronyism results when power determines wealth. Government power inevitably invites the trade of regulatory favors for political support. We limit rent-seeking by limiting the government’s ability to hand out goodies.


A great piece. The inequality fanatics are a solution looking for a problem.  We are likely better to have wealth determining power than to have power determine wealth.

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Profiting from Complexity


from Jonah Goldberg on Foxnews

GOLDBERG: I heard about it. But it was today doing my homework for this that I finally read up on it. I just got angrier and angrier about it. In a lot of ways this spectacle represents not just everything that’s wrong with the Obama administration. It’s sort of everything that’s wrong with liberalism and a lot that’s wrong with America itself. You’ve got this guy who is pretending to be an objective, independent analyst, who’s got huge amounts of skin in the game in terms of money he’d make over off consulting fees, but also off of the prestige of being involved and the speeches he could do, which haven’t been tallied in these numbers. Anyway, it’s millions of dollars being touted around through a transmission belt of liberal journalists who all are pretending to be objective analysts too, quoting each other, reaffirming each other, all with the help of the White House which went along with this soup to nuts, what a process which this guy said was all about lies and misleading the American people. And then when caught about it, the same administration tries to dismiss him as if he was just some sort of random White House intruder.

The whole thing stinks. It’s not just that he’s getting rich. It’s the hypocrisy that every time Republicans complain about ObamaCare, they say it’s just because those evil, profit-hungry Koch brothers are trying to get rich, which was always a lie. It is also that this law itself makes American life more complex. And then there’s this leaching new class of people, who profit from the complexity that they are imposing upon the society. And so it’s like a pinata. You can hit it from any angle and you’ll get something out of it.

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Elementary Truth Ignored


“ECONOMICS IS HAUNTED by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine—the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.”

“In this lies the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.”

“The distinction may seem obvious. The precaution of looking for all the consequences of a given policy to everyone may seem elementary. Doesn’t everybody know, in his personal life, that there are all sorts of indulgences delightful at the moment but disastrous in the end? Doesn’t every little boy know that if he eats enough candy he will get sick? Doesn’t the fellow who gets drunk know that he will wake up next morning with a ghastly stomach and a horrible head? Doesn’t the dipsomaniac know that he is ruining his liver and shortening his life? Doesn’t the Don Juan know that he is letting himself in for every sort of risk, from blackmail to disease? Finally, to bring it to the economic though still personal realm, do not the idler and the spendthrift know, even in the midst of their glorious fling, that they are heading for a future of debt and poverty?”

“Yet when we enter the field of public economics, these elementary truths are ignored. There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: “In the long run we are all dead.” And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.”

“But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed.”

Excerpt From: Hazlitt, Henry. “Economics in One Lesson.” Three Rivers Press, 2010-08-11. iBooks.

This material may be protected by copyright.

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One of the best written pieces on economics.  We are constantly lobbied to pass legislation to solve the problems created by the previous legislation.  The first rule of economics is the scarcity of resources. The first rule of politics is to ignore the first rule of economics.

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Future Consumption Denied

From John Mauldin in his blog, Mauldin EconomicsWhere is the Growth?

Yes, shrinking workforces, private-sector debt overhangs, and technological innovation are making it difficult to achieve “financially stable growth with full employment” (quoting Summers); but governments and central banks are themselves becoming an increasing drag on rich-world economies. Our governments have saddled us with excessive public debt, onerous overregulation, oppressive tax codes, and their attendant distorted market signals; while our central banks have engaged in currency manipulation and monetary-policy overmanagement. Those in power who rely on Keynesian policies almost always find it inconvenient to cut back in times of relative economic strength (as Keynes would have had them do). And if, according to their arguments, the economy is still too weak even in periods of growth to enable the correction of government balance sheets, then perhaps their reluctance has something to do with debt piling up, market signals being distorted, and governments being empowered to encroach on every aspect of the lives of their productive citizens .

Debt is simply future consumption brought forward. Another way to think about it is that debt is future consumption denied. But there comes a point when debt has to be repaid, and by definition, from that point forward there is going to be a period of slower growth. I have called that point the Endgame of the Debt Supercycle, and it was the subject of my book Endgame.