Scapegoats for Inequality

Inequality clearly exists and is even pronounced compared to other periods. AOC, Bernie Sanders, Robert Reich and others from the left have challenged the legitimacy of the very existence of billionaires, though I wonder if this includes Taylor Swift, Oprah, Steven Spielberg, and Tiger Woods.

The assumption that the existence of billionaires is the cause of the problems of the poor and middle class is zero sum thinking. The high price of gasoline, beef, housing, medical care, and higher ed is not the fault of the rich; it is caused by the very government they herald as the solution to the problem. Further these problems are more pronounced in the blue states that have had one party control for decades.

Billionaires are not conspiring to drive up the costs. Billionaires and the very wealthy are not a monolithic group; there are liberals and conservatives among them. While the wealthy are able to influence government policy, they also have the ability to champion positive changes to it. Fighting this influence is one of government policy more than a commentary on the morality of wealth.

Nor are the answers radical changes to the constitutional structure. The problem is not the electoral college, the structure of the Supreme Court, or the need to add Puerto Rico and DC as new states. The answer is policy to relieve the problems of the working and middle class.

There are changes that have merit and should be considered, but the government has little credibility and trust. Many of the wealthy are willing to pay more taxes but have little faith it will be spent to address the problems. The inability to bridge partisan divisions and enact meaningful reform has instead fueled class warfare, political pandering, and the search for convenient scapegoats.

Proper Bookkeeping for Tariffs

From Robert Graboyes’s excellent Bastiat’s Window, Trade Winds 2025-Seriously and Literally:

As seen in the accounting equations in the previous post (“Real-World Trade-Deficit Math-Magic,”), you can’t get rid of a trade deficit without also losing foreign investments in America. This insight was undiscovered in the age of mercantilism and unappreciated in the age of “anti-globalism.”

“Globalism” (a.k.a., free trade) is to those on the political right what “trickle-down economics” (a.k.a., free markets) is to those on the political left. Both are vacuous pejoratives that translate loosely into English as, “Somewhere on Earth, buyers and sellers are engaging in voluntary trade and minding their own business AND WE HAVE TO STOP THEM.”

“China says, ‘Our government will use sledgehammers to break the hands of 90% of China’s people to discourage them from buying American gloves.’ America responds with, ‘Oh YEAH??? Then OUR government will use sledgehammers to break the feet of 90% of AMERICANS to discourage them from buying Chinese shoes.’ China’s tariffs are self-destructive, and America’s retaliatory tariffs are equally self-destructive.”

By the way, this map also sheds light on the Great Depression. As I explained recently, the Roaring Twenties likely resulted from the desire of Warren Harding and Calvin Coolidge to keep their hands off of businesses to avoid destabilizing them; in contrast, Herbert Hoover and Franklin Roosevelt were both dealmaking busybodies who constantly interfered in markets, changing the rules of the game over and over until business crawled into a shell for more than a decade.

Several readers said I should take Trump seriously, but not literally—which was journalist Selena Zito’s famous take on candidate Trump in 2016. Zito’s perception was razor-sharp, but my responses were threefold:

“Seriously, but not literally” had its charms for an insurgent candidate but is untenable for a sitting president who has the nuclear codes and the power to vastly alter the conditions of world trade on whim—nation by nation, product by product, day by day.

World markets clearly take him literally, even if his supporters don’t.

Trump supporters who traffic today in this idea that the president does not mean what he says do no service to their world, country, president, party, or selves.

Capitalism is Cooperative

From Kevin Williamson at The Dispatch, ‘Dispossessed of Their Pathetic Livelihoods’: (firewalled, I highly recommend a subscription)

The more enlightened view understands that human beings are not liabilities but assets. Human effort is inherently valuable. And that doesn’t just mean the effort of geniuses and very clever people and people in high-status occupations—or people in paid formal work, for that matter. There’s a reason we don’t grow our own food. My time is valuable, and so I try to apply my working hours to the thing I do best. (Economics for English Majors: This is “comparative advantage.”) The people who grow my food, deliver my packages, refine my diesel, sew my boots, and put together the computer on which I am typing this all perform the very valuable service of doing things I am not good at—or doing things I might be pretty good at if I did them all day but am not as good at doing as doing what I do for a living—so that I can concentrate all my effort on doing what I do best. We free-market types like to talk about competition—and competition is important—but capitalism is profoundly cooperative: This marvelously productive worldwide economy is something we all do together. The value created by the guy picking avocados isn’t just in avocado production—it’s in the work of everybody else in the world who gets to do something else because Avocado Guy, and millions of others like him, have liberated the rest of us from the need to produce our own food, mill our own flours, manufacture our own tires, etc.

As F.A. Hayek and Ludwig von Mises (among others) pointed out, you can’t plan that. The relevant information is distributed throughout society, every data point is contingent on potentially millions of other factors, and the lifespan of a relevant data point may only be seconds. I don’t know how many avocados I’m going to want to buy the next time I go to the grocery store—and Hawley and other would-be central planners sure as hell don’t know, either. We let markets—including the labor market—work because the actors in the marketplace collectively are in possession of the relevant knowledge that central planners cannot get their hands on. It is not that the free market is unplanned—it is exquisitely, complexly planned by billions of people, each acting on the problems closest to him, about which he knows the most and is best positioned to act. You cannot impose a rational plan on that–you can only impose rigidity and ignorance on it, pretending that that is a plan.

Some people will try to tell you that the middle classes have not seen any real economic progress since the 1970s or 1980s. This is pure baloney. (Unless you are getting it from the New York Times, in which case, it is mortadella.) The best economic data we have do not support that conclusion, but, if you don’t want to dig into the economics, then go to a library. Read a book written in the 1970s or the 1980s. Read a magazine. Look at pictures, look at the advertisements—trust the evidence of your own eyes. Some of you are old enough to remember what a typical house was like in 1975, what a grocery store was like in 1981, how life was actually lived. The Brady Bunch was not a documentary, but there is a reason people laughed at the show’s jokes about the high price of meat—a complaint coming from the family of a prosperous architect who lived in a large modern house with six children, a stay-at-home wife, and a live-in servant. There’s a reason people reading The Stand in 1978 nodded along with Stephen King’s observations about the price of butter. In 1950, groceries (“food at home,” in economists’ parlance) accounted for more than 16 percent of household spending; today, that figure is less than 5 percent. And before you say it, no, that hasn’t been more than offset by eating out: Food “away from home” went from 3.8 percent of household spending in 1950 to 4.7 in 2019, a modest increase, which is part of why overall food spending declined from 20 percent of household spending in 1950 to less than 10 percent today.

Overstating Economic Influence

Presidents get too much credit and blame for an economy as if it turns on a dime the moment they are elected. The right want to credit Trump for the sharp rise since he was elected, but attributes no credit to Obama for the long rise during his tenure. In both cases there is more to the story.

Kevin Williamson writes in The National Review, Of Presidents and Economies:

Presidents are one small piece of the public-policy picture — and public policy as a whole is only a small part of what shapes and moves a complex modern economy. We tend toward a destructively immature and ahistorical view: The regulatory reforms that made the Internet boom of the Clinton years began decades before; the confluence of terrible policies that created the subprime meltdown and financial crisis of 2008–09 began in the 1930s, with housing and banking reforms and regulatory development occurring under presidents and Congresses of both parties in ways that would frustrate any intellectually rigorous attempt at laying blame on a partisan basis. The Asian currency crisis of the Clinton years, Communist aggression and Mideast conflict in Eisenhower’s time, the terrorist attacks during George W. Bush’s first year in office: None of these was the result of some decision taken in the White House. George W. Bush wanted to be a school reformer and economic booster, not a president overseeing a long and thankless campaign against distant desert savages. But history doesn’t wait for anybody to vote on it. That affects everything, including the economy.

The Coolidge Tax Cuts

From Celebrating the 100th Anniversary of Coolidge’s Inauguration: Why He’s the Model President;

Upon Harding’s death in San Francisco on the evening of August 2, 1923, the Harding–Coolidge administration gave way to that of Coolidge alone. He purified a Cabinet that was engulfed in corruption while concurrently lobbying for the 1924 and 1926 Revenue Acts. In combination, those two statutes reduced the top combined tax rate from 58% to 25%, compared to 73% when Harding took office in 1921.

The permanent reduction of onerous taxes makes avoidance less appealing and stimulates economic growth. Thus, total individual tax receipts ballooned by 70% from 1924 to 1928; and, throughout the 1920s, the share of income taxes paid by earners of over $100,000 a year doubled. Meanwhile, Coolidge held spending constant, allowing him to eliminate nearly a quarter of the national debt and leave it fully 29% smaller than it was when Harding took office.

Gray Swans

From The Wall Street Journal, by Scott Patterson, 6/2/23, When Markets Melt Down, These Traders Cash In,

Market crashes. Pandemics. Terrorist attacks. Riots. Megafires. Superstorms. Extreme, destructive, often deadly events seem to be happening across the planet with greater frequency—and greater harm. They happen suddenly and strike widely. The smallest event can cause them, the proverbial flapping of a butterfly’s wings whipping up tornadoes across continents.

A chillingly perverse result of their increasing frequency is that such events are becoming more predictable in certain ways. They aren’t black swans that sweep in out of the blue. They’re what Taleb calls gray swans—devastating events that are all too foreseeable.

Taleb has argued that our increasingly unstable world is the paradoxical result of humankind’s efforts to control it with technology, quantitative models, and ubiquitous just-in-time optimization, resulting in an ever-more-complex, human-built, fragile society susceptible to shocks. Extreme events “are necessarily increasing as a result of complexity, interdependence between parts, globalization and the beastly thing called ‘efficiency’ that makes people now sail too close to the wind,” he wrote in his 2012 book “Antifragile.”

As globalization expands, connectivity accelerates. Complexity breeds complexity, and speed breeds speed. Social networks spread news—and conspiracy theories—like a virus. Rapid air travel can cause infections that might have died out in a small village to explode across borders.

Financial markets, and the economies that depend on them, have become increasingly complex, unstable, and prone to crashes. In the early 2000s, economists such as Ben Bernanke, who would later become chairman of the Federal Reserve, claimed that the global economy had entered a so-called Great Moderation. The steady hand of economic technicians, the spread of derivatives and other products of Wall Street’s financial engineers, known as quants, and low inflation meant the world was set to enjoy untold prosperity, the gift of not-too-hot-not-too-cold, centrally managed perpetual growth. Then came 2008, when the collapse of the U.S. subprime mortgage market ignited a global economic panic attack. The loss of hundreds of billions of dollars in mortgages spread like a contagion through derivatives markets, leading to trillions in losses.

HKO

In A Demon of Our Own Design, Richard Bookstaber (2007) made a similar observation that the combination of complexity and tightly coupled systems increased the severity of crashes. Small firewalls that contained corrections were being dismantled, leading to larger, far more damaging crashes. Part of this was the result of greater connections from travel and communications, but a great part is the result of central powers believing they can control macro markets when they cannot. There is just too much dispersed and unarticulated knowledge for anyone or any administrative bureaucracy to accomplish this.

“The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with most unnecessary attention but assume an authority which could safely be trusted to no council and senate whatever, and which would nowhere be so dangerous as in the hands of man who have folly and presumption enough to fancy himself fit to exercise it. “-Adam Smith

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”-Friedrich von Hayek