The Growth Fairy Visits

Economic growth created our current state of economic grace.  Deirdre McCloskey calls it The Great Enrichment.  Jonah Goldberg calls it The Miracle.   Both of them would agree, we think, that it wasn’t planned.  After thousands of years of human life being short and brutish, in the past few centuries there has been a dramatic change in the quality of human life.  The [economic] growth fairy visited, because of the miracle of compound interest (separate from Jonah’s Miracle), and left us with riches and resources that the richest folks from a century (and especially two) could not imagine.

As an example, Jules Verne published Around the World in 80 Days in 1873 (set the year before).  The hero takes over, Wikipedia helpfully converts it into 2017 pound sterling, two billion pounds or about three billion dollars to make the trip.  We will take the Lady de-Gloves to Changsha, China in a little over a day for about a thousand dollars (and another thousand for the round trip) in a few weeks.  It is a nice comparison of how life has change in a century and-a-half.  Ordinary people now can do far more than the rich could do ten or 15 decades ago.

Economic growth is crucial to our future well being.  If the economy grows at one percent the compound growth over your child or grandchild’s 80 year life span is about 120% but at three percent it is about 960%.  It is a big difference.  It is important because the growth fairy has revisited the US economy after being away for a few years.  The WSJ tells us:

The Commerce Department reported that the economy grew at a robust 3.5% in the third quarter, a mild slowdown from 4.2% in the second. Consumer spending led the way with a 4% increase rooted in a tight job market and wage gains that have bolstered economic confidence. The economy has now grown by 3% over the last 12 months.  The U.S. economy hasn’t grown at 3% in a calendar year since 2005…

We, along with the WSJ, John Taylor:

When policy moves closer to those three attributes, as in the 1980s and 1990s for the advanced countries and more recently for emerging market countries, the economy does well, growing in a stable manner. When policy deviates from those three, as U.S. monetary policy did going into the tragic global financial crisis, the economy does poorly.

and many others believe in the growth fairy.  We do not believe that we can eliminate economic cycles.  Rather, we believe that good policy leads to, on average, better results and bad policy leads to bad results.  There are numerous examples of bad policy with Venezuela being close to the worst possible policies.  We think the WSJ is pretty close on its summary of good and bad policy in the US:

Can economic growth from tax reform and deregulation stand up to the headwinds from higher interest rates, tariffs and perhaps a Democratic Congress?

The WSJ position on interest rates isn’t clear.  It seems like they are saying increasing interest rates are a problem but are they suggesting action to reduce them?  We are with John on a rules based monetary policy rather than worrying about and trying to manipulate interest rates.  So do you believe in fairies?  This is one you really don’t want to die.

 

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A Tale Of Four Countries

To adapt Dickens to our current situation: It is the best of times, it is the worst of times.  That is what Liam Halligan is telling us at UnHerd in [Theresa] Should Set Her Sights On Crony Capitalists.  Liam says the Brexit is not the most important topic for the Tories. It is rebooting capitalism and part of that is fighting crony capitalism.  We tend to agree.

We are only mildly supportive because we don’t like the term crony capitalism (CC) and Liam is really vague about how to fight it.  CC is when the government alters the market to favor certain parties.  A classic example is taxis.  We see the cronyism but not the capitalism.  The best way to fight CC is by reducing regulation.  Liam is vague about what he wants yo do to fight CC and his only real suggestion seems to be more regulation for big entities:

Big companies across the Western world have become far too powerful. Our political, business and media elites are much too intertwined. Such cosy relationships have resulted in an enfeebled competition policy, which is further increasing the might of a small number of corporations, to the detriment of consumers, smaller firms and broader society. [Emphasis added]

We are not sure where Liam is going but if he really wants to fight the cronyism in CC then we are with him.  On the other hand, more regulation will make these entities even more intertwined.

It is the best of times.  Liam reminds us that capitalism has enriched everyone everywhere it has been applied:

Or that, since the late-80s fall of the Berlin Wall, the spread of capitalism has enriched billions – with the share of the global population in extreme poverty plunging from two-fifths in 1990 to under one tenth today.

It is the worst of times as socialism has been tried repeatedly and devastated wide areas of the globe:

No matter that the Soviet Union collapsed under the weight of its economic contradictions. [here is remembering the start of the terror]

Of course, Venezuela is a current example that socialism always fails.  The talented and beautifully named Mary Anastasia O’Grady tells us a story of Why Central America Stays Poor in the WSJ.  We are unsure if we disagree with Liam because he is so often vague about evidence and recommendations.  We disagree in part with Mary but we are sure about it because she writes so clearly:

Nature can be cruel in underdeveloped countries. Yet it wasn’t fire, flood, mudslide or volcano that served this economic gut punch. This is a man-made travesty, courtesy of Guatemala’s Constitutional Court. It is a saga worth recounting because it goes to the heart of the country’s intransigent poverty.

Mary lays the problem at the feet of Guatemala’s Constitutional Court for their interpretation of a treaty:

[T]he United Nations International Labor Organization’s Convention No. 169 states that indigenous peoples living in the area of development projects need to be consulted. Guatemala is a signatory to the convention.

We think some of the blame should go to Guatemala for approving the treaty.  Conservatives recognize the folly of vague treaties, laws, and regulations that sound good because they can come back to bite you just like they did for Guatemala.  Even Progressives can become textualists when it benefits them.

To get back to Dickens is the worst of times because of public and media attitudes.  Liam reports that:

A recent YouGov poll suggested around 60% of voters think the railways and Royal Mail should be renationalised. Over half want the water and energy companies back in public sector ownership. A ComRes survey earlier this year showed that young British adults now think capitalism is more dangerous than communism.

Liam seems to think we should accept such foolishness rather that try to educate folks.  It is true that socialism doesn’t work but folks need reminding.  The attitude towards communism is astounding and another reason for education.

It doesn’t help that the Labor party is headed by Jeremy Corbin.  Liam describes Jeremy’s proposals:

And that’s [what we would call bad reporting] allowing [Jeremy] to present, with some success, his programme of aggressive renationalisation, sweeping trade union powers and highly punitive taxation as “the new common sense of our time”.

The next part of Dickens applies even more: It is an age of wisdom, it is an age of foolishness.  The USSR, Venezuela, and Guatemala offer lessons for the UK.  The first two remind us that socialism, government control of the economy, doesn’t work.  Liam reminds us we need reminders.  Guatemala reminds that treaties, laws, and regulations are written and need interpretation and application.  Much of CC lies in the interpretation and application of such documents.  Some is in the creation of such documents.  If we mean to fight CC we should be at least judicious in the creation of such documents and recognized the need to revise them as necessary.

We’d like to say that it would be a far, far better thing than they had ever done before if the Tories really fought CC but the Tories saved Western Civilization from fascism under Churchill and saved the UK from another form of socialism under Thatcher.  But it is still a really good idea and fighting CC will be a worthy challenge.

Minimum Wage Folies

Terri Sewell and Jim Kessler take to the WSJ to recommend A Better Minimum Wage.  Their idea is to have regional minimum wage that is automatically adjusted for inflation.  Terri and Jim assert:

These wage floors would rise with inflation so that congressional inaction can never again leave working families in the lurch. [and later]

The current minimum wage is too low and too hard to raise.

Starting with the second sentence the answer is no and no.  There is no evidence the current minimum wage is too low.  It is relatively easy to raise as it requires only a simple majority in each house of Congress and a presidential signature.  The problem with raising the minimum wage is that it is a bad idea.

Sidebar: Do Terri and Jim really think their proposal will help some group like working families or the working poor?  We are curious if they are guilty of bad thinking or cynical thinking.  We see the potential advantages to a pro-government group for a higher minimum wage that include a greater demand for government and an ability to blame capitalism for poor outcomes.  End Sidebar.

We are not sure why Terri and Jim tie it to working families.  A higher minimum wage punishes workers whether they are in a family or not.  The key to working is to start working.  Folks develop capital by working and therefore rarely stay at the minimum wage for long.  Raising the minimum wage is an effective method to stop workers from developing skills.  Zero is always the real minimum wage.  If you don’t work you get zero.

We also see no reason to punish folks more because they are already punished by high cost of living.  Pay relates to productivity.  Perhaps fast-food workers in Manhattan are more productive than Spokane or Selma but we would leave that up to the market.

Kevin Williamson’s wonderful recent article at NRO (more on it later) that covers a variety of items including risk aversion reminds us that the flippant answer that zero is the best minimum wage might not be correct and is likely a political loser.  It might not be correct because of risk aversion.  Many folks are reluctant to move, leave a job, or negotiate pay when a risk neutral individual would.  A minimum wage greater than zero provides some value for some folks.  The current one seems perfectly effective for that.

Economic Insight

We don’t know Kevin Williamson’s full resume but he often refers to his English major math.  Yet he has an impressive ability to express economic concepts clearly.  Recently, Kevin was at his best on NRO (and, of course, you should read it all):

A trade deficit is nothing like a budget deficit. Each year’s federal budget deficit adds to the total debt owed by the federal government. Trade deficits don’t do that, which is one reason why “trade deficit” is not a very useful term. A trade deficit is just a bookkeeping entry, not a debt that has to be paid. Countries don’t trade — people do. Americans are no more harmed by the trade deficit with Germany than you are by your trade deficit with Kroger [that is a retailer in case you are not in the 34 states they operate in].

To be clear, you are not harmed because you can get better or cheaper stuff from Kroger (and Wal-Mart, Amazon, etc) than you can produce yourself.  Kevin gives great details about actual tariffs and goes on to identify the real problems that are produced in a trade war:

[The Donald] now proposes to spend $12 billion to bail out U.S. farmers hurt by his batty trade war. That figure will grow if the trade war continues.

The Donald is way wrong in his trade war because it harms everyone.  Elsewhere he has done much to improve economic freedom but he is absolutely wrong here.

Markets Work; Alternatives Don’t

When we allow markets to work we get the Great Enrichment or as Jonah Goldberg calls it, The Miracle.  When we don’t we get the Soviet Union, Zimbabwe, and Venezuela.  The problem is that when we interfere with markets we screw things up and then we need to interfere again and then things get even worse.

We hate to accuse The Donald of having principles but, generally, it has been close to a principle of his to move in the direction of capitalism, for example, Donaldcare and tax reform.  Unfortunately, he has a tariff blind spot that led to this as discussed by Jack Crowe at NRO:

Under the plan, which could be announced as soon as Tuesday, farmers whose livelihoods have been harmed by the retaliatory tariffs resulting from President Trump’s trade war with China, NAFTA and the E.U. will be provided access to three distinct forms of aid: direct assistance, a food-purchase program and a trade-promotion program.

It is the nature screwing up by intervening in the market that one screw up leads to another.  Humans, experts or not, are not an effective replacement for the market. Tho Bishop at the Mises Institute puts it perfectly:

After all, Trump’s tariffs are not only a new tax for Americans, but a policy of directly picking winners and losers in the economy. The interests of steel workers, for example, are being placed above the interest of consumers and farmers. This leads to the government using tax dollars to prop up farmers. Of course this spending means that tax-paying consumers are hit yet again, with their tax dollars being used for this new welfare program.

You should real all of Tho’s article to remind yourself of the joys of capitalism.  If that is not enough to convince you then you need to read Jonah’s appendix in Suicide Of The West.  Capitalism works and alternatives fail.

Government Versus Private

George Leef at NRO Corner is trying to get you to read an article at at the Martin Center.  He starts out with this:

It isn’t easy for any private institution to survive when it has to compete with government-funded institutions. That’s very much the case when it comes to private schools.

We suppose we could give George extra credit for the word easy.  It isn’t easy to compete with other private institutions either.  As we see it, it is easier to compete with government-funded institutions.  Federal Express and UPS seem to be doing fine.  Yale, Stanford, and Hillsdale seem to be doing just fine.

The difference between private institutions and government-funded ones is that the former can go bankrupt while the latter get many more chances to survive.  Jim Geraghty’s The Weed Agency is a wonderful fictional account of how a government agency survives.  It is easier to compete with government-funded institutions because they don’t have an incentive to change.  Their centralized decision making process also makes it difficult for them to change.

What is true is that a poorly run government-funded school is more likely to survive than a poorly run or underfunded private school.  We think that is the advantage of private institutions.  We think George should appreciate that.

Suicide Of The West

Jonah Goldberg’s Suicide Of The West is a book everybody should read.  It is not a great book but it has parts that are absolutely awesome and is full of thought provoking moments.

The best part is the discussion of what Jonah calls The Miracle and Deirdre McCloskey calls the Great Enrichment.  On titles, we’re with Deirdre but we will use Jonah’s here.  Jonah does a great job of explaining the extent of The Miracle.  We love his “most important “hockey stick” chart in all of human history” on page eight.  It shows actual global GDP over the last two thousand years and we get a hockey stick.  He doesn’t limit himself to one method of teaching so everyone should get it.

Sidebar: We thought of saying that everyone should be required to read Jonah’s introduction and appendix but we can’t count on everyone’s sense of humor.  Everyone should read it but we are not into coercion.  End Sidebar

Jonah’s book’s appendix has a nice summary of his four core arguments which we have abridged even more here:

The Miracle has caused us to be unnaturally prosperous
We stumbled into The Miracle and we can stumble out
Human nature is fundamentally unchanging
Human nature can overpower the institutions that make prosperity possible

We agree.  We are fans of the growth fairy so we would add (and think that Jonah agrees based on the last argument) that we now have the knowledge to make prosperity more likely.  We think that Jonah would say that our romantic side, the feelings of human nature, cause the conflict that might end prosperity.

Part of his stumble out argument is that we got The Miracle by argument and rhetoric and we can lose it the same way.  Here Jonah cites Deirdre’s article above.  We love both of them and especially Deirdre’s Rhetoric of Economics.  It was a light from above in our understanding the intellectual differences between economics and accounting.  When Deirdre finds rhetoric for the second time it is less convincing to us.

The conflict of the book is the the rationality of the discussion of economics and human nature and Jonah’s feelings towards The Donald.  Jonah despises The Donald because he has brought tribalism to the right.  With an already tribal left then there is little to do but despair for The Miracle because corruption will set in and capitalism will become ineffective.

In summary, we were beyond delighted that somebody made such a beautiful and sincere argument for capitalism.  Jonah hasn’t convinced us to share his pessimism but we are concerned.  It is an important book that you should read but it is not a great book.