The Skeptical Optimist

The two biggest myths in American conventional wisdom

Myth #2
Don't you wish all of the water we drink could be of the same pristine purity as the crystal clear, refreshing water of our Rocky Mountain streams and lakes?  Almost everybody does . . .

. . . and that included me, up until one summer twenty years ago when my family spent a week vacationing in Rocky Mountain National Park.  The beginning of that week was when I promptly changed my mind about the desirability of drinking crystal clear Rocky Mountain water.  Reason: First thing the ranger told us, in no uncertain terms, was, "Please, do NOT drink any water from the streams and lakes.  Imagine for a minute what the bears, beavers, and moose are doing in the water upstream from here." 

The national park folks have been kind enough to repeat that warning on their web page, under the heading "Hazards":

Giardiasis ["beaver fever"] is a debilitating intestinal disorder, caused by drinking contaminated water, that you will want to avoid. Do not assume that stream and lake waters are safe to drink.

The "pristine purity" of Rocky Mountain water is the second biggest myth in American conventional wisdom. 

Myth #1
The biggest myth of all, however, is in first place by a wide, wide margin.  It was repeated last night by the President of the United States, George W. Bush, in his 2008 State of the Union Address:

American families have to balance their budgets.  So should the government.

Bipartisan applause broke out.  Even Vice President Cheney—Mr. Deficits Don't Matter—was applauding along with Speaker Pelosi. 

It's a powerful idea, but it's a myth.  One to which both parties feign allegiance.

The false idea that federal deficits are bad (and surpluses are good) seems to be an immovable object.  I've been trying to chip away at that dangerous myth for three years here, but the dogma is so engrained, and so easy to exploit for applause at political events (either side's), I'm starting to wonder if anything can ever dislodge the falsehood.  Maybe not. 

The federal government will run out of excuses for not balancing its budget—as soon as General Electric and Wal-Mart stop using a mixture of growing debt and growing equity to fund their growth—and as soon as the Smith, Jones, and Rodriquez families (all generations, moving through time) stop accumulating growing debt for houses, car loans, and family businesses even as their total family incomes continue to grow.  When everybody else stops borrowing, the federal government will be out of "excuses."  [Don't hold your breath waiting for that day to arrive, however.] 

Never mind that I could support a budget goal of holding the debt/GDP ratio steady—which means the debt can grow up to the same rate the economy grows, without violating the goal.  Never mind that the goal of steady debt/GDP would itself become a big challenge soon, due to demographic shifts.  Never mind that it would be far more realistic and achievable than the sophomoric sophistry of insisting on a balanced dollar budget.  A growing economy is what we need, far more urgently than a balanced dollar budget.  It's not the money, it's what we get for the money, and it's the real wealth we create that backs up the money we print. 

But apparently, few voters want to understand it—and politicians would much rather demagogue it than explain it.  (Those who do understand it, such as Mr. Deficits-Don't-Matter Cheney, immediately get their heads bitten off by those who don't understand it, and by those who know how to play false dogma for political gain.  No wonder those who understand it tend to back off; it's just human nature.  When you get struck by lightning two or three times, you tend to get off the hill.) 

Myth #1 is still the all-time champion political falsehood—way, way ahead of "pristine" Rocky Mountain water.  Just ask President Bush.  Just ask any presidential candidate still in the running, on either side.  In fact, Myth #1 is a good bet to outlive the cockroach, which has been around for 350 million years. 

FQ.08.04: Favorite Quote for This Week

Some people believe labor-saving technological change is bad for the workers because it throws them out of work.  This is the Luddite fallacy, one of the silliest ideas ever to come along in the long tradition of silly ideas in economics...

The original Luddites were hosiery and lace workers in Nottingham, England, in 1811.  They smashed knitting machines that embodied new labor-saving technology as a protest against unemployment (theirs)... English government officials, after careful study, addressed the Luddites' concerns by hanging fourteen of them in January 1813.
—William Easterly, The Elusive Quest for Growth

Marx in a nutshell

It's been quite a few years since I read key portions of Das Kapital, and I had hoped I would never need to slog through Marx's prose again.  But I decided to refresh my memory on his "labor theory of value."  I did, and below is a synopsis (not a critique) of what I think I read. 

If you're a Marx expert (Karl, not Groucho or Harpo), let me know if my synopsis is off the mark in any respect.  Here goes:

----- begin synopsis ---------
Summary
Karl Marx’s labor theory of value is his attempt to lay the economic foundation and justification for his broad assertion about the dark social implications of the capitalist economic system.  Capitalism, according to Marx, exploits an industrial society’s working class by appropriating a portion of the value of the workers’ output.  The capitalists, driven by greed for money, use money to get more money—and their engine for money growth is fueled by surplus value stolen from the working class. 

Labor theory of value
Commodities bought and sold (exchanged) in the marketplace have a “use value” that is intrinsic, but impossible to quantify relative to other, very different commodities.  Therefore, the marketplace assigns an “exchange value” defined in terms of money.  Although the labor theory of value originated with British economist David Ricardo, Marx used it as an economic springboard for launching his social theory about the oppressive, exploitive nature of the capitalist economic system. 

How capitalists exploit and oppress workers
The “market” is the subliminal tool employed by greedy capitalists to keep the workers in their proper, subordinate place in society.  The market is where oppressed workers purchase commodities they’ve been led to think they need, at prices they can barely afford.  Capitalists, driven by greed for money, keep the hapless workers living just barely at a subsistence level through constant downward pressure on wages, and constant upward pressure on working hours and required output levels.  The capitalists finance the political and economic engines that maintain their social power over the working class by extracting a portion of the value produced by the workers. 

Conclusion
The hapless, near-powerless working class is ignorant of the secret, subliminal tool employed expertly by the greedy capitalists: “fetishism,” the mistaking of “want” for “need” in the commodity exchange markets.  That ignorance perpetuates the evil, exploitive capitalist system.
----- end synopsis ---------

That's it.  Did I get it right?

[My critique, by the way, is extremely brief.  Maybe I'll post it someday.] 

A deflationary downer: the game of Monopoly

On Saturday, I had a game of monopoly with the family for the first time in a decade.  To make a long story short: (a) I won; and (b) I decided I will never again play by those depressing, deflationary rules—concocted in 1936, presumably by the same genius economists who sucked the money, and life, out of the US economy at about the same time. 

The game took more than two hours.  Four of us started with $1500 each.  Ninety minutes into the game, my mom's railroad monopoly succeeded in bleeding my dad down to $18 cash and three undeveloped (green) properties.  Shortly afterwards, I finished him off: he landed on Illinois Avenue with 4 houses (...he'd been trying to hide in jail, but he rolled doubles, had to come out, then hit Illinois). 

It gets even better.  Two rolls later, I slew my near-penniless brother when he landed on Indiana Avenue with 4 houses.  My mom held out longer.  She kept getting my pass-go money with her railroad monopoly, but the assets I'd soaked up from my dad and my brother gave me enough cushion.  At last, I bankrupted her when she hit New York Avenue with a hotel. 

Hooray!  What fun!  I turned my dad into a pauper, then bankrupted my mom, too!  The dice had been smiling on me that day!

In theory, I was the victorious conqueror.  In reality, I was experiencing deja vu: that same, sick feeling I'd had as a kid, as a teenager, and as a young adult, whenever I'd won—or lost, or tied—the game of Monopoly.  Fifty years' worth of the same, recurring experience. 

But this time, I thought about it a little harder as I looked at the money in front of me.  It was the only money left in the game: about eleven hundred bucks and change.  Wait a minute; the Monopoly economy had started with $6000 ($1500 each); the money supply had shrunk by 82%! 

That's when it hit me: Monopoly's so-called Bank is in reality nothing more than an evil, malevolent Treasury Department.  Instead of recirculating all the money we'd been paying in for deeds, taxes, houses, and fees, the Parker Brothers' EvilTreasury had the net effect of hoarding most of the money, thereby deflating the currency, and driving the whole economy into a murderous deflationary depression.  Result: an economy that ground inexorably to a halt, ending with the most unequal distribution of wealth it is possible to inflict via deflationary malevolence and stupidity.  Coincidentally similar to what the combined actions of the Fed, Treasury, and Congress had done to the American economy in the early 1930s—around the time somebody was thinking up the rules for Monopoly. 

I apologized to my mom and dad (...although I told my brother he got what he deserved).  I also promised that, if we ever play Monopoly again, I'll be ready with some rule adjustments that will keep the money supply from deflating so murderously.  I'm a growth-economics guy.  Deflationary depressions aren't my cup of tea. 

==========
End note:

A few rule-improvement ideas: Five hundred bucks for landing on Free Parking; multiply all Chance and Community Chest rewards by ten, divide penalties by ten; two hundred bucks for landing on a Chance or Community Chest square.  All such awards paid by the EvilTreasury.  Other ideas are welcome.  [Bank loans would be nice, but probably difficult to implement and administer.] 

Easiest option: Never play Monopoly again; fifty years' worth is enough for one lifetime.  Play bridge instead.  (I'm leaning towards this one.)

FQ.08.03: Favorite Quote for This Week

I reviewed what articles and working papers in economics I could find.  They collectively show no convincing evidence that economists as a community have an ability to predict, and, if they have some ability, their predictions are at best just slightly better than random ones—not good enough to help with serious decisions. 
—N. N. Taleb, The Black Swan

Four ways to reduce income inequality

I've spent a lot of time writing about economic growth in the last three years, and it will continue to be the foundation here.  However, that focus all but ignores an entire political party's top economic priority: income distribution—or, more specifically, income redistribution.  The top priority economic goal, according to the party in question, is to reduce two income gaps: rich versus middle class, and rich versus poor.   So it's time I devoted an article to income distribution. 

Unfortunately, that's about as specific as the problem definition gets.  By "income," most people are talking about pretax wage & salary (money) income for a household, or for a person (which are sometimes one and the same thing).  But an income distribution that's "fair" never quite gets quantified; all I hear is that it's "unfair" now, and the candidate in question will make it "fairer."  It always makes me wonder how much income redistribution it would take before John Edwards, Hillary Clinton, or Dennis Kucinich said, "Okay, stop, that's enough; any more than that would be unfair to the rich." 

On the other hand, maybe I shouldn't complain that nobody ever quantifies the word "fair," because I'd love to have a few basis points of Gates, Jobs, Buffet, Soros, Clooney, or Streisand income redistributed to me. 

[Sidebar: I personally think using "wage & salary income distribution" for the analysis is a big mistake right off the bat.  Why?  Because our taxation system is already doing some redistributing.  A better measure, in my judgment, would be disposable personal income after taxes and after transfers.  "Spending power distribution" might be a better name for that, because it doesn't limit the analysis to pretax income; it also takes into account the effects of taxes, and of the outlays side of the federal budget, much of which is spent to help the poor.  I strongly suspect that an unwed teenage mother would rather have $20,000 in after-tax spending power than $20,000 in pretax wage income.  But it's moot; everyone talks of income distribution, not spending power distribution, so I'll go along with that idea for purposes of this article.] 

So, below are four different ways to achieve the goal of decreasing the two income gaps, rich-vs-middle and rich-vs-poor.  [Note: The vertical axis is not to scale—on purpose—because these are concept charts illustrating gap reduction.  Also, these are only four of an infinite number of ways to reduce the gaps, but they bracket most of the possibilities.]

Each of these scenarios "improves" the two income distribution gaps.  As you can see, I think of them as: (1) Help Everybody; (2) Help the Poor; (3) Hurt the Rich; and (4) Hurt Everybody.  (If you can think of better headings, leave a comment.) 

To achieve #1 it takes enhanced economic growth, because everyone gains a lot.  Achieving #2 requires run-of-the-mill economic growth, plus more transfers; everyone gains, but not as much as in #1.  Scenario #3 is what happens when we increase transfers and also have a recession.  "Achieving" #4 requires a depression—in which just about everyone goes broke. 

I can't think of anyone who advocates recession or depression—but that doesn't mean it won't happen if we expend our debating time mainly on fairness and redistribution, leaving little to no time for the importance of growth, and debating ways of achieving it.  We all want scenario 1 (or at least 2), but scenarios 3 and 4 are what we risk if we leave growth out of the debate.   

Which gap-improvement scenario do you prefer?  Which party's campaign rhetoric, if implemented, would be more likely to yield the one you prefer? 

[In spite of my first paragraph above, it looks like this turned out to be another article about growth anyway, doesn't it?]

Comments are open, as usual.  Use your real email address, in case I need to take the conversation private.

New policy: Golden Rule v 2.0

My involvement with the new project I had mentioned previously requires a step-up in the efficiency with which I handle this blog.  As a result, I need to post a frank message about how I'll be handling some comments, and some commenters, from now on.

I will be following Golden Rule v 2.0:

Do unto others as they deserve. 

Almost all of you are welcome here.  Reason: almost all of you, regardless of your ideological leanings, have exhibited an honest desire to engage in objective, respectful debate.  Almost all of you possess enough self-confidence and backbone to use your real name in private messages.  That's the community I enjoy the most in this blogging activity; that's the best forum I've ever found for advancing knowledge; and that's the community that keeps me intent on continuing this blog indefinitely.  Thanks to all of you for making this an enjoyable two-way street.   

However, there's a tiny minority that isn't like the vast majority described above: a few who apparently made a commitment to their chosen ideology at an early age, then learned how to keyboard and name-call... but, sadly, never learned manners, decorum, or respect; a few who prefer to be able to throw their objections, barbs, and smart-ass remarks around, while carefully guarding their own personal anonymity.   

So, especially for that tiny minority, here's the new policy: If you run and hide when I ask you privately for your real name, I will consider you a low-integrity coward.  Expect to be ignored, and expect your comments to be deleted and banned.  One of the best things about the freedom to blog is the freedom to choose who I hang out with.  Low-integrity folks are not on my list. 

Golden Rule 2.0 will be applied from here on out.  Most of you have been abiding by it for years; I thank you for that.  I will trim this community as necessary from now on, with a goal of achieving 100%.  Not much trimming will be necessary, but it's not zero, either. 

Deficit Watch thru Dec 2007

Corporate tax receipts growth in the last twelve months has gone negative; that's not good and it's pulling the trend lines apart.  Although the deficit is still harmless at 1.3% GDP, it doesn't look good for anyone who has been looking forward to a balanced budget within the next two years.  If the economy recovers quickly from the current slowdown, that might change, but a recession would solidify the current trends.  Here's the latest chart; click to enlarge.

FQ.08.02: Favorite Quote for This Week

Our national income accounts do not directly show the benefits of that very large part of knowledge creation represented by new and improved products ... Yet such new and improved products constitute a large part of the increase in economic welfare from year to year, accounting for increases in life expectancy, physical appearance, sense of well-being, range of activities available to us, and so on.
—Julian Simon, The Ultimate Resource 2

A mini brain teaser for Sean Hannity

Sean Hannity told his viewing audience this week that he thinks the Social Security trust fund has been "mismanaged."  Presumably, he's siding with the crowd who laments the SS trust fund "raid."  [Not sure what Alan Colmes thinks about it; I wish I did.]

Hannity has plenty of company: many Democrats and Republicans alike share the misguided view that the trust fund is "empty" because of the so-called raid.  In an attempt to stimulate some critical thinking on Sean's part, I sent him an email with a mini brain teaser; but it was apparently buried amid thousands of messages he doesn't have time to bother with.  So I decided to post it, in case some of the readers here have an inside track with Mr. Hannity.  Here's the mini brain teaser:

If the SS trust fund had never been "raided," what would it contain today:

(a) pallets and pallets of cash, which does not earn interest?  or . . .

(b) interest-earning US Treasury securities?

[Note that both (a) and (b) are backed by the full faith and credit of the US government.  Also note that (b) is what the trust fund contains today.]

And if you know anyone (...such as Ron Paul, Al Gore, Dennis Kucinich, or one of your neighbors) who thinks a logical case can be made for choice (a), please ask them to leave a comment here explaining their thought process.

The bottom line is this: it simply does not matter what the trust fund contains.  It doesn't matter if it's empty, it doesn't matter if it contains pieces of green paper (cash) with George Washington's picture, it doesn't matter if it contains orange pieces of paper (bonds) with Ben Franklin's picture.  It doesn't even matter if the Treasury incinerates all those pieces of paper just after the close of each business day, then reprints them just before opening the next business day.  It simply does not matter.

What DOES matter is the future productive capacity of the US economy—which, after all, is the basis for worldwide faith in the "full faith and credit of the US government."  Yesterday, today, and tomorrow. 

We should be asking our politicians what they'll do to improve the future productive capacity of our economy.  We should NOT be interested in what the unimportant lockbox contains.  Sean Hannity is among the people in a position to start asking the right question.  But step one is for the people in a position like Hannity's to understand the right question themselves.  Not many of them do, just yet.  [I'm still wondering if Alan Colmes does.]

I wrote an article about the SS Lockbox Hoax a year or two ago; the logic still applies—although it's still obvious that politicians and cable news talking heads don't get it yet.