The Choice We Face in This Election

In the course of a campaign speech on Monday, President Obama let slip a reference to his vision for government's role in the economy:



Contrast this with Paul Ryan's vision for government's role:



President Obama is right. This election presents a stark choice.  Between "sharing the wealth" (which means only "destroying the wealth") or "building the wealth." Between statism and individual liberty.  Between decline or prosperity.  Between  condemning the achiever--taxing him, ridiculing him, denying his achievement and saying, "You didn't build that,"--or praising the risk-taker, the entrepreneur, the capitalist who created the business and invented the product and hired the employees by the thousands and who made everyone wealthier in the process.  Between a government on your back or a government that gets out of your way.  Between socialism--rancid, sniping, griping, swiping, envious, petty, demoralizing and dehumanizing socialism--or freedom--self-advancing, horizon-expanding, limitless, dream-fulfilling, ennobling, uplifting, soul-perfecting and wealth-maximizing freedom.

You pick.

Proof that "Stimulus" Is a Depressant

I have posited that involuntary transactions are the opposite of voluntary transactions in their effect, and in fact they destroy wealth rather than create it. For this reason, government spending on anything other than certain clear public goods--goods that make us all better off, like needed bridges (and not bridges to nowhere)--destroys wealth. Government spending of this sort does not merely reslice the pie, it makes the pie smaller. It cannot "stimulate" the economy the way private voluntary transactions do, because its effect is negative. With each involuntary transaction, such as taxing Peter to pay Paul, the economy is further hurt, not helped.

Unlike my assertion that trade creates wealth, my claim that involuntary transactions destroy wealth apparently has not been declared a law of economics, at least as far as I can tell.  I've read many books, essays and articles looking for support, and haven't found any. But an article in today's Wall Street Journal comes close.

Arthur Laffer writes today that the record of recent "stimulus" spending by major economies shows that an increase in such spending is negatively correlated to the rate in growth of gross domestic product, or GDP.  In other words, the more governments increased their spending, the more their economies' rate of growth declined.  Here are Laffer's data (pulled from the International Monetary Fund):

 Laffer's presentation left me wondering whether there was a statistically significant correlation between increase in government spending an decrease in rate of growth.  I took his data and put them in a scattergram to see, then I added a trend line.  Here is what it looks like:

On this chart, the x-axis is percentage increase in government spending, and the y-axis is percentage increase in rate of GDP growth.  Where government spending was reduced or increases kept small, the country's rate of GDP growth suffered less in the 2008-09 downturn.  Where increases in government spending were higher, the decline in GDP growth was higher. 

As you can see, the data points are pretty tight, so I'd say the trend line is relatively reliable. It shows that on average a 1% increase in government spending means a 1.5% decrease in rate of GDP growth.  This correlation is the opposite of what you'd expect to see if increased government spending were a "stimulus" or "jump start" to an ailing economy. If it were, you'd expect to see those countries with higher increases in government spending seeing higher rates of GDP growth.  But you don't.

Laffer therefore correctly points out that the data do not support a government policy of stimulus spending, that what is called a "stimulus" is actually a depressant:

If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment. 

Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit. 

Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.

(Emphasis added.) On this last point I have to disagree with Laffer (at least as far as these data go). The wealth effects of additional government spending do not sum to zero.  If they did, we would expect the trend line on the chart above to be flat: with each percentage increase in spending, the effect on GDP growth would be zero, as each dollar taken is replaced by another dollar spent, and no change in the rate of growth would take place. Instead, as Laffer's own data suggest, the wealth effects of additional government spending are negative--they sum to less than zero.  Wealth is being destroyed by each extra dollar of government spending, because the dollar taken from each taxpayer is worth more to him than it is worth in the hands of each recipient.

Laffer's data appear to support my claim compellingly.  Am I wrong?

Capitalism Creates Happiness as Well as Wealth

Capitalism deserves praise, not just because it builds society's wealth, but also because it builds individual happiness. As British/Australian sociologist Peter Saunders wrote (Why Capitalism Is Good for the Soul):

By perpetually raising productivity, capitalism has not only driven down poverty rates and raised life expectancy, it has also released much of humanity from the crushing burden of physical labour, freeing us to pursue ‘higher’ objectives instead. What Clive Hamilton airily dismisses as a ‘growth fetish’ has resulted in one hour of work today delivering twenty-five times more value than it did in 1850. This has freed huge chunks of our time for leisure, art, sport, learning, and other ‘soul-enriching’ pursuits. Despite all the exaggerated talk of an ‘imbalance’ between work and family life, the average Australian today spends a much greater proportion of his or her lifetime free of work than they would had they belonged to any previous generation in history.

There is another sense, too, in which capitalism has freed individuals so they can pursue worthwhile lives, and that lies in its record of undermining tyrannies and dictatorships. As examples like Pinochet’s Chile and Putin’s Russia vividly demonstrate, a free economy does not guarantee a democratic polity or a society governed by the rule of law. But as Milton Friedman once pointed out, these latter conditions are never found in the absence of a free economy. Historically, it was capitalism that delivered humanity from the ‘soul-destroying’ weight of feudalism. Later, it freed millions from the dead hand of totalitarian socialism. While capitalism may not be a sufficient condition of human freedom, it is almost certainly a necessary one. 

(Hat tip: professorbainbridge.com). Saunders thus echoes a theme of this blog, a point made by political economists over and over (but currently doubted by some): that free markets foster human freedom (and vice versa), that the right to prosperity (the pursuit of happiness) is just as much a God-given right as life and liberty, that liberty and prosperity are intertwined and interdependent. But we don't need to be told this: We know innately that free markets build happiness. No one died trying to cross the Iron Curtain to get into East Germany.  No one sails a bathtub to cross shark-infested waters desperately trying to get from Key West to Cuba.  And South Koreans do not take their lives in their hands to sneak across the DMZ to seek utopia in the north.  Quite the opposite.

If people are willing to risk their lives to escape collectivist countries in order to live in a capitalist one, wouldn't you think those who already live in a capitalist country, and never risked anything to do so, would appreciate what they have been blessed with?

Who Is Today's Milton Friedman?

Yesterday would have been Milton Friedman's 100th birthday.  The Wall Street Journal published a great tribute to him yesterday by Stephen Moore, lamenting the "tragedy that Milton Friedman . . . did not live long enough to combat the big-government ideas that have formed the core of Obamanomics." Although the article goes on to apply a couple of Friedmanesque criticisms to Obama's economic policies (e.g., "There is no magical 'multiplier effect' by taking from productive Peter and giving to unproductive Paul."), its overall tone suggests that, if only Prof. Friedman were still alive, we might have a chance to counter the Left and prove to the American public, yet again, that the free enterprise system--the system that makes it possible to buy, affordably, houses and cars and air conditioning and iPhones and organic free-range chicken--is actually worth preserving.

(The Foundry Blog at The Heritage Foundation makes a similar point, in a post titled "Taxmageddon and Obamacare: What Would Milton Friedman Say?")

One is struck by that tone of lament. Yes, one pines for the sight of Prof. Friedman owning, say, Keith Olbermann in his smiling, gentlemanly and thoroughly ruthless way.  That would be sweet.  But are we without hope in reviving American passion for the American Dream given Friedman's passing?  Are we left to ask, "What would Milton Friedman say" in order to make our points to a public misled by Leftist harangue? Is there no other free market economist with a knack for communication who could be today's Milton Friedman?

I really don't know, and I would be interested in others' views.  In the meantime, we may have to be content sending around links to Friedman's PBS series, Free to Choose, to rally support for the cause.