Saving the American Dream

The American Dream is under attack.

“The American Dream is the belief that anyone, regardless of where they were born or what class they were born into, can attain their own version of success in a society where upward mobility is possible for everyone. The American Dream is achieved through sacrifice, risk-taking, and hard work….” “The American Dream is to succeed by work, rather than by birth”. The Dream has attracted the world’s best and brightest to our shores making America the world’s leading economic powerhouse and enabling us to live freely as we each determine what we are willing to work for, for ourselves and our families.

Historically, individuals have been limited in what they could achieve by where they were born in society, by their parent’s position in life, and by who they knew. Companies of individuals were limited by the restrictions placed on them by their governments, often by the protections from competition government granted their friends (crony capitalism). Such traditional societies limited the freedom and ambitions of its citizens and limited the productivity of its human and physical resources. In short, traditional societies were keep poorer than they would have been if their citizens had been freer to innovate and compete.

The American Dream is now under attack by Donald Trump’s trade protectionism, crony capitalist government favoritism, immigration walls, and weakening of the international rule of law that has extended the benefits of specialization and trade globally. It is also being attacked by Alexandria Ocasio-Cortez’s (LOC’s) vision of state leadership and control of production and a new generation of idealistic, but uninformed, voters who mean well but have missed the lessons of socialism’s failures. If we are to save the conditions in the United States in which the American Dream still lives, we must better understand what has led so many Americans to vote against it.

I am sure that the answers to that question are many and complex, but broadly speaking two stand out in my mind, both of which point to the measures needed to restore support for the dream.

The first is to better educate the public, especially its younger members, about the conditions that allow and encourage a productive, innovative economy. This includes understanding the proper role of government in protecting private property, enforcing contracts, maintaining public safety (the rule of law) and in providing the public infrastructure that facilitates private activities and commerce (the commons of public goods). It includes the lessons of why all socialist economies have failed as a result of the corrupting incentives of state direction of economic activity rather than the competitive search by profit seeking private enterprises for better ways to serve the public.

The second answer concerns the adequacy and efficiency of our social safety net. The American Dream concerns individuals who take responsibility for their own well-being. While on average this has opened the way for most to prosper to the extent of their talents and energy, some will, often through no fault of their own, fail and fall off the tightrope. Society has an interest (even beyond the obvious humanitarian one) in softening the fall. It has an interest in an effective social safety net. 

Some–those who have not understood the lessons of socialism’s failures–have looked to trade and immigration restriction to prevent them from losing their jobs. They object to the economic benefits of free trade when it means that they must look for a new job (however, most manufacturing job losses in the U.S. have resulted from technical progress and the resulting increase in productivity rather than from cross border trade). “Econ-101-trade-in-very-simple-terms”  “Trade-protection-and-corruption” Those with such views have supported Trump’s anti free market policies. They have been attracted by Trump’s “I win you lose, us vs them” rhetoric.

AOC and her friends point to the widening income inequality–the dramatic increase in the incomes of the wealthiest and the stagnation of the incomes of the middle class in recent years–and demand income redistribution. But she fails to understand that it has been the growth of government’s role in the economy and the incentives in big government toward corruption and crony capitalism (protectionism for the wealthy) that have reduced competition and protected the position and markets of the biggest companies with friends in government. Socialism would make those incentives even stronger.

America’s dynamism and success reflects the creative destruction of risk-taking entrepreneurs and their hard-working employees.  However, the workers whose jobs are displaced by new products and new technologies may need help in finding and retraining for new jobs. They may need financial assistance in between (unemployment insurance). If nothing else, this may be the cost of their support for such a dynamic system.  Our social safety net sometimes provides poor incentives and sometimes has holes. It is time to seriously consider replacing it with a less intrusive and more comprehensive Universal Basic Income.  “Our-social-safety-net”  “Replacing-Social-Security-with-a-Universal-Basic-Income”

The American Dream–the foundation of our freedom and affluence–is under attack from the left and the right. We should fight to preserve (or restore) it.

Crony Capitalism

The standard of living of the median income family in the United States has risen to heights that could not have been imagined just a hundred years ago ($73,891 in 2017). All other industrial countries have had similar experiences.  “As measured in 2011 U.S. dollars, the global income per person per day in the first year of the Common Era stood at $2. That’s also where it stood when William the Conqueror set sail in 1066 to claim the crown of England…. In 1800, the average income was $2.80. In the 18 centuries that separated the emperorship of Caesar Augustus and the presidency of Thomas Jefferson, per capita income rose by less than 40 percent….

“Then industrialization changed everything. Between 1800 and 1900, GDP per person per day doubled. In other words, income grew over twice as much in one century as it had over the preceding 18 combined. By 2016, the number…in the United States… stood at $145…. In other words, global and American standards of living rose twelve-fold and 24-fold respectively over the course of the last two centuries….  These and other fascinating data are presented by Marian Tupy in:

How was this miracle possible? It resulted from each worker on average becoming dramatically more productive and being able to trade his or her products for the other goods and services he or she wanted. But what was the source of such an amazing increase in productivity?  Workers developed and or were provided with tools and equipment (capital) that made it possible.  These machines, cooperative production structures and worker skills (so called “human capital”) were developed because “capitalists” creating and investing in them had protected property rights in them and shared in the profits from their use. In short, it was because people had an incentive to invent and learn that was lacking in feudal or earlier social structures.  Bill Gates, for example, became a billionaire from selling us the computer products and services that Microsoft invented and produced. We happily paid Microsoft these billions for its tools that greatly enhanced our own productivity in both production, household management, and play. In the win-win world of private property and trade, we gained from Microsoft as much or more than Bill Gates did.

Interestingly, there is more to this story. As industrialization took hold, and the incomes of the lower and middle classes rose, income inequality declined. The monopolies of feudal Lords were eroded.  More recently “global inequality is declining as developing countries catch up with the developed world. Between 1990 and 2017, argues Branko Milanovic from City University of New York, the global Gini coefficient, which measures income inequality among all of the world’s inhabitants, decreased from 0.7 to 0.63” i.e., became more equal (zero equals perfect equality). [Tupy]

In the U.S. after years of gradual decline, the Gini coefficient rose from 0.35 in 1979 to 0.49 in 2018, slightly less than China’s (0.47). What is going on? Though still more equal than the world on average, why is income distribution widening modestly over the last forty years in the U.S.?

A widely held explanation is that industries have become more concentrated and have exploited their quasi monopolistic market power to extract noncompetitive, i.e. monopoly, rents. Two hundred forty-four years ago, Adam Smith wrote that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” [Wealth of Nations Book I, Chapter X.] What prevents such conspiracies from succeeding is the competition from other firms seeking to exploit these attractive prices. When faced with competition, a person or firm can only profit by satisfying customers better than the competition.

But why have American firms, and those of many other industrial countries, become more concentrated and protected from competition?  Largely via state capture. As he reluctantly increased U.S. military spending as the “Cold War” heated up, President Dwight D. Eisenhower worried that it would be hard to avoid a mutually self-serving relationship between the government paying the bills and the defense industry supplying the goods. In his famous Farewell Address on January 16, 1961, Eisenhower warned that: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes.”

When government becomes involved or increases its involvement with private firms, the door (and the revolving door) is opened for firms to exploit the relationship to their advantage. It is not just the military-industrial complex (or the military-industrial-congressional complex as Eisenhower stated it in the first draft of his Farewell Address) that enjoys government favor and protection. President Trump’s tariffs on imported steel and aluminum are not for the benefit of American’s generally but are protectionist favors to America’s uncompetitive steel and aluminum firms. Protectionism is just another word for corruption.

Some products and industries need to be regulated to protect consumers and insure honesty and transparency. But larger firms increasingly accept, if not welcome, overly burdensome regulations because they are better able to devote resources to complying with them and thus absorbing their cost than are smaller firms. Such regulations protect them from competition from new, smaller firms. Professional licensing has increasingly been used to protect professionals from hairdressers to real estate agents to lawyers from competitors thus enjoying higher fees than would result in a more competitive market for their services.

The quasi monopoly rents firms are able to extract as the result of government protection against competition grow with the size of government involvement with the economy. The increase in income inequality (a reflection of shrinking competition) of recent decades (the increase in America’s Gini coefficient) have followed the large increases in the size of government, whether measured by expenditures, employment, or regulations.

“• In 1900 the federal government consumed less than 5 percent of total output.

  • In 1950 the federal government consumed roughly 15 percent of total output.
  • In 1992 the federal government consumed almost 25 percent of total output.”

Bernie Sanders, a self-proclaimed Socialist, and Elizabeth Warren, a self-proclaimed defender of capitalism (I am not joking), argue that to fix industrial concentration, to prevent or unwind monopolies, the government needs to be bigger and more active in the economy. This is backward in terms of logic and experience. I don’t question that overwhelmingly most public servants work for the government out of the desire to serve the public. However, the interface between government and the private sector creates opportunities and incentives (resisted by most I am sure) for corruption. By corruption I mean the exploitation of government regulations and contracts to reduce market competition for (i.e. to protect) established firms.

Political lobbying by firms and trade organizations can provide useful industry input to congressional legislation or executive rule making but it is generally the prospective of established firms rather than of potential competitors or the general public. “Since the 1970s, there has been explosive growth in the lobbying industry, particularly in Washington DC.  By 2011, one estimate of overall lobbying spending nationally was $30+ billion dollars. An estimate of lobbying expenses in the federal arena was $3.5 billion in 2010, while it had been only $1.4 billion in 1998.” “Lobbying_in_the_United_States – A_growing_billion_dollar_business”

In 2010 the Supreme Court ruled in a 5-4 decision in Citizens United v. Federal Election Commission, “that the free speech clause of the First Amendment prohibits the government from restricting independent expenditures for political communications by corporations, including nonprofit corporations, unions and other associations.” “Citizens_United_v._FEC – Super_PACs”  This opened the door to direct corporate and union “donations” to political candidates and parties, providing a powerful tool in achieving government cooperation with what these groups consider their special interest.

The competitiveness, and whatever the lack of it contributes to income inequality, of American businesses will not be served by expanding the government’s role in the economy, quite the opposite. Competition is rarely stifled by natural market phenomena. Rather it is much more often blocked or restrained by government regulations that favor the established, dominant firms, who are able to gain the government’s favor. The political forces of expanding government regulation and interference in the economy promote every increasing state capture by dominant firms.  Crony capitalism will be the death of the real thing if it is not continuously resisted. As we should all well know, the price of liberty is eternal vigilance.

My Key stories of the world in 2014

Twenty fourteen was a busy year for the planet and in general a rather unhappy time. But believing as I do that when the pendulum swings too far in one direction (big brother) it swings back (personal freedom), I am such an optimist that I see some hopeful signs for 2015. These are the developments that I think are important (and/or felt like writing about).

Torture: A big plus this year was the eye-opening report of the United States Senate Select Committee on Intelligence Report on CIA Torture. It found that the CIA used torture (violating the Universal Declaration of Human Rights, the United Nations Declaration Against Torture, and the I, II, and IV Geneva Conventions of 1949 all of which were signed by the United States and are thus binding laws of the land) and that it was not effective in gathering actionable information that couldn’t have been obtained with traditional interrogation techniques. Admittedly Senator Diane Feinstein was angry about CIA illegal hacking of computers of the Committee staff who have the legal responsibility of CIA oversight and may have been settling some scores. But if you do not find these abuses of power frightening, you live in the wrong country. While the report might not have been fully balanced, its findings on the ineffectiveness of torture are consistent with the earlier findings.’t-work/

Our common sense assumption that a prisoner being tortured will tell his captures whatever they want to hear in order to stop the pain was dramatically confirmed by the recent news that Nian Bin was released by the Chinese government after eight years in prison for murders he did not commit. He was originally tortured into admitting the alleged crimes.

Hopefully these disclosures will reign in these embarrassing and appalling abuses by the United States government.

Greece: Since joining the EU and adopting the Euro (still very popular in Greece as protection against the bad old inflation days), Greece has enjoyed and unfortunately recklessly indulged in a higher living standard (consumption) than it earned (produced) by borrowing from the rest of Europe at the low interest rates paid by Germany. This mispricing of the risk of lending to Greece by financial markets resulted in part from the failure of the European Central Bank (ECB) to rate Greece sovereign debt realistically (treating all sovereign debt of its members alike). It also reflected the moral hazard of the wide spread belief that the EU, ECB, and international financial institutions such as the IMF would bail out holders of such debt. But no one and no country can live beyond its means forever. What can’t go on forever, won’t.,

The balance between what Greece (short hand for individuals, firms, and government domiciled in Greece) imports and (pays for with) exports can be restored by lowering the cost of Greek goods and services. This will increase its exports and decrease its imports. This can be achieved by lowering wages and other costs of production or increasing productivity. Lowering wages without an increase in productivity simply acknowledges the reality that Greeks are poorer than most other Europeans. Increasing productivity improves Greek competitiveness and thus exports while also increasing its real standard of living.

The loans provided to the Greek government by the troika (EU, ECB, and IMF) tied to (i.e. conditional on) reductions in the government’s borrowing needs (reducing government employees, increasing tax revenue, etc) and structural reforms to make the economy more productive, provided an alternative to its default and forced sudden cut in government spending that markets would have forced on it otherwise. There is debate about which approach would be best for Greece in the long term. Hopefully Greek voters will face and debate this choice honestly in the presidential elections in January: The implications for the EU and the Euro are huge.

Cuba: President Obama has decided to diplomatically recognize Cuba after a half century long failed policy of sanctions. Not only have our economic sanctions failed to displace the Castro brothers and their pernicious regime (most other countries do not observe our sanctions and trade and invest with Cuba anyway), we have no business (or national self interest) in adopting and promoting a regime change as national policy, however much we might wish for it. Moreover it is very much in our national interest to have good information on and channels of communication with every country with a government no matter how chosen. The linked article by Marc Thiessen illustrates the arrogant and dangerous thinking of our neocons. If Thiessen supports something, I start out against it until convinced otherwise:

Crony capitalism: President Eisenhower famously worried about the dangers of the military industrial complex as he sought to conduct a cold war with the USSR: It is difficult for the government to objectively serve the public interest while dealing with or regulating industry. The relationship that develops in such a situation often serves the interests of the regulated industry more than the general public. The result is what we call crony capitalism and it is the enemy of true capitalism as much as its variants– socialism and fascism. One of the particularly alarming examples of truly disgusting and damaging crony capitalist deals is described in the following article. It involves JPMorgan Chase CEO Jamie Dimon and Eric Holder’s Justice Department agreeing on what seems like a large fine, but is more accurately described as a bribe, to suppress evidence of criminal behavior on the part of Chase.

Twenty fifteen will be a better year than was 2014 if public outrage at the use of torture, the abuse of the privacy of American’s, the bailing out of and favoritism toward Wall Street and the costly and counter productive deployment of American military around the world, result in rolling back these dangerous excesses. My fear is that nothing will be done and that there will be more the same. I hope that I am wrong.