I’m always happy to gain new readers, even the ones that challenge me. In a way, the dissenters are the most useful; recently, Lauren Sheil questioned one of my premises.
“Why does everyone assume the perpetual economic growth is not only possible but even a good thing?”
I tried to answer that under the original post, but our short back-and-forth in the comments got me thinking further about what economic growth means and how that applies to today’s policy disputes. Many of my posts focus on the problems our world faces, but our discussion reminded me of the importance of stepping back and noticing just how good we actually have it. Let’s take a look at some graphs that provide some perspective on our current situation.
Even if you conclude that most of this growth went to the richest Americans that doesn’t mean everyone wasn’t gaining from this remarkable increase in wealth. For example, as Matt Ridley explains in The Rational Optimist, even today’s poor are substantially better off from even a short time ago.
Today, of Americans officially designated as ‘poor’, 99 per cent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning. Cornelius Vanderbilt had none of these. Even in 1970 only 36 per cent of all Americans had air conditioning: in 2005 79 per cent of poor households did.
Someone might counter that this all well and good for fat-cat Americans, but what about the rest of the world: how has economic growth benefited them? Let’s take a look at another graph.
Today, more than half the world is middle class. Economic growth made this possible. With economic growth comes better health, longer lives, more choices, more happiness, and much more. Expressing cheerfulness at our relative prosperity to ages past doesn’t mean we can ignore the pernicious effects of inequality, contemporary poverty, or any other problems still with us. It should remind us exactly why economic policy should focus on growth. People are suffering economically now precisely because growth is weak. Here’s the GDP data I grabbed from the St. Louis Fed.
Growth has mostly been trending below 2.5%. In other words, all those unemployed people aren’t making new things like air conditioners or better homes and aren’t providing services that make our lives more comfortable. As policymakers lose focus on getting the unemployed back to work they aren’t just failing those individuals, they’re depriving everyone of more wealth and better lives. A stagnant economy that doesn’t produce more things means less for everyone – today’s growth is hardly enough to keep up with the population increase. If we hope to look back with memories of how only 65% of Americans had broadband access or any other good someone enjoys today remember that we need to grow to prosperity.
I try not to make too many predictions on this blog. If I do the only prediction I’m likely to correctly make is that my predictions will be off. Jonah Lehrer shares the results of a big study that calls into question the ability of experts to accurately forecast.
How did the experts do? When it came to predicting the likelihood of an outcome, the vast majority performed worse than random chance. In other words, they would have done better picking their answers blindly out of a hat. Liberals, moderates and conservatives were all equally ineffective.
The reason so many experts were wrong was due to confirmation bias – they were confident they were right so they ignored evidence that undermined their preconceptions. While reading up on whether or not anyone should be concerned about inflation right now (due to Obama’s or the Fed’s policies) I feared ending up in that pitfall. So in my quest to find diverse viewpoints I discovered some older Art Laffer and others making predictions about future inflation because of Obama’s policies. Determined not to prove Lehrer wrong, who writes, “Famous experts were especially prone to overconfidence, which is why they tended to do the worst,” Laffer and gang’s predictions turned out to be almost exactly antithetical to reality.
On June 11, 2009, Laffer wrote a column Ehrlichianly titled, Get Ready for Inflation and Higher Interest Rates: The unprecedented expansion of the money supply could make the ’70s look benign. Now that we stand over a year later, let’s take a look at accuracy of some of his and other inflation Chicken Littles’ predictions.
It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits.
His primary evidence for his fears is this chart:
But let’s now check out this updated chart (upper-right), courtesy of Martin Wolf, from a few days ago.
The rate of change in M1 has plummeted and the new data doesn’t look so scary or out of place with history now, does it? M2 (the money in circulation) also dropped to very low levels. We can also see US inflation rate/expectations (lower-left) hit negative levels and currently floats under 2 (below the Fed’s target rate). With all the current talk about QEII and deliberately raising inflation expectations, the inflation alarmists are back, but as Martin Wolf points out, even if we were to see inflation growing too fast (which there is currently no evidence for) we could always just scale it back.
The hysterics then add that it is impossible to shrink the Fed’s balance sheet fast enough to prevent excessive monetary expansion. That is also nonsense. If the economy took off, nothing would be easier. Indeed, the Fed explained precisely what it would do in its monetary report to Congress last July. If the worst came to the worst, it could just raise reserve requirements. Since many of its critics believe in 100 per cent reserve banking, why should they object to a move in that direction?
Mark Thoma at his blog, Economist’s View, discusses further some mistakes that people worried about the growth in currency are currently making. It’s worth reading but here is the graph that he uses, which shows that the currency in circulation is not outside the historical norm.
Over at the American Principles Project, a conservative Christian organization, Samuel Gregg (who cites Laffer) also worries (7 July 2009) Obama’s policies are going to lead to 1970s style inflation – he even mentions Mugabe’s Zimbabwe.
More than one economist believes that it is only a matter of time before the third member of the 1970s trio – growing inflation – will be back to wreck havoc upon us.
Most amazingly, Gregg’s article stumbles onto an important insight about inflation. Since he takes for granted inevitable skyrocketing inflation, he spends the bulk of his article explaining why having to lower inflation will be so terrible.
Seriously fighting inflation entails a willingness to tolerate increasing unemployment. This is the price of reducing the excessive amounts of money sloshing through an economy.
So if lowering inflation will increase unemployment, what might raising inflation do? Yup, increase employment. Considering 15 million sit out of work right now, which is about 4 million people greater than the entire population of Greece, I think we could stand to raise the inflation rate a tad.
We can see that inflation expectations are low right now; it’s also worth going over some other measures of inflation and potential inflation. Here’s the Consumer Price Index.
And here is core inflation (which is the CPI minus volatile items like food and energy):
(By the way, you can have more fun data like this at the St. Louis Fed’s great website.)
Here’s our current core inflation overlaid with what happened in Japan (via Krugman):
Here’s the Treasury Maturity Spread (via DiA). Yup, also low.
Many alarmists point to rises in gold and other commodity prices. What about those? First it is important to remember that we don’t usually consider volatile commodities when looking at inflation because unpredictable spikes can occur. They’re also traded on world markets so judging US inflation can be thrown off because of that. Consider if a huge new supply (or disruption) of oil or gold was discovered that could suddenly change the price of those commodities, but that wouldn’t really represent a significant change in inflation. Commodities aren’t entirely useless (they’re not all constantly and extremely volatile) and inflation predictors keep using them, so let’s take look at some of them anyway.
On gold, many have been unnerved by the “record high” of its price. Yet, as David Leonhardt points out, it’s not true.
Gold is at a record only if you fail to adjust for inflation. And you should almost always adjust for inflation.
This isn’t simply a question of math. Anyone who says gold is at a record high (or who said oil was several years ago) is getting the story wrong. Why? Because $10 today is not more valuable than $9 a few decades ago. Claiming otherwise is tantamount to saying that 10 rupees is more valuable than $9 because 10 is a bigger number than 9.
Here’s a graph (via Krugman) that isolates commodity prices for us.
I don’t know about you, but it doesn’t really look like any historically high jump in commodity prices going on.
Everyone is entitled to make some bad predictions, but I’m not sure what Sarah Palin’s excuse is for her inability to predict the past. Here she is on grocery inflation.
“Everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so.”
The Wall Street Journal reporter who had the gall to question her responded.
The Nov. 4 Wall Street Journal article noted, in its first sentence, “the tamest year of food pricing in nearly two decades.” It does indeed report that supermarkets and restaurants are facing cost pressures that could push their retail prices higher — but it hasn’t happened yet on a large scale. Critics of the Fed’s quantitative easing policy are focused primarily on concerns about potential future inflation.
Let’s now take a look at few other predictions on inflation at about the time Laffer and Gregg wrote their pieces.
Paul Krugman (28 May 2009):
It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.
Seems he was correct.
Paul La Monica, CNNMoney Editor (4 June 2009):
So with all due respect to the Fed chair, he can talk as much as he wants about how he’s not too worried about inflation. But investors disagree. And Hoenig thinks that the Fed would be unwise to dismiss what’s going on with bond rates, currencies and commodities.
Score that one: Bernanke 1 – La Monica/Hoenig 0.
The Economist (22 Oct 2009):
In short, the likeliest triggers of an acute crisis—a lenders’ strike, a crash in the dollar or inflation—seem remote.
Cheers to the Brits on that one.
None of this should suggest that Krugman or The Economist is always correct or that La Monica, Laffer, and Gregg are always wrong (Palin I’m not so sure about). Remember Lehrer told us that “Liberals, moderates and conservatives were all equally ineffective.” But it does suggest to me that we shouldn’t keep listening to the same voices on a topic they’ve been so utterly wrong about until circumstances change (or they change) and indicate things might be different. For example, here’s Laffer -again in a WSJ Op-Ed- from 2 days ago.
Outlining his growth agenda he recommends,
2) Price stability. Congress should revise the Federal Reserve’s mandate, making it serve only the goal of price stability (and not also full employment). In addition, the Fed should follow a monetary rule, targeting either the quantity of money or the price level. There can be no prosperity without price stability. (my emphasis)
He’s still worried more about inflation than our current unemployment crisis. Can editors explain to me why we keep hearing more and more from those with such bad records? The inverse correlation between the voices of inflation alarmists and the actual inflation rate is surreal. We have plenty to worry about without concerning ourselves with phantoms and problems that only occur if we’re more successful.
I hope I’m not giving the impression that I think I know what will happen with our inflation rate or commodity prices. If I did I’d be in the markets right now, not writing blog posts. But what I can tell is that the bizarro Chicken Littles (“The ground is rising?!”) keep being wrong and the available data suggests we’re not in imminent danger of turning into Zimbabwe. So if you think Greece’s economy is bad and you realize that just because the overall health of our economy is better doesn’t mean that virtual unemployed nation we have living within our borders isn’t feeling real pain. Unconventional ways to further loosen monetary policy aren’t likely to solve all our problems but it could help alleviate a lot of needless suffering.
I’d rather not make a prediction, but I think we should put some money on this.
In Mr Krause’s map he seems to have used the shapes of the countries from a Mercator projection, but has scaled up the outline of Africa, without changing its shape, to show the appropriate area. An alternative and arguably more rigorous approach would be to repeat the exercise using an “equal area” projection that shows the countries’ areas correctly while minimising shape distortion.
Can higher taxes correspond to freer markets? Yes, when the tax that pays for road maintenance raises less revenue than the cost of driving. We need to stop subsidizing driving and raise the gas tax.
The Low Tax Road to Serfdom?
Over at the National Review Online Josh Barro advocates indexing the federal gasoline tax for exactly that reason.
Many state gas taxes and other vehicle taxes have also fallen in real terms. But this has not led to lower spending on road construction and maintenance—from 1994 to 2008, while GDP grew 103 percent and road spending grew 102 percent, gas and vehicle tax receipts rose only 70 percent.
Governments have made up the difference by tripling their borrowing to finance roads and tripling the diversion of general revenue to pay for road costs. This is a bad trend, because gas taxes below the cost of roads use cause inefficient overuse of roads, and the higher sales and income taxes used to plug the gas tax gap are a drag on the economy.
When driving is priced under its cost, it is not lower taxes – it is higher spending in disguise. Incidentally, raising the gas tax is really the perfect tax to raise for a number of compelling reasons.
1. We want to driving to reflect its true cost. More driving causes more damage to roads and more need for roads in general; they need to be paid for. 2. Burning gasoline is dirty and harmful to the environment (including climate change). If you’re going to pollute you should pay for it. 3. The more cars that are on the roads the more traffic. Price gas closer to its market level and we’ll see less overdriving. Traffic costs our economy billions of dollars in opportunity costs. 4. The more gas we buy the more we enrich the Petro-dictators that oppress their people and fund terrorism. Wouldn’t you prefer our government got that money rather than some despots? 5. Raising the price of gas will make investing in cleaner energy sources more economical. 6. Some research has even shown that raising these types of taxes could, somewhat counterintuitively, improve economic performance. 7. No matter how small a government you want, we have to raise some revenue somehow. Why not raise it by taxing something we want less of instead of something we want more of like labor? 8. The price of gas is going to rise eventually anyway, we might as well make that potentially painful transition as smooth as possible. 9. The Pigou Club is cool.
In his RealClearMarkets piece Barro gives us some hope that Democrats and Republicans might come to an agreement to index the gas tax if all the Bush tax cuts are expanded. I previously argued that Democrats should use the sunsetting of the Bush tax cuts to push through some better tax reforms. This wouldn’t be perfect as the Bush tax cuts themselves are extremely inefficient – but I support the proposal nonetheless. I’ve long thought that raising the federal gas tax is one of the best policies we could adopt. I’m not going to get too excited; I’ve been let down before.
The Economist has a very good piece on “The perils of constitution-worship”. It serves as a useful reminder to people like me who sometimes fall into that trap. In a college course I wrote a paper defending James Madison from all attacks – in retrospect I realize I can recognize his genius without making him infallible.
When history is turned into scripture and men into deities, truth is the victim. The framers were giants, visionaries and polymaths. But they were also aristocrats, creatures of their time fearful of what they considered the excessive democracy taking hold in the states in the 1780s. They did not believe that poor men, or any women, let alone slaves, should have the vote. Many of their decisions, such as giving every state two senators regardless of population, were the product not of Olympian sagacity but of grubby power-struggles and compromises—exactly the sort of backroom dealmaking, in fact, in which today’s Congress excels and which is now so much out of favour with the tea-partiers.
The Declaration of Independence and the Constitution still amaze me and deserve our respect. This isn’t an argument for casting them aside as of relics of dead white men. We must be on guard against calcifying unnecessary flaws into our political system. Ironically, the last thing the Founding Fathers would have wanted would be to have their words treated as sacred… not that what they wanted has to matter.
Better to remain silent and be thought a fool than to speak out and remove all doubt.
When Twain made this remark he probably didn’t have American presidents in mind, but it captures an important lesson in an unintended way. Of course, Twain meant that if you’re a fool and you speak, your intellect will be more obvious to others than if you kept your mouth shut. Presidents often aren’t fools (yes, I did just write that) but speaking out even with wise words may be a foolish move.
Over at The Economist’s “Democracy in America” blog, the writer, while staking out an odd position on gay marriage (one I happen to disagree with), observes that “for presidents, words are political actions.”
What would have been the actual political consequences of a decision by Barack Obama to come out in favour of gay marriage in the past year and a half? I don’t think there can be any doubt that such a move would have re-politicised an issue that, remarkably, has become steadily less partisan in recent years. Presidents can’t simply speak their minds. For presidents, words are political actions. A president who voices an opinion without considering the political consequences is acting irresponsibly. Presidents’ voiced opinions about social justice are very sharply constrained by whether voicing those opinions is likely to advance their visions of social justice at that political moment. And that means that presidents’ spoken views on such questions may lag far behind the pace of progressive opinion, and may become much less progressive when they are in power than they were before they were elected.
I happen to believe that Obama speaking out in favor of gay marriage would be beneficial to the cause (and would certainly put him on the right side of history), but it’s not preposterous to think that the opposite effect would result. There is no question that it would further politicize the issue just when a majority of Americans now believe in full marriage rights for gays and lesbians.
On August 11th Matthew Yglesias wrote a post arguing that often presidential leadership can be counterproductive. He was talking about immigration, but this clearly applies to all issues. He was piggybacking off of Ezra Klein’s post on Francis Lee’s book Beyond Ideology which argues that “presidential positions” increase the partisanship on issues.
[The] American people — and the media — expect a lot of bully pulpit leadership. But that bully pulpit leadership polarizes the other party against the initiative, even when the messaging is effective.
Grasping this dynamic is key to understanding the wisdom of President Obama in not offering his full opinion of the Islamic center near Ground Zero. If anyone has any doubts of the effect, notice how the issue became more polarized when he just commented on the constitutionality of it. This isn’t to say that presidents shouldn’t ever speak out on controversial issues; it is to only notice that “A president who voices an opinion without considering the political consequences is acting irresponsibly.”
Given that, I think it’s unfair for writers on the left, right, and center to blast President Obama for being cowardly for not commenting on the wisdom of the choice or to give his personal opinion. Clive Crook’s latest FT column is a perfect illustration of this. This expands on his previous blog post on what Crook thinks Obama should have said. Of course, all this presumes Obama is, in fact, in favor of the mosque and thinks it is wise. If he thinks it is unwise and insensitive, does Crook still think it’d be unifying? Lee’s research suggests that had Obama spoken out by praising the wisdom of the mosque it would have made the polarization of the issue even worse. If he strongly argued that equating this mosque and Sufi Islam with the Islamic fanatics that attacked the US is completely irrational he would have been skewered for being insensitive to the 9/11 families.
Presidents’ words also have effects diplomatically. Had Obama given too much sympathy for the sentiments of the 9/11 families by saying that it isn’t completely irrational to feel disgust at putting a mosque so close to the site of a horrendous attack by Islamic terrorists, how would that have played with our Muslim allies? To not consider the unintended consequences would be ill-advised.
None of this is to argue that presidents shouldn’t take politically unpopular or politically dangerous stands if strong principles are at stake. Commentators just need to recognize the possible effects of a president’s words; after all, a president speaking out may be counterproductive to justice or diplomatic goals and these effects aren’t necessarily going to run in the same direction. Crook or Krauthammer or whoever can plausibly argue that the president should take a stand that they agree with because it is the right thing to do, but to argue that it is cowardly not to or that it would be “unifying” if he did is disingenuous or foolish – on this they’d be better off remaining silent.
(image: abc news)
During the trial in January, both sides brought witnesses to argue for and against same-sex marriage. The larger point of this exercise was to clarify and examine each individual argument against the practice.
Surgically and methodically, Judge Walker (who is himself gay) has now ruled that not a single one has any merit: the plaintiffs (ie, the gay and the lesbian couple) did not seek a “new” right, but merely the same right that heterosexuals have, and a right which in America is first and foremost a civil and not a religious matter. “Procreative capacity” has never been the basis of marriage, hence it is irrelevant, the judge found (infertile heterosexuals are allowed to marry, after all). Calling same-sex unions “domestic partnerships” unfairly disadvantages the couples. Allowing same-sex marriage “has at least a neutral, if not a positive, effect on the institution of marriage” and is good for any children involved. And so on, point by point until none was left.
This reminded me of the way Jeremy Bentham in the late 1700s went through the arguments against homosexuality and couldn’t find any utility in punishing or prohibiting it.
To what class of offences shall we refer these irregularities of the venereal appetite which are stiled unnatural? When hidden from the public eye there could be no colour for placing them any where else: could they find a place any where it would be here. I have been tormenting myself for years to find if possible a sufficient ground for treating them with the severity with which they are treated at this time of day by all European nations: but upon the principle utility I can find none.
The layout of Walker’s decision going through the “finding of facts” and lining up each argument to see if their is any rational basis for denying homosexuals the right to marry looks remarkably similar to Bentham’s Offenses Against One’s Self where he goes argument by argument concluding that each one offers not basis for punishing homosexual behavior. Bentham looks at the history of different sexual practices, Walker does as well. They both look at religious arguments concluding that they aren’t relevant to the state’s legislation. Bentham writes,
For these or other reasons it is an opinion that seems to spread more and more among divines of all persuasions, that the miraculous and occasional dispensations of an extraordinary providence afford no fit rule to govern the ordinary and settled institutions of human legislators. (my emphasis)
Similarly Walker finds that marriage is a civil institution and religious and personal moral objections don’t play into the state’s role in marriage. Walker writes,
To the extent proponents argue that one of the rights of those morally opposed to same-sex unions is the right to prevent same-sex couples from marrying, as explained presently those individuals’ moral views are an insufficient basis upon which to enact a legislative classification. (my emphasis)
It’s just amazing that people can’t reason through the arguments and notice that gay marriage harms no one – rather it benefits many. Unfortunately, most people haven’t even caught up with the 18th century. Moral philosophy needs to be divorced from religious and emotional bigotry. The sooner people can base their morals on moral reasoning rather than dogma and disgust the easier it will be to improve human well-being.
And just to add a great clip so that true conservatives can understand why they should stop denying marriage to other arbitrary classes of citizens, here’s Ted Olson.
(images from wikipedia)