Illusion Economics

One game plan for liberal politicians (and some conservatives) is to first convince you that you have it bad so they then can make the case that they can help.

There is a good example of this in my previous post. Graphs might lead you to believe one thing, but that’s blackboard economics. Look out the window and you will see a different story.

Thinking you have it good or bad is a matter of perspective. Poverty, itself, is a matter of perspective. Sure, if a politician compares the life of a poor person in the U.S. to a rich person, the poor person might feel slighted.

But, the observations from a student from India (via Instapundit) might help poor people in the U.S. find a better perspective:

[The U.S. is] An almost-classless society: I’ve noticed that most Americans roughly have the same standard of living. Everybody has access to ample food, everybody shops at the same supermarkets, malls, stores, etc. I’ve seen plumbers, construction workers and janitors driving their own sedans, which was quite difficult for me to digest at first since I came from a country where construction workers and plumbers lived hand to mouth.

Sometimes it’s hard to see the conveniences and standard of living the wealth of this country affords all people.

This reminds me of a news magazine show I saw long ago, when Brad Pitt was still courting Angelina Jolie. He said that on one of his visits to Africa he asked why they don’t have grocery stores and pharmacies on every street corner filled with remedies for basic ailments — ailments that kill people in poverty in other countries.

Capitalism is the answer. They don’t have much of it and we have more. Here’s why capitalism ensures we have ready access to the thousands of things that help improve our standard of living in ways that we are too spoiled to recognize.

Live in a country where the government or thieves (often one in the same) are going to take your stuff as soon as you have appeared to add value to it (like building a water well or fence to keep livestock) and you quickly learn that it isn’t worth expending the effort.

So, while the graphs Daniel Little uses and the speeches that politicians use may convince many that they are being slighted, in reality all of those people have a standard of living that is unsurpassed ever on this planet. Little’s charts don’t measure the value of having quick, easy and cheap access to basic rubbing alcohol that can easily prevent scrapes and scratches from becoming infected, life threatening injuries.

PS I also thought it was funny that the student from India thought we drank way too much coffee and thought it was crazy that we would spend so much on it, when we could brew it so easily and cheaply at home.

But, I think this goes back to his comment on the classless standard of living. We are generally so wealthy that we choose to hire others to make coffee for us.

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Happy Birthday, USA!

The 4th of July is always a good day to take a few minutes to read the document that gave birth to the USA by telling the King of England to shove it, the Declaration of Independence.

It’s easy to lose the meaning of this document with our distance in time and space to it. When I read it, the words “this has all happened before and it will all happen again” go through my mind.

For those who associate the words ‘declaration of independence’ with hot dogs and fireworks, rather than self-severing of political control from what would probably be considered today as a slightly oppressive and obstinate King, it’s good to put in perspective what the Declaration of Independence is.

The closest analogy that all of us experience in our lives is growing up, out from under the watchful decision-making of our parents, into adults where we are responsible for determining our own destiny and cleaning up our own messes.

Remember the arguments you had with your parents as teenagers? But, Mom, everybody else is going on that trip, why won’t you let me go? Dad, Why do I have to be home at 11? Can’t I stay out later?

Those were your struggles with your independence. In most of our cases, our parents were right and helped us avoid some pain. And, eventually, we earned our independence from our parents as we grew up because we either demonstrated good enough decision-making or our parents just got tired of bailing us out of our idiotic choices.

But, we all probably know friends where the parents didn’t hand over independence to their children so easily. These were the parents who ran their children’s lives for their own benefit, rather than the child’s. Their kids helped the parents recapture some of their lost dreams.

We see these friends struggle to gain their independence. This is what the U.S. struggled with. The oppressive parent that governed the colonies for its own benefit.

The next struggle for independence many folks experience is with their neighborhood Homeowners Association. It seems that the officer positions on those associations tend to attract the direct descendants of King George III, as we find out when we decide that we’d like to add some landscaping to our home and run up against the arbitrary and obstinate neighborhood review board for approval.

It’s worth getting past the first two paragraphs in the Declaration and reading the long list of complaints against the King laid out by the founders in the Declaration of Independence. Here are the first two:

He has refused his Assent to Laws, the most wholesome and necessary for the public good.

He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

The first two complaints are that the King had not allowed the states to pass their own laws without his approval, and he never gave approval.

For those among us who know a little about the birth of our country, we know that it had something to do with taxation without representation and the Boston Tea Party and all that. Indeed, that appears as the seventeenth complaint:

For imposing Taxes on us without our Consent

Before lighting your punks today, take 10 minutes and give a thoughtful read to the full text of the Declaration. It’s why you get the day off, after all.

“Energetic Government”

In the American Enterprise Institute’s Debate, How Much Government is Good Government?, David Brooks makes a case for an “energetic government” that “builds character.”

I believe the following passage from Brooks provides the key assumption for his energetic government stance:

…the reason that America got rich in the nineteenth century was because we were the most educated country on earth, and we could count on a certain level of social capital we no longer can.

I don’t believe that’s why America “got rich”.

To me, that’s like saying, I got rich by saving for retirement.  That’s not accurate.  You were able to save for retirement, and become rich, by creating enough value for others to generate an income for yourself.

Similarly, I believe the cause and effect flows the other way from how Brooks describes it.  America became the most educated country on earth, with a certain level of social capital [i.e. things like public education, social security, unemployment, etc.], because America “got rich”.

America got rich through bottoms-up innovations enabled by the most democratic, fair and socially mobile system the world has ever witnessed, capitalism.

If Brooks were to consider that he is wrong about how America got rich and wanted to learn other possible explanations, I’d recommend that he start with Matt Ridley’s book The Rational OptimistThis post and this one discuss some of Ridley’s, and my own, insights on the matter.

Of course, Matt and I could be wrong, but I have not found convincing evidence of that yet.  But, would love to hear some.

“I can turn this $100 bill into 100 pennies!”*

In their book From Poverty to Prosperity, Arnold Kling and Nick Schulz examine a few natural experiments of side-by-side countries with varying economic “software” or economic systems.

I think this nicely sums the results of these experiments (p. 135):

Another dramatic example of the effect of bugs in the software layer [their term for economic systems and institutions] is the difference between Communist and non-Communist countries.  In the aftermath of World War II, some countries, notably Germany and Korea, became divided along ideological lines.  North Korea and East Germany were Communist.  South Korea and West Germany were capitalist.

The results of this “natural experiment” were striking.  By 1997, North Korea’s GDP per capita was $700, while South Korea’s was $13,590, or nearly 20 times as high.

They then quote the work of Jaap Sleifer which showed that East Germany’s per capita income was 103% of West Germany’s before World War II and shrunk to 31% by 1991.

That should be sobering to anyone who holds romantic notions for a centralized economy.  The opportunity cost in living standards is enormous.

They go on:

Another telling phenomena is the immigration of workers from Latin America to the United States.  Crossing the border appears to make the productivity of a low-skilled worker ten to twenty times higher, based on the wage differential for low-skilled workers in Mexico or Central America and the United States.

These natural experiments are good to keep in mind as some folks encourage centralization of large swaths of our economy.  Years down the road it will be difficult to know how much improvement we traded away, but the outcomes of these natural experiments should give you an idea.

If you have a tough time imagining these differences in living standards in terms of numbers, then imagine it in terms of time periods.  A low-skilled worker crossing the border from Mexico to the U.S. is similar to someone from around 1900 to 1930 America being transported to around the year 2000.

If you still have a tough time imagining this, watch Back to Future III, where Marty McFly journeys back to 1880s Hill Valley.  While eating dinner with his great-great grandad, he’s shocked when he discovers that the meat he’s eating contains buckshot from the fresh kill and his water looked fresh from a mud puddle.  I liked this scene because it’s little improvements like that that we never think about and we take for granted.

*The title of the post is a quote from the television series Arrested Development.  Gob impressed the Board of Directors with this magic trick.  His brother, Michael, pointed out that the Board didn’t realize that Gob’s magic just cost them $99.  Similarly, folks who hold grand visions of centralized planning never seem to realize how much those truly cost when implemented.