Posted by on January 28, 2015

I am a compulsive reader.  Although this is sometimes a sad commentary on me, at least I can use this to the benefit of my miniature blogosphere.  So, I will shift through my readings and recommend things from time to time.  This is one of those times.

The Anti-Innovators by James Bessen

I subscribe to Foreign Affairs.  They provide a weekly selection of short articles, two of which have recently caught my eye.  This is the first one.  Written by James Bessen, a professor at the Boston University School of Law and the former CEO of a software company, the sub-title says it all: “How Special Interests Undermine Entrepreneurship”.  This article is a great summary of how established interests have used money politics to tilt the economic playing field in their favour.  In a series of ways – military procurement policy, patent law, employment law, and professional licensing – existing companies and groups have used government regulation to stifle competitors.   This inherent bias in government policy, in favour of what exists and against the waves of “creative destruction” (or, to use the currently fashionable term, the “disruptors”), is best summarized in a quote from Democratic Congressman Jim Cooper: “The future has no lobbyists”.  (Judging from his party affiliation, although Congressman Cooper has been smart enough to observe this phenomenon, he hasn’t been smart enough to see the role that Big Government inevitably plays in enabling it.)

Best statistic: in the 1950s, only 70 professions had licensing requirements; by 2008, more than 800 did.  Brings to mind the famous quote from George Bernard Shaw that “all professions are conspiracies against the laity,” which means that the amount of government-sponsored conspiracy has exploded.  These laws cause absurdities such as the recent Federal Court ruling which, doubtless after immense expense and time, overturns a Texas state licensing law that prevented an entrepreneurial African immigrant from teaching hair braiding without first spending large sums of time and money on classes and equipment that were totally irrelevant to her proposed activity.

The Truth About Currency Manipulation by C. Fred Bergsten

This is the second one from Foreign Affairs, written by a well-known international economist.  This article focusses on a subject that I discussed in my recent blog on “Switzerland and China”, which is the manipulation of currency values to promote exports, a practice that various Asian countries have employed for a large number of years.  Bergsten points out that this currency manipulation is the equivalent of a tariff, but it is much harder to overturn with the existing World Trade Organisation (WTO) processes.  Bergsten also points out how successive administrations, including recently the Obama administration, have refused to take action against manipulators, despite repeated requests from Congress and business leaders.   Bergsten suggests that the need for Congressional approval of the Transpacific Partnership may finally give Congress the leverage it needs to force the Executive to take action against, notably, China.

I deviate from libertarian orthodoxy in this field.   Most libertarians view currency manipulation by foreign governments with equanimity, knowing ultimately that they are only hurting their own citizens by transferring wealth to the targets of their manipulation.  Although this is true, the key word is “ultimately”, which we know can be a very long time.   In the interim, the unfair competition of the manipulators can do an enormous amount of damage to the domestic economy of the target countries.  I believe that this requires government action to correct, some methods of which are mentioned by Bergsten.

Interestingly, in the last presidential election, Romney was the candidate most strongly calling for this action.  President Obama has steadily pulled back from taking action against China, including his refusal to brand it as a “currency manipulator” under US law.  It is unclear why Obama has refused to do this, although it is perhaps based on a fear that China would “retaliate” by withdrawing funding from the US debt markets.  As my blog on “Switzerland and China” hopefully makes clear, however, this fear is misplaced: China’s currency manipulation is based upon continuous purchase of dollar-denominated investments in order to prevent an appreciation of the renminbi.   If they ceased making these investments in retaliation against any US actions, their currency would appreciate and their ability to manipulate would disappear.  In other words, and not surprisingly, they aren’t doing us any favors.

Road to the Welfare State: Why 50% of America Gets Checks From Uncle Sam by Nicholas Eberstadt

This article is a strongly recommended read.  Written by a scholar at the American Enterprise Institute, it charts the rise of the welfare state in America from Johnson’s “War of Poverty” and “Great Society” initiatives; interestingly, he claims that, after the Great Depression and the New Deal, America’s welfare state was only minimally developed and that it only really took off with the Johnson administration.

Eberstadt views today’s extensive welfare state as being fundamentally antithetical to basic tenants of “American exceptionalism,” including the belief that “poverty was not viewed as the result of an unalterable accident of birth but instead as a temporary challenge that could be overcome with determination and character – with enterprise, hard work, and grit”.   Similarly, today’s programs do not follow the traditional Puritan distinction between the “deserving and the undeserving poor,” the former to be helped with temporary aid (frequently voluntary) and the latter to be helping in “changing their ways”.  Finally, the programs allow long-term dependence on handouts, which is “”pauperism,” an odious condition no self-respecting American would readily accept.”

I am reluctant to start quoting statistics from this article, because I could easily find myself quoting the entire thing, but here are some highlights:

  • social welfare transfers represented 24% of the federal budget in 1963; they now represent 59% (without counting their substantial administrative costs); these increased transfers are not predominately related to the aging of the population;
  • from 1963 to 2013, transfers were the fastest growing source of personal income in the country, rising from less than 7% of personal income to almost 17%;
  • as of 2012, 49% of the American population lived in a household that received at least one entitlement transfer; due to survey under-reporting, the author thinks that this number has almost certainly passed the symbolic 50% threshold;
  • the biggest source of growth has been in “means-tested” programs, with 35% of Americans receiving at least one of these benefits in 2012, versus less than half this amount in 1983 (the first year for which statistics are available); and this despite an official poverty level that was virtually identical in these years, both of which were “recovery” years after severe economic downturns;
  • in 1964, when the war on poverty was launched, 7% of children were born outside of marriage; in 2012, the figure had grown to 41%; and
  • between 1964 and early 2014, the percentage of men between the ages of 25 and 34 who were out of the workforce went from 3% to 11%; from 1965 to 2014, the percentage of 45 to 54 year olds went from less than 5% to almost 15%.

Eberstadt then speculates on the role the welfare state is having in a “rending of the national fabric”.  In his words:

No one can prove (or disprove) that the entitlement state is responsible…But it is clear that the rise of the entitlement state has coincided with these disheartening developments; that is has abetted these developments; and that, at the end of the day, its interventions have served to finance and underwrite these developments.  For a great many women and children in America, and a perhaps surprisingly large number of working-age men as well, the entitlement state is now the breadwinner of the household.

Some other great quotes:

Means-tested entitlement transfers are no longer an instrument strictly for addressing absolute poverty, but instead a device for a more general redistribution of resources.  And the fact that so many are willing to accept need-based aid signals a fundament change in the American character….

It risks belabouring the obvious to observe that today’s real existing American entitlement state, and the habits – including habits of mind – that it engenders, do no coexist easily with the values and principles, or with the traditions, culture, and styles of life, subsumed under the shorthold of “American exceptionalism….”

The late senator Daniel Patrick Moynihan once wrote, “It cannot too often be stated that the issue of welfare is not what it costs those who provide it, but what it costs those who receive it.”  The full tally of those costs must now include the loss of public honesty occasioned by chronic deception to extract unwarranted benefits from our government – and by the tolerance of such deception by the family members and friends of those who commit it….

Being part of the American middle class is not just an income distinction – it is a mentality, a self-conception.  To be middle class is to be hard-working and self-sufficient, with self-respect rooted in providing a good life for oneself and one’s family.  Can members in good standing of the American middle class really maintain that self-conception while simultaneously taking need-based government benefits that symbolically brand them and their family as wards of the state?

But enough quotes.  Read the entire article; I promise that it is worth the effort.  And then contrast the world it depicts – a world in which people are very rationally responding to the perverse incentives placed in front of them by misguided government policies – with the worldview of President Obama, whom this blog has quoted earlier as saying that he could not remember meeting an American “who would rather have an unemployment check than the pride of having a job.”  Unconsciously, since he doesn’t really believe in it, he thereby cited one of the key elements of an “American exceptionalism” that he and his political brethren have done so much to destroy.

Roger Barris, London

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Posted in: Economics, Policy

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