In 2009, in the aftermath of the financial crisis, the debt of the world’s advanced economies shot up the equivalent of a bit more than 10 percent of their GDP; in 2020/21, as a result of efforts to stimulate the economy in the wake of the pandemic, the debt of those same countries increased by the equivalent of almost 19 percent of their GDP. The average national debt for the entire group is now well above the size of their economies.

In many cases, of course, the figures are misleading. This is the case of the U.S., where, if you include the government’s unfunded liabilities, the debt does not amount, as we are told, to some US$28 trillion, but actually to US$100 trillion.

If the economy was growing at a faster rate than the debt in the developed world, that fact would not detract from the enormousness of the problem, but at least we could say that temporarily things were getting slightly less catastrophic. The truth, however, is that it keeps getting worse—and worse. In the world’s developed economies, the debt has multiplied by 4.5 in the last twenty years, while GDP has multiplied by only 1.9.

There was a time when proponents of indebtedness argued that deficits and debt did not matter as long as the economy kept growing. In the end, debt catches up with you one way or another, of course, but that argument has been reduced to utter garbage in the light of the reality of the last twenty years. My guess is that it will look even more ridiculous in years to come since a debt of this magnitude is itself a powerful contributor to slow (or no) growth.

How will this end? There is only one way it can end. If we rule out, (as we should, given the political implications) the kinds of fiscal cuts that taming the debt would entail, we are left with two choices—massive tax hikes and inflation. The size of the debt is such that even in the short run massive tax hikes would not begin to address the problem—not to speak of the real problem, which is that such levels of taxation would cripple any chance of future growth and therefore of addressing the debt. So, we are left with the oldest trick in the book—huge inflation. For centuries governments have resorted to inflation in order to whittle away their debts. Given the lack of realistic alternatives, I see no other way in which this horror story will eventually end, regardless of the fact that, given people’s focus on deleveraging in recent years, consumer price inflation has stayed relatively low. It just a question of time.

What is happening in financial terms is at least as momentous, and perhaps more, than the end of the gold standard in the UK and (partially) the US in the 1930s, the end of the Bretton Woods fixed-exchanged rates at the end of the 1960s and Nixon’s definitive abandonment of the gold standard in the 1970s.

The post The Debt—Who Cares? appeared first on The Beacon.

The US population is about 330 million, so if $1.9 trillion was just divided up evenly and given to every American, each person could receive $5,758. A family of four would get $23,030. Given a choice, would most Americans prefer that everyone receive that much cash, or have the bill as it passed, where some get $1,400?

The bill doesn’t give that $1,400 to everyone. What if the $1.9 trillion were just divided up and given to the bottom 50% by income? A family of four would then get $46,060. What would do the most good, the current relief bill, or giving half of American families $46,060? And if the money were just divided among the bottom 25%, the most needy, each family of four would get $92,121. That could be truly life-changing for those people.

The national debt now stands at about $28 trillion, so this one piece of legislation alone adds about 6.8% to the already bloated national debt, and interest has to be paid on that debt. Twenty year government bonds currently pay a bit more than 2% interest, so the annual interest on that increment of government debt will be more than $38 billion. But interest rates are low today, and it is easy to picture, by historical standards, interest rates two or three times higher than that, which could push the annual interest cost of the bill beyond $100 billion.

So far, that interest cost hasn’t hit the federal government hard, because the Federal Reserve has been buying up those bonds and converting them into money. The monetary base, which is composed mostly of federal debt, has increased by $1.8 trillion over the past year, an increase of 52%.

Eventually, that monetary increase will turn into inflation, and one thing that comes with inflation is rising interest rates, which will impose those higher interest costs on the Treasury. Currently, interest payments are about 5.3% of federal spending. If interest rates triple, which they easily could, we’d be looking at interest taking up more than 16% of the federal budget.

That 5.3% figure doesn’t include payments on the recent COVID relief bill, so it’s not unreasonable to think that five years down the road interest payments might make up 20% or more of the federal budget. That’s money that could be spent on other things (including tax cuts).

The fiscal irresponsibility of our Congress and president has us rushing toward the fiscal cliff, bringing with it inflation, rising interest rates, increased government debt, and an increasing share of the federal budget going to interest payments rather than government programs. But, some will say, people are suffering because so many governments shut down their economies in response to the pandemic.

One answer to that defense of fiscal irresponsibility is that if the government really wanted to help those who need it the most, that amount of money is enough to give every family of four in the bottom 25% of the income distribution more than $92,000. Which do you think would help those in need more?

The post Rushing Toward the Fiscal Cliff appeared first on The Beacon.

The linked article notes that about 25 percent of Black workers and 19.1 percent of Hispanic workers earn less than $15 an hour, compared to 13.1 percent of white workers, so the law would disproportionately throw minority workers out of work. The article says this would “help” minority workers, but it is difficult to see how making their employment illegal would help them. Could anyone believe that if the minimum wage were raised to $15 an hour, no low-wage workers would lose their jobs?

It’s actually worse than that for low-productivity workers, because one way people can increase their productivity and earn a higher income is by learning on the job. If people are priced out of the labor market and can’t get their first job, they won’t be able to increase their productivity through on-the-job training. In a society that increasingly is cognizant of enacting public policies to help minorities, it is shocking that some are proposing a policy that would make it illegal for many minorities to hold jobs.

Some people think that corporations make lots of money and so can afford to pay their workers more, but corporations are not charities, and this thought misunderstands what motivates employers to hire people. Regardless of how profitable a company is, it will not hire people who cost the company more than they bring back in income.

Do we really want to make it illegal for low-productivity people to work? Do we really want to enact a policy that disproportionately disadvantages minorities? Many states have already done so, and there appears to be increasing support at the federal level to limit the right to work for some of our most-disadvantaged citizens.

The post Should It Be Illegal for Low Productivity People to Work? appeared first on The Beacon.

According to Sowell, “For too many people, especially in the media, what is right and wrong, true or false, depends on who it helps or hurts politically.” The scholar also finds that “facts don’t matter” when people claim “under-representation.”

According to proportionality dogma, every group in society must be equally represented at work or school according to their percentages in society. If not so represented, the cause must be discriminatory bias and the only remedy is government action in the form of quotas, now passed off as “diversity.” Those who argue this way, Sowell explains, “cannot show us any society—anywhere in the world, or at any time during thousands of years of recorded history—that had all groups represented proportionally in all endeavors.” For example, Sowell cites the National Hockey League. 

More NHL players are from Canada than the United States, and more players from Sweden than California, which has nearly four times the population. Therefore, Sowell says, “Californians are more ‘under-represented’ in the NHL than women are in Silicon Valley. But no one can claim that this is due to discriminatory bias by the NHL.” The discrepancies are “far more obviously due to people growing up in cold climates being more likely to have ice-skating experience.” 

In similar style, Sowell’s longtime friend Walter Williams heard complaints that African Americans were underrepresented among National Football League place-kickers. For Williams the answer was simple: African American players did not want to be kickers and instead preferred to play other positions.

Walter Williams passed away last December at the age of 86. Thomas Sowell is still going strong at 90. It’s long past time this man got the attention he deserves. 

The post Thomas Sowell on Truth and Proportionality appeared first on The Beacon.

Some opinion leaders at first disparaged the stock market as an irrelevant source of information that was out of touch with reality. But the convenient invention of a “disconnect” between the market and the economy turned out to be a fallacy. With evidence pouring in to substantiate the message from the market, the consensus began a long series of re-estimates. According to the Wall Street Journal’s monthly Economic Survey, the average Q3 forecast reached an annual rate of 28.5 percent as of October, compared with 1.2 percent back in March as the shutdown was about to begin. Cumulatively, it was an enormous shift—from implying no recovery at all to recognizing far the most vigorous quarterly GDP increase since records begin.

Even now, with a substantial fraction of the facts already in, the gap has yet to close. The chart shows the path of real GDP growth since mid-2017, as published by the Bureau of Economic Analysis (BEA) in Washington.

Perversely, the magnitude of the opinion shift has been barely mentioned by the news media, and it remains ill recognized by the public. Although there’s nothing unusual about good news receiving less press attention than bad news, this extreme example was fueled by one an extremely inaccurate diagnosis on the part of consensus opinion.

The most objective starting point for a forecast is to consult the most timely hard data available. On that front, we now have a powerful input, known as GDPNow, that was unavailable in previous recessions: a flow of running estimates of current-quarter GDP growth from the Atlanta Fed. Its methodology for processing real-time raw and incomplete data is similar to the BEA’s. Forecasters could have caught up with reality much more quickly if they had paid this source the attention it deserves. As these “nowcasts” get better known they will be a vital source of previously under-utilized information about the evolving economy. 

There are other reasons why the 2020 forecasting debacle did not need to happen. The earliest sign that forecasts were too pessimistic came from the stock market, but it was disbelieved. Now, with hindsight, it has become clear that the stock market signal was far more accurate than the consensus. 

Another clue that something might be wrong is unwarranted persistence. When a forecaster is obliged to adjust an estimate in the same direction many times in a row, it’s a sign of resistance or denial. If adjustments have been too small, the forecaster’s beliefs are overriding objective information. Indeed, forecasts cannot be “efficient” if errors are not random. 

Contributing causes of unjustified pessimism lie in economic myth and false assumptions. The economy is portrayed to us as akin to a house of cards, easily knocked over by a single setback, and in need of a powerful central authority to rebuild. Too many economists emphasize vulnerability and forget about resilience. To the contrary, economies behave like living systems that adapt to setbacks by changing shape. They adjust to constraints by adopting a path that is feasible instead of the one that would otherwise have been chosen. As the classical economists recognized centuries ago, the course of the economy is not directed from a controlling point such as King George III or the Federal Reserve. Then as now it is guided by a dispersed price system of free and competitive markets. 

A related mistake shows up in the popular idea of a “90 Percent Economy.” Back in May, The Economist calculated that avoiding person-to-person proximity of the length of an arm or less would “render unviable” occupations worth approximately 10 percent of national output, and concluded that the resulting economy would be, “by definition,” 10 percent smaller than that which came before. Actually, this is very far from a matter of definition. A free-market economic system substitutes what is viable for what is not, and thereby changes its shape without any necessary reduction in size. 

The coronavirus crisis turned out to be a self-inflicted consequence of mandatory shutdowns. Once shutdowns were lifted there was no excuse for professional opinion to underestimate the US economic rebound to such a massive extent. The error could have been avoided through simple changes of mindset and procedure.

The post How Did Forecasters Get the Pandemic Economy So Wrong? appeared first on The Beacon.

Consider now that getting the economics right can be as consequential for analytical philosophy as parsing language; note for example how the logic of public choice economics clarifies deep problems in political philosophy. Public choice represents a testable behavioral science that incorporates both the self-interest of individuals who create philosophical problems and the pragmatic “cash value” that those problems entail.

Cracking the longstanding puzzle of “free will” demonstrates economics’ value as a complement to philosophy.

Writing in the Stanford Encyclopedia of Philosophy, philosopher Timothy O’Connor describes free will as “a philosophical term of art for a particular sort of capacity of rational agents to choose a course of action from among various alternatives.” Philosopher John Searle [Freedom and Neurobiology: Reflections on Free Will, Language, and Political Power, 2007, 11; 37] explains the hitch: “The problem of free will, in short, is how can such a thing exist? How can there exist genuinely free actions in a world where all events, at least at the macro level, apparently have causally sufficient antecedent conditions? ... we are nowhere remotely near to having a solution. ... The persistence of the traditional free will problem in philosophy seems to me something of a scandal. After all these centuries of writing about free will, it does not seem to me that we have made very much progress.”

Free will is the polar opposite of determinism. Philosophers who cleave to either system are labeled “incompatibilists,” as are “libertarians” who argue that emergent, conscious, and semi-autonomous mental processes resembling Freud’s ego and id place “us” rather than our physical brains in charge. By comparison, philosophers who believe that free will and determinism are reconcilable are labeled “compatibilists”; Daniel Dennett [Elbow Room: The Varieties of Free Will Worth Wanting (2015), pp. 21; 184] argues that “[w]e can have free will and science too ... as a natural product of our biological endowment, extended and enhanced by our initiation into society.” Neuroscientists disagree: Michael Gazzaniga [Who’s in Charge: Free Will and the Science of the Brain (2011, 129)] concludes that free will is “an idea that arose before we knew all this stuff about how the brain works, and now we should get rid of it.” Apologists [Dan Barker, Free Will Explained: How Science and Philosophy Converge to Create a Beautiful Illusion (2018)] in turn characterize free will as a “beautiful illusion”; a social rather than a scientific truth that yields moral and spiritual benefits.

The grammar of this debate bleeds across academic disciplines, affecting economics along the way. Compatibilistic microtheory claims that individuals are free to choose, and also that their choices are determined by relative prices [see Gary Becker and George Stigler, “De Gustibus non est Disputandum.” American Economic Review 67: 76–90 (1977)]. The logic of public choice economics reconciles these philosophical, scientific, and methodological claims by focusing upon the self-interest of the individuals who introduced, expanded, and wielded the free will concept as a privately profitable artifice for achieving mischievous social outcomes.

The free will concept has a long and checkered history: Plato introduced it in his Republic dialog as a preventable source of evil; Augustine and Aquinas offered it as partial proof of God’s existence and significance; Cross and Crown invoked it for centuries to justify feudal, authoritarian, and totalitarian social structures. Plato and the early Church fathers are presumed to have been well-intentioned men of intellectual integrity. However, they also were entrepreneurial actors whose passions and self interests committed them to the rightness of their private causes; none was as indifferent to competing alternatives as he professed to be. Plato touted the disinterested virtue of philosopher-kings, yet his political ambitions in Athens and Syracuse belied his commitment to this ideal form. Augustine and Aquinas argued in God’s name for the necessity of comprehensive Church authority over the lives of ordinary individuals, yet Lord Acton correctly noted the corrupting effect that absolute power had upon the papacy. In short, the “beautiful illusion” of free will historically served private interests more efficiently than it furthered either the common good or the pursuit of truth.

The free will concept was introduced and furthered as an expedient justification for political action. It cannot be analyzed meaningfully without first getting the economics right. Philosophy’s failure to resolve the problem merely by getting the grammar right is unsurprising by this light.

[This post draws from the author’s “Free Will: Hail and Farewell” in Essays in the Philosophy of Humanism 27 (2019), 98-124.]

The post Free Will: Getting the Economics Right appeared first on The Beacon.

The next U.S. administration will likely face a global debt crisis that could dwarf what the world experienced in 2008-2009. To prevent the worst, it will need to address the burdensome debt plaguing both the United States and the global economy.

Even before the COVID-19 pandemic paralyzed economies around the world, economists were warning about unsustainable debt in many countries. Take the United States: A surge in spending to mitigate the health and economic impacts of the pandemic has brought the total public debt in the United States to over 100 percent of GDP—its highest level since 1946 and a hurdle that will create a considerable drag on future economic growth. Other types of debt—household, auto, and student loans, as well as credit card debt—have seen similar surges. Almost 20 percent of U.S. corporations have become zombie companies that are unable to generate enough cash flow to service even the interest on their debt, and only survive thanks to continued loans and bailouts.

Multiply that across the globe. Total global debt stands at an unsustainable 320 percent of GDP. Perhaps more worrisome, China is now an important creditor, which adds a geopolitical dimension to the concerns over debt. China is the largest foreign lender not only to the United States, but to many emerging economies. This gives the Chinese political class enormous leverage. Naturally, the combination of strained U.S.-Chinese relations and the dependence of many advanced and developing countries on continued Chinese credit and investment limits the scope for negotiations on debt restructuring or moratoriums.

Worrying About the Debt

If too much debt didn’t concern you before 2020, now is a good time to start worrying. Moyo is absolutely correct in recognizing that having too much debt limits economic growth. She is also right to recognize that China’s debt trap diplomacy will negatively affect the nations whose leaders buy into it.

On the other hand, I think the U.S. government has less to fear from being dominated by China than do smaller nations. In the current fiscal crisis, we’ve seen the Federal Reserve become Uncle Sam’s new sugar daddy, making the U.S. government less dependent on borrowing money from the Chinese than it was in the past. Below is Political Calculations’ latest chart revealing to whom the U.S. government owes money. It shows both a shrinking share of I.O.U.s held by the Chinese and a growing share owned by the Fed:

China has threatened the United States with a “nuclear debt option” strategy of financial warfare. This option involves dumping all its U.S. debt holdings in a fire sale which, in normal times, would hurt the government’s ability to raise funds by borrowing money. But as we’ve learned from the coronavirus pandemic, the Fed could and would step in to fund the U.S. government with as much as it could ever want to borrow.

Knowing the politicians and bureaucrats who run the federal government, that possibility may be a much bigger danger.

The post Is the Presidential Election Winner Ready to Face a Mammoth Debt Crisis? appeared first on The Beacon.

One important difference between those two types of power is that economic power is exercised only through voluntary cooperation with others. Political power is exercised through the threat of force against those who do not comply.

Even the most powerful corporations cannot obtain resources from others unless those others voluntarily agree to transact with it. Of course, those with economic power can use some of it to buy political power to force people to deal with them, but economic power by itself operates through mutually agreeable transactions.

Political power operates by threatening force against those who resist it. Even for those who are fully supportive of government action, government still threatens them if they do not pay their taxes, or if they do not abide by government regulations. That’s true for those who favor the taxes and regulations and for those who oppose them.

If economic and political power do become separated, there is always the tendency for them to recombine. They can do so through cooperation between the economic and political elite–cronyism–and they can also do so if those who have political power use it to confiscate resources from those who have economic power, as happened in Cuba in 1959, in the formation of the Soviet Union in 1917, and more recently in Venezuela.

The challenge is how to keep them separated, to produce progress and prosperity.

The relative importance of factors of production has a substantial impact on the ability of those with political power to also acquire economic power. I discuss this in detail in my book, but here’s a quick overview. Thinking of factors of production as land, labor, capital, and entrepreneurship:

In pre-agricultural societies, labor is the primary factor of production, and power is not clearly differentiated. All power is social power: power over others. But there is a check on the abuse of power in pre-agricultural societies, because its members can easily leave, and when they do, they take their labor with them.

The agricultural revolution, which began more than 10,000 years ago, made land the primary factor of production, and those who controlled the land also controlled the people who worked on it. Those people could not easily leave, because they could not take their land with them.

Those who controlled the land had, as a result, both economic and political power. Political motives tend to dominate economic motives. Those with power wanted to keep it, which meant maintaining the status quo. Agricultural societies are stagnant societies because those with political power also have economic power.

Capital is the primary factor of production in capitalist economies, and capital is mobile, unlike land. Even if it cannot be physically relocated (a factory, for example), it depreciates if it is not maintained, so the use of political power to confiscate economic power ends up eroding the economic power, as happened in the Soviet Union, in Cuba, and in Venezuela.

The mobility of capital, and the even greater mobility of entrepreneurship, offers some (but not complete) protection against its confiscation. Those with political power fare better using it to protect economic power, and taxing it.

Even this is no guarantee that these two types of power will remain separated, as I’ve already noted. Those with political power do sometimes use it to confiscate economic power, and the cronyism in contemporary capitalist economies shows that those with economic power can use it to buy political power. The cooperation of the economic and political elite combines them and leads to stagnation.

Joseph Schumpeter talked about the creative destruction of capitalism. Those who want to build economic power in a capitalist economy are the creators, but creative destruction threatens to destroy those who are already established. They want stability, not the creative destruction of capitalism.

Preserving that separation between economic and political power is a major challenge to those who want a classical liberal social order. That’s an overview of some issues I discuss in Coordination, Cooperation, and Control.

The post Coordination, Cooperation, and Control: The Evolution of Economic and Political Power appeared first on The Beacon.