Which would be worse?
[A] Doubling the size of the deficit with public spending cut in half, or [B] balancing the budget with the level of the deficit doubled in size from where it presently is.
Neither would be great, but for me A would be vastly preferable to B.
There is no way one could ever find out since no economic model could be trusted to give an accurate model. But on this score, my guess would be that most modern macro models would show B preferable to A.
I had a brief query from a friend the other day:
This is probably a red-herring but I did wonder if there are degrees of ‘socialism’ in which some degree of government ownership and control of the means of production is acceptable but with private sector ownership and incentives the dominant force. I’m thinking of the so-called ‘mixed’ economy concept.
Here in NZ we are having a debate about how we should frame objectives for the economy, with a shift away from a predominant focus on growth (in GDP) towards a ‘well-being’ framework (currently being developed by the NZ Treasury. I don’t think most economists are persuaded by this but it’s politically appealing because it appears to offer more emphasis on distributional fairness and the environment.
Well, I do go on a bit, but the question is an interesting one and important. My reply, off the top of my head, but more consideration still needed.
Interesting issue since everyone who now declares themselves a socialist doesn’t define socialism in the same way. There are plenty of “socialists” who think socialism is a heavy duty form of the welfare state. It’s fantastically costly, and in rich economies like ours, we typically allow plenty of free riding which will eventually have to be paid for one way or another. We are ruining ourselves because we think we are richer than we are, to subsidise plenty of people who ought to be contributing to their own upkeep. But once you get into the various forms of attempting to create greater equality, you are in an endless spiral since you can never create enough of it since there are always going to be income differences, many of which have no cosmic justification but just are what they are.
We already do an incredible amount of redistribution from those with high incomes to those with lower incomes. But if you take from some who earn high incomes they will provide less output to the common pool. And funny enough, if you give to people with lower incomes, they too will provide less to the common pool. Very destructive of an economy based on personal incomes related to one’s own contribution to the total. In a bygone era, most individuals felt a responsibility to remain as productive as possible for as long as possible, so we invented a system of welfare to assist those who fell by the wayside. Now there are so many who sit by the wayside picking up whatever they can, and this is now made much much worse by the increasing numbers who never intend to contribute anything but intend to be subsidised merely for existing. You can call that socialism if you like. It is immensely destructive, but since we have so much productive capital to run through it may take a while before we really notice. By then, alas, it will be too late. An inbred lack of industriousness in the midst of a crumbling economic structure is what you have right now in California which has more people on welfare proportionately than any other American state. And as rich as they are, it will not survive another decade before some kind of collapse overtakes them. Already the productive are escaping to other states. Unfortunately they are taking their welfare mentality with them.
As for the more traditional forms of socialism, virtually no government now seeks to take over the commanding heights of the economy, other than idiots like in Venezuela. There it took around a decade for the full horror to manifest itself, but now that it has, everyone has backed off from that version, at least for the time being. The version we are in the midst of is what I think of as the “crony capitalist” version, which is based on governments squeezing the last dollar of tax revenue, plus whatever they can extort from their central bank money creation process, to direct spending in a politically advantageous direction. Australia is at the start of a fall in living standards that is in large part based on the notion that all public spending adds to demand and therefore is positive. Which is augmented here by a superstitious belief that bringing in many many migrants makes the economy rich because we have to build infrastructure and housing for them to live in. Quite insane, but if you really think economies are driven by C+I+G, you cannot see the problem until the economy finally does fall apart and even then won’t understand the problem although it will be right before their eyes. The RBA and Treasury keep expecting the economy to turn around, and are ever-amazed when it does not.
Mises’ Human Action is an austere no frills explanation of not just how a market economy works, but also why only a market economy can work. There are the members of a community who have material desires they would like satisfied and personal services they would like to engage. Most of what individuals want is dependent on what has already been produced and sold in the past, although of those desires are for goods and services that have only just been made available.
There are also individuals who earn their own living by running businesses that produce these goods and services in the hope that others will buy them, and in so doing pay enough in total amongst all purchasers to cover the costs of production.
There are also entrepreneurs who run businesses that produce inputs that are used within other businesses. Ultimately, however, all production is focused on satisfying the demands of final consumers. It is in this sense that consumers call the shots. What people are willing to pay for determines what will be produced since only those enterprises that produce goods and services that earn a profit can stay in business.
But what people will be willing to pay for is an unknown that can only be discovered if an entrepreneur makes the decision to produce some good or service and put it on the market. Only then can it be discovered whether whatever has been produced can be sold at a profit. Once it has been determined that a profitable enterprise can be established to produce these particular goods and services, many other firms may then follow along and try to produce the same product or even better versions.
This is how the market works through the trial and error efforts of entrepreneurs to find products that can be sold at a profit. If a community is content never to change any of the products it chooses to buy, and there are never any interruptions or changes in the supply conditions for the inputs used in production, the economy can enter a steady state which can repeat endlessly the same routine. But since in the real world there are new innovations taking place all the time, and changes in the supply conditions for inputs, a steady state outcome is an impossibility.
Therefore to ensure an economy continually improves the products produced, and can adjust to new conditions in the supply of inputs, a market mechanism is essential. No other mechanism will work if a community is intent on improving its standard of living or wishes to accommodate changes in the conditions of supply.
The question then is whether there is any role for government oversight and regulation in such an economy. And while it is clear that Mises is reluctant to state that there is such a role for governments because of the principle of give-them-an-inch-and-they-will-take-a-mile, nevertheless, he does accept that government does indeed have such a role. This is from Human Action:
There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule. (Mises [1949] 1963: 748)
There ought to be no doubt from this passage that there are circumstances for which government regulation is warranted. It is a cost-benefit calculation in which regulations are laid down, which have a cost in lost production, but in which there is a positive return in the prevention of an even more costly outcome whose probability of occurrence has been reduced.
His reluctance to state in a more fulsome way that such regulations have a role in economic management is based on his no doubt correct judgement that from the example of this unquestionable use of government regulations to diminish the possibility of a much more costly outcome has been a thin edge of the wedge to justify an enormous and monstrous regulatory regime across all the economies of the world. If anything has occurred, the meticulous examinations that now occur are to determine if there is absolutely no possible harm that might occur if some regulation is not introduced and enforced. The weight of evidence has now been placed on those who wish to reduce such regulations where outcomes with a small probability of occurrence are not made the basis for such rules.
The principle should therefore not be seen as a blanket ban on government regulation per se, but as the need for those who wish to impose such regulations to demonstrate that the potential risk is large and that the market would not be expected to provide its own cure if left on its own to work things out.
If, for example, individuals who wish to built houses in the middle of flood planes that are expected to flood only once in fifty years should be permitted to do so, but also told that if they do, they must cover the cost of insurance themselves and not expect a government to make good any losses they might endure because of flood damage.
And while there is need for licensing for doctors and electricians, since no consumer can be expected to research into the competencies of individuals who declare themselves a doctor or electrician, there is no need for regulation in endless other occupations, with hairdressers as the most notorious example of regulatory overkill.
But there is a further issue in relation to regulation. Within political debate, to argue that no regulations are ever justified will instantaneously lose the public debate. No one will accept that the market can be left to itself without oversight and regulation. Finding the balance is important, but not to recognise an important social function of regulation by governments, specially by governments under popular control, is to throw the baby of good economic management out with the bathwater of heavy-handed control.
Mises, Ludwig von. [1949] 1963. Human Action: A Treatise on Economics. Fourth Revised Edition. San Francisco: Fox and Wilkes.
I see the RBA today froze at the thought of raising rates in the midst of an economy as stone cold dead as this one. They are, of course, clueless about why this is, just as Treasury is equally clueless. So let me take you to my article just published at Quadrant on The Dangerous Persistence of Keynesian Economics. Here’s how it starts.
OUTSIDE the United States, no economy has fully recovered from the downturn that followed the Global Financial Crisis in 2008-09. The crisis came and went in half a year, but just about every economy continues to have problems generating growth, increasing employment and raising real incomes. As I was writing my article on “The Dangerous Return to Keynesian Economics” in 2009, I commenced working on an economic textbook, now in its third edition, to explain why modern macroeconomic theory is utterly useless, why no one using these economic models as a guide to policy would ever succeed. And here we are, ten years later, and everything discussed in that earlier article, explained in far more detail in my text, has come to pass.
________________
Just as the causes of this downturn cannot be charted through a Keynesian demand deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.
What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.
—Steven Kates, Quadrant, March 2009.
Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?
—Question to Steven Kates from Senator Doug Cameron, Senate Economic References Committee, September 21, 2009________________
Why did I get it so right? Because nearly everyone else thinks economies are made to grow through increases in demand, while in reality, as was once universally understood, economies can only be made to grow through improvements in supply-side conditions. Demand has absolutely nothing to do with making an economy grow. Demand of course is crucial to how many units of any particular good or service will sell, but has nothing whatsoever to do with how fast an economy in total will grow, or how many workers will be employed.
Does being right count for anything? Not a bit. Still, you can go back to my original article from ten years ago, The Dangerous Return to Keynesian Economics, and see how well what I said then stacks up with how things now are.
Let me add that if you are not already a subscriber, you should be. Subscribe here.
“Need to put pencil to paper to tell what it will do to the economy.”
More here: Larry Kudlow: ‘We Have to Put Socialism on Trial’. But the point made is that no matter how good things are no one is fully satisfied. There is always a struggle and there are always others doing better than we are. Envy and dissatisfaction are everywhere and universal.
If logic worked, there would no longer be a single socialist in the world. So why are they still there and growing in number? Irrationality is rife, and there are many in the world who to advance themselves see leading the masses as their only way to power and wealth.
At the centre are the entrepreneurs who guide the individual units of a capitalist economy through their moment-by-moment attendance to the businesses they run. This is a passage about Tolstoy in an article on the novel that has great relevance:
In one essay, he retold a story about the Russian painter Bryullov, who corrected a student’s sketch. “Why you only touched it a tiny bit,” the student exclaimed, “but it is a completely different thing.” Bryullov replied, “Art begins where that ‘tiny bit’ begins.” Tolstoy elaborates:
That saying is strikingly true not only of art but of all life. One may say that true life begins where the tiny bit begins—where what seem to us minute and infinitely small alterations take place. True life is not lived where great external changes take place—where people move about, clash, fight, and slay one another—it is lived only where these tiny, tiny, infinitesimally small changes occur.
“All of life” includes the lives of those who run a business. Socialists argue that a central plan can replace the individual attendance of those who own, run, manage and earn an income from running a firm. But there, too, each of those “tiny bits” affects the whole. That is also part of why socialism must fail.
“Under the guise of Medicare for All and a Green New Deal, Democrats are embracing the same tired economic theories that have impoverished nations and stifled the liberties of millions over the past century. That system is socialism.”
And there is no disguising their intent, even if they disguise the truth, certainly from everyone else, but also often enough from themselves. From the Washington Post just yesterday: Five Myths About Socialism. These people are either deluded or evil. The aim is to remove or radically restrict the role of private entrepreneurs. The rest is pure gloss. See below, the entire column.
Socialism in the United States is prominent in a way it hasn’t been in decades. High-profile left-leaning politicians like Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) hold up socialist policies as solutions to the ills facing the nation, from the growing political influence of the “top 1 percent” to the lack of universal health care. Meanwhile, critics, including President Trump, say socialism leads inexorably to tyranny and poverty. But the important debate isclouded by many misconceptions.
MYTH NO. 1Socialism is a single coherent ideology.Socialist groups may have different names (“democratic socialists” and so on), but the distinctions between them are an illusion, columnist Jenna Ellis wrote in the Washington Examiner last year : All are “precursor[s] to full-blown Marxist-Leninist communism.” And according to an editorial in Investor’s Business Daily, “All forms of socialism are the same.” Many attacks on socialism, as well as polls gauging its surprising popularity, take for granted that it’s a unified philosophy amenable to a crisp judgment.
Yet socialism has multiple meanings and interpretations, which have to be disentangled before a discussion about its merits can begin. One distinction centers on whether socialism is a system that must supplant capitalism or one that can harness the market’s immense productive capacity for progressive ends. Karl Marx, who predicted that historical forces would inevitably lead to capitalism’s demise and to government control of industry, was the most famous proponent of the first type of socialism. An impatient Vladimir Lenin argued instead that rather than waiting for history to run its course, a revolutionary vanguard should destroy capitalism.
Other socialists, however, did not accept the violent, undemocratic nature of that course, although they agreed that capitalism was unjust and unstable. The left’s role, in the view of these “democratic socialists” — the Czech-Austrian theorist Karl Kautsky, for instance — was to remind citizens of capitalism’s defects and rally popular support for an alternative economic system that would end private ownership and assert popular control over the means of production.
Although Sanders and Ocasio-Cortez embrace the term “democratic socialist,” the policies they advocate place them much closer to yet another socialist tradition: social democracy. Social democrats say it is possible and desirable to reform capitalism. This tradition dominated the post-World War II European left and influenced the American Democratic Party, most notably during the Progressive era and the New Deal, inspiring Social Security, unemployment insurance and the eight-hour workday.
MYTH NO. 2Socialism and democracy are incompatible.In a speech last month on the crisis in Venezuela, Trump argued that socialism “must always give rise to tyranny.” Socialism is a “pseudo-science . . . enforced by political tyranny,” wrote the Heritage Foundation’s Lee Edwards in December.
Communists reject democracy, of course, but other socialists have strongly supported it. In many parts of the world, including Europe, they were the most consistent advocates of democratization. Eduard Bernstein, for example, one of the fathers of social democracy, described democracy as “both a means and an end. It is a weapon in the struggle for socialism and it is the form in which socialism will be realized.” Conservatives, on the other hand, thought of democracy as “despotism of the multitude,” in Edmund Burke’s phrase, and liberals like Alexis de Tocqueville and John Stuart Mill were resistant to expanding the franchise as well, because giving workers too much power would threaten the economic elites necessary for social stability. Only organizing and pressure from parties of the left broke liberal and conservative resistance to democracy in Europe.
After the Russian Revolution, a commitment to democracy became a key distinction dividing socialists from communists. The Bolsheviks split off from the Socialist International in 1919 because socialists would not to commit to overthrowing capitalism by “all available means, including armed force.” And after World War II, socialist and social democratic parties became mainstays of democratic systems in Europe.
MYTH NO. 3All socialists want to abolish markets and private property.Cass Sunstein, a liberal law professor, writes that once voters realize socialism means government ownership of “the nation’s airlines, hospitals, restaurants and department stores,” they will sour on it. Socialism leads to the “seizure of private property, and the dictating of individual behavior,” asserts Charlie Kirk, founder and executive director of Turning Point USA.
But on this question, too, the traditions vary. Communists, when in power, have done away with markets and private property. Democratic socialists say that in principle they hope capitalism will disappear over the long run, but in the meantime they advocate piecemeal changes in the ownership and control of economic resources — bank nationalization, for instance. (Democratic socialists have never fully held power anywhere, so their programs remain largely theoretical.) And social democrats have focused on redistributing the fruits of markets and private enterprise rather than abolishing them. Most of the policies advocated by politicians like Sanders, Ocasio-Cortez and Sen. Elizabeth Warren (D-Mass.) — including universal health care, free college education, and higher wealth and income taxes — are clearly achievable within a capitalist system.
MYTH NO. 4When socialism is tried, it collapses.“Socialism . . . will always fail,” wrote Mark J. Perry, a professor of economics at the University of Michigan at Flint and a scholar at the American Enterprise Institute, in March 2016. The Hoover Institution’s Paul R. Gregory offered a primer on “Why Socialism Fails” in January 2018.
Communism certainly failed, but social democracy has arguably been the single most successful modern ideology or political movement. Stable European democracies arose after World War II because a social consensus married relatively free markets and private ownership of the means of production with expanded welfare states, progressive taxation and other forms of government intervention in the economy and society. Without the impressive economic results generated by the market, the huge improvements in living standardsin the West after the war would not have been possible; the 30 years after 1945 were Europe’s fastest period of economic growth ever. But without the welfare state, the benefits of growth would not have been distributed so widely: Inequality declined dramatically during the postwar decades.
Moreover, the parts of the world considered to be the most “social democratic,” like the Scandinavian countries, are successful by almost any measure: Growth is strong, unemployment is low, their economies are consistently ranked as highly competitive, and the quality of life is extremely high.
MYTH NO. 5Socialism offers a ready-made solution to numerous current problems.Socialism’s advocates today promote it as a near-panacea. It’s a possible “answer to the climate catastrophe,” writes a commentator in the Guardian. It “would remedy the systemic deprivation of people of color,” says Connie M. Razza, director of policy and research at the think tank Demos. It would go far beyond political reform to reshape the “basic structures that disempower people and keep them in wage slavery,” says Julia Salazar, a New York state senator and democratic socialist.
But many of today’s democratic socialists lack clear plans for what they want to put in capitalism’s place and how this new economic order would generate the growth, efficiency and innovation necessary to achieve redistribution and raise living standards. Nor is it clear that democratic socialists have realistic plans for dealing with other vexing social controversies, such as anxieties over immigration. Some argue that many current problems can be solved by new versions of policies that worked during the mid- to late 20th century, like a Green New Deal; more government spending on health care, education and infrastructure; and higher taxes.
Republicans insist that these initiatives would destroy growth and turn the United States into a tyrannical economic basket case like Venezuela. True, conservatives made similar claims in the past about major government initiatives like Social Security and Medicare. But it is surely legitimate to press advocates of increased government spending on how they would pay for these programs. The economist Paul Krugman, for example, who is sympathetic to many social democratic policies, has criticized those on the left who argue that these programs can be subsidized by simply printing or borrowing money.
What distinguished the postwar era was the combination of rising growth and equality. If socialists want to convince Americans, Europeans and others that they have the best solutions to contemporary problems, they need to show that their policies can generate substantial wealth and resources as well as, simultaneously, a more equitable distribution.
Via The Week in Pictures.
An appeal for papers to an economics journal that I thought might be of interest to some of you out there, brought to your attention as a public service information announcement. This was the covering note:
Dear colleagues,
might be you are interested in this call for papers for a Special Issue on Feminism and Capitalism.
best wishes,
And these were the details.
This is a call for innovative theoretical, empirical, and creative submissions about feminism and twenty-first-century capitalism. Our call is spurred by phenomena such as the millions of people displaced and relegated to invisibility as “surplus populations,” increasing debt and income inequality, rising corporate profits, persistent agrarian crises, planetary urbanization, labor precarity and informality, and climate change. We acknowledge the recent resurgence of feminist engagements with capitalism—on the crises of care and social reproduction, on immaterial labor and work, and on the Anthropocene and environmental destruction, for instance. New feminist interventions on the intimate, poetic, and generative lifeworlds that articulate creative responses to capitalism give us glimmers of hope.
We invite scholarship on feminism, capitalism, and anti-capitalism through a wide range of angles such as social reproduction, pinkwashing, corporate feminism and state feminism, neoliberalism, financialization, risk and debt, racial capitalism, bioeconomies, and nonhuman-human relations. We also invite essays that open up feminist thinking to new conversations about capitalism as an emergent social formation through a focus on specific spatiotemporal sites. Lastly, we encourage the submission of essays that grapple with the aporias and contradictions of capitalism such as its technologies of desire, economic (entrepreneurial) aspiration, and the commodification and fetishization of difference.
Contributions based on ongoing academic and activist collaborations, debates, and discussions are welcome. Submissions may range across genres such as empirical and theoretical studies, speculative conceptual essays, review essays, art essays, poetry, fiction, and news-based commentaries.
Deadline: September 1, 2019
Picked up at Neil’s Economics Blog and of much interest to me at the moment. I have been criticised for seeing public-sector-provided welfare in a positive light. This seems to be the core of such criticism:
The Supporters of the Welfare State Are Utterly Anti-Social and Intolerant Zealots; They Advocate Enlightened Despotism
It is customary to call the point of view of the advocates of the welfare state the “social” point of view as distinguished from the “individualistic” and “selfish” point of view of the champions of the rule of law. In fact, however, the supporters of the welfare state are utterly anti-social and intolerant zealots. For their ideology tacitly implies that the government will exactly execute what they themselves deem right and beneficial. They entirely disregard the possibility that there could arise disagreement with regard to the question of what is right and expedient and what is not. They advocate enlightened despotism, but they are convinced that the enlightened despot will in every detail comply with their own opinion concerning the measures to be adopted. They favour planning, but what they have in mind is exclusively their own plan, not those of other people. They want to exterminate all opponents, that is, all those who disagree with them. They are utterly intolerant and are not prepared to allow any discussion. Every advocate of the welfare state and of planning is a potential dictator. What he plans is to deprive all other men of all their rights, and to establish his own and his friends’ unrestricted omnipotence. He refuses to convince his fellow-citizens. He prefers to “liquidate” them. He scorns the “bourgeois” society that worships law and legal procedure. He himself worships violence and bloodshed.
–Ludwig von Mises, epilogue to Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 520-521.
Let me bring this out of the pack:
Every advocate of the welfare state and of planning is a potential dictator.
It is that kind of statement that hands the debate to the left. If the defence of the free market is based on never advocating or providing social assistance to those in need, however that may be defined, then socialism will roll through and upend the capitalist order in no time flat. It is the conflation of welfare with central planning, and then indicting everyone who wishes to help the aged and the sick as a potential dictator really does lose the debate. I am still looking for a statement from Mises delineating the role of government. If all it does is defend property rights and our national borders, no one will ever sign up, other than those who already feel fully protected by whatever system we already have in place.
The front page story in the AFR today is: Weak incomes for years to come, International Monetary Fund warns. A bit of the story, all depressing:
Real incomes are poised to barely grow over the next six years and living standards are destined for a slowdown, unless a wave of major economic reforms and technology innovation by business can unleash a productivity boom like in the 1990s.
The International Monetary Fund has projected that incomes adjusted for inflation would average just 0.3 per cent growth a year through to 2024, well below the long-term average of 1.8 per cent since the 1960s.
We are still suffering from the effects of the GFC, not the actual financial meltdown which disappeared a decade ago, but from the massive incompetence of the stimulus program put in place at the time. Keynesian economic management – that is, the kinds of stupid ideas that remain au courant within Treasury and the RBA even now – have spiked our ability to grow, with these people unable to work out why wasteful public spending and ridiculously low rates of interest have caused the damage they have. A reminder of the words of our departing former Treasurer on the massive damage he has caused.
“In short, you don’t feel the bullets you dodge. And we dodged a huge one,” Mr Swan, who will not contest the next election, expected to be held in May, said this afternoon.
Mr Swan said the enormous stimulus package devised by the Kevin Rudd Government had worked.
“Ten years ago, there was a deeply weird attraction in some quarters to the idea that a ‘cleansing fire of recession’ wouldn’t be such a bad thing for Australia,” he said.
“I rejected it then and I reject it even more forcefully now, precisely because of the potentially terrible human consequences.
“We did all this knowing full well that our opponents would hound us with slogans about ‘debt and deficit’.
“In departing this place, I have a perspective I didn’t in the heat of battle, and can honestly say I’m happy to wear that criticism as the price of saving Australia from much worse.”
Really, he wouldn’t know which way was up if he didn’t have the words “it’s the other way, stupid” painted on his shoes. It is his advisors in Treasury and the RBA who are responsible and who are still there directing traffic. It really is a tragedy.
Law of Markets 