The above title has been filched from a book with the same title written by economist Bryan Caplan in 2007. Today the book reads like a primer for 2016 American Presidential elections. Generalizing only a little, all three candidates are espousing populist policies which ignore basic economic principles. (I know. Trump doesn’t really mean what he says. We can hope.)
Caplan speaks from the point of view of traditional economics which he equates with rationality. I have the same point of view. It takes a certain arrogance to assert that the public is wrong and we economists are right, but it’s an unavoidable conclusion. Besides, economists never claimed to be normal people.
Caplan lists four areas where public attitudes lead to bad policies. I will add two more in my next blog that he doesn’t mention.
1. The Public Has an Anti-Market Bias
Commerce is, by its very essence, satanic. -Charles Baudelaire
We know who the bad guys are in this election—just about any successful enterprise or business executive. The banks, Wall Street, the pharmaceutical companies, the energy companies, Jeff Bezos, Mark Zuckerman, General Electric, Verizon, Walmart—just about any company or anyone that makes money by providing an essential service to the public. The public, unlike Adam Smith with his invisible hand, dislikes self-interest. As Caplan puts it, “non-economists tend to view successful greed as socially harmful per se.” The public judges market economic activity not by the results – which are good—but by motives, which are judged to be bad. The public refuses to believe that the road to heaven might be paved with greedy intentions.
Anti-market attitudes pervade the culture and not just at the presidential level. Take Uber’s surge pricing. Politicians around the world hate surge pricing. We constantly read of local politicians – and not just in the US—condemning the practice. How often do we have to read about Uber’s “overcharging” at some key hour of peak demand?
Economists love surge pricing. They are the rational way to allocate and increase resources that can be scarce at peak times. Raise the price at hours when demand is strong and supply will increase while demand will diminish. And, voila, we have equilibrium. Nobody will have to stand in the rain waiting forever for a taxi as I had to do several times in Hong Kong before the advent of Uber. Airlines do it, hotels do it, bars do it (happy hours lower prices at times of lower demand). But Uber is up against entrenched taxi monopolies who appeal to the public’s prejudice that the practice is unfair.
Economists do not wish for forty virgins when they die. Economists want a heaven where there are no price controls, where prices fluctuate freely under conditions of perfect competition, where everyone loves surge pricing.
2. The Public Has an Antiforeign Bias
Immigrants and foreign trade are two of the public’s favorite hatreds, as the Donald and the Bern have enthusiastically figured out and the Hill, despite her husband’s NAFTA free trade record, has had to follow. No amount of data or economic studies showing the benefits of foreign trade or immigrants will convince the public. Comparative advantage and David Ricardo? These are old staples of economists. But the public doesn’t want to know. And so many college students forget about them once they escape from their dreary but logical introductory economics course.
Admittedly there is a security issue with Middle Eastern refugees. But Mexicans? H1B visas? Silicon Valley is filled with Indians and Chinese, some of whom are CEOs. One study just came out which showed that over 50% of American billion dollar unicorns have immigrant founders or cofounders.
Caplan in his book (remember it was written in 2007) quotes a “shrewd” businessman who advocated two things: 1) A naval blockade of Japan and 2) A Berlin Wall at the Mexican border. This shrewd businessman must have been psychic (or maybe he was Donald Trump). Except of course it’s China, not Japan, that probably two of the three candidates suggest they would blockade now. The yellow peril has shifted headquarters. Not to be outdone by his would-be successors, Obama, as this was being written, hiked tariffs on Chinese steel imports by over 500%.
There is no question that China, Japan, Korea, Mexico and most other countries engage in protectionist policies. It hurts them and it hurts the US. If Trump could negotiate some of this protectionism away, that would be good—for the US and for them. But US protectionism in retaliation is a cure worse than the disease. The dollar occupies a special place in the global financial system, from which the US derives many benefits. The world isn’t going to come crashing down because of other countries’ near sighted protectionist and exchange rate policies. Anyway longer term the US economy adjusts. Just listen to the earnings reports this quarter. So many companies had out a crying towel because their earnings were hurt by the stronger dollar. But if the dollar doesn’t strengthen more, you won’t hear these laments in the next quarters. The companies will have adjusted.
A trade war on the other hand would bring a global depression. As it did in the 1930s.
3. The Public Has a Make-Work Bias
They said Ned Ludd was an idiot boy
That all he could do was wreck and destroy, and
He turned to his workmates and said: Death to Machines
They tread on our future and they stamp on our dreams.
-Robert Calvert, from his Freq album
Productivity increases are what drive economic progress. Thus when a productivity increase permits one widget to be made by two workers instead of three, economists cheer. That extra worker can be redeployed in an expanding economy. That happened in the farm sector. For example, Caplan cites statistics which showed it took 95 out of every 100 Americans to feed the country. In 1900 it took 40, today it takes three. Agriculture got more productive. So what’s there not to like?
But the public doesn’t cheer. It focuses on jobs lost and it doesn’t see the benefits of a redeployment of surplus labor. It doesn’t appreciate how the global standard of living has risen so much thanks to productivity gains. It demonizes companies which downsize and introduce productivity gains. Our triumvirate of would-be Presidents certainly have exploited the public’s prejudice in this case.
There is a long Luddite tradition of fear of the machine. Ned Ludd was a near mythical late eighteenth century rebel, who may or may not have existed. He supposedly led attacks in England on the new factories that had sprung up. A whole movement sprung up in his name. This Luddite tradition has now been updated with the arrival of robots and artificial intelligence. Supposedly, the pessimists say, the majority of jobs will be replaced by robots and AI.
None of these dire forecasts regarding machines have materialized in the past. But as I have argued with AI we are reaching an inflection point in human evolution. Marx referred to the “idiocy of rural life.” Actually there are a whole lot of occupations for which the term “idiocy” might apply and for which robots and AI could take over. The optimists see future in which humanity is freed from these.
I don’t know the future on this. Nobody does. AI could bring major redistribution and employment problems as well as unleash all kinds of new industries. In any case it cannot be stopped.
Better to invest in AI oriented companies and let the future worry about itself.
4. The Public Has a Pessimistic Bias
The Donald, the Bern and the Hill are unanimous on this one. Although they disagree on causes, they repeatedly assert that in recent years life in these United States has gone to hell for the average American. This plays right into the public’s normal attitude which according to Caplan tends to be excessively pessimistic about the state of the economy and overall living conditions. Unfortunately, the public’s natural biases may be getting some boost from reality on this one.
Yes it is true that according to according to the US Department of Health and Human Services, the average American life expectancy was 68.2 in 1950, 76.8 in 2000, and 78.8 in 2014. Things got better, not worse. It is also true that comparing life in the US today with earlier periods leads to the conclusion that the standard of living broadly defined has improved for everyone. The internet and the smartphone and the improvements in medicine standout.
But there is a general consensus that the average American’s income has stagnated, though not declined, over the last ten years. Economists argue about how to adjust income for transfer payments and taxes but the average American, with his or her natural pessimistic bias and a daily onslaught of pessimism from the formal and social media, thinks he or she has gotten a bad deal while the ever-unpopular one percent is cleaning up. The subpar economic recovery from the Great Recession of 2008 has not helped matters.
Here, in my opinion, the Donald is saying the right things. The American economy since the New Deal has been assaulted by a tsunami of regulations, an assault which has gotten worse under Obama. Tax rates creeping upward, the Affordable Care Act, Dodd Frank, Sarbanes Oxley, the whole host of executive orders regarding the environment and energy, the list goes on and on. Small businesses in particular are damaged by these regulations. Small businesses do not have the resources to hire the army of lawyers, accountants and HR types that are needed to comply with all the new regulations.
On this there is a major difference among the candidates. The two Democrats never met a regulation they didn’t like. But the Donald is different. Trump wants to get rid of all these regulations and lower taxes. Go Donald!