Reading the headlines, this was my thought process, almost exactly. Is xkcd evidence of alien mind probes? Also, “Venus?? I thought they said Venice!”
I’ve been playing a city management game called Sim Empire. It’s a lot like the old classics of Pharaoh, Caesar, or Anno Domini. You are building a town out of nothing, lay out the streets, houses, businesses, and municipal buildings – even houses of worship. The more of your citizens’ needs you can satisfy, the more lavish their homes become – and therefore the more you can collect from them in taxes.
The game has made me aware once again of the sheer beauty of the invisible hand of the market. Here then are some random thoughts on the economy of these types of games.
My citizens don’t have enough grain. If I don’t build enough grain farms, they could starve (in some games, yes). It’s a wonder they don’t revolt and throw me out of office! Oh, but I built enough police stations to cover every square pixel, so they daresn’t, and enough military that no outsider feels safe ‘liberating’ them. If only I allowed free markets, though, some entrepreneurial bitizen would notice the price of grain was high, farm some land, and provide for everyone. No tyrant needed!
The one chief advantage my underlings have is a powerful one: if I don’t provide for their every whim, they will refuse to pay taxes. Apparently my military apparatus is not sufficient to take their money by force, despite being strong enough to remain in power. If I’ve neglected the game for a while due to the pressures of real life, I see 75% of the country simply refusing to pay taxes and nothing to do about it.
Actually, there is one thing I can do about it: go to the free market. What? I thought there wasn’t a free market in my empire. Well, there isn’t, but there is a free international market with no tariffs, quotas, or other restrictions. Well, there is one restriction: no trading outside of 6am-6pm. The one chief advantage Sim Empire has over its older cousins is that I can work with other tyrants. If one has too much wood or grain, there is a marketplace where they can sell their excess to me. I can also sell my excess stone or porcelain.
I’ve noticed, though, that this free market is rather odd. The price of raw materials is higher than the price of finished products. Clay, for instance, right now costs 40-45 gold and wood costs 50, while porcelain – made from clay and wood! – costs 35-40. And you get less porcelain than you put in clay and wood! It’s a real money loser. It occurs to me that I should stop my porcelain factories altogether, sell the clay and wood I used to be using on the market, buy porcelain, and pocket the difference. If enough of us do that, the prices ought to revert. … But why are they doing that in the first place?
I am pleased to announce our Empire runs on hard metal money: gold. No fiat currency here! So no inflation, right? I’m actually dubious. There is no actual limit on the amount of gold I personally can amass, nor on the amount other players can create. The developers never come in to take gold out of the system, so I actually predict as the number of players increase and the amount of gold increases faster than the number of goods being traded, the prices of goods ought to go up over time as well. For an example of real life silver and gold-based currencies, economies, and countries being destroyed by inflation, head on over to Crash Course History for Spain and China.
A reminder that being on the gold standard won’t solve all your problems.
When COVID first started spreading more widely in the US, I began worrying that this would lead to an upsurge of anti-immigrant sentiment. I worried that people would draw the wrong lesson from this experience and return to the isolationism of the 1920s, closing our borders on a more permanent basis to both people and goods. This would slow economic growth and lead to a poorer nation. It seems particularly ironic that just now Americans are becoming the unwelcome foreign visitors abroad, particularly from my home states of Texas and California.
Nowrasteh and Forrester at CATO discuss some papers by Giuliano and Tabellini on the question of if increased immigration moves the median voter to the left. They also add a few suggestive regressions of their own. Their summary is interesting and nuanced. First, they find that closing the borders to immigrants in the 1920s encouraged much greater government spending (as a percent of GDP) while allowing more immigrants in the 1960s has slowed the growth of government spending. This effect seems to work both ways: American voters are more willing to vote for welfare benefits, etc, when there are fewer immigrants getting them, and the larger the welfare state is, the more concerned voters are about allowing immigrants into the country. So it may not be so much that adding immigrants from more left-leaning countries shifts the median voter as much as it moves native voters further to the right? (See also Rosenthal and Eibner 2005, who also conclude that “a voter of a given income is less eager to redistribute given that redistribution has to be shared with the non-citizen poor.”)
This suggests an interesting line of argument, that these feedback effects can work in the opposite direction as well. I imagine a friend who is very concerned about the size of government and also would prefer to have fewer immigrants. To that friend, I would suggest that allowing more immigrants can help slow or even reverse the growth of government and the welfare state. Using their aversion to one issue could potentially reduce their aversion to the other. <epistemic status: highly speculative>
The problems of trying to actually identify Keynesian spending multipliers is nothing new, but it was brought home to me this last week. You see, my mother-in-law passed away just after her stimulus check arrived. Her children chose to use it to pay for her headstone. Being more familiar with the discussion than most spending, I break it down this way:
Someone in government, trying to figure out how many jobs were created or saved by the stimulus bill, would ask us what we spent the money on. We would tell them it went for a headstone. They might figure out how much the monument workers are paid, how much of that $1200 went to the carvers and how much to the stone itself and multiply it throughout by marginal propensities to consume and any other leakages in the system to come up with a fancy number. (For those of to whom that is all Greek, see Jacob Clifford’s introduction.)
The usual first response to this is to cite the Broken Window Fallacy (introductory video here). That stimulus money had to have come from somewhere. Someone else will be taxed or have their savings inflated away to pay for it eventually, and the first round calculation does not take into account the jobs lost from this confiscatory taxation/seigniorage. Thank you, Bastiat.
The other problem more visible to me than usual is that we (the assembled kids) were totally going to get her a headstone either way. The stimulus check was entirely fungible and it will actually be spent over time with a little bit here and a little bit there because someone in the family has more in their savings account than they otherwise would have. Trying to follow and account for that spending and its effects borders on the well-nigh impossible. Forget the distinction between approximate right and precisely wrong (a quote misattributed to Keynes), it’s not even possible to know if you’re even in the right ballpark!
And those distinctions are still before factoring in monetary offset. Though with Powell begging the government to spend more, you might think that’s less of an issue also, but Sumner responds to that idea in the comments section at the same link.
PS – What did we do with our family’s stimulus check? Far as I know it’s still sitting in the savings account. Our needs are met, so we try to keep our mpc kind of low.
538 has some interesting new polling data. While the vast majority of respondents in the US agreed that social distancing et al is the right thing to do right now, there is a large and rapidly growing split between Democrats and Republicans on the future, and whether the worst is over or not. Their story fits what’s going on on my Facebook feed certainly. But I was curious what Notes on Liberty readers think (wherever in the world you happen to be living). Which of the following best describes your outlook in your country? Please choose only one:
a) There will be a 2nd or even 3rd wave during 2020 that will be far worse than we have had so far. Total deaths in my country will more than triple from where they are today. The highest number of new deaths in a single day is in the future. (For the US, that’s more than 255k deaths total and more than 4000 dead in a single day; for the UK and Italy, that’s more than 100k dead; and so forth)
b) There will be a 2nd or even 3rd wave during 2020 that will be worse than we have had so far. Total deaths in my country will double from where they are today. (For the US, that’s more than 170k deaths total and a return to 2000-3000 dead per day in on average; for the UK and Italy, that’s more than 65k dead; and so forth)
c) Right now is the worst it will be. Total deaths will increase from where they are today, but at a decreasing rate.
d) We have already survived the worst of the infections and death (For the US, total deaths will be less than 170k and average dead per day will not increase above 2000 again; and so forth).
And let me ask you a second polling question about civil liberties that have been constrained during the quarantine in most countries. Which of the following describe(s) your outlook? Feel free to answer more than one:
e) The restriction of my civil liberties will be temporary (less than 6 months).
f) The restriction of my civil liberties will be long lasting, but eventually I’ll get them back (6 months – 3 years)
g) The restriction of my civil liberties will be nearly permanent (3+ years)
h) The restriction of my civil liberties was a deliberate power grab by the state
i) The restrictions on civil liberties successfully prevented many more deaths in the last few months and in the future
j) The restrictions on civil liberties successfully prevented many more deaths in the last few months, but not many in the long run
k) The restrictions on civil liberties may have prevented some deaths in the last few months, but not many in the long run
I wrote the following update for my Principles of Macroeconomics students and thought it might just count as an update for Wats On My Mind.
In the first two minutes of class, I asked you how you would know how the economy is doing. Let’s focus on our three big areas: GDP, unemployment, and inflation.
Initial estimates are that GDP decreased by 4.8% in the first quarter (Jan-Mar). Let me comment on that a bit:
- That number is almost certainly inaccurate. It will be revised 3 months from now, 6 months from now, and be finalized 9 months from now. That is totally normal – as more and more data rolls in, our estimates get better. My bet is that the number is worse than that because closed firms won’t be reporting anything yet.
- The number for the second quarter will certainly be worse than that. We were only closed for 2-3 weeks in March, so the fact that we’re done that much in such a short window is a bad sign. We have already been closed longer in this quarter and the careful, measured opening we’re doing right now – which I think is wise to prevent a new spike of cases – won’t make for an instantaneous rebound.
- This is as bad as we saw during the Great Recession, but faster. Again, my hope and expectation is that our recovery will also be faster.
- GDP dropped in the EU by 14%. So it could be a lot worse!
The Bureau of Labor Statistics also released new numbers. So far 30 million Americans have filed for unemployment. That is roughly 18-19% of the workforce. This is officially, as expected, the highest unemployment rate since the Great Depression in the 1930s. The good news is that the number of new applicants has been going down each week, from 6.8 million at the end of March to “only” 3.8 million last week. (Recall: That’s still 4x larger than the previous high set in the 1980s.) The other bit of good news is that 90% of unemployed workers expect to return to their old job, while that number is usually only 40%. That gives me more encouragement that we could quickly bounce back.
Inflation is DOWN. If this were primarily a supply shock, we would be seeing overall higher prices. That means the drop in aggregate demand is bigger than the supply shock. To a Keynesian or a Monetarist, that also means that all the fiscal and monetary stimulus we have done so far is not enough and more needs to be done. To a Classical economist, the thing that needs to be fixed is still supply – demand itself is not terribly important. A Hayekian, of course, thinks all this stimulus is making things worse – it messes with the price signals markets rely on.
To get a rough estimate of where inflation is going, I have been recommending comparing TIPS bonds to nominal bonds because the difference between the interest rate on those bonds (the TIPS spread) is the market’s best guess of inflation. As you can see here the TIPS spread fell from 1.8% in 2019 to 0.5% at the end of March. During April, it has recovered slightly to 1-1.2%. A very rough guesstimate based on that suggests we would need a stimulus 3x as large as we have done right now to return inflation expectations to normal. !!!
The very idea of having Congress spend an extra $5 trillion on top of what is already being done is more than my little fiscally-conservative heart can comprehend just now. Politically, though, I expect Congress will find it in their hearts/re-election campaigns to have another round of stimulus. The Federal Reserve has even called on Congress to spend more, so have no fears of monetary offset hampering anything. Here is a monetarist arguing the Fed needs to do a great deal more to ensure spending expectations don’t fall. One of the points, though, is that we should not expect hyperinflation is around the corner.
On that first day, most students suggested looking at the stock market. From Feb 21-Mar 23 the Dow lost 10,000 points – 1/3 of its value. Since then it has recovered more than half. Notice that the drop came BEFORE quarantine and that the stock market has been recovering even as unemployment has climbed to record heights. This is another reason I don’t recommend imagining that the stock market gives a clear and unbiased view of what’s going on in “the economy”! The situation right now is clearly much worse than it was a month ago, so trying to figure out current conditions would not make sense. If I wanted to give it the best spin possible, I’d say the stock market is predicting better times ahead despite how bad things currently are.
A few other data points:
- 59% of Americans say they can social distance as long as needed, which is up from a few weeks ago. (Gallup)
- Western European countries started reopening earlier than we have and they are starting to see an increase in cases and deaths again. Now, so far that’s only a 3-day trend and it could just be a blip, but it’s not encouraging.
- Most people are actually behaving like decent, responsible people during the crisis – and they usually do.
I had a mentor at BYU, Prof. James McDonald, who tried to convince us that
- Econometrics is Fun.
- Econometrics is Easy.
- Econometrics is Your Friend.
One of his classes made a bronze plaque out of it for him. He also tried to convince us that Economics is Romantic because this one guy took a girl to his class on a date and she married him anyway. Because he was one of the economists I’ve tried to model my life after, I’ve always been on the lookout for ways to convince people that econometrics is, in fact, fun, friendly, easy, and romantic.
A while back, Bill Easterly blogged about how marriage search is like development, and in the process talking about how unromantic economists can be:
I recently helped one of my single male graduate students in his search for a spouse.
First, I suggested he conduct a randomized controlled trial of potential mates to identify the one with the best benefit/cost ratio. Unfortunately, all the women randomly selected for the study refused assignment to either the treatment or control groups, using language that does not usually enter academic discourse.
With the “gold standard” methods unavailable, I next recommended an econometric regression approach. He looked for data on a large sample of married women on various inputs (intelligence, beauty, education, family background, did they take a bath every day), as well as on output: marital happiness. Then he ran an econometric regression of output on inputs. Finally, he gathered data on available single women on all the characteristics in the econometric study. He made an out-of-sample prediction of predicted marital happiness. He visited the lucky woman who had the best predicted value in the entire singles sample, explained to her how he calculated her nuptial fitness, and suggested they get married. She called the police.
He goes on from there to describe how he eventually did find a mate and makes a comparison with development and over-reliance on econometric methods. As popular as it is in Libertarian circles to bash on econometrics, I’d like to defend empirics by pointing out that his regression advice was not sound:
1 – The suitor’s regressions ignored the self-selection bias. Regressions only tell us what the ‘average’ effects are, that is the effect for the ‘average’ person. Making the average guy happy is only relevant if he is the average guy. Economists being the strange lot we are, it is likely that it takes a special kind of person to marry one of us. He ought to have found a bunch of guys very similar to himself and examine the qualities that made a difference from among (and this is key) the population of women willing to marry guys like him – the women who self-select themselves into our group. If he then approached a women who was not in that group, no wonder he was rejected! I knew I had my work cut out for me since I was in junior high: a Latter-day Saint economist-in-embryo who read Shakespeare “in the original Klingon”, and who carried a briefcase to school? Small sample sizes indeed!
2 – He ignored endogeneity. Instead of trying to convince her that research showed she would make him happy, he needed to present research that demonstrated he would make her happy, and that’s the other half of the regression: male qualities on marital happiness. No wonder she rejected him: his regressions didn’t answer her question!
Personally, I took more of a Bayesian approach. Bayesians believe that a lot of things in life (like regression coefficients) are random and over time we get better and better signals about where the truth is, but we only ever approach it by degrees. First, by trying to become a friend, I identified if a woman was in the group of people who might marry someone like me. Each interaction gave me more information about the error term and the regression coefficients about fostering a happy, loving friendship that could endure. After any failed relationship, I had a new variable or two to add to my equations and I understood the ‘relationships’ between relationship variables better. That might be about finding out different things I needed (hunh, so her political affiliation isn’t as important as I thought and her willingness to smile at me is vital) or about learning more and better policies over time that I could enact to make her happier (tips for being a better listener or learn to identify her love languages and feed them to her regularly).
One of the most important regression-related romance tips I learned was to control the variables I could control, and leave the residual in God’s hands. I recall a graduate labor economics research seminar where the presenter claimed that the marriage market always cleared. I complained that I was willing to supply a great deal more marriage than had ever been demanded at prevailing prices. I was reassured that the marriage market clears in equilibrium, and I might not have found my equilibrium yet. The presenter’s prediction was, thankfully, prescient: I found a buyer a year later, and last week we celebrated 5250 days of married bliss.
That, and spring time: that mystical time of year when a young student’s fancy turns to their neglected grades and wonders if there is anything they can do once the semester is over to raise them.
— Culture is an emergent order. It cannot be owned, so you can’t have a “right” to a culture. It can’t be controlled, and while it can be influenced, it’s a complex system so beware lest your efforts backfire.
— Change doesn’t come, until it comes quickly. This serves as another reminder of the importance of keeping true ideals alive even when they are unpopular and they seem doomed to obscurity.
— It is also a warning about other changes, such as the growing anti-natalism of the left, brought in through environmentalism.
— Caplan’s review of Moller’s Governing Least. “Instead of focusing on the rights of the victims of coercion, Moller emphasizes the effrontery of the advocates of coercion.” Even if “exceptions abound” to the “common-sense morality … that rights to person and property are not absolute … Moller sternly emphasizes … that these exceptions come with supplemental moral burdens attached.” Highly recommended.
— Responding to Ambassador Araud’s claim that the culture of neoliberalism and free trade are dead, Sumner says “Intellectuals focus too much on interesting rhetoric and too little on mundane reality.”
— On the importance of a culture that allows people to repent and change, that allows someone to apologize, make amends, and receive public forgiveness.
And how ‘bout them Dodgers, hunh? Actually, how about each division’s top team? That’s a lot of winning!
— A partial response to Marx’ claim that managers are expropriating the value produced by the workers while providing nothing themselves: “The study showed that managers didn’t just influence the results their teams achieved, they explained a full 70% of the variance. In other words, if it’s a superior team you’re after, hiring the right manager is nearly three-fourths of the battle.”
— Boudreaux wonders what supposedly-enormous transaction cost prevents firms from offering workers a choice of pay packages – buying more parental time for a lower wage, for instance. One commenter notes their firm does just that, letting workers buy back vacation time. This is also, of course, standard practice in much of academia, where faculty are allowed to reduce their teaching load in exchange for a salary cut – usually funded by a research grant.
— Sumner on how labor market reforms (including cutting unemployment benefits) helped Germany and Israel to lower average unemployment rates and increase economic growth.
— But there appears to be a great deal that only deregulation will not be able to change. A new paper by Berger and Engzell finds correlation between the European-country-of-origin of people in modern US and the level of inequality and intergenerational mobility. Institutions persist for a very, very long time … again. (Homework: How does this apply to the reparations debate?)
— Another new paper by Fone, Sabia, and Cesur finds that higher minimum wages increase property crime arrests – contra expectations – so that “a $15 Federal minimum wage could generate criminal externality costs of nearly $2.4 billion.”
— A history of civil asset forfeiture tells how the British Crown’s attempt to encourage the Royal Navy to enforce trade restrictions and tariffs became so widely used in modern America.
— Summers and Sarin show that wealth taxes will take in much less than their proponents hope.
Apart from grading, reviewing, and my soon-to-be 5-yr-old’s birthday, that is…
– A good question from Don Boudreaux. “Assuming (contrary to fact) that American trade deficits do necessarily cause Americans’ indebtedness to foreigners to rise, why do you bemoan these deficits? Why not instead cheer them? … Being indebted to foreigners means that we Americans must repay these debts, which in turn means that we Americans must in the future work to produce more goods and services for export. Isn’t this situation precisely what you and other protectionists want? Isn’t a rise in the demand for American exports – especially a rise not derived from, or offset by, a simultaneous rise in American imports – your very ideal?”
– Speaking of protectionism, Tyler Cowen on Elizabeth Warren’s agriculture proposal: “a disappointment on two fronts: too wonky to be considered a purely political document, but not nearly wonky enough to be defensible in terms of substance.” It fails to understand inflation and food price data, calls for more protectionism, and doesn’t remove subsidies. He says he might be persuadable on a “right to repair” law, but worries about copyright infringement.
– One of the issues Ludwig von Mises himself, I am told, never fully settled in his mind was over patents and copyright. It seems a necessary evil to encourage innovation, but granting someone a government-sanctioned monopoly just grates the wrong way. Now we’ve got “patent trolls” to add to the mix, who do not innovate themselves but buy up patents to collect licenses and sue or threaten to sue others. A paper finds that patent trolls encourage more upstream innovation while discouraging downstream innovation.
– Why does Scott Sumner simultaneously support the Federal Reserve’s interest rate hike last year and expect a cut this year? As a market monetarist, he would like the market to dictate Fed policy and “the fed funds futures market forecasts a rate cut. … Because markets continue to forecast slightly below 2% inflation, even as the economy slows, the market forecast of an interest rate cut should be taken as evidence that a rate cut is probably needed at some point this year.” I also enjoyed the picture that goes with the article – he is an owl, neither a hawk nor a dove.
– There’s a dictionary, detailing how Africans speak about politics, including some fascinating idioms. “Three-piece suit voting” refers to supporting the same party for all elected positions. On the contrary, “skirt-and-blouse voting” means to vote for different parties for presidential and legislative elections.” Other enjoyable examples at the link.
– 538 has an interesting piece on the perceived fairness of kidney donation systems, and the real struggle that still exists trying to get people to accept slightly less-regulated systems (let alone actually compensating donors’ families).
– David Henderson: Occupational Licensing is a Bad Idea. Still. Really.
<Scene: A wood-paneled study where a smartly-dressed person sits reading aloud from an oversized King James Bible.>
“Isaiah 9:7 – Of the increase of government … there shall be no end… .”
<Our hero pauses, turns to the camera and deadpans.>
“You got that right, brother!”
Ethan’s post on “The Why of Religious Freedom” inspired me to add one more to his list of reasons why freedom of religion deserves special treatment and protection. The freedom of religion preserves other freedoms we hold dear. Even those who do not wish to belong to an organized religion or to hold strong religious opinions have their freedoms secured because of the protection granted to religious freedom.
Freedom of religion, the first freedom protected by the US Constitution’s First Amendment, is part of having freedom of speech. Imagine a country where you could say anything you wanted, except those ideas and principles you hold most dear to your heart. How free would you feel your speech actually is? If you have freedom of the press and can print any opinion or argument you care to, unless it is about your conscience, how free is your press? To say that you may express your political opinion and vote unless you have religious reasons for that opinion similarly denies the equal protection clause of the 14th amendment.
Freedom of religion is also a guarantor of freedom of assembly. This last weekend while in Atlanta for the Teaching Professor Conference in Atlanta, my colleagues and I toured Rev. Dr. Martin Luther King Jr.’s church and neighborhood. The civil rights movement for many years worked through the churches because it was the only place African Americans were freely allowed to assemble together in many areas. As they assembled, they had the freedom to speak out against the injustices and oppressions they faced and work together to overcome them.
As Rev. King put it, “Freedom is like life. It cannot be had in installments. Freedom is indivisible – we have it all, or we are not free” (The Case Against “Tokenism”). To extend that argument, when we say ‘freedom of religion’ it is the people who are free, free to believe how they will, to speak and gather and act according to their beliefs freely. In “The Ethical Demands For Integration,” Rev. King argued:
“A denial of freedom to an individual is a denial of life itself. The very character of the life of man demands freedom. In speaking of freedom … I am not talking of the freedom of a thing called the will [or in our case, religion]. The very phrase, freedom of the will [religion], abstracts freedom from the person to make it an object; and an object almost by definition is not free. But freedom cannot thus be abstracted from the person … . So I am speaking of the freedom of man, the whole man.”
If we cannot be free in our religious thoughts and exercise – whether connected with an organized religion or not – we cannot be a free people.
Today I’d like to write a few words of hope and encouragement to those who already understand liberty’s value. I read a speech from 1853 that stood out to me. It’s easy to be caught up in the daily news cycle and feel that liberty is constantly under attack and threatened at every hand, that every gain is clawed back as liberties are eroded one at a time. At times like that, it is good to step back and took a better look at the broader history of the world.
The speech I read was by a gentleman named Parley P. Pratt, an apostle of the Church of Jesus Christ of Latter-day Saints in the Utah territory. This was just a few years after the Mormons, including Pratt and his family, had been driven from their homes by mobs and by indifferent and sometimes hostile state and federal governments in the United States proper to find freedom and refuge in the Rocky Mountains. There they still held 4th of July celebrations, honoring the sacrifices for liberty their fathers had made. Pratt, by this point in his life, had traveled through England and parts of Europe, much of the US, Canada, and along the Pacific into Mexico, and met with many people from Asia as well – a remarkably well-traveled man.
Despite the very real failures of the government to protect their individual rights or redress their grievances, he spoke in praise of the Constitution. The main thrust of his address was that the cause of liberty would expand and someday fill the world:
The longer I live, and the more acquainted I am with men and things, the more I realize that … the Constitution of American Liberty was certainly dictated by the spirit of wisdom, by a spirit of unparalleled liberality, and by a spirit of political utility. And if that Constitution be carried out by a just and wise administration, it is calculated to benefit not only all the people that are born under its particular jurisdiction, but all the people of the earth … . It seems broad enough, and large enough, to receive and protect all that may be in any way deprived of the common rights of man. …. [The principles of the Constitution] embrace eternal truths, principles of eternal liberty, not the principles of one peculiar country, or the sectional interest of any particular people, but the great, fundamental, eternal principles of liberty to rational beings – liberty of conscience, liberty to do business, liberty to increase in intelligence and in improvement […]
There is a day coming when all mankind upon this earth will be free. When they will no longer be shackled, either by ignorance, by religious or political bondage, by tyranny, [or] by oppression (Journal of Discourses, Vol. 1, p. 137-143)
Pratt claimed this would not happen predominantly by revolution and violence, but by America being a beacon light to the world. He spoke of throngs of people who would sit in his day enjoying to hear of our freedoms, our institutions, and our scientific and cultural progress. He spoke of the immigrants coming to this country from all parts of the world specifically to find that freedom, and that once enlightened by being allowed to think and reason and act for themselves without the bondage of kings, state religions, or other powers they would blossom and rise up in greatness. Whether they eventually returned to their native lands or not, this would act as an “indirect influence … on those despotic nations” of Europe and Asia.
Recognizing that our liberty is remarkably multi-faceted, I will focus on the same categories Pratt mentioned. At the time he spoke, there were exactly 3 nations that were in some measure democracies, where at least some large percentage of the populace had the liberty of choosing their leaders. You can see for yourself how this has grown in the intervening 160+ years:
Billias’ 2009 work on how the principles of American constitutionalism were “heard round the world” shows that waves of influence gradually spread the principles of self-determination, liberty, separation of powers, and checks and balances into the freedom movements and constitutions of most of the world. Even while warning that the last ten years have seen declines in liberty overall worldwide, Heritage shows us that the last thirty years still show remarkable improvement:
From a time when the US was one of very few countries to legally protect religious liberty, today nearly three-fourths of all the countries in the world have a constitution that specifically protects freedom of belief, and two-thirds permit some religious proselytism – which preserves freedom of expression (Pew Global Restrictions on Religion). There is still much to do to improve and preserve religious liberty around the world, both in legally acknowledged protections and in fostering an actual peaceful society where religious groups are not subject to violence and persecution.
Despite the distance left to go, the cause of liberty has clearly moved forward in great ways in the last 160 years. Much as Pratt predicted, much of this was accomplished without great revolutions and civil wars, but through the power of example as free nations and free people proved themselves a beacon to the world. There is still good cause to believe in that fundamental converting power from setting the right example and allowing free people to govern themselves.
TL;DR summary: The one thing most populist governments studied had in common was a declining protection for property rights. Focus there next time.
Nicolás Cachanosky explained that populism in five Latin American countries had led to a rapid deterioration in their economic freedom, intimating that this also led to a relative drop in living standards compared to other South American countries. Given that the two primary economic strategies of populism are control and spend (Dornbusch and Edwards 1991 quoting Carbonetto et al. 1987), it would be shocking if a populist government did not reduce economic freedom. That’s the idea! However, there is more we could learn about how populism reduces economic freedom by doing a little more to identify exactly what it was that populist governments did. First, I think it’s useful to go a little further back, to compare how trends were looking before* populism (say by 1991) to how those trends changed with the election of a populist government. Second, I’m going to take a more careful look at how and why economic freedom decreased.
It is funny to me that when Cachanosky’s response to his first commenter is to ask for a definition and a measure before being willing to debate a correction; that suggests he really ought to have been more careful to define populism in his post. In fairness, that’s a tall order*: much of the literature on populism has been trying to define it and there is still no consensus as far as I can tell. Are we focusing primarily on increasing statism, whether it is called populism or progressivism or socialism or cronyism? Or is there something special about the populist brand of statism that we should be looking out for? To the extent populism is a “power to the people” movement, Libertarianism itself could try to appropriate the populist brand and claim they are taking power back from the government for the people! I don’t think this is what Cachanosky has in mind. :). I tend to think that he is focused mostly on statism and for the purposes of his post, it doesn’t matter whether it’s populism or socialism that caused it, so please assume when I say “populism” hereafter, I mean increased state control over the economy.
Even given that, populism/statism exists on a continuum. There is a marked difference between a determined populist government that nationalizes wide swathes of an economy rapidly in order to redistribute riches to the common people and someone in an unnamed developed country who uses populist rhetoric to get elected and keep his base happy only to turn around once in office and enact largely pro-business deregulations and strengthen conservative social mores.
Because of this, it’s important to make distinctions between the 5 countries in question (Argentina, Bolivia, Brazil, Ecuador, and Venezuela). To demonstrate that, let me focus on Argentina and Brazil. Mueller and Mueller (2012) contrast Brazil and Argentina’s responses to the global food price crisis in 2006-08, during this populist period in both countries. There have been very few checks and balances on executive power in Argentina, allowing the Kirchners to enact “opportunistic price controls and intrusive export bans, generating significant discontent and investment disincentives” (pg 3). In Brazil, the checks on the presidency to prevent a repeat of the late 80s/early 90s inflation led to “the surprising conversion of President Lula once in office in 2003, reneging the leftish policy agenda his party had defended for years in the opposition, only to continue the fiscally disciplined macroeconomic policies of his predecessor” (pg 5). These kinds of difference are very important to understand what happens and when and why.This table shows how Heritage’s Economic Freedom in the World survey ranked the five countries Cachanosky singles out as populist in 1995 when the survey started, the year when they elected a populist government, and 2015; I then add five other South American countries for comparison. 10 represents high economic freedom and 1 very low freedom. The astute reader will notice that I am using the raw scores rather than country rankings as Cachanosky does because I suspect it matters more for economic growth what happens within my country rather than thinking economic growth will collapse because a handful of other countries on other continents become more free while I stay put where I am: I will look worse by comparison, but not be worse.
To delve into the Argentina/Brazil comparison again, the survey shows Argentina scoring markedly higher than Brazil in 1995. This situation had already reversed itself by 2003 and the start of populism. Since then Argentina has continued to fall rapidly while Brazil has turned reversed its progress. Delving deeper into those numbers, Argentina has become markedly less free in terms of almost every category Heritage measures (respect for property rights in 2001-2003, government integrity 2006-2008, tax burden, government spending since 2011, business freedom in 2002, and monetary, investment, and financial freedom in 2003), while Brazil’s primary sin was an increase in spending in 2006 and an increase in taxes to pay for it. That’s it. This shows a real deterioration in Argentinian freedom before populism, a trend only continued and exacerbated by the Kirchners, while Brazil has shown both improvement and decline, with a much different, constrained form of policy making. Argentinian populism and Brazilian are far from the same phenomenon.
In Bolivia and Ecuador, property rights fell in 2001 and investment freedom by 2005 before populism in either country and both slid down steadily after electing a populist government; both countries have improved in government integrity, taxes got worse in Ecuador in 2008 with spending increasing massively in 2010, and financial freedom worsened after populism started. Venezuela saw the largest decrease in respect for property rights right after electing Chavez and again in 2008. In contrast to other countries, Chavez initially reduced government spending and kept taxes roughly constant, with spending not increasing again until after 2008. Business and financial freedom declined steadily, investment freedom plummeted in 2004, and monetary freedom only declined in 2014.
We see then five rather different patterns, even though most of them saw the same sort of decline of 1.2-1.4 points. The key feature in all but Brazil is the decrease in respect for property rights shortly after the election of a populist government. Spending also tends to be higher in these five countries, though all happened during the global food price crisis and the US/EU financial crisis when spending also increased by many non-populist countries as well. Otherwise, there is very little in common among the five countries, with some embracing freer trade and others fleeing it, some cracking down on monetary and financial freedoms with others largely ignoring them. Our five ‘control’ countries saw an improvement in economic freedom from 2005-201, particularly in Colombia. Colombia and Peru reduced their respect for property rights in 2002, but later repented; Paraguay has not held property rights in even modest esteem since 1998.
All of this suggests the place to look in future research is to the importance of declining respect for property rights among populist governments as a driver of economic freedom and economic growth.
And that brings us to the second of Cachanosky’s points – that this drop in economic freedom in those five countries led to shrinking economies compared to other economies in the region. First off, to be clear, all five of these populist economies experienced rapid economic growth during the time period in question, and this economic growth was much higher than the economic growth enjoyed in the decade before populism started. This would lead pro-populists to conclude that populism was actually quite good. Cachanosky admits that even though Argentina fell farther in the economic freedom rankings than its peers, its GDP/capita actually increased. He excuses this as being “largely explained as recovery after the 2001 crisis and by consuming capital stock, not as an expansion of potential output.” Unfortunately for his story, Argentina’s GDP/capita in terms of real USDollars not only surpassed its pre-crisis level (around $12300 in 1998), but rose to $17500 – a 42% increase during its populist period. (All numbers from www.gapminder.org are PPP$ inflation-adjusted.) In every single case he cites, GDP/capita rose while the headcount poverty rate fell dramatically.
However, compare their growth to the five control countries, and compare the time period before and after in each case:
|GDP/cap (PPP$)||Growth||poverty (% below $3/day)|
|GDP/cap (PPP$)||Growth||poverty (% below $3/day)|
The 2003-2015 period was good across the board in South America, with most growing at least 30% more from 2003ish-2015 compared to 1991-2003. Similarly, poverty rates fell markedly from 2003-2014 in every country for which I have Gapminder data. So the claim is not that populism resulted in negative economic growth. The issue is that the average growth in the non-populist countries was around 1% per year higher than in the populist countries. Thus, to the populist-supporter who points to the high growth of Argentina et al as proof that populism works, the response is that growth was even higher in their non-populist neighbors and poverty is lower in them as well.
Now the unfortunate thing for drawing a clear causal interpretation from these correlations is that economic growth was also higher in the non-populist countries in the before period as well, perhaps due in part to having higher economic freedom to begin with. Growth in the freedom-preserving countries was slightly more than 1% per year higher, and that is driven predominantly by Chile. If Chile had had a more average 11-13% growth during that time period, we would be able to show more conclusively that the economic growth gap increased after populism. So, really, the claim that populism caused a lower economic growth in those countries doesn’t hold up very well – economic growth was lower in those countries before populism as well. It may well be that economic growth would have been higher in Argentina, Bolivia, Ecuador, and Venezuela had they maintained or improved their respect for property rights, but the raw data doesn’t tell us that without significantly more controls and doing some proper regressions.
* – One of the problems of this exercise is that to get “before” populism, you need to go back a hundred years or so. Ah well.