Tuesday 30 April 2013

Misleading Statement Hunter: Round 1


1. From Michael Norton and Dan Ariely, Building a Better America – One Wealth Quintile at a Time, Association for Psychological Science, Abstract:

“Disagreements about the optimal level of wealth inequality underlie policy debates ranging from taxation to welfare. We attempt to insert the desires of ‘‘regular’’ Americans into these debates, by asking a nationally representative online panel to estimate the current distribution of wealth in the United States and to ‘‘build a better America’’ by constructing distributions with their ideal level of inequality. First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: All demographic groups—even those not usually associated with wealth redistribution such as Republicans and the wealthy—desired a more equal distribution of wealth than the status quo.”

Response: These results are perhaps interesting as a factual description of public opinion, but they should not, as I think many people would be inclined to, be interpreted as any kind of argument in favour of egalitarian wealth confiscation and redistribution. Most “regular” Americans are utter illiterates when it comes to economic theory and the “regular” people of almost every other country in the world as well. Most don’t even realize that the government printing money is what causes the inflation that has been a constant feature of all modern economies since World War I. Given this, one would not expect them to realize the negative effects that egalitarian wealth redistributions would have, or realize that most of this wealth, while owned by rich people, is actually invested in business ventures to best serve them, the ordinary consumers. Not learning economics is fine, provided that your economic views do not affect the formulation of economic policy. As such, “regular” people’s economic views on wealth inequality, and whether most desire “a more equal distribution of wealth or not”, is based on an incomplete picture of the costs and benefits of such a policy due to most people’s ignorance of economic theory, and as such does not constitute any argument in favour of such policies.      


“The era of globalisation between about 1980 and the early 2000s was characterized by extreme financial liberalization in comparison with the 1945–1980 period of tight and effective financial regulation.”
And:
In the case of the US, we can point to a number of important acts of financial deregulation that were the direct causes of the [2008] crisis”

Response: These two statements are true, as far as they go, but while avoiding the error of commission, they commit the error of omission. Not mentioned is the fact that the financial industry, and the banking industry in particular, throughout the modern world, including in the US, does not at all run on free-market principles. Rather, in the US, the members of a banking cartel, headed by the government-linked central bank called The Federal Reserve, are protected from bankruptcy and are encouraged to inflate the currency and reap the benefits. The big firms in the financial industry are some of the main beneficiaries of these easy money inflationary policies, and as we saw in 2008, apparently have the privilege of being ‘bailed-out’ should their wild speculations based on easy money illusions turn sour in the face of reality. The banking and financial industries in the US are not paragons of free-market capitalism, but of crony capitalism, where the State heavily favours certain market participants and corporations with special privileges attained through coercion. Given this reality, perhaps ‘deregulation’ was a bad thing, as it could well have led to even more reckless behavior on the part of banks and financial institutions. But rather than trying to walk the policy tightrope between imposing hampering, inflexible financial regulations and letting the crony institutions run wild with their government privileges, why not just restore the best system of regulation of all, the free-market system of profit-and-loss, success and bankruptcy? (See: http://thinkingabouthumansociety.blogspot.ca/2013/03/a-superb-regulatory-system.html)
     
3. From Paul Krugman, “Myths of Austerity”, http://www.nytimes.com/2010/07/02/opinion/02krugman.html?ref=paulkrugman:

“For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity.”
And:
“And real-world policy — [austerity] policy that will blight the lives of millions of working families — is being built on that foundation.”

Response: In recent economic policy debates, there has been a misleading use of language running rampant, the use of the word ‘austerity’ to describe the economic policies of certain countries like Britain, Ireland, and sometimes even the US! Also, the economic policies that EU leaders allegedly seek to ‘impose’ on troubled countries like Greece, involving tax increases and spending cuts to pay back their sovereign debt, are also labelled as ‘austerity’. To a genuine supporter of the free-market such as myself though, this represents a misleading abuse of language. Let us take Britain: the alleged poster child of ‘damaging austerity in the wake of an economic crisis’. According to the data Sean Rosenthal in this article (https://mises.org/daily/5939/Krugman-and-British-Austerity) gathered, this government ‘austerity’ consisted of raising tax rates significantly and barely cutting government spending at all. Spending as a percent of GDP fell from the mammoth 51.1 percent in 2009 to the hardly-less mammoth 49.8 percent in 2011, still significantly higher than the also-mammoth 43.9 percent of GDP the leftist Labor government was spending before the 2008 crisis. I don’t know what such a policy should be designated as, but ‘fiscal austerity’, with its implications of a free-market policy intended to shrink government’s role in the economy significantly, is an utterly misleading label. Part of it stems from the  Keynesian idea that one should never, ever cut government spending in a ‘recession’, no matter how much of the economy it is currently engulfing or how wasteful the spending appears to be. Thus, any proposal to cut government spending at all, and even the failure to increase government spending fast enough during a depression is labelled ‘fiscal austerity’ by the Keynesians. For the ordinary reader, unencumbered by Keynesian theories though, the term is downright unhelpful and fraudulently misleading.    

4. From Paul Krugman, “Myths of Austerity”, http://www.nytimes.com/2010/07/02/opinion/02krugman.html?ref=paulkrugman:

“What’s the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? (By the way, this is precisely the doctrine expounded by Herbert Hoover in 1932.)”

Response: Though from the same article as the previous misleading statement, this misleading statement is not about ‘fiscal austerity’ per se, but about the historical economic policies of US President Herbert Hoover. According to Keynesian mythology, Herbert Hoover was a doctrinaire free-marketeer who, when the Great Depression hit in 1929, misled by his outdated laissez-faire views, refused to intervene. The results were disastrous, and it took the free-spending President Roosevelt and his New Deal, and ultimately World War II, to lift the United States out of the Great Depression. For a book-length refutation of this utterly false account of the economic policies pursued by the Hoover administration in the face of the Depression, I would recommend Murray Rothbard’s America’s Great Depression, available for free here: http://mises.org/document/694/Americas-Great-Depression. Basically, Rothbard points out how Hoover actually originated many of the big-spending, interventionist policies that are typically associated with Roosevelt’s New Deal, had always been a fan of government regulation of business, and cajoled business’s into not reducing the wages of their workers in the face of the Depression and the monetary deflation, which in turn led to mass unemployment. For the busy reader though, I would point to Franklin Roosevelt him self’s indictment of Hoover’s economic policies when he challenged him in the 1932 election: "I accuse the present Administration of being the greatest spending Administration in peacetime in all our history." That’s right, Roosevelt’s criticism of Hoover wasn’t that he was a laissez-faire ‘liquidationist’ as Keynesians would have you believe, but that he was a big spender, the biggest peacetime spender in fact! That Roosevelt would, after the election, completely change his policy orientation from that put forward as his campaign platform and proceed to surpass Hoover in economic interventionism and government spending is only a testament to Roosevelt’s political duplicity, not to Hoover’s credentials as a ‘laissez-faire liquidationist’ who favoured ‘fiscal contraction’.           

5. From Paul Krugman, “The lost generation”, http://krugman.blogs.nytimes.com/2009/11/05/the-lost-generation/:

“the best quarter-century of growth America has ever experienced, the postwar generation — which happens to be the era during which many of the founders of neoconservatism came of age! — has gone down the memory hole. After all, it’s impossible that living standards would double under a regime of high marginal tax rates, generous minimum wages, and strong unions. So it just didn’t happen.”

Response: Krugman is here implying that it was the high marginal tax rates, generous minimum wages, and strong unions that caused the postwar quarter-century to be the fastest period of per capita GDP growth in American history. He does not actually offer a plausible, logical explanation for why high taxes, generous minimum wages, and strong unions would lead to rapid economic growth, nor does he refute the explanations of free-market economists of why these things would retard, not strengthen, economic growth and lead to unemployment. Rather, he commits the grave epistemological mistake of trying to refute logic with statistics, taking a correlation and assuming it equals causation without any theoretical explanation for why it should. In the spirit of Krugman’s logic-free empiricist methodology, I will offer a few relevant correlations of my own:

1. In the post-war years, marginal tax rates may have been high, but few people actually paid those tax rates. Government revenue taken in as a percent of GDP was actually lower in Krugman’s vaunted 1950s and 1960s than in the proceeding decades, as this chart shows: http://www.usgovernmentrevenue.com/downchart_gr.php?year=1950_2008&view=1&expand=&units=p&fy=fy12&chart=F0-total&bar=0&stack=1&size=m&title=&state=US&color=c&local=s

2. Leftists like Krugman are always going on about how government should regulate private businesses. But in the 1950s and 1960s, government regulations were cranked out at a significantly slower rate than in the proceeding decades, as this chart shows: Page 17 of: http://cei.org/sites/default/files/Wayne%20Crews%20-%2010,000%20Commandments%202012_0.pdf 

3. While the US economy did indeed grow very quickly in the 1950s and 1960s, it also grew very quickly and probably in even more life-changing ways from 1865-1914. As Robert Higgs, in his detailed empirical study of the period, The Transformation of the American Economy notes: “The economy grew spectacularly in the half century following the war. Real GNP per capita advanced at an average rate of 2 percent per year, and on the eve of World War I it stood at about three times the 1865 level”. The governments of this period are ones that, by the standards of today, would be considered radically libertarian, and there were barely any economic policies that one would today recognize as ‘Keynesian’ to speak of.  

4. While private sector unions were indeed more prevalent in the 1950s and 1960s than they were in proceeding decades, they were legally strongest in the mid 1930s in the midst of the Great Depression with the passage of the pro-union Norris-Laguardia Act and Wagner Act in 1932 and 1935 respectively. The Taft-Hartley Act of 1947, passed despite the attempted veto of Democrat President Harry Truman, took away some of the special privileges granted to labour unions in the 1930s by restricting the kinds of coercive strike-actions they were allowed to engage in. Could we not say then that the period characterized by the strongest labour unions was the 1930s, while the 1950s and 1960s were only characterized by moderately strong labour unions?

5. We must not forget that Medicare and other social welfare policies associated with Lyndon B Johnson’s ‘Great Society’ program, beloved of contemporary leftists, were only really introduced in 1965, near the end of Krugman’s postwar rapid period of growth. The programs were not repealed, but expanded under the Nixon and Ford administrations in the stagnant 1970s, and most of them have survived until this day.

6. The monetary system in place in the postwar period until 1971 was the Bretton Woods System, a system tied very loosely and precariously, but tied nonetheless, to some kind of gold standard, for the US dollar at least. If the 1950s and 1960s were so great, then, according to the crude empiricist methodology, couldn’t we assert that the last vestiges of the gold standard helped make this period more conducive to economic growth than the proceeding decades, where the monetary system lost all ties to gold and became a purely fiat system?    

6. The general leftist narrative is that everything was great in the allegedly statist/leftist postwar period, but all went to hell with the ‘Reagan Revolution’ in the 1980s and the rise of ‘free-market neoliberalism’ as the dominant economic ideology. Besides misleadingly implying that the period from the 1980s to the present has been one characterized by free-market principles and the lack of government intervention, which is completely false as point #1 and point #2, among other pieces of evidence, suggest, this narrative also seems to forget that the economically stagnant 1970s happened. If the policies of the 1950s and 1960s were so great, why did they not continue to have great results in the 1970s, before the evil Ronald Reagan and his allegedly ‘free-market’ revolution struck?
           
           If we were to use Krugman’s rhetorical strategy, given these correlations, couldn’t we just as easily assert that 1950s and 1960s prosperity was due to less revenue collected by the government, less economic regulation, less powerful labour unions than there had been in the terrible 1930s, the relative lack of extensive social welfare programs, and the last vestiges of the gold standard being in place? How do we reconcile Krugman’s statist interpretation of the postwar period with the fact that a relatively libertarian period in the late 19th century also resulted in rapid economic growth? How do we account for the economically stagnant 1970s, which witnessed no real changes in the policies Krugman lauds, being before the dreaded ‘Reagan Revolution’?
            
           The point is that historical periods, based on the ‘facts’, can often be interpreted in many different ways, some diametrically opposed, and whether we accept an interpretation as true or not must be based on some kind of logical theory, not just on correlations masquerading as causations. Mount Vesuvius erupted in 79 AD, utterly destroying the Roman city of Pompeii. An exceptionally prosperous period in Roman/Ancient History was to follow. Here is a correlation, so according to logic-free empiricism, couldn’t we seriously consider the proposition that the eruption of Vesuvius caused, and was not just correlated with, the subsequent century of unusual prosperity? If we employ logic to evaluate this theory though, we must find it preposterous: how can a destructive volcanic eruption cause a century of empire-wide prosperity? We must conclude that the prosperity happened despite the volcanic eruption, not because of it. Though not quite as absurd, a similar argument could be used against Krugman’s attempt to use the historical record of the 1950s and 1960s to ‘prove’ that high taxes, powerful labour unions, and high minimum wages lead to prosperity. Someone armed with free-market economic theory would, rather, conclude that the prosperity happened despite these generally economically harmful policies, and look for explanatory factors for this prosperity elsewhere, which are not too hard to find if one is really looking.                                      



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