Arnold Kling  

Morning Commentary

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1. The New York Times editorializes,


Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort.

When the New York Times entitles an editorial "The Truth About..." what it really means is "the liberal elite narrative about..."

The narrative is that we are suffering from a shortfall in demand. The reality is that the private sector has decided that workers should be hired on the basis of profits, rather than on the basis of debt. The government may choose to make a different decision, of course, but that will not necessarily strengthen our economy.

The editorial continues,


To truly tame deficits will require serious health care reform

Is this the truth? In Washington, serious health care reform means "fixing" private health insurance. But our deficits are caused not by problems in private health insurance. They are caused by the structure of Medicare and Medicaid. That is where we need reform. But the Times and other liberal mouthpieces need to create a narrative that makes it sound as though unsound government programs are the fault of the private sector.

2. Tyler Cowen writes,


When it comes to the big issues, voters at the midpoint usually get the policies, if not always the exact outcomes, they want. In the federal budget, the largest line items include Social Security, Medicare, Medicaid and military spending -- all very popular programs. The interest on the national debt is mounting because we don't like paying higher taxes now for all those benefits, so our government borrows to postpone the pain.

In the immortal words of Pogo, we have met the enemy and he is us.

Take a look at the top ten countries in the economic freedom index. Then look at the top ten countries by population. The United States is the only country in both lists, and at the rate things are going we will not be in the top ten in terms of economic freedom much longer.

My reading is that there are serious diseconomies of scale in governance. The larger the polity, the worse the ability to govern. Yes, some small countries are very un-free, but the most-free countries are all small. Of the other countries in the top ten in terms of economic freedom, Canada has the largest population, and it is barely more than 1/10th of ours. My impression is that Canada also is less centralized than the U.S., with more autonomy in the provinces.

Several readers have asked how one can prepare financially for a collapse of European currencies. Perhaps in the short run the U.S. dollar will be helped, but I would be thinking in terms of securities from countries like Canada, New Zealand, Singapore, and Switzerland.

Ultimately, I think that democracy is a very unreliable friend of economic freedom. The ability to vote with your feet is more valuable than the ability to cast a ballot. The trend in the U.S. is toward giving people less power to vote with their feet, as power becomes more centralized. If the median voter would like more decentralization, that is one message that is not getting through.


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CATEGORIES: Political Economy



COMMENTS (12 to date)
david writes:

The median voter is pretty bad at ensuring international mobility, too.

(I note that countries higher on the Index can have expansive government without losing economic freedom - Hong Kong owns much its real estate. Singapore has GIC and Temasek Holdings. And, well, Canada remains solidly to the left of its southern brethren.

You can posit that Singapore and Hong Kong behave like small competitive multimillion-employee corporations (and you wouldn't be the first to accuse these city-states of being so). But Canada?)

Greg Ransom writes:

This is part of the "libertarian" argument for open borders and mass immigration of the world's poor to American, just how?

"My reading is that there are serious diseconomies of scale in governance. The larger the polity, the worse the ability to govern. Yes, some small countries are very un-free, but the most-free countries are all small."

kevin writes:

Canada is no longer to the left of the US in aggregate. They have smaller government, fiscal sanity, more net Negative Liberty, AND more Positive Liberty. Canada is just a very well managed country. Though I do wish they had a 1st amendment like ours.

Jayson Virissimo writes:

"And, well, Canada remains solidly to the left of its southern brethren." -david

I think this was probably true a decade ago, but not anymore.

Prakhar Goel writes:

Dear Arnold,

"My reading is that there are serious diseconomies of scale in governance."

I would agree if the above statement was limited to democratic governments. In democratic governments, special interests can get away with more because the negative effects are spread over a larger working population.

However, consider the fact that the Tsars of Imperialist Russia rule for quite some time while ensuring a remarkable amount of freedom (for those times) -- see Catherine the Great, etc....

GU writes:

Greg Ransom has a very good point. More people will tend to decrease the U.S.'s quality of governance—so why so ra-ra for immigration?

Milton Friedman was correct: immigration would be great if we had a libertarian state, but in the state we have, we should be a lot more cautious. (This is a very rough paraphrase)

My take on why many prominent libertarian bloggers are vocally pro-immigration: the primary reason is it's a way to pre-empt charges of racism. All conservatives/libertarians will at some point be called "racist," and having a history of cheering for immigrants is nice "evidence" of non-racism.

The secondary reason is the (academic) economic arguments in favor of immigration. The assumptions these models make are very naive though, and if you take Arnold's political economy seriously, false.

Lord writes:

The private sector may have hired on the basis of debt, but I am fairly confident that was not their intention. The question is whether those will be real profits or imaginary ones.

Medicare and medicaid has experienced slower growth than private insurance insurance and while some blame this on them, this seems highly questionable. If they need reform, private insurance is even more likely to need reform.

Far from power becoming more centralized, centralized power is becoming more impotent. That is good for the status quo and for the promulgation of crises, for freedom, not so much.

Daniil Gorbatenko writes:

2Prakhar

As a Russian, I can only wonder where you got the idea that tsarist Russia was some kind of a free society.

During Catherine the Great's rule, what actually happened was just the opposite to what freedom implies. The enslavement of the majority of the population had been completed. The great Russian serfdom took its final shape.

It is funny to see Liberal theory promote materialism. They say that there is a bad economy because people aren't buying enough(!). I thought Liberalism was about cutting back, small footprints, living minimally upon the land, eating grain - not beef, and growing your own vegetables.

Now they are saying we can only be wealthy if we all get out and buy, buy, buy. But, not too much, because that would be conspicuous consumption. And, no dessert, because it is bad for your weight and raises the cost of healthcare.

They excoriated G.W.Bush after 9/11 for asking people to shop as usual, to maintain the economy. Now, they agree with him.

For the record, Bush was wrong, the Liberals are wrong, and Keynes was wrong.

- -
People do not prosper because money moves around or stops moving around. The money is the result of an efficient management of labor and resources to produce what people want (can pay for). Building more houses did not make the society rich, because many people couldn't pay for them. The government got us into a mess because they encouraged everyone to buy a house, no matter what.

I think the most destructive illusion in government is that they can create prosperity by increasing spending.

The government sees spending and prosperity, and decides wrongly that spending causes prosperity. It then decides to increase spending by any and all means, even if it needs to take the money now or later from some people, to give it to others.

I get it. People use umbrellas when it rains, so using umbrellas causes it to rain.

Sad to say, this is a type of Cargo Cult centered around money. John Maynard Keynes is the shaman of this cult.

Cargo Cult Economics

JohnJ writes:

I included your thoughts along with some excerpts from James Madison and Montesquieu, discussing why a republic must be limited in area, and how the Senate was originally supposed to protect against centralization of power in one large republic: http://repealthe17thamendment.blogspot.com/2010/02/madison-montesquieu-and-arnold-kling.html

[Full URL replaces shortened version.--Econlib Ed.]

Paul writes:

I suppose I am considered poor. I already have too much stuff. Too much food, too many tools, two cars( albeit crappy ), cloths I haven't worn, or wear infrequently.

Yeah, my spending is down. A bit. Why is that a problem, and not a good thing? I see a shift change needed and coming. By saving I am putting liquid cash into the investment system where better educated people can fund the next economy.

The gooberment funds crappy GM. High cost low quality unions. Road work that doesn't need to be done, at all. And, the left says I'm the problem?

Please.

Jeremy, Alabama writes:

Government is the spender of last resort. Also, first resort, and every other resort, to the uttermost limit, without regard to the prevailing economic circumstances.

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