Bryan Caplan

Why Are Free Market Economists Skeptical About Stagnation?

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The most interesting question to come out of Tyler's Great Stagnation debate is: Why are free-market types so hostile?  Early on, Tyler remarked:
I do not hold the view that relative stagnation will last forever, only that it has lasted for thirty-seven years and that it will not end immediately.  Oddly, it is the so-called "economic right" -- which complains bitterly about decades of increasing taxes and regulation and litigation and government privilege -- which finds such a claim hardest to accept.
In a follow-up, he challenged me personally:
[I]t is more than strange for Bryan to think that the earlier era, with the federal government at less than five percent of gdp, and open borders, did not have much higher growth for the typical family! You are the one caught in a contradiction, not I.
There are two separate questions here.  The first is psychological: Why does Tyler's thesis upset free-market types?  I think my post on the "Stages of Libertarian Denial" offers a good explanation.  Most people imagine that governments are here to solve problems.  Libertarians' psychologically easiest response is stage #1: to deny the problems' existence.  Only if this initial denial fails do libertarians gravitate to stage #2: to blame the problems on government.

I'm the first to admit that there's something fishy going on here.  As I wrote a while back:
[P]essimistic bias undermines whatever people perceive as the status quo. In the U.S., people (bizarrely) perceive laissez-faire to be the status quo, so pessimism helps government grow. But in places where government is the status quo, pessimism can and often does push in the opposite direction.
When I was in Sweden, locals told me that even in this beacon of the Third Way, pessimism and support for more government go hand-in-hand.  Why?  Because Swedes have the chutzpah to frame their status quo as "laissez-faire, more or less."  I bet that many free-market types resist Tyler's stagnation thesis simply because they reverse the Swedes' error.  Score one for Tyler.

Ultimately, though, free-market types are right to scoff at pessimism.  Why?  Because pessimism is just factually in error.  Is growth a little slower than it used to be?  Maybe.  But it's amazing nonetheless.  I'll never forget one of the greatest books ever written on this topic, Cox and Alm's Myths of Rich and Poor.  It's deeply convincing - and I have no doubt that if they updated it to include the last decade, their story of long-run progress would remain the same.  Once you know about evidence like this, painting bleak pictures and trying to blame the government loses all intellectual appeal.

This isn't the first time Tyler's tried to sell pessimism to libertarians.  Just last year, he was pushing "food pessimism."  My response generalizes:
I suppose that if I cared only about advancing liberty, I might want to engage in - or at least remain silent in the face of - food pessimism.  But I don't just want to advance liberty; I want to advance it honestly.  And in all honestly, I'd bet against food pessimism in a heartbeat.
In Tyler's case, unfortunately, it's hard to get a bet on the table.  Not only does he deny his duty to bet on his beliefs.  There's also a major disconnect between his big picture rhetoric about the Great Stagnation - where I know we disagree - and his specific claims about the facts - where I'd need to spend a month crunching the numbers to weigh in.  Until I get a spare month, all I can say is that even if Tyler's right, he's wrong.


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COMMENTS (9 to date)
volatility bounded writes:

The reason that median worker's wages stagnated IS due to government interference in the marketplace. The deduction for employers encourages the use of third party player health care programs, so the government has been diverting the median worker's compensation gains into health care.

If workers don't like this result, they ought to lobby for employers giving them cash instead of health care benefits, so they can choose to buy none or less expensive health care. Consumer pressure against doctors, hospitals, and drug companies is the only thing that prevents excess health care inflation. It's the reason that cosmetic health procedures that are not paid for by health insurance face price pressure: the patient themself pays for the procedure, so they shop around and only pay if they think they're getting a good value.

Chris Koresko writes:

Conservative thinkers have recognized a pattern that starts with a strong, purportedly scientific claim that a serious long-term problem exists, inevitably followed by calls for a bigger and stronger government which can intervene to solve the problem.

Statistics showing an increasing spread in median household incomes have been widely published, usually in articles that imply, or even state outright, that this demonstrates that the free market economy is deeply unjust and that government redistribution is the answer. This has happened so often that a lot of people now react to such claims reflexively with either support or criticism, depending on their political leanings. It's perhaps unfortunate that Tyler's new e-book has gotten categorized this way.

NB: The median-income statistics are far from being the only example of this. My favorite one is AGW (Anthropogenic Global Warming). It's another case of heated arguments over models and statistics between those who see in them a chance to advance a Progressive agenda and those who seek to resist it. The truth or falsehood of the AGW claim appears to be secondary to both camps.

SteveV writes:

Wow, as for your 2 proposed stages of "libertarian denial"... I think you forgot the single most important one:

- Deny that government has the moral right to tell individuals what to do.

I think you've made a lot of false stereotypes about "free market types". They are different folks with different personalities and educational backgrounds who agree with the statement above. Some are optimistic, some are pessimistic.

Matthew C. writes:

Unfortunately, the free market died somewhere around 2008. All we have left is this pretend market, dirigeste economy.

The worst example of this is the stock market, where the central bank and its crony banks are deliberately manipulating stock prices higher via abominations such as "QE2" where the Fed gives free money to the primary dealers via rigged front-run auctions in exchange for the primary dealers buying the market.

The ostensible idea is to kick-start the economy via the "wealth effect" and secondarily to absorb the insane issuance of treasury debt.

Of course, this insane monetization of the Federal debt is driving unprecedented amounts of commodity inflation as the endless torrents of free money chase assets higher, causing hunger and revolutions around the world.

The economy of 2011 is doing fantastic if you live in or around the beltway, or work on Wall Street. At least until $5 gas prices bring the entire economy crashing to the ground again.

Steve Horwitz writes:

I think this is exactly right:

"Ultimately, though, free-market types are right to scoff at pessimism. Why? Because pessimism is just factually in error. Is growth a little slower than it used to be? Maybe. But it's amazing nonetheless. I'll never forget one of the greatest books ever written on this topic, Cox and Alm's Myths of Rich and Poor. It's deeply convincing - and I have no doubt that if they updated it to include the last decade, their story of long-run progress would remain the same. Once you know about evidence like this, painting bleak pictures and trying to blame the government loses all intellectual appeal."

And I heartily endorse Cox and Alm's book as well.

NL writes:

I think a big part of the libertarian aesthetic is lack of revulsion towards the world, and a basically optimistic disposition towards people. A world in crisis, danger, depression, or moral decrepitude is a world crying out for smart and powerful people to intervene.

Sure, there's a slam-dunk pessimistic case for libertarianism: If people are stupid, evil, or selfish, then the only way we'd trust people in government is if some people are just innately more moral than others. Historically the way to differentiate the good few from the wicked many is racial, ethnic, income, education, or whatever. That sort of prejudice is unpopular today, for good reason, so we don't have a handy way to decide who is righteous and who is not. The result should be that none of these evil human beings should be trusted with much power to rule the rest of us evil human beings.

But fundamentally, optimism goes really well with libertarians, who love to marvel at what humanity has created. Libertarian economic blogs are always posting links to various videos and graphs showing the amazing economic progress that has been achieved over the last XX years.

It just fits with the style and theme:
- people are basically smart and competent despite the obstacles in their way;
- things tend to improve pretty impressively because of human ingenuity; and
- life in general doesn't need rigid organization from the top down to achieve positive results.

This doesn't mean that bad news never happens, or that I can never accept it. But my inclination is skepticism, and the skepticism is roughly proportionate to the claim. Assert something about 3 or 4 decades of economic history and I'm likely to have a heaping dose of it.

SteveV, he actually wrote six stages of libertarian denial, not two. Follow the link.

Stage 5: ... claim that the libertarian principle is more important.
The stages are basically: 1. there is no problem, 2. the government caused the problem, 3. government would make it worse, 4. government action would cost too much, 5. government action violates freedom, 6. government action is needed but must be narrow.
Keith Eubanks writes:

"[I]t is more than strange for Bryan to think that the earlier era, with the federal government at less than five percent of gdp, and open borders, did not have much higher growth for the typical family! You are the one caught in a contradiction, not I."

One point often overlooked. Back in the days of small government (less than 5% GDP), the population growth rate was higher than today. Per capita economic growth rates are not that different, but population growth rates are different: i.e., today's rates are lower than before (by about a percentage point).

This means with more workers today, we save less, invest less and grow the economy less per worker than did our counter parts 100 years ago.

Jeff R. writes:

Considering the list's Yes Minister pedigree, what happened to the "Government action might have done something earlier, but it's far too late for it now" stage?

John in Fly Over Country writes:

Will add Cox & Alms book to my must read list.

I recommend Matt Ridley's "The Rational Optimist" as an uplifting view of man's historical progress, and a positive outlook on our unknowable (yet most likely better) future.

Ridley cites free exchange and continual contact with other cultures as the wellspring of innovation and growing prosperity.

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