Monday, August 09, 2010

Director's Law Repealed

An interesting issue is why doesn't the bottom 51% of a democracy simply expropriate the rich every couple of years. The Constitution is subject to considerable tendentious interpretation (the 10th Amendment, the right to privacy). In this video, Friedman states that it is a common myth to think the government takes from the rich and gives to the poor. He mentions Director's law--really an empirical tendency in the US circa 1960--that the rich and poor pay for programs to the middle class.

A bottom 51% coalition isn't effective because they are not as skillful at political activity: someone has to write the speeches, write initial checks, and those people usually are above average in economic standing. The top 51% would be a good coalition, but as the top 10% make so much money they are ripe for expropriating. Thus the most logical coalition in Friedman's argument is from the lower middle class to the upper middle class, feeding off the the very rich and very poor.

As depressing as Friedman's argument may be, there are worse things than tyranny of the middle class: a coalition of the elites with the lowest classes. We have legislators bestowing all sorts of sinecures, pensions, and welfare on the masses, creating a coalition of the unproductive, and they grow in popularity and power by granting more entitlements. The end game is bankruptcy.

We have replaced Say's Law--that supply creates its own demand--with the Liberal's Law--that demand creates its own supply. Thus, Krugman contemptuously ridicules Paul Ryan's proposed budget because it freezes discretionary spending in the future, as if this modest fiscal restraint is insane. How is this sustainable? In a private company, if you are losing money you cut until revenues meet expenses, whereas in government that's illogical via the sophistry of macroeconomics. All good liberals presume any spending (a component of Aggregate Demand) is a good idea in times of higher than average unemployment. What or how it is spent is not of any importance. The fact that debt is created is presumably irrelevant, because if the markets lends us the money, it must mean it's prudent. The thought of having government get out of the way to promote growth is considered stupid and mean.

So, we can increase the size of the Transportation Safety Administration even though they spend all day looking out for signs of the repeat of a crime that will not happen again anyway, a lot like the way our financial regulators analyze financial practices. They will look closely at arrow-heads in the pockets of 11-year old boys, as the did to my son recently who was taken aside and given a serious work-over for this transgression (he was literally crying during the interrogation). These do-nothings are not adding to our nation's wealth or safety, but they are creating permanent liabilities and voting union members.

If you read Roman history, you see the constant struggles between the patricians, equestrians, and plebeians, questions about who is considered a citizen, and finally the apotheosis of the Emperor. There was a general trend from an aristocracy that built the Republic, to the end where a god-like emperor ruled with the support of the masses who were placated with free grain and big coliseum events. It was a barbell strategy, and was unstable, always extending.

A cardinal mistake in the last expansion was to presume that merely because lenders would give home buyers money it was a good idea. Even after the defaults you hear people excuse the home buyer who put nothing down as if he's the victim (current muni-bond and sovereign debt salesmen take note). Similarly, the US is currently borrowing at record peacetime level, and the solution to our problem seems to have the government spend more. As anyone with some fiscal discipline knows, you don't buy something merely because you can, bills must be paid.

So, perhaps every society has a different optimal coalition at various times, and currently I don't see what will keep it from bringing everything down to the coalition of a few elites, sincerely deluded as to their belief in the virtue of government spending, combined with a vast entitlement mob at the bottom, all literally feeding off the middle class. It sounds a lot like South America.


DorsetDipper said...

guess you've read Amy Chua "World on Fire" ...

Anonymous said...

All true. But the ultimate question is, can we make some money off of this problem?

Dave said...

"It sounds a lot like South America."

Given some of the prudent policies practiced by South American countries such as Brazil and Chile in recent years, referring to "South America" in this context is a little too broad. Friedman himself influenced some of Chile's economic reforms made during the Pinochet era that have been kept in place by its subsequent administrations.

Brazil current president, of course, won (twice) by appealing mainly to the poor, but Brazil has a huge advantage over us: its poor have much lower expectations of state support and it's a lot cheaper to buy their votes than it is to buy the votes of poor Americans. So Lula got a lot of traction for relatively little money with his Bolsa Familia stipends for poor parents sending their kids to school, etc.

Patrick R. Sullivan said...

Say's Law is that supply is (implicit) demand.

Dave, Friedman only met with Pinochet once, for about 40 minutes. His advice was merely about how to stem to terrible inflation Chile was then suffering.

Arnold Harberger, Friedman's U of C colleague, was the man running the graduate program that trained many Chilean economists (including some who worked for Allende). He was the person most responsible for Chile's more sensible economic policies of the 70s and 80s.

Dave said...


Thanks for the correction/elaboration.

TJ said...

"Krugman contemptuously ridicules Paul Ryan's proposed budget because it freezes discretionary spending in the future, as if this modest fiscal restraint is insane. How is this sustainable?"

Government can choose one of two options:

1) The government can reduce spending at the same time as households and businesses (which is what Ryan's plan amounts to), resulting in a fall in aggregate demand and concomitant rise in spending due to increased welfare provision and falls in tax revenue due to falls in GDP.


2) The government can borrow to increase spending, thus stimulating demand and increasing GDP, thus increasing tax revenues, allowing the government to service the debt it has incurred.

"In a private company, if you are losing money you cut until revenues meet expenses"

Clearly you have never worked in a high-tech startup.

Many businesses "lose" money for years before they start making profits. They borrow money to invest in future growth, much as the US government can borrow to invest in future growth.

Anonymous said...

As a left-wing Brit, I'm curious what your view is on the Arizona laws to force Police to check papers of suspected illegal immigrants?

Surely this is additional state action that will push up labour costs - a typical act of Liberal governments, except its the republicans.

Dave said...

Something else, Eric. Re this:

"An interesting issue is why doesn't the bottom 51% of a democracy simply expropriate the rich every couple of years."

Historically, hasn't the belief of the bottom 51% in their potential for upward mobility been part of the reason? Also, I think the notion of fair play in a meritocracy and the desire not to kill the golden geese have been factors too. After all, Reagan got political traction with a lot of working class voters by arguing that if you didn't soak the rich, they'd be more likely to take risks, and create jobs.

I think all three of those beliefs have taken a beating recently though. Polls show increasing percentages of Americans think their children will do worse than them in life. And the huge paydays at government-rescued financial firms that make most of their revenues trading their own books don't inspire a lot of confidence in the idea of fair play. In addition, the disconnect between healthy financial industry profits and the sagging real economy raises doubts about any trickle down effects from the rich to the rest.