book reviews

Miscellaneous books on economics
Reviewed by: T.J. Nelson

Return to Prosperity
How America Can Regain Its Economic Superpower Status
by Arthur B. Laffer and Stephen Moore

B y now, the destruc­tiveness of the Obama-Bush fiscal stimulus packages should be obvious to anyone who has taken Econ 101. Arthur B. Laffer calls them a "panic response"--like the decisions made by Herbert Hoover and FDR, whose panic-driven policies (including huge tax increases) prolonged and deepened the Great Depression. With Stephen Moore, a senior economics editor for the Wall Street Journal, Laffer argues that it still might be possible for the economy to recover from these colossal blunders if drastic action is taken now, starting with the imposition of a flat income tax.

I've often wondered whether a flat tax would be practical. Several eastern European countries have tried it with great success. I found myself nodding my head repeatedly throughout this book (so much so that I may have to sue Laffer for whiplash).

If you subsidize it, you will get more of it. It's the most basic rule of economics. Taxing the rich to give to the poor, says Laffer, only creates more poor people. Imagine, says Laffer, that the government took 100% of the income above the average wage and "When fairness is put ahead of economic growth, societies get less of both." (p 150). gave it to poor people. This would result in perfect income equality. But there would also be no incentive for anyone to work. The result would be that the average wage would drop to zero. This thought-experiment, if one was needed, proves that using the government to redistribute income will not work. Forcing "equality" would destroy the American economy as surely as it destroyed the economy of the Soviet Union.

High taxes always reduce economic growth. Laffer points out that in 1970, when the highest individual tax rate was 70%, the richest 1% of Americans paid 17% of the total taxes. Now, with the rate at 35%, they pay over 40% (p.70, 146, 158). The Democrats' god, JFK, was a staunch advocate of reducing taxes. When he did, tax revenues shot up. When Reagan cut taxes even more, it produced 25 years of prosperity.

The only downside to this book is that Laffer doesn't fully consider the objections made by his opponents. It's as if his ideas are so obviously reasonable that no rational person could disagree with them. Of course, there are some rationality-challenged individuals who attribute the Obama depression to anything from global warming to deregulation, insufficient government spending, or "low" taxes. But there are also many more-or-less rational people who will wonder how Laffer's ideas for changing the tax code, lowering the minimum wage, and creating enterprise zones, useful as they may be, could possibly end the Great Recession. Surely there are other factors, like the structural factors that force companies to offshore their production, the unsustainable growth in the size of government, and the massive Ponzi schemes in both the public and private sectors, that need to be fixed first.

More than 40% of the working-age public are now unemployed. As Andy Grove recently pointed out, unemployment is corrosive: it causes social instability. Laffer doesn't seem to appreciate just how bad the situation is.

Laffer's solutions are so obvious that even the Democrats and the news media cannot ignore them indefinitely. On the other hand, we should be careful what we ask for. The government might well give us a flat tax in the form of a VAT, while keeping the income tax. Laffer has the Laffer Curve. I have the Nelson Curve, less famous but just as true: in the long run, taxes always go up--and they are never permanently repealed.

July 4, 2010

The Collapse of Complex Societies
by Joseph A. Tainter


T he question of why civilizations collapse is one that concerns everyone. By some criteria, our own civilization could be said to have already collapsed: we are no longer producing any refined art or music to speak of, and little of any other kind of what is called highbrow culture. Whether we realize it or not, we are in a cultural desert. The West is also declining demographically as our population ages, possibly heralding a new age of long-term poverty and economic collapse. Is the West therefore in decline?

This is the question that provides a sense of urgency to Joseph A. Tainter's book. Building on the success of the concept of complexity in physics, Tainter begins by summarizing and dismissing the views of most previous writers on the subject of civilizational collapse. For example, he dismisses the theory that collapse results from mismanagement and excessive taxation, saying it doesn't explain why the leaders exhibited mismanagement. He dismisses Spengler and Toynbee as "mystical" or "unscientific." What Tainter is probably trying to say is that some theories of social collapse, such as Spengler's metaphor of the life cycle of civilizations, are merely descriptive and have insufficient explanatory power.

In dismissing these theories, Tainter sets for himself a high standard. It will not do to propose a theory based on political opinions or values, or which does not explain the collapse in concrete, causal terms. Likewise, it won't do to propose scientific-sounding causes from physics that are, in reality, only analogies. How well does Tainter's own theory meet these criteria?

Tainter's theory is economic: the survival of complex societies is related to the cost per capita of complexity. When investment of sociopolitical complexity as a problem-solving response reaches the point of diminishing returns, the system collapses. The same principle applies to information as to energy, food, and other resources.

Although the principle of diminishing returns, like the Laffer curve (which is similar), is a well known phenomenon, Tainter tries to extend it too far. Take information. Tainter's data here are far from convincing. He says the number of patents per scientist and engineer has declined over the last century, and that this is caused by increased complexity. But any number of other factors could also account for this. For example, scientists could be doing more theoretical or academic work, such as archaeology, which rarely leads to patents. This does not necessarily mean archaeology is not useful for society. The tremendous increase in the cost of filing and protecting a patent undoubtedly also plays a role. A patent only gives you the right to sue an infringer. When the cost of lawyers plus the costs of filing exceeds the commercial value of the invention, patents become useless.

His argument of the decreasing marginal utility of higher education is similarly flawed, because his only measure of the benefit is increased GNP. On the other hand, his argument that increasing bureaucratization causes inefficiency is well accepted. For some reason, though, he thinks when it happens in the corporate world it's because of the need to process more information. Clearly Tainter has not worked there recently. Corporate managers spend more time than ever seeking out new ways to cheat their employees of their legally entitled benefits, and spend even more time trying to reduce their tax liability and conforming to increased numbers of government regulations. Whether you call this "complexity," "corruption," or "bureaucratization," it not only creates a drag on the economy, it also creates cynicism and alienation.

But how does this cause collapse? If society reaches a point of diminishing returns, what prevents it from remaining there instead of going off a cliff? The only answer is depletion of resources, plagues, climate shifts, high taxes, or invasions, as suggested by everyone else. Perhaps Tainter shouldn't have dismissed his predecessors' conclusions so quickly in Chapter 3.

What these examples have in common is increased regulation and parasitic legalization. Maybe, then, this is what causes collapse. It may be, as Tainter says (p.121), that collapse becomes inevitable when the cost to the individual of helping a civilization to stay alive exceeds the benefit, causing that individual to stop caring about the civilization. This explains the tremendous value of intangibles such as refined culture, art, and so forth, which motivate the individual to help the society survive. If this is so, our culture may be in far worse shape than Tainter realizes.

January 30, 2011

How the West Was Lost
Fifty Years of Economic Folly--And the Stark Choices Ahead
by Dambisa Moyo

C onven­tional wisdom about the 2008 economic crash is that it resulted from allowing political goals to drive economic policy. To increase home ownership among the poor, the government encouraged lenders to provide subprime mortgages to people who did not qualify and who inevitably defaulted. It was a colossal failure of social engineering that will have dismal consequences for generations.

Dambisa Moyo says this is only part of the problem. Financial guarantees to bondholders and banks caused misallocation of capital into unproductive assets, i.e. houses. Because they were protected by the government against losses, banks could now engage in risk-taking adventures, and landed up to their eyeballs in debt. Now the government sees increasing debt as the only way out of the crisis. Moyo writes: "governments are actively involved in parlaying policies that misallocate capital and which in the long term will seal the economic fate of the West."

Moyo calls this "good intentions leading to unintended consequences." But this charitable view ignores the fact that the government resisted repeated attempts by Ron Paul and many others as early as 2003 to rein in Fanny Mae and Freddy Mac. It was obvious even then that this was necessary to avert catastrophe. No one can be as ignorant of basic economics as our politicians pretended to be. The logical conclusion is that they viewed the risk that our economy would be crushed as acceptable.

Or was crushing the economy their goal all along? You only have to read the recent issues of Foreign Affairs where author after author revels with evident glee about how America's time is over to realize there are a great many people in this country who crave seeing our economy crushed. These people, along with many of our politicians, would love for America to be just another ordinary country.

Don't expect them ever to admit that. What we know for sure, and what Dambisa Moyo deserves kudos for explaining so clearly, is that government meddling in the economy has led to disaster.

But Moyo's solutions are crazy: if government interference got us into this mess, she reasons, more government interference will surely get us out. She advocates more regulation and more taxes. She proposes a special high-earners tax to penalize sports figures and actors who are successful, to be paid to those who aren't. Complaining that the USA doesn't produce enough engineers and scientists, she proposes greatly expanding the H-1B program. What this would do to salaries, and to the number of American students willing to go into science and engineering, you can easily imagine.

As for China: during the Cold War, a US general was once asked whether, given the large numerical superiority of the Soviet Union's military, he would trade America's military for theirs. Without a moment of hesitation, he answered, "No." The same is true for China's economic future. China's future is not as bright as everyone seems to think. If they convert their extra dollars to yuan, the value of the yuan goes up, and their exports collapse. If they keep it in dollars, America could steal them back by ramping up inflation. Their only reasonable recourse is to buy real estate, just as the Japanese did in the 1980s. And, if China becomes wealthy, their government will come under intense pressure to democratize. This is such a scary thought that they slaughtered thousands of students 22 years ago to prevent it. We should hope China becomes wealthy: a wealthy China will raise all boats. Our problem is not China. Our problem is our huge, wasteful governments run by economic illiterates and a population afraid of change: afraid, most of all, of what a sustainable government would do to their free benefits.

Moyo's real point is that it is by no means foreordained that the West must decline--this is just where our so-called leaders are taking us. Anyone working for a company being run into the ground by its idiot managers knows the feeling. All it would take to avoid it is courage and common sense, and a fair amount of government reform.

What Moyo does not realize, however, is that as long as the government has only one interest--to get bigger--expecting it to reform is a pipe dream. Our government will never do the smart thing until, as Churchill said, it has exhausted all other options. By then, we may already have had to roll out the guillotines.

February 19, 2011