During the period in which Friedman and his colleagues across most of the political spectrum lauded themselves, the economy fared poorly. Until recently, this broad failure almost went unnoticed. Wages in the United States for those the government calls production and nonsupervisory workers—most workers—rose only 3 percent since 1979. These wages had been stagnating well before the crisis of 2008. By a slightly different measure, wages for the typical male worker were lower, after inflation, in the 2000s than they were in the early 1970s and, depending on how they are measured, the 1960s as well. Meanwhile, the top 1 percent earned roughly 20 percent of the national income, compared to 10 percent in 1970—a level of inequality not seen since the 1920s. African Americans consistently had unemployment rates twice as high as those of whites for thirty years. The lack of decent jobs contributed to a surge in the number of men in prison. In some states, prison costs were the second-highest expenditure after Medicaid. Location 79
And most tragically, the richest nation in the world had the highest child poverty rate among all wealthy nations. Location 90
In sum, the growth of GDP per capita was significantly slower after 1980 in the United States than before it. Some claim new products such as the iPhone or multiple cable channels compensated for slow income growth, but there had been equivalent new products throughout America’s economic history, from the automobile to the cinema, radio, television, and jet travel. Life spans lengthened, but this usually had more to do with reduced cigarette smoking and new cardiovascular drugs, often developed by government researchers, than with economic vitality. Location 96
Note: Remember Chang’s point that the washing machine did more for the works than the Internet. That’s why all this reading, and sometimes seemingly unimportant information is so valuable. It’s all connected. Conservatives love to point out that, even if wages are stagnant today or the poor struggle, their money buys better things than it once did, iPhones, flat screen TVs, tablets and Video games. But innovation today is no different than it was, and maybe less important. An iPhone is nice but likely won’t change your life or well being. The last century had electricity, the washing machine, freeing up countless hours for leisure and production, antibiotics, the television, and computers. No, we’ve long had new products, but more broadly shared prosperity.
Had economists been fully dedicated to their free-market views, they would also have been up in arms over the glaring lack of regulation of the new and deliberately opaque derivatives market on Wall Street. Based on securities that could be bought and traded with little down payment, these derivatives were at the heart of the financial crisis. If someone is selling a good or a security, competitors cannot offer it for less if they do not know the price asked. Yet the Clinton administration, following the new economic thinking, prevented regulators from setting federal standards of openness in this market. Location 144
Note: An example of where perfect competition doesn’t exist due to assymetric information, and the beginning of the debate on the financial crisis.
The most damaging of the new financial derivatives were credit default swaps, a technical name for insurance sold by financial firms to protect investors against price declines of securities. The insurance to protect against losses on mortgage securities became especially popular as the housing boom progressed—particularly insurance for securities based on subprime mortgages. Because the prices of these insurance-like derivatives were traded secretly, however, there was not adequate competition to keep prices sensible. Economists should have rallied in opposition to the lack of rules, but I could find no research papers done on the phenomenon until it was too late. Some investors and professional traders bought the insurance at high prices, some sold at low prices. Moreover, there were no legal requirements to hold a reserve to ensure that someone selling insurance could pay off—as is done with traditional life and property insurance. When the value of mortgages collapsed as the housing bubble burst, those who sold such insurance—notably the insurance giant AIG—could not pay off, making the crisis far worse. Investors who thought they were protected against falling mortgage securities were now losing fortunes, forcing them to sell other securities to meet their liabilities. This drove the prices of other securities still lower, and market prices fell further in a vicious spiral. Location 148
Note: The crisis of 08 in a nutshell, described slightly differently.
Economists also said little when they should have proverbially shouted about the obvious conflicts between those who issued securities and the agencies they hired to rate the securities they sold. These agencies, Standard & Poor’s and Moody’s, were inclined to make their clients happy and gave their securities high ratings, even those based on subprime mortgages. Giving unjustifiably high ratings to the securities of clients who were paying for them seems, well, almost inevitable. After the collapse, the agencies sharply, and with at least temporary embarrassment, reduced their ratings for the large majority of securities they had previously given their highest ratings, the value of which had often fallen to zero. Location 158
Note: The role of the credit agencies.
“Get the incentives right” had become a cliché for economic reform, especially in poorer developing nations. But financial incentives were awry on Wall Street. Traders were paid lavishly when they were correct but were not penalized commensurately when they were wrong, thereby incentivizing them to take risks. Much of the profits earned on trading the new derivatives were kept secret from buyers and sellers so that customers could not seek a better deal elsewhere. It was said that the very high compensation of bankers and traders reflected their unusual talents and that high profits for financial institutions meant they were contributing ever more to the nation’s prosperity. Economists were barely disturbed by such implausible nonsense. Meanwhile, by contrast, laws to set higher minimum wages, it was argued by many economists, would only distort labor markets and result in lost jobs. Location 163
Note: You can have runaway windfalls for Wall Street traders trading grossly inflated commodities nowhere near a reasonable market value, due to the lack of information by competitors unable to drive down prices through market signals, but by GOD if you pay 3% of the workforce 3$ more an hour the Country will end in a fiery death.
Wall Street itself exhibited the characteristics of a monopoly. Commissions were fixed at abnormally high levels for most financial transactions, suggesting the lack of true competition. Fees earned by bankers on transactions were always high but did not fall as a percentage of the soaring value of financial assets, which under normal competitive conditions should likely have been the case. Location 169
Note: Wall street traders and bankers don’t earn according to free market price signals either, since very important tenants of the free market are not maintained, such as symmetric information in order for competitors to make a better offer.
Those of us who grew up in the 1960s were especially lucky because it was a period in which the economy grew fast, wages rose at all income levels, and poverty levels were falling thanks to new government programs. The prosperity of that era, however, would not last. Location 265
When oversimplified, however, individualism stood in contrast to the idea of community and helping others. Location 281
economies of scale—the reduction in production costs brought about by many more units being sold. Location 295
The stagnating wages and relatively high unemployment over the thirty years since Reagan took office have made economic hardship a characteristic of American life and are a major cause of the conservative antigovernment attitudes that have since prevailed in the nation—even, for the most part, during the Clinton presidency. Location 345
The allure of the Invisible Hand is its elegance. The profound weakness is that it is not nearly as complete a model of markets as many economists insist it is. Its underlying assumptions—that people have material preferences that don’t change, that they are rational decision makers, and that they have all the price and product information they need—are extreme. The Invisible Hand is thus a limited proposition, elegant but impure. Location 399
In short, was there a universal key to economic growth? Political decisions, the tides of history, scientific breakthroughs, the spread of literacy, the rise of rapid transportation—all these and more affect growth. But my college textbooks, even when they included sections on Keynesian government stimulus, by and large agreed that prosperity is mostly a consequence of the Invisible Hand—that is, a free market. Location 435
Note: The things that really cause growth are ignored.
The general cause of increasing wealth is productivity, he wrote in his first chapter, the growing quantity of goods and services that can be produced per hour of work. More income was produced per worker as productivity increased. The persistent increase in productivity, accumulating over years, decades, generations, and centuries, is the cause of the economic benefits we enjoy today. This was accomplished through what Smith called the “division of labor.” Location 448
Note: While not new, a powerful reminder of what underlies growth, prosperity, productivity. Use this as a foundation to support education and infrastructure, public research and science. In an argument over education, Chris denied it helped the rich, or a similar point. But all productivity is underlined by one thing, knowledge. If no one knew how to do anything, we would all stand around and do nothing. Knowledge is everything. Using the principle of productivity, so many forms of investment and public goods make sense.
Faith in the Invisible Hand led to the once-general belief that a higher minimum wage results in lost jobs. It presumes that the wage paid reflects the worth of the workers and that any wage increase resulting from a minimum wage law represents an overpayment to workers, reduces profits, and also reduces the hiring of new workers. But in fact often the wage can be too low because of a business’s power or generally restrictive government policies that keep unemployment high. In that case, a hike in the minimum wage would be healthy economically, restoring demand for goods and services, and would not cause jobs to be lost. Location 540
Note: Minimum Wage
Another concern regarding the labor and other markets is often referred to as asymmetric information. The classic example is the used-car salesman who has more information about the car than the buyer has, much of which is kept secret. As Smith feared, a market cannot work under these circumstances. Buyers cannot make proper bids without knowing what they are buying. This concern extends to markets in health care, insurance, and mortgages—and arguably to most other markets as well. It is not only the poor subprime mortgage buyer, for example, who will make errors, but almost all homebuyers who enter into such transactions only two or three times in their lives. How can they possibly be knowledgeable and informed? Even sophisticated pension fund managers clearly did not have enough information about the complex mortgage securities fashioned by Wall Street to make sensible decisions in the years leading up to the 2008 crisis. Location 548
Note: Small Summary of Assymetric Information. Where purchase does not reflect preference, and purchases would not have been made had we the information we needed. Thus markets distort.
The Invisible Hand also depends on market participants knowing and understanding their self-interest well and therefore making rational decisions about buying and selling products. Behavioral economics has uncovered many examples of buyers being unable to make such rational decisions, a factor economists once minimized. An obvious example is herd behavior in buying stocks, in which buyers are lured into paying high prices because so many others are. The opposite, also damaging, is irrational risk aversion, with investors refusing to buy even when the odds of gains are good. Another example is susceptibility to misleading advertising. Still another is fashion itself, evident in surges in demand for new products like the iPhone or traditional ones like an Hermès Birkin bag. One can argue that there is some satisfaction in being a part of fashion, of course, but not if it leads to buying bad products or stocks whose prices will inevitably fall precipitously. Location 557
Note: The invisible hand requires many assumptions to be met that are not in the real world.
The Invisible Hand is a source of clean economics in a dirty world. Great castles can be built on the Invisible Hand, but a rising tide will wash them away. This is what happened in 2008. Location 569
The many obstacles to the workings of the Invisible Hand amount to an overwhelming criticism. The Invisible Hand is an approximation, usually not applicable in the real world without significant modification. Dependence on it leads to major policy errors, most of them having to do with restraining government intervention. We assume away monopolies, business power, lack of access to information, the likelihood of financial bubbles, economies of scale. Location 579
The proof is in the pudding. Predictions about economies based on this generalized theory have often been proved wrong. The most important of these is that economies should be stable because they self-adjust to reach general equilibrium. Yet we have had countless deep recessions and financial bubbles and crashes since the start of the Industrial Revolution. The eighteenth century was rife with them, but so have been the past thirty years of the modern laissez-faire era. Location 582
Say’s law holds that supply creates its own demand. If businesses make products, the wages paid to the workers employed will enable them to buy all that is produced. Similarly, if individuals and businesses save, all the savings will be allocated to capital investment. Finally, there will never be too many workers because their wages would fall until all are hired. Thus, any glut of goods, savings, or workers will be only temporary, and economies will adjust on their own to a more prosperous level. Location 596
Note: Says Law in general, with heroic assumptions.
This is an enormous assumption for economists to make, and it requires not merely the Invisible Hand to hold but that Say’s law be true. Where does the money to buy excess goods come from if workers lose jobs when companies cut back in a recession? According to the predominant theory, as prices fall in a recession, people’s savings become more valuable; they will be able to buy more with the same amount. The historian of economic thought Mark Blaug summarizes the proposition a little more technically: “If demand proves insufficient to sell all goods … prices must fall. The purchasing power of [cash savings] will rise.… The demand for commodities increases until the excess supply … is eliminated.” Location 606
Note: This is not a highlight for an argument we want to make, but rather to remind us or the typical market fundamentalist position I’m order to attack it. This sounds pretty good. But a rebuttle to this will undermine much of neoclassical and libertarian thinking.
Arrow and Debreu showed that Pareto optimality was possible. But ironically, the model also showed how very unlikely it would be to achieve. As they stressed, their model required extreme assumptions about free-market competition (complete information, no monopolies, rational decision makers). Arrow, in particular, made a point of noting that their “proof” was based on assumptions that did not hold up outside of the mathematical world they created. “Arrow devised his model,” says Joseph Stiglitz, a student of Arrow’s and a fellow Nobelist, “and then spent the rest of his career showing it was wrong.” Location 665
Keynes injected modern finance into the fairy tale of the self-adjusting economy. In a barter economy, a product is made and then soon “sold.” In a money economy, a product can be made and then sold a long time later, and producers can borrow money to hold them over. As a result, there are often long lags between the making of a product and the receipt of revenue needed to pay wages and increase profits. Location 691
In a money economy, consumers can save part of their wages. Neoclassical economists argue that if consumers save, the money they put in the bank will be invested because interest rates will fall (or not rise as much as they otherwise would have). Banks lend the money to businesses. Consumers might also buy stocks and bonds. No income demand is lost in the process. But Keynes, as we see below, argued the lower rates often did not lead to more investment by business in deep recessions. Keynes introduced psychology and uncertainty into economics, two very inconvenient concerns for orthodox economists. Keynes believed that business investment is not just affected by the supply of national savings but by the state of optimism. If consumer demand for goods is not strong, a business will have little incentive to invest, no matter how great its profits or how low interest rates are on bank loans. In other words, contrary to Say’s law, savings will not automatically be invested. Location 694
In a money economy, the state of mind of consumers and businesspeople—their exuberance or, conversely, their lack of confidence—is important, according to Keynes. Consumers’ expectations regarding inflation and job prospects affect their buying and savings decisions. In recessions, they often fear for their jobs, so they may choose to let the money in their bank accounts sit right there. Businesses are driven to invest not merely by rational analysis but by “animal spirits,” as Keynes put it, and they can be restrained by excessive caution in recessions. Keynes focused on emotional and irrational decision making. The central critique of Keynes in the dominant conservative philosophy since the 1980s was that consumers and investors are highly rational. Location 701
Note: Largely the most effective rebuttle to generally all forms of arguments about a self adjusting economy, and supported by the work of Khannaman and others, we see it again and again; poeple don’t behave like the market fundamentalists want you to. The irrational man who spends more than he makes from his job or saves much of what he makes during times of uncertainty such as recessions, job loss, or herd behavior, as well as financial speculation and bubbles short circuit Say’s necessary premise that the economy works like a well oiled feedback loop.
Say’s necessary premise that the economy works like a well oiled feedback loop.
He did not believe the stock market was an objective meeting place for traders and investors but more like a newspaper contest in which people were asked to choose the most beautiful woman from among those pictured and could win a prize if they chose the woman most others did. The best strategy would be to try to guess who everyone else thought most beautiful, instead of picking personal favorites, noted Keynes. Similarly, stock prices were often dependent on fashion—on what everyone else thinks everyone else thinks about a company’s value. Speculative bubbles are to be expected, and they in turn stimulate too much investment. In market declines—bear markets—subdued spirits often depress investment too much. In a recessionary environment, he concluded, contradicting Say’s law, demand for goods, services, and capital investment will often be inadequate. This “paradox of thrift”—too much savings—is what happened in the Great Depression and again after 2008 (and, to a lesser extent, in previous recessions). This represented a radical thrust against orthodox thinking. Economies did not automatically adjust from recession. There could indeed be persistently inadequate demand, even when wages, interest rates, and prices fell. This is impossible in a Say’s law world. And all this could persist because an equilibrium—a balance between supply and demand—could be reached with high unemployment. Location 707
Keynes taught the world that government budget deficits were often necessary, the reverse of personal thrift. They created the demand that motivated business investment in a recessionary economy. Neoclassical economists argued that deficits reduced national savings and thereby, under Say’s law, investment; economies were like families. But when it comes to financial health, governments are not at all like families. In hard times, a family saves to improve its future prospects; its savings do not affect the prospects of others. If most people in an economy save more, however, spending goes down, setting off a spiral of less spending, less investment, and less confidence. In a weak economy, this could lead to recession. Keynes showed how this could happen quite brilliantly. Location 725
He also points out that Say himself more or less eventually repudiated the proposition. Location 734
Contrary to the claims of some of his later critics, Keynes’s thinking was not based on an economy of imperfect markets or market failures, where the Invisible Hand was undermined by unions, slow-falling wages, or monopolies that set high prices. Keynes actually believed in economic equilibrium. What made this believer in capitalism radical was his argument that a steady state of equilibrium could be reached, but often at a high level of unemployment and other unused resources. This was a blow to the heart of neoclassical economics, which argued that equilibrium was reached at an ideal state of economic prosperity. Location 735
Note: If you can only remember a few things from the chapter this is one of the take home messages.
The conventional example of Keynesian wisdom was the large increase in government spending during World War II, which was enough to lift the U.S. economy from the Great Depression. But it is not the only real-world example. Public spending in Germany in the 1930s is also an example of Keynesian success; the German economy flourished because of it. The sharp economic recovery in the United States beginning in 1933 is another earlier example, though it was undone by the adoption of austerity in 1937, as Frranklin D. Roosevelt, wrongly fearing a return of inflation, raised taxes and the Fed tightened money. In an example of so-called military Keynesianism, defense spending continued to be a boon to the U.S. economy in the 1950s and 1960s. Location 739
American Keynesians after World War II were not purists. Led by MIT’s Paul Samuelson, they did not accept the contention that high unemployment could persist, or even exist, in a state of equilibrium. To them, market imperfections warranted Keynesian stimulus, but only temporarily. The most important of these imperfections was the fact that wages and prices did not tend to fall, as the Invisible Hand would suggest. There was a strong tendency to maintain wages, even in a weak economy. Unions had a part in this, and so did businesses, which often exercised market power to resist price cuts. Neither wages nor prices always fell enough to allow the markets to correct, and therefore, Samuelson believed, unemployment remained high and consumption weak. The Invisible Hand was prevented from doing its work so government was needed to correct this market failure. Location 750
Budget deficits, even if they caused a little inflation, were worth it because they created new jobs. But once the economy was back on track and full employment had been reached, it was imperative to balance the budget. In other words, the tolerance of these Keynesians for deficits and inflation was not unlimited. The leading economists in Lyndon Johnson’s administration, for example, sought a tax increase in 1967 to pay for the Vietnam War and reduce the deficit when the unemployment rate had fallen below 4 percent. Johnson refused until it was too late. Inflation began its rise with LBJ and was further stoked in 1971 by Richard Nixon, who pursued aggressive economic policies to reduce unemployment in the hope of winning a second term the following year. Location 769
Friedman insensitively underemphasized the degree of suffering high unemployment created even in the medium term and the social instability faced by nations in depression. Location 822
Note: This is perfectly written. Chris and other conservatives don’t often call poor poeple bums, but they do ” insensitively underemphasize the very real struggle, stress, and suffering that most Americans go through as a result of conservative thinking.
Despite myriad claims to the contrary, the stimulus unambiguously did its job. The sharp reduction in job losses that coincided almost precisely with the spending of the stimulus money is persuasive. Without the cash infusion, the economy would have kept shrinking and job losses would have risen rapidly. Probably three million jobs were created, though the unemployment rate stayed well above 9 percent until 2011 because so many more jobs than expected had been lost during the depths of the recession in 2008 and early 2009. Location 899
The deficit was being reduced by Congress, which, according to Say’s law, should have led to more investment. It didn’t. Location 946
Not only did the chancellor predict that the budget deficit would fall as a percentage of GDP, he also predicted a healthy rise in exports because interest rates would now fall due to a diminishing budget deficit, meaning less demand for the pound. A lower pound would stimulate exports, also helping growth. Most important, following Say’s law, business confidence would be restored and capital investment would again flow liberally. Location 1006
Note: Not really for debates but this itself contains alot of macroeconomic principles in one paragraph including currency value, interest rates, demand, and exports.
Austerity economics has driven much of the West into recession and may hold the United States back for decades. Dedication to the ideas that underlie such economic policies is keeping the country from investing adequately in itself to compete in a global economy and from creating social policies that include all Americans and promise them a life of dignity. Bad ideas cost jobs and may ultimately cause political instability. Location 1049
Even politically liberal economists generally argue that government must only correct what they define as market failures. These obligations can be significant, such as investing in infrastructure, regulating monopolies, establishing unemployment insurance, creating a public retirement system, or setting limits on pollution. Location 1054
Note: Quick and dirty role for government
Nonorthodox economists believe that government investment in infrastructure, education, research and development, and health care is at least as important as private capital investment and creates the necessary conditions for business to thrive and for a just and optimistic society. This investment is not required simply because markets fail. Institutional economists recognize the need for equalizing education, but also for persistent regulation of markets, which, in their view, are rarely if ever perfect and do not reach even an approximation of the Invisible Hand. Some believe federal budget deficits must always be maintained because there is a tendency for demand to be inadequate in a free-market economy. They welcome, within limits, labor unions and regulations on minimum wage and maximum hours. Many think health care is a right of citizenship. Some argue that government must go beyond the hard-to-define ideal of equal opportunity for all and provide cash assistance to a large proportion of the population to ensure a dignified life for all. Some recognize that government research has been visionary, creating opportunities for entrepreneurs that would not have existed otherwise. They also, of course, recognize that people cannot be allowed to steal, that private property must be respected. And they allow for the need for national defense. As an example, over the past forty years, wages and salaries have stagnated in the United States, with those in the bottom half of the income distribution experiencing very modest gains or losing ground. Since the 1970s, Social Security, unemployment insurance, food stamps, the earned income tax credit, and other forms of government assistance have provided more than half the income of these people, and a very high proportion of all the income in the lowest 25 percent. This suggests more than a mere market failure; it suggests a chronic problem with free markets that requires persistent government response. Location 1077
Note: Pretty good explanation of our conception for the role of government. Once again at what point do you move from blaming the victim to examining if something is wrong with the system or environment in which people are trying, and failing to earn a living.
A level playing field might require equal power between workers and employers; equal access to quality education; excellent child care for all; minimal childhood poverty; multiple free parks and cultural institutions; income and health care supplements for people who do not have the material means to enjoy a decent life. Location 1147
Friedman had little sense of the historical importance of collective action, especially that undertaken through formal governance of some kind. As he wrote,
The great advances of civilization, whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government. Columbus did not set out to seek a new route to China in response to a majority directive of a parliament, though he was partly financed by an absolute monarch. Newton and Leibnitz; Einstein and Bohr; Shakespeare, Milton, and Pasternak; Whitney, McCormick, Edison, and Ford; Jane Addams, Florence Nightingale, and Albert Schweitzer; no one of these opened new frontiers in human knowledge and understanding, in literature, in technical possibilities, or in the relief of human misery in response to governmental directives.
This is, to say the least, a distorted recitation of these contributions. Consider the state-sponsored art of Periclean Athens or how Renaissance artists were commissioned by princes or the church (a central government if ever there was one) and how they often worked in large guilds—basically apprenticeship trade unions. The pope demanded that Michelangelo paint the ceiling of the Sistine Chapel against the great man’s wishes. The Medici rulers of Florence were passionate patrons of the arts. Jumping ahead a half millennium, think of all the fine works created in the Depression that were financed by federal subsidies. Government was also critical to the funding and encouragement of countless educational and scientific achievements. Virtually all the intellectuals mentioned by Friedman were educated at public institutions, and many held professorships at public universities. Newton was a member of the faculty at Cambridge University; Leibniz was employed by Leipzig University; Einstein was hired by an institute in Princeton, New Jersey, that enjoyed large tax deductions. The United States started subsidizing technical research at universities in the 1800s, giving rise to schools like MIT and the University of California, Berkeley. Army chemists discovered the best ways to purify water in the early 1900s. Robert Oppenheimer led the atomic bomb project, a directive of government, only a few years before Friedman wrote these phrases. After World War II, government-financed research and development produced many wonders, from the computer chip to the Internet. Almost all the science behind Apple’s products was paid for by the government. The National Institutes of Health supports research that has led to numerous breakthroughs. By one count, 75 percent of major new molecules were discovered by the NIH in the post–World War II era. Government, not business, may be the great innovator. Location 1157
Note: Level 10 – The most important thing in the book so far. This is the first line of defense when asked not for generalities of government contributions (Simple roads and military and education) but rather specifics that really drive the point home and become difficult to refute. It also directly addresses Friedmans popular passage specifically.
“The closest approach that the United States has had to true free enterprise capitalism was in the nineteenth century. Anybody was free to put up an enterprise, anybody was free to come to this country: it was a period when the motto on the Statue of Liberty meant what it said. It was a period in which the ordinary man experienced the greatest rise in his standard of life that was probably ever experienced in a comparable period in any country at any time.” Location 1199
Note: This is for the rebuttle, not the passage. This is similar to the “we had roads education and all that before the income tax” meme. Thete was also widespread poverty, most roads were dirt, no retirements insurace, primative infrastructure, and everything associated with less public spending. It’s also a large jump in living standards to get simply out if the cold and into a warm house worth food and medicine. It’s easier to go from the baseline to mimimal but adequate comfort than from comfort to more comfort.
Friedman’s contention that the nineteenth century saw the most rapid rise in the standard of living is astonishingly inaccurate for an economist, and a statistician at that. The standard of living of Americans rose far faster in the twentieth century, as the government became larger and intruded more into personal lives, and it was the first time that a true middle-class majority was created. Wages grew at about 1 percent a year on average (there were big ups and downs) in the 1800s, but at 2 percent a year in the 1900s, when government spending as a proportion of the economy was larger and increasing rapidly. One dollar growing at 1 percent a year over one hundred years would come to $2.70. In other words, the average worker’s standard of living rose by 2.7 times over the course of the nineteenth century. One dollar growing at 2 percent a year would come to $7.20; the average worker’s standard of living rose by 7.2 times in the twentieth century. Location 1208
Note: There is your rebuttal to the notion that things were better in the 1800s with less government, seen from everyone from Magie to Jared and a dozen others. As government’s size and influence grew, so did our standard of living.
The political scientist Lane Kenworthy approached the subject in a different way. He calculated government revenues in America as a proportion of GDP and compared them to economic growth rates. In the early 1900s, federal, state, and local government revenues as a percentage of GDP were about 10 percent; by the 1990s they leveled out at about 37 percent. Yet economic growth continued at very close to the same rates, with a few wiggles here and there, over the entire period—even during the Great Depression. GDP per capita continued to grow at about 1.2 percent a year as government got bigger. Location 1219
Note: So much for government spending inhibiting prosperity and growth.
Friedman was appalled that Americans are forced to pay a tax into the Social Security system to guarantee themselves at least a minimal retirement annuity. It is a violation of freedom, he asserted, conveniently ignoring the high levels of poverty that had existed among the elderly before the system matured—upward of 30 percent. Social Security is one of the country’s greatest success stories. Elderly poverty rates are now around 10 percent; they would be 44 percent without it. Location 1243
Note: Social Security
He then proceeded to list the “exceptions,” those government ventures that had clearly succeeded: the highways built in the 1950s; the school system, with all its admitted defects; the antitrust laws, which he conceded did foster competition; public health programs that limited infectious diseases; assistance measures that relieved suffering, by which he meant welfare; and the maintenance of law and order. To any objective observer, these are more than a little impressive. Location 1251
Note: Great small list of government successes, coined by none other than Friedman himself.
Friedman treated this theory as simple fact. For a system of voluntary cooperation based on free exchange to work, workers must be paid what they are worth. But what if minimum wage laws actually raise wages to their right level, compensating for businesses’ power over workers? The possibility did not enter his mind. Location 1265
Note: The invisible hand and supply and demand make several heroic assumptions. Perfect information and perfect compitition. That means a worker would have to be able to know every possible option of who is hiring and that every worker could get a job at any other place. When these two conditions are not met, the wage will be lower than the perfect market equilibrium due to unilateral bargaining power, and the min wage shouldn’t reduce employment becsuse the idea that all wafes reflect contribution was based on perfect assumptions.
Simply stated, there was no laissez-faire economy in early America. There were countless regulations on the sale of commodities and other products. Friedman wrote that anyone could come to the New World, but it was not so. Labor was not free; a large number of workers came to the United States as indentured servants, who had to win or buy their freedom. Location 1291
Note: There you go Magie, you said we had basically laisse-faire in early America, and once again we did not. Good examples.
Government defense contracts for firearms in the mid-nineteenth century underwrote the development of the means to mass-produce them. This system by which large military contracts, not the market, made possible capital investment in production techniques became the envy of Europe. It was a major technological and managerial advance. By the 1820s, America was committing itself to free public education for children, perhaps the nation’s greatest achievement before the Civil War. The record shows that by 1850, the United States was spending more per child than any other nation except Prussia. School attendance as a proportion of school-age children was as high as in France and Germany, the European leaders. Primary education was paid for by property taxes on rich and poor alike; it was the nation’s first system for redistributing income. A wave of high schools were built later in the century, as demand for better-educated workers grew. In addition to aiding economic growth, widespread education strengthened public discourse and democracy itself. Location 1309
Note: It just doesnt end.
Railroads were by and large subsidized or actually built by governments throughout the rich world of the 1800s. The United States subsidized the development of its railroads through massive donations of land; by one estimate, these donations accounted for half of the capital. Outright spending by the federal government came to only 3 or 4 percent of GDP, but had the donated land been figured in at a reasonably estimated price, the size of government would have been understood correctly to be much larger. Before the Civil War, railroads provided a major stimulant to growth not only by increasing the speed and lowering the cost of transportation but by increasing the demand for processed iron and steel. After the Civil War, the amount of new track laid was astounding. Location 1316
Note: Government continues to show up in history as integral to our development
Government was exclusively responsible for sanitation in the late 1800s and early 1900s, something often overlooked by economists. Clean water made the growth of cities possible, and cities in turn were major sources of growth, their dense populations providing demand for goods and labor in new and less costly ways. Government also led urban health campaigns, including inoculations that helped prevent persistent outbreaks of disease. Location 1322
Note: Sanitation is an oft overlooked but requisite component of development and prosperity. The reason its so easy to overlook these things and talk about “individual library” is that the right takes this for granted.
As industrialization swept the nation after the Civil War, change was radical. Cities boomed thanks to the health improvements financed and managed by state and local governments. The first progressive political movement resulted in laws to protect people from the dangers of factory work and long hours. Early in the twentieth century, the Federal Reserve was created to stabilize currencies; the large toll taken by repeated financial crises and recessions had shown the need for a lender of last resort and a guarantor of the dollar’s value. Antitrust laws were passed to break up powerful monopolies. Location 1332
Note: At this point this chapter needs its own page on liberal database, government influence in America in the 1800s and 1900s
After World War II, the interstate highway system was built; the National Institutes of Health was expanded to subsidize medical research; the Defense Department devoted enormous sums not only to building weapons but to research and development that had myriad civilian uses, especially in high technology; college attendance was subsidized; and Social Security was expanded, enabling millions of senior citizens to climb out of poverty. Location 1347
But the narrowing of the income distribution was caused by the almost nonexistent unemployment rate during World War II, which was a consequence not of free markets but of war production and the resulting rapid economic growth—and in part the new acceptance of Keynesian policies. Location 1352
The income distribution remained narrow in the 1960s and throughout most of the 1970s, when Keynesian policies were in vogue. In these years, the nation subsidized college education further and created Medicare and Medicaid. Johnson’s War on Poverty helped reduce poverty rates from 22 percent in the early 1960s to 11 percent in the 1970s. The economy grew rapidly, until inflation—at first due to spending on the Vietnam War, but later to a variety of issues—began to rise dramatically. Location 1354
Note: Poverty, poverty reduction. So much for Chris’s argument that we spend on poverty amd nothing happens.
Crop failures, the Arab oil price hikes, and the end of price controls all contributed to soaring inflation in the 1970s. Location 1366
Note: There are your reasons for the inflation and stagflation of the 70s
Financial regulations were watered down significantly during the Clinton administration, and necessary new ones were never undertaken. Clinton refused to regulate derivatives, the heart of the 2008 crisis. He ended the last major Glass-Steagall restriction on mergers with insurance giants, enabling Citicorp and Travelers Group to combine to become the largest financial concern in the nation. The sheer size of financial institutions then allowed them to borrow and invest aggressively, contributing significantly to the riskiness of finance and the ensuing crisis. Location 1393
Note: 2008 recession
Mariana Mazzucato persuasively found that the conventional wisdom that entrepreneurs, not government, are the great source of innovation is wrong. As she wrote, “Not only has government funded the riskiest research, whether applied or basic, but it has indeed often been the source of the most radical, path-breaking types of innovation.
Similarly, Mazzucato noted, though we think of Apple as an innovative leader in pure technology, it has been able to exploit research done by various government-sponsored programs around the world. One eye-popping breakthrough was made by two European scientists at the U.S. Department of Energy’s Argonne National Laboratory; when they won a Nobel Prize in 2007, the Royal Swedish Academy of Sciences announced that their work had led directly to the iPod. Other government-dependent breakthroughs involved Apple’s display screens, the touch screen of the iPhone and iPad, and silicon-related advances. Seventy-seven of the eighty-eight most important innovations ranked by R&D magazine in 2011 were solely or partly funded by federal research according to Mazzucato. And most of those funds were made available in the early stages of development, before commercial possibilities were obvious. Location 1449
Note: And that breaks the back of Libertarians who said government only gets in the way, that it hasnt done anything, or that taxes are theft. This line of reasoning, which was known, but lacked the very specifics, and further contained in her book, could be the new central argument against Libertarians. They cant even say “but but private markets brought them to….” thats fine. Companies did assemble these products and im happy for it. Its also not the point in contention. I didn’t claim companies and private markets didn’t do anything. You claimed that of government. And your dead wrong. This breaks their back. The level 10 is probably in Mazzucutos book. But here is the genesis.
But the best empirical data, for all the attempts of Friedman’s followers to show otherwise, have not supported the case that lower taxes or smaller government leads to more rapid growth. The economist Peter Lindert, in his book Growing Public, explains how government spending as a percentage of GDP has no measurable effect on GDP growth rates. Growth depends on where and how the money is spent and how it is raised. In Taxing Ourselves, the economists Joel Slemrod and Jon Bakija illustrate that there is no explicit relationship between higher tax rates and lower growth. Location 1469
Note: There goes the tax argument.
Consider the post–World War II era. Cowen is right to note the importance of natural resources. But it’s important to review the real-world details. The price of petroleum, the most important natural resource at that time, increasingly inported from Arab oil producers, was kept artificially low by diplomatic machinations and the power of the United States and Western oil companies. Oil consumption tripled in the 1950s and 1960s, yet prices fell sharply because of government, not the free market. The market for oil was never free and unregulated. The U.S. government made the difference. Location 1488
Note: Post war boom
he ignores the fact that the economy in the postwar period neared full employment in good part because of high levels of defense spending. The Cold War and the growing political power of defense companies—Eisenhower’s militaryindustrial complex—kept defense spending at 12 percent of GDP in the 1950s and 10 percent in the 1960s. (As I write this, military spending, even during a major war, is only around 5 percent of GDP.) Those decades also saw the building of the interstate highways, stimulating the fabulous growth of the suburbs, and the continuation of the GI Bill and other forms of college tuition subsidies, all of which contributed to growth. In other words, government spending added a lot. Location 1497
Note: Post war boom
Cowen also ignored the contribution of high and growing wages, supported by unions, to the demand for goods and services that kept growth at a high, full-employment pace. There is no room for the strength and persistence of consumer demand in the orthodox growth model developed by Robert Solow and Trevor Swan. In the postwar years, union representation was strong. The agreements reached with the Detroit automakers, in particular, resulted in high wages. Unions can push wages too high, but the union-induced wages of those years were initially a key to growth. Detroit influenced wage demands by other unions and in nonunion companies, even for salaried white-collar workers. Union bargaining rights were the work of government. Location 1502
Note: More post war boom
The increase in world trade was another source of growth. Here was the most basic argument of the classical economists led by Adam Smith: that tariffs, quotas, and other inhibitions to free world markets diminish wealth. After World War II, major trade agreements reduced such tariffs in the rich world. But the growth was made possible by dependence on the U.S. dollar as the basic means of payment, a dollar whose value was basically fixed over these years, and by a fairly flexible interpretation of trade rules. Location 1508
Note: Post war boom
And contemporary theory, as I’ve said, would not have laid out the path to American development that the nation had actually taken so successfully. Location 1516
Social organization must prevent “bad” people from doing damage as much as it should allow “good” people to do good. In the philosopher Isaiah Berlin’s classic terms, Friedman was talking about negative freedom. In a complex world, however, Berlin’s positive freedom in a world of widespread disadvantage is more important. Government creates freedom when it enables people to get a good education and a good job, have good health, retain dignity. In the words of the philosopher and Nobelist economist Amartya Sen, it is being sure people have the capabilities to live full lives. Not only was Friedman’s denial of government’s importance wrongheaded, but his ideal world never existed. Without government, there would be no serious economic competition, no capable workforce, far fewer innovations, inadequate transportation for commerce. The elderly would be poor, the unemployed would suffer badly, and social cohesion, not to mention democracy, would be threatened. Friedman’s supporters have only weak counterarguments, mostly that individual Americans would take more responsibility for themselves. But we know of the far crueler world before progressive reform. A nation that operates as if free markets are adequate governance is a nation headed toward decline and tragedy. America abjured government for forty years. During this period in which Friedman’s ideas gained ascendance, the economic record was mostly one of failure. Location 1523
Government’s role in American history did not follow contemporary economic theory. Today’s ideas didn’t build canals, provide clean water, send adolescents to high school, protect workers from abuse. Today’s left-of-center thinkers seem content with their market failure doctrine. Location 1539
A central bank like the Federal Reserve adjusts interest rates to target its inflation rate. Raising interest rates should slow the economy, reducing demand for goods and services, restraining wage increases, and keeping inflation at moderate levels. Some believe raising rates can also be used to reduce the growth rate of the money supply, which a few economists, following the lead of Milton Friedman, still think is a key factor affecting inflation and the pace of growth of the economy. This idea has been largely abandoned, partly because the ups and downs of the money supply are also caused by business activity. When banks make loans, they do so by putting the funds in checking accounts (demand deposits), which are the main component of money in modern countries. If business is so strong that companies want more loans, and if banks have the funds, the money supply will go up. The growth of the money supply is thus as much a result as it is a cause of business activity (which economists refer to as being endogenous). In particular, the Fed focuses on controlling the so-called federal funds rate, which is the rate banks charge each other for short-term loans. This directly affects the interest rate banks will charge for loans and, as a consequence, the interest rates on other securities. Location 1586
Note: Not as much a direct argument for debate, but a good piece of information to go in the economics section.
If unemployment is too low, the bargaining power of workers will increase and they will demand larger increases in their wages. If wages rise rapidly, it is thought, business will in turn raise prices. Greenspan and Bernanke would argue that if the economy is working efficiently because of low, controlled inflation, employment will automatically reach its best level possible anyway, as will the average wage. Again, this is a leap of faith in pure theory; there is no empirical case that a 2 percent rate of inflation is the right one, and recent history suggests it has been too low. Location 1603
Low inflation was also especially congenial to those that made loans. High inflation reduced the value of loans because they were paid back in less valuable dollars. Low inflation kept the crors happy. It enabled them to lend more, culminating in the debacle of subprime mortgages (mortgages sold to people with poor cr). Once again, many economists seemed to be on the side of the rich and powerful. Location 1639
Note: A good trick to use against people who complain about low interest rates causing loose money and loose lending who also tend to support low inflation, which also incentivizes loose lending as opposed to high inflation which could easily curb lending since you know you’re getting back less valuable money as payment.
In 1971, President Nixon imposed controls on prices and wages, which did stanch inflation. The trouble was that when these controls were lifted in the following years, many prices rose especially rapidly, as if the lid had suddenly been taken off a boiling kettle. Nixon, seeking a second term, had increased government spending in 1971 and 1972, almost ensuring an explosion of prices when the caps were removed. Location 1678
Severe crop failures caused the price of food products to jump dramatically. And Arab countries raised oil prices three times in the wake of the Yom Kippur War and then again by another 33 percent in 1974. Average consumer price inflation reached nearly 12.5 percent in 1974. Then, between 1973 and 1975, the economy fell into its deepest post–World War II recession yet. Unemployment climbed from a low of 3 percent in the 1960s to 8.5 percent in 1975. Mortgage rates rose to over 7 percent, compared to 4 and 5 percent in the 1960s. The prime rate for business loans hit 10 percent in 1974. Location 1682
Note: End of Great Compression
Alan Blinder showed credibly that, contrary to Friedman’s assertions, the rising money supply could not have accounted for the rapid rise in inflation. According to his calculations, the end of Nixon’s price controls, the crop failures, and the increase in oil prices were far more important in creating the inflationary surge. But in the heated focus on inflation, Blinder was generally ignored. Location 1691
Note: More evidence that it wasnt Keynesianism
Oil and food inflation did eventually subside. But then oil prices were raised again in 1979, and there was another crop failure. Consumer inflation momentarily rose to 15 percent, and mortgage rates to 12 percent. Location 1695
Note: Twice crop failures and rising oil prices coincided perfectly with inflation. Th I s show m I re pursuasive evidence than it being Keynesianism.
“It’s morning again in America,” Reagan declared. It was no such thing. His using tax cuts to help stimulate the economy was, ironically, a Keynesian proposition. Keynes argued that a stimulative deficit could be achieved through either more government spending or a temporary tax cut. But Keynes didn’t argue that tax cuts permanently increased growth by raising incentives to work or invest, as many of his opponents did. Reagan’s tax cuts were excessive, and even after a tax increase—one eventually borne more by the middle class than the well-off—America was left with a deficit larger than Jimmy Carter’s as a percent of GDP even toward the end of Reagan’s presidency. Location 1706
Arguably of greatest concern is that wages have risen much less rapidly than productivity since the early 1990s. In a general equilibrium model, wages should keep up with the improvement in output per hour of work. Instead, the gains have gone to business. Over the era of the Great Moderation, the share of profits to business from GDP grew rapidly and the share of wages fell. It was getting hard to maintain with a straight face that workers got what they deserved—that they were rewarded according to their product, in economists’ terms. Economists largely blamed such problems not on a tight monetary policy or the failure to raise the minimum wage but on unequal education in a time of technologically demanding jobs. Soon enough, however, many college graduates were not being paid adequately, either. Education was not the single or even the most significant cause. Location 1791
Friedman thus denied the possibility of herd behavior. But people do sometimes buy high, the price keeps going up, and so many more buy still higher. Similarly, many follow the lead of sellers and sell still more. Markets can move rapidly to extremes. Financial markets have been subject to fashions and fads for hundreds of years. Friedman’s view was dependent on faith that market participants were always intelligent and rational—or at least that enough of them were at every point in time—and were rarely caught up in fads. Location 1962
Academics in the growing field of behavioral finance undertook experiments to show that investors were not rational. The classic experiments were those in which participants were offered money or the option to gamble for more with a high probability of winning. Most of the time, participants took the certain money. People are not purely rational, these experiments strongly suggested, thus challenging a prime assumption of the Invisible Hand. They are generally risk averse. They irrationally avoid possible losses. A smart investor weighing the odds more objectively could take advantage of the risk aversion and find good buys in the securities investors shied way from. Clearly, markets now seemed less efficient. Location 1991
The trail of damage left by EMT includes blind deregulation, a failure to address asset bubbles, dominance of short-term profit objectives to allow CEOs to maximize the value of their shares, and a wasteful takeover movement. All these in turn have harmed the economy and most Americans by leading to lower wages, recession, market crashes, misdirected investment of the nation’s savings, and rising inequality. Location 2160
A central tenet of free-trade theory is that not all benefit: some, often many, workers lose jobs to foreign nations when trade is expanded. The United States and others have frequently been unable to maintain full employment and high-paying jobs, and promises of adequate social programs to offset losses or reduced wages resulting from free trade have rarely been kept. Location 2244
World levels of poverty fell as many nations benefited from economic growth. But lower poverty rates, according to the World Bank, were largely due to poverty reductions in China and to a lesser degree India, neither of which adopted the market liberalization policies prescribed. The poverty threshold is also painfully low: the equivalent of $1.25 a day in the United States. It is really a measure of minimum tolerable penury in the poorest nations. In the meantime, incomes became more unequal within many nations—including in most of the rich nations. Location 2261
Returning to social programs, government should be allowed to develop a substantial safety net and training programs for workers who lose jobs as markets are opened. The United States has such a program today, but it is trivial in size and provides only temporary help. The demand of the Washington consensus to suppress budget deficits while simultaneously opening up markets limits such needed social programs. Location 2350
Economic growth was so rapid in the first two decades of tariff reductions after World War II that economists romanticized and exaggerated the role played by free trade. By the late 1960s, unemployment had fallen to around 3 percent. To economists, it looked as if free trade were a win-win. In the United States, wages rose and income inequality was reduced, even as trade increased. Location 2356
But much else contributed to this rapid growth, including repressed demand during World War II, the Marshall Plan, which created demand for U.S. exports, and new technologies and highly profitable investment opportunities. High defense spending even after the war provided ongoing Keynesian demand, and falling world oil prices reduced manufacturing and transportation costs dramatically. Location 2359
Note: More Post War boom.
Mankiw said on balance he favors “efficiency” over government policies that redistribute money. The economic argument for efficiency is that it will produce greater wealth over time and that wealth will be widely shared, but this has not been the case historically. Over the last generation, productivity has risen faster than the wages of most Americans. If Mankiw were right, wages and productivity would have risen at roughly the same rate. A place, then, must be made for government policies that are not merely an amelioration of the unevenly distributed pain of free-market economic growth but a correction of a basic failure of capitalism to maximize wealth. Location 2614
When the austerity economics advocated by Harvard’s Alberto Alesina and his colleagues were discred, it did not change policymakers’ minds. Alesina argued that government spending cuts could lead to growth. Those challenging his work, among them the IMF’s chief economist, Olivier Blanchard, noted in devastating analyses how the research failed to account for the conditions under which austerity policies were adopted in the past. If an economy was already strengthening or could benefit from a falling currency to stimulate exports, austerity would not necessarily work. If economies were weakening, austerity made matters worse. Location 2657
I’m sorry to say, you can pretty much go think-tank shopping to buy the result you seek.” Location 2667
The minimum wage, adjusted for inflation, has fallen significantly since the 1970s; this has especially affected women’s wages and may have particularly dampened the growth of income at the lower end of the spectrum. Indeed, as Lane Kenworthy points out, earnings for the bottom 25 percent in the United States have grown more slowly than in almost all rich nations since 1970. Location 2756
That the unemployment rate was unusually high over this period is among the more important factors contributing to inequality. With many looking for work, wages could not be bargained up. At the same time, union power had decreased. And the spread of globalization saw jobs being increasingly offshored. Location 2759
In 2002, David Card of the University of California, Berkeley, and John DiNardo of the University of Michigan published a stinging paper showing that income inequality rose fastest between 1980 and 1986, yet the rapid advance of technology, as measured by computer use, did not occur until the 1990s, just as inequality stopped widening. Location 2771
Some 95 percent of income gains went to the top 1 percent of workers between 2009 (when the recession officially ended) and 2012. It just couldn’t be that the top 1 percent were so much better educated than others. Moreover, the top 0.1 percent made by far the most, and they were clearly not simply better educated than the rest of the 1 percent. Location 2784
Note: Thus it isnt merely education