Tuesday, September 07, 2010
No, Mr. President, I like dogs.
Monday, September 06, 2010
Why is the Recovery So Slow Coming?
In linking to an Atlantic article on economic doomsday scenarios Glenn Reynolds comments,
Non-Predatory Government -> Robust Financial Systems and Innovation -> Entrepreneurship -> Professional Management
The first of those deserves special mention because it is the most important and it may well be the source of much of our troubles. Non-predatory government is the sine qua non of economic development. Without it, economic actors cannot have a reasonable expectation that their efforts, even if duly rewarded in the marketplace, will be theirs to enjoy. There's no sense in saving for the future, building a business, hiring workers to help you generate more profit, or sacrificing for long-term plans if you think the state (or rulers) will merely confiscate the fruits of all that hard work. And you don't do these things if you think you won't have a system of law and government protecting these things from private predators. Putting it most simply, you don't work like a dog to get something if you think someone else is going to come and bonk you on the head and take it away. Instead it makes much more sense to ingratiate yourself with the predators to gain some portion of the predated wealth. If you can't do that, your best bet is to keep your head down and generate enough wealth to get by till tomorrow.
Through much of human history and in much of the world today, genuinely non-predatory government is the exception, rather than the rule. The extent of the predation no doubt varied and the extent of economic growth beyond bare subsistence with it. But, economic actors had no way of expecting non-predatory government on a sustained basis and economic development remained pitiful as a result. In much of the world today, its easy enough to find places in abject squallor that are blessed with abundant natural resources, gifted with intelligent and hard-working (particularly when removed from those places) people, and struggling in abject squallor because their economies will not develop without non-predatory government.
Now, there's something that I think it's very important to make clear. If you've noticed, I've focused more on the consequences of predation for economic actors' behavior than I have on the consequences of the predation itself. There's a reason for this. The drag on growth from the predation itself is eclipsed by the consequence on its victims' behavior. Relatively modest changes in the behavior of economic actors yield vast changes in the amount of wealth produced. And, while any actor may not know that he will be the victim of predation, the threat alone will produce that change in behavior. But, that raises another important point. Since it is the effect on the behavior of economic actors that is important, the actual predation is less important than the perception of predation. It is because economic actors perceive the government as predatory that they change their behavior. In theory, a massively predatory government could exert little drag on economic growth if it were discrete enough about it. Of course, I don't think I'd be terribly inclined to bet on the discretion of a predatory government. This centrality of perception means that the beneficiaries of the predation are largely beside the point. The perception and behavior is shaped by the interaction of the actor and the predator, not by the actor and beneficiary. As a result, whether the predated wealth is sent to the leader's Swiss bank account, is put at the disposal of a foreign company or state, or is redistributed to the disadvantaged will play little role in perception of predation.
My concern is that this perception of predation has risen substantially in recent years. From a TARP that raised indisputable questions of moral hazard on the part of the banks, to revelations that some of the participants may have been coerced to participate in the program, to the bailouts of the auto companies that discarded longstanding bankruptcy procedures to the benefit of the UAW, to a stimulus that seemed more about rewarding political constituencies than stimulating economic activity, to revelations of corruption within the administration and Congress, to strongarm tactics by the administration and its supporters in dealing with private businesses, economic actors have increasingly had ample reason to suspect that the government is acting less a disinterested arbiter of economic actors than as an agent of some actors at the expense of others, in short as a predator. (And lest one thinks I'm picking on the Obama administration, revelations of no-bid contracts to Halliburton or the appointment of the children of political allies to run the Baghdad Stock Exchange during the Bush administration certainly added to the public's perception of predation.) Add to that the fact that only 21% of people believe the government has the consent of the governed and you have a recipe for economic actors to conclude that the government is increasingly predatory.
The growth diamond was invented to discuss the development of economies at the lower stages of development. Obviously, there will be some uncertainties when translating its lessons to the health and well-being of developed economies. However, its lessons are not irrelevant for developed economies. Prior to the rise of Peron, Argentina was among the world's ten richest countries. The pattern of predation Peron launched stunted its development in ways the Argentines have still to overcome. Should the current trend in perceived predation continue here, I cannot help but wonder if it might well lead to the same conclusion.
In linking to an Atlantic article on economic doomsday scenarios Glenn Reynolds comments,
I don’t think doomsday is coming, but I don’t think we’ll see substantial job growth or recovery until people are convinced the government won’t shaft them.I think this is substantially right. And it is a cause for significant concern. NYU Stern (full disclosure, my MBA alma mater) developed a framework for considering economic development called "The Diamond of Sustainable Growth", or more colloquially, the growth diamond. The growth diamond is roughly analguous to a baseball diamond, with each of the developments or stages corresponding to one of the bases. The stages of the growth diamond are as follows:
Non-Predatory Government -> Robust Financial Systems and Innovation -> Entrepreneurship -> Professional Management
The first of those deserves special mention because it is the most important and it may well be the source of much of our troubles. Non-predatory government is the sine qua non of economic development. Without it, economic actors cannot have a reasonable expectation that their efforts, even if duly rewarded in the marketplace, will be theirs to enjoy. There's no sense in saving for the future, building a business, hiring workers to help you generate more profit, or sacrificing for long-term plans if you think the state (or rulers) will merely confiscate the fruits of all that hard work. And you don't do these things if you think you won't have a system of law and government protecting these things from private predators. Putting it most simply, you don't work like a dog to get something if you think someone else is going to come and bonk you on the head and take it away. Instead it makes much more sense to ingratiate yourself with the predators to gain some portion of the predated wealth. If you can't do that, your best bet is to keep your head down and generate enough wealth to get by till tomorrow.
Through much of human history and in much of the world today, genuinely non-predatory government is the exception, rather than the rule. The extent of the predation no doubt varied and the extent of economic growth beyond bare subsistence with it. But, economic actors had no way of expecting non-predatory government on a sustained basis and economic development remained pitiful as a result. In much of the world today, its easy enough to find places in abject squallor that are blessed with abundant natural resources, gifted with intelligent and hard-working (particularly when removed from those places) people, and struggling in abject squallor because their economies will not develop without non-predatory government.
Now, there's something that I think it's very important to make clear. If you've noticed, I've focused more on the consequences of predation for economic actors' behavior than I have on the consequences of the predation itself. There's a reason for this. The drag on growth from the predation itself is eclipsed by the consequence on its victims' behavior. Relatively modest changes in the behavior of economic actors yield vast changes in the amount of wealth produced. And, while any actor may not know that he will be the victim of predation, the threat alone will produce that change in behavior. But, that raises another important point. Since it is the effect on the behavior of economic actors that is important, the actual predation is less important than the perception of predation. It is because economic actors perceive the government as predatory that they change their behavior. In theory, a massively predatory government could exert little drag on economic growth if it were discrete enough about it. Of course, I don't think I'd be terribly inclined to bet on the discretion of a predatory government. This centrality of perception means that the beneficiaries of the predation are largely beside the point. The perception and behavior is shaped by the interaction of the actor and the predator, not by the actor and beneficiary. As a result, whether the predated wealth is sent to the leader's Swiss bank account, is put at the disposal of a foreign company or state, or is redistributed to the disadvantaged will play little role in perception of predation.
My concern is that this perception of predation has risen substantially in recent years. From a TARP that raised indisputable questions of moral hazard on the part of the banks, to revelations that some of the participants may have been coerced to participate in the program, to the bailouts of the auto companies that discarded longstanding bankruptcy procedures to the benefit of the UAW, to a stimulus that seemed more about rewarding political constituencies than stimulating economic activity, to revelations of corruption within the administration and Congress, to strongarm tactics by the administration and its supporters in dealing with private businesses, economic actors have increasingly had ample reason to suspect that the government is acting less a disinterested arbiter of economic actors than as an agent of some actors at the expense of others, in short as a predator. (And lest one thinks I'm picking on the Obama administration, revelations of no-bid contracts to Halliburton or the appointment of the children of political allies to run the Baghdad Stock Exchange during the Bush administration certainly added to the public's perception of predation.) Add to that the fact that only 21% of people believe the government has the consent of the governed and you have a recipe for economic actors to conclude that the government is increasingly predatory.
The growth diamond was invented to discuss the development of economies at the lower stages of development. Obviously, there will be some uncertainties when translating its lessons to the health and well-being of developed economies. However, its lessons are not irrelevant for developed economies. Prior to the rise of Peron, Argentina was among the world's ten richest countries. The pattern of predation Peron launched stunted its development in ways the Argentines have still to overcome. Should the current trend in perceived predation continue here, I cannot help but wonder if it might well lead to the same conclusion.
