Wednesday, March 1, 2017

Evidence for Libertarian Economics

The debate I transcribed in my last post did not end there, but it did veer into a separate topic.  I’ve placed the rest of it here on a second post for easier readability and organization.  I continued my remarks by asking JJ, my debate companion, the following:


If we are comparing two policies, why do I have the burden of proving my preference works better than yours, and not vice-versa?  Personal freedom is not some cooky newfangled social experiment dreamed up by policy wonks; it is the default condition of humankind.  The state is the experiment.  And because the state is defined by violence, it seems to me the ethical burden is yours to give me evidence that’s more effective than the peaceful alternative.

Whoever has the burden would have an easier time comparing real-word outcomes if my ideas were ever permitted to have any case studies.  Unfortunately, however, governments are rarely inclined to forfeit their powers, which is part of the reason successfully restraining them is so often a benchmark of social progress.  Early governments were monarchies; at one time, constitutional democracies had never been tried.  Until recently, gay marriage had never been legalized.  At each stage in between, developing society required somebody with nothing but theories in their head to take the plunge on an untested reform they had intuitive reason to believe would make the world more just.  Not all of those theories are worth a try and it’s fine to think mine are not.  But until such time as the state steps aside somewhere and lets us test it, you can’t argue against our testing it on the logic that it’s never been tested!

JJ: Why do you have the burden of proof? Er because as someone who studies developed and under developed countries, your idea (as you have pointed out) does not have real world studies (as communism in its entire theory does not have any real world studies).

This is not because, as you seem to think, governments are so power hungry. It's because IF the government does not provide adequate social services and there are no alternatives (privatized) options, it gets overthrown.

To the extent that economies function prosperously, we find that states with strong centralized governments & legal systems, who effectively REGULATE their economies, do the best economically. Why is this? Because privatization, as I mentioned, has a tendency towards corruption. Without strong regulation, monopolies arise, family/nepotism & ownership is centralized within tribe-like structures. As I keep telling you, it is a balancing act & removing gov in that removes the public good from the equation, leading to mass inequality. We are literally watching this happen in the US (e.g financial crisis)

Libertarianism, to the extent that is has been tested, I would say is closest in the IMF/washington consensus policies, which have had governments all over the world cutting social services, removing minimum wages & workers regulations, etc. Your idea is a top-down approach, that with less regulation, companies will do better & the success will trickle down to the people. It is widely regarded by the development community to have failed dramatically.

Trickle-down does not work. Instead, what we have seen in countries that cut these services are an explosion of NGOs to provide the basic social needs of the population, since the governments are not effectively redistributing their country's wealth. Where do the funding for those NGO primarily come from? From other governments (USaid, EU, UN, etc)

1. Since particularly in the US we are not taxing effectively, this is primarily taking taxes from the middle class here to subsidize our [huge global] companies, not small family businesses btw, being able to exploit workers in other countries

Oh yeah and without any gov regulation, new companies in other countries can't compete with well-established global ones. This is why China, for example, has done so well since it has blatantly protected its economy from global companies, allowing them to develop before competing with others. The US has actually destroyed whole economies by promoting lack of regulation in other countries

2. If, say, the US gov was to stop funding social services in these countries through grants to NGOs, either other governments would step in to do so (china), social/political organizations (muslim brotherhood), or the people will literally not be able to survive. When people do not have basic social services, they revolt against the government, & often the system that failed them i.e. capitalism (e.g communism).

Here are your options. I like the enthusiasm, but just like communism, your theory IS actually being tried out today, and gov deregulation has in fact flat out failed economically.

Me: I finally got time to respond to this.  I’ll start by zeroing in on this quote:

“To the extent that economies function prosperously, we find that states with strong centralized governments & legal systems, who effectively REGULATE their economies, do the best economically.”

I don’t think that’s what we find at all, and I’m going to provide a lot of links with counter-evidence.

As you mentioned, nowhere to my knowledge has a perfectly free market.  Almost all economies on earth are mixed economies.  This makes empirical analysis of either of our contentions rather difficult: each side can point to all the bad conditions in a place as a symptom of the other side’s ideas, and all the good conditions as proof their own ideas work.  Unfortunately we cannot isolate every variable like we can in chemistry or physics, so an enormous portion of economic analysis out there is really just confirmation bias one way or the other, from think tanks or academics who decided what they wanted to prove before they set out to research it.

But the closest we can come to objective real-world analysis is by creating a spectrum from “most free/unregulated economies” to “most heavily regulated economies,” and comparing outcomes from different sides of the spectrum.  There are several indices which have done this.  One of them is the “Economic Freedom of the World” rankings done by the Cato Institute and their Canadian counterpart the Fraser Institute; another is the “Index of Economic Freedom” compiled by the Heritage Foundation and Wall Street Journal.  Another one is the State of World Liberty Index, which defined liberty as “"the ability for the individual to live their lives as they choose, as long as they do not infringe on the rights of others to do the same.” It’s not an exact science and we can certainly nitpick, but by and large these ratings systems agree with one another about how relatively free or regulated a nation’s economy is.  For instance, Hong Kong, Singapore, New Zealand, Switzerland, and Canada each rank highly on these measures, whereas Eritrea, Venezuela, Uzbekistan, Syria and North Korea each rank very poorly.

The results?   On each of these indices, there is a tremendous correlation between more economic liberty (aka LESS centralized state regulation**) and more economic prosperity, especially relative to other nations in their same region.  Cato summarizes their findings:

“Nations in the top quartile of economic freedom had an average per capita GDP of US $41,228 in 2014, compared to US$5,471 for bottom quartile nations. Moreover, the average income of the poorest 10% in the most economically free nations is about twice the overall average income in the least free nations. Life expectancy is 80.4 years in the top quartile compared to 64.0 years in the bottom quartile, and political and civil liberties are considerably higher in economically free nations than in unfree nations.”

This is as true in developing parts of the world as it is among the wealthy.  You mentioned Singapore’s success?  It ranks second in Economic Freedom!  Paying their public employees enough to deter corruption doesn’t mean it’s economy is characterized by strong central regulation; it’s been one of the freest markets on earth for decades now.

Estonia’s another country in a poor region that got relatively rich by following the free-market recipe.  I’ll quote directly from it’s Wikipedia page:  Estonia has the highest gross domestic product per person among the former Soviet republics.[10] It is listed as a "high-income economy" by the World Bank, is identified as an "advanced economy" by the International Monetary Fund, and is a member of the Organisation for Economic Co-operation and Development. The United Nations classifies Estonia as a developed country with a very high Human Development Index,[5] and the country ranks highly in measures of press freedom (3rd in the World in 2012[11]), economic freedom, political freedom and education.”

Even Sweden, believe it or not, is not as socialist as many people make it out to be.  Most of the economic progress Sweden has experienced since 1990 is a direct consequence of deregulation.  This Reason video explains:

Sweden adopted its famously progressive policies during the 1970s, but after years of sluggish economic growth the land of ABBA altered its course in the 1990s, adopting a host of free-market reforms, from deregulation to tax cuts.  Although much of the disco-era welfare state remains, economist Andreas Bergh credits the free market reforms with reviving his nation's economy. "Sweden is moving in the market economic direction," says Bergh.

Of course, none of those countries are AS libertarian as I would prefer, but if you want case studies about how less regulation is better than more, that’s as close as you’ll get.

**For sure, one of the biggest distinguishing traits between rich and poor countries is the presence of clearly established property rights.  For example, a Peruvian economist named
Hernando de Soto Polar has done a lot of work explaining how the inability to get a title or a deed to own land prevents the global poor from having a real address, and thus from getting credit or a loan and advancing their station.  We DO need the government to establish those fundamental property rights and enforce contracts to facilitate exchange; if you want to call that a regulation, fine, but to me it’s just a precondition for the market to even exist.


Inversely, there is EXTENSIVE evidence that strong, centralized regulatory schemes burden business and kill economic progress all across the world.  Here’s a good article from The Economist on that.

Here’s another source with some additional studies:

à a study done for the European Commission by economists at the University of Paris looked at public employment in 17 countries between 1960 and 2000. It found that for every public-sector job created, 1.5 private-sector jobs were destroyed.”

à a study of President Obama’s stimulus bill by Timothy Conley of the University of Western Ontario and Bill Dupor of Ohio State concluded that, while the stimulus created or saved some 450,000 government jobs, it destroyed or prevented the creation of more than twice as many private-sector jobs.

àHarvard’s Robert Barro finds a “significantly negative relation between the growth of real GDP and the growth of the government share of GDP.”

Here’s a list of heavily regulated economies which I would argue have seen their economic performance hampered as a result:

àGreece.  Greece’s collapse is famous by now, and almost entirely due to unrestrained growth of government’s role in the economy.  This video is a little melodramatic but essentially correct nonetheless.

àSpain.  This is perhaps my clearest example.  They are famous for stifling their businesses with obscene amounts of red tape – Jace and I studied abroad there together and I bet even he would admit that.  Then when they run out of tax dollars it sparks mass protests from people who don’t realize there’s simply not enough money to go around.

àFrance is also running out of other people’s money. As of 2012: “The budget has not been balanced for almost four decades. Many local authorities are deeply in debt. At 2.8 million, unemployment is at a 12-year high. State spending amounts to 54% of GDP. State debt stands at 85% of GDP and some analysts forecast that it could rise to 95% by 2014.

And historically, for certain, the radical departure from anything resembling market principles brought about by Francois Mitterand in 1981 caused economic disaster for France:

“Declaring that there was nothing wrong with dreaming, the Mitterrand administration declared war on finance, nationalising banks as well as big companies, state spending was boosted. Wages went up. Capital flowed abroad. Though some social measures such as the abolition of the death penalty brought lasting reform, the experiment ended in economic disaster as inflation soared, the franc was devalued and unemployment rose after the president was obliged to change tack, adopting policies that increased unemployment, slowed growth and lowered France's status vis-a-vis Germany.”

àIn Denmark, the welfare state is out of control and clearly dissuading work, making the country poorer. 

àArgentina has become poorer and poorer in direct proportion to how heavily regulated it has become.

Portugal and Italy are in the same boat.  I could go on.

In each of these cases, you might defend those countries as not so bad...OR you might counter that this isn't an argument against regulation overall, just me cherry-picking cases where the pendulum swung too far in the direction of socialism (an imbalance in your Yin-Yang, by analogy).  That's fine and a perfectly reasonable position to hold, but it then becomes your burden to provide examples in the opposite direction: where has a UNDER-regulation allegedly hurt the economy?

And before you argue the 08 crash, re-read the response I sent you to that a few months ago over messenger!!!

Finally, let’s get to the rest of your response.  You write:

“Why is this? Because privatization, as I mentioned, has a tendency towards corruption. Without strong regulation, monopolies arise, family/nepotism & ownership is centralized within tribe-like structures.”

This is 180 degrees from the truth, for two reasons.  First, it is literally impossible for a privatized industry to be corrupt – if it’s truly private, there’s no government involvement by definition, and so nothing to be corrupted!  What you may refer to is partial privatization, which often happens with prisons or military contractors, where the government still PAYS for the thing with tax dollars, but the actual management of the activity is conducted by some private organization.  This is not libertarian!  I usually oppose such arrangements just as fiercely as you do.

But second and most importantly, strong regulation is NOT what prevents monopoly and nepotism; it is much more accurate to say it’s what CREATES monopoly and nepotism, thanks in large part to regulatory capture.  When politicians are bought and sold by private interests, regulations are those things they are selling.

As you’re probably aware, regulatory capture is the tendency of regulating agencies, first discovered by Chicago school economist George Stigler, to create regulations which favor the biggest and most established interests in the sector they regulate.  Over the years economists have gotten a better understanding of just how it happens, and the opening paragraph of this more recent UChicago paper describes that pretty well:

 “When economists talk about regulatory capture, they do not imply that regulators are corrupt or lack integrity. In fact, if regulatory capture was just due to illegal behavior, it would be easier to fight. Regulatory capture is so pervasive precisely because it is driven by standard economic incentives, which push even the most well-intentioned regulators to cater to the interest of the regulated. These incentives are built in their positions.  Regulators depend upon the regulated for much of the information they need to do their job properly. This dependency creates a need to cater to the information providers. The regulated are also the only real audience of the regulators, since taxpayers have all the incentives to remain ignorant. Hence, the regulators’ on the job performance will be naturally defined with the regulated in mind, pushing the regulators to cater to the interest of the regulated.  Finally, career incentives play a big role. The regulators human capital is highly industry specific and the best job for people holding that specific human capital are with the regulated. Hence, the desire to preserve future career options makes it difficult for the regulator not to cater to the regulated.”

Hopkins’ Steven Teles teaches a whole chapter on this, and so does the very-liberal Dean Baker who I had the pleasure to have a class with.  Regulators have such a specialized knowledge-base and skillset that they have well-blazed career paths right into the top of the companies they regulate, and accordingly have an incentive to not be a hard-ass and get blacklisted by those companies.

Here’s a long list of real-world examples of this happening in the US and other places:

Another just off the top of my head is UPS and Fedex, where ground shipping and air shipping were regulated differently, and each was lobbying the government to tax their competition’s preferred shipping method more strenuously so they could gain market share.  Clearly this is not how companies compete with one another in a healthy economy.

Sometimes the regulatory agencies are actually even CREATIONS of the industry they supposedly regulate, because powerful companies see the potential benefit they could derive from borrowing the state’s power and actually lobby to have themselves regulated so they can write the rules. There’s good evidence this helped create the FDA, for instance: at the time it was founded, major US meat companies wanted to ship their product to Europe, but Europe had higher standards for meat.  To compete in Europe, these big companies had to increase their meat quality – but this would prevent them from competing here in the US, against smaller companies who could sell cheaper meat at lower qualities.  Creating the FDA allowed these big companies to force ALL meat providers to meet the higher standards, allowing them to compete in Europe without losing business here at home.

Long story short, regulatory capture is not an unfortunate, isolated aberration from the norm.  Regulatory capture is the rule.  As I said when you showed me the article by Johnson and Kwak about the Wall Street collapse:

“Corruption requires two complicit parties.  Libertarians are the first to agree that politicians are too cozy with Wall Street or corporate leaders, but that is a consequence of regulation!  Wall Street is just adjusting to the rules of the game.”

The stronger the government’s regulatory powers, the more those powers will be used to the benefit of the most powerful, often enlarging their profits and strengthening their already-dominant market share to the detriment of both consumers and their competition.  This is a recurring, foreseeable and inherent problem with regulation, not some kind of market failure!

Next you write: “Your idea is a top-down approach, that with less regulation, companies will do better & the success will trickle down to the people. It is widely regarded by the development community to have failed dramatically.  Trickle-down does not work.”

So trickle-down economics aren’t actually a thing.  They don’t exist!  Nobody supports it, and nobody ever really has.  Much like “neo-liberalism,” that term is a pure creations of the left, used exclusively by people who oppose the set policies they allegedly represent, and use them as hobgoblins to argue against those policies.

The set of policies you describe as the “Washington consensus,” though - low taxes, low regulation, private services – do indeed work, as I described above.

“Oh yeah and without any gov regulation, new companies in other countries can't compete with well-established global ones. This is why China, for example, has done so well since it has blatantly protected its economy from global companies, allowing them to develop before competing with others. The US has actually destroyed whole economies by promoting lack of regulation in other countries.”

Sheesh, now you sound like Trump!  Protectionism is probably the single most widely discredited idea in all of economics.  There are benefits to native companies, as you mentioned, but those benefits are more than outweighed by the cumulative harms to both foreign AND local consumers.  The reason China has done so well is closer to the opposite half of this argument: the explosion of international trade enabled by globalization and the decisions by rich trade partners like the US to decrees tariffs and regulations on their imports.  This enabling global economies of scale to emerge which have elevated almost a billion people from desperate poverty since 1970 in China alone.  If I get my way and free trade is promoted abroad, the same benefits will extend to India and other densely-populated third-world nations with surplus labor in the coming decades; if Trump or Sanders get their way, they will not, and those places will likely remain poor.

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