American Elephants


When You Don’t Understand the Economy, You’re Not Apt to Provide Correct Solutions! by The Elephant's Child

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When the economy seems dismal, and nothing seems to be going right, you may have noticed that reasons start appearing why we just have to settle for a less prosperous world. Obama’s answers in his speech to the UN General Assembly are particularly interesting. We have to make the global economy work better for all people, not just those at the top. Open markets and  capitalism have raised standards of living around the globe, but globalization and rapid progress and technology have weakened the position of workers and their ability to secure a decent wage. Unions have been undermined and manufacturing jobs have disappeared. Here’s Obama:

But I do believe there’s another path — one that fuels growth and innovation, and offers the clearest route to individual opportunity and national success.  It does not require succumbing to a soulless capitalism that benefits only the few, but rather recognizes that economies are more successful when we close the gap between rich and poor, and growth is broadly based. And that means respecting the rights of workers so they can organize into independent unions and earn a living wage.  It means investing in our people — their skills, their education, their capacity to take an idea and turn it into a business.  It means strengthening the safety net that protects our people from hardship and allows them to take more risks — to look for a new job, or start a new venture.

Forgive me, but this is pure claptrap. “Soulless Capitalism” indeed. That benefits only a few? Too much time going to Socialist meetings, and a deep ignorance of basic economics. Robert Barro, professor of economics at Harvard and a visiting scholar at the American Enterprise Institute corrected the president:

The Obama administration and some economists argue that the recovery since the Great Recession ended in 2009 has been unusually weak because of the recession’s severity and the fact that it was accompanied by a major financial crisis. Yet in a recent study of economic downturns in the U.S. and elsewhere since 1870, economist Tao Jin and I found that historically the opposite has been true. Empirically, the growth rate during a recovery relates positively to the magnitude of decline during the downturn, economist Tao Jin and I found that historically the opposite has been true. …

On average, during a recovery, an economy recoups about half the GDP lost during the downturn. The recovery is typically quick, with an average duration around two years. For example, a 4% decline in per capita GDP during a contraction predicts subsequent recovery of 2%, implying 1% per year higher growth than normal during the recovery. Hence, the growth rate of U.S. per capita GDP from 2009 to 2011 should have been around 3% per year, rather than the 1.5% that materialized.

The Left is burdened with the ideas that things need be done by government, that those in government (themselves) know better how to manage businesses and direct trade, and decide what needs to be done in the future. They are so filled with themselves and their self-admiration that they cannot conceive of letting people be free to pursue their own ideas and ambitions. Yet this is the very way you welcome growth and invention. Economist Dierdre McCloskey points out that:

“two centuries ago, the average world income per human (in present-day prices) was about $3 a day. It had been so since we lived in caves. Now it is $33 a day—which is Brazil’s current level and the level of the U.S. in 1940. Over the past 200 years, the average real income per person—including even such present-day tragedies as Chad and North Korea—has grown by a factor of 10. It is stunning. In countries that adopted trade and economic betterment wholeheartedly, like Japan, Sweden and the U.S., it is more like a factor of 30—even more stunning.”…

Over the past 200 years, the average real income per person—including even such present-day tragedies as Chad and North Korea—has grown by a factor of 10. It is stunning. In countries that adopted trade and economic betterment wholeheartedly, like Japan, Sweden and the U.S., it is more like a factor of 30—even more stunning.

The capital became productive because of ideas for betterment—ideas enacted by a country carpenter or a boy telegrapher or a teenage Seattle computer whiz. As Matt Ridley put it in his book “The Rational Optimist” (2010), what happened over the past two centuries is that “ideas started having sex.” The idea of a railroad was a coupling of high-pressure steam engines with cars running on coal-mining rails. The idea for a lawn mower coupled a miniature gasoline engine with a miniature mechanical reaper. And so on, through every imaginable sort of invention. The coupling of ideas in the heads of the common people yielded an explosion of betterments.

Another article by Dierdre McCloskey covering many of the same ideas is available at The New York Times. Both may be behind subscription barriers, but you can find them on Google. It’s worth trying to track them down.  I love Matt Ridley’s brilliant description of  “ideas having sex.” But that’s how it works. You suddenly put two ideas previously unconnected— together and suddenly you have a new and different thing. And it’s how people and nations get rich as well.


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