Friday, January 23, 2015

Whither the Welfare State?

Here, George Will provides an accurate and succinct description of the growth of the welfare state in America over the past three or four decades.  As usual, Mr. Will gets it right and offers entirely thoughtful comments.

Unless I misread his intent, Mr. Will is less than happy about the growth of transfer payments now received evermore broadly by Americans who would not be considered "needy."  Although I rarely find myself at odds with the ideas of George Will, I will offer a different perspective for explaining continuing growth in the welfare state in America and in other developed countries of the world.

The American economy continues to grow at a modest pace (about 2% per year over the long haul), which is far more impressive than pundits seem to think.  Our GDP weighs in at about $17 trillion per year, which is really a huge economy.  China is second at about $9 trillion per year.  Japan is third these days at about $5 trillion per year.

Even a small rate of growth for something as large as the American economy generates impressive gains in income per household.  Two percent of $17 trillion is about $340 billion.  If that $340 billion were divided equally among the approximately 118 million households in America, just 2% growth in GDP per year would bring an additional $2,800 per year to each household.  Or, examined on a 10-year period (which government types are fond of doing), a $31,500 increase in household income over the 10-year period, accounting for compound growth.

Of course, annual gains in GDP are not earned equally across all 118 million American households.  The widening gap between annual income of the top quartile and the bottom quartile of households in America is frequently the topic for hand wringing by those who call themselves progressives.

Mr. Will writes in his essay,
"America’s national character will have to be changed if progressives are going to implement their agenda. So, changing social norms is the progressive agenda."  
He is correct, of course.  But I propose that we all might as well get used to a sea change in America's national character and its social norms.  Let me explain.

In a word, "technology."  The widening income gap between the top and bottom of the statistical income distribution in the United States (and in other developed countries) is pretty much a direct result of advances in technology, in my judgment.

People who own income streams generated by creating technological advances (e.g., Bill Gates), or by owning income streams generated by astute use of technology (e.g., many IT employees across the nation), enjoy high and rising income.  People who own only their labor, made evermore obsolete by advancing technology, suffer from low and falling income.  Hence, the expanding income gap between those who benefit from advancing technology and those who don't.

Tyler Cowan has written a book Average is Over: Powering America Beyond the Age of the Great Stagnation   that explores many implications of the truth that advancing technology is making common labor obsolete for production of goods and services in our economy.  But people who own nothing other than common labor services must somehow keep body and soul together.

The answer is not "work harder," as any number of pundits on the right are wont to expound.  Nor is the answer "get more education," as any number of politicians and academicians have advised.  The simple truth is that an ever-rising number of people are not now capable of and will not become capable of inventing advanced technology, or becoming astute users of advanced technology.

Advancing technology makes it ever more possible to produce greater quantities and better qualities of goods and services with less human labor.  In the United States, our creation and use of advancing technology has already enabled us to transfer about 14% of annual GDP from people who earn it to people who did not earn it each year.  Although many lament such expansive transfer payments, the amazing thing is that it is possible to make such transfers while the standard of living for the payers of those transfers continues to rise!

Think for a minute of all the people who have jobs that literally could be done without.  I can easily think of tens of people I know whose job falls into that category.  Even what I do, which is teach economics and finance to college students, is quick on its way to falling into that category!  Yes, even college teachers will be replaced in the fullness of time with advanced technology.

On the one hand, advancing technology that permits a rising standard of living for everyone on the planet is a good thing.  On the other hand, most of us will not be inventors of that technology, nor will we be astute users of it, which means that most of us will have declining work-based claims on goods and services as technology continues to advance.  Yet, we will still want to eat, be clothed, be sheltered, and enjoy life.

Yes indeed, America's national character and social norms will definitely have to change.  They have been changing for decades, and they will continue to change.  The challenge we and other developed countries around the globe face is how to live in a world of abundance --- a world in which advancing technology makes it possible for an ever-growing percentage of GDP to be transferred from those whose current job generated it to those who either have no job or who have a job that is unnecessary for generating goods and services.

In my own insignificant corner of the world, I continue to add value by what I do because I have been an early adopter of computer technology throughout my teaching career.  I became certified in online teaching, for example.  I am a fairly astute user of technology.  But, still, I am not safe.  I can foresee the day when what I do will be unnecessary, due to a combination of clever computing and clever computer programming.  Call it a fairly meager advance toward artificial intelligence, which I think is not far off.

In a world of abundance --- a world in which scarcity of resources has been greatly attenuated --- we face a disconnect between work, income, and wealth.  I grew up in an era when hard work and education led to higher income.  I grew up in an era when social norms required attention to being a productive member of society.  I grew up in an era when national character and social norms dictated that those who would not work hard and obtain an education should not earn much income.

But what is one to do when what one can do has little productive value?  Which of you reading this essay is capable of inventing advanced technology?  Which of you is capable of even using advanced technology astutely?  And what of technology that is literally just around the corner that we cannot yet even imagine.  If you doubt that advancing technology is likely to be the rule, all you need to do is think about the technological advances that have occurred in just the most recent 50 years. David Hume was right in noting that the future is under no obligation to repeat the past.  Still, I think the future of advancing technology will be very much like its recent past.

Technology is advancing at an advancing rate.  It's not even linear; it's exponential.  Advancing technology is not a bad thing; it is a good thing.  But we humans will have to figure out a way for the fruits of advancing technology to benefit all of humanity, not just the inventors and the astute users.

I will close this essay with an analogy, one that some readers may find offensive, although no offense is intended.  My dogs have limited intellectual capacity,  even though they appear to have unlimited willingness to please.  No amount of hard work or eduction will enable my dogs to learn algebra.  If the material well-being of my dogs somehow depended on their learning algebra, they would be toast.

I submit that George Will and any number of others who lament rising transfer payments in America and around the world may as well get used to a continuing rise.  How else will the masses keep body and soul together?  How else will most of us enjoy the rising abundance of real goods and services available to humanity?

I confess that I have no good answers to the questions I just posed.  But I think they are questions we must grapple with out in the open, because I absolutely believe that technology will continue to mitigate the ravages of scarce resources.  I invite economists around the world to quit talking about scarcity and get on to the challenging business of creating economic theories that embrace abundance and the problems of income distribution in the face of rising abundance --- abundance that is the result of a very small number of persons, compared to the population of earth.

I am a confirmed classical liberal, as readers of EconoBlast have surely noticed. I believe fervently in individual liberty.  My recently published book, Morality and Capitalism, is a testament to that fact. When I note that transfer payments in the United States will be an ever-rising proportion of GDP, it is not because I favor the progressive policies of the current federal administration.  I have not lost my way, but the path is getting harder to see.


Anonymous said...

118 million households in America

If only we could have (Somehow)distributed 2% of the wasted, 'stimulus package' dollars to these households, where would our economy be?? Someone please share or direct me to the accountability of the stimulus: who, where, and why??

Fiddlinmike said...

Anonymous, I have some bad news. You will never find an objective assessment of the consequences of the Obama stimulous. Folks against it have always seen it as wasted money. Those who support it say the world would have been worse without it, or it should have been bigger.
I think you have to rely on philosophy.... Where did the "money" come from, and what would it have been spent on otherwise? Who directed the spending, and to what end? Should such spending be concentrated in the hands of a public body, or left to the preferences of the masses? For me, the philosophical answers are clear. Irrespective of any short-term statistical effects, in the long run stimulus plans are not only stupid but they are immoral - read Dr. Kendall's book and you might agree.

David L. Kendall said...

Fiddlinmike is correct. No credible accounting of the stimulus package will ever be done, and even if it were, different people would draw different conclusions about whether federal deficit spending did or didn't stimulate the economy.

As Fiddlinmike says, we will have to rely on thinking to understand why federal deficit spending cannot stimulate the economy. I've explained the ideas involved several times on this blog. See, for example, the article here:

Google "did the stimulus work" and prepare to spend the rest of your year browsing one or another article about the topic. :o)

Fiddlinmike said...

On the other issue ... The possibility there may be a permanent need for a wealth transfer from the technologically advantaged to non-technologically advantaged:

Everyone likes to draw a circle around a country and determine inequality, but it seems to me that world inequality is improving (largely thanks to technology). Middle classes are growing rapidly outside of the western world. And there are still billions of people who live in poverty - ready to move up.

It may be that in our country we are reaching a more permanent gap. Our guts tell us this is a problem that needs to be corrected, but maybe it isn't. What if I invented a product that made me obscenely wealthy, but dramatically improved the lives of the masses - a super health pill. I've widened the gap, but improved everyone's quality of life (which is not as closely related to income as many believe).

I'm not ready to accept the idea that there's a need to repair a gap, and I completely reject the idea that our government is capable of designing a system for "fairly" redistributing wealth. Still, if someone held a gun to my head and forced me to come up with a gap filler, it would be much different than what we do today.

Today some genius in government decides what the poor folks need, then gives it to them through a myriad of overlapping and ineffective programs.... One for a house, one for food, one for education, one for child care... on and on. There are centers and programs and research programs, that just happen to be named after politicians - but that's another story.

I say, if you're going to do it, just give those with low incomes cash. Don't administer a damn thing. Have a guy stand outside the courthouse with a big roll of twenties passing them out to government cardholders.

On the other side of the building, have a central collection point where armed officers drag wealthy folks and owners of successful businesses for shake-down and interrogation. Make sure they being twenties.

At least my system would be more honest.

David L. Kendall said...

Fiddlimike, you are absolutely right. Quality of life is improving rapidly around the globe, especially in places where people are allowed to be free, engage in voluntary exchange, own land, and practice just law (all to some degree, since no country on earth achieves a perfect score on these dimensions).

And just as you imply, the "gap" is not interesting or important at all. And government has no ability to close the gap, although government operatives can greatly influence who is on the top and who is on the bottom of the gap.

Milton Friedman agreed with your idea of just giving money to people, if somehow we agreed in a social context (e.g., by voting) that someone was too poor. You are in excellent company with that idea.

The idea I am offering in my article is not something that has been talked about in either academia or the world of pundits. That idea may best be explained by abpnalogy.

Suppose that you found yourself in a world inhabited by you and 20 loving, wonderful dogs, but no one else. You are intelligent, capable, and productive. So productive that you are able to produce all that you want and much more. The dogs, of course, are just dogs. Lovable, but unable to produce much mor than poop, tail wagging, and longing looks as they admire you.

How would you treat the dogs?

My hypothesis is that technology is creating such a world. Yes, the analogy draws attention to an extreme, but that is to help us see the point.

Fiddlinmike said...

So much to say here...

First, I'm not convinced that the 20 dogs don't already enjoy a better life than I do, with our without me. I could give them some money, but they'd probably just chew it up. The point is, we can't simply compare my command of resources to theirs and determine that all is unfair and needs to be corrected.

Second, the dogs clearly give me some benefit. So I may want to do what I can to sustain our relationship. I may act out of love or selfishness, who knows. My actions could take many forms, from feeding to an occasional belly scratch. We'd find an optimal arrangement in time - and that's the key. There would be 20 mutually satisfying relationships.

What I don't need is a law floating out of the sky telling me I had no choice but to give ten percent of my food to the dogs and be subject to filing auditable reports and challenges from the national dog administration.

A law such as this will not be close to optimal, and it strips any virtue I may have in my actions by eliminating my ability to choose how to treat the dogs on my own.

I would treat the dogs well. And that's what would happen to the non-techs, even in the absence of a mandate from on high.

David L. Kendall said...

The issue isn't about fairness. I would never use the word, since I can't define it in a useful or meaningful way, aside from the Moral Imperative.

The issue is for me is indeed that we must find voluntary relationships. I am satisfied that you and I and everyone else would do whatever they think will maximize their own net benefit. That's the Fundamental Hypothesis of Economics, as I call it.

I'm entirely confident that you would indeed treat the dogs well. And I am absolutely certain that any kind of law about you giving the dogs income would be immoral. In any case, you make the laws in the world I posited, not the dogs, which makes the situation pretty analogous to the world we are approaching.

My thoughts just now about how the future could evolve is that abundance will end up making most of us pretty happy with the world, quite regardless of the fact that some who live in it will be very wealthy and some will just be well off.

My real point is that economics will have to change, because economics as we know it is based on managing scarcity. The world of the future will be a world of abundance, not scarcity, if the past 100 years is any guide.

Fiddlinmike said...

I like to think technological advances, particularly in healthcare, will someday take us to a time as you describe - where folks are happy enough with what they can accomplish in their own lives not to be concerned with those more fortunate, or extremely fortunate. Managed wealth transfers would not be necessary.

It seems to me that scarcity will always exist as an economic phenomenon, even in an environment of pure leisure, for we can't do everything at once and we can't live forever.

David L. Kendall said...

Fiddlinmike, you are correct that scarcity can not be eliminated entirely, but only mitigated. As you say, the nature of matter, energy, and time dictate that truth.

Still, scarcity has been mitigated greatly over the most recent 250 years, and will be further mitigated to an amazing degree over the next 250 years.

If the market value of 75% of people on earth were below the subsistence level, while the market value of 25% were 10 times the subsistence level, would managed wealth transfers be acceptable? And if the answer is "no," then would allowing 75% of the population to expire be acceptable?

For me, this whole topic is intensely interesting, because I see plainly the path we are on, and I think I see why we are on it. As I said before, I don't have much else worked out, but I will continue to think about the issue.