Friday, May 19, 2017

America's Snowflake Economy - by Gary North

We like to ridicule campus snowflakes. They need their safe spaces. They need their trigger warnings. They need their chill zones with nap mats and beanbag chairs.
The public thinks of them as a bunch of feminized, whining losers. The public is correct. They are.

The problem is this: the American economy is becoming a snowflake economy. Major sectors of the economy are becoming safe spaces that are protected by law. These are reduced-competition zones. They are licensed by bureaucrats and protected by bureaucrats.

This is not a recent development. It began no later than 1901, when Teddy Roosevelt became President. The essence of the Progressive movement was always the creation of a regulatory state which became more and more bureaucratic over time. This development began Europe in the late 19th century, so Europe has a head start on the United States. The essence of the modern regulatory state is the substitution of bureaucracy for free market competition. In the name of protecting consumers, unelected, tenured bureaucrats create protected areas of life throughout the economy. Bureaucrats reconstruct society in their own image.

The essence of the process is the public school system. It has been bureaucratic from the beginning. From top to bottom, it is staffed by bureaucrats who seek and gain tenure. Tenure is the heart, mind, and soul of the snowflake society. Laws force almost the entire population to go into a massive bureaucracy to be trained, beginning no later than the age of six, and continuing through graduate school. Career success hinges on people's ability to tolerate enormous boredom in the classroom, and then pass specialized examinations in order to enter their chosen professions. Almost 30% of America's professions require examinations and licensing in order to enter them. Everybody wants protection. Everybody wants a safe space. Bureaucrats promise this, and voters believe them.

Tyler Cowan's latest book, The Complacent Class, is one of the most important books in decades. It is well written, under 200 pages, and irrefutable.
He is a free market economist who teaches at George Mason University, a semi-Austrian department. He is a big fan of entrepreneurship. He shows that it is declining in the United States. New business formation is one indicator. Innovation is declining outside of Moore's law areas of the economy. Economic growth is declining.
I have my theory of the main culprits: relentless regulation including licensing, Nixon's destruction of the gold-exchange standard, and federal deficits. This does not hurt the book. These are politically irreversible, given the present political order. What is important is the trend, which appears irreversible.
In every area of our lives except digital technologies, we are dependent on the state to protect us. He understands that this is what ultimately lies behind the process. Voters use the government to create zones of immunity from competition. Then, lo and behold, there is less competition. This has been going on since the rise of the Progressive movement and the triumph of the Progressives under Teddy Roosevelt in 1901. He doesn't mention this, but it ought to be obvious.

I think it really goes back to the rise of copyright and patents in the 18th century. These are both interventions by the government into the economy. But there is a lot of debate about this within free-market circles, and we've certainly had a lot of economic growth under copyright and patents.

While he did not mention this, there is a parallel in political life. There has been a bipartisan move at the state level to make certain that congressional districts are locked in by political incumbents. There are changes in districts in response to the census every 10 years. Each party uses gerrymandering techniques to make certain that congressional districts are safe. Parties on the losing side every 10 years have support in Congress from political incumbents. The survivors have their districts made even safer. There are fewer districts for one of the parties, but the ones that remain are safe for another decade, and the incumbents appreciate this. This is why there is not a hue and cry every 10 years in Congress when states re-district congressional districts.
It is virtually impossible to replace an incumbent Congressman prior to the next census and redistricting. When that comes, it is decided by state legislatures, not by Congress. So, politically speaking, Congress is immune to political opposition. Congress can do whatever it wants, and there will not be political repercussions at the next election. Things change only at the margin.

The public was overwhelmingly opposed in October 2008 to the $700 billion TARP bailout. That did not stop Congress from passing it.
This redistricting plan was never foreseen by members of the Constitutional convention, but Elbridge Gerry figured it out in 1812. Gerry had been a member of the Convention. He was one of the three men who refused to sign it at the end of the Convention, because he thought it needed a Bill of Rights. Here is a classic case of the law of unintended consequences. The Convention did not see the rise of political parties, which was by far the most important single development of the Constitution. Members of the Convention hated political parties, and yet they created them as a result of the Constitution.

What state governments do for congressional districts every ten years is what virtually every aspect of government does in every aspect of life that it regulates, which is just about everything. Every group wants protection from competition. Every group appeals to the civil government to provide this protection. It is all done in the name of protecting the consumer. It in fact protects the producers. The process is now relentless.
One of the trends that he discusses is one which I have discussed for years. At the national level, I regard it as the most important political development. The most important development is nonpolitical, namely, the expansion of federal regulation, as revealed in the Federal Register. This is completely beyond politics. It cannot be solved by politics. It is truly irreversible. It is a worldwide phenomenon, and it is sapping the Western legal tradition. But what about politics? What is the primary trend there?

The primary trend is the expansion of the nondiscretionary budget. These expenditures are built into previous legislation. The main ones are Social Security, Medicare, Medicaid, the Pentagon's budget, and interest payments on the federal debt. There are others, but they are smaller programs that are not listed in the breakdown that we read on Wikipedia or anywhere else.
According to Cowan, in 1962, two thirds of the budget at the federal level was discretionary. He says that the present percentage is approximately 20%. But, most important in the book, he said that in 2022, it will be down to 10%.

This means that, even if the Democrats come in with a majority in both houses of Congress and the presidency in 2022, the way they came in 2009 for one term, they will not be able to start any new federal program. It will not be politically possible.

I think it is likely that by 2030, the discretionary portions of the budget will disappear. This means that politics will be all sound and fury, signifying almost nothing. It will be about who is appointed to the Supreme Court. It will have to do with issues of free speech and rights of non-cooperation. It will be all hat and no cattle.
I do not think Trump will be impeached and convicted in this term of Congress. The Republicans obviously can block this. They control the House and the Senate. It would take a political upheaval in 2018 for the House to go back to the Democrats. It would not take an upheaval for the Senate to go back to the Democrats. But that gives the country two more years before the first President in American history will ever be impeached and convicted. Frankly, I don't think it's going to happen. I think the media will undermine the presidency, 24×7, until Trump leaves office. The media are undermining public confidence in the Presidency, which is altogether a good thing. We haven't had a principled defender of limited central government as President ever since Grover Cleveland left office in 1897. When something doesn't work as planned for over 120 years, it is fair to conclude that it was poorly designed.

Even if the Republicans lose the House and the Senate, they will not lose the vice presidency. Mike Pence is far more conservative than Trump is. If Pence becomes President, the media will back off. They will have driven Trump out of office. To continue to attack Pence in the same way would be to admit that getting Trump out of office was politically meaningless. The media will want to make certain that he is not elected President in 2020, but they will not go out of its way to vilify him personally. A recession will play into their hands.
All the Republicans have to do over the next three years is nothing. I think that is pretty much all they will do. I don't think they're going to roll back ObamaCare. I don't think they're going to roll back Obama's tax system. I think Trump has been politically neutered. There is not going to be any wall with Mexico. Tariffs are not going to change much. Nothing is going to change much.

He may get his tax reductions through Congress. It is a long shot, but it is conceivable that he can do this. That will increase the federal deficit. But the federal deficit is going to go through the ceiling, which is fake anyway, due to the recession. We are going to see unprecedented federal deficits in the next recession. We're going to see falling interest rates on Treasury debt. Treasury bonds will rise in price. This will encourage a massive transfer of capital to the federal government. That will reinforce what Tyler Cowan is talking about in his book. It will strip the American economy of investment.

We are headed relentlessly toward the Great Default. The unfunded liabilities of Social Security and Medicare are relentlessly transforming the federal budget into a nondiscretionary fiscal sinkhole. Politically, nothing can reverse this. Nothing that happens in Washington is going to change the direction in which we are headed. Cowan talks about the relentless increase in spending on Social Security and Medicare. These two gargantuan welfare state monsters are going to get much bigger. He sees this. He does not think there is anything that can be done to reverse this.

I think the political system is being gerrymandered by the nondiscretionary components of the federal budget. Congress is running out of elbow room. Nobody in Congress is going to vote against increases in Social Security and Medicare. It is clear by now that nobody is going to vote against the Pentagon's share of the budget. Nobody is going to run for federal office in 2018 on a political platform of cutting the Pentagon's budget in half.

Nobody in Washington talks about what is statistically obvious, namely, that there is no way to fund Medicare, Medicaid, and Social Security. There is bipartisan acceptance of the federal deficit. There is no political movement capable of rolling back the federal deficit. The Tea Party has come and gone. It would never take a stand against Social Security and Medicare, which meant that it was politically irrelevant from day one.
By the time the Democrats can get back into the White House in 2022, it will be too late for the incoming President to have any effect on federal spending. Yet politics is all about special-interest groups getting their hands into the federal till. Political promises are made to these special-interest groups, but the absence of discretionary components in the federal debt will prevent almost all of these promises from being fulfilled. For all intents and purposes, national politics will be decided in terms of debates over social issues that have no budgetary consequences. All the rest of politics will simply be political rhetoric: sound and fury, signifying nothing.

Americans have become snowflakes. They have done everything they could to get governments to create barriers against competition. This is seriously reducing American innovation. It is undermining American character.

The economic pie is not growing as fast as it did in the past. Meanwhile, population is growing. Young adults who are coming into the economy are going to find that America is becoming more like Europe. The economic system is being rigged against the campus snowflakes. Older people who have jobs are going to protect these jobs through government. The snowflakes coming out of the college system are going to be melted early. They are not going to have any safe spaces, because their parents have politically gerrymandered the economy. They are going to find it hard to break into this economy. Robots will be competing against them. Algorithms will be competing against them. Their third-rate educations will do them little good. Their bachelor degrees in sociology will let them get entry-level jobs. Not very many of them will move up the career ladder. If they did not major in engineering, they will find economic success elusive.

We have seen all this in Spain, Italy, and Greece. It is the European disease, especially in southern Europe. The United States has been relatively immune, but I think Cowan is correct. The complacent class is in charge of both politics and economics, and the days of American innovation are slowing. We are importing the European disease. We have been doing this systematically since the early 1970's.

The Great Default is going to change this. There is no way to fund Social Security and Medicare. The unfunded liabilities of the two programs will overwhelm the federal budget. The federal government will have to cut the expenditures. This means cutting off granny. The only way to delay this is to slaughter a lot of sacred federal cows. This will overturn the New Deal's legacy. But it will take a political upheaval before the straitjacket of the federal welfare state is finally ripped to shreds. The Great Default is going to overturn American politics and the American regulatory state. I am optimistic about the long-run effects of the Great Default. But between now and then, the federal straitjacket will be tightened by the federal bureaucracy. There will be 80,000+ pages in the Federal Register every year.

The welfare state works only as long as the government can get its hands on other people's money. There are serious limits politically on the ability of the federal government collect taxes from the public. That limit is about 20% of GNP. The increase in nondiscretionary spending in the federal budget is going to place the welfare state in a straitjacket. This is good news in general. There is no way that America can grow its way out of the straitjacket. But the straitjacket is limited by the enforcement of federal laws, and without money for enforcement, Americans are going to get out of the federal straitjacket. I won't live long enough to see it, but maybe you will.