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Tuesday, July 22, 2025
The Falling Dollar
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Friday, June 13, 2025
Current Governments and Concurrent Economic Performance
I estimated real GDP growth by presidential administration, spanning from Reagan's first term to the first quarter of Trump's second term, using the FRED database series NGDPRSAXDCUSQ, which measures real GDP. For those interested in the mathematical details, I calculated the geometric annual growth rate between the last quarter the administration was in office and the quarter it took office.
Voters have a natural tendency to associate their favorite
elected official with positive economic performance, and real GDP growth is undoubtedly
a key statistic. Our politicians nourish this tendency by taking credit for
good economic news and, of course, blaming political opponents for bad economic
news. It takes time for the government to implement fiscal policy, and even
more time for it to have an impact on economic activity. A policy can have both
short-term benefits and long-term costs, or vice versa.
Politicians ignore another essential feature of our market
economy. Markets generate their momentum, which might cause a downturn or a
boom, but the tendency is towards full employment. Good policy may augment
growth and mitigate market downturns, while bad policy has the opposite effect;
however, policy is generally overwhelmed by market forces.
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Tuesday, June 3, 2025
Economists Are Pro-Market, Not Pro-Business
The circular flow diagram assumes two types of economic
agents: households and firms (represented by the red ovals). Households own all
the resources, which economists generally categorize as land, labor, capital,
and entrepreneurship. Firms combine these resources into outputs categorized as
goods and services. Agents trade resources in the market for resources (represented
by the lower blue rectangle), and goods and services in the market for goods
and services (represented by the upper blue rectangle). The circular flow
diagram has two types of flows from economic agents to markets. The flow of
tangible objects, resources, goods, and services is represented by the orange
arrows, which move in a counterclockwise direction. The second flow is
financial. It records the payments for resources, goods, and services,
represented by green arrows moving clockwise.
Households take resources to market, illustrated by orange
arrow 1A. Firms take the resources from the market, illustrated by orange arrow
1B. The financial flow moves in the opposite direction. Firms pay households
for resources in the resource market; green arrow 2B shows the financial flow from
the firm to the market, and green arrow 2A shows the financial flow households take
from the market to the household. Each type of resource receives payment. Land
receives rent, labor receives wages, capital receives interest, and
entrepreneurship, which combines all the resources into goods and services,
receives profit. Household income, the sum of rent, wages, interest, and
profits, equals exactly the expenses of firms for the resource.
Having described the nature of the two flows between
economic agents in one market, I can be more succinct in describing the flows
between agents in the other market. Firms produce goods and services for markets
where households buy them. The orange arrows 1C and 1D illustrate the physical
flows, while the green arrows 2D and 2C represent the financial flows.
The flow of resources, goods, and services to markets and
the financial exchanges for them may seem routine and dull. It is anything but.
They are tumultuous. Joseph Schumpeter described them as the “perennial gale of
creative destruction.” Entrepreneurs want more than the profits earned in competitive
markets where they are unable to influence price. Their exertions create
winners and losers. Robots and AI continue to replace workers, who then struggle
to find remunerative employment. Burgeoning trade with China shuttered
factories in the Midwest but created jobs in technology centers near great universities,
such as those in Seattle, Silicon Valley, Boston, and Austin. Does anybody miss
Ma Bell? An antitrust settlement hamstrung her, and smartphones finished the job.
Market competition hampers the ethically challenged, but they
still manage to plague markets. Enron employed fraudulent accounting practices
to conceal debt and inflate profits. WorldCom’s CEO, Bernard Ebbers, inflated
profits by nearly $3.8 billion through capitalizing operating expenses. An
internal audit by Cynthia Cooper discovered and revealed fraud. Burdened by high
debt, the company filed for bankruptcy. BP’s Deepwater Horizon drilling well would
have given the company access to 50 million barrels of oil valued at $5 billion.
Shortly before the well went online, it failed a critical safety test. The company
covered up the failure, leading to an explosion that caused the largest oil spill
in U.S. history.
According to the First Welfare Theorem, total payments are
maximized when markets are so competitive that entrepreneurs must accept the
prices set by markets. When entrepreneurs set prices, they extract rents,
wages, and interest from the other factors of production. Income falls. Having
a government that does not keep an eye on entrepreneurs, and two as often as
they can, is bad enough. Giving entrepreneurs the reins of government is like
giving them the key to the candy store. Most entrepreneurs are honest, but they
tend to see all problems through the eyes of an entrepreneur. Entrepreneurs do
not need to run the government themselves. They can elect pro-business
politicians who share the same predilection to maximize profits at the expense
of other sources of income. The first welfare theorem compels economists to be
pro-market, rather than pro-business. Voters should demand that the government
at all levels be pro-market.
1. See the "About ProMarket" at ProMarket - ProMarket.
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Wednesday, May 21, 2025
Remembering Joseph S. Nye Jr.: An Ad Hoc Test of Soft Power
Joseph S. Nye Jr. passed on May 6, 2025. Unless you have studied international relations, you probably never heard of him, but you have heard of his ideas. He coined the term soft power, using diplomacy, cultural influence, and persuasion to achieve policy objectives over a prolonged period. Scholars and diplomats distinguish soft power from hard power, which uses military and economic force to achieve goals. He taught that hard and soft power are more effective when combined to create smart power, using strategic alliances, partnerships, and institutions to expand our influence and establish legitimacy in international affairs. He believed that soft power, properly applied, could reduce the overall cost of foreign policy by reducing the level of hard power needed to achieve objectives.
Nye summarized power and its use in a May 16, 2025, article by Project Syndicate titled “The Future of American Soft Power.” The Future of American Soft Power by Joseph S. Nye, Jr. - Project Syndicate
“Power is the ability to get others to do what you want. That can be accomplished by coercion (“sticks”), payment (“carrots”), and attraction (“honey”). The first two methods are forms of hard power, whereas attraction is soft power. Soft power grows out of a country’s culture, its political values, and its foreign policies. In the short term, hard power usually trumps soft power. But over the long term, soft power often prevails. Joseph Stalin once mockingly asked, “How many divisions does the Pope have?” But the papacy continues today, while Stalin’s Soviet Union is long gone.
“When you are attractive, you can economize on carrots and sticks. If allies see you as benign and trustworthy, they are more likely to be open to persuasion and follow your lead. If they see you as an unreliable bully, they are more likely to drag their feet and reduce their interdependence when they can. Cold War Europe is a good example. A Norwegian historian described Europe as divided into a Soviet and an American empire. But there was a crucial difference: the American side was “an empire by invitation.” That became clear when the Soviets had to deploy troops to Budapest in 1956, and to Prague in 1968. In contrast, NATO has not only survived but voluntarily increased its membership.”
The Kennedy administration created the U.S. Agency for International Development (USAID) in 1961. It became an essential part of the government's projection of soft power. On March 28, 2025, the Trump administration shut it down. The action has been contested. The status of USAID and its programs is being argued in the courts.
The Chicago Booth’s US Economic Experts Panel answered three questions about the impact of eliminating its programs. Foreign Aid - Clark Center Forum These questions do not directly test Nye’s theories, but I have shoehorned them as an ad hoc test. As a note, I eliminated the category “did not answer” and adjusted the results. The questions and responses are as follows:
Question A: The cancellation of the majority of programs run by the US Agency for International Development (USAID) will have no measurable effects on GDP growth in the recipient countries over the next five years.
Question B: The cancellation of the majority of USAID programs will have substantially negative effects on the most vulnerable people in the recipient countries over the next five years. Question C: Development assistance motivated by the potential benefits for the donors in terms of prosperity and security is measurably more effective in promoting GDP growth in recipient countries than aid based on humanitarian or other moral principles. The survey, which I had appropriated to test Nye's theory of soft power, might be interpreted as weakly supporting the theory. Most economists (51%) were uncertain about how ending USAID aid would impact the future GDP growth of recipient countries. Thirty-five percent believed removing aid would impact future growth, and 12 percent thought it would not. Nearly all the economists believed that the USAID aid achieved humanitarian objectives. Ninety-eight percent believed that removing the aid would “have substantially negative effects on the most vulnerable people in the recipient countries over the next five years.” Is hard power, carrots and sticks, more effective for donor nations than soft power, honey? Most economists, 54 percent, were uncertain. Thirty-four percent believed it is not. None of the economists surveyed thought that hard power is more effective. Twelve percent offered no opinion.
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Wednesday, August 21, 2019
Update of the Impact of Current Policy on Concurrent Growth
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Thursday, April 25, 2019
Capitalism and Democracy
“I think the reason we’re having this argument over socialism and capitalism is that capitalism has let a lot of people down. I guess what I’m out there to say is it doesn’t have to be so.” “I believe in democratic capitalism, the democratic part is extremely important. There was this assumption that capitalism and democracy were almost the same thing — if you were for capitalism, you were also for democracy. Right now, we see democracy and capitalism coming into tension.”Overall, Buttigieg gave a good answer, much better than I expect from a presidential candidate, but there were a few problems with it. First off, he did exercise discretion, and discretion is generally good, by not criticizing fellow Democrats, but he evaded the question, not responding to directly to whether Democrats in office have excessively vilified business and capitalism giving rise to a preference for socialism among Democrat voters. He did say that capitalism “has let a lot of people down.” This is true, but so has socialism. Comparatively speaking, competitive capitalism has a much better record than socialism. As noted by Milton Friedman in an interview with Phil Donohue,
“In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear that there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”Buttigieg is correct to limit his praise to democratic capitalism. The success of capitalism to create long-run prosperity seems to be limited to those countries that combined democratic and market institutions. The two can work to strengthen each other. Economists have emphasized this relationship in their empirical findings after Friedman made his statement. While I disagree with Buttigieg’s wording, “we see democracy and capitalism coming into tension,” he certainly captures the mood of many voters. To be clear, democracy and capitalism are not people; they don’t make decisions and they don’t experience tension. Focusing on economic agents is more productive than ascribing human characteristics to institutions. Politicians from both parties, combined with politically empowered businesspersons, have designed law to benefit each other to the detriment of large groups of voters. Buttigieg brought one of President Donald Trump’s advisors, Stephen Moore, into the fray.
“It was alarming to hear recently one of the president’s economic advisers [Fed nominee Stephen Moore] said between capitalism and democracy, he’d choose capitalism.”It is easy to pick out part of a quote and criticize the originator for it. As best I can tell, the quote is from Michael Moore’s documentary, Capitalism: a Love Story. The full quote reads,
“Capitalism is a lot more important than democracy. I’m not even a big believer in democracy. I always say that democracy can be two wolves and a sheep deciding on what to have for dinner. Look, I’m in favor of people having the right to vote and things like that. But there are a lot of countries that have the right to vote that are still poor. Democracy doesn’t always lead to a good economy or even a good political system.”Just as Buttigieg focuses almost exclusively on the weakness of capitalism in its interaction with democracy, Moore almost exclusively focuses on the weakness of democracy. Sure, there are a lot of countries with some democratic institutions that are poor, but all wealthy countries have successfully combined democratic and market institutions to become so. Unlike Bittigieg, in this particular quote Moore does not recognize the positive outcomes when they two types of institutions operate together.
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Saturday, November 24, 2018
Current Policy and Concurrent Economic Performance
The first graph shows the quarterly growth of real GDP by administration from 1981 to the present. The data in red demarks the first term of a Republican president, and the data in blue, a Democrat president. Likewise, the light red reflects the second administration of a Republican president, and the light blue, a Democrat president. I could not visibly determine a difference in outcomes by party. Other readers may pick up trends that I missed.
The first histogram displays real GDP growth 88 quarters (22 years) of Republican administration and 64 quarters (16 years) of Democrat administrations. The red is the Republican, the blue, the democrat, and the purple, the overlap between the two parties. There are differences in the performance between the two parties. Republican administrations seem to have weathered the most severe downturns, and enjoyed the highest levels of economic growth. More striking is the overlap. The red represents the histogram of Republicans and the blue and purple, the Democrats. The distribution of growth between the two parties center around the same mean, 2.7 for the Republicans and 2.9 for the Democrats.
Picking on President Trump because he is the current president, and because he recently asserted that second quarter 2018 growth is “an economic turnaround of historic proportion,” the second histogram separates the Trump administration figures from the other Republican administrations. Growth to date for his administration averages 2.8%, splitting the difference between Democrats and other Republicans.
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