What exactly went wrong in Germany? Thomas Jefferson had been dead for 150 years when Adolf Hitler came to power. But he would have recognized the broad outlines of the problem. Jefferson: "My reading of history convinces me that most bad government results from too much government."
Too much security turned out to be as deadly to the people who created it as to those who fought against it. Even after the Germans had surrendered, the dying continued. The Allies turned their heads as 13 million Germans were expelled from Prussia, Poland, Hungary, Rumania, Czechoslovakia, and other nations in Eastern Europe. It was not a pretty sight. The Germans call it "die Flucht"...the biggest 'ethnic cleansing' in all history. Hundreds of thousands, perhaps millions — mostly women, children and old men — died en route. That too, was part of the cost of Germany's 'too much' reliance on military power. Once the downside began...it was a long way down.
But suppose the government had confined its activism to helping people rather than killing them? Suppose Heinrich Himmler put flowers in his hair and Adolf Hitler went to anger management sessions. Suppose they turned their energies from mass murder abroad to 'making a difference' at home?
Is there any limit to the good works they might have realized? Could the world ever have 'too much' improvement? Where's the downside?
You fill the tank of your car. Minutes go by as the big tank fills, with a deep gurgling sound coming from the mouth of the tank. It gets fuller and fuller, better and better. Then, you hear a different sound. The tone changes as the neck of the tank fills quickly. It is time to click the nozzle and stop.
How much gasoline has been spilled on the ground by people who failed to stop when they should have? The problem has been greatly alleviated by the invention of the automatic nozzle, which closes when it senses a back-up. What a shame similar devices have not been developed to stop people from overdoing it in other ways! How many desserts have been consumed by people who passed the point of diminishing returns at the starter course? How much money has been wasted on investments whose rates of return sank to zero...and kept declining? How many couples should have kissed and made up at the breakfast table rather than continue their argument through dinner? And how many armies should have called a halt at their own borders?
Here we examine a well-known, but little studied, phenomenon — what happens AFTER you have gone too far...and what you get after declining marginal utility has turned into negative utility. Calories that shouldn't be eaten...money that shouldn't be spent...things that shouldn't be said and wars that sensible people shouldn't fight — they are all part of The Downside, where every success is measured in red and every step forward is a march to hell.
So, let us turn away from the warfare state to the welfare state. Surely, you can't over-do it when you're trying to help people, can you? Which brings us back to the world, and specifically, the United States of America, circa 2012. Never before in the history of the world have so many people devoted their lives to trying to the make the world a better place. What is government if not an organization that works to improve the lives of its citizens? Surely, every one of its employees strives to "make a difference" in a positive way.
The baker may be said to improve the lives of his clients, but he does so unintentionally, almost accidentally. He is just trying to support himself. If anyone else gets a benefit out of his actions it is purely coincidental. And the auto mechanic too. And even the psychiatrist. Each looks after his own. Any improvement in the lot of mankind is offset by the money each charges. In theory, the world comes out even, exchanging one resource for another. That is how the market system works. A buyer exchanges with a seller. One gives up something; one gets an equal value in return. Even Steven.
But in the year of our lord 2012, 2.65 million people work apart from the market system. They are the employees of the US government whose purpose is not to render any service nor produce any manufactured good in an even exchange for money. Instead, the GS 1's through GS 12's have a more important and more general mission.
If the bakers and auto mechanics only got back from government what they actually paid for they would have no reason to go to government at all. They can get what they pay for in the private sector. They must get something more from government. Or something different. Something not available in the market.
The people on the federal government payroll, if they thought about it at all, would probably think that they were hired to increase the sum of human happiness by correcting the failures, oversights and shortcomings of the market system. If they labor for the SEC, they believe they improve the way securities are bought and sold. If they draw their pay from the Department of Education or one of its many subsidiaries or any of the institutions of higher or lower learning supported in part or in whole by the feds, they believe they provide some fillip to the educational process that is beyond the reach of the free enterprise system. As for the central bankers, who knows what they really think? But to the outside world they maintain that they can do a better job of selecting the interest rates paid on short term notes than the buyers and sellers of the notes themselves.
As mentioned earlier, a similar conceit has taken over almost the entire economics profession. The world created by able buyers and willing sellers isn't good enough for them. They aim for a better one. And they believe their professional training gives them the tools needed to improve it.
Without coming to any conclusion about how good their training was...or how well they are able to accomplish the enormous task in front of them...let us merely look at the tools themselves. Whereas the classical economist, before Keynes and econometrics, was a patient, neutral observer, the modern, post-Keynes economist has ants in his pants and help in his heart. He cannot sit idly watching his flock, like a philosopher studying a group of sinners...or a botanist watching plants. Instead, he comes on the job, opens his tool chest, and gets to work. But what tools does he work with? Numbers.
If you are going to improve something you must be able to measure it. Otherwise how do you know that you have made an improvement? How do you know there is any improvement to be made? But there is the problem right there. How do you measure economic performance?
You need numbers. But when we look carefully at the basic numbers used by economists we find that they are fishy...if not outright fraudulent. These numbers claim to have meaning. They claim to be specific, scientific and precise. They are the evidence and the proof that led to thousands of Ph.D. awards, thousands of grants, scholarships and academic tenure decisions. More than a few Nobel Prize winners also trace their success to numbers. They are also the basis of weighty decisions and far-reaching policies that change the lives of millions of people.
There are only 9 cardinal numbers. The rest are derivative. These numbers are useful. In the hands of ordinary people they mean something. Three tomatoes is different from 5 tomatoes. Three buckets of 5 tomatoes each is 15 tomatoes.
In the hands of scientists and engineers they are indispensable. Careful calculations allow them to send a spacecraft to Mars...and then drive around on the Red Planet.
But a useful tool for one profession may be a danger in the hands of another. Put a hairdresser at the controls of a 747...or let a pilot cook your canard a l'orange... and you're asking for trouble. So too, when an economist gets fancy with numbers, the results can be catastrophic.
The old, classical economists were suspicious of numbers. They were not 'bean counters' or mechanics. They were observers. By watching what people did — and how economies actually worked — they induced 'laws' or 'principles' that helped them understand what was happening and predict what would happen next. There was, for example, the 'law of supply and demand.' Or the aforementioned 'law of declining marginal utility.' Economists back then did not earn much money. So they took their recompense in other forms, often by naming one of these newly discovered 'laws' after themselves. Jean Baptiste Say discovered that "products are paid for with products" not merely with money. (He meant that you needed to produce things to buy things...you could not just produce money.) It is today called 'Say's Law.'
Gresham noticed that if people had two different kinds of money available to them, they would spend the weakest of them first, and keep the good money in storage.
We're not above eponymous vanity either. So we give you Bonner's Law: In the hands of economists, the more precise the number, the bigger the lie.
An article appeared in the press on Oct. 4, 2012. "Health care as 'income' for the poor.' The New York Times reported that the Congressional Budget Office had decided to include government's health care spending, dollar for dollar, as income to American families. In the wink of an eye, the numbers boys at the CBO increased the household income of the bottom 5th of the population by $4,600 per household...thus lifting hundreds of thousands up above the poverty line.
The government does indeed spend nearly $8,000 on the average Medicaid beneficiary per year. As for the average Medicare recipient, the total rises to $12,000. So, the quants seem to be on solid ground in adding this money to the 'income' of the people who receive it.
The NYT is much too earnest a journal to mention it, but this opens up vast new possibilities for the number crunchers. Do the poor not also receive their share of other spending? Their children are educated, almost entirely at the expense of the government. Take the median number of children. Take the cost of a private school education. Add that to the typical low-income household. Presto! They're now a middle-income household. No kidding. Do the math. Or make it easier. Take educational spending, $809 billion. Add it to household income. You just increased the average household income of the lowest fifth of the population by $7,000.
And what about security? Don't American households benefit from US 'security' spending? If they don't, why do we spend the money? The feds spend about $800 billion on 'security.' And if you added in all the crackpot spending justified in the name of security — such as building a US embassy in Baghdad that can withstand a nuclear attack — the total is closer to $1.2 trillion. Divide that by 114 million households. Now, you can add another $11,000.
In fact, what is the entire US federal budget — not to mention state and local budgets — if not a benefit to the citizens, residents, and illegal immigrants of the United States of America? So, take the whole damned budget and divide it up. And now we have the poorest people in America with household income of about $55,000. Voila, we have won the war on poverty without firing a shot.
The Downside of Mathematics
We also have a way to vastly increase US household income — the feds have only to spend more money! Just add zeros. How about that? The poor family has not a dime more in real, spendable income...but we've managed — by clever use of mathematics and economics — to double its income.
But that illustrates the nature of modern economics. It is all numbers...and none of them mean anything. And none means less than the zero.
I've always been especially suspicious of the zero. It is a number. But a number is 'something.' The zero, on the other hand, is supposed to represent nothing. Well, which is it? Something or nothing? Nothing, right? But how can something be nothing? You say you have zero tomatoes. And you tell me zero is a number, used for counting. But how can you count tomatoes that aren't there? You've either got tomatoes or you don't. Zero tomatoes is a contradiction. It's oxymoronic.
And if the zero is actually nothing, how come you can put it after a number...and suddenly you have 10 times as much? Or, put it in front of a number...and you have 1/10 as much. How can nothing do all that?
Now if I have 3 tomatoes and I add zero tomatoes, I have done nothing. I still have three tomatoes. But if I multiply my 3 tomatoes by zero, suddenly, I don't have any tomatoes. If zero is nothing, I want to know what happened to my tomatoes.
We didn't have the zero for thousands of years. As far as I know, we got along fine without it.
Numbers are a trap for economists. They make it look like science, but it is not science. Far from it. Initial conditions can never been controlled or fully understood. Instead, they are infinitely complex. Nor can results be reproduced. Nor can hypotheses ever be disproven. That's why economists can cling to dopey ideas for centuries — they can never be disproven.
Using numbers, economists pretend to tell you something they don't really tell you, often something they can't possibly tell you. The unemployment rate, for example.
The Bureau of Labor Statistics uses numbers like make-up. Put on enough of them, and you can make things look good...as long as you don't look too closely. Behind every number is a wrinkle... Small numbers hide small ones. Big numbers hide big ones. A big number, such as the unemployment rate, has a Grand Canyon of wrinkles hidden behind it. There are the statistical adjustments...seasonal adjustments...and enough arbitrary definitions to make a corpse look good.
BLS says that 7.8% of the workforce is unemployed. Simple enough. But what does it mean? What's the 'workforce'? And what does it mean to be 'unemployed'? Think of all those people who work for cash...like the Latinos you pick up at gas stations for day work. Are they unemployed? How about the guy who couldn't find a job, so he went back to school? Is he unemployed? What about the housewife who would like to find a job...sort of...but isn't actively looking for one? Are these people part of the workforce?
It's obvious that you can change the assumptions a bit and change the reported unemployment rate a lot. When statistician John Williams looks at the US data, for example, he comes up with a real unemployment rate of 23% — almost as high as the jobless rate in Spain.
And yet, the BLS tells us that US unemployment is 7.8%. Not 'around 8%.' Not 'less than one in ten.' But 7.8% exactly. And yet, there are so many greasy assumptions lurking in the cracks of this number that it is not only completely unreliable and practically meaningless, it is the downside of mathematics. It pretends to tell you something...but once you have taken it in you know less than you did before, because what you think you know is largely a fraud.
The exact number of people who want a job and can't get one is unknowable. It is unknowable because the people concerned don't know it themselves. I saw a bum on the street in Baltimore the other day. He stopped me and asked if I could spare a dollar.
I said I couldn't give him a dollar. "Free money could adversely affect your moral character development," I explained.
Instead, I offered him a job. I had some work to do around the office; I thought I was doing him a favor. What do you think he said?
It begins with an "F".
Now, should that man be counted as unemployed? He certainly didn't have a job. But if you offer a job to most people...what will they say? They'll reply — maybe. Because it depends on a lot of things that even they don't have the answers to. How much will they be paid? How many holidays will they have? How far will they have to commute? Will they get health benefits?
And those are just the obvious questions. If you're considering taking a job you also have to think... 'What are my other options?' 'Could I make more without working?'
'Maybe I should start my own business instead.' Or, 'Let me see if I can get on disability, first...'
That's why the old economists thought it was absurd to try to calculate an unemployment rate. It was just an empty number. And it was even more absurd to try to 'increase' employment. As long as buyers and sellers of labor were both free to make a deal, there would never be any 'unemployment.' There would merely be people who, given the current bid, decided to withhold their labor from the market.
The old economists knew their limits...all they could do was describe the conditions under which people had jobs...and come up with some general rules and principles that explained why some people had jobs and others didn't. But you could not say with any precision how many people were unemployed.
But today, economists tell us not only how many people are looking for work...but what to do so that more of them find jobs. How? The easy slight-of-hand would be to redefine what the workforce means...reduce the workforce and you automatically increase the employment rate. That's what economists and their numbers can do for you. During the Obama administration a record number of people left the workforce, substantially lowering the unemployment rate.
But now if you want to get your face on the cover of TIME magazine as a hero of some sort, you've got to come up with some other, craftier subterfuge. How about this... Raise the taxes on overtime pay! This is exactly what Francois Hollande has done in France. He says it will increase employment. And he's probably right. Because now it is more expensive to pay someone to work overtime than it is to hire someone new. So, with a little luck, the unemployment numbers may look better in France.
Is that good? Are people better off? Who knows? The numbers certainly don't tell you.
In America, they've kept the jobless numbers down by lending people money to go to school. So, instead of people officially counted as unemployed....people are counted as students. They load them up with debt — student debt is now over $1 trillion. Now, when the young person finally gets out of school, his job prospects may still be uncertain, but his debt is undeniable. Is he better off? Is anyone better off? Has any improvement been wrought?
The numbers are not silent on the matter. They lie at the top of their voices.
Probably no numerical grease is thicker and less transparent than the GDP. There, the numbers dissemble and mislead, just like economists' other numbers.
Here's a story from The New York Post:
They take a limousine to McDonald's, own his-and-her Segway scooters and have designed their new house with 23 bathrooms, each equipped with Jacuzzi tubs.
Time-share magnate David, 77, and his beauty-queen trophy wife, Jackie, 46, were already Orlando's gaudiest couple when they decided to open their doors to filmmaker Lauren Greenfield as they broke ground on a 90,000-square-foot monster home with a 120-foot Grand Hall modeled after France's Palace of Versailles.
It's bigger than a 747-jet hanger. Designs include three swimming pools, 10 kitchens, a bowling alley, a skating rink and a garage that fits 20 cars. The home's mahogany doors and windows alone cost $4 million.
"We never sought to build the biggest house in America," Jackie says in the film, titled The Queen of Versailles. "It just happens."
It has been described as tacky, trashy and tasteless, with the top three floors inspired by Las Vegas' Paris Hotel.
Trashy? Tasteless? In 2012, the biggest house in America sat unfinished. It may never be finished.
But hey, it added to the GDP!
GDP numbers are a complete scam. They don't tell you if you're coming or going. They don't tell you if you're getting richer or poorer. This is another way that numbers fail. They can only measure quantity. Or speed. Here's an example. An article ran in the Wall Street Journal last month. It explained how Italy's economic growth was retarded by strong family attachments. Half the young children in Italy are raised by their grandparents — their 'nonni' — while their parents work. Instead of going to day care centers, the kids go to their grandparents.
How does this affect an economy? There is no exchange of money when the grandparents do the day care. So, it doesn't register in the GDP. No exchange of money, no 'growth.' The article also went on to say that people were reluctant to leave their hometowns to seek work elsewhere because they relied on the family for childcare. Theoretically, a mobile population increases GDP too...GDP increases when people take new jobs, move, buy houses and furniture, sign up for health clubs, day care and so forth. All these things add to GDP growth, even though they do nothing to really increase quality of life. They are a kind of phony growth. GDP looks only at the quantity and velocity of money transactions, not the quality of them...nor the quality of life they produce...nor the real wealth of the people in an economy.
I cut your lawn. You mow my lawn. We pay each other. The GDP goes up. The more transactions per person per year — the greater the GDP of a country.
Is anybody better off? What really have the numbers told us? Has one single extra lawn been mowed? One single extra blade of grass cut down?
No, right? So, if a number...the GDP growth number...tells you that you're growing...and you're not really growing...what good is the number? It's a flimflam. An empty number. There's no good information in it. It's like the unemployment number. Empty. Hollow. A zero. And so are almost all the compound, formula-driven numbers used by economists. They are dishonest. Their only role is to tart up economists' confections and make it appear that they can do things they can't really do. They are designed to make economics look like engineers, working on the economy as though they were real technicians preparing a moon launch.
But if these guys were building a bridge, none of us would want to drive over it. If they were building cars, we wouldn't buy them. And if they were running the phone company, and we needed a telephone number, we could call "Directory Information;" they'd estimate it for us.
Posted by Bischoff on 10/17/12 12:51 AM
I love Bill Bonner's philosophical musings about economics. I have read his "Daily Reckoning" Newsletter for a better part of a decade, and I greatly enjoy his style of writing.
I like to add to the points he makes in the essay by directing attention to the fact that government does not produce anything. It only provides a "service", just as a hospital or restaurant provides a service. While the hospitals and restaurants have to compete for customers in a market for services, the size and cost of government services are supposedly determined by the constituents of the politicians charged with running the government.
How well government promises for service in return for tax money has worked out is the subject of Bill Bonner's essay. What he fails to make clear is that Say's Law not only presupposes that products be produced before they can be exchanged, but that products are requisite to afford the compensation for services. IOW, if no goods are produced, payment for services is not possible.
Adam Smith's RBD banking system creates a "netting currency" based on social circulating capital, which promotes the production of goods in the private sector. Services, be they governmental or private, can only be paid with products created in the private sector.
If the production of goods is shipped overseas in favor of creating a "service" economy at home, products or money need be borrowed to pay for services. To extoll the virtues of a "service economy" is like claiming that living standards can be raised by taking in each other's laundry. It's total nonsense.
However, that is exactly what the present crop of Washington politicians claim. Having control over a central bank creating debt based currency, the politiciams have figured out how to manage the private productive economy.
In contrast, RBD banking which creates a "netting" currency, leaves the volume of the currency and the size of the economy up to the producers and consumers.
On the other hand, the central bank created currency is based on government deficit spending which finds its intellectual support from Keynesians and Friedmanites in an education establishment which is amply rewarded in their employment with central bank currency. The establishment education system totally neglects to discuss the positive alternatives of RBD banking operated in the private sector.
The central bank currency system is directed by central government and forces producers to employ labor and enntrepreneurship according to governmental policies which include the setting of the prime interest rate, reserve requirements, etc.
Posted by dotti on 10/16/12 05:21 PM
I loved this article!!
Re: "I cut your lawn. You mow my lawn. We pay each other. The GDP goes up. The more transactions per person per year - the greater the GDP of a country."
I believe that the GDP numbers also include government spending, which is largely non-productive if not counter-productive.
I have never seen this concept expressed so well.
Mr. Bonner, Thanks for your wonderful enlightenment regarding economists in general and GDP in specific. You put into words things that I may have "known in my heart", but would never have been able to express as you did.
Thanks Mr. Bonner and DB!
Posted by dave jr on 10/16/12 07:32 AM
Wow, maybe I should paste my comment from the previous article here too.
Good job Mr. Bonner, I like the way you think.