A good exercise for economics students is to find instances of economic nonsense in a politician’s speech. In his speech of last Wednesday before Congress, President Joe Biden provided good course material. The proverbial Martian landing on Earth would have thought that Biden’s goal was to emulate his immediate predecessor.
Even some elements of style—the interrupted and hanging sentences, and the repeated words, for example—look like an imitation. By the way, render unto Caesar what is Caesar’s: it’s all to the honor of the White House to have reproduced multiple misspeaking events in the official transcript; refreshing honesty, it seems! But this is not what I want to focus on; I will give instead three substantive illustrations of Biden’s “economics.”
On free trade, he comes close to 17th-century protectionism and to his immediate predecessor. Among other anti-economic statements, he said:
There is simply no reason why the blades for wind turbines can’t be built in Pittsburgh instead of Beijing. No reason. None. No reason.
What about the following reasons? Because the blades are cheaper in China so that “we” can use the savings to give money to the poor. Or because they are cheaper in China so that “we” can use “our” national resources to produce something else to export in exchange for more blades—which is, ignoring the collective “we,” the essence of the law of comparative advantage.
Another big problem lies in what used to be called “equal pay for equal work.” As proposed by the Paycheck Fairness Act adopted in April by the House and sent to the Senate, it is not only about the fair sex but about any other sex too: the bill redefines sex as including “gender identity” (“regardless of the individual’s designated sex at birth”) as well as “sex characteristics, including intersex traits.” But let’s ignore these refinements and think of women’s remuneration compared to men’s. In his speech, Biden declared:
We need to ensure greater equity and opportunity for women. And while we’re doing this, let’s get the Paycheck Fairness Act to my desk as well — equal pay.
I assume Biden means “equal pay” for equal work by any person. The problem is, what is equal work? Politicians and bureaucrats don’t know that and cannot calculate it; they can only define it in any way they want (like they do when, for example, they redefine “sex”). Only the market—that is, the free interactions among 160 million individuals in the American labor force plus those with and among the owners of American companies—can compute what a specific job is worth. So “equal work” means nothing but work having the same value on the market or alternatively work with equal pay. Thus “equal pay for equal work” reduces to “equal pay for equal pay”—which goes without saying in classical logic.
It is true that if employers or their employees or customers have what Nobel laureate Gary Becker called “a taste for discrimination,” some pay discrimination can survive competition, although Biden did not mention this argument. But the market has built-in mechanisms against discrimination. It is in an employer’s interest to increase his profits by poaching with a slightly higher wage somebody who, because of discrimination, is not paid the value of his productivity. Any employer not doing so is leaving money on the table. So those who discriminate will automatically pay a price for their discriminatory preferences. This is why free markets usually minimize discrimination better than governments, as was shown by Jim Crow laws.
Ultimately, if women are still paid less than their actual productivity, why don’t women entrepreneurs start companies hiring only women? Investors would be excited to invest in such obvious money-making ventures. If one replies that current anti-discrimination laws would forbid that, one has just confirmed my argument about the inefficiency of the government in fighting discrimination.
If you are not persuaded by this argument, replace “women” by “Caucasians” (Whites excluding Hispanics) and “men” by “Asian Americans,” and ask yourself whether Caucasian households earn less (on average) than Asian American households because they are discriminated against (at equal productivity).
Source: Maddison Project. Reproduced from my book review “From the Republic of Letters to the Great Enrichment,” Regulation, Summer 2018, p. 59.
Last but not least, Biden declared that
trickle-down economics has never worked and it’s time to grow the economy from the bottom and the middle out.
This big ideological statement flies in the face of economic history. The Industrial Revolution and the two centuries that followed showed that capitalism, at least if not too regulated and controlled by the government, benefits nearly everybody in society. The three charts I reproduce illustrate how “trickle-down economics” has worked extraordinarily well for ordinary people. It would be a mistake to think that the main cause for this incredible growth was technological progress, which could not have developed without 19th-century capitalism and even the constrained capitalism of the 20th century.
Observe the meteoric growth in real world GDP per capita (that is, production per capita) since the early 19th century, first starting in England and then spreading to the rest of the world. In constant dollars, world GDP per capita went from less than $1,000 in the early 19th century—roughly where it had been since the beginning of our era—to nearly $8,000 in 2010.
Many observations and estimates show how ordinary people benefited from this increase in production and consumption; how, not surprisingly, it “trickled down.” One instance, related to many consequences of economic growth (such as better nutrition, health conditions, housing, etc.), is life expectancy. With the Industrial Revolution in England, life expectancy increased from about 40 years to today’s 81 years. The whole world followed, with an average increase of life expectancy from 30 to 73 years. (Click on the figure to see a larger image.) In most countries, the most humble person lives longer than most privileged individuals in times past.
Reproduced from Johan Norberg, Progress: The Reasons to Look Forward to the Future (London UK: Oneworld, 2016)
Just over the last 70 years, world undernourishment has decreased from half the world population in 1945 to barely more than 10% in 2015. Despite technical progress around them, under-developed countries took off economically only after abandoning the straightjacket of communist-inspired central planning. (In China and India, the return of authoritarian central planning could reverse the trend.)
A final point, more normative: in a speech that wanted to look historic and to celebrate “the American idea,” Biden did not once mention the word “liberty”; he did not once mention the word “individual” either. This level of Newspeak is a feat that perhaps none of his predecessors managed to accomplish.
READER COMMENTS
Thomas Lee Hutcheson
May 2 2021 at 6:31am
“The Industrial Revolution and the two centuries that followed showed that capitalism, at least if not too regulated and controlled by the government, benefits nearly everybody in society.”
This sounds a lot like “grow the economy from the bottom up and the middle out.”
That certainly a lot better than trying to shrink the economy with trade wars, transferring borrowed money to high-income people and restricting immigration.
Jon Murphy
May 2 2021 at 11:22am
Yes, but that is not what Biden meant with the phrase.
This set of policies is what Biden meant by “bottom up and the middle out.”
Pierre Lemieux
May 2 2021 at 6:20pm
Thomas: I think Jon is right. By saying “grow the economy from the bottom up and the middle out,” Biden implies that somebody must be the grower, and that this farmer is the efficient and nice federal government. How could the Industrial Revolution happen otherwise?
Thomas Lee Hutcheson
May 3 2021 at 6:07am
Then perhaps the post would have been clearer if it had given an indication of what Biden should have said about promoting growth in incomes of lower and middle income people: end occupational licensing, increase immigration, shift from wage taxation to a VAT for financing SS/Medicare/ACA , or whatever.
Jon Murphy
May 3 2021 at 11:22am
Note that you’ve proven Pierre’s point
Craig
May 2 2021 at 10:54pm
Unfortunately this is going to be the era of bigger government. Its at least theoretically possible they might blow up the dollar. Just read an article which quoted Charles Munger as essentially saying that Bernie Sanders has effectively ‘won’ the public debate on ‘wealth/income inequality’ in the US. I can’t really argue with that.
Mark Brady
May 3 2021 at 12:35am
“Trickle-down economics” does not encapsulate the Industrial Revolution. Avoid that expression like the plague. Advocates of free markets who embrace that locution are their own worst enemies. Nuff said.
Carl Milsted
May 3 2021 at 10:02am
Protectionism? Baloney!
Prior to Trump, we were taxing US made goods at a far higher rate than Chinese merchandise. Without tariffs, the government loses tax revenue when outsourcing happens.
If we had the Fair Tax, the tax on all imported consumer goods would be a whopping 30%. Our tariffs average 3% last I checked.
Econ textbooks don’t take into account the fact that we have high payroll and income taxes. They don’t take into account welfare systems.
Saving money on wind turbine blades so we can afford to pay more taxes to pay hoards of the permanently unemployed to collect welfare and/or rot in jail is what our low tariff policy has done.
Follow the link attached to my name for the complete reasoning.
Pierre Lemieux
May 4 2021 at 4:01pm
Carl: You make at least one analytical error besides a factual error. The analytical error consists in not distinguishing income taxes and indirect taxes on goods and services (including tariffs). Only the latter create distortions in markets for goods and services. See any introductory textbook on public finance. (Also, note that VAT is a sales tax, not a tariff.)
Your factual error is that the total tax rate (total taxes as a proportion of GDP) as well as the rate of labor taxes are higher in virtually all rich countries than in the United States. Following your own (mistaken) reasoning, the tariffs should hit mainly American goods entering other rich countries.
I have a number of posts on the economics of trade (https://www.econlib.org/econlog-by-author-and-letter/?selected_letter=L#plemieux), but I would recommend instead Douglas Irwin’s 1996 book Against the Tide, which provides a good introduction to the history of economic thought on trade. It also gives some perspective to read James Mill (the father of John Stuart) on free trade; see a central quote at https://www.econlib.org/social-nirvana/. You may also get some excitement from his 1808 Commerce Defended, where he took to task an entomologist who knew little about economics (or see my short review before jumping).
Carl Milsted
May 6 2021 at 9:27pm
Run the use cases.
With income/labor taxes and “free trade”, a consumer good produced in the US results in FICA, Medicare, personal income tax, corporate income tax, state income tax, and state/local property taxes being collected. A Chinese good produces state/local sales tax plus income tax on the markup of the importer.
With a VAT, the US made good would result in the same US tax as the Chinese good. Ditto for a national sales tax (aka the Fair Tax).
And, by the way, tariffs would result in net revenue to the Treasury. Even if a tariff results 100% of production moving home, the resulting domestic profits get taxed via the income, labor, and property taxes here.
The artificially simplified examples in the textbooks are wrong.
Tariffs without income taxes were indeed distorting. Tariffs that are far beyond the amount of domestic taxes would also be distorting.
But heavy domestic income taxes without tariffs are destroying this country.
And that’s why the people who noticed what is in front of their eyes vs. what the Narrative dictates were desperate enough to elect a buffoon for president.
Carl Milsted
May 6 2021 at 10:55pm
Some corrections:
My analysis above looks only at the import side. So yes, if tariffs reduce exports then the revenue gain from tariffs is less than what I posted above.
With that said, we haven’t run a trade surplus in ages. Income taxes are distortion free iff there are no trade deficits/surpluses. Once you get such, there is a positive feedback effect: trade deficit leads to lost revenue, which leads to higher taxes on income/labor, which leads to higher trade deficits…
But zero distortion is not the goal! We have the desired distortions of minimum wages, welfare, etc. And they are desired for good reason. You get to pick two of the below:
Democracy with universal suffrage
Capitalism/smallish government
A large income gap
We now have universal adult suffrage democracy, and without a coup, this will continue. Ergo, we need to contain that income gap if we want smallish government.
Look at the news. It’s looking like Weimar Germany for good reasons.
I’d rather pay for some distortions and have stable democracy than have to wade through beggars, hire security against riots and kidnappers, and call for a military coup when the disgruntled poor win an election.
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