One of the biggest developments holding back human progress in the last century is probably a surprising one. We are hamstrung by our ability to collect macroeconomic and other demographic data. This development started in earnest in the 1930s (mostly as a result of trying to understand the Great Depression) and accelerated with the development of information technology that drove down the cost of data collection.
Factual information can be deceiving as well as illuminating.
You would think that having more information about something would be immensely useful, and quite often it is. Unfortunately, humans also quite often use data to mislead themselves as well as others. Sometimes this deception is intentional. Sometimes it is wishful thinking. Other times it is simply a result of ignorance of the limitations of data.
“There are three kinds of lies: lies, damned lies, and statistics.”
– Unknown (possibly Benjamin Disraeli, but popularized by Mark Twain)
We have to be especially careful with highly aggregated statistics. Examples include the inflation rate, the unemployment rate, and GDP. In our quest for statistics that neatly summarize information, important details are lost. The greater the aggregation, the more information that is lost (otherwise known as “abstraction”).
Consider the concept of an “average.” If you have one foot in a bucket of 30-degree water (AKA ice) and another foot in a bucket of 170-degree water, both feet would be very uncomfortable. On average though, your feet would be in water averaging 100 degrees, a temperature that would feel quite nice. However, the 100-degree average would not save one foot from being frostbitten and one foot from being burned.
“The first principle is that you must not fool yourself, and you are the easiest person to fool.”
– Richard Feyman
These are important details that are lost by looking at the average. It is a fact that the average is 100 degrees. It is accurate. It is reality. It is true, but the truth can be misleading. It is this self-deception that we must be most vigilant against. Not only must we try to separate what is true from what is false, but we must also think critically about what the facts are really telling us.
Always ask yourself: Is this telling me anything useful? What does it really mean? In what way could it be misleading even if it’s true?
Politicians love highly aggregated statistics.
The vast majority of politicians believe in a very large role for government (and that includes almost all Republicans, despite their reputation). I imagine it is because people who are drawn to politics either crave power or have great faith in all the wonderful things that government can accomplish (usually both).
To politicians, highly aggregated statistics represent problems to be solved through expanded government intervention. How can we decrease the unemployment rate, decrease inflation, and improve GDP growth? To those who don’t think critically about the limitations of this information (i.e. almost the entire human population), these might seem like reasonable goals, but let’s take a closer look.
GDP is limited as a measure of our “standard of living.”
Gross Domestic Product (GDP) represents the total market value of all finished goods and services within a country’s borders. It is a measure that is supposed to encapsulate how well the economy is doing. GDP per capita is often used as a measure of our “standard of living.”
GDP is an extremely common talking point in the political arena. We compare GDP growth rates under various Presidents (foolishly, as if they were the only factors impacting GDP growth rates). We hear constant chatter about ways to increase GDP (and almost all of them supposedly require government intervention, not surprisingly). The focus is improving the statistic without really thinking about what it is truly supposed to represent.
As with averages, GDP is limited in its usefulness. If the government paid people to dig holes and fill them up again, this would be included in GDP, but why? It does nothing to improve our well-being. When we are at war, all that spending on weapons and manpower to destroy people and property is included in GDP. Does that improve our “standard of living”?
It is abundantly clear that not all GDP is created equal. A dollar spent on road signs across the country reminding us of all the money being wasted on the American Recovery and Reinvestment Act (ARRA) is clearly not as valuable as a dollar spent to save someone’s life. Such road signs are a mind boggling waste of money that provide nothing of value to us, and yet they are included in GDP.
Spending that is freely chosen is more valuable to us.
When we are free to choose how our money is spent, our spending typically generates greater well-being than when others choose how to spend it for us. I recently purchased a nice 27-inch HP all-in-one desktop computer. I love it. Call me crazy, but somehow I think it has more value than an equivalent amount of money spent on those stupid ARRA signs.
That’s one huge problem with government spending. No one spends other people’s money as carefully as they spend their own. Do you think that our politicians would voluntarily spend their own money on ARRA signs? Hell no! If the money had to come out of their own pockets, they would acknowledge that the signs have no real value.
Another problem with government spending is that it tends to displace private investment in favor of politically motivated current consumption. Private investment is absolutely the most valuable component of GDP in terms of improving our future well-being (although you wouldn’t know it from the prevalence of government policies that discourage private savings and investment).
Investment increases our capacity to generate future well-being, as opposed to current consumption, which contributes to our current well-being. How much should we invest now versus how much should we consume now? That is really a decision that individuals need to make. Politicians can pretend that they know what is best for us, but each individual’s circumstances are different so it is impossible for a politician to know what is optimal for maximizing our well-being.
Governments can also make investments (“public investment”), but such investment rarely generates the kind of value that private investment generates. The incentives are just not there. Consider the numerous “investments” in high-speed rail that inevitably generate huge taxpayer-subsidized losses ad infinitum. They don’t generate nearly enough value to make them profitable or valuable enough to justify the investment, nor could they reasonably have been expected to generate such value before they were undertaken.
That’s why it is so difficult to get private investors to undertake these projects. Private investors are very deliberate about how they invest their money. Politicians spending other people’s money? Not so much. They appropriate billions of dollars for various projects with little thought. It doesn’t matter to the politicians. It’s not their money on the line, so they don’t take care to make sure that the cost is justified by the benefits. All that really matters to a politician is that the intentions are positive.
What is the purpose of a job?
How did “jobs” arise in the first place? Early humans didn’t have jobs. They did everything themselves. We spread ourselves too thin, and we lived at a subsistence level. There wasn’t much specialization to speak of. Then we learned that we could improve our lives if we each focused our time, energy, and resources on a single area and then traded or shared with other humans.
Specialization allowed us to become far more productive than if we tried to do everything ourselves. We could accumulate more knowledge in our area of focus during our lifetimes and invest more in specialized tools. This specialization became what we refer to as a “job.”
Over time, “markets” developed to facilitate trade, and we began using “money” in order to eliminate the necessity of “barter” (trading one good for another). The motivation behind jobs and trade is to get more of things that we value. We trade with each other to get things that make our lives better.
“You can get everything in life you want if you will just help enough other people get what they want.”
– Zig Ziglar
This is the key. If we want to get things we value from others, then we need produce things that they value so that we can trade with them. If you choose a job based on what you like to do rather than what others value, then there is a good chance that you won’t be able to find a job. If you do something that people value highly, then finding a job is easy.
“Stimulating” job creation is asinine.
The purpose of a job explains why efforts to “stimulate” job creation are invariably a bad idea. Consider the constant efforts to stimulate the real estate market. The real estate market creates numerous jobs in construction, banking, real estate agencies, and on and on.
So what does the government do? The government creates artificial demand for real estate through numerous policies, such as driving down interest rates, allowing tax deductions for mortgage interest and real estate taxes, insuring loans with almost no money down, encouraging Fannie Mae and Freddie Mac to purchase risky loans in the name of “affordable housing,” and on and on.
This artificial demand is not sustainable. We temporarily “overconsume” housing at the expense of other things that we value. Eventually our desire for housing becomes satiated, and the market crashes. Unfortunately, we have had a huge influx of people into the real estate job market to satisfy the artificial demand, and they now go unemployed.
It’s bad enough that there was a huge deployment of physical and financial capital towards real estate, much of which will now be wasted. What’s worse is that human resources are generally not easily shifted to other uses. We don’t want to change and rationalize not changing. We identify with our jobs (“I am an accountant.”).
We hang on in the hope that we will find a job in our current occupation or industry, even if it is objectively unlikely. Unemployment insurance makes matters worse. It provides financial resources that allow unemployed people to delay the day of reckoning. There is less motivation to shift to an area of the economy where we can provide greater value to others.
Top-down solutions will NEVER work.
Central economic planning has never worked, and more importantly, it can’t be made to work. It’s not about getting the right leaders in place. Our politicians spend endless time trying to convince us that their strategies for planning the economy is better than their opponents’ plans. The reality is that one central plan can only be less bad than another.
The solution is to allow the economy to grow organically from the bottom up. The market’s purpose is to provide greater value to individuals than we could achieve individually. The greater the level of centralization, the larger the disconnect between what the individual values and what others decide to provide.
Logically, the greatest amount of government spending should be done at the local level, somewhat less should be spent at the state level, and the least amount should be done at the federal level (This is the way it was from the beginning of the United States until early in the 20th century when it began to reverse).
Think of our spending on “infrastructure” such as roads and bridges. Who is in a better position to decide where such spending is most valuable? Congressmen spending other people’s money in an area that they know nothing about? Or the people who would actually use the roads and bridges and would be willing to back it up with their hard-earned dollars?
Centralized policies can never effectively account for critical local differences in markets. Consider the minimum wage. We currently have a federal minimum wage that applies to the whole country. The local impact varies from completely irrelevant in areas where wages are already above the federal minimum wage to hugely destructive in areas where the market wage is far below the minimum wage (leading to massive unemployment).
If we are going to have a minimum wage, then it would make more sense to push it down to the state or local level so that it can be tailored to local market conditions. In fact, all government spending and regulation should be pushed down to the most local level that is practical. You would find that much of the spending and regulation would just be eliminated because it is of little value to the individual. The cost would simply not be justified by the benefit.
Okay, so now what?
By now you should understand that macroeconomic data is severely limited in its usefulness because it fails to adequately describe how we are doing in meeting our most important goal — improving an individual’s well-being. Furthermore, the loss of information as we increase the level of aggregation in these variables makes it impossible to effectively centrally plan an economy.
The goal shouldn’t be to maximize job creation or GDP growth. The goal should be to create a system that allows us to maximize our well-being. Unfortunately, “well-being” is a very fuzzy concept and can’t be measured nearly as precisely as employment levels or GDP. I doubt that we will ever be able to come up with a meaningful measure, but it really doesn’t matter.
Individuals, not politicians, are in the best position to determine what they truly value. Individuals, not politicians, are in the best position to determine what will improve their well-being the most.
The answer is to maximize the ability of an individual to interact with others on a completely voluntary basis, so they can choose what’s best for themselves.
The answer is freedom.