In my last two posts, I suggested that technological innovation is an important and undercounted source of economic growth and that it helps temper inequality by creating new ideas that can rapidly be enjoyed by most people. Thus, any agenda for increasing economic growth and reducing inequality should focus on increasing innovation and decreasing barriers to its enjoyment. Here are four items for an innovation agenda. 1. Clear obstacles to innovation. Federal, state, and local governments should eliminate regulations that make it harder for new firms offering disruptive technologies to enter markets. At the local level, for instance, big-box stores are…
Growing economic inequality is now becoming a premise of our political debates. Unfortunately, however, conventional government measures of inequality provide a misleading picture of comparative living standards in the modern world.
Most importantly, income inequality is not a good proxy for gauging the rise or decline of economic equality. To be sure, if income equality is to be used as a proxy, incomes have to be calculated accurately. For instance, incomes have to be calculated after tax rather than before tax. Moreover, government transfers have to be included. Finally, for most people income changes significantly over their lives. The amount earned over a lifetime seems more relevant than that earned from year to year. All these adjustments temper the inequality of earned income.
Consumption, however, provides a better measure of economic equality than income. Consumption is the ultimate objective of earning, as Adam Smith himself recognized. And, as I have discussed in a recent essay, Innovation and Inequality, the most important phenomenon for consumption in modern world is that economic value is now more and more created by information that arranges material rather than the material itself. As a result, we all can enjoy a higher level of consumption from the common pool of innovations that rapidly become inexpensive or even free. Income differentials are less important given that common pool.
In my last post, I considered the difficulty the government has in reflecting innovations in its analysis of economic growth, because measurement by rule cannot capture economic reality. Here I continue the theme by discussing the failure of government statistics to take account of the improvements in health care and then consider some objections to the idea that economic growth is continuing at a rapid pace rather than stagnating.
In a brilliant article, economists Kevin Murphy and Robert Topel showed that improvements in longevity have provided huge social gains not counted in GDP. Indeed, they calculated that including the value of these gains added from 10 to 50 percent to GDP depending on the period analyzed. And their calculations do not include gains to the quality of life, which they estimate are on the same order of magnitude. Thus, improvement in social well-being has been substantially understated in government GDP figures.
Economic growth and inequality are among the political matters most discussed these days. It is often thought that economy is more stagnant compared to the buoyant days of the middle of the last century and economic inequality much more pronounced. Politicians offer new government programs as remedies for these perceived reversals.
My skepticism about such claims has a common core. The government has difficulty measuring economic growth and inequality, particularly in an age of accelerating technology. A centralized decision maker cannot create a set of rules to pin down an ever changing and dynamic economy.
Famously, socialist governments in the last century wrongly thought they could calculate the appropriate prices for goods. Today calculation problems also beset government measurement of growth and inequality. In this post and in the next, I will take up economic growth. I will then discuss economic inequality.
I had the pleasure of attending the Federalist Society’s faculty convention in New York last weekend. I learned, as always, a great deal about issues, including those outside my field, like intellectual property. But it was also an occasion to recall why the Federalist Society is so important to the cause of law and liberty in the United States.
Lawyers, as Alexis de Tocqueville noted almost two centuries ago, play a crucial role in the political order of the United States. He observed that United States lacked an aristocracy, and lawyers filled that void, because they were experts in the democracy’s mode of governance.
When society reflects the spontaneous ordering of private law and a limited role for government, lawyers tend to be a force for property and legal stability. Under those circumstances, it is private law, after all, that provides much of their living. Thus, lawyers by and large at the beginning of our republic protected the constitutional structures that both promoted commerce and sustained the rights of property.
Last Saturday, the New York Times published a sad story of another Californian town heading for bankruptcy under the weight of unaffordable pensions and salaries. The figures should astonish even the politically jaded. In a town where the median household income is less than $32,000 the average pay and benefits for a member of the police department exceeded $177,000.
Rich public employee compensation schemes create public tragedies. First, poor people suffer the injustice of overpaying people richer than themselves. Second, when the bubble bursts, a city can no longer afford needed services, leading to higher crime rates and worse educational results. Those with most to lose live in high crime areas and low performing school districts. So the poor take a double hit.
Often the reaction is to blame” greedy” public employees. But this sentiment is wholly inappropriate. These people were just operating rationally within a structure of bad laws. The real question is what can be done to prevent similar tragedies in the future. Here are three suggestions:
Cell phones on airplanes frighten a lot of people and not for safety reasons. Few people want to listen to a seatmate discuss his cat’s health or other trivia for hours. As someone who flies a good deal and values a trip in the clouds for wispy and random reflection, I deeply sympathize. But as a friend of liberty, I oppose a law to ban phone calls on planes. Private ordering can better determine when and where passengers may make calls in the air.
In the same week in December that the FCC voted to consider lifting its ban on cell phones for airplanes, members of Congress introduced legislation to ban calls, regardless of an inquiry into their safety. This position allows our representatives to pose as tribunes of the people’s ear. But left to their own devices, airlines have an interest in maximizing revenue by satisfying both cell phone users and devotees of peaceful glide time.
First, some airlines might permit cell phone uses and others not, giving customers a choice. Southwest, for instance, has said it will not allow phone service, regardless of its legality. Second, airlines could have quiet sections where no cell phone is permitted and sections where travelers can connect with the world outside. Even the government monopoly of Amtrak offers inspiration here with its quiet cars in several sections of the nation.
The law school curriculum is now full of interdisciplinary subjects. Law and economics may dominate but almost other every social science is well represented. These perspectives offer innovative methods to analyze the effects of law and inform the content of legal reforms. But long before the rise of this alphabet soup of interdisciplinarity, law and history were a well-established combination, providing an important part of legal education and an essential element of legal science. The early salience of legal history for the study of law is all the more reason to welcome the splendid volume, Law’s History: American Legal Thought and…
This next Liberty Law Talk is with John McGinnis, the George C. Dix Professor of Constitutional Law at Northwestern University, on his book Accelerating Democracy: Transforming Governance through Technology. McGinnis aims for an updated government that will use technology enabling it to fit with the progression of change in the twenty-first century. This involves improving the government's capability to better utilize accumulated information to make sounder public policy. Part of this, McGinnis argues, is in using prediction markets and ensuring that information flows more transparently to citizens. Also, government must not stand in the way of new developments like Artificial…
In response to: Why You Can’t Understand the Constitution Without the Common Law
James Stoner’s essay on the common law and the constitution provides a very valuable perspective on our founding document. Stoner is wholly correct that the common law concepts are often essential to interpreting the Constitution. Nevertheless, I want to raise a note of caution about using the common law method of interpretation as applied to the federal constitution. My position can be readily summarized: yes to common law concepts in the Constitution and the rules forged by the common law that were expected to be applied to its interpretation, but no to a common law method of constitutional interpretation. Let me…