Saturday, October 27, 2012

Blue State Blues

Recently, Walter Russell Mead wrote the latest in his analyses of the crumbling “blue social model” that is dragging down any serious momentum for economic growth in the U. S. and Europe.  His focus was on President Obama’s home state of Illinois, where the Church of the All Powerful State (CAPS) reigns undisturbed by reality (although Rahm Emmanuel has shown signs of apostasy).

The Recovering Bureaucrat’s favorite journalist from the Land of Lincoln, John Kass, has been chronicling the disheartening details of how the feudal structure is propped up.  In his latest column for the Chicago Tribune, called “Change in Madiganistan Starts at Home,” Kass outlines how Speaker of the House Michael Madigan, high priest of the Illinois CAPS, controls the political apparatus that has bankrupted the state. 

This level of control could only happen in either a one-party state like California or a place, like Illinois and New York, where both parties are in on the deal.

Here in the once Golden State, the Republican Party slowly committed hara-kiri over the past twenty years, and now has become all but irrelevant to statewide decision-making.  With the erosion of our once dominant manufacturing base, the big business establishment is controlled by banking, Hollywood, and Silicon Valley—activities indifferent to, if not outright manifestations of, the parasitic impact of rent-seeking on wealth creation.

The Destructive Impact of Rent-Seeking

It’s essential to our civic responsibilities to be literate with political economic terms and dynamics.  “Rent-seeking” originally meant financial activities that of themselves generate no wealth but are entirely dependent upon actual wealth production for their existence.  Investopedia explains it thus: “When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.”
An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don't create any benefit for society, they just redistribute resources from the taxpayers to the special-interest group.
Sandy Ikeda has a primer on rent-seeking on the Foundation for Economic Freedom’s website, The Freeman.
According to the principle of human action that Ludwig von Mises used as the starting point of economics, man acts in order to improve his situation as he sees it.  One of the important lessons taught by Mises, and later many of the adherents of the Public Choice school of political economy, who follow in the footsteps of Tullock and James Buchanan, is that while the principle of human action is universal, the particular actions chosen, and the consequences that follow from them, depend crucially on the “rules of the game.” 
If the rules say that the acceptable way to improve your situation is to provide a product or service that consumers would be willing to pay more for than the opportunity cost of the resources used, then that’s what you’ll tend to do.  In that case, if you’re correct, and if you can out-compete your rivals in the market for those consumers’ dollars, then your actions will have added wealth to society.  This is profit-seeking.

On the other hand, if the rules say that it’s okay to use political means—the government’s authority to initiate violent aggression and fraud—to contrive rents by preventing others from competing with you or by forcibly taking the wealth of others, people will naturally tend to spend valuable resources trying to gain access to them. This is rent-seeking.

But unlike profit-seeking, rent-seeking doesn’t create wealth, it merely transfers it from one party to another.  Whoever wins rents by using political means may be better off, but others, potential competitors, but more importantly consumers, will be made decidedly worse off.  The latter will pay higher prices, get poorer quality, or have fewer choices because political means are quite effective in discouraging rival entrepreneurs.  The results of rent-seeking also stifle the competitive discovery process, so that consumers are less likely to become aware of more efficient methods or better providers.

Thus the resources that competitive rent-seekers spend in their quest for these politically created rents are indeed wasted because they are used to produce an outcome in which nothing of value is created. Indeed, rent-seeking of this kind destroys wealth.
In a stricter, more modern sense, rent-seeking has come to refer to economic or financial activities that depend on government intervention for their success.  As David Henderson, writing on the web page of the Concise Encyclopedia of Economics, explains it,
People are said to seek rents when they try to obtain benefits for themselves through the political arena.  They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors.  Elderly people, for example, often seek higher Social Security payments; steel producers often seek restrictions on imports of steel; and licensed electricians and doctors often lobby to keep regulations in place that restrict competition from unlicensed electricians or doctors.
It is easy to see how this more narrow meaning derives from the general one; they all involve people at least one removed from the actual wealth produced.

The Rent-Seeking Basis of the Blue Social Model

What does this have to do with the failed Blue Social Model?

All of the states most beholden to the model have seen a dramatic collapse in their wealth-creating tax base.  When producers flee, the resulting economic vacuum brings in rent-seeking activity in their place.  Debts pile up, because obligations outstrip the economy’s ability to both sustain itself and pay back what it’s borrowed.  Political power shifts accordingly.  As the number and magnitude of wealth producers diminishes, the number and magnitude of rent seekers increases, and power is transferred from producers to consumers.

Many of the things we want do not directly generate wealth, but do so indirectly by supporting the infrastructure that contributes to the increases in productivity necessary for sustainable growth.  Courts, roads, water systems, schools, and hospitals are all examples of activities we happily pay for out of our collective social surplus because, properly managed, they enable our economy to grow more efficiently.

But not all government spending supports economic growth.  Indeed, since government activity almost never generates wealth but only consumes it, great care must always be taken to favor public spending for supporting expansion of wealth against those activities that impede it.

In states still clinging to the blue social model, such care no longer exists.  The political leadership has given up supporting real wealth generation and now increasingly favors rent-seeking.  (In this context, another name for rent-seeking is “income redistribution.”)  Political power is held by those able to control redistribution of money.

Public sector unions, of course, are classic rent-seekers.  In California, New York, and Illinois, they are central pillars of the power structure.  Other rent-seeking allies include environmentalists whose push toward so-called “green investments” is entirely dependent upon taxpayer subsidies; trial attorneys, whose livelihood entirely depends upon wresting financial settlements out of corporate treasuries; and welfare activists, who make a living extracting money for their various “victim” clients from the homeless to customers of utilities and insurance companies.  Along with banks and other financial institutions, these groups are now the power network propping up these unfortunate states.

When the economy is booming, as it was for the several decades after World War II and again in the Reagan-Clinton years, the rent-seeking bite out of overall profitability is affordable.  However, when the economy collapses as it did in the 1970s and again after 2008, the rent-seeking sector becomes an unsustainable burden as profits dwindle and the demands put on the diminishing social surplus increase.

When the New Left, with its “progressive” prejudice against profit, took over the Democratic Party in 1972, the redistributionists found a permanent political vessel with which to work their will.  Although Americans have been susceptible to the soothing promises of the rent-seeking snake oil peddlers in times of serious economic crisis, we have generally put up with these types as we do our crazy cousins who read too much Marx in college.

But since the collapse of the Soviet Union and the old industrial order by 1990, we have become a 50-50 nation.  This is probably driven by our reactions to the increasing chaos generated by the epochal transcendence of the Information Age over the once dominant Industrial Era.  The social unrest of the 60s gave way to the economic disorder of the 70s, a decade that manifested the first signals of the new economic order being born by the increasing application of computers to every aspect of our society.

The Blue Social Model’s Numbered Days

Moore’s Law, which predicts that the number of transistors per square inch on integrated circuits will double every year since the integrated circuit was invented, symbolizes the sweeping revolution brought about by the tools of the Information Age.  Some observers like Vernor Vinge and Ray Kurzweil have noted that the rate of technological change is accelerating exponentially.

Kurzweil, in a 2003 interview with Chris Meyer in Perspectives on Business Innovation, laid out the basic challenge that we humans are facing.
The Law of Accelerating Returns is the acceleration of technology, and the evolutionary growth of the products of an evolutionary process.  And this really goes back to the roots of biological evolution.

Evolution works through indirection.  You create something and then work through that to create the next stage.  And for that reason, the next stage is more powerful, and happens more quickly.  And that has been accelerating ever since the dawn of evolution on this planet.

The first stage of evolution took billions of years.  DNA was being created and that was very significant because it was like a little computer, and an information processing method to store the results of experiments, and to build up a knowledge base from which it could then launch experiments and codify the results.

The subsequent stages of evolution happened much more quickly.  The Cambrian Explosion only took a few tens of millions of years to establish the body plan to evolve animals.  And we see that evolution, like certain technologies, has become mature and stopped evolving.  Evolution has concentrated on other issues, specifically higher cortical functions.  And that happened much more quickly than the Cambrian Explosion.  Humanoids evolved over many millions of years, and Homo sapiens over only hundreds of thousands of years.  And there again, evolution used the products of its evolutionary processes, which was Homo sapiens, to create the next stage, which was human-directed technology, which really is a continuation of the cutting-edge of the evolutionary process on earth, for creating more intelligent systems.

In the first stage of human-directed technology, it took tens of thousands of years, which is what you would expect for the next stage via the wheel, or stone tools, and that kept accelerating, because when we had stone tools, we could use them to build the next stage.  So a thousand years ago a paradigm shift only took a century, like the printing press.  And now a paradigm shift, like the World Wide Web, is measured in only a few years’ time.  The first computers were built with screwdrivers and were designed with pencil and paper, and today we use computers to create computers.  A CAD designer will sit down and specify a few high-level parameters, and 12 different layers of automated designs will be done automatically.  The most significant acceleration is in the paradigm shift rate itself, which I think of as the rate of technical progress.  And all of these are actually not exponential, but double exponentials because not only does the process accelerate because of our evolution’s ability to use each stage of evolution to build the next stage, but also, as the process, as an area gets higher price performance, more resources get drawn into that capability.
This is jabberwocky to the adherents to the blue state model, which assumes that the old structures will last forever.  And to resist the inevitable, they will apply increasing amounts of naked political power to maintaining the status quo.  As the Greeks careen toward their inevitable bankruptcy and Italy descends into political chaos, the mandarins of the Eurozone continue to utter soothing words of bravado, while the printing presses accelerate the currency of chaos.

Here in the U. S., President Obama, aided and abetted by Harry Reid and Nancy Pelosi, has staked his re-election on a half-hearted defense of his version of the blue social model.

In Illinois, as John Kass reports, the politicians controlled by Mr. Madigan and his machine have snuffed out any meaningful opposition to their tax, borrow, and skim policies that have brought this once powerful manufacturing and transportation center to the brink of fiscal ruin.  (This is the machine whose last two governors are both behind bars!)  The MSM ignores this story, in part because Mr. Obama is one of its most prominent products.  At least his former chief of staff, Chicago Mayor Rahm Emmanuel, is willing to defy the Chicago Teachers Union, because even he recognizes that the old game is unsustainable.

In New York, Governor Andrew Cuomo has been willing to defy public sector union leaders in his state.  New York is a perennial leader of states with the highest tax burden in the country; Cuomo recognizes the role that that dismal fact is playing in the deterioration of the Empire State.

In California as in Illinois, unrest against the blue social model has started at the local level.  Voters in San Jose and San Diego signaled their displeasure with runaway pension obligations in the June primary.  At the state level, however, denial is in full roar.  The state’s political establishment is demanding that voters agree to tax increases which they already admit will, if passed, be insufficient to cover the voracious spending demands of the public sector.  They have no Plan B.

That hasn’t deterred in the slightest the indefensible green adventurism of the state’s “cap and trade” initiative to save the planet from global warming and of the $70+ billion boondoggle of an economically marginal high speed rail system linking the Bay Area with Los Angeles.  California's mandarins of the Church of the All Powerful State, bedazzled by their faith-based mantras, believe they can win their war on math.

It is a strange phenomenon that the neither the state nor national Republicans have presented a compelling alternative.  Americans are by tradition and founding principles eager to invent new futures; indeed, the Information Age is almost exclusively an American invention.  Our commitment to individual freedom has always advantaged us over the more tradition-bound societies in the rest of the world.  One would think that the Republicans, with the Tea Party holding a knife to their throats, would be keen to speak for the future.

The GOP's unyielding opposition to Mr. Obama and blue social model Democrats everywhere is based upon the correct instincts, yet Republicans are incoherent and vague when it comes to laying out a strong and persuasive case for applying our fundamental American beliefs to the political economic challenges we face.

Global economic pressures are building up against the resistance of Obama, the Eurocrats, and all the other members of the Church of the All Powerful State.  There is an unavoidable limit to rent-seeking as an ideology.  We always run out of other people’s money.  When the earthquake strikes, who will be prepared to offer a convincing plan to address the opportunity?

Even in the darkest days of the Civil War, Abraham Lincoln was thinking offensively.  What will it take to win, to unleash “a new birth of freedom” to help America fulfill its divine purpose for all of humanity, was his inextinguishable focus.  We, the inheritors of his blazing commitment to American exceptionalism, can find inspiration from his leadership.

Whoever wins the election will inherit a deteriorating polity within a stalemated national government. We informed citizens must prepare ourselves to point the way.  The "fiscal cliff," the national debt, the Fed's fantasy QE3 and beyond, while important, are merely symptoms of the greater challenge.  Washington will not solve our problems; we the people must.

Let us turn our eyes away from the trivia of politics, focus on the huge dynamics at play across the world, and recommit ourselves to our founding principles of individual freedom, responsibility, and initiative.  These are the tried and true foundation of economic and spiritual prosperity; their effectiveness is universal.  Like Lincoln and the Founders, let us be fearless in advocating them as the focal point of true recovery, both for America and for the world.

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