Let’s stop and think about why some of the Occupy Wall Streeters are upset. They are upset that working hard and getting an education has not produced a “fair” return for them, and that some folks in society are getting an “unfair” return. Fine, I have no problem with that interpretation. Life is not fair perhaps, but I have no issues with that. But what I DO have a serious issue with is the implicit hypocrisy in the complaining here. It seems to me that the OWS-ers that make this complain wish to work hard at doing whatever the heck they want and they are upset that they cannot make a living by spending a life in the Peace Corps or making Youtube videos.

But why should they be upset? Isn’t their motivation entirely selfish and individualist? The irony of course is that the reason the are not able to make a living as professional checker players or in the Peace Corp is that “society” actually does not value those things so much. In other words, one of the most basic tenets of selfish, market capitalism is biting them in the arse. In other words, our private capabilities are predicated on social/public evaluations of what is and is not valuable. It seems to me that objections to this tenet are akin to saying that society does not matter, that their own selfish idea about what is valuable matters. But isn’t that precisely the opposite claim they are trying to make?

Does it make me selfish if other people happen to value the things I have chosen to do with my life? Does it make me unselfish if not? I don’t think so, but that is what it seems the complaints are all about.

Tax collections and tax rates mean nothing. The true burden of government is captured by the resources it consumes. If it spends nothing every year, and merely collects taxes and gives them right back to us, the tax collections themselves may cause distortions and may themselves be costly to collect, but the burden of government is extremely small. On the other hand if governments spend trillions of dollars every year, but never collect a dime in taxes to do it, those are substantial costs, as it takes real resources to do this today, and will require payment in some form or another from taxpayers in the future.

I’d also add the caveat that “big” government in the sense I am going to depict below is NOT a priori evidence of bad or intrusive government, though it certainly is a piece of data to consider. For the purposes of this series I want to show the data without much commentary.

The following chart captures how spending at all levels of government has increased since 1960. The data are all in constant dollar terms (as of October 2011 prices). I have also eliminated the expenditures of transfers at the local and state levels – a huge chunk of their nominal spending comes from federal to state, federal to local and state to local transfers – so we need to pull these out so as to not double count. A detailed analysis of the productivity of government expenditures would be required to make any deep observations about the data, and is the topic of a longer-term research project of mine (sort of an update of this paper).

Sources: US Census of Governments, US Census, Bureau of Labor Statistics, Office of Management and Budget, NASBO, Various Years

I’d only like to make three observations on the obviously growing and large level of government spending in the US economy.

1. I take a Hayekian view of this. I think the level of government spending is very much an emergent process. No single person has the ability to say, “aha, I am the US Czar now, so I will set expenditures on an ever upward march!” I know the right and some libertarians are prone to this kind of an argument, and I can see its allure. But it is not very useful. The level of government spending is an emergent order that is the outcome of hundreds of millions of small decisions made over many years. Sure, “we” can possibly increase or reduce it with some pen strokes, but that is a simplified way of thinking about the issue. For example, since we are so darn rich, it might be the case that “we” demand more government spending as a matter of course. Or, since we are so darn rich it might be the case that “we” can tolerate a lot more government spending as a matter of course. I really have no idea what is the reason, but it is clear that the income elasticity of demand for government spending is not a small number.
2. For those of you wanting me to jump on this data, you might reflect on the nature of public goods (this idea is not original to me). If the government is in the business of providing truly pure public goods, then you should not see real, per-person government expenditures increase very much as population and GDP increases. Why? Because a pure public good is something for which providing it to one person is no less costly than providing it to 10 people. Think of viewing a sunset, or a missile defense system. If the US needed to spend $1 trillion on national defense to protect a population of 200 million, it should not cost 50% more to protect a population of 300 million. Of course, this is not what we see in the data.
3. Notice the dramatic crushing of the government during the soul-crushing conservative Reagan years and the dramatic expansion of government during the bleeding heart liberal years of Clinton.

By the way we measure economic activity in this country, my watching of the kids is a bad thing! Since no exchange takes place, then the value of the “child care” that I deliver on this Friday never can be calculated and added into GDP statistics. There is no reason an effort to do so could not, in principle, be attempted. The point of measuring GDP is to add up the total value of all goods and services produced within the borders of the United States, regardless of who does the producing. When I deliver child care services, or attend to a skinned-knee, or brew my own coffee, or clean my own gutters (not fun when you are scared of heights), and mow my own lawn, each and every one of these actions constitutes valuable goods and services produced. But those values (and indeed the quality of the output from those vis-a-vis trading for it) are not included.

But by the way we measure GDP, none of those actions constitutes economic activity. I actually like the distinction, but I wanted readers to understand this distinction nonetheless. Economic activity occurs the second we take a risk as individuals and determine that rather than doing something for ourselves, we seek to have others do things for us (how’s that for greed!). The way we do this is not by asking others to do stuff for us, but by assuming that they are each making the same determination as we are. Great, so we all agree to start having others do things for us. How do we get the things we need from them? As Smith said, we do not make appeals to them about ourselves, rather we think hard about what we can do to provide them things they may be interested in (again, how about that greed and self interest?). But this is inherently risky. We may have  a hard time figuring out what people want. We may have a hard time delivering those things to others. The preferences and needs of others may change, and quite rapidly. The resources and technologies available to us to produce things for others may change and quite rapidly. The number of people who are making these same decisions can change and quite rapidly. It could very well be the case that when you stop trying to cook for yourself  and sit for your own kids, you end up getting neither service since there are barriers to providing your talents to others. But the risk is worth the reward, at least most of the time. Why?

Because when others do stuff for us, it dramatically expands the division of labor. And this expansion does a whole host of wonderful things: it lowers the cost of making any one particular good (no different than if we invented a new machine), it reduces the costs to us of learning and constantly switching tasks all day long, it allows each of us to take advantage of “economies of scale” in the things we are producing, and it enables and encourages learning about the particular things we specialize in, and encourages the accumulation of capital to further increase our ability to produce things for each other.

Which takes us back to measuring GDP.

I might argue that we should measure the value of wintercow’s watching his kids and include that in our measure of GDP. Indeed, I think there is a case for at least estimating it. But when wintercow spends his entire day cooking and cleaning for example, he is in his own way being self-sufficient, he is pulling himself out of the extended order of human cooperation, he is not relying on others to do stuff for him – in other words, he is truly making the world poorer – at least in a very real material sense. Thinking in those terms indicates that we perhaps are OK to not include these in GDP.

But by not including those activities in our GDP measurements, we are presenting an extremely misleading picture about how much activity, valuable activity, is taking place in our societies. If, for example, GDP is $15 trillion this year, that means that if you multiply the price of every good/service sold times how much is sold, that is the expenditures on those goods/services. Clearly much more valuable activity happens. How much more? I have not seen good estimates, but my brain tells me that if we were able to truly measure it, the real number would be closer to $30 trillion.

One implication of this is that when we enter a downturn, the decrease in measured GDP will overstate how much of a decline in value-producing activities are going on in the economy. Instead of my wife and I eating out and spending $60 to do it, we may produce a meal at home. There is not $60 less value in the economy, but rather there is a fraction less. The benefit of including the “whole shebang” in GDP statistics would be for us to get a better sense for how serious “real” shocks to the economy are. In a world where we experience a real negative shock to the economy, it means that it becomes much harder to produce the valuable goods and services we want. When we measure GDP the way we do, we are only capturing how difficult it becomes to exchange them with one another.

This is not meant at all to diminish the importance of the current measure – indeed decreases in measured GDP do correlate extraordinarily well with changes in well being. But let’s not be misled into thinking that it tells us too much about what is actually happening in the economy. Finally, I’d offer up (the obvious?) observation that even if we measured all of this stuff into GDP, it is not clear that declines in measured GDP would indicate regress. Why? Consider what would happen if every American decided they wanted to spend an extra month each year camping and backpacking and not at work. Measured GDP would drop substantially. Would well-being?

And so on.

Now consider what your listening experience was like prior to the iPod. You are at the mercy of disc jockeys on a handful of radio stations that may or may not come in clearly. You could only enjoy your favorite songs or shows or lectures when the radio station deemed it appropriate, and only in a location where you could have that radio station beamed in. I’d also argue that over 75% of the material played on your favorite station was at best uninteresting to you, and perhaps really problematic for you. Radio stations used to (and still do) brag about “coming up, a whole FIVE songs in a row uninterrupted!” and so on. The commercials are incessant, annoying, repetitive and boring. And when you did not like one station, you spin the dial to rinse and repeat the exercise on another. I am sure you still know someone in your family who has a radio station “trigger finger” whereupon a 20 minute drive to school turns out to be nothing more than an utterly annoying and unsatisfying machine gunning through every radio station in the city before you either turn the radio off, or listen to the day’s traffic and weather for the umpteenth time while sitting in the middle of that traffic jam you wished you could avoid.

No metaphor is perfect. But the world of the iPod is the world market enthusiasts encourage, promote and seek. The world preceding the iPod, the one-size-fits-all, no choice, no personalization, no “radio responsibility,” is the world that others are advocating for when they seek greater government control in all aspects of their lives. They may even advertise their preference as superior because it is “free.” But it’s not free, in practice or in theory. And it’s not a world I think many people wish to live in. Ask anyone who is enamored with the glory of government intervention what they think about the iPod world as compared to the stifling experience that preceded it and I would venture a bet that scarcely any would wish to return to that world. So, if we adore the freedom, choice, customization, quality and innovation of an iPod, then why can we not appreciate that widely? Do you really get pleasure forcing me to listen to this day after day after day after day?

One aspect of this learning process does not bring me joy – and that is the annual dance of students trying to figure out what I am. It’s a strange process really, since until recently I never really tried to actively do it when I met others. For example, for all but one or two of my college roommates, I have no idea to this day what their political affiliation is, despite my apparent interest in political economy.

Early on in my principles of economics class, we spend lots of time emphasizing what economics is and is not about. Pretty early on students know full well that it has a lot to do with things other than money. Pretty early on students come to appreciate that economists spend a great deal of time thinking about and debating how messed up the world might be. They tend to get excited about this too. One reason I think they get excited is that hearing a teacher discuss that the world has some issues reinforces this well known “fact” that they have learned from many people over the years. But as the course evolves and we learn about the challenges to social planning, about the limits to our knowledge, about the importance of property, about the way markets work and force reality onto policies like a dousing of cold water, some formerly excited students either become angry, disappointed, or simply puzzled.

“How could something that started out with such promise end up as such a buzzkill?” I find some of them asking. Here is an example after just one lecture. On day one, I run around demonstrating the power of incentives, and that the powerful push and pull of incentives is evident in all aspects of our lives – not just the things we do in market settings. We end up having a discussion about what being a true scholar means and about how economics properly studied is the essence of humanity – it helps us get the most out of life, and not just the most in terms of the “profane and dull pursuit of material gain” (their descriptions not mine!) but also in terms of the “softer” and more “sacred” aspects of life. Some students hate this – they just want to see some graphs and equations and get ready for their next theory class. But some love it (as I do). But among those who love it, I inevitably end up in several conversations that include a observations like, “I am sure glad you talked about sacred values today, I was worried that I was going to get another Republican free-market guy … I think this class might turn out better than I feared!”

I don’t really respond to that aside from learning more about the student and asking them what their big concerns might be. Let’s take this observation out of context. You’ll notice a really disturbing rhetorical trick here (that I hypothesize has been increasing in incidence in my circles). It’s like an argument from intimidation dressed up in a verbal nicety. Surely you are not a Republican! And embedded in this argument is something worse than the logical fallacy that the aforementioned technique implies. Because embedded in these comments is the idea that commitments to justice (properly understood, not the social kind), clean environments, peace and prosperity are only held by a select and enlightened few, and that people who do not “tow the party line” somehow hope for injustice, pollution, war and indigence?  Shouldn’t a human being’s commitment to the good life go without question?

And about that “free-market economist” meme. Nothing drives me crazier, particularly since most people have some version of corporatism in mind when they hear the term, or some other dubious attribute. There is a Hayekian lesson in central planning that can be gleaned from this simple “naming problem.” Ironically, most 6 year olds understand it, as do their teachers, but as we age we forget the lesson. No label effectively captures the myriad thoughts, features, bugs, etc. that make up a person. People are typically repulsed in polite company when certain labels are used. For example, when was the last time you heard someone come up to you at a party and ask you, “So, you must be white?” even if you are light skinned and seemed to have other things that might mark you as being white. You will never hear it. But as for someone’s views on economics or politics, and out come the labels. I have my own ideas as to why, which we will write about later, but let’s stay focused in the point at hand. The Hayekian lesson is that abstracting from the millions of little attributes and nuances of one’s view into some view that is amenable to understanding and reprocessing by people who know you is a really tough task — having it be processed by people who do not know you is completely absurd. It cannot happen. Yet we continue to do it.

I do not think most people have a clue what “free-market economist” means. It really is shorthand for something close to Republican. Well, I am here to announce that I am neither a Republican nor a free-market economist. If I must be tagged, and tagged I will be, then here is how I declare myself in the future. Definitions will come in future posts, as will further thoughts on the linking of terms like free-market and Republican. Please note that when I advocate the views below that I am not claiming that any of them are “right” in some objective sense, I AM claiming that they are “right for me” for whatever that means, and I am also claiming that all of these have their obvious difficulties. No world view is perfect, but some are less imperfect than others. I am a:

• Voluntary-ist
• Anything-that’s-peaceful-ist
• Property-rights-ist
• Competition-ist
• Feedback-loop-ist
• No-special-privilege-ist

Now as you can see there is nothing particularly anti-government about any of that, despite it being easy for people to ridicule free-marketers as such (and therefore the intellectual and moral equivalents of Stone Age Man). Readers might reflect on why and how various anti-government views come out of applying those “-ists” to the world we actually live in and not some nirvana.

And no, I am not in favor of equality. And no, I am not in favor in pure utility maximization – a world with maximized utility, or a need to maximize it, is not a world I would ever want to live in. I would be more than happy to explain each and every one of those and other “-ists” that I might be, and promise to be forthright in doing so – admitting the warts of each position. But consider the folks who might be inclined to ridicule people who share similar thoughts as these. Again, we are treated as little more than Neanderthals. So I can only ask, do my “opponents” really want to go to the mat fighting against peaceful voluntary association? Do they want to go to the mat to promote special privilege? Do they really want to denounce the power of competition? What about feedback processes )(imagine how we’d maim ourselves if suddenly our bodies became insensitive to pain!). Those positions, held purely, are rare.  I suppose some might rescue themselves by saying things like, “voluntary action is good and all that but not all actions are voluntary, and don’t we want to stop some of those actions?” To which I can only remind them, “who is this we” that gets to decide, and do you recognize that by acceding to abandoning one of those positions above, you are necessarily breaking other principles which you would not “normally” want to break?

My way of absorbing the reality of this is by considering how much time, effort and money I spent this year to grow a few pots of tomatoes, peppers and a small garden of sunflowers. I would post pictures of them but that would be embarrassing to all serious gardeners out there. I easily dedicated well over $500 of time and effort to this measly task, which required a minimal amount of materials and ingenuity (and the materials were largely traded for, not solely produced by myself).