Steam Shovels vs. LeBron James

Why doesn't academic economics act like this is the 21st century...?

 

In his INTRODUCTION to John Tamny's new book Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics, Steve Forbes sums up the present state of academia, writes Nathan Lewis at New World Economics in this article first published at Forbes...

The quote is from a popular undergraduate textbook, Paul Samuelson's Economics. Any young person still willing to participate in such stupidity after this first indoctrination is soon instructed to use far more complicated math. This leads eventually to the present state of academic posturing, in which increasing solipsism spirals eventually into a singularity of perfect irrelevance. This is typically followed by a brief conclusion in plain English, which is whatever the author (and his sponsors) wants it to be.

 

This leaves the real study of real economics, in the real world, wide open for abler minds. In this book, Tamny addresses the most fundamental question – What is good government economic policy? – and comes up with four basic conclusions, illustrated with colorful up-to-date examples.

 

Although his approach is lighthearted and fun, nevertheless Tamny incorporates considerable sophistication in his investigations. He focuses not only on what happens, but also, what doesn't happen: the businesses that don't appear, the investments that are not made, the jobs that are not created, the improvements and advancements that don't take place.

 

The book is divided into four sections: Taxes, Regulation, Trade, and Money. These four items, you will note, have no place in Samuelson's algebra, and for the most part cannot be reduced to any numeric variable. How can you reduce the 70,000 pages of the US tax code, or an even greater quantity of regulation, into a T or R? You cannot, which is one example of why such exercises are a waste of time.

 

Also, unfortunately, it explains why so many governments (and their university-trained advisors) think their economic solutions should be more I or less C, instead of focusing on taxes and regulation.

 

The idea that a poor tax policy can be horribly destructive is not exactly a surprising insight – people were making such observations at least as far back as the fifth century B.C. Nevertheless, the topic is still poorly understood today – as you may have noticed around April 15 – and is an arena for major future advances. Tamny addresses two popular ideas in the US today, both characterized by their simplicity, breadth, and low official rates: the "flat" income tax, with rates typically below 20%, and also a broad sales tax or other consumption-based tax ("fair tax"), to take the place of the typical barrage of dozens of junk taxes.

 

He illustrates this discussion with several cheerful examples including actor and director Ben Affleck, Dallas Cowboys owner Jerry Jones, and, yes, the dramatic series Downton Abbey.

 

I hope Tamny's example inspires more attention to real economics in today's real world. Even now, many people often lapse into references to 18th century pin factories, or, with a little more sophistication, a discussion of mid-20th century automobile plants and steam shovels ("steam" shovels?).

 

Then they go home and watch Downton Abbey on Netflix.

 

Tamny titles one chapter "Job Creation Requires Perpetual Job Destruction." He notes that all of the productivity advancements since the Industrial Revolution (and earlier) have come about by "destroying jobs." In other words, the same amount of work can be done by fewer people, which is also called "higher productivity." Whether the steam-powered spinning machines of the 19th century, or today's "robots," all of the labor rendered unnecessary by these improvements needs to find new high-value productive endeavor. This requires a lot of investment, facilitated by a good tax and regulatory environment. Also, the form of this new investment – and the new jobs that result – quite often renders old solutions obsolete, thus creating more "job destruction".

 

Tamny is one of the few people I know who has anything useful to say about the topic of money, so I am glad to see that it forms the fourth major section of his book. The notion of Stable Money has been a foundational principle of capitalism for centuries. Today, people are waking a bit from their slumber, and asking whether it is at all a good idea to have everyone's economic livelihood dependent on the interpretation of three or four words in Janet Yellen's latest public utterance.

 

"A Floating Foot, Minute, and Second Would Give You Ugly Houses, Burnt Wings and Slow NFL Draft Picks," Tamny entitles his first chapter on the subject. It might also give you: Swiss government bonds with negative yields out to ten years' maturity, a tsunami of "covenant-lite" junk bond issuance in the US, stock valuations in the top 1% of US historical examples dating back to 1880, Japan's central bank printing money at a rate of 15% of GDP per year, and endless chaos among major currencies, making all international commerce into a continuous episode of Wheel of Fortune.

 

Which, as we all know, is going to end wonderfully.

 

"A currency, to be perfect, should be absolutely invariable in value," reads an introductory aphorism to that chapter. David Ricardo (a bond speculator turned real-world economist) wrote it in 1816. Although Tamny is certainly familiar with such intellectual history, he goes easy on both the musty tomes, and, for that matter, up-to-the-minute financial-market wonkery, for a plain-English discussion.

 

Historically, the "classical" economic approach that Tamny embraces has been divided into two main camps. The Austrian camp had focused on sound money and also regulation, although mostly as a criticism of mid-20th century centrally-planned socialism which is not so relevant today. The Monetarist camp had been somewhat in favor of small government and light regulation, but promoted a funny-money floating currency. The much smaller Supply Side camp was mostly focused on taxes; its adherents had a wide range of views on money, ranging from hard-money extremism to Monetarist dogma, and also the who-knows, leave-it-to-the-Fed agnosticism of most Congresspeople who actually voted for past tax reforms.

 

Tamny ably combines the best of these traditions, filling in blanks and also discarding the chaff. His plain-spoken style and magazine-cover examples update Classical thinking in a way that makes declaring oneself an "Austrian" or "Supply Sider" as fusty and irrelevant as claiming to be a Whig or Progressive. It's also more fun to talk about LeBron James.