One Economy to Rule Them All

A CAUTIONARY TALE:

Dynamia, Not Stagnatia: Specialized labor and freely shifting markets result in creative destruction, but also mutual enrichment. Where would you want to live? (Donald J. Boudreaux, January 10, 2025, The Daily Economy)

Consider the fictional little country of Dynamia. Although, strictly speaking, this place is a product of my imagination, my imagination here sticks closely to essential facts of reality. Dynamia is very much like a real-world country in a modern market-oriented society.

EARLY STAGES:

This Is Not Late-Stage Capitalism (John Aziz, 8 Jan 2025, Quillette)

In fact, since Lenin’s day, capitalism has ascended to newer and higher forms. Lenin was wrong—imperialism was not its highest stage. Western economists developed new ways to balance the dynamism and economic opportunities of capitalism with the human desires for stability and predictability, and the need for jobs for the general population. In the wake of the Wall Street Crash of 1929 and the ensuing Great Depression, John Maynard Keynes published his seminal treatise proposing that governments adopt countercyclical economic policy: spend more heavily to create jobs and build infrastructure when unemployment is higher and the private sector is depressed and cut back when the market is booming and unemployment is already low.

One of the most influential critiques of communism was written by Friedrich Hayek, whose concept of informational efficiency highlighted capitalism’s unique strengths. In his 1945 essay “The Use of Knowledge in Society,” Hayek argues that the price system in a market economy is an unparalleled mechanism for coordinating dispersed knowledge. In a capitalist economy, prices reflect millions upon millions of individual decisions about supply and demand, and therefore act as signals that guide resource allocation dynamically and efficiently.

There is no such informational network in a centrally-planned communistic system. The knowledge needed to run an economy is not just statistical or aggregate; it is local, dynamic, and often tacit. For example, a small business owner’s understanding of their customers’ preferences or a farmer’s knowledge of local soil conditions cannot be easily centralised or standardised. The market leverages this dispersed knowledge through competition and price adjustments, whereas central planning is inherently rigid and prone to inefficiency.

Aside from a change in emphasis from government spending to monetary policy as the main countercyclical mechanism in the 1970s, capitalism with a few countercyclical adjustments has ruled the day from World War 2 until the present.

As we produce wealth ever more cheaply–thanks to declining costs of labor and energy–and spreadownership ever more widely–thanks to universal savings accounts–we aren’t even to the midway point yet.

ONE ECONOMY TO RULE THEM ALL:

Why Are There No Trillion-Dollar Companies in Europe?: Large companies don’t just happen. They are born, fostered, and grown in low-tax, high-opportunity societies. (David Hebert, January 1, 2025, Daily Economy)

The same can be said about tech giants. They will want to locate themselves where most of their customers live and, with a massive customer base with one of the highest rates of adoption of technology in the world, locating in the US makes good business sense.

But this explanation falls short, too. Notice that it presumes that these tech giants exist and are simply deciding where to locate. The truth is that these tech companies did not descend upon the world like mana from heaven; they had to be created and built from the ground up. The real questions we must ask, then, are 1) what makes the US so fertile for economic growth and 2) what makes Europe so reticent for growth?

It is no secret that the US remains “the land of opportunity.” Even just logically, we can tell that it is based on immigration patterns. The US remains one of the most immigrated-to countries in the world. In fact, the UN reports that 20 percent of the total immigrants in the entire world are in the United States. But this still invites a question: why do so many people want to live in the United States when they could live elsewhere?

There are many factors, but chief among them are economic in nature. First, we can look at average wage rates across countries. The US remains one of the highest-earning countries in the world. Lest we think this is a fluke or a historical accident, cross-national studies confirm that simply living in the US actually causes wages for workers to increase.

The newly-awarded Nobel Prize economists Daron Acemoglu and James Robinson evidenced this by looking at the city of Nogales, a city at the border between Mexico and Arizona. What is unique about this situation is that the city’s people share a common heritage and culture; in fact, there are families that were split in two when the wall was first erected. Because of their shared heritage, the only real difference lies in which side of the fence, running right through the middle of downtown, one lives. The US side is much, much wealthier than the Mexican side. In fact, in 2012, the fire department on the US side of Nogales famously helped the Mexican side put out a fire by “exporting” water over the fence. They could only do this because of their dramatically higher wealth.

We can also look at the ease with which one can start a business.

LIBERALISM GOES FROM STRENGTH TO STRENGTH:

The U.S. is the King of Net Worth (Calafia Beach Pundit, 12/16/24)

ARBITRARINESS IS THE ENEMY OF JUSTICE:

Dead Tape: Annual Federal Paperwork Hours Consume Equivalent Of 14,983 Human Lifetimes (Nov. 20th, 2024, Forbes)

The ICB’s “Paperwork Reduction Accounting” appendix indicates that 10.5 billion hours were required to complete paperwork from 39 departments, agencies and commissions—up from 10.34 in 2022. A table below depicts these.

The bulk—6.657 billion hours—is attributable to the Department of the Treasury (up from 6.603 in 2022). The runner-up Department of Health and Human Services clocks in at 1.59 billion hours (compared to 1.65 billion in 2022; here we do find reduction). Past years’ cross-governmental paperwork-hour tallies appear below, by fiscal year.

2015: 9.865 billion hours
2016: 11.442
2017: 11.529
2018: 11.357
2019: 10.998
2020: 11.618
2021: 9.974
2022: 10.34

Despite the emphasis on ease of access to programs, paperwork hours are considerably higher today than the 7.2 billion at which they stood back in 2000. There are far more programs today, although the Government Accountability Office (GAO) affirms we don’t know how many.

SO MUCH DONE, SO MUCH YET TO DO:

Is the US national debt a risk to investments? (Brian Levitt, 7/03/24, Invesco)

The US is a very wealthy country. For example, the total US household net worth is over $150 trillion, which is close to five times the size of the nation’s debt.5 From that lens, the debt level may not seem as troubling. It may be one reason to explain why the nation is generally viewed by markets as a good creditor.

With $34 trillion in liabilities and $200+ trillion in assets, the US federal government has far more assets than many realize.1 Rather than measuring debt as a percentage of GDP, which is primarily an income measure, measuring debt against total assets paints a far more solvent picture. If all the US government land, buildings, and natural resources were combined, the country would likely have more than $200 trillion in assets. While not all are liquid, they certainly paint the US as a much better creditor than many would believe.

Given that Treasuries are one of the safest and most liquid assets in the world, it’s unlikely investors will lose their appetite for US debt. The federal government owns 20% of US debt, making it the largest single holder.2 Since this debt is just money the government owes itself, however, it has no effect on overall government finances. More than 40% of US debt is owned by US savers, pensions, mutual funds, and financial institutions, who hold Treasuries for safety, yield, policy requirements, or regulatory reasons.2 While it’s true that more than 20% of US debt is held abroad, it’s not heavily concentrated in one country. The largest foreign investors include Japan and the UK, where yields are historically lower than they are in the US. 2

The debt, like the Border, is only an aesthetic matter, not an economic one. But the aesthetics make people believe government isn’t functioning well. Some showy but trivial “fixes” would be worthwhile in that context.

AT THE eND OF hISTORY OUR MAIN “PROBLEM”…:

The real story of inflation (Peter R. Orszag, November 14, 2024, Washington Post)

The results show that supply-chain variables directly accounted for 79 percent of the rise in underlying inflation in 2021. These effects then continued into 2022, with ongoing supply issues directly explaining 60 percent of the rise in inflation that year. The rest was more than accounted for by spillovers from the 2021 supply-driven inflation. All of which leaves only a modest role for demand-driven effects like the covid relief package.

Why did these effects play out over such a long time? At the start of the pandemic, Americans shifted their spending from services (like travel, eating out and going to the movies) to goods (like computer hardware and exercise equipment) — just as a snarled supply chain caused those goods to be in short supply. This caused prices to spike.

…is having too much money to spend. Tax consumption.

BUT HE WON’T:

President Trump Should Abandon Biden’s Misguided War on Big Business (Mark Jamison, 11/14/24, AEIdeas)

Yes, industry concentration has increased—but this trend reflects a more productive economy, not a broken one. Mergers and acquisitions (M&A) have a marginal impact on concentration, and rising concentration is largely a result of two factors: improving productivity and expanding regulation. Ironically, Biden’s regulatory efforts risk making concentration worse, not better. Large firms benefit from regulatory barriers to entry and economies of scale in compliance, leaving smaller competitors at a disadvantage.

Our study examined five potential drivers of industry concentration: productivity, regulation, M&A activity, imports, and information technology (IT). Although data limitations prevented us to showing causation, we did find that productivity is the primary consideration. Larger firms achieve economies of scale, allowing each worker to produce more and giving consumers more of what they want. In other words, concentration signals economic strength, not weakness.

Regulation, the second biggest factor, exacerbates concentration in multiple ways. Large firms can absorb the costs of compliance more easily than small ones, gaining a competitive edge. Regulatory barriers also reduce opportunities for “creative destruction,” a process where new firms can disrupt and replace established players. There are counter examples, such as the 1994 Riegle-Neal Act, an act of deregulation that encouraged industry concentration by allowing interstate banking and branching. But on net, more regulation means larger businesses.

Regulations kill.