The threat of today’s American Democratic Institutions Fernando Morban My purpose Raised as I am in the Dominican Republic i know a few things about nepotism. I know, that the way to get ahead in third world countries is to “carry the bag” for powerful people. In economies like these, the only way to prosper is on the basis of the influence on government officials rather than the ability to succeed in the marketplace. Companies and individuals with connections may gain in the form of public contracts, subsidies, bailouts, or regulatory protection against rivals. Knowledge of influential people is the number one rule to success. Promotion is based on who you know, not what you know. Cronyism is the way that political and business elites distort everything in order to preserve their rents at the expense of the rest of society. Therefore, competition there (third world countries) is suppressed, corruption is rife and clientelism is rampant. This has robbed my home country much of its potential for economic development. I do not want it to rob the United States as well. People started to question again the viability of the system since the 2008 great recession. The nature of the crisis, now threaten to undermine the public’s sense of the fairness, justice, and legitimacy of American democratic capitalism. The common explanation of the mainstream media, and some members of the academia, is well represented by one political commentator of MSNBC when he quotes “the greedier capitalist were too excessive”. At the eyes of the well-prepared lector that may be too simplistic, nevertheless that is the view of a great part of the American society, especially millennials. It is difficult to explain today the magnificence of this system, without having a relentless, ambiguous and exhaust discussion with the folks. The economics professor of the University of Columbia Xavier Sala I Martin expressed in his book liberal economics “Capitalism, in a matter of two hundred years, has ensured that the average family lives in conditions that the kings of the past would have qualified as luxury is certainly prodigious. Well, that is precisely what the free market system has done”. This is a phrase that any serious social scientist will not claim any objection. According to Gallup polls May 2016, 42 % of millennials (the new illiterate communist generation) have favorable views of socialism and 32% of the whole country seems it as promising thing. But how a system, like socialism, that proved that was completely inefficient, that didn’t resolve the problems of human misery and finally failed in 1991 have that popularity today? Two things help to explain why this is happening? In one hand, the problem is not free market economies, the problem is the group of lobbyist, rent seekers and the political investors of these days. With a biased political system, America is moving in the direction of European corporatism and the crony capitalism of more statist regimes. America today is under the risk of becoming a socialistic mess. On the other hand, there is wide a misinterpretation of the word socialist. The confusion is so great that millennials today don’t know the real meaning, origin and implication of
the word socialism. Among their leaders the ignorance is even greater. Senator Sanders, the socialist candidate of the extreme wing of the Democratic Party, has said that the United States should follow the path of the Scandinavian Peninsula. Referring with this, that their socialist system has worked for them. But he should do his homework a little better, cause he will notice that Scandinavian economies are the more open, less regulated and market oriented of Europe. Even more, the functionality of their education and healthcare systems is settled under base of competition, not on the basis of state ownership monopoly. With the Occupy Wall Street protests, public attention has been focused on what organizers see as the excesses of America’s free market system. With this, the new illiterate communist generation took advantage of the scene. With the help of the crying babies of the media, the leftist teachers of the academia and the Hippocrates of Hollywood, this buddies started to rewrite history. Now every problem of society is owed to the white, well segregated, antifeminist capitalist system. Indeed, these facts constitute a serious risk. Paraphrasing Luigi Zingales of Chicago University, this, in turn, endangers America’s unique brand of capitalism, which has thus far avoided becoming associated in the public mind with entrenched corruption, and has therefore kept this country relatively free of populist anti-capitalist sentiment. At this moment there is a war on everything without any fundamental objective. People in both side of the political spectrum are so frustrated that they do not care about anything, besides preserving their own biases and opinions. They catalogue something that may affect them immediately as fake news. This is better expressed in the words of the political commentator Ben Shapiro “(apparently) truth no longer has the capacity to drive voters or Americans”. If you don’t tell the people how things happened they are going to rewrite history. My purpose in this essay is to remember how special the United States of America is.
How everything started At the beginning of the republic, the GDP per capita was US$ 600 in 2008 dollars. Making US comparable to sub-Saharan living standard. Nowadays the rent per capita in the US is US$ 57,300, which represent an increase for the whole period of 9,500%. Today the US dollar is the international reserve. English is the universal language. A disproportional number of the world’s greatest inventions in medicine, pharmaceuticals, electronics, petrochemicals and technological services comes from America. The United States was the place where the telephone, mass production of the automobile and airplanes were all invented. How this does happens? For some economist it is easy to assume that an economy grows if the inputs of labors, capital and natural resources increase. However, this might be right in macroeconomic terms, but it does not provide a complete vision of the whole reality. This only explains what, not how and why. Economic prosperity is generated by investment and trade, which depend on legal protection and public infrastructure that must be provided by government. So the quality of government is required as necessary condition to generate economic development. But how does this work? This is a critical question for political economy. In any society, leaders can govern effectively only when there is broad public recognition of their authority, but at the same time these pals are constraint by the freedom of expression of individuals, the pressure of civil society and the
check of other government branches. In the founders words “their power is limited” The previous core can be modeled by the simple economic framework of the scheme of supply of good political leaders and the demand of them. But, how is this achieved? The peculiarity of this relies in the complexity of history. Paraphrasing Adnan Q. Khan, mass local political participation was also cultivated after 1620 in the British colonies of North America (the future United States), where institutions of local self-government were granted to encourage English settlers to come to America and to offer loyal service in local militias. The United States government was established by thirteen autonomous provincial assemblies whose members had been locally elected for over a century before the first election to choose a national president in America. Therefore, the interactions among local and national authorities lead the doors open to inclusive political and economic institutions. In the same order, this interaction between local, state and federal leaders provided the basis for the decentralization of the American political system and, as unintended consequence, the creation of the first democracy in the world. This historical example accommodates with the words of Milton Friedman “economic and political liberty are the same face of one coin”. Furthermore, the decentralization of the states and the formation of the federal government created the conditions for prosperity. According to the Nobel laureate in economics Roger B Myerson “A broad distribution of such power that threatened the privileged status of government was seem as an inconvenient to established national leaders, but a fundamental fact of economic growth is that it requires decentralized economic investment by many individuals who must feel secure in the protection of their right to profit from their investments. Thus, modern economic growth requires a wide distribution of political voice and power throughout the nation”. Perhaps, that decentralization of power created the path for reputational leaders to compete for office, and with this, the reliance required to implement the adequate measures and reforms. In fact, the United States after the American Revolution of 1776 began its independent political existence with a large supply of leaders who had been locally elected under British colonial rule long before the federal constitution was written. In Myerson words “the adoption of the United States constitution depended substantially on the longstanding personal political reputations of its authors”.
Tocqueville’s impressions of the American people In 1831 the French politician and diplomat Alexis Charles Henri Clérel, Viscount de Tocquevillehe obtained from the July Monarchy a mission to examine prisons and penitentiaries in America, and proceeded there with his lifelong friend Gustave de Beaumont. While Tocqueville did visit some prisons, he traveled widely in America and took extensive notes about his observations and reflections. He returned within nine months, he compiled and published a set of notes under a report. However, the real result of his tour was a pseudo book called Democracy in America. Tocqueville’s vision of America was similar to the European aristocracy. Why this folks were prospering at an enormous pace? He asked. As was commonly belief at the time in his words “the cause of this prosperity should be the great central planners that Washington might have” but the true is that that wasn’t the key of the American experience. Paraphrasing, Senator Ben Sasse “Tocqueville noticed that Washington bureaucrats was not the answer. The cause of this prosperity was the Rottery club”. What does this means? In simple words the senator for Nebraska was making an important point in the
last quotation. In an implicit form he was making emphasis in the role of clubs, churches and associations as forms of social capital. According to the political economy literature it is this kind of social forms the ones that strengthen civil society. After all, in words of Steven Levitt “every transaction has an element of trust”. In his book, Bowling Alone: The Collapse and Revival of American Community, the political scientist Robert Putnam of Harvard university points out that “social capital and institutional enforcement might be in some sense alternative ways of providing social order. Social capital does facilitate informal contract enforcement”. In the same order, James madison, the founding father and the fourth president of the United States once said “The truth is that all men having power ought to be mistrusted” politician are not angels, they do not act in the benefit of the whole society. They do not put their interest apart and sacrifice their own. The only way that they could do this is by some kind of external pressure. The necessary and sufficient condition to put all interest in the same line and avoid the principal agent problem is by diminishing the asymmetry of information. This is the role that civil society and free press plays in politics. Perhaps, this explains why the populist movement of the last part of the 19 century helped to promote 14º, 17 º and 19 º amendments. Perhaps, this explains why Theodore Roosevelt was involved in a fight with monopolies and corruption. If this social structure was not alive at the moment, the progressive movements of the twenty century would have kidnapped the American institutions.
The outcome The two phenomenons mentioned before created the path for the American exceptionalism of twentieth century. In one hand, the force of the supply side, which compose the interaction of the local, state and federal government plus the division of power at every level created the system of check and balance. In the other hand, the role social capital, whose action translated in social trust and confidence provided the awareness of the civil society, the inquisitive-free press and supremacy of collective conscious and individual values. These factors created the demand side which served as system of accountability for public servants. These two phenomenons generated a framework where the process by which the laws are enacted, administered, and enforced is accessible, fair, and efficient. Justice is delivered timely by competent, ethical, and independent representatives. This is the standard definition of the rule of law. In the United States of America, unlike much of the rest of the world, democracy predates industrialization. By the time of the Second Industrial Revolution in the latter part of the 19th century, the United States had already enjoyed several decades of universal (male) suffrage, and several decades of widespread education. This created a public with high expectations, unlikely to tolerate evident unfairness in economic policy. It is not coincidence that the very concept of anti-trust law was developed in the United States at the end of the 19th century and the beginning of the 20th. In his book capitalism for the people the economics professor at Chicago University Luigi Zingales described that “American capitalism also developed at a time when government involvement in the economy was quite weak. At the beginning of the 20th century, when modern American capitalism was
taking shape, U.S. government spending was only 6.8% of gross domestic product. After World War II, when modern capitalism really took shape in Western European countries, government spending in those countries was, on average, 30% of GDP. Until World War I, the United States had a tiny federal government compared to national governments in other countries”. It is difficult to become rich through the privilege of the federal government when the government is small and relatively weak in terms of economic resources but is rigid and decentralized in term of politics. The only way to make money in this kind of environment is by starting your own business. Perhaps this explains the industriousness and the culture for innovation of the American people. With the protection of property rights, the enforcement of contracts and the presence of the rule of law, freedom flourish and with this free market economy. That was happened in the US The genius of the market economy is that prices convey information more subtle than the largest planner with the most comprehensive computers could ever hope to process. Prices are central in conveying information about the technologies that support growth. They provide signals that guide producers on the substitution among the factors of production. Markets align the social desires with the individual need throughout the channels of the search for profits. These factors come all together at the moment to achieved prosperity and promote growth. As senator Ted Cruz defined “is for that reason that so many millions have risked everything for a chance of the American dream”.
What is happening right now? When the 45. º President of the United States of America tells that “Sadly, the American Dream is dead” he is reflecting the thoughts of some Americans. According to Gallup polls more that 50% of the people saw our economic conditions worsening. In certain ways they are right, that may be too dramatic but those statements are supported by statistics and economic evidence. According to The Equality of Opportunity Project; “in 1970 the percentage of 30-year-olds in America that earned more money than their parents had earned at that age -Adjusted for inflation, were 92%, that was amazing. Unfortunately today only 50% of millennials are receiving that percentage” But what is causing this? There are a lot of factors that discourage economic mobility and growth. According to the Stanford University professor of economics Raj Chetty, there are four aspects that constraint the upward mobility of today:
Segregated spaces In Chettys words “Cities that are more segregated by income and by race tend to have much lower levels of upward mobility”. Although, there is no universal evidence of what is causing this level of segregation, something is true; withe privilege isn’t the answer. Discrimination is something bad, but if you want to reduce the power of a stereotype, you eliminate the classifications. The more you reinforce the classifications, the more powerful the stereotype will be. For that reason, movements as black lives matter, the feminist’s complaints and other minority’s protests are worsening the state of the nation today rather that improving it.
Inequality In the same order, the former chairman of the council of economic advisers Alan Krueger points out that “as soon you have more people in the middle class, you also tend to have
higher levels of upward mobility”. In the same order, social mobility is highly correlated with inequality. Curbing this inequality requires a clear understanding of its causes. Three of the standard explanations—capital shares, skills, and technology— are the usual ones. But in some ways this are some kind myths. The real cause of elite inequality is the lack of open access and market competition in elite investment and labor markets. To bring the elite down to size, we need to make them compete. This is well represented by Jonathan Rothwell of the brooking institution in his article makes The Elite Compete; “For lawyers, doctors, and financiers— three of the most over-represented occupations in the top 1 percent—state-level lobbying from professional associations has blocked efforts to expand the supply of qualified workers who could do many of the “professional” job tasks for less pay” There is a general agreement that the decline in innovation and competition and an increase in rent seeking are contributing to the rise in inequality. Therefore a general agreement over a number of policies to reduce it has been proposed. From taxing the rich to promote and encourage the formation of unions. In their presentation at the ASSA 2017 the Nobel laureates Angus Deaton and Joseph Stiglitz points out that “Eliminating rent seeking and toughening enforcement of antitrust laws are “critical” to reducing rising inequality”. Moreover, two other fellow laureates, Roger Myerson and Edmund Phelps, echoed their message and warned of a return to 1930s-style corporatism. If we don’t resolve this, the enrolment of money in politics will be greater. So, things as campaign finance reform, term limits for senators and congressman and taxes on activities that would distort the market place will help to improve the current situation in America.
The structure of family today it turns out that the single strongest correlation that is founded in the data of Chettys works is the one that measure family structure, such as the fraction of single parents living in an area. In words of the author “We find that places with more single parents have significantly lower levels of upward mobility. Now in interpreting this correlation, it’s very important to note that it’s not purely driven by the fact that growing up in a one-parent family leads to worse outcomes for children. And the way you can see that is if we look at the subset of kids who grow up in a two-parent household, we see that for that subset of children, even for them, growing up in neighborhood with a lot of single parents is associated with lower levels of upward mobility. So it’s not literally about whether your own parents are married or not — again, it’s picking up some community-level factor where growing up in a place that has a lot of single parents — maybe there’s more family instability or it’s correlated with some third factor that is leading to higher rates of single parenthood. For whatever reason, that seems to be strongly associated with lower levels of upward mobility”
The levels of social capital. As explained before social capital is the informal networks that unite individuals under some form of association. Sadly the social capital is declining in the US and with it the element of trust in the market place. As Robert Putnam says “We were becoming more and more isolated. Or as a friend suggested to me once we’re bowling alone”.
Unluckily there is no easy policy prescription for the previous statements. Moreover, the partial solutions that had been implemented are not statistically robust. Nevertheless, in the middle run these are the priorities of the US system.
There’s a long list of potential diagnoses and an even longer list of potential causes. It’s like when you catch a cold, and then you try to figure out — of all the sneezing, sniffling, snotty people you saw recently — who did this to you. The U.S. economy is far healthier than most countries’ economies — and also, it should be said, way healthier than most economies throughout history. At the same time that the social mobility has declined in US, the growth and productivity rates have decrease. For example, the average growth rate from 1950 to 2000 was 3.5% per year. Since 2000, the American economy has grown at half that rate, 1.7%. There are multiple views to explain this sclerotic growth. In one hand, we have run out of ideas. Basically, this hypothesis explains that there is a slowdown in the innovation rate. On the other hand, there is this famous hypothesis that comes from the Keynesian school establish “we are under secular stagnation age” therefore to get out of this slowdown we need to increase public expenditure no matter what. Finally, the policy makers had deteriorated the business environment. In fact the last one is the one that accommodates to evidence. There is a large debate today between growth and redistribution policies. This byzantine discussion does not acknowledge that without growth the economy cannot redistribute resources. When the average person (the voter) expresses concern over inequality, what they really mean is that they are concerned that average people are not getting ahead economically. If the average person were getting ahead, whether some big shot CEOs fly on private jets or not would make little difference. Conversely, the average voter, if not the average left-wing pundit, does not support equality of misery. If the average person continues to do poorly, it would bring them little solace for the government to tax away the lifestyles of the rich and famous. Long-term robust economic growth is the only way to deliver sustained improvements in the lot of average Americans, and the less fortunate in particular. When the French revolution took place, the redistribution of MarieAntoinette’s jewelry did little for the average French farmer. The polarization in the US is so great today that both parties do not care about the distortion that some policies will create. One of the fundamental things that economic student learns is that “The golden rule of economic policy is: Do not transfer incomes by distorting prices or slowing competition and innovation” In words of John Cochrane of the University of Chicago “The vast expansion in regulation is the most obvious change in public policy accompanying America’s growth slowdown”. As unintended consequence, most economic regulation is specifically designed to slow growth. Political parties today do not focus their debate in terms of economic efficiency. Instead, they pay too much attention to social justice. This endless discussion has turned around on how to much or less regulation is imposed. Regulation is not more or less, regulation is effective or ineffective, smarter or dumber, full of unintended consequences or well- designed, captured by industry or effective, based on rules or based on regulator whim, accountable or arbitrary, evaluated by rigorous cost benefit standards or by political winds, distorting economic activity or supporting it, and so forth. One of the principals features of government programs is also not so much their cost, as it is their disincentives and their effectiveness. So, you (as policy maker) create an environment that promote competition in the market place, prevent the creation of barriers and allocate resources in economic terms. This is what economist call growth oriented regulation. That is the current problem with the Dodd-Frank Act, Affordable Care Act, the structure of the EPA, the hiring and firing workers process, taxes proposals, the structure of government expenditure etc.
As John Cochrane observed “the United States is becoming a divided nation, as Europe is, between “haves” with expensive, highly regulated, full time jobs—that are inflexible for people who wish part time work—and often illegal, under the table, part time “gig” work” Lastly, the greatest threats of the American economy are demographic change and the high levels of debt. The retirement of the Baby Boom generation means that millions and millions of people are making a transition from working and creating income to not working and being dependent on income through Social Security and Medicare, provided by the working generation. If this spectacle goes on, in one hand, in the near future it would be too difficult for the US to improve its health system. On the other hand, with ¾ of the national budget devoted to social transfer, this mass retirement will make the national debt unsustainable. As soon as the fertility rate goes down, the national debt goes up and the growth rates still being steadily lower. The American economy in particular and the rest of the world in general are threatened to being under a secular stagnation era. Why? Cause no nation has been able to take the technological leadership of the US. Moreover, the likelihood that China will replace the American economy is close to zero. This statement is sustained on the basis that china needs to promote the development of their national consumption, the amplification of their national markets and the development of their financial system. But, I’m skeptical about that, because one thing, and only one, will prevent them to make such kinds of reforms; the reallocation of political power. The communist party is showing too much resistance today to give power away and it seems to be that they would not led the market place to operate without the massive intervention of the state. China is not a developed country and is not the future of the world. In words of the economics professor of MIT Daron Acemoglu “political inclusiveness is the only way to achieve growth in the long term”. Without the political reform is almost impossible that China will replace the US.
My last words The liberal law scholar of Chicago University Eric Posner points out that “the growth of the administrative state is inevitable”. I do really hope that he’s not right about that. With the implementation of Administrative Procedure Act of 1946 and the involvement of the executive branch in other activities, the state of the rule of law is under risk of becoming the rule by law that we commonly see in the banana republics of the third world. Regulations have left behind the rule-of-law framework that many Americans are supposed to have. In many areas, the regulations are so vast, so complex, self- contradictory and so vague, that they basically give the regulators free rein to do what they want. In many cases, there is not a set of rules that you can read and comply with. You need to ask for preemptive permission from a regulator, who determines if your project can go ahead. Delay in getting needed approval is as good as denial in many suitcases. In other cases, vague and expansive laws and regulations give regulators ammunition to pursue a few selected victims, to extort big settlements or send a few examples to jail. In many cases the constitution does not apply to some Federal agencies. Usually, we see agencies taking unilateral actions. We see them as a prosecutor, police, judge, jury, and executioner. All wrapped in one. In the same order, the methods of these agencies for determining an “abusive” practice or
“discriminatory” outcome are not revealed ahead of time so that people could structure their actions in accordance with the rules. The problem of America today is not between a radical left that has been drop out of power and “white supremacist” America that is accused to take back their place. You and I are told increasingly we have to choose between them. Putting this in simple terms we have choose between a left or right. As Ronald Reagan Notice in his famous speech of 1964 “Well I'd like to suggest there is no such thing as a left or right. There's only an up or down: [up] man's old -- old-aged dream, the ultimate in individual freedom consistent with law and order, or down to the ant heap of totalitarianism. And regardless of their sincerity, their humanitarian motives, those who would trade our freedom for security have embarked on this downward course.” It is time to decide if we abandon the American Revolution and release our confidence in small intellectual elite in a far distant capital. It is time to decide if we millenials will put our trust in the hands of a bunch of few bureaucrats. People most acknowledge that they cannot solve all the problems of human misery through channels of government and government planning. As Reagan observed well “now, if government planning and welfare had the answer shouldn't we expect government to read the score to us once in a while? Shouldn't they be telling us about the decline each year in the number of people needing help?” but the reverse is true, every year the leviathan becomes greater. Paraphrasing F.V.Hayek the “(over) involvement of government in the market place will create the path to the graveyard of modern society” We have to realize that, when we give too much power to one man or small elite, we give them too much discretion in their actions. As a result, sooner or later arbitrary actions will appear and with this the elimination of the rule of law. It is time to acknowledge, that there is no organization better than the democratic capitalist system. When Margaret Thatcher delivers her pivotal speech in 1976, she claimed that “there are moments in our history when we have to make fundamental choice. This is one such moment when our choice will determine the life and death our kind of society and the future of our children. Let us ensure that our children cause to rejoice that we didn’t forsake their freedom” lets ensure that the coming generations will enjoy the freedoms that we have. I deeply belief that totalitarians ideas must be something of the past and that Marxism Leninism should remain in the garbage of history. If we don’t tell to the people the importance of history, history will be rewritten. If we don’t make the reforms, history will record us “with the greatest astonishment that those who had the most to lose did the least to prevent its happening. Well I think it's time we ask ourselves if we still know the freedoms that were intended for us by the Founding Fathers” I hope that my generation takes right decisions
Fernando Morban, January 21 2017