Daniel Sutter: Freedom and the Fourth of July
America celebrates 222 years of independence this July 4th. Our current political polarization makes many question whether Americans are still united in freedom. I think freedom is still widely embraced, just two distinct visions. The leaders of America’s founding generation studied lessons from political theory and history concerning lost freedom. They were rooted in English liberal political thought. Liberals sought freedom for the people against rule by kings, emperors, or pharaohs and had radically altered government in England and Holland. Thomas Jefferson’s words in the Declaration of Independence encapsulated liberalism: “all men are created equal, that they are endowed by their Creator with certain unalienable Rights … That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.” Liberalism’s foundation is the moral equality of all. Slavery represented a glaring inconsistency in America’s experiment in freedom. Liberal principles were inconsistent with slavery; many 19th Century liberals were abolitionists. Throughout human history, monarchs ruled nations, and slavery was ubiquitous. Liberalism eventually ended monarchy and slavery, but change took time. Liberty as freedom from being ruled by a king is straightforward. Divergence occurred with further theorizing about freedom. Is the necessity of work a type of repression, as reflected in Karl Marx’s “wage slavery”? Economists think in terms of constraints on our choices, like a household’s budget constraint. Scarcity, the necessity of producing the goals and services we need and want with limited resources, produces constraints. Making the best choice given the constraints we face is the essential economic problem. The divergent views of freedom can be interpreted as two types of constraints people face. Some constraints result from Nature and scarcity, the need to produce food, clothing, and shelter. Some constraints are placed on us by others, like kings, lords, and slave owners. Liberalism addressed human-imposed constraints and viewed freedom as freedom from interference by others. A second vision of freedom addresses the constraints that Nature places on us through scarcity. Economic rights secured by the government provide people with sustenance for survival and liberate them from the necessity of working hundreds (or thousands) of hours each year in a dreary job. The push for economic rights emerged after political rights and the market economy produced prosperity. A society at the subsistence level has no surplus production to redistribute. With the Great Enrichment and modern prosperity, many people produce more than they need to survive or live comfortably. Proponents of the first approach view government efforts to provide economic rights as coercive. Healthcare or housing must be produced before being provided to anyone by right, and the government pays the cost. Taxpayers face forced labor until Tax Freedom Day to provide the economic rights of others. Proponents of the second vision do not consider this coercive. Representative democracy ensures that citizens must give their deliberate consent to taxes and the welfare state. Taxation with representation is not the tyranny of a king’s armed men seizing your possessions. We have two visions of freedom. One minimizes the constraints from other persons and regards Nature’s constraints as natural. The second balances the impositions from Nature and others. Conservatives and libertarians typically embrace the former, progressives the latter. I think that most Americans still care very deeply about one of these visions of freedom. That the meaning of freedom has been elaborated over the last 250 years should surprise no one. Many great thinkers have explored freedom since Jefferson penned the Declaration. Many people believe that freedom is worth fighting for; the accounts of George Washington and his army or Mel Gibson’s speech in Braveheart inspire many of us. Increasingly Americans on the right and left see themselves in an existential battle to defend their freedom. A battle between two groups of freedom fighters is sure to be ugly. We could perhaps ratchet down the acrimony by recognizing that we all value (different shades of) freedom. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Are we getting richer or poorer?
Economists debate whether typical Americans are better off now than fifty years ago. The debate concerns the reliability of the Consumer Price Index (CPI). The Cost of Thriving Index (COTI) from American Compass and Oren Cass think tank contends that middle-class prosperity is becoming unaffordable for American families. Mr. Cass gained attention with the publication of The Once and Future Worker. He voices the frustration of many conservatives with free markets, particularly emphasizing how markets leave many Americans without jobs capable of supporting families. The dollar loses value with inflation, making dollar amounts not comparable over time. Economists adjust dollar values using the CPI, yielding “real” as opposed to nominal values. Between 1985 and 2022, the CPI increased 142% and men’s median earnings 145%, leaving real income basically unchanged. The term “thriving” is deliberately chosen, as the COTI measures the cost of a changing “middle-class” life. By contrast, the CPI tries to measure the cost of the same items – a typical market basket – at different times. Mr. Cass contends that being middle class in 2022 does not mean having the same things as in 1985. The cost index has five components: food, housing, health care, transportation, and education. The COTI compares the dollar value of income and costs in each year and reports the weeks of work at the median wage needed to afford the middle-class life. The COTI stood at 39.7 weeks in 1985 versus 62.1 weeks in 2022. (The cost and weekly earnings were $17,500 and $443 in 1985 against $75,700 and $1,219 in 2022.) Similar results hold for women’s earnings or earnings by education attainment. In his book Mr. Cass argues that “without access to work that can support them, families struggle to remain intact or to form in the first place, and communities cannot help but dissolve; without stable families and communities, economic opportunity vanishes.” This is an important consideration. Families transmit values in society, which is why progressives seek to undermine the family. Men with low earnings are less likely to marry, and their marriages tend not to last. Remember that these are averages, and do not deny that happy family with Mr. Mom. Competition from imports has devastated many American industrial towns. Free market economists often argue for unrestricted imports and government assistance for those losing their jobs. Mr. Cass points out, though, that a life on the dole ensures family disintegration. Mr. Cass further points to regulation in the offshoring of manufacturing. When high labor costs drive jobs overseas, this is efficient since highly valued and paid American workers can take other jobs. This is not the case when regulations increase the cost of manufacturing here. Free trade evades regulations but devastates communities. Does the COTI prove that middle-class living has become unaffordable? Economists Scott Winship and Jeremy Horpendahl challenge this claim for the American Enterprise Institute. They criticize the measurement of some costs and consider quality improvements. The healthcare component uses the full cost of employer-provided health insurance, including costs paid directly by the employer, but does not add this to earnings. Although this might seem to cancel in comparisons over time, the cost of healthcare has risen much faster than inflation, biasing the measure. Education uses in-state tuition for public universities. But very few students pay the full tuition price; net tuition, or tuition minus any institution-granted scholarships, better measures cost. Sticker price tuition has increased significantly faster than net tuition, overstating the cost increase. Winship and Horpendahl further address quality improvements, a major source of economists’ concern over CPI accuracy. Expenditures today purchase bigger houses, more reliable cars, and better medicine. They estimate that a properly measured COTI has increased by four weeks since 1985, not 22. Oren Cass rightly focuses attention on the economic requirements of strong families. The debate over whether American families are better off now than a generation ago is vital. Economists’ difficulty conclusively answering this question is telling, as I doubt there was disagreement in 1922 about whether families were doing better than in 1885! Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Economics and the transfer portal
The transfer portal is changing college sports, particularly in combination with Name, Image, and Licensing (NIL) deals. The portal also illustrates the role of philosophies of life and work in our decisions. College athletes (and students) have long transferred. Previously players transferring from one Division I (or FBS) program to another had to sit out a year. Consequently, player mobility has increased significantly. As one example, quarterback J.T. Daniels started at USC, transferred to Georgia for two seasons, played for West Virginia in 2022, and will play for Rice this year. Transfer restrictions were controversial since coaches did not have to sit out when taking a new job. And players could not freely transfer after their coach left or was fired, even though new coaches might seek to make inherited players leave. Many fans believe the transfer portal is ruining college sports, but that is not today’s subject. Let’s consider the transfer decision instead. According to ESPN, 8,700 football players total, and nearly 3,300 from FBS, entered the portal between August 2022 and May 1, or almost 30 percent of FBS scholarship players. Thousands of transfers undoubtedly involve numerous factors, including being beaten out by another player, coaching changes, and family considerations. The potential for NIL money adds another rationale. Some starters transfer, like Jalen Hurts, after starting two national championship games for Alabama. But consider the players who have not yet had success. Should non-starters transfer to find a team where they fit better or stay put, learn the system well, earn the coaches’ trust, and work to gain playing time? The appropriate course of action depends on how to achieve personal success in football. Is hard work sufficient to take you as far as possible, or do you need a good fit? If you believe the former, then stay and work hard. If the latter and your current fit is not great, transferring is wise. The hard work versus fit question arises in many life endeavors. Can any student succeed at any college? Or do class size, access to professors, and campus environment matter? Does a successful marriage require a perfect match or partners willing to work very hard? Should you work hard to impress your boss or find a boss who values your talents and contributions? The best course of action depends largely on how you think the world works. Many simple words to live by can be seen as statements about how the world works, which then guide behavior. “Hard work pays off,” “honesty is the best policy,” “the customer is always right,” or “live by the Golden Rule” all recommend courses of action based on the nature of the world. Our views matter because we would be hard-pressed to definitively prove their validity. Daily life does not unambiguously reveal whether honesty is the best policy or if nice guys finish last. Before hard work yields success, our belief keeps us going. Economists typically presume that people can easily determine their best course of action. In part, this is because we begin with consumer choice. Consumers can easily tell if they prefer apples to oranges or chicken to steak. Economists then explain behavior with incentives: people work hard when they get paid well. Yet this misses some important dynamics. Economists struggle to make sense of the work ethic, which correlates with prosperity. The work ethic makes sense as a view about hard work paying off. Holding this belief leads people to work hard. Most of us pick up many of our views of how the world works from others, including parents, siblings, teachers, and grandparents. Such transmission ensures the persistence of widely held views. But maintaining the work ethic will be difficult when few people believe that hard work gets rewarded. Few athletes compete collegiately without first practicing and training for countless hours. The transfer portal will not degrade athletes’ work habits. But the transfer decision illustrates how our beliefs about the world affect our behavior almost as much as incentives. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Tasks and jobs
Economists think about jobs in a seemingly counterintuitive way. While noneconomists see job creation as a primary goal, economists view labor as a scarce resource to be conserved. This leads to differences of perspective on everything from government incentives to businesses to the impact of automation, including artificial intelligence (AI). To understand the economic perspective, think about all the various things you want in life. A house or apartment to live in, food to eat, clothes to wear, and things to do for enjoyment. These things require tasks to be done. Houses must be built, clothes made, and food grown, transported, and prepared. Someone must do these tasks, and you must pay for those done by others. Consequently, working to earn money to pay others is itself an important task. Your “to-do” list quickly becomes overwhelming since there are only 24 hours in a day. This is scarcity, which means our wants and desires exceed our ability to satisfy them. Winning the Powerball jackpot will not solve these problems since consumption takes time. Even if cost is not an issue, you will never eat in all the world’s restaurants. Automating one or several tasks clearly improves life. Robot vacuums, riding lawnmowers, and clothes washers and dryers save time. They make life better, provided that earning the money to buy them does not take more time than they save. Further automation makes us even better off. A self-driving lawn mower is better than a riding mower, and a self-driving mower for $50 is better. We also benefit from automating the tasks others do for us. A sewing machine leads a tailor to sell us clothes for less. The logic applies down the line. If a restaurant pays less for food because of labor-saving agricultural innovations, they will charge less for meals. Time is the ultimate scarce resource. The best measures of cost of living over time convert prices into the work time required for purchase. HumanProgress.org calculates, for example, that a Frigidaire refrigerator cost 218 hours of work in 1956 versus 17 hours in 2022. Our biggest economic challenge is getting the most productive work possible out of the available labor. Not just doing tasks quickly but prioritizing the most important ones. The labor market performs this through wages and salaries. A business unable to perform tasks quickly, say a lawn maintenance company not using riding mowers, will have high costs and be unprofitable. A worker’s earnings are the market’s admonishment to only use scarce labor only for sufficiently valuable tasks. The more intuitive view celebrates job creation and mourns business closures. This view emerges from how we, as employees, experience the labor market. An economy based on specialization and the division of labor offers unprecedented prosperity but requires us to trade with others, and by implication that we work for a living. We respond by specializing, that is, finding a task that others will pay for and learning to do this task well. We typically select jobs relying on our talents and abilities. Increasingly we can find tasks we enjoy doing, making work not seem like work. A market economy offers no guarantees of employment. Automation, or what economist Joseph Schumpeter called creative destruction, can always render our job market skills obsolete. We fear our skills no longer being in demand. Research, not surprisingly, documents the significant, adverse health and mental health impacts of unemployment. The two perspectives on jobs lead to contrasting interpretations of events, like the automation of tasks by AI. From the scarcity perspective, this improves life – we can get more tasks done. But the automated tasks provided jobs people had honed their skills to perform. AI and creative destruction involve a fundamental tradeoff between the economies of yesterday and tomorrow. We will never accomplish all our tasks, but it can be difficult to foresee how the tasks automation lets us perform will translate into good-paying jobs. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: The debt ceiling and the national debt
The United States faces potential default in June as we run up against the debt ceiling, currently at $31.4 trillion. Whether the debt ceiling is good policy depends largely on one’s attitude toward Federal spending. Is our national debt sustainable? I will defer to the judgment of financial markets. Interest rates compensate savers for being patient and for bearing default risk, the risk that borrowers may not repay the loan or interest payments. The “risk-free” interest rate is what investors would charge a borrower with no default risk. When default risk increases, investors will first demand a higher interest rate and then stop lending altogether. U.S. Treasury securities have long been viewed as the risk-free investment. The inflation-adjusted (or real) interest rate on 10-year U.S. Treasury securities, courtesy of the St. Louis Fed, stands at 1.3 percent, over two percentage points higher than at the start of 2022. But this interest rate hike is widely attributed to the Fed’s tightening of monetary policy to combat inflation. The debt to GDP ratio stands at historically high levels. But economists Jason Furman and Larry Summers argue that real interest payments as a percentage of GDP better measures indebtedness. This measure is not at record levels, suggesting that Washington has untapped credit. Nonetheless, our current budget situation is troubling. The Congressional Budget Office (CBO) estimates this year’s deficit at $1.5 trillion, the third largest ever and 7th largest since 1962 as a percentage of GDP. Yet the economy is not in recession. We are at peace, and the COVID-19 pandemic is over. This represents a structural and not cyclical deficit. Deficit projections depend on future policy choices, so let’s consider entitlement spending. The CBO projects that Social Security and Medicare spending will increase from $2.3 trillion this year to $4.2 trillion in 2033. The deficit will increase significantly unless we cut spending or increase taxes. Credit markets are voluntary; nobody must purchase Treasury bonds. At some point, credit markets will say no more Federal borrowing. We would be wise to keep some credit for emergencies. Imagine financing World War II without any borrowing! Now let’s turn to the debt ceiling, beginning with its history. Congress enacted the ceiling in 1917 to keep from having to approve each issuance of Treasury debt. The ceiling has been raised over 100 times since World War II and suspended on several occasions. Fiscal conservatives use the ceiling as leverage to push spending cuts, like the 1985 Gramm-Rudman-Hollings Debt Reduction Act and the 2011 budget deal. The ceiling creates policy uncertainty for our economy. Uncertainty is unavoidable in life and especially business but hurts investment. Government affects business in many ways, so uncertainty about government policy increases overall uncertainty. Failure to raise the debt ceiling will delay the repayment of bonds, drive up the Federal government’s interest rate, and potentially also other interest rates. A long-term budget agreement would be better than a fight over the ceiling every other year. Evaluation of the ceiling depends mostly on how one views current Federal spending, not creditworthiness. If avoiding default were paramount, a deal could be done easily. Republicans could agree to big tax hikes, or Democrats could agree to freeze discretionary spending. These are not solutions due to their impact on spending. The Biden Administration is considering challenging that the debt ceiling violates the 14th Amendment. I am not a constitutional lawyer, so I will not weigh in here. Fiscal conservatives have voiced opposition to this tactic, but we are a constitutional republic; the constitutionality of any law can be questioned. The inability to reach a compromise reflects our increasingly divided nation. Legitimate government reflects the consent of the governed, meaning all Americans, because we recognize the equal moral worth of all citizens. Today both sides want to force their preferred policy on the other by any means necessary. This is a tell that many now view their fellow Americans as subjects, not fellow citizens. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Taxation without taxation
The Federal Housing Finance Agency (FHFA) is imposing fees on mortgage applicants with high credit scores to assist applicants with low credit scores and small down payments. The 2007 housing crisis illustrated the potential costs of “helping” people buy homes they could not afford. The proposal offers insight into the politics of government favors. The FHFA new rule will charge the strongest applicants up to $60 per month. Over the term of a 30-year mortgage, this would be over $20,000. Subject homebuyers will qualify for smaller mortgages. The measure arguably addresses credit score racial disparities. According to Newsweek, average credit scores are 727, 667, and 627 in white, Hispanic, and Black communities. Yet such differences are not evidence of discrimination since credit scores are based on things like missed bill payments. And Blacks and Hispanics with high credit scores will face reduced home-buying opportunities. The mortgage fees are an example of cross-subsidization, where the government, through regulation, makes some consumers pay higher prices so others can pay less. A cross-subsidy is economically equivalent to a tax and direct government subsidy. The seminal paper by Richard Posner on this was titled “Taxation by Regulation.” To see the comparability, the Biden Administration could ask Congress to impose these fees as taxes. Congress could appropriate the revenue to subsidize home buyers with low credit scores. Why cross-subsidize instead of tax? Public choice economics offers an explanation. Politicians get credit or blame only for actions voters attribute to them. Politicians will publicize giving people things. But politicians try hiding the taking of money from people. Politicians calculate that voters are less likely to notice higher prices than taxes. And if they notice, they may forget the policy of hiking prices. Or politicians could blame higher prices on corporate greed or Vladimir Putin. Politicians can also honestly deny the existence of a government subsidy or a payment by the government to an individual or business. Vehemently denying a subsidy might help voters miss the cross-subsidy. Cross-subsidies are one component of a public choice debate over the “efficiency of democracy.” The debate has implications for potentially ending government policies benefitting some Americans at the expense of others. One side sees the hiding or disguising of assistance as crucial to the programs’ continued existence. Consider the Federal government’s price support programs for agricultural crops. The Department of Agriculture sets target prices and buys surplus crops at this price. This drives up the market price since farmers will not sell on the market for less than the USDA pays. The price support is a costly way to help farmers. To get government money, farmers must plant crops using tractors, fuel, fertilizer, and labor. They might get $50,000 net of expenses from the USDA. Send the farmer a check for $50,000 could let these resources be used for other purposes. The price support helps disguise the transfer to farmers. The program can be billed as ensuring America has an adequate supply of food. If voters knew what was happening, they would put a halt to these programs. The other side of the debate holds that the government may still be helping the farmers or low credit score home buyers in the cheapest way possible. No less expensive, legal way to benefit farmers or borrowers exists. Congress cannot simply give designated individuals $50,000. The details get very complicated, but one implication is that politicians are not trying to hide these programs from voters. Enough political support exists to keep them going. As a public choice economist myself, I believe that the assistance must be disguised to persist. Elected officials know what voters will not accept and incur the cost of disguising the programs because they must. Our governments – local, state, and Federal – have many programs favoring some Americans at the expense of others. This might seem depressing. But it is also encouraging. Elected representatives must hide favors because the voters ultimately hold the power. We, the people, have the power to rein in favors and cross-subsidization. We just need to use it. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: What’s good and bad with DEI
Diversity, Equity, and Inclusion (DEI) initiatives in business and higher education have become controversial. Texas A&M and Texas Tech recently ended DEI statements for faculty hiring and tenure. What is problematic about being welcoming and inclusive? Let’s consider the underrepresentation of women in engineering. According to the National Science Foundation, in 2016, women earned 21 and 24 percent of engineering bachelor’s and doctoral degrees. The disparity exists across white, Black, and Hispanic students. Everyone should be free to pursue the career of their choice regardless of gender or race. Such inclusion, I hope, is not controversial. Historical discrimination calls for extensive efforts to make women feel welcome today. Ivy League universities, for instance, did not admit women until 1969 (Yale). The service academies only admitted women in 1976. Gender segregation did not reflect pure animus. Many educators believed separate men’s and women’s schools facilitated learning. The all-male Ivies had the prestigious Seven Sisters as counterparts, colleges like Barnard and Vassar. Pioneering women in male-dominated fields faced discrimination and harassment. According to a 1960s survey, 90 percent of law firms would not interview women. Pioneers in law enforcement and firefighting had to overcome horrific harassment. Discrimination can yield perceptions of hostility long after reforms. It is not enough to treat women in STEM fields fairly; young women must feel welcome. I favor strongly worded commitments to inclusion by universities and businesses. Will this yield equal representation of men and women in every field? No. Career choices depend on preferences regarding work, which may differ between the sexes. Consider building skyscrapers. This would be a nightmare job for anyone afraid of heights. If more women are afraid of heights than men, the free choices of individuals may yield a male-dominated job, but one in an economy where everyone can choose their career. Alternatively, drafting women afraid of heights to work on high steel to achieve gender balance is preposterous. Once we eliminate legal barriers and harassment, can we attribute any STEM gender disparities to preference differences? Not necessarily. We also must consider the shaping of preferences. Our preferences are at least partially socially constructed, shaped by many influences in our lives. Economists take preferences as given and as reflecting our genuine selves. Suppose young Jack and Jill both want to be rocket scientists. Adults encourage Jack and discourage Jill, who does not choose a STEM career. I think many people fear that these numerous social cues push gender roles on young people. The interpretation of these cues gets to the DEI controversy. Here I mean the programmatic elements of DEI and the academic theories behind them. Consider the research on microaggressions, “brief and commonplace daily … indignities, whether intentional or unintentional…” But as Greg Lukianoff and Jonathan Haidt observe in The Coddling of the American Mind, intention matters significantly in evaluating action; the difference between murder and an accident is intention. DEI programs have evolved from critical theory, the application of Marxist analysis to gender and race instead of economic class. Karl Marx viewed the features of markets as deliberately designed by capitalists. Similarly, critical theory views slights as deliberate aggressive acts designed to discriminate against women. This worldview views all gender or racial disparities as intentional. The alternative to Marx’s deliberate design is Adam Smith’s spontaneous (or emergent or unplanned) order. As one example, money evolved spontaneously as people recognized that trading with stones or gold, or silver made life easier. The cues and prompts shaping preferences reflect the personal values and actions of millions of Americans or an unplanned order. Unplanned orders can be enormously complex, creating the potential for policies to have unintended consequences. Policies can negatively impact the intended beneficiaries. Since the impacts are not intended, we can modify the policies once we recognize the impacts. Welcoming and inclusive universities are desirable. But programmatic DEI, including litmus tests for hiring, threaten to impose one ideology on higher education, impinging on open inquiry. Programs sold under the banner of diversity may enforce conformity. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: Can we halt research?
Elon Musk, Apple co-founder Steve Wozniak, and Stability AI founder Emad Mostque have signed an open letter calling for a pause in cutting-edge artificial intelligence (AI) research. But can we halt research, whether on AI or the gain of function research that may have produced the SARS-CoV-2 virus? How much control would be necessary, and what if others do not pause? The letter reads in part, “Advanced AI could represent a profound change in the history of life on earth, and should be planned for and managed with commensurate care and resources. … Powerful AI systems should be developed only once we are confident that their effects will be positive and their risks will be manageable. … [W]e call on all AI labs to immediately pause for at least six months the training of AI systems more powerful than GPT-4.” Four potential impacts motivate the proposed pause. Three involve economic and political impacts, like automating jobs and rendering humans obsolete. Since I recently discussed economic impacts, today will focus on the potential “loss of control of our civilization.” Will AI produce intelligent, malevolent machines in the mode of the Terminator movies? Top experts do not rule out AI getting out of control. Is it possible to conduct research to prevent this? And if not, should we permanently halt the research? Insurance is how markets ensure safety in research and production. If research could produce an explosion destroying the lab and the surrounding neighborhood, the lab should carry insurance. Insurers would then impose safety and training requirements on the lab as conditions of coverage. Government might only need to require that AI labs carry insurance. If no insurer would cover a lab at any price, the market halts research. I strongly favor markets and insurance over government regulation. But AI presents a major problem. What would a war against the machines, as in the Terminator movies, cost? It may be hard to come up with enough zeros. The losses would (easily) bankrupt the insurance industry. And in any event, a hefty insurance payment will not help people enslaved in the Matrix. Bankruptcy forces consideration of government regulation. Yet we still face problems. Do we even know how malevolent consciousness might develop? Suppose the AI pause letter signatories listed ten ways research might produce a science fiction nightmare. Would the path by which malevolent machines eventually emerge be on this list? If not, government regulation will not save us. Perhaps then we should ban this research. A ban seemingly requires controlling all persons and facilities capable of research. Depending on the nature of the research, this may be very authoritarian. Fortunately, training an AI system like GPT-4 requires enormous computing power, energy, and brainpower. Only a few labs currently possess this capacity, making verifiable compliance at least plausible. But innovators could devise distributed ways to assemble computer power to evade a ban. The Bitcoin blockchain and distributed denial of service attacks demonstrate the potential for coordinated decentralization. Suppose U.S. labs halted AI research. Could we force the ban seems difficult to force on China, Russia, and other nations, especially since AI promises a path to technological superiority and world domination? Research has an arms race element to it. The Manhattan Project was needed in part to keep Nazi Germany from developing atomic weapons first. The Obama Administration halted gain of function research on viruses in 2014. The COVID lab leak scenario, if true, illustrates another potential consequence of halting research. Gain of function may simply have been shifted from highly competent U.S. bioresearch facilities to the Wuhan Institute for Virology with its documented safety issues. Risky research should be performed under the safest conditions possible. I have raised numerous questions, so I will close with a story offering hope- recombinant DNA technology developed in the early 1970s. The potential to create new, deadly viruses was obvious. Leading researchers halted research and organized a conference to set risk thresholds and safety protocols for experiments. The protocols have helped unleash biomedicine while maintaining safety. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: TikTok and national security
The House Energy and Commerce Committee grilled ByteDance CEO Show Zi Chew as Congress seeks to either force a sale of TikTok to a U.S. company or ban the app. Multiple factors are producing a coalition to ban something enjoyed by millions of Americans. One factor is social media’s alleged impact on anxiety and depression in teens. The research is out of my field of expertise, so I will not comment on its strength. History, though, reminds us that new media frequently produce panic. TV and video games supposedly harmed prior generations of Americans. Even if social media and specifically TikTok harmed teens, we should try a more focused protection strategy first. Limiting minors’ social media access is not something I favor but would consider it before a ban for all Americans. National security issues have been more prominent, both the sharing of Americans’ personal data with the Chinese Communist Party (CCP) and TikTok’s propaganda potential. CEO Chew says the company will store American users’ data on servers outside of China and not share this with the CCP. Data sharing does not appear to have occurred to date. I seriously doubt the company’s ability to keep users’ data from the CCP. The increasingly authoritarian CCP could, even if they do not already have backdoor access, threaten company executives (and their families) for access. TikTok users should assume that the CCP can access their data. So what? Facebook, Google, and Twitter collect (and share and sell) similar data to TikTok. Lots of information about each of us is already available. The CCP could likely find out everything they could get about a user from TikTok through alternative means. TikTok’s critics are never specific about how the CCP will use all this personal data. Big data is a boon for advertising, allowing companies to identify many other things their customers do, browse, or buy online. This helps target ads to persons most likely to buy a product. Advertising is part of the voluntary market economy. Targeted ads might be disconcerting – like seeing an ad for a book I just browsed on Amazon pop up on another website – but help companies be more persuasive. No matter how many ads you see, you still must choose to make a purchase. How does improving the effectiveness of persuasion affect government spying? Do we fear targeted ads recruiting Americans to spy for China? Now let’s consider TikTok as a communist propaganda tool. The competition for eyeballs on TikTok and social media is incredibly intense. Users looking for content from top TikTokers like The Rock, Jason Derulo, Charlie D’Amelio, or Bella Poarch are not going to watch boring propaganda videos instead. I suspect propagandistic ads would be similarly ineffective. Fears of CCP propaganda seemingly reflect the same mindset that Russian social media trolls swung the 2016 election. Yes, Russian government employees posted material on Facebook. And bot accounts liked and shared other content. The Russian-linked accounts posted little material and attracted less attention. Furthermore, the CCP can more directly and effectively influence Americans. The lure of access to the Chinese market leads Apple, Disney, and the NBA to remain silent about China’s human rights violations. Many elected officials have lucrative Chinese business deals. Politicians are proposing shutting down a successful business. Forbes’ John Tamny has described this as a “mugging.” Tens of millions of Americans choose to post and watch TikTok content, seemingly without fear of becoming pawns of the CCP. Americans use TikTok to earn a living. Charlie D’Amelio makes over $100,000 per post from sponsorships. She and other TikTok influencers achieve this through their own talent and effort. The bar to shut down or disrupt the livelihoods of law-abiding Americans should be extremely high. Valid national security claims must go beyond fears and possibilities. Otherwise, any business could be shuttered for its potential future foreign collaboration. Politicians should not be allowed to disrupt business and life because they fear monsters under the bed or seek votes in the next election. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Is this a bailout?
Silicon Valley Bank (SVB) became the second-largest bank failure in American history this month. How has the government responded, and does this constitute a bailout? Washington gave all SVB depositors access to all their money. We have a system of government deposit insurance administered by the Federal Deposit Insurance Corporation (FDIC), established after 9,000 banks failed between 1929 and 1933. The FDIC insures deposits up to $250,000, and banks pay premiums for coverage. Only 11 percent of SVB’s deposits were FDIC-insured, reflecting numerous big-dollar accounts. The stockholders of SVB, who had $20 billion invested, are not (currently) being assisted. In the 2008 financial crisis, many investors were saved from losses. I see this as a large depositor bailout. And uninsured depositors would have gotten some money back after liquidation of SVB’s assets. The bailout may only have let depositors get their money sooner. The consequences of this action depend largely on whether FDIC coverage is now unlimited or if this is a one-time deal. If truly a change in coverage, the consequences involve trading off a potential bank run versus worsening moral hazard, both of which require some explanation. Let’s consider bank runs first. In our fractional reserve system, banks keep only a small percentage of deposits as reserves with the Federal Reserve. Banks make loans and other investments with deposits, earning returns to cover their costs, pay interest on deposits, and make a profit. Most of these investments are illiquid. Liquidity refers to how quickly an investment can be converted into cash without a loss. You could sell a house today but at a poor price. Obtaining the market price might take weeks or months, so homes are not liquid assets. You can lose a lot of money selling an illiquid asset quickly. This creates a vulnerability for banks, as depositors can withdraw their funds at any time. Selling assets at “fire sale” prices can render sound a bank insolvent. Economists Douglas Diamond and Philip Dybvig, who shared the 2022 Nobel Prize, demonstrated many of the dynamics of bank runs. The failure of one bank can make other depositors fear their bank. Bank runs can spread like wildfire. Milton Friedman and Anna Schwartz in A Monetary History of the United States, argued that most of the failing banks in the 1930s were sound, and these failures turned a routine recession into the Great Depression. Businesses operate on credit, so a banking breakdown is truly calamitous. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: A national divorce and economic policy
Comments from U.S. Representative Marjorie Taylor Greene have brought attention to the idea of a national divorce. A national divorce would enable the enactment of the economic agendas of the left and right and is worth thinking about. National dissolution has been broached via calls for secession following the 2012 and 2016 elections. Michael Anton of the Claremont Institute, author of the influential essay “The Flight 93 Election,” recently penned a brilliant dialogue on national divorce for The Asylum. The dialogue is between childhood friends Tom and Malcolm, who have grown apart on ideological grounds. Tom recognizes how Blue state residents, including his former friend Malcolm, hate everything about Red state conservatives. If this were a marriage, the spouses would be separated and talking exclusively through insults. Why not end this nightmare marriage peacefully? Malcolm’s not unexpected dismissal of national dissolution leads Tom to wonder, if Blue America so hates everything Red, why not break up? The answer: Blue America intends to subjugate and rule folks like Tom through legal manipulation, if not outright force. Mr. Anton notes Abraham Lincoln’s observation that North and South shared 99 percent of values and differed only over one thing. That one thing, slavery, was a doozy, but other common values offered potential for continued union. And Lincoln was right; after a terrible Civil War ended slavery, we eventually healed back into a United States. Today’s differences are far more extensive, including economic policy (taxes, spending, and regulation), the form of government (the desirability of the Constitution), and culture (religion, abortion, parental rights, etc.) Red and Blue America seemingly cannot even agree on who is a woman! A divorce differs from secession in being mutual. Precedent for peaceful dissolution exists, most notably division of Czechoslovakia into the Czech Republic and Slovakia in 1992. What is the alternative to a divorce? Polls suggest that many Americans fear civil war or descent into authoritarian rule. When the FBI investigates parents speaking at school board meetings as domestic terrorists, we may already no longer be a liberal democracy. To be clear, some polls indicate more common ground between Americans than suggested by MSNBC and Fox News. During the selection of Kevin McCarthy as Speaker of the House, television cameras caught Democrats and Republicans talking cordially to each other! Pursuit of clicks and followers may drive the news media to be excessively venomous. A national divorce offers benefits and not just avoid conflict. Economists view nations in terms of institutions, things like property rights, the rule of law, and constitutional limits on government. Red and Blue America want different institutions, not just slightly more or less government spending. America was founded on freedom, which in 1776 meant not being ruled by a king. Multiple visions of freedom have since evolved. Liberals (generally) favor economic rights and expansive government to liberate people from necessity. Conservatives and libertarians want limited government and view high taxes as negating freedom. One nation cannot have two sets of institutions. Government cannot both spend half of the GDP and only 10 percent of the GDP. We cannot have government control of the economy and free markets. Pinballing between these extremes every four or eight years might be even worse. Perhaps we just need to decide the correct vision of freedom. This has not worked. We are no closer to consensus now than fifty or one hundred years ago. Waiting for consensus means never implementing either vision. The seeming authoritarian turn in American politics reflects, I think, an unwillingness to never achieve our preferred vision of freedom. Blue and Red America see each other as preventing the realization of a just America. Yet the only true barrier to implementing both visions is remaining one nation. Perhaps America is still the land of the free, but we embrace different and incompatible visions of freedom. Should we never implement either due to a lack of consensus, have half the country try to force their vision on the other, or try to realize both through mutual separation? Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Social Security insolvency
Social Security has been long viewed as untouchable in American politics. An aging population seemingly only further entrenches this. Yet cuts may be coming if Democrats and Republicans do not act today. Social Security’s potential insolvency would trigger benefit cuts. Here’s how Veronique de Rugy of the Mercatus Center describes it, “Failure to reform, in fact, means benefits will automatically get cut. … [W]hen the Trust Fund runs out of IOUs around 2033, Social Security benefits by law will be cut by about one-fifth.” To unpack this, let’s start with the structure of Social Security. The taxes funding Social Security, primarily the payroll tax, goes into a Trust Fund (technically two funds, but money can be shifted between them), from which benefits are paid. Any surplus is invested in U.S. Treasury securities. The program operates on a pay-as-you-go (PAYGO) basis instead of accumulating assets like a private pension. Today benefits slightly exceed tax revenues, so the Fund operates at an annual deficit. Thanks to earlier surpluses, the Fund has a balance of $2.6 trillion. The annual deficits are projected to grow over the next decade, and insolvency occurs when the balance is zero. The Social Security system’s trustees project this in 2035, while the Congressional Budget Office predicts 2032. Which year is correct is immaterial. The Antideficiency Act prohibits Federal agencies from spending funds they do not have. Social Security revenues are projected to be 80 percent of annual benefits at insolvency. This yields the 20 percent benefit cut. Yet the Social Security Act creates a legal entitlement to benefits. Insolvency will bring these two laws into conflict. The Congressional Research Service is unsure which law will take precedence. Warnings of impending cuts presume the Antideficiency Act will rule, so benefit cuts are not written in stone. Also, Congress could hike the payroll tax to avoid insolvency. Why does this matter? Economist Thomas Sowell says that the first lesson of economics is scarcity, while the first lesson of politics is to deny the first lesson of economics. Economists, I think, should be clear whether scarcity or rules and procedures force choices on us. Rules and procedures drive the feared benefit cuts, not scarcity. Scarcity means that the current 12.4 percent payroll tax is inadequate; either Social Security taxes must increase, benefits must be cut, or both. Will Social Security become unaffordable? Some commentators offer very scary projections, but here’s a straightforward approach. Our aging population is lowering the worker-to-retiree ratio, stressing our PAYGO program. This ratio exceeded three in the 1990s, currently stands at 2.8, and may eventually fall to two. Since a 12 percent payroll tax covered annual benefits with three workers per retiree, an 18 percent tax should fund current benefits with two. Careful calculations suggest a lower rate will suffice. The Congressional Research Service estimates that a 15.6 percent rate rising eventually to 16.7 percent will fund benefits. I do not favor any tax increase, but a four-percentage point increase will not cause economic ruin. Medicare is on weaker ground going forward, but I am only considering Social Security’s sustainability today. Social Security has problems making it poor public policy. Most significantly, PAYGO produces an atrocious rate of return compared to true pensions. According to one estimate, the average participant will get $698,000 in benefits for $698,000 in taxes. A better public pension plan should enable reform long-term. Social Security’s funding problem reflects a larger problem facing our nation. We want more from government than we are willing to pay for in taxes. This fiscal imbalance produces our ballooning national debt and traces back, I believe, to the partial Reagan Revolution. President [Ronald] Reagan wanted to cut government, both taxes and spending. Spending cuts proved unattainable, but tax cuts remained politically popular, so President Reagan proceeded with tax cuts culminating in the landmark 1986 tax overhaul. This locked in low taxes, which persist today. To sustain current Social Security benefits or Federal spending, Americans will have to pay more in taxes. I hope we choose less government and more freedom, but scarcity will force a choice soon. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
