The Price of Civilization

Chapter 2Prosperity Lost

America’s Approval

• Wary, pessimistic, and cynical

• 2/3 of Americans are dissatisfied; US is “off track”

• 71% say federal government looks out only for its own interests

• 70% say government and big business work together to hurt consumers

America’s Lack of Confidence

• Institutions closer to home > national/global institutions

• Loss of confidence in each other– Robert Putnam:

“bowling alone”– High in ethnically diverse

communities– “hunkering down”

Richard Easterlin’s Subjective Well-Being

• Self-reported happiness• Between 1972 and 2006,

between 2.1 and 2.3 (scale of 1 to 3)– GDP doubled during this

time, yet no sign of change in happiness as a result

– Declined among women

• Gallup Poll: 19th

• Hedonic Treadmill– US running very hard to

pursue happiness, but are staying in the same place

Jobs Crisis• 9%• Peak 2007 - Trough 2009: 8.6 million

jobs lost• 2000s = lowest job growth since

WW2• Highest for lower-skilled

– 15% for no diploma– 10% for diploma/some college

• 1975– Bachelor’s degree = 60% more income

than HS diploma

• 2008– 100%

• Housing crisis

Savings Crisis• National savings rate• 1980s-2008 sharp fall• As individuals lost financial

prudence, Congress did too– 1955-1974: below 2% GDP– 1974-1995: above 3%

• Caused retirement crisis• Center for Retirement

Research at Boston College; “National Retirement Risk Index”– 43% unready 2004– 51-60% in 2009

Investment Squeeze• China: 54% of national income• American Society of Civil

Engineers (ASCE)– Report card 5-year investment

needs to correct major problems

– D, “poor”, $2.2 trillion = 2-3% GDP

• Intellectual capital – the pride of America – diminishing

• Most serious threat to human capital – quality of work force– Most important factor of US

future prosperity

Education• Human capital• Program for International

Student Assessment (PISA)• 2009: 15th reading, 23rd

science, 31st math• Shanghai #1 in all three• 12th in the world for portion

of 25-34 year-olds with at least an associate’s degree

• More people attending college, but same rate of graduation

New Gilded Age• Income gap/inequality

– Highest since Great Depression

• 1/8 Americans on food stamps

• Top 1% > 99% in net worth• Dishonesty = contagious

social disease• Social Immune System• Something goes wrong – lie• Almost nobody at the top

pays for the lies, even with the truth surfaces

Government and Big Business• Dick Cheney: CEO of

Halliburton to VP• Goldman Sachs, Citigroup,

JPMorgan Chase: central part of financial crisis 2008 to Obama administration

• Goldman Sachs: SEC charged $550 million for fraud; company made $13.4 billion

• Countrywide CEO Angelo Mozilo: fraud with $67.5 million fine; made $470 million

The Price of Civilization

Chapter 3The Free-Market Fallacy

Age of Paul Samuelson• 1940s to 1970s• First American winner of Nobel

Prize in Economic Sciences• 5 core ideas of modern mixed

capitalism:– Markets are reasonably efficient– Efficiency ≠ fairness– Fairness = share the wealth;

government redistribution of income

– Markets underprovide certain “public goods”

– Markets prone to financial instability; solved by government policies

“Great Stagflation”• Bretton Woods dollar-

exchange collapse• US abandons link to gold on

August 15, 1971• Surge of oil prices 73-74• Economic stagnation and

inflation• Reaganomics and Margaret

Thatcher– Decrease rich tax rates to

unleash entrepreneurial zeal– New disdain for the poor

who depend on the government for support

Adam Smith’s Invisible Hand• “Market equilibrium”

– When the balance of supply and demand is reached for each good/service

• ME is reached without a central planner

• If everyone aims for self-interest, well-being for all

• “self-organizing system”• Competitive ME is

efficient – no waste of resources

Why Free Markets Need Government

1. Provide public goods• Private markets work with many suppliers and consumers,

but fail because only need “single supplier” for some goods– Causes adverse spillovers; too much of a good thing is bad

(pollution)– Need “corrective pricing”; taxes to get rid of pollution

2. Regulate markets when info between buyers and sellers is “asymmetric”

– Sellers have inside info buyers don’t leads to fraud, insider trading, etc.

Economic Fairness• 63% of Americans believe it is the

responsibility of government to take care of citizens who can’t take care of themselves

• Rule of law – treat everyone equally; redistribution should follow due process

• Distribution of income and well-being – both at a point in time and also across generations: “sustainability” (fairness to future)

• “Stewardship”: living generation must be stewards of earth’s resources for the next generations; only have one Earth

Libertarianism• Liberty: the right of each

individual to be left alone by others and the government

• Individuals have no responsibility to society other than to respect the liberty and property of others

• Tax = government extortion• Most Americans accept

legitimacy of taxes – 61%

Libertarian arguments

• Moral assertion: everyone has the overriding right to liberty

• Political/pragmatic: only free markets protect democracy from government despotism

• Economic: free markets ensure prosperity

Triple Bottom Line• Efficiency (prosperity), fairness

(opportunity for all), and sustainability (future)

• Joseph Schumpeter’s “Creative destruction”: new technology wipes out way of life

• Free markets do not guarantee sustainability– Natural capital is property of

everyone and very vulnerable– Market interest rates

• Interest rates are positive because people are impatient

Efficiency and Fairness• 10-20% say market outcome

is fair• Rich should be taxes, poor

should be helped• Trade off

– Rich are taxed and poor are helped through transfers = hard work of rich is punished while idleness of poor is rewarded

• Scandinavian opposite• Promoting fairness also

promotes efficiency

The Price of Civilization

Chapter 4Washington’s Retreat from Public

Purpose

New Deal to War on Poverty

• Federal government steered national economy as an instrument of democratic power

• S&T initiatives: nuclear power, satellites, computers, Internet

• 1960s Medicare, rights for women and disabled

New Deal Programs

• Extended during 40s-60s– Construction of physical infrastructure (roads, etc)– Regional development– Increased provision of public services (education)– Social Security– Support for science and technology– Public administration– Income security (unemployment insurance)– Food stamp and welfare programs

FDR, Reagan, and Clinton

• FDR: “Government is the instrument of our united purpose to sole for the individual the ever-rising problems of a complex civilization.”

• Reagan: “In this present crisis, government is not the solution to our problem; government is the problem… It is my intention to curb the size and influence of the Federal establishment.”

• Clinton: “The era of big government is over.”

Rise of Public Spending

• Government’s economic role: civilian (nondefense) federal spending relative to national income

• Rose to 16% of GDP by 1980; unchanged until 2008

• Everywhere in the world; more in Europe• Reflects need for a mixed economy

Complacency with Big Government

• 1940s to 1960s• Nation had gone through “near-death”

experiences and emerged as an increasingly united society: Great Depression and WW2

• 1924 Immigration Act slowed flow of immigrants; 15% in 1924 to 5% in 1970

• Government was competent and representative of national interests; NATO, EU

• JFK and LBJ; War on Poverty

The Great Reversal and Jimmy Carter

• 1977-1981• Big Labor lost its political influence; rise of

Sunbelt power; 1978 Revenue Act; Japan exports increase

• Deregulation• “Big government” constituted the major

barrier to prosperity• Government lost its aura of competency

Reagan Revolution