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There are some elements that I will add to those explained by Professor Becker:

1) Companies moving out of the US looking for lower costs (with high quality) abroad, especially to China, India, Brazil, and Mexico.

2) Lower global demand for US manufacturing products (services), now mainly imported from China (India).

3) The still very rigid immigration policies by the US that keep labor costs relatively high.

Even though the US fiscal policies and probably monetary policies are to blame for this crisis, I wonder how much of it is due to a global economic restructure, with economic activity moving to other parts of the world.


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Pradeep Despandee

Becker: “…increase the long-term growth rate beyond the 3% average annual GDP growth rate of the past 130 years.”

In a world that grows by 4-5% every year, indeed that is the only recipe for survival.

Americans have only two choices: Either

…reestablish all the core American incentives of individualism, self reliance, independence and, of course, resultant productivity which brought America its current prosperity in the first place, and resume growing at a rate comparable to the world average (4-5%) or

…just fade away into economic marginalization being just an average 0.3 billion in a humming world of 6 billion.

The sheer intimidation and despondence the first proposal triggers in most people, tells me that it is too late for America. Her fate of decline has been cast. 2008 was the last fork on the road to serfdom and Americans took it – in spades. A Tea Party garnering 20% voter support represents little more than the expected screams of a society headed for economic marginalization and decline.


"It is no surprise that this rhetoric and the proposed and actual policies discouraged business investment and slowed down the recovery." Oh, really?



alanzo hern

Since the downward trajectory in investment started well before Obama was elected, let alone took office (see http://research.stlouisfed.org/fred2/graph/?g=S3 ), your attempt to blame Pres. Obama is revealed as yet another disingenuous Republican propaganda ploy. You have shot whatever credibility you might have directly in the foot.


Hi, another liberal from the Yglesias site here. With sincere respect for the Nobel laureate, and with sincere apologies for the food thrown in the comments immediately preceeding: isn't this sort of partisan smack-talk (the OP, not merely the trashy replies), the authority of which rests on the professor's reputation rather than the cogency of the argument, which was easily demolished by a generalist-amateur such as Yglesias, exactly what your co-blogger Judge Posner was bemoaning in his book about public intellectuals?


Every meaningful business criterion has improved from January 2009 to today: Business investment, corporate profits, DOW average, bonuses, etc. Even jobs have gone from losing hundreds of thousands a month in the private sector to making gains for 14 straight months (though certainly not as many as everyone would like to see). Hard to see how this Mt. Everest of positive evidence can be viewed as the death knell of business at the hands of the Obama administration.


the media frequently had discussions of the “failure of capitalism”

What media would that be? The media I followed did no such thing. Eventually, in their own slow and bumbling way, they did discuss that
The Bush-initiated bailouts prevented a complete collapse of the American auto industy;
The Bush-initiated stimulus cost a bundle but supported employment significantly;
The Bush-initiated TARP had various minor but significant positive short-term effects, though there seems to be honest disagreement on these;
The Bush-initiated bank bailouts prevented a catastrophic failure of the industry, which enriched a lot of undeserving folks but also helped in the short term.

No doubt the media also took aim at many of the vile, gluttonous reptiles who rode the bubble like Slim Pickens rode his nuke. If that's what you mean by "the media frequently had discussions of the 'failure of capitalism' then I'll concede your point and relegate you to the intellectual and moral Beckistan of the far right.

One half-exception: FOX news had frequent discussions about the discussions of the failure of capitalism occurring in the media. Those discussions 'frequently' occurred at the same time as similar discussions on right-wing talk radio and in the editorial section of the WSJ.

They didn't offer any evidence, either.


Watching idiotic old men cheer on the end of the middle class

Becker Posner, earning their way through a down economy the only way they know how.

By tossing out BS and hoping no one notices.

Look guys, you're more than a bit grey. Shouldn't you be able to retire on the wingnut welfare you've earned to date?

I mean seriously, how much could you possibly need?

David Youngberg

Becker is saying that if Obama's policies were different, the investment would be stronger than it is. "Discouraged business investment" is not the same thing as "zero business investments." This is really the classic challenge in macro: are the changes in spite of or because of some policy? There's no way to tell for sure. But Becker's argument of regime uncertainty is a worthwhile one to consider.


Indeed, Becker and Posner would be foolish to work at the full capacity of their brains. Given the fact that marginal happiness per extra income earned already decreases with increasing income, and given the additional fact that this extra income would be first heavily taxed as high income only to be taxed again as inheritance, it is logical that a person that has arrived at the success level of Becker and Posner would be rather unwilling to press his/her brain to work at full capacity when there are so many leisurely activities that compete for a successful person’s time. So it is hard to keep truly exceptional people working as it is, even without class warfare policies.

So Becker and Posner probably limit themselves to writing about economic matters on their blog as a hobby. Many of us aren’t even doing that. A significant portion of ex-productive people have gone further by finally adopting the advice typically dispensed by the left: That “Money does not bring happiness” – so, naturally, trying to make money under a class warfare environment brings even less happiness, not to mention stress and possibly ill health at the end. So many of us took our modest success and headed for the south seas, soon after we became able to do so, from where, our brains finally relaxed from the demands of creating unique things, we shoot the occasional blog post as we see the American middle class on an ever more accelerated path to economic suicide, adopting the disincentivizing class warfare policies espoused by other declining societies. As one might say, many people capable of exceptional work on a worldwide scale have “gone Laffer”.

Now the American middle class can figure out by itself how to create the iPads, Software, Medical equipment etc. … and the other exceptional products that are the only way to sustain an exceptional middle class standard of living that is 10 times higher than the world average, or rely on an ever decreasing fraction of uniquely competent people willing to work under the headwinds of class warfare. The war on capitalism and merit based compensation that American people have lately imported from other declining societies, will only hasten what seems to be an inevitable American decline.

The American middle class is basically asking for the following pipe dream: “Pass laws that will allow me to maintain a top 5% worldwide standard of living, by relaxing into Welfare State incentives and doing unimaginative ordinary work that half the planet is now learning how to do”. It won’t happen, it is a delusional dream that does not exist any more than perpetual motion machines exist in the Universe. Pressing for legislative means to go against the inevitable fundamentals that exceptional prosperity can only be based on exceptional and innovative work (i.e. producing what few people in the world can figure out how to invent, manage, and grow) is a recipe for disaster. A disaster that will replace the current orderly economic marginalization with even faster and choppier decline.

But alas, historical experience shows that the more desperate a society becomes, the more it gets bamboozled by the siren song of prosperity through class warfare policies, making American decline all but inevitable.

Red Bottom Heels

Very good!Really nice!


The author(s) of this piece apparently lack the guts to return here and address the trenchant takedown from Mr. Yglesias. Might be a wee bit embarrassing, yes?


Excluding inventory builds from actual expansion (Fixed Private Investment), the picture changes somewhat...

Regardless, the point being made is that the recovery itself has been slow to come and largely dampened in the time since Barack Obama took office. This contrasts with Yglesias' implication that Becker was implying the Obama caused the decline.

Looking at either set of data, it is pretty clear that although investment has bounced off the bottom, it has not experienced strong, lasting growth.

Additionally, it's good to see that thoughtfulness is characteristic of Ygleslias' readers. No need to resort to rhetorical buzz words or name calling...

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The most attractive reform of Medicare put forward by any member of Congress is Paul Ryan’s proposal to provide grants to the elderly to buy health insurance, with the size of the grant falling with the income of the recipient..

The National Benefit Authority

Once more an important blog post by Gary S. Becker. This time about reasons for the slow economic recovery in the US. Becker thinks that the US needs a favorable tax environment, a clean up of the public household and better predictability of regulators


Julio Iglesias is an economist?!?


What the public at large fails to understand is the fundamental reality that:

In anything by the very short term, compounding dwarfs everything.

Two countries, societies, or economic environments that have what seems a mere 1-2% annual growth difference on their economic expansion trendlines, are on divergent paths that lead to dramatic changes in prosperity after 10-20 years, more as time goes on. This is an inescapable arithmetic fact that no politics, legislation or ideology can change - or “hope” to “change”.

But you cannot create motivation to increase your growth trendline when the main underlying theme of virtually all the policies you enact is just another direct or indirect variant that requires harvesting ever larger percentages from the production of the most productive people to help shield the voting majority from the consequences of mediocrity. No matter how the argument is presented, it always boils down to this fundamental dynamic.

For better of for worse, the altruistic human that will put forward a significant portion of his competence towards working for the benefit of some distant unknowns does not yet exist; at least in sufficient numbers to create an environment of endemic sustained high growth. This in spite of the constant and futile attempts made by various ideologies to convince humans to do just that. It will not happen. Meanwhile, on the other side of the spectrum you cannot expect the same productive enthusiasm and ambition amongst the middle and lower class by promoting the message: “Don’t worry, it won’t be that bad, we’ll take from the more productive to prop up your standard of living”.

But the hope lives on, so America’s decline continues. Not only does it continue, but it now seems that dear Americans have finally triggered the vicious cycle of decline. That is because now, the worse things seem to get, the more help the public will demand at the polls, as historical evidence shows. It is the Grecian cycle. But there is no way to give that help without harvesting ever more from those people and the incentives that make America the vibrant and innovative place that it has been. Thus the vicious cycle has closed, and now, dear Americans, you are entering the phase of accelerated decline.

So Americans are about to deal the final blows to the virtuous cycle that has kept America abreast of the rest of the world. Isn’t it an extreme coincidence that Americans live in the one out of 200 countries in the world that is the most prosperous? It is most prosperous because incentives to innovate, create and benefit from one’s work have been historically left most unhindered in this country. You did not appreciate that fact dear Americans. The combination of your most productive people finding in America the most unhindered environment to lead the world in innovation, coupled with the ability to redistribute at the polls proved too tempting to sustain. So now you’re going down dear American middle class . You did not appreciate the fact that as a middle class American you were still in the top 5% of this world. You could not resist the redistributive production disincentives espoused by other, mostly declining, economies, so now prepare yourself for the path to parity with the developing world.

But in practical terms, what does all this mean?

It is always difficult to make predictions as to what might happen. However, since it is a lot more likely that my predictions will be much closer to reality compared to what is envisioned by “Hope and Change”, I’ll dare reveal what I see in my crystal ball happening to Americans. Here is what I see in the next decade, in, more or less, the following order:

1. A budget/deficit compromise that kicks the can down the road will be reached to get us through to the 2012 election.

2. In 2012 Obama will be re-elected, and having little left to loose, will finally increase taxes on the rich - which by his definition are households making more than 250k.

3. The new taxes will produce increased revenue for a couple of years but that will not be nearly enough to address increased expenditure and, more importantly, counter the loss of production from the work dis-incentives of, primarily, ObamaCare and secondarily other regulation imposed by this administration. To cap the detriment, the compounding effect of slower growth induced by taxing the rich and encouraging the middle class and poor to make choices that lead to lifetime mediocrity, will also put government revenue growth on a path much below what is needed to finance exploding collective expenditures.

4. A new round of taxation on the rich will bring taxation on the wealthy up to European levels.

5. The same forces described in 3 will further accelerate US economic decline.

6. In a last ditch attempt to preserve American prosperity a grand bargain will be stricken whereby “everyone must contribute to save the economy”: The rich will get a 3rd round of tax increases and the poor and middle class will get European style VAT, $9 gasoline and a host of excise taxes.

7. The USA will have now entered the irreversible economic slough of despondence, like Europe and the rest of the once developed Western world. Americans welcome to levels of prosperity equal to the worldwide average.

The joker wildcard in all this, is whether investor loss of confidence in Americans’ ultimate ability to repay sends borrowing costs into a tailspin, in which case the grand bargain described in (6) happens sooner and perhaps abruptly.

Of course, I could be wrong. Guided by brilliant committees headed by insightful government bureaucrats America may yet succeed at the Nth human attempt at prosperity through redistribution, regulation and central planning. Something that seems to have eluded every civilization up until Paul Krugman.


Its only the folks on the Right who obsess over "the Decline of America" and their cure usually involves abandoning poor people to poverty, favoring business (especially big business) with deregulation and low taxes, and exerting US power abroad (on a borrowed dime no less), while promulgating the myth that poor people don't work, that they are not productive, and that somehow magically business owners do all the work. What is American prosperity if those who prosper are only the few?

Yet, El-Greco, tax rates have hardly ever been lower. Free trade means a race to the bottom with only big business capable of moving its operations overseas the beneficiaries.


The few who prosper involve the entire American middle class and most of the lower class. They may be middle class, but their standard of living is still in the top 5% by world standards. The American middle class seems to completely ignore how well they live compared to the rest of the world, a standard of living afforded by the tremendous productivity of capitalism. They are at that level because they are also in the top 5% of most productive people in the world (and that in spite of not being the most competent as individuals – but that is another story) led by the top 1% of most productive people in the world. Both the 1% and middle class who is still in the top 5% by world standards, share one unique thing in America compared to most other places in the world: They are allowed to keep more of what they earn in exchange for their labor, and their activities are less regulated by attempts to shoehorn them into some central plan.

But when the top 5% starts waging war on the top 1%, the exceptional place that America has been for innovation, production and resultant prosperity ceases to be. With mediocrity of incentives, mediocrity of prosperity levels will inevitably follow. As I said, on the road to hope and change prepare yourselves to become more equal – equal to the world average that is.

No matter what redistribution schemes one tries to conceive and implement, the American middle class just cannot have a standard of living that is 5 times the world average but do the same work that three billion people in developing countries are now learning how to do. If the American middle class wants to remain in the top 5% of the worldwide prosperity scale, they also need to maintain a productivity that is in the top 5%. That involves not waging war on the top 1% who innovate and productize their unique ideas and not trying to restrain their creativity into top down collectively managed central plans. Only that will enable the American middle class to maintain its 5% top position in worldwide productivity (and thus also, inevitably, worldwide prosperity).

That is the fundamental equation of American prosperity. The rest, monetary policy, subsidies, micro-manipulation of the 90 day emergency petroleum reserve, QE packages, bailouts, forcing companies to accept lower profits, amount to little more than gimmicks, temporary second order distractions as well as delusional and ultimately distortionary, bubble creating attempts at some perpetual motion machine to motivate productivity out of thin air, against core fundamentals of redistribution, regulation and central planning which inevitably weaken the personal incentives to excellence that are unique to America - the real wellsprings of prosperity.

With the end of American exceptionalism, comes the end of American prosperity. When we eventually look back at our times in a historical perspective we will realize what a time of precipitous American decline the early 21st was under hope and change. What we had and what we lost. But, by then, it will be too late. Virtually no country has travelled that road backwards. Let’s complete the experiment of socialism one more time. To infinity, and beyond!


Wow, how does Germany manage it? High labor costs, universal health care, high taxes, lots of regulation, a health 3.6% growth rate, and a robust net exporter to boot.

High progressive tax rates is not class war, and it is taxing precisely those people who have benefited most from what services government provides. I don't care about the top 1%. I care about the top 0.01%. When too few people have too much wealth, the political system inevitable tilts in their favor, often at the expense of everyone else. Concentration of wealth is bad for representative democracy because representatives can be captured by those with power and influence.

America is squandering its vitality by policing the world, spending a ridiculous amount on military equipment we don't need, and engaging in long unfunded wars of dubious value. Meanwhile, we have sold out our manufacturers so that big business can cut their labor costs abroad, just as we are being told that the only way to save US industry is by destroying labor unions and deregulating environmental and other safety protections. Meanwhile, people are sold a bill of goods that education will save the American economy. For what?

Productivity has gone up, and continues to go up now... and productivity increases mean that less work is required to produce the same amount of goods. That either means that more goods are produced and so more goods have to be consumed (with less saving and more borrowing)...and that's not working out too well, or fewer goods and less work-hours. Employers can either hire fewer persons, or have them work fewer hours. Work week used to be 60 hours a week, then it was 50, and now its 40, because productivity went up, and because labor unions fought for it. Maybe its time to go to 30...

But I agree that the American middle class needs to take it up a notch. I'm not so sure that education is the key (blaspheme).

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