The World’s Utopia in 200 Years
Rutger Bregman is a Dutch historian who was lauded earlier this year for bravely telling billionaires at the Davos World Economic Forum that they should pay more in taxes. Considering the many letters by the wealthiest demanding to be taxed at a higher rate, Bregman was not really saying anything the least bit controversial. It can be likened to those Hollywood celebrities who are described as being courageous for insulting President Donald Trump during an awards show where 99% of the room hates Trump.
Bregman recently participated in an interview that is gaining traction, mainly because of his vision of the future that is pretty much the wishlist of every Sen. Bernie Sanders (I-VT) supporter.
Speaking with Vox, Bregman listed free money, shorter workweeks, and open borders as a utopia the world will get to enjoy in the next 200 years. But he may not have to wait two centuries for these to become a reality: Basic income pilot projects are being initiated all over the world, the workweek has already been cut by more than half since the industrial revolution, and, should the Democrats win the 2020 election, an open borders policy seems quite feasible.
But there was one moment in the interview that would perturb any economics major. He said: “If we actually rewarded people for the value of the work they do, I think that many bankers would earn a negative salary while many nurses and teachers will be millionaires.”
He did not explicitly aver that the government would decide compensation rates. The obvious question, though, is: Who would determine how to reward people for the value of work they do?
The historian does have the right intentions. Many folks would prefer to see a nurse make the same level of money as Bryce Harper of the Philadelphia Phillies or Kawhi Leonard of the Los Angeles Clippers. But labor markets do not maintain formulas of wishing, and governments could never afford to pay a nurse $30 million a year anyway.
The water-diamond paradox is key in this regard. Judging on value alone, water should have infinite value because it is necessary for life. A diamond, on the other hand, is a luxurious item, something to admire and inflate your self-esteem. So why is a bucket of diamonds worth far more than a bucket of water? Marginal utility, the amount of pleasure you receive when consuming one unit of a good or service. The marginal utility of your first cup of a venti coffee frappuccino with two scoops of ice, five pumps of frap roast, and double blended is greater than your third, fourth, or fifth because your desire for the beverage dissipates after the first cup.
Consumers are not forced to choose between the entire supply of water and the whole inventory of diamonds in the world. A container of water is easy to replace, but not so much those diamonds in your ear or on your fingers. Therefore, the same concept applies to everyday labor. We are not forced to choose between all the nurses in the world or, using Bregman’s example, all the bankers in the world. If we had to make this decision, then it is more likely a nurse’s services are far more important than a number-cruncher. However, this does not affect the value of a single nurse’s services or a single athlete’s human capital.
Let’s be honest: It would be fairly easy to replace a high school teacher since most of the US adult population has a college degree. But it is not as easy to find a left-handed pitcher who can toss a 97-mph slider or a quarterback who can throw a 100-yard pass with tactical precision.
Fed Pushes Pause Button
President Donald Trump got his way this week.
The Federal Reserve, heeding the advice of the White House and caving in to the demands of equities markets, cut interest rates by 25 basis points to the target range of 2.00% to 2.25%. Described as a “mid-cycle adjustment,” Fed Chair Jerome Powell told reporters that he hopes this quarter-point reduction will jumpstart the economy again and support growth at every level of the market.
While the first rate cut in a decade s is dominating headlines, there is another part of the announcement that should turn heads: the ending of quantitative tightening, a policy of contracting the money supply to reduce liquidity in the economy. The central bank said it will stop shrinking the $4.5 trillion worth of Treasurys and mortgage-backed securities (MBS) in the balance sheet, a move that became effective August 1.
In order to diminish the balance sheet, the Fed needs to sell government bonds on the open market or adopt the maturation approach. The Fed has already sold off about $500 billion since early 2018, so it has a couple trillion to go. But now that the Powell pause button on balance sheet normalization has been pushed, the central bank is no longer flooding the bond market with US debt, though it will add dollars to the economy to suppress interest rates.
Right now, the Fed will be sitting on trillions in Treasurys and will continue to purchase new bonds once they mature – or choose to not reinvest the maturing assets. Therefore, it is unlikely that we will see the Fed’s active participation in the credit market wind down anytime soon, which means the long-term interest rate manipulation will persist.
There have already been trial balloons floating in the air about possibly increasing the balance sheet. Kansas City Fed Senior Economist A. Lee Smith posited in March that the Fed will need to maintain a permanent and sizeable chunk of change in the balance sheet since the unwinding has applied upward pressure on borrowing costs. Can we expect another round of quantitative easing (QE) from the Fed? Trump has championed European Central Bank (ECB) President Mario Draghi and his heightened accommodation, so perhaps the next demand from Trump is to ease.
Analysts have anticipated for much of 2019 that the central bank would impose two rate decreases this year. Powell seemingly rejected the premise of aggressive monetary easing and confirmed that this is not the beginning of a long series of rate cuts. So, for now, the world’s largest economy will sink or swim with 2% interest rates, meaning there is now no excuse for the administration. Despite getting lower interest rates during the boom phase of the business cycle, Trump is still not happy, going on a Twitter tirade against the chief Eccles Building occupant and stating that “Powell let us down.”
Subsidizing Illegal Immigration
In Econ 101, one of the chief lessons you learn is that when you subsidize something you get more of it. People will do something when the incentives increase. Women may have more children if higher welfare payments are attached to each child. Or, the old tale of a viper-infested town paying people for killing the snakes, only to learn that residents had been breeding them in their basements.
The problem of illegal immigration applies to these economic principles. And no, CNN, this is not comparing illegal immigrants to viper snakes and welfare recipients, so refrain from crying on air, please.
Illegal immigration dominated both Democratic debates this week. The normal candidates urged a more realistic approach to the border crisis, but the competitors polling higher went as far as proposing decriminalizing border crossings, offering free college to illegal immigrants, and providing free health care to people who are in the country illegally.
No word yet if this will apply to Canadians.
If you are offering millions of people south of the United States border a treasure trove of goodies at no expense, then you are inevitably going to attract huge swaths of people to your country. This is human nature. So, if someone from El Salvador or Guatemala can receive incredible medical treatment from an American hospital and enroll their children into an American college without paying a dime and not risk threat of criminal punishment, then what do you think is going to happen?
Perhaps it is time to erect a welfare wall.
The Fatal Conceit
While the stories in this column are three separate issues, they do connect when it comes to big government and central planning.
Rutger Bregman envisions a society of the government handing out free money and manipulating the laws of basic economics to instill compensation justice and shorten workweeks. The Federal Reserve manipulates the economy with conventional and unconventional monetary tools that distort markets, enable malinvestment, and benefit the few at the expense of the many. Left-leaning politicians, should they regain power, want to adjust public policy to facilitate millions sneaking across the US-Mexico border, perhaps as a ploy to capture a significant voting bloc for elections to come.
Eminent economist Friedrich Hayek would refer to this as the fatal conceit, men and women who think they can shape the world according to their wishes. This has been on full display in the public realm for way too long. Yet, when things go wrong, they do not face any repercussions in the town square.