Politics & Policy

The Great Paradox of Political Economy

A big-picture look.

It’s election season, so you can be sure you’ll hear a lot of silly stuff about how this or that political party can run the economy. I prefer Republican economic policies to Democratic ones. But the truth is, most debates on economic policy are silly because they miss the big picture.

#ad#The biggest picture is the one most obscured by our dated arguments. Poverty, as defined for millennia, is pretty much nonexistent in the United States. Until very recently, poverty was defined by material scarcity of essentials, chiefly food, shelter and clothing. Today, some people go without these things, but scarcity isn’t the culprit. “If poverty today remains a serious problem,” Christopher DeMuth noted in Commentary nearly a decade ago, “it is a problem of individual behavior, social organization, and public policy. This was not so 50 years ago, or ever before.”

To understand how subjective poverty in America is, one need only recognize the fact that most rich people from a century ago would be considered poor by today’s standards, and today’s poor would be considered rich by the standards of 1900. In 1900, 2 percent of homes had electricity, and 1 out of 10 homes had flush toilets. Today, pretty much all of them do. In other words, the tangible goods that defined wealth have been democratized.

Absurdly, according to the official measurements used by the federal government, fewer people lived in poverty in 1973 than today. But in 1973, most poor people didn’t have a car. Today, almost 75 percent of those officially in poverty have a motor vehicle. Today’s poor households, according to statistician Nicholas Eberstadt, are more likely to have telephones and televisions than non-poor families were in 1970. In the 1970s, undernourishment still factored into poverty. Today, obesity is a far bigger problem.

At the beginning of the 20th century, sweeping ideological movements promised to solve poverty through state-planning. It turned out Americans solved it themselves, largely by keeping the planners at bay.

There are other factors that seem to be invisible to government bean counters. We live in a “knowledge economy,” but the folks who measure the gross domestic product don’t count the money spent on research and development (as well as money spent on training and education) as an investment. Business Week’s Michael Mandel notes that Bugsy Siegel’s $6 million construction of the Flamingo Hotel was counted as a contribution to the GDP, but AT&T’s investment in Bell Labs — where the transistor was invented around the same time — wasn’t.

Similarly, all the research and development that goes into things such as the iPod (or various new medicines) isn’t counted in GDP stats. Instead, writes Mandel, the government merely counts each iPod twice: “when it arrives from China, and when it sells. That, in effect, reduces Apple — one of the world’s greatest innovators — to a reseller of imported goods.” Indeed, trade-deficit fetishists have led us to believe that China has the better part of the deal because it gets to make the iPods, while California-based Apple merely gets to sell them at an enormous profit.

Meanwhile, the single-most underreported good-news economic story of the 21st century so far is the explosion in American productivity. From 2000 to 2004, productivity in the United States grew by 17 percent. That is a staggering number which tells us more about the long-term health of the American economy than statistics about the GDP, unemployment or wage growth. Those four years — which include a recession and 9/11 — are almost better than all of Bill Clinton’s eight years in office (which also saw impressive productivity growth).

This isn’t a partisan point. Bush and Clinton deserve virtually no credit here. The credit goes to American ingenuity and technological innovation (chiefly in the form of computers finally paying off on a massive scale). But these improvements aren’t easily captured in the statistics that bureaucrats are paid to keep on top of, and politicians can’t claim credit for them, so the media ignore them. Collectively, policymakers are like a man looking for his car keys only where the light is good.

This predicament is a byproduct of the great paradox of political economy. Free markets are better than any other system in the world at solving those things we want economics to solve. But it doesn’t feel that way. Markets shake things up and make us feel insecure even as the big picture continues to brighten. People want guarantees — even though the lack of guarantees makes American ingenuity possible — and politicians are only too happy to oblige.

©2006 Tribune Media Services, Inc.

Jonah Goldberg — Jonah Goldberg holds the Asness Chair in Applied Liberty at the American Enterprise Institute and is a senior editor of National Review. His new book, The Suicide of The West, is on sale now.

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