Reality Isn't Optional

A while ago I created a blog called Reality Isn't Optional. The name comes from a friend of mine, who uses that phrase as a touchstone when he (a libertarian of the Republican variety) is criticizing the ideas of the Left. I think it's an apt phrase when criticizing the ideas of Left, Right, North, South, and so on.And I shall do so. I've decided to get serious about posting to that blog, starting with this essay, cross posted to Reality Isn't Optional. Nothing like a little ambition.[[Update: and nothing like redundancy. Editing this post I managed to delete all its content. Google Cache didn't have the original. archive.org didn't either. But because of my cross-post I was able to get the other version, hopefully the same as the original. Or close. And quickly, I backed up this blog, entire. That's not gonna happen again. Much.]]The SeedThe seed that's grown into this post was planted long ago. It took time to germinate and started sprouting during the 2011 "Debt Ceiling Crisis," when it struck me that the debt arguments were framed incorrectly by both sides. As I'll explain below, debt isn't a problem; nor is per-capita debt; nor debt to GDP ratio.That sprout continued to grow as I continued to research and to think about politics and economics. During the 2012 election when the rhetorical focus shifted to jobs, it again struck me the issue was being framed badly: more jobs would solve nothing.The ArgumentsI'm not ideologically attached to Adam Smith's Wealth of Nations, but it's a fine book that this project inspired me to study. I admire the way that Smith made his arguments and how he took care to accompany his every principle with empirical evidence supporting it. Reality isn't optional. I believe that in his title Smith focused on the right fundamental issue. Not jobs. Not debt. Wealth.During the 2012 contest, the Left argued that the government should create jobs by spending money to "stimulate the economy." This would produce more jobs and thus more revenue, which would drive down the debt after it had been driven up by the stimulus. And the Left argued for keeping deficits lower by raising taxes on some people they called "The 1%."The Right argued that government should create jobs by getting out of the way. It should reduce taxes so that the people they called the "Job Creators" (likely the same ones the Left called "The 1%") could use that money to--well, create jobs. They argued that these new jobs would create additional revenue that would drive down the debt after it had been driven up by the tax cuts; and the Right argued for keeping deficits lower by cutting something they called "entitlements."My research and thinking led me to conclude that these are both bad arguments, By themselves, jobs solve nothing. And taken in isolation, debt is not a problem.JobsFirst, think about jobs. We can reduce the jobless rate to zero by putting the unemployed to work doing unproductive things. Or we can lower it by outlawing devices and practices that make people productive. For example, we could have a full-employment economy simply by passing a law that outlawed bulldozers. People would be put to work with shovels, and there would be no increase in taxes or debt. China does something much like that: it deliberately withholds productive machinery from some of its infrastructure projects to keep unemployment down. The jobs get done, and the people have jobs and the debt does not rise. But is the country better off economically than if fewer people worked, more efficiently, and those otherwise employed were paid to--who cares?Alternatively, consider a world in which productivity has become so great that it takes only 10% of the population to provide everything that the rest of the population gets today. In this world, everyone has just as much food, clothing, housing, heat, and iPads as today, but the number of people who are unemployment is massively increased. Would the world be worse off economically with so many fewer jobs and so much more unemployment if everyone got what they had today? Well those people who no longer had jobs--and thus income--would be worse off. But suppose the government gave them money. Just gave it to them. How would be worse off than we are today? Of course that's not reality. It's a thought experiment. But reality's evidence supports the experiment. In 1776 90% of the US workforce was employed in agriculture; now it takes just a few percent and we eat better than we did back then. In nearly every economic domain more and more gets done with fewer and fewer people--with fewer jobs.In Wealth of Nations, Adam Smith explained that wealth was created by the productivity of land and labor. But Smith pointed out that just working wasn't enough, because much labor was unproductive. He gave examples of productive and unproductive work. His might classify things differently today, when so much wealth is in the form of work on ideas rather than on material objects. But his distinctions are still valid: if the people who are engaged in today's unproductive labor found themselves unemployed (but still paid) our material well-being would be largely unchanged.DebtNow let's look at debt.Debt is important for households, for companies, and for nations. The Right and the Left want to reduce the debt. They disagree about how to do it, and in what time frame, but they miss several important points when they analyze the debt. The first is that there's nothing intrinsically wrong with debt. In some cases debt is good. The second is that the effects of debt on households, companies, and small nations are different than the effect of debt on economies the size of the United States. I'll detail this second argument in another planned post (The False Debt Analogy--which I never quite wrote. But I did write this, and this, and this, on the same topic) Here I'll explain why there's nothing wrong with debt per-se.Growing debt is not necessarily bad in a household with growing income or when the household is taking on debt to invest in the future; it's likewise not bad in a company or an economy if the debt is used to buy assets or the means for future production. It's not necessarily bad if debt per householder, or unit of revenue grows. A company might take on debt to acquire capital equipment that will lower the labor content of products (and thus raises debt per unit of revenue or per employee) but which will make its products more profitable. In a household debt for an education that increases earnings might be good.When is debt a problem?We can decide if debt is a problem for a household only by comparing it to the household's assets and to current and expected household income--effectively it's net present value. We can decide if it's a problem for a company only by comparing it to the company's assets and expected net income--likewise it's value. Indeed when a company does not have enough debt, financial analysts often consider it to be under leveraged.Debt is a problem for an entity only when it's large compared with the value of that entity.So a better question about our national debt is this: how does our national debt compare to our "national value."Again back to Adam Smith: what's important is wealth.National ValueWe know the size of the national debt. What's our national value? What is this country worth? How do we even answer that question?In a market economy, we gauge the value of an asset (in this case the asset called the United States of America) by considering these questions: "At what price would its owners want to sell it?" "At what price might a buyer want to purchase it?" To determine our "National Net Worth" let's consider selling parts of the United States. Let's consider selling the entire country.There's a precedent for buying and selling parts of our country. In 1803 the United States bought the Louisiana territory for $15 million dollars, or about $233 million in 2012 dollars. That sale put everything in the territory, formerly governed by France, under the control of the United States Federal Government. Residents got to keep what they owned, and the United States got the right to extract taxes, to govern it so that it might grow, and to benefit from its growth. In 1809 we purchased Florida from Spain in return for settling claims amounting to up to $5 million, or about $70 million in 2012 dollars. We bought Alaska from the Russian Empire for $120 million 2012 dollars. We bought part of what is now Arizona and New Mexico as part of the Gadsen Purchase for $279 million 2012 dollars.At what price might the United States Federal Government--which bought the Louisiana territory, Florida, Alaska and the Gadsen territory--sell its property off to pay the National Debt? At what price might the United States Federal Government sell other parts of the country that it acquired not for cash, but through armed conflict? I claim that the price, which imprecisely measures the "National Value," dwarfs the national debt.But the Federal Government does not "own the country," you might argue. It's owned by the people. Really? The Federal Government bought parts of the country, and has never sold them. Nor has it relinquished any of its rights. So if you subscribe to the notion of property rights, it's hard to argue that the Federal Government does not continue to own what it bought. But let's not quibble about the word "ownership," if that's the problem. As far as I can determine, the Federal Government could outsource its power over the land that it bough, giving that entity rights that are equivalent to ownership. If enough citizens elected federal legislators who passed the necessary legislation and elected a President willing to sign the legislation, then it could be done.So we transfer the rights of ownership of the entire country if enough of our citizens choose to. Would people want to do that?The per-capita debt this country is about $50,000. For most people that's a lot of money. If some entity offered to forgive each citizen's debt obligation in return for their agreement to be governed by that entity some people might take the offer? But I think that most would not. If you believe everything has a price, at what price would a majority of the people in this country be willing to sell their share of the country? To keep things simple, let's assume that sellers could choose to leave the country or take their chances with the country's new owners? Does anyone believe that the premium, above debt-forgiveness would be small?This thought experiment tells me that our "National Value" is much greater than our National Debt. And if our value is so much larger than our debt, is the debt really such a big issue? It might be, if our debt was growing fast enough to swamp our value soon, but I don't see that it is even close to doing so.Increasing Wealth, Assets, and ValueI claim that what's important is what we do to increase the wealth, the assets, and the value of the nation. The best way to do it may be through the market or it may be through the government, or through some combination. But what seems clear to me is that the goal should be national wealth expansion not debt reduction or job creation.We don't need job creators, we need wealth creators.When we shift our focus to national wealth creation and expansion a consequent issue arises: how do we distribute the increase? Not all ways of distributing wealth will lead to equivalent outcomes, so there must be ways to distribute wealth that will lead to greater or lesser future increases in wealth. The Right takes it as a matter of faith that the market machinery that they believe creates wealth also distributes that wealth optimally for further wealth creation. This might be true, but I don't believe that it's a necessary consequence. The Left argues for "fairness and justice."It's Wealth That MattersAdam Smith was focused on the right issues. His book was called Wealth of Nations and not Jobs of Nations or Debts to GDP Ratios of Nations. Smith correctly realized that in economics (and politics) it is wealth, and the things that contribute to, and proceed from wealth that make the greatest difference in the human condition.Freedom matters, but below a certain wealth threshold people spend almost all their time and available energy trying to feed themselves. They may have certain freedoms in theory, but they might as not have them, for all the difference it makes in non-optional practical reality. Many freedoms can only be enjoyed by people with wealth to exercise those freedoms.Productivity matters, but without access to the fruits of wealth, including tools, knowledge and social order, individuals can produce almost nothing. Truly impoverished people cannot produce enough to survive. With no wealth at all (no clothing, no tools, no knowledge) they are hunters and gatherers at best, and can only live by consuming what nature, or more fortunate others have produced. Within an organized society people who are insufficiently wealthy (insufficient knowledge to be productive) can only forage, or steal, or live on charity.The wealth that has been accumulated by individuals, families, groups and nations over the course of millenia is the reason that we don't live like our cave dwelling ancestors. Wealth is created only by productive labor. Wealth can be owned through productive labor, or by theft.Regardless of how it came to be owned, in the end the result is the same.It's wealth that matters.