The Price of Civilization
Chapter 2
Prosperity 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 3
The 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 dollarexchange 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 selfinterest, 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 4
Washington’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