Sunday, October 25, 2009

New Deal History

I've been reading a very interesting and entertaining history of the United States written by Garet Garrett and entitled THE AMERICAN STORY. Mr. Garrett has a marvelous ability to see through the fog. Here is a sample:
In all these New Deal laws there was infringement of the individual's liberty. The employer was no longer free to hire and fire whom he would, nor to buy labor below a certain price; neither side to the labor contract was free. An American boy, with a tear in his eye and adventure in his heart, was no longer free to steal away over the kitchen roof at night and go forth to meet the world; there was no work for him in the world out there because the law said he was child labor and any employer who hired him would be forbidden access to the channels of interstate commerce. The wage earner had to have a union card and a Social Security number. The farmer was no longer free to do what he would with his own ground or his own wheat. No wage earner was any longer free to be so improvident as to consume the whole of his own earnings and forget his old age.

To enforce these laws it was necessary to create new agencies of government. Each new agency issued its own rules and regulations, having the force of law; and in a little while these administrative agencies were passing ten times as many laws as Congress, all binding on the people.

So bureaucratic authority developed and became not only aggressive but indispensable--indispensable, that is, if the hand of government was going to touch every kind of human activity. Congress, the only elective law-making body, could pass only general laws, and then only after long debate; whereas the administrative agencies could pass specific laws, which were sometimes not printed at all but only mimeographed, and often got mislaid at the source. The confusion was unbearable until they were required to publish their laws in a bulletin called the Federal Register. After that any body who wanted to know what the law was--even a member of Congress--had to read the Federal Register.

And not only did the administrative agency make its own laws--that is, rules and regulations having the force of law--but when it came to the enforcement of them it acted as prosecutor, jury and judge, all three in one, and appeals from its decisions to regular courts of law were, for technical reasons, costly and difficult.

All of this took place in the executive sphere of government, with its axis in the Office of the President. Never before had the executive principle of government been so exalted--over the parliamentary principle, which is the Congress, and the judicial principle, which is the Supreme Court.

But this was a new time. Jealous individualism was waning. These New Deal laws were popular with the people; and the Supreme Court, after having liberalized itself, consistently upheld them. Two of the conservative Justices retired. In their room Mr. Roosevelt appointed men to his own liking. Then Chief Justice Hughes, who apparently thought he had saved the Court from disaster, resigned, and that was the end of the feud. The President had won. As it turned out the Supreme Court did the New Deal no harm at all. It got all the laws it really wanted. (pp. 281-282)
I highly recommend this book.

Tuesday, October 20, 2009

Middle School Economics 3

Here is another good one from the same middle school civics and economics textbook I've been quoting from:
“The federal government may sometimes intervene in business to help control prices. One way the government does this is by subsidizing, or giving money to, certain industries. For example, to make sure that people can buy flour, cereal, and other wheat products cheaply, the government might give subsidies to wheat farmers. Because they are receiving money from the government, the farmers do not have to charge high prices for their crops. As a result, prices for wheat products stay low.”
Yes, indeed, this has been the history of U.S. government intervention into agriculture, eh? Anyone else getting nervous yet?

UPDATE 10-24: Before I write about my concerns with this quote, I want to comment on the comments by Craig and Tim.

I agree with Craig that this illustration of a subsidy is incomplete because it does not include a consideration of where the money for the subsidy comes from. If government chooses to subsidize any activity, we can certainly confine our analysis of the impact of the subsidy to what happens after the subsidy is received. But, government gets the money for the subsidy because it has the power to tax. The power to tax means that the money for the subsidy is taken from people. It is money that people would have spent or saved if it had not been taken from them. Perhaps the subsidy will indeed result in more of some good thing, but because the subsidy money is taken from people it is is also the case that the money reduces other good things. A good economic lesson to learn is: "There is no such thing as a free lunch." That lesson could be taught by this textbook if it offered a more complete discussion of what must be the case with any government subsidy. But it doesn't.

Now Tim's comment seems a bit out of place relative to what I've quoted. I think he is thinking about how the U.S. government has actually intervened in the market process for wheat production, which has resulted in a greater quantity of wheat produced in the U.S. than would have otherwise have been the case. I think this is why he is considering crowding out wheat production in other countries. And, if you read my update to my first post on middle school economics, Tim's comment is another illustration of one U.S. government policy being at odds with other U.S. government efforts in some other arena. Certainly, this seems to me another important lesson for our middle school students to learn about how the real world works, but it seems it is going to be neglected.

My first reaction to the quote is that if the author wants to discuss government efforts to control prices, then the discussion should not be about subsidies. Actual government efforts to control prices have mostly involved government trying to set minimum prices (e.g., minimum wages) or maximum prices (e.g. rent controls).

A second point to suggest is that the author should not use an agricultural illustration for keeping prices down because historically the U.S. government policy toward agriculture has been to impose a price floor. Even in the middle of The Great Depression when so many people were without jobs and thus without their usual source of income, U.S. government policy was to impose a price floor on agricultural products so that prices would by higher than they otherwise would have been. Still today, the prices of agricultural products are often higher than they otherwise would be because of U.S. government agricultural policies. So, by choosing to offer up this specific illustration, it seems to me this textbook encourages our middle school students to think U.S. government policy is to keep agricultural prices low, which is pretty much the opposite what is true.

A third point is about what economic analysis suggests in the general result of a subsidy. If government offers to subsidize an activity, you are going to get more of that activity. Government really cannot directly subsidize a price. This is why government is likely to use a price ceiling if the goal is to try to keep a price low. Typically when economists discuss a government subsidy, the outcome is expected to be a higher price associated with the subsidized activity, not a lower price. And, I think this brings us back to the U.S. government policies toward agriculture. The government has wanted to subsidize farmers, but the way this was done was for government to impose a price floor. Instead of keeping agricultural prices low, the U.S. government has acted in an effort to keep prices for agricultural products higher than they would otherwise be, and these efforts have gone so far is to directly pay agricultural producers to take land out of cultivation.

Agricultural policy is a great case study for the economic analysis of price floors, but it is a really poor case study for discussing the results of government subsidies. And, if the author wants to discuss government efforts to keep a price low, then the discussion should really be about an illustration of a price ceiling, e.g., rent controls.

Middle School Economics 2

The following is a suggestion in a middle school text on civics and economics for teachers to discuss with their students:
The U.S. Economic System – Identify – What are some ways the government helps protect workers? By establishing minimum wage laws, laws guaranteeing workers' safety, and laws to protect people from discrimination – Make Judgments – Do you think that the U.S. Government should control parts of our economy? Why or why not? Possible answers: Yes – without government control some companies would take advantage of the public interest by polluting, creating monopolies, and other problems. No – the government should stay out of business because it interferes with people's ability to make a living.
The material in italics are suggestions about what the answers to the questions might be. As you might guess, I have concerns. How about you?

UPDATE 10-24: As I read the text, it seems to me at this point the students do not have sufficient understanding of the economic world to make these judgments. Perhaps this is proven by the answers given to the question how government helps protects workers. Minimum wage laws do not protect workers, unless you mean only the workers who keep or are able to get jobs after the minimum wage is imposed. Minimum wages lead to unemployment, which surely cannot be protecting those unemployed workers who would otherwise have had jobs. And, is it ironic? In the list of ways government helps workers we have both minimum wage laws and protecting people from discrimination. Of course, if people have preferences for discriminating in hiring employees, minimum wages laws reduce the cost of acting on such preferences, and thus lead to increased discrimination that government wants to protect people from. In other words, if students had sufficient economic understanding, they would perhaps be as perplexed as I am, when their teacher notes that government protects workers with minimum wage laws. And, they would perhaps be curious about why government would attempt to protect workers with minimum wage laws and anti-employment discrimination laws, when the first policy makes it more likely there will be a perceived need for the second policy. But, perhaps there is an opportunity here as well to teach the lesson that being a politician is a pretty good gig because there is always a need for making more public policy to deal with the messes made by your earlier public policies.

Now consider the government control question. The answer yes to whether government should control the economy is enormously na├»ve, even though this sort of stuff is standard political bill of fare. I think the idea that companies take advantage by polluting seems nonsense to most economists (and remember this is in the section of the textbook teaching economics). One of the greatest sources of pollution are all of us in our role as consumers and workers when we drive cars to play and to work and to school and to shop, even when we shop for “needs” such as the weekly groceries. Companies pollute for the same reasons we as consumers pollute, we find it is cheaper than collecting the waste to dispose of in some other way. Of course, the monopoly part of this answer is nonsense because most monopolies are created, even enforced (see unions), by government. In addition, the answer completely neglects one of the most important issues concerning this question, and that is whether government can get sufficient information to do better with any identified problem than would voluntary action, not to mention whether the incentives faced by our governors, even when they are our elected representatives, will choose to act in ways that would direct government to truly serve the public interest rather than rent seeking. And, the no response is simple and inadequate for the same reasons. The incentives and information issues both suggest government cannot accomplish what it states it seeks to accomplish.

So, here again, I have to wonder if trying to bring economics to our middle schools might be such a good idea. I do think our middle school students should learn about how the world around them works. But, the quotes I've posted here suggest to me it is pretty likely that what our middle school students will learn from their textbooks on Civics & Economics will be at odds with learning how the world around them works.

Monday, October 19, 2009

Economics In Middle School

Recently I've been reading bits and pieces of a few middle school textbooks on Civics and Economics. I'm sure at least a few economists think it is a good idea to begin teaching economics earlier in the educational life of our kids. After all, there seem to have been many surveys that suggest the level of economic literacy is pretty darn low. So, let's start earlier to help our citizens become economically literate. But, perhaps it is also possible that what gets taught reduces economic literacy. Consider the following from one of those middle school textbooks:
In order to make a profit, people need to provide a good or service. In order to provide a good or service, they need resources. As you know, however, resources are not unlimited. As a result, businesses and individuals must compete for the resources they need. This competition eventually affects everyone, not just business owners. In time, it affects the prices we pay for the goods we want.

One result of the competition for these resources is scarcity. Scarcity is the lack of a particular resource. When a resource becomes scarce, it is harder for producers to obtain. Products made with that resource also become more difficult to obtain. As a result, the prices for these items usually rise.
I have to say that in all my years of teaching I don't think I've ever said any thing like this to my students. Oh, on the face of it, the words written here do sound a bit like economics, and I suppose they do sound a bit like things I have talked with my students about, especially in a course in microeconomic principles. But, there are aspects of what is written above that concern me.

So, what do you think? Could the quotation above tend to encourage our middle school students to misunderstand the nature of the real world?

UPDATE 10-24: I like the comments by both Kari and Casey, and Casey comes close to my response when I read the quoted passage. The textbook is suggesting that competition leads to scarcity. Of course, this is not a lesson that comes from the study of economics. Scarcity is a given. As Casey points out, competition through the market process mitigates or lessens the impact of scarcity in our lives. So, the lesson told in this quote is pretty much just the opposite of the lessons learned from economics. In addition, if we look again at the first paragraph quoted, there is a suggestion that competition affects our individual lives. This is surely the case. But, when you look at both paragraphs together, this textbook seems to suggest that competition affects our lives in a bad way. This of course is not true. At least, it is not true if economists understand at least something about how the world works. Competition within the market process is one part of the explanation for the wonderful material prosperity we enjoy today, and as Casey suggests, without that material prosperity far, far fewer people would live on this earth today. Thus, I am concerned that the lessons suggested by this quotation may well encourage our middle school students to misunderstand the nature of the real world.

Thursday, October 01, 2009

Sole Task of Economics

Ludgwig von Mises:
Economics is not about goods and services, it is about the actions of living men. Its goal is not to dwell upon imaginary constructions such as equilibrium. These constructions are only tools of reasoning. The sole task of economics is analysis of the actions of men, is the analysis of processes. (Human Action, p. 354)