Michigan's Tax Elasticity

WSJ COMMENTARY on Michigan state government:

Officials in Lansing reported this month that the state faces a revenue shortfall between $350 million and $550 million next budget year. This is a major embarrassment for Governor Jennifer Granholm, the second-term Democrat who shut down the state government last year until the Legislature approved Michigan's biggest tax hike in a generation. Her tax plan raised the state income tax rate to 4.35% from 3.9%, and increased the state's tax on gross business receipts by 22%. Ms. Granholm argued that these new taxes would raise some $1.3 billion in new revenue that could be 'invested' in social spending and new businesses and lead to a Michigan renaissance.

Not quite. Six months later one-third of the expected revenues have vanished as the state's economy continues to struggle. Income tax collections are falling behind estimates, as are property tax receipts and those from the state's transaction tax on home sales."

[ . . . ]

The tax hikes have done nothing but accelerate the departures of families and businesses. Michigan ranks fourth of the 50 states in declining home values, and these days about two families leave for every family that moves in. Making matters worse is that property taxes are continuing to rise by the rate of overall inflation, while home values fall. Michigan natives grumble that the only reason more people aren't blazing a path out of the state is they can't sell their homes. Research by former Comerica economist David Littmann finds that about the only industry still growing in Michigan is government. Ms. Granholm's $44.8 billion budget this year further fattened agency payrolls.

I don't like calling government an industry, but it is interesting to note that Michigan state government continues to grow even as people and businesses move from the state to greener pastures. Politicians and bureaucrats in state governments often seem to neglect the idea that people may well have a very elastic response to increases in the costs they face.

Maybe if government encroaches on liberty too much people will respond by taking their lives to other locales in which they can find just a bit more liberty.

Of Subsidies & Charity

ARNOLD KLING:

". . . I would argue that there is nothing morally wrong with receiving a subsidy, even from government. The moral corruption in government subsidies is not in the recipients, except insofar as they deliberately pressure legislators for money. The moral corruption is in the subsidizers, who are taking money involuntarily from A to give it to B."

I think this is an interesting point. There are people who are demanders of subsidies or gifts from others, and there are people who are suppliers of subsidies or gifts. When the suppliers respond by taking from their own pocketbooks, their charity is a good thing. But, when the suppliers respond by taking from the pocketbooks of others charity is not what is going on.

Drive Less

TIM HAAB writes about the high price of gas:

"The real question CNN should ask is: What can you do about $4 gas? There is only one answer. 'Drive Less'. You as a consumer have control over your own gas purchases and little over the market price. The choice to drive less may be uncomfortable, but all the whining, crying and shouting for the government to do something will only make the situation worse. Price controls, gas rationing, windfall profit taxes, gas tax holidays...are all bad policies that may make you (and politicians) happier in the short run but will make everyone miserable in the long run. Your solution to high gas prices is to adapt. Drive Less! If the market adjusts, all the better, you're saving even more money."

I guess he has heard of a demand curve. This is certainly the short run response because it is about the only way reduce consumption in the short run. Of course, in the long run, a person can respond to a higher gas price by purchasing a car that gets better gas mileage, or perhaps even by changing the location of his or her economic activities. There are already reports in the news of an increased demand for better gas mileage vehicles.

I'll Be Watching

This is well worth watching.

Obama's Capital Gains

A WALL STREET JOURNAL commentary notes Senator Obama has revised his views concerning increasing the capital gains tax rate:

After Senator Obama let it be known that he'd consider nearly doubling to 28% the current capital gains tax rate of 15%, he had to expect questions. In the Pennsylvania debate, the moderator pointedly asked Mr. Obama why he'd do this, since history has shown that higher rates bring less revenue. Mr. Obama's response was to take a shot at wealthy hedge fund managers.

Since then, he's done some homework on capital gains. In a weekend interview with Chris Wallace of Fox News Sunday, Mr. Obama was asked again about raising capital gains rates. Though still leaving open the chance of a higher rate, he suggested 'we might go back up to 20' (a number Hillary Clinton has proposed), because 'I'm mindful that we've got to keep our capital gains tax to a point where we can actually get more revenue.' Mark this down as economic progress.

Very interesting, eh? I suppose this isn't quite what we should call a "flip-flop." I do think it presents a curious change in his views over a relatively short period of time. I wonder which of the views he has publicly expressed about this tax rate he actually believes? Perhaps the Senator doesn't actually have a view about the capital gains tax rate? Perhaps he chooses his campaign rhetoric in light of his analysis that voters are rationally ignorant?

Senator McCain's Economy

Recently SENATOR MCCAIN gave a speech on the economy. Let's take a look at what he had to say.

I kind of like the way Senator McCain opens his discussion of the economy:

In our free society, it is left to each one of us to make our own way in the world -- and our jobs, businesses, savings, pensions, farms, and homes are the work of years . . . .

But, in almost no time, it seems to me he backs away:

Economic policy is not just some academic exercise, and we in Washington are not just passive spectators. We have a responsibility to act -- and if I am elected president I intend to act quickly and decisively. We need reforms that promote growth and opportunity. We need rules that assure fairness and punish wrongdoing in the market. We need tax policies that respect the wage-earners and job creators who make this economy run, and help them to succeed in a global economy. In all of this, it will not be enough to simply dust off the economic policies of four, eight, or twenty-eight years ago. We have our own work to do. We have our own challenges to meet.

He starts with freedom, and then turns to government acting to make reforms. I'm almost afraid to continue on because I suspect those reforms are not going to be for greater freedom.

Senator McCain seems to take a little time getting warmed up, but when he gets to the details about what he would like to do I think I can find quite a bit I can warm up to.

In so many ways, we need to make a clean break from the worst excesses of both political parties. For Republicans, it starts with reclaiming our good name as the party of spending restraint. Somewhere along the way, too many Republicans in Congress became indistinguishable from the big-spending Democrats they used to oppose. The only power of government that could stop them was the power of veto, and it was rarely used.

If that authority is entrusted to me, I will use the veto as needed, and as the Founders intended. I will veto every bill with earmarks, until the Congress stops sending bills with earmarks. I will seek a constitutionally valid line-item veto to end the practice once and for all. I will lead across-the-board reforms in the federal tax code, removing myriad corporate tax loopholes that are costly, unfair, and inconsistent with a free-market economy.

He then discusses a review of, and a different approach to, the government agencies and regulation that reminds me just a bit of the things President Reagan used to talk about. I'm not sure how much was changed in this regard by Reagan's presidency. I think there were some significant reductions in regulations and some improvements in bureaucratic operations, yet after time government in Washington has again become something for which Reagan's themes may now be reused in a McCain bid for the presidency.

Senator McCain has some interesting things to say specifically about tax reform:

The goal of reform, however, is not merely to check waste and keep a tidy budget process -- although these are important enough in themselves. The great goal is to get the American economy running at full strength again, creating the opportunities Americans expect and the jobs Americans need. And one very direct way to achieve that is by taking the savings from earmark, program review, and other budget reforms -- on the order of 100 billion dollars annually -- and use those savings to lower the business income tax for every employer that pays it.

So I will send to Congress a proposal to cut the taxes these employers pay, from a rate of 35 to 25 percent. As it is, we have the second-highest tax on business in the industrialized world. High tax rates are driving many businesses and jobs overseas -- and, of course, our foreign competitors wouldn't mind if we kept it that way. But if I am elected president, we're going to get rid of that drag on growth and job creation, and help American workers compete with any company in the world.

I will also send to the Congress a middle-class tax cut -- a complete phase-out of the Alternative Minimum Tax to save more than 25 million middle-class families more than 2,000 dollars every year.

[ . . . ]

The tax laws of America should also promote and reward innovation, because innovation creates jobs. Tax laws should not smother the ingenuity of our people with needless regulations and disincentives. So I will propose and sign into law a reform agenda to permit the first-year expensing of new equipment and technology... to ban Internet taxes, permanently... to ban new cell phone taxes... and to make the tax credit for R&D permanent, so that we never lose our competitive edge.

One of the more interesting tax proposals to ponder may be his suggestion with respect to a "flat" income tax:

. . . I will propose an alternative tax system. When this reform is enacted, all who wish to file under the current system could still do so. And everyone else could choose a vastly less complicated system with two tax rates and a generous standard deduction. Americans do not resent paying their rightful share of taxes -- what they do resent is being subjected to thousands of pages of needless and often irrational rules and demands from the IRS. We know from experience that no serious reform of the current tax code will come out of Congress, so now it is time to turn the decision over to the people. We are going to create a new and simpler tax system -- and give the American people a choice.

I wonder how taxpayers would respond if given this choice? If many choose the less complicated approach, perhaps this would be the opening of a door to a significant change in the way the federal government raises revenue. After all, the income tax code is so complex and so large essentially because our elected representatives find it impossible to resist supplying the rent seekers by writing special exemptions, exclusions, credits, etc., etc., etc., into the tax code. But, I suspect that even if many taxpayers chose the simple approach today that over time what would emerge is just a little new exemption or exclusion or credit to the simple approach one year, and then another a couple years later, and then several more later in order to fulfill some presidential campaign promise. Still, I wonder, if the Senator's specific suggestion here does catch voter attention, perhaps this would indicate an opening opportunity to significant tax reform that might tax consumption rather than income.

Here is some of what the Senator said specifically about free trade:

There's never been a problem Americans couldn't solve. We are the world's leaders, and leaders don't fear change, pine for the past and dread the future. We make the future better than the past. That is why I object when Senators Obama and Clinton and others preach the false virtues of economic isolationism. Senator Obama recently suggested that Americans are protectionist because they are bitter about being left behind in the global economy. Well, what's his excuse for embracing the false promises of protectionism? Opening new markets for American goods and services is indispensable to our future prosperity. We can compete with anyone. Senators Obama and Clinton think we should hide behind walls, bury our heads and industries in the sand, and hope we have enough left to live on while the world passes us by. But that is not good policy and it is not good leadershi p. And the short-sightedness of these policies can be seen today in Congress' refusal to vote on the Colombian Free Trade Agreement.

When new trading partners can sell in our market, and American companies can sell in theirs, the gains are great and they are lasting. The strength of the American economy offers a better life to every society we trade with, and the good comes back to us in many ways -- in better jobs, higher wages, and lower prices. Free trade can also give once troubled and impoverished nations a stake in the world economy, and in their relations with America. In the case of Colombia, a friend and crucial democratic ally, its stability and economic vitality are more critical now, as others in the region seek to turn Latin America away from democracy and away from our country. Trade serves all of these national interests, and the interests of the American economy as well -- and I call on the Congress once again to put this vital agreement to an up or down vote.

I know that open markets don't automatically translate into a higher quality of life for every single American. Change is hard, and while most of us gain, some industries, companies and workers are left to struggle with very difficult choices. And government should help workers get the education and training they need -- for the new jobs that will be created by new businesses in this new century.

Overall his views on trade seem good, although the last paragraph here suggests he may accept more government involvement than I would. He does promise to "give displaced workers of every age a fresh start with new skills and new opportunities," and with respect to the present mortgage crisis he says his approach would mean that "citizens will keep their homes, lenders will cut their losses, and everyone will move on."

He also proposes a "gas-tax holiday" between Memorial and Labor days this year. By suspending collection of federal excise taxes on gasoline the Senator says there would be an immediate economic stimulus. I'm sure I would welcome paying less in gasoline excise taxes, and I'll bet lots of other people would as well. Of course, this summer McCain cannot be President yet. Perhaps instead of proposing his tax holiday in a campaign speech the Senator could return to his work in the Senate and offer such a bill.

On the whole, the trepidation I expressed above was not well supported by McCain's view of the economy. I find much more in his view to like than I found in SENATOR OBAMA'S VIEW.

Climate Heretics

GLENN REYNOLDS:

THEY TOLD ME THAT IF GEORGE W. BUSH WERE RE-ELECTED, famous scientists would be punished for daring to dissent from politico-religious orthodoxy. And they were right!

Here is the article that motivates his comment:

By pioneering the science of seasonal hurricane forecasting and teaching 70 graduate students who now populate the National Hurricane Center and other research outposts, William Gray turned a city far from the stormy seas into a hurricane research mecca.

But now the institution in Fort Collins, Colo., where he has worked for nearly half a century, has told Gray it may end its support of his seasonal forecasting.

As he enters his 25th year of predicting hurricane season activity, Colorado State University officials say handling media inquiries related to Gray's forecasting requires too much time and detracts from efforts to promote other professors' work.

But Gray, a highly visible and sometimes acerbic skeptic of climate change, says that's a "flimsy excuse" for the real motivation — a desire to push him aside because of his global warming criticism.

Among other comments, Gray has said global warming scientists are "brainwashing our children."

Now an emeritus professor, Gray declined to comment on the university's possible termination of promotional support.

But a memo he wrote last year, after CSU officials informed him that media relations would no longer promote his forecasts after 2008, reveals his views:

"This is obviously a flimsy excuse and seems to me to be a cover for the Department's capitulation to the desires of some (in their own interest) who want to reign (sic) in my global warming and global warming-hurricane criticisms," Gray wrote to Dick Johnson, head of CSU's Department of Atmospheric Sciences, and others.

When science meets politics, it seems politics wins out. Bummer.

Global Warming

STOP GLOBAL WARMING NOW!

Capitalism Day

DON BOUDREAUX celebrated capitalism yesterday. Be sure to read his tribute:

"Peace and free trade."

Desperately Seeking Ludwig, F. A., and Milton

PETER BOETTKE:

"Right now the economics profession has not had a clear intellectual leader step forward to challenge the emerging statist hegemony in the wake of our current financial situation. We are in a state of desparately seeking the next Ludwig, F. A., and Milton. No disrespect to the great economists amongst us, e.g., Andrei Shleifer, or my colleagues at GMU, e.g., Tyler Cowen and Russ Roberts, but the arguments emerging from these talented men do not have the 'force' of those presented by Mises, Hayek and Friedman. And without that intellectual force, our future in the US is potentially very bleak as statism will crowd out market creativity, and wealth creation. Where is the next intellectual figure that will explain the impossibility of socialism, why the worst get on top, and why government policies are counter-productive?

How do we find these type of economists and how do we cultivate them? And without them can we survive the statist onslaught on our economic freedom?"

Senator Obama's Economy

Let's take a look at some of the text from SENATOR OBAMA'S SPEECH "Renewing the American Economy."

But the American experiment has worked in large part because we have guided the market's invisible hand with a higher principle. Our free market was never meant to be a free license to take whatever you can get, however you can get it. That is why we have put in place rules of the road to make competition fair, and open, and honest. We have done this not to stifle - but rather to advance prosperity and liberty. As I said at NASDAQ last September: the core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well being of American business, its capital markets, and the American people are aligned.

I think all of us here today would acknowledge that we've lost that sense of shared prosperity.

I'm not liking the sounds of this. America works because "we have guided" the invisible hand? Who is this "we?" Does he mean because government has guided the invisible hand? I suspect that is what he means, although he doesn't seem to me to specifically state what the higher principle is that has been used by government to guide the invisible hand.

I don't think we've lost the sense of prosperity. I'm not sure about the "sense of shared prosperity," maybe because I'm not sure what he means by this phrase. But "sense" seems to me a lot like "preference" or "utility." That is, "sense" is something we can't easily see or measure, which makes it a convenient choice for political rhetoric.

But, let's take a look at his explanation for why our "sense of shared prosperity" has been lost.

This loss has not happened by accident. It's because of decisions made in boardrooms, on trading floors and in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both.

I'm not sure what he means by a market that favors this street over that street. But, then, I like to think of markets as exchange, and I like to think of exchange as resulting from the voluntary choices of a buyer and a seller. Of course, an exchange cannot favor or disfavor anything, not even this street over that street.

Moving on:

Nor is this trend new. The concentrations of economic power - and the failures of our political system to protect the American economy from its worst excesses - have been a staple of our past, most famously in the 1920s, when with success we ended up plunging the country into the Great Depression. That is when government stepped in to create a series of regulatory structures - from the FDIC to the Glass-Steagall Act - to serve as a corrective to protect the American people and American business.

I'm not buying his history lesson in this speech either. Admittedly, I'm not an economic historian, and I didn't stay at a Holiday Inn Express last night either (I'll bet this is true for Senator Obama as well). But one of the things I learned about the economics of the Great Depression was that the research of Milton Friedman found that government's monetary policy was the explanation for why this recession turned into the Great Depression. Further, Amity Shlaes explains in THE FORGOTTEN MAN that when the "government stepped in to create a series of regulatory structures" those regulatory structures prolonged (not ended) the Great Depression. My students learn to suspect this as well when they study Supreme Court opinions from this period in my course Constitution and the Economy and discover numerous instances in which the policies of FDR reduced output at a time of "depression."

I also want to add that the "series of regulatory structures" referred to by Senator Obama were generally regarded by the Supreme Court at the time as unconstitutional, at least initially. I like to think our Constitution as it was written protected individual economic liberty and that these regulatory structures were seen as unconstitutional then because they infringed upon individual liberty. Unfortunately what emerged from politics at the time was FDR's scheme to pack the Supreme Court and the "switch in time that saved nine." Certainly from that time on, the Suprme Court's view of the Constitution became more and more a view that I think is fairly described as the lost constitution and which is discussed by Randy Barnett in RESTORING THE LOST CONSTITUTION.

Once again the Senator moves on to something that I'm not at all sure what he means by what he says:

Ironically, it was in reaction to the high taxes and some of the outmoded structures of the New Deal that both individuals and institutions began pushing for changes to this regulatory structure. But instead of sensible reform that rewarded success and freed the creative forces of the market, too often we've excused and even embraced an ethic of greed, corner cutting and inside dealing that has always threatened the long-term stability of our economic system. Too often, we've lost that common stake in each other's prosperity.

I don't think the Senator is clear here on who he is criticizing, and I don't think "that common stake in each other's prosperity" is something that can be lost because I think the "tendency to truck, barter and exchange" (to borrow from Adam Smith) is an inherent part of human nature. It seems to me that as long as government does not intervene with regulations that the "common stake in each other's prosperity" works out in exchange after exchange really rather well.

Now if Senator Obama means to say that the "we" who have lost a sense of understanding "that common stake" are our political leaders, then I might just be with him on this one. I do think much of Washington fails to understand (the basic economics) that exchange is voluntary and therefore beneficial for both buyer and seller (the common stake in prosperity), and that government's regulations bring force to bear upon the common stake in prosperity. When politicians overlook this stuff of basic economics, and when the Judicial branch of government fails to enforce the Constitutional constraints against government's infringements of economic liberty, then rent seeking prospers at the expense of "that common stake." But, my guess is that Senator Obama is not saying what I would say: "Government and rent seeking is the problem, not that answer."

I suspect Senator Obama means to say that the answer is to better use government's force in our lives and our individual daily economies. At least that is how I understand this:

Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform - to foster competition, lower prices, or replace outdated oversight structures. Old institutions cannot adequately oversee new practices. . . .

Or, consider this as well:

. . . . This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment. . . . .

In other words, it is the greedy corporate rent seekers (demanders), not the greedy Washington politicians (suppliers of rent seeking), who are to blame for our "failing" system of political economy.

What follows in his speech seems to be illustrations of his idea that "the rules that govern" the economy must be changed as the economy changes. I suspect this is an easy idea (or principle as I think he would say) to latch onto. In my view, this idea is of course quite the opposite of understanding that exchange, not force that is directed by government to intervene in exchange, is the foundation of "that common stake in each other's prosperity." When the Senator finishes with the list of illustrations he gets to the following:

Our history should give us confidence that we don't have to choose between an oppressive government-run economy and a chaotic and unforgiving capitalism. It tells us we can emerge from great economic upheavals stronger, not weaker. But we can do so only if we restore confidence in our markets. Only if we rebuild trust between investors and lenders. And only if we renew that common interest between Wall Street and Main Street that is the key to our success.

Of course this all sounds just fine on the surface, but I'm still nervous by his use of "we" in the context of restoring confidence and rebuilding trust. I already have great trust and confidence in "our markets," and I haven't lost that confidence because of any of the illustrations he draws upon. Instead, I see in his illustrations, and I see in our history, reason to conclude that "our markets" do just fine without government intervention. I'm nervous about his use of "we" because I'm pretty sure he means to say we have to involve government even more in our markets to restore trust and confidence, and I think it is largely because of government's intervention in the past that he can mistakenly assert today that we've lost trust and confidence in our markets. It seems he is saying that for all the ills he finds in our economy the answer is really more government policy so that "we" can try to fix the very problems "we" created with earlier government policy.

Well, the Senator's speech goes on for quite a bit longer, but, it seems to me that once I get to the end I've pretty much already covered with my comments above the Senator's view of our system of political economy. At the end of his speech he repeatedly refers again and again to "we" this and "we" that. While it sounds like by "we" he means all of us, it is pretty clear to me that he means "we" in the national government will fix all these ills for you. Or, perhaps I can say that Senator Obama's view of our economy is one in which he will try again and again (with his colleagues in Washington) to use government's force to intervene in our own individual economies to fix the problems that have now emerged from the earlier interventions of government policy. Of course, as you know by now, my view of government and prosperity is pretty much the opposite of the view I find in the Senator's speech.

Obama's Tax Expectations

GREG MANKIW MAKES an interesting observation with respect to Senator Obama's choice not to make use of tax-deferred savings opportunities:

I was surprised to see that Senator Obama has, for some reason, decided not to use this opportunity. His recently released tax returns show significant Schedule C income from book royalties (about half a million dollars in the most recent year). I am not a tax accountant, but I believe he could have put a substantial part of these earnings ($44,000) into a SEP-IRA and deferred taxes on it until withdrawal. Line 28 on his tax return, however, is completely blank.

Why? I don't know. Maybe he is getting bad tax advice. Or maybe he is expecting vastly higher tax rates in the future when the accumulated savings will need to be withdrawn and taxed. As Obama economic adviser Austan Goolsbee has written, "Future increases in tax rates potentially threaten to significantly reduce the value of your retirement savings and may even mean that you should not save in 401(k) accounts at all."

Well, this is a very interesting possibility, especially since I don't think there is a clear reason to think Senator Obama would not want to hire sound tax advice. Maybe, the Senator is looking at the financial and political future of Social Security and Medicare, or maybe he is simply expecting the democrat party to be in control of the power to tax in the future.

Bailouts

The NY Times has an article that notes the positions of the presidential candidates with respect to MORTGAGE BAILOUTS:

Drawing a sharp distinction between himself and the two Democratic presidential candidates, Senator John McCain of Arizona warned Tuesday against vigorous government action to solve the deepening mortgage crisis and the market turmoil it has caused, saying that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”

Both democrat candidates have called for the federal government to create a fund to provide "relief" for those facing foreclosure.

I haven't watched this issue closely, but it seems to me taking the policy position that government should not save those who act irresponsibly is a good policy position to take.

Of course, since this is about mortgages, it would also seem relevant to point out the federal government is already in the business of subsidizing home mortgages because of government entitites that provide mortgages (e.g. FHA), and because of mortgage interest deductions from federal income tax liabilities. Perhaps we could guess that the federal government's subsidies had already caused an inefficiently large number of mortgages before the present crisis, and perhaps at least some of those facing foreclosure today are among those inefficient mortgages.

Hayek on the Benefits of Freedom

I often think about liberty from the point of view of what I can do with my freedom. In THE CONSTITUTION OF LIBERTY Hayek writes about the benefits of liberty by emphasizing what others do with their freedom:

The benefits I derive from freedom are thus largely the result of the uses of freedom by others, and mostly of those uses of freedom that I could never avail myself of. It is therefore not necessarily freedom that I can exercise myself that is most important to me. It is certainly more important that anything can be tried by somebody than that all can do the same things. It is not because we like to be able to do particular things, not because we regard any particular freedom as essential to our happiness, that we have a claim to freedom. . . .What is important is not what freedom I personally would like to exercise but what freedom some person may need in order to do things beneficial to society. This freedom we can assure to the unknown person only by giving it to all. (p. 32)

I think this is very important. It may be difficult to see why Hayek writes this about freedom. Perhaps one way to understand is to consider this question: How many of the things you use in your daily life would you have to make use of if you relied only upon your own freedom? Or consider this question: How many of the things you do in your daily life could you do if you relied only upon your own freedom?

If I relied only upon my own freedom, I would not have the personal computer I'm using right now, and I would not have the modem nor the internet connection I'm using to compose this blog post. I would not have the copy of THE CONSTITUTION OF LIBERTY that is sitting in front of me, and I would probably not have the eyeglasses I've been using to read this great book. Nor would I have the desk lamp I'm using to see the pages of this book. I would not have the desk my monitor and printer sit on, and for that matter I would not have the monitor and printer if I had to rely only upon my own freedom. I certainly would not have an automobile for transportation, nor would there be roads that I use every day if I relied only upon my own freedom. Of course I could go on and on and on with this. Take a look at your own daily life and consider what your life would be like if you relied only upon what you could do with your own freedom.

Perhaps some will read this and suggest that I am merely pointing out the fact that I rely on the production of others rather than the freedom of others, and that I would be able to benefit from the production of others even if those others were not allowed broad individual freedom and liberty. Such a suggestion would seem to miss the understanding of a fundamental aspect of the economic world:

It is through the mutually adjusted efforts of many people that more knowledge is utilized than any one individual possesses or that it is possible to synthesize intellectually; and it is through such utilization of dispersed knowledge that achievements are made possible greater than any single mind can foresee. It is because freedom means the renunciation of direct control of individual efforts that a free society can make use of so much more knowledge than the mind of the wisest ruler could comprehend.

. . .It is because we do not know how individuals will use their freedom that it is so important. If it were otherwise, the results of freedom could also be achieved by the majority's deciding what should be done by the individuals. (p. 30-31)

My standard of living is what it is not merely because I rely on the production of others.

I rely on the knowledge of others. I simply do not know how to make a car, a computer, a telephone, or the electricity that powers my computer and my desk lamp. Most importantly I rely on the use of knowledge in society which cannot possibly be known by any one individual. Even if I wanted to learn how to make a telephone or a modem or a personal computer, I would not be able to come to know for myself all of the knowledge that is required for such things to be part of my daily life. I cannot even come to know for myself all of the knowledge that is required to cause something as simple as a pencil to become part of my daily life. If you doubt this, then you must read I, PENCIL by Leonard E. Reed. Here is just a taste from I, Pencil:

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. . . . .

The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines . . . .

My "lead" itself -- it contains no lead at all -- is complex. The graphite is mined in Ceylon . . .

The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow -- animal fats chemically reacted with sulfuric acid . . . .To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it?

. . . . .

And, of course, there is much, much more to knowing all that needs to be known in making a pencil part of my daily life.

While I certainly value my own individual freedom, I think Hayek's insights are correct. My life depends on the freedom of others. And, as Hayek writes:

Of course the benefits we derive from the freedom of others become greater as the number of those who can exercise freedom increase. (p. 32)

Learn more about THE USE OF KNOWLEDGE IN SOCIETY.

Paternal Government

A letter by DON BOUDREAUX:

I'm outraged that Hillary Clinton promises, if elected president, to help people (in her words) "quit smoking, to get more exercise, to eat right, to take their vitamins" ("The Iron Lady," March 17). Perhaps I'm overreacting because I buried my mother on Wednesday, but neither Uncle Sam nor Mrs. Clinton is my parent. That role was performed remarkably well and lovingly by the persons who had responsibility for it: my father and late mother. I, like any self-respecting adult, resent beyond words the impertinence of any stranger presuming to possess the moral authority to intrude into my affairs.

To my own dying day, I will live by the creed instilled in me by my parents: My life is my own, and just as I have no right (or wish) to meddle in the affairs of others, no one - regardless of how exalted her status or how large her electoral majority - has the right to meddle in mine.

Senate Corruption Continues

THE HILL REPORTS:

Citizens Against Government Waste (CAGW) named all 71 senators who voted against a one-year earmark moratorium March Porkers of the Month. The amendment to the fiscal year 2009 Budget Resolution was offered by Sen. Jim DeMint (R-S.C.) and had fourteen bipartisan co-sponsors including the support of all three presidential candidates.

“King of Pork” Sen. Robert Byrd (D-W. Va.) dismissed the earmark ban saying, “The idea that an all-knowing, all-powerful executive bureaucracy is more trustworthy than the elected representatives of the people when it comes to spending taxpayer dollars challenges the most basic tenet of our political system.”

In a similar vein, Senate Majority Leader Harry Reid (D-Nev.) opposed the ban as “unrealistic” and even went so far as to erroneously claim that earmarking “has been going in this country for 230-some-odd years,” and that “The Founding Fathers would be cringing to hear people talking about eliminating earmarks.”

I guess "pork" is one word for this, but I think a better word for it is corruption.

It strikes me as pure nonsense to suggest the "Founding Fathers would be cringing" at talk of ending the practice of earmarks. Let's take a look at the list CITIZENS AGAINST GOVERNMENT WASTE provides with respect to 2006. Here are just a few of the earmarks:

• $5.7 million for a Wildlife Management Institute
• $1.3 million for curriculum development at Mississippi State
• $500,000 for the Artic Winter Games
• $1 million for the Griffth Observatory Planetarium
• $1 million for a competency based distance education initiative in the state of the Senator making the earmark
• $1 million for the closed Philadelphia Navy Yard for what appears to be local urban redevelopment
• $350,000 for the Chicago Greenstreets Program which included the design, installation, and maintenance of over 950 hanging baskets
• $400,000 for the Kam Wah Chung & Company Museum
• $250,000 for the Stanley Theater in Utica, New York
• $100 million to create a family literacy course
• $41 million for the Byrd Honors Scholarships
• $21.7 million for a project to improve the writing skills of grade school teachers
• $5 million for the Industrial Outreach Service at Mississippi State
• $1 million for academic programs at the University of Redlands
• $1.2 million for compact laser sensors at Montana State University
• $2 million for the Virginia Community College System web portal

Of course the list could go on and on. I think our Founders knew what was in the Constitution, and I think they knew our Congress was supposed to be a Congress of enumerated powers. I find it very difficult to place any of the earmarks in the above list within the list of enumerated powers written as Article I, Section 8 of the Constitution. At least while James Madison was a member of Congress, I'm pretty sure that there would have been one of our Founders who would have been arguing strongly against Congress having the power to tax and spend for programs such as these. I mean, really, does Congress have the constitutional power to spend tax dollars on hanging baskets in Chicago?

Of course it is not just that such expenditures should be considered unconstitutional, it is also that for most (maybe all) of these earmarks a member of Congress is specifically designating that tax dollars be spent in his or her district or state for purposes of their choosing. There have even been earmarked projects that cause tax dollars to be spent on projects that directly involve a member of the earmarker's family.

The corruption continues.

In Colorado it appears that Senator Allard voted to stop the corruption for a year, while Senator Salazar voted in favor of the continued corruption.

At least all 3 Senators still competing to be our next President voted to stop the corruption for a year.

Perfection

PERRY DE HAVILLAND:

The latest great idea from 'digital-strategy consultant' Jim Griffin, who is advising the Recording Industry Association of America on new and innovative ways of rent seeking, is to propose a piracy surcharge on ISPs in the USA.

Of course the advantage of that is if all broadband users have to pay the music industry $5 per month, regardless of whether or not you actually download any music, legal or illegal, why bother promoting music at all? Who needs products when you can just force people to pay you regardless? Is it great that we have governments around the world who are in a position to actually try and do stuff like that?

NO.

Free Trade Parable

ARNOLD KLING'S PARABLE of free trade:

The challenge is to make an argument for free trade in terms that everyone can understand. Perhaps a parable is in order. Perhaps we could start with "Once upon a time," and describe an economy that works like ours today. But we decide that free trade has gone too far.

First, we enact national protectionism. Then, the "buy local" movement catches on and leads to effective elimination of the Constitutional provisions against trade barriers within the United States. Cities and states start enacting tariffs, quotas, and trade subsidies.

Finally, the movement moves toward its logical conclusion: only buy products made in your own household. People give up computers, cars, packaged food, electricity, and plumbing. We go back to subsistence farming and hunter-gathering.

Notice that the advantages of free trade are not described in this parable directly in terms of comparative advantage. The advantages of free trade in this parable seem to be due to the division of labor, even though this concept is not explicitly described. The advantages of free trade in this parable seem, perhaps, to rely more on what I've described in class as the broadening or deepening of the network on which we individually depend in our daily lives.

Economic Advisors

Which economists are the presidential CANDIDATES LISTENING TO? Senator McCain's advisor is Douglas Holtz-Eakin:

"Nevertheless, Holtz-Eakin, a former director of the Congressional Budget Office and former chief economist on President Bush's Council of Economic Advisers, is well-respected among deficit hawks for his positions on less-than-hip issues like entitlement reform, for which he's advocated early and often.

In his view, the sooner the long-term shortfalls in Medicare and Social Security are addressed, the better for the economy. Shoring up both programs would involve tough choices when it comes to spending cuts, Holtz-Eakin has said, a route he believes would be more effective than tax increases. Both he and other economists estimate the economy is not likely to grow enough to offset the mandatory spending pressures that will build as Baby Boomers retire."

I agree that Medicare and Social Security are among the most important issues for Congress and the President to deal with.

Senator Obama's advisor is Austan Goolsbee:

But he is used to the politically fraught debate over how much to tax high-income Americans. In his estimate, the sky won't fall if the top tax rate returns to 39.6% from the current 35%.

In one of his New York Times columns, Goolsbee points to data showing income for the top 1% of earners rose disproportionately relative to everyone else both when tax rates fell and when they rose.

"Seeing the same pattern ... indicates that tax cuts weren't responsible. It suggests that cuts for high-income taxpayers likely gave windfalls to those whose incomes were already rising sharply because of broader market forces," he wrote.

I don't like an emphasis on taxing the rich, nor do I warm up to the idea that taking less money from anybody, rich or poor, should be called a "windfall."

Senator Clinton's advisor is Gene Sperling:

In his book "The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity," Sperling calls for balancing the advantages of a global economy with the goals of protecting workers.

"With hundreds of millions of new middle-class consumers coming into the world economy, we should be confident that in the long run America will win more than it loses from an open global economy," he writes. "What practical options do we have between simply assuming greater globalization will lift all boats, and resorting to self-defeating protectionism?"

I haven't read Sperling's book, and I'm not sure this quote tells me very much about his policy view. But I like his reference to protectionism as self-defeating, and I can also agree "America will win more that it loses from an open global economy." Winning more than losing is probably a view that is a bit too weak for me.

Free Trade Politicians

The Cato Institute provides information about how our politicians line up in Washington CONCERNING FREE TRADE issues. The 3 Senators still in the hunt to be our next President are clearly different on free trade issues based upon their voting records in the Senate. Senator McCain is characterized as a Free Trader, while the 2 Senators on the democrat side appear to be Interventionists.

I've looked at 21 Senators so far, and all the Free Traders are republicans: McCain, Allard, Lugar, Voinovich, and Kyl.

In Colorado, Senator Allard is a Free Trader, while Senator Salazar is between an Interventionist and an Internationalist. Since 1986 (when I moved to Colorado) I think it has been traditional for the voters to elect a Republican Senator and a Democrat Senator. You might expect when voters elect a Senator from each party that the senators would have similar voting records on important issues such as trade. But, Colorado seems not to have done that, and Indiana (another state with a Democrat and a Republican senator) also has a Free Trader (Lugar) and an Interventionist-Internationalist (Bayh). What do you suppose this means with respect to voter preferences? Could this be consistent with voter irrationality, which Bryan Caplan emphasizes in The Myth of the Rational Voter? Or, could this be consistent with the standard assumption of public choice that voters choose to be rationally ignorant?