Ain't Rocket Science

PETER BOETTKE:

"I don't possess a crystal ball, so I cannot forecast the economic future. But I do know that it is not good to expand the monetary base 140% or to run deficits the size we have, or accumulate public debt as we have. . . . This 'ain't rocket science'! There will be a day of reckoning due to the monetary mischief and fiscal irresponsibility.

I also know that the problems we are facing are not 'market problems' --- it is not that actors are all of a sudden 'irrational', and it is not that markets are inherently 'unstable'. Everything we are seeing in market behavior is a rational response to the environment created by public policy. This is not a psychological problem we are dealing with, it is a public policy problem. Bad public policy produce bad incentives which in turn produce bad results. Ultimately, this is a problem of bad ideas which result in bad public policies. Again, this ain't rocket science. The role of the economists in all of this should be like my Dad when I was a teenager (and truth be told an adult), and grab policy makers by the shoulders star them squarely in the face and state clearly 'this isn't rocket science' and explain clearly the Econ 101 basics of why the decisions we have made so far have not been correct."

Right on and well said: "Everything we are seeing in market behavior is a rational response to the environment created by public policy."

Unintended Health Insurance Consequences

WASHINGTON (AP):

Some major health insurance companies will no longer issue certain types of policies for children, an unintended consequence of President Barack Obama's health care overhaul law, state officials said Friday.

[ . . . ]

The major types of coverage for children - employer plans and government programs - are not be affected by the disruption. But a subset of policies - those that cover children as individuals - may run into problems. Even so, insurers are not canceling children's coverage already issued, but refusing to write new policies.

The administration reacted sharply to the pullback. "We're disappointed that a small number of insurance companies are taking this unwarranted and unnecessary step," said Jessica Santillo, a spokeswoman for the Health and Human Services department.

Yesterday it was unintended consequences of "financial reform."

I wonder how people in the administration know these actions by insurance companies are "unwarranted and unnecessary?" It seems to me they must lack the knowledge these businesses need in their efforts to make a profit, and thus a living for many people, by supplying others with health insurance. The "health care reform" statute seems to attempt to force insurance businesses to structure risk pools in specific ways that would not otherwise have been chosen by these businesses. It seems to me one likely result of such government actions will be that at least some insurance businesses find that it is better to stop insuring than to try to earn a living insuring and following the government's new statute.

Economists on Government & This Recession

JOHN B. TAYLOR:

Some argue that we need more deficit spending—another stimulus package—to boost the economy. I agree that the economy needs a boost, but not in the form of increased deficit spending. In my view, the economy is being held back by high deficit spending and related policy uncertainties. The large deficits are causing the federal debt to explode, raising concerns about how it will be financed.

VERNON L. SMITH:

So what has been the government’s response in the current crisis? Besides spending stimulus, it was tax incentives for new home buyers and cash for clunkers if you bought a new car. All three are programs for borrowing output, homes and cars from future production and sales. Using subsidies to pump up home sales beyond what people could afford was the problem that led to the crisis. Now the problem is touted as the solution.

Liability For An Uncertain Future?

WALL STREET JOURNAL:

The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings.

The odd plea is emerging as the first consequence of the financial overhaul that is to be signed into law by President Obama on Wednesday. And it already is creating havoc in the bond markets, parts of which are shutting down in response to the request.

Standard & Poor's, Moody's Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law.

The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies say that, until they get a better understanding of their legal exposure, they are refusing to let bond issuers use their ratings.

[ . . . ]

Once the bill is signed into law, advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating.

That is a change from the current law, which considers ratings merely an opinion, protected like any other media such as a newspaper.

Perhaps this is a nice illustration of the unintended consequences of actions taken by government, in this case Congress and the President. I assume Congress and the President did not intend for providers of bond credit-ratings to respond to their legislation by deciding to no longer be providers of bond credit-ratings.

On the other hand, perhaps Congress and the President did intend for this result. Who will provide bond credit-ratings if private businesses won't? I guess government could.

I also wonder why it is thought to be a good idea to say a provider of credit-ratings has liability for actions taken by others who consult these ratings. It seems to me that trying to create such liability amounts to saying the providers of credit-ratings should be liable for an uncertain future. The future is inherently uncertain, and while credit-ratings may provide some information about the risk involved in certain kinds of actions taken today, it seems to me foolish to believe that credit-ratings accurately predict the uncertain risk, much less remove the risk.

Tax Cuts For The Most Fortunate

Treasury Secretary Timothy Geithner:

We believe it is appropriate to let those tax cuts that go to the most fortunate expire

Most fortunate?

So, I wonder how these guys think a person gets income? To use a phrase like "most fortunate" suggests to me that they don't think income is earned, because if it is earned then large income may go to those who work hardest and that have the greatest abilities in producing goods and services for others.

I wonder how these guys think a person gains wealth? It seems to me wealth is chosen. In order to have wealth, I think a person has to choose to save something out of current income by not spending everything that he or she earns. I don't think the bottom line is that a person is fortunate to have wealth. It seems to me a person is wise to try to choose wealth by not consuming all that he or she earns.

Tax Increases & The Economy

Ever wonder about the idea that tax increases can be bad for the economy? Well the TAXPROF BLOG points out that apparently the Chair of the Council of Economic Advisers has just published research which "indicates that tax increases are highly contractionary":

Christina D. Romer (Chair, Council of Economic Advisers) & David H. Romer (UC-Berkeley, Department of Economics) have published The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, 100 Am. Econ. Rev. 763 (2010). Here is the abstract:

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.

Since the lead author is an adviser to the President, I'm wondering why the President, and members of Congress as well, are interested, especially in a period of recession and high unemployment, in letting tax cuts during the Bush Presidency expire. Hmmm. . . .tax increases "are highly contactionary." Maybe these elected representatives think the Romers aren't very good economic researchers? Maybe these elected representatives think there is good reason to believe things will be different this time around? Maybe these elected representatives have other goals than seeing the economy pull out of this recession?

Congress Created Them All

DON BOUDREAUX in a letter to the Washington Post:

You’re right to worry that Uncle Sam responded to the public’s anxiety about terrorism by creating an overgrown intelligence bureaucracy with bloated budgets that strain our wallets and arbitrary powers that mock the Constitution as they threaten our freedoms . . . Will bureaucrats in, say, the new Bureau of Consumer Financial Protection spend taxpayer funds more wisely than do bureaucrats in the NSA? Is the power to command people to purchase health insurance, or the power to prohibit consenting adults from buying and selling certain kinds of financial instruments, really so mild and beneficial that we should calmly welcome the exercise of these powers while we simultaneously quake with fear at the exercise of “intelligence” powers?

July 4, 1776

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness -- That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, -- That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. -- Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States.

. . . And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Federal Taxes on the Rich & the Poor

Average Federal Tax Rate by Income Quintile, 1979-2007

From the CONGRESSIONAL BUDGET OFFICE:

The pattern of average tax rates has varied over time. The lowest three income quintiles have seen steady declines in their average rate. The tax rate on the fourth quintile was flat over most of this period, before declining in the early part of this decade. The tax rate on the top quintile has fluctuated more, with periods of increases and decreases.

By the way, since this information comes from the CBO, we should assume that every member of Congress has this information available to him or her, or at least to staff members. So, the next time a member of Congress in on a soapbox opining about taxes on the rich and the poor, you will be able to judge the veracity of the assertions.

Independence Day?

CHIDEM KURDAS:

Our government has managed to create endless opportunities, but not for ordinary people—only for political operators and influence peddlers, with the Obama Administration pushing some 4,500 pages of medical and financial regulation just in its first 18 months.

Something to celebrate this Independence Day, eh?

What Do Inequality Data Mean?

Steven Horwitz has an interesting post on inequality data. Here is the way he understands what the data means:

Carroll uses a nice analogy from Schumpeter that I'd never heard before: the distribution of income is like a hotel with some really fancy rooms on the top floors and some very basic ones on the bottom. All the rooms are always full, but who occupies which rooms changes from year to year.

If one wants to stretch the analogy a bit more, it's also the case that each year brings a new upgrade to every room. What constitutes a "basic" room gets slightly more luxurious each year as standards of living rise, and the same is true on other floors. It might be the case that the upgrades to the top floor rooms are proportionally greater than those to the basic and middle floor rooms, but given that the occupants of the rooms switch around from year to year, those greater improvements at the top are still consistent with improvements in the absolute standard of living for many.

And to take the analogy even further: if we account for immigration and other new entrants to the labor force, it's as if the hotel keeps adding rooms/floors on each year at the lower/basic level, enabling everyone else to potentially keep moving up (assuming that some occupants die or leave the country!).

I've often noted in my courses that aggregate data hide a large amount of important information. In the case of the static aggregate income distribution data, we cannot see what happens over time and within each income quintile.

It seems that many people assume a person who is in the lowest income quintile in any year will also be in the lowest income quintile 5 years and 10 years later. It also seems many assume that a person in the top income quintile in one year will still be in that top income quintile 5 years and 10 years later. If you check out Mr. Horwitz's post you can learn that such conclusions are not well-founded. For example:

Of those taxpayer households in the lowest quintile of income in 1999, 57.5% had moved up at least one quintile by 2007 and over 30% jumped two quintiles or more.

Of those in the top 1% in 1999, only 44.6% were still there in 2007.

Oil Spills & Executive Powers

I recently commented on the following taken from a speech by President Obama:

"Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company's recklessness. In order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent third party.

I asked if such actions as these promised by the President fall within existing statutes and also the responsibilities of the courts? The point of the earlier comment was different than this. So, I want to explain my concerns about what the President said in his speech.

In order to determine who has a legitimate claim for damages against BP, and in order to determine the amount of such damages, I think it is the case that the President, or an independent third party picked by the President, will have to make decisions and take actions that are supposed to, constitutionally, be within the Judicial power of government.

Shouldn't it be a significant concern to ask, and answer, whether or not the President has exceeded his constitutionally granted Executive power to inform the CEO of BP that he must set aside $20 billion? If a President can decide what a legitimate claim is against BP, and if a President can decide how much compensation must be paid by BP, then what is the difference between the Judicial branch and the Executive branch of government?

Oil Spills, Oil Producers & Governments, Part 2

We might find another illustration of how earlier, and not easily seen, federal government actions could be involved in the BP Gulf Oil spill by wondering about something the President said in his recent OVAL OFFICE SPEECH:

Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company's recklessness. In order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent third party.

I don't understand this idea that the President will tell BP it has a liability for this accident, and further that the President is going to require BP to create an escrow account to be administered by an "independent third party." Don't such actions fall within existing statutes and responsibilities of the courts?

My first thought is to wonder about why the President would think actions such as these are appropriate and necessary. I have assumed all along that BP is liable for the damages caused by the oil spilled because of an accident involved with it's production of oil. I certainly expect that if I caused oil to be spilled on my neighbor's property, that I would be fully liable for the damages my actions caused to my neighbor. So, I assume BP understands already that it is liable for the damages.

This also leads me to wonder about why the President has been spending so much time and effort in his public speeches insisting that BP is going to be made to pay for the environmental harm it has caused. Once again, I assume that in the same way that I know I would be made to pay for harm I cause to others, BP knows it will have to pay for the harm it's actions have caused others.

But, now I think that perhaps I should start to by a bit more of my normal, cynical and dismal economist self. Do I smell a rat?

Perhaps I do. THE OIL POLLUTION ACT OF 1990 "imposes liability for removal costs and damages resulting from an incident in which oil is discharged into navigable waters or adjoining shorelines or the exclusive economic zone." Yep, just what I assumed to be true. But, the Act also limits liability:

Liability is limited by specific dollar amounts, which vary depending on the type of vessel or facility involved. These limits do not apply in the case of gross negligence or willful misconduct or the violation of an applicable federal safety, construction, or operating regulation or for failure to cooperate in certain specified ways.

Oh my, perhaps BP believed it would not be fully liable for the damages caused by an accident that resulted a spill such as is occurring in the Gulf. Can you imagine, Congress created a statute in 1990 (and some President must have signed it) that both made it clear that BP was liable for damage caused by this accident, and at the same time the statute told BP (and all other oil producers in the Gulf) that it's liability was limited, that it would not be fully liable.

Well, you can see the incentives partial liability creates for BP and every other oil producer in the Gulf. At the margin, this limited liability statute should result in BP being at least a little less cautious in it's operations than it would otherwise be. Same incentive and response by all the Gulf oil producers as well. In other words, by limiting liability with this statute Congress and the President did two things: (1) Incentives to produce oil in the Gulf were increased, and (2) the probability of an accident occurring in the Gulf was increased.

Now we come to the second sentence in the limited liability quotation above. I suspect members of Congress also understood the incentives they would create by limiting liability. So, of course, Congress also writes laws that allow for the Executive Branch to regulate how BP, and the other oil producers in the Gulf, go about the business of producing oil from Gulf waters. Do you remember hearing reports after the accident, and before the Oval Office speech, that BP had requested that the government agency overseeing its operations modify several permits in the last day or two before the accident? I'm guessing this indicates that the government regulatory agency was at least supposed to be closely involved in making sure BP's actions met with all the things government thought BP was supposed to be doing.

I think this is another illustration of government's involvement in the actions of people and businesses in the economy that we cannot easily see. It is my view that government should not limit liability, and that especially in the case of deep water oil production government's role should be to strictly enforce full liability.

And, because government regulatory actions are involved in oil production in the Gulf, my default position has to be that government has some part to share in this accident, unless it can be shown that BP violated permits and regulations that if followed would have prevented this specific accident from happening.

Finally, returning to the President's statement quoted above, I think there are some additional serious issues to bring up. I will do that with another post in the future.

Enough Money?

TOM SOWELL on politicians and enough money:

"One of the many shallow statements that sound good-- if you don't stop and think about it-- is that 'at some point, you have made enough money.'

The key word in this statement, made by President Barack Obama recently, is "you." There is nothing wrong with my deciding how much money is enough for me or your deciding how much money is enough for you, but when politicians think that they should be deciding how much money is enough for other people, that is starting down a very slippery slope.

Politicians with the power to determine each citizen's income are no longer public servants. They are public masters."

You should read the whole piece.

Oil Spills, Oil Producers & Governments

The accident in the gulf is a pretty ugly sight. I'm sure there is no person alive who actually likes the accident and the aftermath, which of course continues.

Today you can read news reports of our political leaders holding hearings to point fingers and hold the culprit's feet to the fire. And, of course, you may have read or heard the President castigating the oil producers and promising to kick the appropriate butts.

You can also read reports that assert British Petroleum made numerous bad decisions that led to the accident, and which were made in an effort to save some costs and improve profits. Even if there is some truth to such allegations, there may be more involved in terms of the incentives and the tradeoffs than meets the eye.

I make this last assertion myself because I'm come to believe government policy is almost always involved, and it is almost always well hidden from us, unless we are able to spend much time reading statutes, regulations, and executive orders.

STEVEN HORWITZ has written about just one example related to this accident:

"The Jones Act is actually section 27 of the MMA and requires 'that all goods transported by water between U.S. ports be carried in U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents.' This, of course, includes the Gulf of Mexico. Thus any attempt to move equipment from one U.S. port to another for the purpose of either stopping or cleaning up the Deepwater Horizon leak must involve U.S. ships, fully constructed in the U.S., etc..

Of course in a world of globalized trade few such ships exist. In fact, a number of foreign-constructed or crewed ships are in U.S ports at the moment and could easily transport oil sucking equipment or more booms to the Gulf, but the Jones Act prevents them from doing so. Like the school buses that sat in a parking lot while folks were stranded during Hurricane Katrina, those non-U.S. ships and their equipment are sitting idle while an environmental disaster unfolds."

Professor Horwitz mentions the buses and Katrina because he wants to point out that the Jones Act was apparently waived two days after the hurricane. I haven't read the Jones Act, so I am not aware of whether the Act itself includes conditions by which it might be waived. Perhaps it does. Or, perhaps Congress must act to repeal the Act, something suggested by Professor Horwitz, and something I agree would be a good idea. In any case, Professor Horwitz does point out that apparently the President does not agree that Act should be waived or repealed since he writes: "Meanwhile, President Obama and others continue to insist that such a blanket waiver is 'not needed at this time.'"

So, who might benefit from not waiving or repealing the Jones Act? My guess would be some union or unions, and that is the view of Professor Horwitz as well. If this seems plausible, then it should also seem plausible to you that the President is making political calculations when he decides to trade off this against that. Not too surprising to me, and not really unlike the tradeoffs some assert BP made and should not have made.

It seems to me there are other aspects of this accident and the aftermath that involve government policies, regulations, and actions that are hidden from our easy view. I'm always suspicious this might be the case when our elected leaders in Washington rush to microphones and hearings to point fingers. I will try to add at least one or two additional illustrations in the next day or two.

Taxing Incomes & Estates

Ludwig von Mises:

If the present American methods of taxing incomes and estates had been adopted fifty years ago, most of those new things which no American would like to do without today would not have been developed at all or, if they had, would have been inaccessible to the greater part of the nation. (Theory and History, p. 238)

Economics: The Primary Civic Duty

In Human Action Ludwig von Mises writes:

". . . As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake.

Very few are capable of contributing any consequential idea to the body of economic thought. But all reasonable men are called upon to familiarize themselves with the teachings of economics. This is, in our age, the primary civic duty.

Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen." (p. 875)

Of course, this is a pretty easy thing for an economist to believe. I wonder how many others, economists and non-economists, agree with Mises?

Big Brother Is Green?

Washington Examiner:

"Alexandria residents soon will have to pay for larger home recycling bins featuring built-in monitoring devices.

The City Council added a mandatory $9 charge to its residents' annual waste collection fee.

That cash -- roughly $180,000 collected from 19,000 residents-- will pay for new larger recycling carts equipped with computer microchips, which will allow the city to keep tabs on its bins and track resident participation in the city's recycling program.

'If you know who's participating in the programs, you can focus your education and outreach to those who are not participating,' said Stacy Herring, Alexandria's recycling coordinator."

I suppose this is just like our parents when we were kids -- our paternal governors are just making sure we take out the trash, eh?

Constitution & The Supreme Court

Senator Hatch offers some thoughts about how the Constitution is supposed to constrain all 3 branches of government, even the Supreme Court.

Federal Spending 2020

The Congressional Budget Office makes this projection. The CBO is projecting then, that in 2020 the federal government will be spending 47 cents of every dollar it spends on social security, medicare, and medicaid combined.

From a constitutional perspective, isn't this rather remarkable? After all, Congress is supposed to have only those powers explicitly enumerated in Article 1 Section 8 of the Constitution, and not one of these three programs is thus enumerated.

With respect to social security, the projection is that in 2020 22 cents of every dollar the national government spends will involve the redistribution of income from those who are working in 2020 to people who are among the retired.

I think we can consider social security, medicare, and medicaid as redistribution programs. If so, then this projection is that about 1/2 of every government dollar spent in 2020 will involve redistribution. Again, constitutionally remarkable since the Constitution seems to me to have created a limited government, mostly a "protective state" government, not a "redistributive state" government.

My son is not yet old enough to vote, but he will be in 2020. He may or may not be paying income taxes to the federal government then, both because he may be in college instead of the workforce and because a large percentage of people pay no taxes to the federal government today (I expect the same in the future). But, if he is paying income taxes then, note that 14 cents of every dollar spent by the national government will amount to him being required to make payments for loans taken out by others now and in the past. Assuming he is working, then 22 cents on the dollar will represent taking money from his paycheck to give to people who are retired and no longer a member of the workforce. Perhaps we can toss medicare and medicaid in with respect to these sorts of considerations as well. In any case, his income and productive abilities in the year 2020 as well as the years beyond have already been encumbered by federal government policies and programs, and he cannot yet vote.

As Hayek wrote, it seems to me the case that "the basic principles on which this civilization was built have been falling into increasing disregard and oblivion." The government I know today, and the government projected in the CBO's picture, seems impossibly different from the government I read about in the words of the Constitution.

Profit & Loss

Ludwig von Mises:

“Profit is the difference between the higher value of the good obtained and the lower value of the good sacrificed for its obtainment. If the action, due to bungling, error, and unanticipated change in conditions, or to other circumstances, results in obtaining something to which the actor attaches a lower value than to the price paid, the action generates a loss. Since action invariably aims to substitute a state of affairs which the actor considers as more satisfactory for a state which he considers less satisfactory, action always aims at profit and never at loss. This is valid not only for the actions of individuals in a market economy but no less for the actions of the economic director of a socialist society.” (Theory and History, p. 210)

Here is President Obama commenting on profits for Wall Street businesses.



It seems to me that the best way to think about "profit" is the way Mises explains, and of course this view of profit does not support the President's view. It is always a time to profit, or to make profit, and never a welcome time when loss is made instead.

The President seems to believe that in a time of recession businesses should not be earning profits. The implication of this is that instead, in a time of recession, businesses should earning losses, because profit and loss are terms that characterize the opposite results of human actions. But this is a perverse view isn't it? After all, businesses can only earn profits if their efforts to produce and sell goods and services sufficiently predict consumer desires in the future.

Mises's view of profit and loss is also informative about the President's actions in encouraging us to believe that now is not the time for Wall Street businesses to earn profits. The President's actions in politics can either serve to gain a state of affairs he regards as more satisfactory (profit) or a state of affairs he regards as less satisfactory (loss). Thus the President is acting as though he believes he will personally profit by castigating the efforts made by others to profit themselves by supplying consumers with goods and services they want. Oh, and incidentally, when consumers are able to buy goods and services they want, the consumers gain profit for themselves as well.

In the freedom of voluntary market exchange, the actions of businesses and consumers to profit themselves is positive sum. It is indeed possible for buyers and sellers to choose well their personal courses of action in face of an uncertain future, and both buyers and sellers can profit from exchange.

The President seems to see the situation as zero sum. He seems to be suggesting that profits for Wall Street businesses necessarily mean losses for consumers. But, while a business or a consumer need not choose well and thus profit from their choices, on the whole the realm of free and voluntary exchange is positive sum. It is in the President's world, the world of politics in which the struggle between competitors is over which will win the opportunity to determine the way that force will be used in the lives of others, that we should be prepared to expect to find a zero sum (even a negative sum) world. So, it seems, the President is apparently thinking that he will personally profit by encouraging his listeners to believe that they will also profit if there is greater reliance of the zero sum realm of politics instead of the positive sum realm of market exchange.

I'm pretty sure the view the President encourages will not profit me, but I also fear that because of the nature of politics it may well profit him.

Knowledge & The Human Condition

THOMAS SOWELL:

The risks of making decisions with incomplete knowledge (there being no other kind) are part of the tragedy of the human condition. However, that has not stopped intellectuals from criticizing the inherent risks that turn out badly in everything from pharmaceutical drugs to military operations -- nor does it stop them from helping create a general atmosphere of unfulfillable expectations in which 'the thousand natural shocks that flesh is heir to' become a thousand bases for lawsuits. Without some sense of the tragedy of the human condition, it is all too easy to consider anything that goes wrong as being somebody's fault.

Jefferson -- On Democracy

Thomas Jefferson:

"A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine."

Do you suppose this is why the Constitution guarantees a "republican" form of government instead of a "democratic" form of government? At least this is a view of democracy that might help us understand why the conceptual foundation of the Constitution is supposed to be a national government, and specifically a legislature, that has only the powers granted to it by We The People and specifically enumerated in the Constitution itself. Unfortunately, the knowledge and wisdom expressed so simply and directly by Jefferson, and I think widely understood by many others of his day, seems to have been lost to many of us, even lost to the constitutional scholars of our day.

Perhaps you would want to pull out your handy dandy copy of the Constitution and see if you can find the enumerated power that was granted to Congress to create a statute popularly called "health care reform."

Good People

GOING JOHN GALT:

"I don't want good people to flee bad law, but bad law to flee good people."

I think this is worth reflecting on.

Countries & Taxes per Person

Greg Mankiw:

"The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack."

Check out his numbers.

Borrowing For Unemployment Benefits

TheHill.com reports:

"A bipartisan Senate deal to briefly extend a package of expiring provisions fell apart Thursday night, endangering unemployment aid set to expire April 5.

Senate leaders from both parties had neared a deal to allow swift passage of a package providing benefits for another week that would be fully paid for, according to Senate sources from both parties. The compromise was needed because Sen. Tom Coburn (R-Okla.) blocked Senate Democrats from quickly passing a month-long extension. Coburn objected because its cost -- $9.2 billion -- wasn't offset and would increase the $12.7 trillion national debt."

I know, this is going to be reported as such a terrible bit of partisan politics by Senator Coburn. The Senator must be heartless and mean. So, too, I suppose I will seem heartless and mean. And, I have no idea whether the reporting in this article is accurate or not.

But I just have to ask if this is really something we want our government to be either (1) borrowing money for or (2) creating money and thus causing inflation for.

I suspect few of us want to see this $9.2 billion paid for by inflation. After all, does it really make any sense to pay unemployment benefits to people today by causing all of us to have to pay higher and higher prices for the things we need and want tomorrow and the next day. So, let's move on to the only other way this $9.2 billion contribution to the government's budget deficit can be paid for.

Government can borrow this $9.2 billion. Who will be paying this money back when the loans come due? It depends on when the loans have to be repaid. It might be 5 years, or 10 years, or even 30 years in the future. The money to pay off the loans will have to come from tax revenue (unless it is paid by inflation or additional borrowing at that time). It will have to be paid by those paying taxes at that time. Some of these people paying taxes will be you and I. So, here is a question I think we should all ask. Do you want to borrow $9.2 billion today against our own income in the future so that unemployment benefits can be paid to some who are unemployed at this time?

Let me suggest a way to think about this question. Suppose you become unemployed. Would you take a personal loan, assuming someone would make this loan to you, in order to have money to live on while you look for another job? If you do this, you are actually borrowing money from your own future income when you return to working. You would be reducing your future income by the amount of your loan plus interest. More money for consumption today, but less money for consumption at some time in your future.

I don't know that there is a correct answer. But, notice something by contrasting this personal question with the government policy question. If you personally borrow money to cover a period of unemployment, you will personally have to pay the money back. If government borrows the money and gives it to you, then you won't have to pay it back. And, if you are unemployed now and don't have to pay back money you get from government, isn't that like taking money from others?

Let's go back now to that policy question I asked earlier: Do you want our government to borrow $9.2 billion today against our own income in the future so that unemployment benefits can be paid to some who are unemployed at this time? Perhaps you would like that tradeoff: more income for some who are unemployed today but less income for all of us to consume from in our futures.

But, let me add something to your deliberations of these issues. Why has this recession happened? My answer is that it is the result of bad government policies by many people in several Congresses and in the Presidency. It seems Alan Greenspan, along with many others, sees it this way as well. Therefore, the apparent "need" for additional unemployment benefits today is the result of past government actions. So, today there seem to have been many in the Senate who were angered by Senator Coburn who obstructed their efforts to borrow money from our future incomes, mine and yours, because they had chosen bad government policies in the past. I don't know about you, but it seems less than obvious to me that we want to borrow money today to pay additional unemployment benefits.

Still, I have one more thing to ask you to consider. There are children who are not now paying taxes, and who are not now able to vote, such as my 4th grade son, who will be working when the time comes to pay off this $9.2 billion loan to pay today's unemployment benefits. Some of the people who will have to repay these loans haven't even been born yet. Remember the Boston Tea Party? Talk about taxation without representation. These kids can't even vote NO yet and our government is acting on our behalf to promise some of their future incomes to pay off loans for unemployment benefits today. This seems unjust don't you think? Thomas Jefferson thought so to.

Recently I told my son I had a similar deal for him. I said I'd found someone who would loan me money to get another house. He thought: "nothing unusual about that." But, then I told him the punchline. The guy loaning me the money agreed that I didn't have to pay the money back. Instead, when my son began his first job after college this guy would start sending him a monthly bill of $2000 to pay off my loan. My son's response? You guessed it: UNFAIR.

So, please think again about what Senator Coburn did today, and think about about whether it makes any sense at all to borrow money to pay additional unemployment benefits. Perhaps Senator Coburn was merely thinking about taxation of those who aren't yet able to vote?

Obesity Bake Sales

Chidem Kurdas comments on New York city's BAN ON HOME BAKED GOODS at school bake sales:

Last week, New York City’s Panel for Educational Policy approved a new rule for school bake sales. Home-made treats are no-no, but pre-approved packaged products, the ones that are also in school vending machines, are fine.

The bake sale ban is supposed to reduce childhood obesity. An education bureaucrat explained that homemade goods can’t be allowed because it’s impossible to know their portion size and content. You may add raisins to your banana bread and slice it thin, while I add walnuts and cut it thick.

Hence banana bread, cupcakes and anything else baked at home have been banished; but kids are free to gorge on Kellogg’s Frosted Brown Sugar Cinnamon Pop-Tarts, which come in portion-controlled packages and have known ingredients—in fact a long list of ingredients from high fructose corn syrup to yellow dye #6.

This is a vivid little example of how regulation in general functions and the impact it has in many areas of social life.

One, regulators are almost always influenced by the industry involved and work to its advantage— the NYC schools’ chosen vending operator plans to sell “fund-raising kits” of packaged products.

I probably shouldn't be shocked, but I am shocked at just how far the nanny state has progressed in our country. If you've taken my second course in public sector economics you should also recognize this as yet another illustration of BOOTLEGGERS & BAPTISTS at work to help the local vending operators be successful rent seekers.

The President & Prosperity

Yesterday PRESIDENT OBAMA SPOKE before the Business Roundtable and said this:

Whatever differences we have in this country, all of us have a stake in meeting the same goal, which is an America in which a growing prosperity is shared widely by its people.

Of course, the President goes on to talk about how this growing shared prosperity can be achieved through his favorite government policies. I agree with the goal of a growing shared prosperity. I wonder how this goal should be pursued?

I think we can discover the answer to this question by reading LUDWIG VON MISES:

“. . .there is only one way a nation can achieve prosperity: if you increase capital, you increase the marginal productivity of labor, and the effect will be that real wages will rise. (p. 88)”

If you read all of the President's speech, and/or if you follow the President's policy proposals, I think you will be forced to the conclusion that the President seems to know very little about how the country's prosperity was achieved, and very little about how the country's prosperity can be sustained.

Oh, and if you have some time, you will learn many more valuable lessons by reading the entire set of lecture by Mises, than you will from following all the speeches and policies of the President. I would go so far as to suggest that if you study these seven lecture by Mises the result will be that you will be one of the most economically literate voters in the country.

The Green Police

This GREEN POLICE video is one of the best commercials I've ever seen. I'm afraid that although this is very funny today, it is likely to be not so funny by the time my son graduates college. I'm not sure, but hasn't there already been a bill introduced to Congress to ban the incandescent bulb? Maybe this ban is already law, and that could be me they're loading into the squad car, eh?

Health Insurance Tax Credit

CHIDEM KURDAS:

But there is another way to make exchanges viable, one that should be prominently on the table at Blair House: offer a tax break. Some Republicans like Tom Coburn of Oklahoma and Paul Ryan of Wisconsin propose a refundable tax credit for buying insurance. This can be linked to exchanges.

Since employer-provided health insurance has a huge tax advantage, the only way a market is going to develop outside employer-mediated insurance is to level the tax field with a proper tax incentive. It also happens to be fair, since a growing number of people work for themselves and hence are discriminated against in being forced to pay higher taxes compared to those who benefit from the employer health insurance tax break.

With a significant – say $3,000 a person – and permanent tax cut, exchanges have a chance of attracting enough customers. Justice and economic logic both demand this tax break.

I think this is a good idea. I think the whole idea would be even better if the tax exchange idea was dropped, plus the Congress said both that there would no longer be mandates for what must be in a policy at either the national or state levels and that there could no longer be restrictions on buying insurance from companies across state lines.

Please don't any body point out that this tax credit idea sounds a lot like a "voucher" for health insurance. If Democrats notice this they just might be afraid that if vouchers worked for health insurance they would probably work for education as well.

A Paralyzing Presidency

KIMBERLEY STRASSEL:

The U.S. economy ought to be flying out of recession. Yet bank lending is sluggish. Companies refuse to hire. Business is going elsewhere to raise capital: China last year outstripped the U.S. as a center for initial public offerings. The market gyrates on Washington's latest political drama.

A venture capitalist recently remarked to me that the uncertainty the administration has created is "nothing short of paralyzing." Nobody will invest in an industry that might be the next to be overtaxed, overregulated, or publicly disemboweled.

Add to that uncertainty the administration's new populist bent, and it's a recipe for a continued capital freeze. "People in the economy are thinking about whether to invest or take risks when what they are seeing are early signs of Hugo Chávez economics," says Wisconsin GOP Rep. Paul Ryan. . . .

It seems to me this is a reasonable observation. Investing in the creation of new productive economic activities is a risky business. Uncertainty about what Congress and the President might do that would further burden business means that creative new productive economic activities looks even more risky. By the time someone is able to realize in some future moment the fruits of a commitment today to new economic activities, the opportunity to earn a profit may have been burdened away by new actions and new policies of the President and the Congress.

Climate Science. . .Trust Us?

Oh dear, IF WE CAN'T TRUST SCIENTISTS:

"The University of East Anglia breached the Freedom of Information Act by refusing to comply with requests for data concerning claims by its scientists that man-made emissions were causing global warming."

who can we trust? Oh, I know. . . . .politicians. I almost forgot.

Alternative SOTU

Jeffrey Miron suggests an interesting 10-point libertarian state of the union.

A Thousand Central Planners

MATT WELCH & NICK GILLESPIE write to President Obama:

"A thousand central planners before you have learned it the hard way: Prosperity isn't something the government creates, it's something the government, in the best case, can enable, mostly by establishing a set of simple rules and getting the hell out of the way."

Wise advice, don't you think?

Health Care Reform Constitutional?

Are the health care reform bills passed recently passed by the House and the Senate constitutional? AKHIL REED AMAR argues yes, while ROB NATELSON argues no. Here is Natelson:

"I do not share the writer’s confidence that national health care mandates are constitutional even under the modern Supreme Court’s altered version of the Constitution — but I recognize that legal scholars differ on this question. However, the claim that the Founding Fathers would have thought the Constitution allows Congress to impose health care mandates is little short of absurd."

If you are interested in this issue, I recommend reading at least the piece by Natelson. Why? Because I think his analysis is the better analysis.

But, for myself, the constitutional issue should be much easier to answer. I suggest whenever you see an argument, like Amar's in this case, which goes on and on with this and that justification, you should be wary of the conclusion of constitutionality. The conceptual foundation of the Constitution does not require a long list of reasons to suppose any action by Congress is constitutional. In fact, I think the conceptual foundation of the Constitution requires just the opposite to argue an action is constitutional.

The Constitution is a document which grants specific and enumerated powers to Congress. The conceptual foundation of the document is the idea that unless there is a specific power granted to Congress that is directly written into the language of the Constitution, then the Congress does not, constitutionally, have the power to act as it wishes.

The enumerated powers of the Constitution can be found in Article 1, Section 8. There is a simple test of the constitutional question with respect to the health care reform bills, at least as far as I can understand the meaning of our Constitution. To see this consider some of the language in the enumerated powers clause of our Constitution:

The Congress shall have the Power . . .

• To borrow money . . . .
• To coin Money . . .
• To establish Post Offices and post Roads. . .
  
• To raise and support Armies. . . .
• To provide and maintain a Navy. . . .
  

So, when I ask whether the bills passed by the House and the Senate regarding health care reform are constitutional I'm going to read Article 1, Section 8 looking to find something that would be like the following: "Congress shall have the power to provide health care services or health care insurance." I think the constitution issue should be this simple and this straight forward. And, if the proponent of the conclusion of constitutionality has to offer more than this kind of straight forward analysis, then the conclusion of constitutionality should probably, in my view, be seen as incorrect.

Of course, the health care reform bills passed by the House and the Senate could become constitutional. How? The Constitution could be amended to say that Article 1, Section 8 now includes the following: "Congress shall have the power to provide health care services or health care insurance." Of course, Congress seems not to be interested in doing health care reform the constitutional way (to paraphrase Justice Oliver Wendell Holmes).

Pretty Picture

Isn't this a pretty picture, eh? The lines depict the national government's revenues and outlays as a percentage of gross domestic product (GDP). This is from a report by the Congressional Budget Office. The CBO's analysis suggests that the deficit, the amount the national government chooses to borrow this budget year, will again represent about 10% of GDP. Check out the dotted lines which depict average revenues and outlays, and which suggest over the past 4 decades a deficit, on average, of about 2-3% of GDP. It looks a bit like something has changed. Have the preferences of the voters has changed?

Latest Index of Economic Freedom

The latest INDEX OF ECONOMIC FREEDOM is out. It reflects a downward trend over the past year for 8 of the top 10 countries with the greatest economic freedom. Only Switzerland and New Zealand, among the top 10, show an upward trend in economic freedom over the past year. The United States fell to #8 and is no longer characterized as "free" but only "mostly free." I'm not surprised.

TERRY MILLER offers commentary and this summary of the reasons for the decrease in economic freedom in the United States:

The U.S. lost ground on many fronts. Scores declined in seven of the 10 categories of economic freedom. Losses were particularly significant in the areas of financial and monetary freedom and property rights. Driving it all were the federal government's interventionist responses to the financial and economic crises of the last two years, which have included politically influenced regulatory changes, protectionist trade restrictions, massive stimulus spending and bailouts of financial and automotive firms deemed "too big to fail." These policies have resulted in job losses, discouraged entrepreneurship, and saddled America with unprecedented government deficits.

Economics for Polymers

Here is the link to Economics for Polymers.

Austrian Economics Course

Here is the syllabus for my new course AUSTRIAN ECONOMICS.

The Bonuses Problem

Jonathan Macey writes about bank bonuses and politics:

"There is only one way to resolve the bonus problem. We should continue to let shareholders pay their managers whatever and however they want. But we must get out of the business of guaranteeing against failure. The bankers and the shareholders who enjoy the rewards of risk-taking should be made to act like real capitalists: They should be required to assume the risks that go along with the banks' business activities."

Maybe another way to look at the issues here would be that we should not see executive bonuses as a problem. Without government policy that protects banks and other financial corporations from failure, costly risk taking by executives will not be rewarded with bonuses because such risk taking will turn out to be unprofitable.

But, given a government policy that says a bank or financial corporation is too big to fail, otherwise costly risk taking is turned into a return or revenue that comes from Uncle Sam and the taxpayers. Costly risk taking is turned into a idea with no reality for the protected from failure banks and financial corporations. Even otherwise costly risk taking by executives becomes an opportunity to turn a "profit," and from the government-is-my-protector corporation's perspective profits from any source are worthy of reward.

It seems to me we should not think that there is a bonuses problem. Instead we should see, if we see clearly, that there is a government policy problem.

A Liberty Lover's Top Ten List

Atlas Economic Research Foundation offers a list of the Top Ten Pro-Liberty Books of the Decade. How many have you read?

A Healthy Corruption?

FROM THE WSJ:

Instead of appointing a formal conference committee to reconcile the House and Senate health bills, a handful of Democratic leaders will now negotiate in secret by themselves. Later this month, presumably white smoke will rise from the Capitol Dome, and then Nancy Pelosi, Harry Reid and the college of Democratic cardinals will unveil their miracle. The new bill will then be rushed through both chambers with little public scrutiny or even the chance for the Members to understand what they're passing.

Evading conference has become standard operating procedure in this Congress, though you might think they'd allow for the more open and thoughtful process on what Mr. Obama has called "the most important piece of social legislation since the Social Security Act passed in the 1930s and the most important reform of our health-care system since Medicare passed in the 1960s."

Does this Congress seem ever more corrupt? Or, perhaps it is tyrannical?

Jobs Economics

I've become a really big fan of MARIO RIZZO:

"Nevertheless, both economists are, I think, too much in the spell of the Principle of Aggregate Demand. Aggregate demand theories abstract from concern about the need for readjustments in lines of production after credit-induced unsustainable sectoral expansions."

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.

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 naïve, 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.

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.

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)

Health Care Reform: Essential Economic Insights

COGAN, HUBBARD, & KESSLER:

According to provisions in both House and Senate bills, mandated plans must have low copayments and provide coverage of health-care services that is at least equal in scope to a typical, current employer-sponsored plan. But these are the very flaws that are responsible for high and rising health-care costs, flaws that stem directly from the misguided tax exclusion for and the extensive state regulation of health insurance. By locking in these flaws, the mandates will inhibit precisely the innovation needed to reform U.S. health care....Comprehensive, low-deductible, low-copayment insurance has brought us to where we are today. The administration's plan to expand and lock-in this flawed paradigm will ultimately defeat the goal of making health services more affordable for everyone.

If one wants to use government and public policy to "solve" a "problem," then it seems to make good sense to first understand the cause of the "problem." These 3 economists understand the sources of the health care problem today are past government policies. Thus, government actions today that do not correct the past bad government policies, even more that lock in the past bad policies, should not be expected to lead to better results in the future.

[HT: Greg Mankiw]

Of Entrepreneurs & Philosophers

LUDWIG VON MISES:

It is not the business of the entrepreneurs to make people substitute sound ideologies for unsound. It rests with the philosophers to change people's ideas and ideals. The entrepreneur serves the consumers as they are today, however wicked and ignorant. [Human Action, p. 297]

Consumers Captain Economic Ship

LUDWIG VON MISES:

The direction of all economics affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him." [Human Action, p. 270]

Intergenerational Injustice

Pajamas TV offers an interesting look at the intergenerational impact of the national government's recent bailouts and stimulus.

If you are college age or younger this is must viewing.

If you are an adult with children, you may also be interested in viewing, but maybe you will be even more interested in trying to keep this away from your children. Why?

Consider that when I followed this link I discovered that I can expect to pay about $276 per month until I die for the bailouts and the stimulus. That will be a total of only about $76,000 because of these government actions. In contrast, my son, who is now 9, will pay about $285 per month across all the years that he is a federal income taxpayer. My son's total payments for bailouts and stimulus, this time around, will be about $154,000 over his lifetime. Of course, this is only a small part of the impact of today's government policies on my son since it calculates nothing for the impact of social security, medicare, health care "reform," etc., etc., etc.

I think this illustrates pretty nicely why I follow Thomas Jefferson in concluding that government debt is intergenerationally unjust. My son is still quite a number of years away from voting age, and by the policies of our government we are binding him to pay for our own bailouts and stimulus.

Obama & His Taxes

WSJ REVIEW & OUTLOOK:

"President Obama didn't make much news on his round of five Sunday talk shows yesterday, with one notable exception. The President revealed a great deal about his philosophy of government and how he defines a tax increase. It turns out the President thinks a health-care tax is not a tax if he thinks the tax is for your own good."

Yeah, I know. I'm very lucky the President is looking out for my own good.

The Wages of Government

THE WSJ REPORTS that:

"A group of blue-chip companies is lining up behind efforts to voluntarily change their pay practices, in part to head off potentially more onerous restrictions out of Washington. . . . .

Many of the Conference Board's principles resemble those of the Obama administration, including tying a 'significant portion' of incentive compensation to a company's long-term success, rather than rewarding short-term gains that some worry promote risky behavior. The proposal also calls for doing away with certain pay practices, such as 'overly generous golden-parachute payments' in the event of a takeover, and long-term employment contracts that require generous severance payments."

I suppose rhetoric is a beautiful thing, at least to some. I would like an explanation as to why it makes sense to say a group of companies will voluntarily change their pay policies when at the same time these companies are trying to placate government.

It seems to me more accurate to say that "a group of companies are being coerced by government to change their pay policies." And, if government passes legislation or writes regulations about pay policies, then it would seem accurate to say that government has forced companies to change their pay policies. Or, if we would prefer to match rhetoric with more rhetoric, how about we say instead that "a group of companies have decided to give into to the big government bully." I think my use of coercion and force is more accurate, but telling the story in terms of the "big government bully" might help tell a story with more political traction.

Check out the paragraph that lists some of the proposed changes. I've read this entire news article, and I don't think I can find any analysis that explains why it is thought that these companies have bad pay policies now. So, I have no way to judge whether these changes make any sense. What's more, it seems to me that any company's pay policies should seek to achieve the company's purposes, and not the purposes of government.

Oh, and I wonder how "generous" is defined?

Finally, since we are considering the responses of business to the coercion of government, is it completely silly to ask where Congress or President Obama constitutionally have the power to coerce, or to force, businesses to change their pay policies? I can't see that they do in the Constitution I have.

Never Merely Consumer

Ludwig von Mises:

"Living and acting man by necessity combines various functions. He is never merely a consumer. He is in addition either an entrepreneur, landowner, capitalist, or worker, or a person supported by the intake earned by such people." [Human Action p. 253]

Hmm, where does the politician fit? Or, has Mises neglected to include politician in his list of various functions?

Happy Constitution Day!

If you would like to celebrate our constitution, then I have a suggestion. Check out the POLITICIAN'S PLEDGE at the 10th Amendment Center. Take a look around while you are there. I like the looks of the center. While you are there, consider clicking on "Petition" and letting your representatives know what you think about the constitution and our government.

ObamaCare: Would I lie to you?

GREG MANKIW:

"At first, it sounds like the President is threatening to veto the bills being considered in Congress because, according to CBO, they will add significantly to deficits in the out years. If true, that would be a big story. But the provision he mentions in the next sentence seems to suggest he is just passing the buck.

Translation: 'I promise to fix the problem. And if I do not fix the problem now, I will fix it later, or some future president will, after I am long gone. I promise he will. Absolutely, positively, I am committed to that future president fixing the problem. You can count on it. Would I lie to you?'"

Chinese Tire Tariffs & The President

WSJ:

"The White House leaked word late Friday evening that the U.S. will impose heavy tariffs on imported Chinese tires used by millions of low-income Americans. We wonder if President Obama understands the political forces he's unleashing with this blatant protectionism.

[ . . . ]

As a candidate, Mr. Obama courted union support, and the United Steelworkers filed the tire case anticipating he would pay them back. Some in the business and policy communities thought Mr. Obama didn't really mean it, and that like Bill Clinton he would stand for the national economic interest in open trade once he became President. Mark that down as another misjudgment. In his first big trade test in the White House, Mr. Obama has allied himself with the protectionists, and the world will see his political surrender and rush to exploit it."

Well, I guess that's okay since I like paying higher prices for tires.

Obama's Takeover of Student Loans

WSJ:

"The furor over President Obama's trillion-dollar restructuring of American health care has left his other trillion-dollar plan starved for attention. That's how much the federal balance sheet will expand over the next decade if Mr. Obama can convince Congress to approve his pending takeover of the student-loan market.

The Obama plan calls for the U.S. Department of Education to move from its current 20% share of the student-loan origination market to 80% on July 1, 2010, when private lenders will be barred from making government-guaranteed loans. The remaining 20% of the market that is now completely private will likely shrink further as lenders try to comply with regulations Congress created last year. Starting next summer, taxpayers will have to put up roughly $100 billion per year to lend to students."

I guess "ObamaCare" has been used as shorthand for "health care reform." But, maybe we should start to see "ObamaCare" as President Obama's view of government, i.e, Obama's government is one that cares for all our needs.

The Age of Liberalism

LUDWIG VON MISES:

It is a purposeful distortion of facts to blame the age of liberalism for an alleged materialism. The nineteenth century was not only a century of unprecedented improvement in technical methods of production and in the material well being of the masses. It did much more than extend the average length of human life. Its scientific and artistic accomplishments are imperishable. It was an age of immortal musicians, writers, poets, painters, and sculptors; it revolutionized philosophy, economics, mathematics, physics, chemistry, and biology. And, for the first time in history, it made the great works and the great thoughts accessible to the common man. (p. 155)

Cap & Trade

Sounds like the climate bill has stalled.