Chevy Volt

TOM GANTERT:

"Each Chevy Volt sold thus far may have as much as $250,000 in state and federal dollars in incentives behind it – a total of $3 billion altogether, according to an analysis by James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy.

[. . . .]

GM has estimated they’ve sold 6,000 Volts so far. That would mean each of the 6,000 Volts sold would be subsidized between $50,000 and $250,000, depending on how many government subsidy milestones are realized.

[. . . .]

“It just goes to show there are certain folks that will spend anything to get their vision of what people should do,” said State Representative Tom McMillin, R-Rochester Hills. “It’s a glaring example of the failure of central planning trying to force citizens to purchase something they may not want. … They should let the free market make those decisions.”"

I hope you remember Magnum P.I., because the only thought that comes to mind is Higgins saying: "OH MY GOD!!!"

UPDATE January 5, 2012

All Volts sold in the U.S. have been "RECALLED" in order to fix fire hazard.

Government Organizing Injustice

I'm just now reading Bastiat's "The Law" for the first time. Of course Bastiat puts ideas so well. Just meditate for a while on the following:

Try to imagine a form of labor imposed by force, that is not a violation of liberty; a transmission of wealth imposed by force, that is not a violation of property. If you cannot succeed in reconciling this, you are bound to conclude that the law cannot organize labor and industry without organizing injustice.

Sowell On Greed

Thomas Sowell:

"Among the favorite sloppy words used by the shrill mobs in the streets is "Wall Street greed." But even if you think people in Wall Street, or anywhere else, are making more money than they deserve, "greed" is no explanation whatever.
"Greed" says how much you want. But you can become the greediest person on earth and that will not increase your pay in the slightest. It is what other people pay you that increases your income.

If the government has been sending too much of the taxpayers' money to people in Wall Street — or anywhere else — then the irresponsibility or corruption of politicians is the problem. "Occupy Wall Street" hooligans should be occupying Pennsylvania Avenue in Washington."

Unoccupy Econ

An Open Letter to Greg Mankiw:

"Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.

As Harvard undergraduates, we enrolled in Economics 10 hoping to gain a broad and introductory foundation of economic theory that would assist us in our various intellectual pursuits and diverse disciplines, which range from Economics, to Government, to Environmental Sciences and Public Policy, and beyond. Instead, we found a course that espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today."

If you read the letter you'll see Mankiw is being criticized for not including Keynes in this course. However, this semester of the course is apparently covering microeconomics, and Keynes will be discussed, where he should be, next semester in macroeconomics. Seems sad, don't you think, that these students are several weeks into the semester and they don't yet understand the difference between micro and macro?

Quote of the Day

FREDERIC BASTIAT:

I am, I confess, one of those who think that choice and impulse ought to come from below and not from above, from the citizen and not from the legislator; and the opposite doctrine appears to me to tend to the destruction of liberty and human dignity. (p. 12)

I confess the same!

Joke of the Day?

The DIAPER INVESTMENT AND AID TO PROMOTE ECONOMIC RECOVERY ACT must be a joke, right?

Oh wait, I forgot. Article 1 Section 8 of the Constitution says that "Congress shall have the power to give diapers to families."

I don’t understand aggregate demand

RUSS ROBERTS doesn't understand aggregate demand:

Does an increase in aggregate demand increase employment?

Yes, if by an increase in aggregate demand you mean people buying and selling more from each other where buying and selling includes consumers and manufacturers.

The above statement has virtually no informational content. It is equivalent to saying that when the economy is healthy, there is lots of exchange going on. When an economy is not healthy, there is less exchange. There is less buying and selling of goods and services and labor. To describe that unhealthiness as less aggregate demand is just to put the problem into different words.

You should read the rest of his post.

I don't understand either.

An Idea Intolerable To Modern Man

Hayek:

But when developments take an undesirable turn, the suggestion that this is not the effect of circumstances beyond our control, but the necessary consequence of our earlier decisions, is rejected with scorn. The idea that we are not fully free to pick and choose whatever combination of features we wish our society to possess, or to fit them together into a viable whole, that is, that we cannot build a desirable social order like a mosaic by selecting whatever particular parts we like best, and that many well-intentioned measures may have a long train of unforeseeable and undesirable consequences seems to be intolerable to modern man." [Law, Legislation and Liberty, vol 1, Rules and Order]

Hmm, seems to me this idea that is intolerable to modern man is one of the basic insights of economics. No wonder so few people seem interested in economics, and no wonder so few who study some economics come away with much understanding about the consequences of public policy for the world around them.

Hayek on American Constitutionalism

Hayek:

When Montesquieu and the framers of the American Constitution articulated the conception of a limiting constitution that had grown up in England, they set a pattern which liberal constitutionalism has followed ever since. Their chief aim was to provide institutional safeguards of individual freedom; and the device in which they placed their faith was the separation of powers. In the form in which we know this division of power between the legislature, the judiciary, and the administration, it has not achieved what it was meant to achieve. Governments everywhere have obtained by constitutional means powers which those men had meant to deny them. The first attempt to secure individual liberty by constitutions has evidently failed. [Law, Legislation and Liberty, Volume 1: Rules and Order, p. 1]

Does this seem correct? If so, are there any means by which limited government might be achieved?

Budget Reflections

With all the political drama in Washington these days over raising the US Government debt ceiling I thought perhaps I should see if it was possible to add a wee bit of perspective. I've taken the information portrayed in the following charts from the President's web page for his 2012 budget proposal.



This chart tells the basic story of the US Government Budget from 1950 - 2010. I realize the image here is pretty small, but if you click on the image you can see a larger more readable version. The blue line reflects millions of dollars spent annually by the US Congress, while the green line reflects millions of dollars annually taken in by the US Congress. The red line reflects the budget deficit and therefore the millions of dollars that have been borrowed annually by the US Congress since 1950.

So what basic story do I think this chart tells? From 1950 until about 1975 or 1980 there seemed to be almost no trend up or down in terms of the amount of money Congress decided to borrow each year. This period was followed by an increase in the annual amount of money Congress borrowed but this new period also showed a fairly horizontal line and thus not much of a tendency to further increase the amount of annual borrowing. Congress balanced the budget and even seems to have spent less than it took in for about three years around the year 2000. The trend shown by the red line depicts a significant increase in the amount of money Congress has chosen to borrow annually since around the year 2000.

Notice also that during the entire period from 1950 until 2010 the annual amounts taken in and spent by Congress increased. The green line which represents annual receipts shows almost a linear trend upward since around 1980, while in contrast, the blue line representing the amount Congress has spent annually kicks into a "new gear" with a much steeper line. Take note also that over this period from 1950-2010 there have been both recessions and expansions, and there have been both increases and decreases in the income tax rates imposed by Congress. Nonetheless, the story of Congress and the budget it has chosen annually reflects more revenues year to year and more spending year to year. The story also seems to be that Congress's habit of borrowing also kicked in to another gear since the last two or three budgets that were in surplus.

I suspect someone might say that this is not the proper way to evaluate the US Budget, so here is a picture of this same story but told in a chart the depicts receipts, outlays, and deficit/surplus as a percent of GDP.




Perhaps the story to notice from this chart is that both revenues and outlays as a percent of GDP have relatively flat trend lines starting around 1970. Also these trends are such that annual outlays have been around 20% of GDP while annual receipts have been around 18%. Of course periods of recession have reduced annual receipts. Once again I will point out that these trends include periods of recession and expansion as well as increases and decreases in income tax rates, and still a pretty flat trend. Also note that with the year 2008 there was a substantial increase in outlays as a percent of GDP, and an increase that has no precedent over this 60 years period.

It seems to me that Congress has acted less constrained concerning spending choices over time, and most recently Congress has shifted into another gear with spending and borrowing. I suppose we could fuss over whether Congress has a spending problem or a revenue problem, and thus we could pick the Republican side or the Democrat side with respect to the current debate over the debt limit. Yet, we know that revenues decline in recession, and without increasing any income tax rates, revenues will again increase (as reflected in the first chart) with expansion. But Congress has seen a significant recent decrease in revenue because of recession, and instead of reducing outlays or even holding outlays constant Congress has chosen to significantly increase annual spending. Where is Congress getting the money to increase it's annual spending so much? The amount borrowed has been increased to about 10% of annual GDP, which also is a number without precedent over this six decade period.

So, this last chart gives us some perspective on the choices Congress has made over the last 60 years with respect to the amount it borrows annually. The bars depict the amount number of cents borrowed by Congress for every dollar it spend. Years without bars mean that the budget


was in surplus and no money was borrowed that year. For the first 25 years over the period portrayed in the chart, Congress mostly borrowed less than 10 cents annually for every dollar it spent. Only 6 times between 1950 and 2008 did Congress annually borrow as much as around 20 cents of every dollar it spent. But, Congressional behavior changed significantly for the last two years of this period because in these last two years Congress has borrowed about 40 cents of every dollar it spent.

I suppose some may say we should understand the dire economic situation that characterized these last two years, and therefore Congress had to take action or else. But note that over the 60 years of Congressional behavior depicted in these charts there were, as I wrote earlier, plenty of recessions and expansions, and there were also times when Congress both increased and decreased income tax rates. I'm thinking it is very difficult to justify borrowing 40 cents of every dollar spent, even given the recent recession.

I'm thinking the annual budgetary behavior of Congress has been showing a trend from 1950 until now of more annual revenue, more annual spending, and more annual borrowing. This is the way I put recent budgetary politics into perspective.

Congress, along with the President, are debating whether to increase the ceiling on the aggregate amount of borrowing and debt that our national government can incur. I know some of these leaders think it is necessary to increase this ceiling or else bad things will happen. Borrowing 40 cents of every dollar spent seems like a bad thing has already happened. The trends since 1950 depicted in these three diagrams perhaps suggest it is unwise to allow our representatives in Washington to think they can continue to borrow and borrow and borrow. When our representatives are borrowing 40 cents of every dollar they spend perhaps it is already too late to think these folks can learn some fiscal responsibility.

I've described this budgetary perspective in terms of the actions of Congress instead of the President. Of course, much of the attention in public discussions is tuned in to the President. But, keep in mind that the President does not have the power to tax, and his authority to spend is granted by Congress. In addition, the President does not have the constitutional power to borrow money. That is a Congressional power. I think it is unwise to put all of the attention on the President, and it is much better for us to blame members of Congress when they vote for borrowing, taxing, and spending policies. But, of course, since the President can veto budgets presented to him by Congressional budget bills, the President also should be seen as responsible when the fiscal actions of the national government are irresponsible.

Quote Of The Day

A society that does not recognize that each individual has values of his own which he is entitled to follow can have no respect for the dignity of the individual and cannot really know freedom.

F. A. Hayek, The Constitution of Liberty

Equality & Inequality

In The Constitution of Liberty Hayek writes:

From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either the one or the other, but not both at the same time. (p. 150)

Open Letter to Barack Obama

Check out Professor Boudreaux's Open Letter to Barack Obama. Here is the punchline:

With respect, sir, you’re complaining about the source of our prosperity.

I hate it when this happens. Don't you wish more leaders in Washington understood how the world works and why we are able to live such prosperous lives?

Human Reason Advances

Hayek in THE CONSTITUTION OF LIBERTY:

Human reason can neither predict nor deliberately shape its own future. Its advances consist in finding out where it has been wrong. (p. 94)

Why Is Water Scarce?

The following comes from a middle school textbook on civics and economics:

Even a seemingly plentiful resource such as water is considered scarce because it is not free; we pay to use it.

What is wrong with this idea?

Civilization Begins

Hayek in The Constitution of Liberty:

The Socratic maxim that the recognition of our ignorance is the beginning of wisdom has profound significance for our understanding of society. The first requisite for this is that we become aware of men's necessary ignorance of much that helps him to achieve his aims. Most of the advantages of social life, especially in its more advanced forms which we call "civilization," rest on the fact that the individual benefits from more knowledge than he is aware of. It might be said that civilization begins when the individual in the pursuit of his ends can make use of more knowledge than he has himself acquired and when he can transcend the boundaries of his ignorance by profiting from knowledge he does not himself possess.

Keynes v Hayek

HAPPY TAX DAY!

LARRY CORREIA rants about government on tax day. I think his rant is excellent. I'm going to have to check out his novels.

The Government Budget & Government Borrowing

Congressman Ryan unveiled his proposed U.S. budget yesterday, and of course there has been much recent talk in politics about taxing, spending, budgets, deficits, and debt.

There is even a lot of political theater these days over whether to continue to fund government in the current fiscal year since the last Congress failed to pass a budget. Well, I write "failed," but I suspect the people in charge of the last Congress, for whatever reasons, may simply have chosen not to pass a budget.

It seems Congressman Ryan is trying to lead Congressional budget choices in the direction of balancing the U.S. government budget some time in the future. I suppose that may seem a worthy goal for the government's future, but I'm wondering what sense it makes for government to routinely run a deficit?

When the President and members of Congress choose to run a government deficit it means that the President and members of Congress are choosing to spend more in any year than the government takes in through taxation in that year. This means the President and members of Congress are choosing to borrow at least some of the money they spend "on our behalf."

Well, how often have the President and members of Congress chosen to borrow money? When the President and members of Congress choose to borrow money, how much do they borrow?

To answer these questions I went to the web page for the President's annual budget, and I downloaded the historical tables in spreadsheet form. It turns out that in only 6 years in the last 50 years have the President and members of Congress chosen not to borrow money to spend on government projects and activities. It seems rather routine for the President and members of Congress to borrow money for the things they do "on our behalf."

To get a sense of how much the President and members of Congress choose to borrow when they borrow I used the spreadsheets to calculate how many cents of every dollar spent by the President and members of Congress in any year come from borrowed money. In 1980 for example the President and members of Congress borrowed 20 cents of every dollar they spent, and back in 1970 they borrowed only 1 cent of every dollar they spent.

The two largest years for borrowing by the President and members of Congress over all of the last half century have come in the 2009 and 2010 budget years. In 2009 the President and members of Congress borrowed 40 cents for every dollar they spent that year, and in 2010 they borrowed 42 cents on every dollar they spent. The next largest amount borrowed was in 1983 when the President and members of Congress borrowed 26 cents on every dollar they spent.

In the current budget year the President offered to Congress a budget proposal that apparently proposed borrowing 33 cents for every dollar they would spend in the 2011 budget year. I see from today's editorial in Investor's Business Daily that the President and members of Congress are finding it difficult to agree to cutting $33 billion from the 2011 budget. In other words, the President and members of Congress are arguing over whether they should borrow 33 cents or only 32 cents on every dollar they spend during the 2011 budget year. No, I'm not kidding.

Once again I wonder why the President and members of Congress want to borrow money at all, much less 40 cents or even 30 cents for every dollar they spend on our behalf. I understand Congressman Ryan, as well as many other republican members of the House, are proposing that the U.S. budget return to 2008 spending levels, and this is like proposing to return to a year in which the President and members of Congress chose to only borrow 15 cents on every dollar they spent that year. Why not propose a return to 1970 when the President and members of Congress chose to only borrow one penny for every dollar they spent?

I don't think it is easy to pick out the specific things the President and members of Congress borrow money for. So, I think it is acceptable to conceptually frame their choices as borrowing money for every government policy, action, and activity. Recently Senate Majority Leader Reid appeared on YouTube lamenting the idea that some members of Congress had proposed no longer funding a government program that subsidized the annual Cowboy Poetry Festival in Elko Nevada.

No, I'm not kidding. The President and members of Congress borrowed about 40 cents in 2009 and 2010 for every dollar they spent on this Cowboy Poetry Festival. Imagine that. I recently borrowed money to purchase a home, and the President and members of Congress are borrowing 40% of the money they spend to fund this Cowboy Poetry Festival.

Honestly, I can't imagine how anyone could justify using Congress's constitutional power to tax to gain the money to fund a Cowboy poetry festival, much less borrow 40% of the money from our future incomes and from the future incomes of our kids to fund such an activity. Of course, I even suspect that such programs as these should be declared unconstitutional because I simply can't find "Congress shall have the power to subsidize Cowboy Poetry Festivals" in the list of enumerated powers in Article 1, Section 8 of our Constitution.

But, then again, I might change my tune if I thought, as Senator Reid seems to think, that ending the government program in question would mean that the tens of thousands of people who attend the Cowboy Poetry Festival each year "would not exist." Maybe the President and members of Congress should borrow money so that these people can continue to live, eh?

The Daily Show, Economics Edition

Check out economist Ed Glaeser on THE DAILY SHOW. I might have to use Glaeser's new book in my Econ 425 Urban Economics course next semester.

Cotton Subsidies

Check out THIS VIDEO about cotton subsidies. So, how do you like the idea that some of your tax dollars (well, perhaps some of the dollars borrowed by Congress) are being spent to subsidize cotton farmers in Brazil?

Our government enjoys supplying rent seeking so much that it supplies rent seeking farmers from other countries. Very interesting, eh?

Oh, I've got an idea. If the people in Congress really are interested in cutting down the size of their budget deficit, then the least they could do is end cotton subsidies both for farmers in the United States as well as for farmers in other countries.

Reflections on Graduate Economics Education

GREG MANKIW discusses graduate economics education:

The question we face as designers of educational programs is how to structure them in light of the longer times that PhDs take and the fact that some students who start these programs may rationally choose not to complete them. The answer may be to divide current PhD programs into two chunks. The first chunk would be a two-year master’s degree focused on taking advanced courses. The second chunk—appropriate for only a subset of master’s students—would be a research degree culminating in the PhD.

For quite some time my advice to most of my undergraduate students about pursuing a Ph.D. in economics has been consistent with Mankiw's suggestions. I think it is worth reading his entire post.

PETER BOETTKE also notes Mankiw's suggestions and offers:

Back to Mankiw's reflections --- at GMU we have a strong MA program, and within that a track that the Mercatus Center supports that has done an excellent job of placing students in highly leveraged positions in public sector, public policy think-tanks, and the private sector, and our full-time population of PhD students on funding graduates students in 4 to 5 years, and has a high percentage of graduation. In many ways, we are already doing what Mankiw recommends in terms of structural changes to graduate programs in economics to maximize their educational value to their customers.

I think that for almost a decade now I have been telling my students interested in economics graduate study that if I started all over today, given all that I've learned since about 1975, I would probably put George Mason at the top of my list.

Simple System of Natural Liberty

DEIRDRE MCCLOSKEY at Cato Unbound:

"I claim that a true liberalism, what Adam Smith called “the obvious and simple system of natural liberty,” contrary to both the socialist and conservative ideologues, has the historical evidence on its side. Despite the elements of regulation and corporatism defacing it (and the welfare programs improving it), it has worked pretty well for the poor and for the people for two centuries. I reckon we should keep it — though tending better to its ethics."

I think her opening essay is from the introduction to her new book BOURGEOIS DIGNITY. She concludes that the fundamental reason why we prosper is because of certain ideas. Ideas such as "the obvious and simple system of natural liberty." It is well worth the time to check out her essay and the interaction that follows at Cato Unbound. If you have the time and the interest Bourgeois Dignity and her earlier BOURGEOIS VIRTUES are important books if you want to understand why we prosper today.

Some of the Predators of Mali

DON BOUDREAUX:

This report in yesterday’s New York Times offers evidence of the extent to which “Progressives” will go to stop progress – evidence of the filth and pollution that flesh-and-blood individuals are obliged to endure when economic growth is forcibly halted – evidence of the utter arrogance and selfishness of rich-world elites, and of their propensity to treat other human beings as objects for amusement.

Kind of gets your attention, eh? The news report Boudreaux points to is interesting and well worth reading, especially if you were in my Power & Prosperity course last semester. The deal is that the city the news report is about is a World Heritage site and that has important implications:

"When a town is put on the heritage list, it means nothing should change,” Mr. Maiga said. “But we want development, more space, new appliances — things that are much more modern. We are angry about all that."

From the news report it seems to me that, as Boudreaux alludes to, there has recently been some development and progress going on in this city. After all, the people reported on seem to have at least some money available to spend on new wants and desires with respect to the way they live. Unfortunately, it also seems that there are predators from without who want to keep these people from using the gains they have made for their own purposes.

“If you want to help someone, you have to help him in a way that he wants; to force him to live in a certain way is not right,” he said, before lying on the mud floor of a windowless room that measured about 6 feet by 3 feet.

Well said. Put the power of government behind what a person wants to do for himself and good things will emerge in the future.

You can learn more about the necessary conditions for Mali prosperity by checking out the information at the INDEX OF ECONOMIC FREEDOM. While Mali officially has a democratic form of government, the protections for private property are weak and corruption is prevalent.

The Economist's Toolbox

PETER BOETTKE:

"Kirzner in that 1963 work, and then again in his more developed theoretical exposition in Competition and Entrepreneurship (1973), was trying to intellectually square his understanding of mainstream neoclassical price theory, and his understanding of Misesian price theory. In short, he did not reject mainstream price theory, he accepted it but also accepted its own internal critique (provided by Arrow, but also pointed out earlier by individuals such as Joan Robinson) and sought to salvage the theory by way of Mises. Arrow had asked how can price ever change to clear markets when all the actors are themselves price takers; and Robinson years earlier had pointed out that they only to get into equilibrium under standard assumptions was to already be in equilibrium. Kirzner provides an answer with only slight modification of the assumptions to the neoclassical model."

Boettke's summary of the critiques of Arrow and of Robinson may help some of my students, especially those in Intermediate Microeconomics last semester, understand my discussions of the equilibrium nature of demand and supply, why I emphasized the nature of comparative static analysis, and why I ended the semester with a discussion of entrepreneurship as a significant missing link in understanding the real and emergent economy.

Economists Used to Believe This

PETER BOETTKE has a very interesting post about the conceptual context for the work of Israel Kirzner. Students in economics classrooms today may be interested in the history of economic thought that Boettke describes in his post. I think there is a significant delay between where economic analysis is currently and what is presented in undergraduate textbooks and course work. Thus, as you read Boettke's history you may recognize that much undergraduate economics is consistent with a conceptual economic framework that was the foundation of the economic discipline some decades ago. I think this is especially true with respect to the analysis of entrepreneurship, public policy, and prosperity.

Congress and the Constitution

The Senate has an "omnibus" spending bill and Senator Coburn's webpage has a spreadsheet the summarizes all the "earmarks" in the bill. The Senator's spreadsheet is worth a look. Here are a few of the things Congress is considering spending money on. Keep in mind that since the government is running a deficit, we might as well say these are some of the things Congress is borrowing money for:

• $1 million - City of Rockville sanitary sewer rehabilitation project
• $2.5 million - Long Creek Watershed Management District for a stormwater and water quality project
• $1 million - City of Hamtramck for water and sewer line rehabilitation
• $1 million - County of Riverside, Moreno Valley, CA, for facilities and equipment related to trauma care
• $16.1 million - John F Kennedy Center for the Performing Arts and its affiliate, as authorized by the Elementary and Secondary Education Act
• $10.5 million - National Board for Professional Teaching Standards. . . .
• $25.6 million - National Writing Project . . . .
• $1 million - Planning, Design, Renovation and Revitalization of Historic Building
• $1 million - For event and meeting space infrastructure at the Bangor Regional Arena and Meeting Complex
• $0.5 million - To acquire blighted property and renovate facilities to create an industrial park
• $1 million - For the acquisition of facilities in Covington, LA to be used for community services and economic development
• $1 million - (City) Demolition of Blighted Buildings
• $1.25 million - For construction of a senior center
• $1.55 million - For improvements to the Pigeon Harbor Industrial Park
• $1 million - For construction of facility that will accommodate an education and interactive learning center
• $1 million - To renovate the facility for the Jewish Vocational Service and to provide equipment and furnishings
• $2.5 million - Legal Advocacy for Crime Victims (Nationwide)
• $1 million - Bronx River and South Bronx Waterfront
• $1 million - Washington State Methamphetamine Initiative
• $4 million - Marine Aquaculture Lab Operations
• $4.5 million - Center for Water Technology and Policy
• $2 million - Sensors for Monitoring Chesapeake Bay Watershed Health
• $2 million - Center of Teacher Excellence
• $4 million - Life Sciences Commercialization Laboratory
• $5 million - Phase II construction, National Center for Natural Products Research, Oxford, MS
• $2 million - Market Development, WI
• $2.6 million - Agricultural Pest Facility, HI
• $3.49 million - Formosan Subterranean Termites Research, New Orleans, LA
• $1.65 million - Human Nutrition Research, Boston, MA; Houston, TX; Kannapolis, NC
• $1.45 million - Mosquito Trapping Research/West Nile Virus, Gainesville, FL
• $1.25 million - University of Alabama, Rural Health Entrepreneurial Development Project, Tuscaloosa, AL
• $2.4 million - Bank On USA demonstration projects, HI

This is just a really, really small part of the entire list.

Why is Congress spending money on these things, much less borrowing money for them? I suppose the answer to this question is simple, i.e., this is the way our rent seeking system of politics works these days.

I think the more important question is: Why do members of Congress think they have been granted the power to spend money on such things? Our Constitution defines our government, presumably, to be a limited government with specifically enumerated powers. You've read the Constitution. It goes something like this:

The Congress shall have Power . . . . To borrow money on the credit of the United States; To regulate Commerce with foreign Nations, and among the several States . . . . To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States; . . . . To establish Post Offices and Post Roads; To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries; . . . . To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years; To provide and maintain a Navy. . . .

I just can't find in my copy of the Constitution that Congress has the power to create a center for teacher excellence, or the power to renovate buildings for religious vocational services, or the power to create industrial parks, or the power to be an advocate for crime victims, or the power to demolish blighted buildings for city governments, or the power to provide facilities for trauma care. I suspect that if I had time to read through Senator Coburn's entire spreadsheet I would find no more than one or two percent of the spending items were associated with the actual enumerated constitutional powers of Congress.

Does it make sense to ask if the United States Government is now, properly speaking, a constitutional form of government?

Constitution & Health Care

I've been reading Judge Hudson's opinion concerning the recently passed "health care reform" statute. I'm not sure I can continue to endure the pain. I am suspicious of the logical gyrations that seem to be integral, these days, to constitutional jurisprudence. I think we should weep for our lost Constitution. But, perhaps, when the smoke clears on all the court challenges a bit of our Constitution will have been returned. After all, it seems to me that the gyrations of constitutional analysis are probably most needed when it should be easy for us to see that an act of Congress, and/or the President, is unconstitutional.

Let's consider a bit of the analysis in support of the constitutionality of the statute as summarized by Judge Hudson:

"Critical to the Secretary's argument is the notion that an individual's decision not to purchase health insurance is in effect 'economic activity.' The Secretary rejects the Commonwealth's implied premise that a person can simply elect to avoid participation in the health care market. It is inevitable, in her view, that every individual--today or in the future--healthy or otherwise--will require medical care. . . .The Secretary maintains that the irrefutable facts demonstrate that '[t]he conduct of the uninsured--their economic decision as to how to finance their health care needs, their actual use of the health care system, their migration in and out of coverage, and their shifting of costs on to the rest of the system when they cannot pay--plainly is economic activity.'" (p 11-12).

This analysis by the Secretary seems pure nonsense to me. The analysis seems to conclude that the actions of the uninsured, whatever the actions are or aren't, are plain old "economic activity." Well, I have been known to suggest to the students in my economics classes that "everything is economic." So, I'm with the Secretary in concluding we have lots of "economic activity" involved in choosing or not choosing "health care." But the nonsense in all of this is that we really should be asking what that "economic activity" has to do with the constitutional powers granted to Congress. Does Congress have the power to regulate any (and all) "economic activity?"

I think the short answer to this question is simple. NO.

Article 1 Section 8 specifically grants the power to Congress to regulate interstate commerce. It is not the case that economic activity is equal to interstate commerce. Commerce means someone buys a good or service from someone else. Interstate commerce means the buyer involved in the act of commerce is in one state and the seller involved in the same act of commerce is in a different state. If the buyer and seller engaging in the act of commerce between consenting adults are in the same place, such as when I buy a big mac at McDonalds for lunch, then it is an act of intrastate commerce. Congress has the power to regulate the buying and selling between people in different states, it does not have the constitutional power to regulate the buying between people in the same place or in the same state.

The Secretary's analysis is fun, but it seems a waste of time, resources, and taxpayer dollars because Congress is not supposed to have the constitutional power to regulate any/all economic activity, only the specific form of economic activity that involves exchange between a buyer in one state and a seller in another state.

Of course, the constitutional issue in this case involves whether Congress has the power to mandate that people purchase health insurance coverage. I certainly think that a person who chooses not to purchase health insurance has made an economic choice, but an economic choice is not economic activity, nor is an economic choice always an act of commerce. Apparently Judge Hudson concluded that the constitutional power to regulate interstate commerce was not the power to compel an act of commerce, whether of the interstate or intrastate variety. That certainly seems the sensible and correct conclusion to me. If I choose not to purchase insurance, or any other good, I have chosen not to engage in an act of commerce. It is even sensible to point out that I might sometimes not choose to engage in an act of commerce because I think the tax Congress has imposed on the commerce results in a price that is too high for what I get in return from my purchase. I hope that Congress does not have the power to both tax an act of commerce and then compel me to engage in that act of commerce as well.

I think the constitutionality, or unconstitutionality, of this statute should be quite straightforward. Congress has the power to regulate an act of commerce between a buyer in one state and a seller in another. Pretty much all of my actions to purchase health care services involve intrastate commerce. Why? Because I go to see my doctor in his office, and even if my doctor's office is in another state, the act of commerce between me and my doctor always takes place at one location. And, while the prescription drugs I purchase may come from a factory outside of Colorado, I always buy my prescription drugs from the Walgreens around the corner, which once again is a act of commerce at one location. The straightforward analysis of Congress's constitutional power is that Congress does not have the power to regulate, prohibit, or compel any of these sorts of acts of commerce I engage in frequently.

I can think of one sort of act of commerce in all of this that might involve me in an act of interstate commerce. I might purchase health insurance from a business which has its offices in a state other than Colorado. If I did, then Congress would have the constitutional power to regulate this act of purchasing/selling insurance. But, the power to regulate this commerce is not the same thing as the power to compel the act of commerce (which would then not be an act between consenting adults). In this area of constitutional power, I suspect that Congress has actually been neglecting it's constitutional duties. I think many states regulate health insurance providers in a way that amounts to erecting a barrier to interstate commerce. State law in many cases does not allow an individual to purchase health care insurance coverage from an insurance business which is located in a different state. If Congress would use it's interstate commerce power to prohibit such state regulations, then the cost of health care insurance would be less than it is these days. But, noooo, Congress acts instead to use power in unconstitutional ways.

It is unfortunate, perhaps even characteristic of an unjust government, that the Supreme Court, over time, has come to understand the Constitution in ways that encourage all the conceptual gyrations of lawyers and professors because, I think, the gyrations are efforts to encourage us to conclude the Constitution means something other than what the words in the Constitution actually mean. The words written into the Constitution seem to me to describe a government significantly limited in scope, and not a government that is supposed to have the power to regulate any "economic activity." The words written into the Constitution were chosen from the conceptual perspective of individual liberty and it seems to me the constitutional power of the Court was meant to be exercised in defense of individual liberty. Conceptual gyrations and gymnastics seem to me to serve the purpose of removing limits from Congressional power and thus infringing on individual liberty.

A Repeal Amendment

RANDY BARNETT & WILLIAM HOWELL:

Any provision of law or regulation of the United States may be repealed by the several states, and such repeal shall be effective when the legislatures of two-thirds of the several states approve resolutions for this purpose that particularly describe the same provision or provisions of law or regulation to be repealed.

Why amend the Constitution in this way?

The Repeal Amendment would help restore the ability of states to protect the powers "reserved to the states" noted in the 10th Amendment. And it would provide citizens another political avenue to protect the "rights . . . retained by the people" to which the Ninth Amendment refers. In short, the amendment provides a new political check on the threat to American liberties posed by a runaway federal government. And checking abuses of power is what the written Constitution is all about.

I think this is probably a good idea. However, I'm not sure 2/3 of the state legislatures would ever act to repeal a federal law or regulation. Still, I think it would probably be good if a number of state legislatures made efforts today to push this amendment. It would probably be a good thing is there were more people who looked at the Constitution and compared and contrasted the government implied by the Constitution to the governments we have today.

Speaking Sense To Government

FIVE ECONOMISTS TALK SENSE, instead of nonsense with respect to government and the economy. Here are some of examples:

"Nobel Prize-winning economist Edward Prescott examined international labor market data and showed that changes in tax rates on labor are associated with changes in employment and hours worked. From the 1970s to the 1990s, the effective tax rate on work increased by an average of 28% in Germany, France and Italy. Over that same period, work hours fell by an average of 22% in those three countries. When higher taxes reduce the reward for work, you get less of it."

"Having "skin in the game," unsurprisingly, leads to superior outcomes. As Milton Friedman famously observed: "Nobody spends somebody else's money as wisely as they spend their own." When legislators put other people's money at risk—as when Fannie Mae and Freddie Mac bought risky mortgages—crisis and economic hardship inevitably result. When minimal co-payments and low deductibles are mandated in the insurance market, wasteful health-care spending balloons."

The 2010 health-care law undermined positive reforms underway since the late 1990s, including higher co-payments and health savings accounts. The law should be repealed before its regulations and price controls further damage availability and quality of care. It should be replaced with policies that target specific health market concerns: quality, affordability and access. Making out-of-pocket expenditures and individual purchases of health insurance tax deductible, enhancing health savings accounts, and improving access to medical information are keys to more consumer involvement. Allowing consumers to buy insurance across state lines will lower the cost of insurance.

You really should read the whole piece.

Congressional Corruption

HOT AIR:

"The scholarships were publicly intended as charity, a way to impact the community by giving underprivileged students an opportunity to get an education they otherwise may miss. Instead, the two Representatives turned it into an entitlement program for the children and grandchildren of the already-powerful. Regardless of whether the CBC had explicit language barring the awarding of funds to family members, anyone with a sense of ethics would have known that putting that scholarship money into the hands of their own family violated the ostensible spirit of the charity. It also shows Bishop and Johnson as greedy, self-absorbed malefactors whose only consideration of the power they hold is how it can personally benefit themselves and their family."

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.