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."