The economic recovery has been slow. Obama has engaged in unwise policies that do more to hurt recovery than to help it. However, he has faced an uphill battle from the beginning. Obama certainly didn’t cause the recession, but he hasn’t helped it either. George Bush didn’t cause the recession either, but he too made recovery harder.
War spending and the expansion of government under Bush has driven the U.S economy into massive deficits. One of the best tools to fight against recession is deficit spending, either by cutting taxes or by increasing government spending. The assumption here, however, is that the marginal returns of such spending will be increasing.
If we already have extreme deficits, that in itself becomes a problem and any positive returns that might be gained by adding to the deficit will diminish very quickly.
Thus, Obama is at an immediate disadvantage because he lacks an important tool for fighting recession. We started with a moderate deficit and Obama’s fiscal policy quickly turned it into a serious deficit. Now that deficit spending is no longer a viable option and is quickly becoming a political liability, Obama is faced with the unenviable decision of whether to play smart politics or smart economics. The decision he faces is whether or not to let the Bush tax cuts expire.
The easy political decision is to pander to the politically motivated, class-warfare mentality that Obama has perpetuated and end the tax cuts. This appeases those on the left who feel a sense of injustice that the “rich” don’t pay their “fair share” (we won’t tackle the validity of such a mindset here, but rather simply accept that that’s how they feel), and it also reduces the deficit (assuming of course that the added tax revenue won’t be spent – a dubious assumption).
Therefore, it must be awfully tempting for Obama to take the easy road and play politics and validate many people’s baseless outrage at the “rich” while at the same time claiming to be fiscally responsible by reducing the deficit.
The other path that Obama could take would be the politically unpopular but economically sound route of keeping the tax cuts. This would be a very hard political decision because it would mean that Obama would have to acknowledge that the tax cuts by Bush was a good policy (one of his few), something that is anathema to Obama. Also, it would mean Obama might sacrifice some of his political points from the left, even though he would be advancing the correct economic policy. I doubt Obama would think it a fair trade off to lose votes on the left but gain respect from the right.
A tax hike in a recession is unquestionably bad policy, uniformly decried by economists. It creates negative incentive for businesses and investors, precisely the types of people who play a key role in getting us out of recession. There is a time that raising taxes might be the best economic policy, as it might have been in the 1990s. We are certainly in a different place than we were in the ‘90s. Just because it might have been good then, doesn’t mean it’s good now.
Obama is certainly in a no-win situation. Deficit-inducing stimulus spending has been ineffective, in part because we started with already moderate deficits. Therefore, continued spending isn’t a viable solution. It must be very tempting for Obama to raise taxes, but it would be precisely the wrong prescription.
Obama must get us out of this recession now. That will entail keeping the Bush tax cuts and stopping runaway spending. There is no overnight solution so Obama must stop looking for one. If the government will rein itself in and keep taxes low and stop interfering in the market, businesses and banks just might venture out onto the playing field again. That is the first step that has to take place. Everything else is moot if investment and lending aren’t nurtured. The best way for government to do that is to reduce uncertainty by staying out of the way.
Once the economy can start growing again, there will be less need for increased government spending and the tax revenue will be up due to increased consumer spending. The deficit problem, ironically, will solve itself if we stop trying to solve it.
Obama could do the self-serving thing and let the Bush tax cuts expire, thus lending weight to irrational and self-defeating attitudes about class-warfare, and causing real harm to the economy and delaying recovery, or he could do the economically smart and necessary thing and reap the political benefits.
Unfortunately, Obama has proven to be short-sighted and more concerned with appeasing his political masters (unions) than he has been about stabilizing the economy, healing partisan rifts and moving the country forward. Therefore, unfortunately it seems that Obama’s Dilemma won’t be a dilemma to him at all.
Monday, August 30, 2010
Friday, August 27, 2010
Nigeria Sees the Light
Nigeria announced plans to privatize its power grid. This is great news for the country because currently blackouts are extremely common and more the rule rather than the exception. Private households and business get most of their power from running their own diesel generators which are noisy, dirty, smelly and expensive.
The privatizing of the power grid is a win on all fronts for Nigeria if it plays its cards right. It must be very accommodating and not let politics get in the way. Previous privatization attempts in the telecom industry have failed due to corruption and lack of necessary infrastructure that private firms need to operate successfully.
Foreign direct investment (FDI) is perhaps the greatest booster of economic growth for any developing nation. Nigeria is at a point where the marginal returns on investment could be exponential. There is a huge market for energy in Nigeria, so any company that is able to capitalize on that demand stands to see a huge return. This is good news because it means both the people of Nigeria and the power companies will win.
The people demand reliable energy and as such, will be willing to pay for it. Right now, since energy is heavily subsidized by the state, demand is way way up and people don’t value the power they use. People leave lights on all day simply because it’s so cheap. This puts added strain on an already feeble state-run grid.
By privatizing it, costs will likely go up, but this would be much more efficient as people would be forced to value the energy they use, thus conserving much more, which will keep pressure on prices to stay low.
Since Nigeria is ripe for investment, the competition to take over the power will be strong. There is already interest from companies from Cananda, Ireland and India. If the government commits to improving infrastructure, which could come easier with a reliable power grid and the increased revenue that results, the power companies could be even more successful.
It really only takes one industry to be successful with its investments in Nigeria before other industries seek to capitalize on the positive gains that come from reliable power and infrastructure. FDI begets FDI and growth has the potential to take off.
Business leaders in Nigeria say a lack of reliable power is one of the biggest obstacles they face, and if that problem can be solved, the business environment in Nigeria could explode.
The main lesson here is that state-run, command-and-control policies never work, and make much needed growth almost impossible in developing countries. Market forces are what are needed to create the proper incentives and send the signals that investors and customers need to operate effectively. We have seen this in China, as their growth can be directly attributed to market-based reforms, and if Nigeria proceeds smartly, we will likely see them rise to prominence and wealth in Africa, something that continent desperately needs.
The privatizing of the power grid is a win on all fronts for Nigeria if it plays its cards right. It must be very accommodating and not let politics get in the way. Previous privatization attempts in the telecom industry have failed due to corruption and lack of necessary infrastructure that private firms need to operate successfully.
Foreign direct investment (FDI) is perhaps the greatest booster of economic growth for any developing nation. Nigeria is at a point where the marginal returns on investment could be exponential. There is a huge market for energy in Nigeria, so any company that is able to capitalize on that demand stands to see a huge return. This is good news because it means both the people of Nigeria and the power companies will win.
The people demand reliable energy and as such, will be willing to pay for it. Right now, since energy is heavily subsidized by the state, demand is way way up and people don’t value the power they use. People leave lights on all day simply because it’s so cheap. This puts added strain on an already feeble state-run grid.
By privatizing it, costs will likely go up, but this would be much more efficient as people would be forced to value the energy they use, thus conserving much more, which will keep pressure on prices to stay low.
Since Nigeria is ripe for investment, the competition to take over the power will be strong. There is already interest from companies from Cananda, Ireland and India. If the government commits to improving infrastructure, which could come easier with a reliable power grid and the increased revenue that results, the power companies could be even more successful.
It really only takes one industry to be successful with its investments in Nigeria before other industries seek to capitalize on the positive gains that come from reliable power and infrastructure. FDI begets FDI and growth has the potential to take off.
Business leaders in Nigeria say a lack of reliable power is one of the biggest obstacles they face, and if that problem can be solved, the business environment in Nigeria could explode.
The main lesson here is that state-run, command-and-control policies never work, and make much needed growth almost impossible in developing countries. Market forces are what are needed to create the proper incentives and send the signals that investors and customers need to operate effectively. We have seen this in China, as their growth can be directly attributed to market-based reforms, and if Nigeria proceeds smartly, we will likely see them rise to prominence and wealth in Africa, something that continent desperately needs.
Tuesday, August 24, 2010
Something's Fishy About Regulating the Ocean
Icelandic Fishing Dispute Sparks Trade Wars
Iceland, Britain and the EU are all parties to a fishing quota agreement on how many fish each country can harvest from the ocean. Iceland and the Faroe Islands unilaterally raised their quota which seriously angered the other parties. There is talk that the mackerel population will be wiped out, the fishing industry will suffer and people will lose their jobs. Countries like Norway are closing their ports and refusing to trade. There is talk of a mackerel war, similar to the cod wars of the 1950s and 1970s.
This story is a gold mine for economic lessons. There are things we can learn about the negative incentives created by common property, the escalatory nature and negative economic effects of protectionism, why cartels are never very stable, the unsustainability of using regulations and quotas in place of a market, and how all of these problems can be solved or avoided if property rights are assigned.
Let’s look at each of the issues in more detail.
The root of this whole mess is because the ocean is an economic public good, that is, it is non-rival and non-excludable. In other words, just because I am using the ocean, it doesn’t preclude you from using the ocean. Also, anybody and everybody that wants to use the ocean can – nobody is excluded. These two properties create very bad incentives. Since the fish in the ocean are a finite resource and nobody owns them, the incentive is to catch as many as you can before the other guy catches as many as he can. The result is a mad rush to over-fish the oceans. We are seeing exactly this. Such a system is clearly not sustainable and the fears that the mackerel population might be wiped out are justified.
In response, Norway is closing its ports to Icelandic ships, thus voluntarily giving up the clear benefits of Comparative Advantage, and the EU and Scotland are considering similar action. This doesn’t make any sense. Protectionism is never a good idea and retaliation for protectionism is equally as folly. It’s unfortunate that politics dominate a country’s actions, rather than sound economic policy leading the way.
From Struan Stevenson, the senior vice-president on the European parliament's fisheries committee,
There is no question that blocking trade would hurt Iceland and the Faroe Islands, but it would also hurt the EU. I have never understood the policy of actually hurting your own country’s economic well being simply to make a political point.
Quite frankly none of this comes as a surprise, as it was set up to fail from the beginning. Rationing, quotas and resource boards are about the most inefficient way allocate resources.
From the article,
The scientific recommendation set by the International Council for Exploration of the Sea? How much more bureaucratic can you get? Command-and-control never works. No central planning commission could ever possibly have enough information to know what supply and demand of mackerel looks like, the appropriate number for each country to harvest, the best way to achieve these quotas or how sustainable such a system can be. Only the market, through the signals sent by prices and dispersed information could possibly allocate everything efficiently and sustainably. Unfortunately, a market only works when there is private property.
Since the ocean isn’t private property, it seems we are left with inadequate solutions like planning and control boards. So why then, and how, does this commission fail to achieve a sustainable outcome? Why did Iceland break from the quota agreement?
Well, the agreement between nations on how much fish to catch is basically a cartel. Each nation assures every other nation that it will set a limit on fish and stick to it. The only problem is that the incentive to “cheat” on such a system is strong. By nations agreeing to limit how much they catch, they are basically agreeing to limit their profit by leaving valuable fish in the ocean. As such, it is very tempting for other nations to seize on the vulnerability of their counterparts and “snatch up” the extra fish, thus increasing their own profits. We have seen Iceland and the Faroe Islands do exactly this.
What will be the response by other nations? Well, in addition to the trade wars, don’t be surprised if other nations increase their quota as well. Now that Iceland and the Faroe Islands have shown that they’re willing to collect extra valuable resources, other nations will race to collect as many as they can before Iceland gets them all. The cartel is broken so all bets are off.
Clearly this is a losing situation all the way around. The oceans are being over-fished and trade wars are resulting. Nobody wins. The frustrating thing is that the solution is so simple – property rights! If property rights are established, fishing no longer becomes a race to the bottom because it would be in each individual’s (or nation’s) best interest to ensure sustainability. Right now, the incentive is to get as much as possible before everybody else does and it’s all gone.
If property rights were created, people would no longer be free to fish to exhaustion. Only the property owner would be able to fish to exhaustion, but he would never do that because he would have customers that would be willing to pay to get his fish. If he runs out, he loses his customers. Through sustainable practices such as these, we can ensure that as long as there is demand for mackerel (or any resource), there will a supply ready and waiting.
And this solves every problem mentioned above. Obviously the incentive to overfish is eliminated, therefore there will be no quotas, regulations or control panels, therefore nobody will have the incentive to cheat, therefore nobody will enact retaliatory protectionist policies, therefore there will be no trade war.
Okay, well that all sounds good, but how in the world do we assign property rights to the ocean? Are we going to fence off sections of the ocean? Even if that were possible it would surely be a case of the solution being worse than the problem. But there are several viable solutions including a form of electronic fencing, a permit system similar to cap-and-trade, Individual Transferrable Quotas (ITQs), a deposit-refund system similar to that of soda bottles, and even assigning property rights to the fish themselves.
The body of literature on this idea of assigning property rights to the ocean is vast, and the ideas for how to do so are too numerous to go into any detail here, so I offer below a brief list of just some of the great ideas on this issue, and to give an idea on the robust consensus among economists.
The Privatization of the Ocean
Let’s Homestead the Oceans
Why Oceans and Waterways Should Be Privatized
Want To Prevent Piracy? Privatize the Ocean
Law, Property Rights, and Air Pollution
Healing Our World: The Other Piece of the Puzzle
For a New Liberty
Water Privatization
Property – The Great Problem Solver
Iceland, Britain and the EU are all parties to a fishing quota agreement on how many fish each country can harvest from the ocean. Iceland and the Faroe Islands unilaterally raised their quota which seriously angered the other parties. There is talk that the mackerel population will be wiped out, the fishing industry will suffer and people will lose their jobs. Countries like Norway are closing their ports and refusing to trade. There is talk of a mackerel war, similar to the cod wars of the 1950s and 1970s.
This story is a gold mine for economic lessons. There are things we can learn about the negative incentives created by common property, the escalatory nature and negative economic effects of protectionism, why cartels are never very stable, the unsustainability of using regulations and quotas in place of a market, and how all of these problems can be solved or avoided if property rights are assigned.
Let’s look at each of the issues in more detail.
The root of this whole mess is because the ocean is an economic public good, that is, it is non-rival and non-excludable. In other words, just because I am using the ocean, it doesn’t preclude you from using the ocean. Also, anybody and everybody that wants to use the ocean can – nobody is excluded. These two properties create very bad incentives. Since the fish in the ocean are a finite resource and nobody owns them, the incentive is to catch as many as you can before the other guy catches as many as he can. The result is a mad rush to over-fish the oceans. We are seeing exactly this. Such a system is clearly not sustainable and the fears that the mackerel population might be wiped out are justified.
In response, Norway is closing its ports to Icelandic ships, thus voluntarily giving up the clear benefits of Comparative Advantage, and the EU and Scotland are considering similar action. This doesn’t make any sense. Protectionism is never a good idea and retaliation for protectionism is equally as folly. It’s unfortunate that politics dominate a country’s actions, rather than sound economic policy leading the way.
From Struan Stevenson, the senior vice-president on the European parliament's fisheries committee,
"That is what I am actually suggesting now. We should use that as threat. We should follow the example of the fishermen in Peterhead. We should threaten to close all the EU ports to Faroese and Icelandic vessels, block all imports from these countries, and show them that we mean business."
There is no question that blocking trade would hurt Iceland and the Faroe Islands, but it would also hurt the EU. I have never understood the policy of actually hurting your own country’s economic well being simply to make a political point.
Quite frankly none of this comes as a surprise, as it was set up to fail from the beginning. Rationing, quotas and resource boards are about the most inefficient way allocate resources.
From the article,
“If maintained, said WWF Scotland, the combined 2010 mackerel quota would result in the fish being exploited 35% above the scientific recommendation set by the International Council for the Exploration of the Sea, and spell a "death sentence" for precious fish stock.”
The scientific recommendation set by the International Council for Exploration of the Sea? How much more bureaucratic can you get? Command-and-control never works. No central planning commission could ever possibly have enough information to know what supply and demand of mackerel looks like, the appropriate number for each country to harvest, the best way to achieve these quotas or how sustainable such a system can be. Only the market, through the signals sent by prices and dispersed information could possibly allocate everything efficiently and sustainably. Unfortunately, a market only works when there is private property.
Since the ocean isn’t private property, it seems we are left with inadequate solutions like planning and control boards. So why then, and how, does this commission fail to achieve a sustainable outcome? Why did Iceland break from the quota agreement?
Well, the agreement between nations on how much fish to catch is basically a cartel. Each nation assures every other nation that it will set a limit on fish and stick to it. The only problem is that the incentive to “cheat” on such a system is strong. By nations agreeing to limit how much they catch, they are basically agreeing to limit their profit by leaving valuable fish in the ocean. As such, it is very tempting for other nations to seize on the vulnerability of their counterparts and “snatch up” the extra fish, thus increasing their own profits. We have seen Iceland and the Faroe Islands do exactly this.
What will be the response by other nations? Well, in addition to the trade wars, don’t be surprised if other nations increase their quota as well. Now that Iceland and the Faroe Islands have shown that they’re willing to collect extra valuable resources, other nations will race to collect as many as they can before Iceland gets them all. The cartel is broken so all bets are off.
Clearly this is a losing situation all the way around. The oceans are being over-fished and trade wars are resulting. Nobody wins. The frustrating thing is that the solution is so simple – property rights! If property rights are established, fishing no longer becomes a race to the bottom because it would be in each individual’s (or nation’s) best interest to ensure sustainability. Right now, the incentive is to get as much as possible before everybody else does and it’s all gone.
If property rights were created, people would no longer be free to fish to exhaustion. Only the property owner would be able to fish to exhaustion, but he would never do that because he would have customers that would be willing to pay to get his fish. If he runs out, he loses his customers. Through sustainable practices such as these, we can ensure that as long as there is demand for mackerel (or any resource), there will a supply ready and waiting.
And this solves every problem mentioned above. Obviously the incentive to overfish is eliminated, therefore there will be no quotas, regulations or control panels, therefore nobody will have the incentive to cheat, therefore nobody will enact retaliatory protectionist policies, therefore there will be no trade war.
Okay, well that all sounds good, but how in the world do we assign property rights to the ocean? Are we going to fence off sections of the ocean? Even if that were possible it would surely be a case of the solution being worse than the problem. But there are several viable solutions including a form of electronic fencing, a permit system similar to cap-and-trade, Individual Transferrable Quotas (ITQs), a deposit-refund system similar to that of soda bottles, and even assigning property rights to the fish themselves.
The body of literature on this idea of assigning property rights to the ocean is vast, and the ideas for how to do so are too numerous to go into any detail here, so I offer below a brief list of just some of the great ideas on this issue, and to give an idea on the robust consensus among economists.
The Privatization of the Ocean
Let’s Homestead the Oceans
Why Oceans and Waterways Should Be Privatized
Want To Prevent Piracy? Privatize the Ocean
Law, Property Rights, and Air Pollution
Healing Our World: The Other Piece of the Puzzle
For a New Liberty
Water Privatization
Property – The Great Problem Solver
Monday, August 23, 2010
For Whom the Road Tolls
9 Day, 100 Km long traffic jam in China
While freeways don’t technically meet the economic definition of a public good, they often suffer from many of the same symptoms. What happens when something is free to use by everybody that wants to use it? Congestion.
This is extremely evident in China as they are experiencing a traffic jam that has lasted for nine days and extends over 100 kilometers. What is the best way to deal with congestion? The typical response is to expand the size and scope of roadways by adding routes and lanes. Does this work? If it does, why do will still suffer from congestion? If we expand our roads it might temporarily ease frustration, but we’ve all seen our highways quickly fill up again. Now what do we do? Expand again? Surely we can’t expand forever right? There must be a better way.
Why doesn’t road expansion fix the problem? Congestion can be looked at as simple supply and demand. The roads are the supply and our wish to get from point A to point B is the demand. If we simply widen our roads, we are just increasing supply, while doing nothing to alleviate demand. In fact, by supposedly making travel easier by relieving congestion, road expansion basically reduces the marginal cost of a car trip, thus making it appear “cheaper”, thereby increasing demand for driving.
As you can see, expanding the supply of roadways leads to an equal (or more) increase in demand at the same time. How many resources do we waste by paying for construction and maintenance of an ever-expanding system of roads while gaining nothing in return? And this is to say nothing of the enormous opportunity cost of being stuck in traffic for hours on end (or days in the case of China!).
Surely there must be a better way. Why are roads so congested in the first place? Well, quite simply because they are free to use. Technically speaking, we pay for them through taxes, driver’s license requirements and fees, and gasoline and maintenance costs for our cars, so driving is not “free”, but people think at the margins. All that matters is what does the NEXT TRIP cost? Beyond the small cost of gasoline, a car trip is virtually free.
And since everybody that wants to can drive on the road at anytime, people who may not really value driving do so anyway simply because it’s free. So what’s an economist’s solution to this problem? Tolls. A lot of people don’t find the idea of monetizing such things as driving very appealing, but the fact remains that tolls are the most efficient and effective way of allocating scarce resources like road space and people’s time.
Tolls, right off the bat, make substitutes like public transportation, walking or biking relatively cheaper, thus reducing demand for driving. Also, tolls ensure that only those who truly value driving continue to do so; those who are only driving simply because it’s free are immediately weeded out.
Also, tolls can help the flow of traffic not just the quantity. By charging a higher toll during peak traffic hours or when coming into downtown for example, we can more effectively manage traffic congestion. Simply by making some roads more expensive than others to drive on, we can change the incentives that people face and thus change their behavior.
Finally, tolls are excellent because they put revenue back into the roads themselves. That is, tolls pay for the maintenance and construction necessary for their upkeep, thus reducing the burden on taxpayers or ensuring that tax money can be diverted into other areas – for instance public transportation.
The incentive as it exists now is to stretch tax dollars as far as possible so roads often aren’t maintained adequately and needed repairs and maintenance are put off until they become critical. If it costs the same to resurface a road If there are 10 potholes or 1,000 potholes, it only makes sense to wait until there are 1,000 potholes.
Also, there is no market system to decide which roads get priority for maintenance. A city might simply have a list and repair the roads in order, regardless of actual need or demand of those roads. A toll system sends market signals so we can immediately and easily know which roads are being used actively and which roads are in need of repair and in which order. Since drivers are now paying customers, it’s just bad business to have poor quality roads so potholes and other damage will be fixed quickly and effectively.
Toll roads are a win for everybody. They encourage the use of alternate transportation, they reduce congestion, they raise revenue and they ensure high quality roadways. And remember, the important aspect of toll roads are the market signals and incentives created by them. Toll roads do not have to be privatized, for-profit enterprises. They can still be run by the city with all revenues going back into the road system itself, while still reaping all of the benefits.
If you think this isn’t important, or is the wrong tactic, just ask a person caught in that Chinese traffic jam if they would have minded paying a small toll if it meant they wouldn’t be stuck in traffic for nine days.
While freeways don’t technically meet the economic definition of a public good, they often suffer from many of the same symptoms. What happens when something is free to use by everybody that wants to use it? Congestion.
This is extremely evident in China as they are experiencing a traffic jam that has lasted for nine days and extends over 100 kilometers. What is the best way to deal with congestion? The typical response is to expand the size and scope of roadways by adding routes and lanes. Does this work? If it does, why do will still suffer from congestion? If we expand our roads it might temporarily ease frustration, but we’ve all seen our highways quickly fill up again. Now what do we do? Expand again? Surely we can’t expand forever right? There must be a better way.
Why doesn’t road expansion fix the problem? Congestion can be looked at as simple supply and demand. The roads are the supply and our wish to get from point A to point B is the demand. If we simply widen our roads, we are just increasing supply, while doing nothing to alleviate demand. In fact, by supposedly making travel easier by relieving congestion, road expansion basically reduces the marginal cost of a car trip, thus making it appear “cheaper”, thereby increasing demand for driving.
As you can see, expanding the supply of roadways leads to an equal (or more) increase in demand at the same time. How many resources do we waste by paying for construction and maintenance of an ever-expanding system of roads while gaining nothing in return? And this is to say nothing of the enormous opportunity cost of being stuck in traffic for hours on end (or days in the case of China!).
Surely there must be a better way. Why are roads so congested in the first place? Well, quite simply because they are free to use. Technically speaking, we pay for them through taxes, driver’s license requirements and fees, and gasoline and maintenance costs for our cars, so driving is not “free”, but people think at the margins. All that matters is what does the NEXT TRIP cost? Beyond the small cost of gasoline, a car trip is virtually free.
And since everybody that wants to can drive on the road at anytime, people who may not really value driving do so anyway simply because it’s free. So what’s an economist’s solution to this problem? Tolls. A lot of people don’t find the idea of monetizing such things as driving very appealing, but the fact remains that tolls are the most efficient and effective way of allocating scarce resources like road space and people’s time.
Tolls, right off the bat, make substitutes like public transportation, walking or biking relatively cheaper, thus reducing demand for driving. Also, tolls ensure that only those who truly value driving continue to do so; those who are only driving simply because it’s free are immediately weeded out.
Also, tolls can help the flow of traffic not just the quantity. By charging a higher toll during peak traffic hours or when coming into downtown for example, we can more effectively manage traffic congestion. Simply by making some roads more expensive than others to drive on, we can change the incentives that people face and thus change their behavior.
Finally, tolls are excellent because they put revenue back into the roads themselves. That is, tolls pay for the maintenance and construction necessary for their upkeep, thus reducing the burden on taxpayers or ensuring that tax money can be diverted into other areas – for instance public transportation.
The incentive as it exists now is to stretch tax dollars as far as possible so roads often aren’t maintained adequately and needed repairs and maintenance are put off until they become critical. If it costs the same to resurface a road If there are 10 potholes or 1,000 potholes, it only makes sense to wait until there are 1,000 potholes.
Also, there is no market system to decide which roads get priority for maintenance. A city might simply have a list and repair the roads in order, regardless of actual need or demand of those roads. A toll system sends market signals so we can immediately and easily know which roads are being used actively and which roads are in need of repair and in which order. Since drivers are now paying customers, it’s just bad business to have poor quality roads so potholes and other damage will be fixed quickly and effectively.
Toll roads are a win for everybody. They encourage the use of alternate transportation, they reduce congestion, they raise revenue and they ensure high quality roadways. And remember, the important aspect of toll roads are the market signals and incentives created by them. Toll roads do not have to be privatized, for-profit enterprises. They can still be run by the city with all revenues going back into the road system itself, while still reaping all of the benefits.
If you think this isn’t important, or is the wrong tactic, just ask a person caught in that Chinese traffic jam if they would have minded paying a small toll if it meant they wouldn’t be stuck in traffic for nine days.
Thursday, August 19, 2010
Economic Pie War: Rich vs. Poor
Profit is not a bad word. The rich are not evil. Government’s job is not to take from the rich and give to the poor. Similarly, the rich did not get rich by taking from the poor. The rich are rich because they provide a valuable service that somebody is willing to pay for. Yes, people give their money to the rich. Too often, this is the only side of the equation that gets reported by liberal politicians and the media. The other side is that people give their money to the rich in return for a service. It is a mutually beneficial transaction that makes both parties better off. Nobody is stealing from anybody else. The rich are not becoming rich at the expense of the poor. Rather, both parties are becoming richer.
If the government tries to redistribute wealth, the moral hazard is twofold: First, the poor come to expect to be given things, thus removing their incentive to work hard and create wealth. Second, the rich become disinclined to produce extra because the money they make from their extra work will just be taken from them anyway. This removes their incentive to work hard and create wealth.
Nobody is made better off if we villianize the rich and take from them to give to the poor. If you remove the incentive to produce, wealth will not grow. Just because money was taken from a rich person and given to a poor person does not make the poor person better off.
In economics, we refer to the economy as a pie. There are two problems economics tries to solve: How to maximize the size of the pie, and to understand how that pie gets divided up. If we focus on wealth redistribution, we are solely focusing on the second aspect: how the pie gets divided. We can cut the pie so one person gets 90% and the other person gets 10%, or we can divide the pie 50/50. One person wins, but one person loses. No matter how the pie is divided, you must take from one person to give to another and the pie never gets any larger.
In fact, if we continually take from the rich – the producers - as mentioned before we remove their incentive to produce in the first place. We know that the poor won’t step up and produce because either they don’t know how or they have been “conditioned” to expect things to be given to them. Thus, by focusing only on how to divide the pie, not only does it not get bigger, it very well could actually shrink because nobody wants to produce.
If instead we focus on how to make the pie larger, even if the original distribution is 90/10, the real number making up that 10% is greater. Economics is no longer a zero-sum game but becomes a nonzero-sum game. We can enrich the poor not by taking from the rich, but by encouraging the rich to produce and sell and hire, thus creating and providing valuable services and products that people are willing to pay for.
This can be accomplished by keeping taxes low, keeping the bureaucratic red tape to a minimum and making sure entrepreneurship is encouraged and rewarded.
Let me illustrate it another way. In economics, we often play a game to illustrate the lunacy of class jealousy. Imagine you were given $100. The $100 is yours. The only catch is that you must split the $100 with another person. Since the money is yours, you can split it in any way you want (50/50, 60/40, 90/10 etc.), but if the other person doesn’t agree to the split, you both lose everything.
How do you split it? Do you split it 50/50 because that’s “fair”? Do you even care about fairness and only split it 50/50 because you think the other person cares about fairness, and might reject the deal if he doesn’t get half? Remember, the money is yours and the other person is entitled to nothing – anything they get is nothing short of a gift.
How would you split it? Or better yet, pretend you’re the other person. What deal would you reject? Would you reject it if it’s less than 50/50? Why? What if it were 99/1, would you reject it then? Why?
Unfortunately it seems a lot of people would reject the offer if they were only offered $1. Does this make any sense? Why would you willingly make yourself worse off (if you accept, you’re better off by $1) and deprive the other person of their gains too? Do we really resent the person that has $99 so much just because they have more, even though we were never entitled to anything and we’ve improved our own situation? Do we resent that person that has gained more than us so much that we’re willing to forgo our own gains and take away their gains? Are we really willing to turn a win-win situation into a lose-lose simply because of some false sense of class warfare? How does that make sense?
We must rid ourselves of this idea that the rich steal from us and they don’t pay their “fair share”. Such simplistic ideology might make us feel good, but who is really happy wallowing in self-misery and blaming others while preventing mutually beneficial positive gains? Can a class-warfare mentality really make us feel that good? Impossible!
Once we stop and analyze these beliefs for what they really are, it quickly becomes apparent that they are illogical, irrational, self-defeating and destructive. How ironic that these same people, who by their attitudes create so much damage, blame the rich for destroying the economy. Unfortunately a lot of people would rather sit around and blame others rather than take responsibility and truly examine issues for what they are.
Remember, we all win when we strive to increase the size of the pie rather than quibbling about how it’s divided.
If the government tries to redistribute wealth, the moral hazard is twofold: First, the poor come to expect to be given things, thus removing their incentive to work hard and create wealth. Second, the rich become disinclined to produce extra because the money they make from their extra work will just be taken from them anyway. This removes their incentive to work hard and create wealth.
Nobody is made better off if we villianize the rich and take from them to give to the poor. If you remove the incentive to produce, wealth will not grow. Just because money was taken from a rich person and given to a poor person does not make the poor person better off.
In economics, we refer to the economy as a pie. There are two problems economics tries to solve: How to maximize the size of the pie, and to understand how that pie gets divided up. If we focus on wealth redistribution, we are solely focusing on the second aspect: how the pie gets divided. We can cut the pie so one person gets 90% and the other person gets 10%, or we can divide the pie 50/50. One person wins, but one person loses. No matter how the pie is divided, you must take from one person to give to another and the pie never gets any larger.
In fact, if we continually take from the rich – the producers - as mentioned before we remove their incentive to produce in the first place. We know that the poor won’t step up and produce because either they don’t know how or they have been “conditioned” to expect things to be given to them. Thus, by focusing only on how to divide the pie, not only does it not get bigger, it very well could actually shrink because nobody wants to produce.
If instead we focus on how to make the pie larger, even if the original distribution is 90/10, the real number making up that 10% is greater. Economics is no longer a zero-sum game but becomes a nonzero-sum game. We can enrich the poor not by taking from the rich, but by encouraging the rich to produce and sell and hire, thus creating and providing valuable services and products that people are willing to pay for.
This can be accomplished by keeping taxes low, keeping the bureaucratic red tape to a minimum and making sure entrepreneurship is encouraged and rewarded.
Let me illustrate it another way. In economics, we often play a game to illustrate the lunacy of class jealousy. Imagine you were given $100. The $100 is yours. The only catch is that you must split the $100 with another person. Since the money is yours, you can split it in any way you want (50/50, 60/40, 90/10 etc.), but if the other person doesn’t agree to the split, you both lose everything.
How do you split it? Do you split it 50/50 because that’s “fair”? Do you even care about fairness and only split it 50/50 because you think the other person cares about fairness, and might reject the deal if he doesn’t get half? Remember, the money is yours and the other person is entitled to nothing – anything they get is nothing short of a gift.
How would you split it? Or better yet, pretend you’re the other person. What deal would you reject? Would you reject it if it’s less than 50/50? Why? What if it were 99/1, would you reject it then? Why?
Unfortunately it seems a lot of people would reject the offer if they were only offered $1. Does this make any sense? Why would you willingly make yourself worse off (if you accept, you’re better off by $1) and deprive the other person of their gains too? Do we really resent the person that has $99 so much just because they have more, even though we were never entitled to anything and we’ve improved our own situation? Do we resent that person that has gained more than us so much that we’re willing to forgo our own gains and take away their gains? Are we really willing to turn a win-win situation into a lose-lose simply because of some false sense of class warfare? How does that make sense?
We must rid ourselves of this idea that the rich steal from us and they don’t pay their “fair share”. Such simplistic ideology might make us feel good, but who is really happy wallowing in self-misery and blaming others while preventing mutually beneficial positive gains? Can a class-warfare mentality really make us feel that good? Impossible!
Once we stop and analyze these beliefs for what they really are, it quickly becomes apparent that they are illogical, irrational, self-defeating and destructive. How ironic that these same people, who by their attitudes create so much damage, blame the rich for destroying the economy. Unfortunately a lot of people would rather sit around and blame others rather than take responsibility and truly examine issues for what they are.
Remember, we all win when we strive to increase the size of the pie rather than quibbling about how it’s divided.
Wednesday, August 18, 2010
There's Whiskey in the Car-o
New Biofuel Developed from Whiskey Byproduct
This is a great breakthrough and could go a long way towards making alternate energy more viable.
Too often politicians, in their zeal to “do something”, encourage or promote ideas that aren’t economically sound or have very serious unintended consequences. Ethanol fuel is a neat alternative to oil, but are the costs worth it? The market price for a gallon of ethanol is about the same as a gallon of fossil fuel, but ethanol requires massive amounts of nitrogen and incredibly vast swaths of land to grow the corn.
Opportunity cost tells us that the more corn that goes for fuel, the less goes towards food, driving up prices around the world. This is especially damaging because corn is often a cheap staple for developing countries. If the price rises too high, many people will not be able to afford to eat at all.
The obvious political solution to this is to simply cap prices, but that comes with its own set of economic troubles. For instance, if prices were simply capped, some corn producers might not find it in their interest to continue producing and simply leave the market. Reducing supply when corn is already scarce would be a disastrous unintended consequence. In economics, unfortunately you can’t have your cake and eat it too. Resources are scarce and opportunity costs are everywhere. In order to gain one thing, you must give up something else.
I admire the effort to free ourselves from fossil fuel, but it must done in an economically smart way. Spain, who literally bankrupted its economy, provides a great example of the dangers of trying to sell out to alternate energy.
That’s why this new breakthrough is so encouraging. By being able to turn the byproducts of whisky distillation into fuel, we have a jump on the game. To use ethanol or solar or wind energy, massive amounts of capital and land must be consumed. The entire process must be built up from square one which is a huge reason alternate energy is not yet cost-effective.
With this new energy, called biobutinol, the capital for producing it already exists in massive quantities. Since it’s an unwanted byproduct of an already commercially viable industry, there is no need to invest in capital or use scarce resources in its creation.
According to the researchers, the new fuel provides more output power than does gas and could be easily used in existing cars without expensive retrofitting as is required for ethanol. Since it’s basically already commercially viable and can be used in existing cars, there is no need to completely overhaul our network.
Electric cars and biofuel cars are not catching on in large part because the entire infrastructure would need to be completely replaced if these energies are to become viable. The expense of such a drastic change is not yet justified.
This new biobutinol is encouraging indeed. It takes the waste from one industry and turns it into a cost-effective, valuable product in another industry. Talk about turning lead into gold. Of course this isn’t a total solution and it’s still a new and largely untested product so there is much yet to be seen, but it’s at least an encouraging tidbit and a step in the right direction.
Alternate energy is a good thing – a great thing – but it’s not a magical solution to our economic problems. We should encourage research in this area and celebrate its successes, but we should do so cautiously with our feet grounded. Let’s not sell out our entire economy to reach some utopist goal if we have to give up much more than we gain.
This is a great breakthrough and could go a long way towards making alternate energy more viable.
Too often politicians, in their zeal to “do something”, encourage or promote ideas that aren’t economically sound or have very serious unintended consequences. Ethanol fuel is a neat alternative to oil, but are the costs worth it? The market price for a gallon of ethanol is about the same as a gallon of fossil fuel, but ethanol requires massive amounts of nitrogen and incredibly vast swaths of land to grow the corn.
Opportunity cost tells us that the more corn that goes for fuel, the less goes towards food, driving up prices around the world. This is especially damaging because corn is often a cheap staple for developing countries. If the price rises too high, many people will not be able to afford to eat at all.
The obvious political solution to this is to simply cap prices, but that comes with its own set of economic troubles. For instance, if prices were simply capped, some corn producers might not find it in their interest to continue producing and simply leave the market. Reducing supply when corn is already scarce would be a disastrous unintended consequence. In economics, unfortunately you can’t have your cake and eat it too. Resources are scarce and opportunity costs are everywhere. In order to gain one thing, you must give up something else.
I admire the effort to free ourselves from fossil fuel, but it must done in an economically smart way. Spain, who literally bankrupted its economy, provides a great example of the dangers of trying to sell out to alternate energy.
That’s why this new breakthrough is so encouraging. By being able to turn the byproducts of whisky distillation into fuel, we have a jump on the game. To use ethanol or solar or wind energy, massive amounts of capital and land must be consumed. The entire process must be built up from square one which is a huge reason alternate energy is not yet cost-effective.
With this new energy, called biobutinol, the capital for producing it already exists in massive quantities. Since it’s an unwanted byproduct of an already commercially viable industry, there is no need to invest in capital or use scarce resources in its creation.
According to the researchers, the new fuel provides more output power than does gas and could be easily used in existing cars without expensive retrofitting as is required for ethanol. Since it’s basically already commercially viable and can be used in existing cars, there is no need to completely overhaul our network.
Electric cars and biofuel cars are not catching on in large part because the entire infrastructure would need to be completely replaced if these energies are to become viable. The expense of such a drastic change is not yet justified.
This new biobutinol is encouraging indeed. It takes the waste from one industry and turns it into a cost-effective, valuable product in another industry. Talk about turning lead into gold. Of course this isn’t a total solution and it’s still a new and largely untested product so there is much yet to be seen, but it’s at least an encouraging tidbit and a step in the right direction.
Alternate energy is a good thing – a great thing – but it’s not a magical solution to our economic problems. We should encourage research in this area and celebrate its successes, but we should do so cautiously with our feet grounded. Let’s not sell out our entire economy to reach some utopist goal if we have to give up much more than we gain.
Tuesday, August 17, 2010
The Worst "Best" President Ever
I ran across this short, entertaining piece in the Washington Post and it made me chuckle. Those on the right are starting to say more and more that Obama is the worst president ever. Of course those on the left immediately reply back that George W. Bush has a vice grip on the title. The author of this piece seems to think it might be William Henry Harrison, who had the dubious honor of only being in office for one month before he died.
While Harrison was certainly insignificant, I wouldn’t call him the worst. Actually, he’s probably one of the only presidents that hasn’t messed anything up, therefore he might be the BEST president we’ve ever had! Unfortunately, politicians are often judged by how much they do, and it doesn’t really matter if they do it well or not.
Obama has certainly done a lot, and that’s been enough to fool many people into thinking he’s a good president. G.W. Bush certainly did a lot, but a war is easier to denounce than poor economic policy, so it’s easier for some people to say Bush was a worse president than Obama. While I think both Obama and G.W. Bush are certainly worthy of mention in the debate, I think the Worst-President-Ever Award must go to Franklin Delano Roosevelt.
FDR, through a series of poor economic policies, turned what would have been a moderate recession into a decade-long depression. For instance, according to a 1937 New York Times Article, “The cause [of the depression] is attributed by some to taxation and federal curbs on industry; by others, to the demoralization of production caused by strikes”.
FDR can be directly blamed for all of those causes. FDR continuously experimented with governmental power and intervention into the market; the effect of which was to paralyze business and dry up investment and entrepreneurship. In a desperate and foolish response to cautious business practices tacitly encouraged by FDR’s policies, he passed the National Labor Relations Act with greatly strengthened unions and put the power of government behind them. This caused businesses to hire even fewer workers, aggravating an already disastrous situation.
But perhaps his most lasting failure is the fact that he almost single-handedly turned America into a welfare state. By passing the Social Security Act in 1935, he put America on an un-reversible course towards dependency on government. Not only is Social Security itself insolvent, but it paved the way for Medicare and Medicaid, two of the most disastrous government programs ever (Medicare and Medicaid were introduced to America in 1965 in an amendment to the Social Security Act).
Medicare and Medicaid are directly to blame for the healthcare debacle currently being experienced in this country. Rising healthcare costs have pushed Obama to try to “reform” the system, but in fact he’s only made it worse. But perhaps healthcare wouldn’t have been so broken in the first place if it weren’t for Medicaid and Medicare. This is just one clear example of how FDR’s failed policies are still hurting us today, over 65 years after his death.
So while my biggest gripes with FDR are his failed social welfare policies, I would be remiss if I failed to mention the very tragic and oft-overlooked aspect of FDR’s presidency - his decision to inter Japanese-American citizens during WWII and his refusal to allow Jews to emigrate from Europe; basically sentencing thousands to death.
Furthermore, FDR blatantly disregarded the long-held, unspoken tradition of presidents serving no more than two terms in office. When George Washington was first elected, observers in Europe became resigned to the fact that the new United States would become a monarchy. Nobody expected Washington, once he attained power, to give it up.
Washington set perhaps the most respected and important precedent of our nation by willingly and voluntarily stepping down after two terms and ensuring a peaceful transition of power. That had basically never been done before. Washington set America on the right path and made is an excellent example to the world of what peaceful transitions of power should look like.
Since Washington’s time, no president ever wanted to tarnish or undermine Washington’s legacy, or erode the precedent by serving more than two terms. It was a hallowed tradition. Unfortunately, FDR didn’t care much about that and only sought to consolidate and accumulate power. Who knows what would have happened if he hadn’t died in office?
The country was so disturbed by FDR’s lust for power that Congress immediately passed the 22nd Amendment to the Constitution, ensuring no president could serve more than two terms. It was ratified by the states in 1951. To amend the Constitution requires broad and deep support from across every political spectrum across the entire United States. It’s not an easy thing to do. The fact that such an Amendment was written and passed so easily is a testament to the bad taste FDR left in people’s mouths.
A by-product of FDR’s illegitimately long tenure in office was his influence on the Supreme Court. He first tried to unconstitutionally “pack” the Supreme Court with 15 Justices. FDR sought this measure because he wanted to control the Court because he was frustrated that it rightly declared unconstitutional many of his New Deal programs.
Even though his quest to pack the court failed, due to his long term in office FDR was successful in appointing eight Justices, second most of any president, behind George Washington. At one point in the composition of the court, 7 of the 9 Justices were appointed by FDR and the remaining two were appointed by FDR’s Vice President-turned-President Truman.
I’d say FDR was successful in his plan to transform the court and thus transform the country. FDR changed the character of America. Most students, from grade school through college are only given the rosy picture of FDR as America’s savior during its greatest crises. Unfortunately FDR disregarded individual liberty and sound economic policy – two mortal wounds from which the US will never recover – in order to become the “greatest” president ever. If that’s what greatness means, then the world truly is upside-down.
While Harrison was certainly insignificant, I wouldn’t call him the worst. Actually, he’s probably one of the only presidents that hasn’t messed anything up, therefore he might be the BEST president we’ve ever had! Unfortunately, politicians are often judged by how much they do, and it doesn’t really matter if they do it well or not.
Obama has certainly done a lot, and that’s been enough to fool many people into thinking he’s a good president. G.W. Bush certainly did a lot, but a war is easier to denounce than poor economic policy, so it’s easier for some people to say Bush was a worse president than Obama. While I think both Obama and G.W. Bush are certainly worthy of mention in the debate, I think the Worst-President-Ever Award must go to Franklin Delano Roosevelt.
FDR, through a series of poor economic policies, turned what would have been a moderate recession into a decade-long depression. For instance, according to a 1937 New York Times Article, “The cause [of the depression] is attributed by some to taxation and federal curbs on industry; by others, to the demoralization of production caused by strikes”.
FDR can be directly blamed for all of those causes. FDR continuously experimented with governmental power and intervention into the market; the effect of which was to paralyze business and dry up investment and entrepreneurship. In a desperate and foolish response to cautious business practices tacitly encouraged by FDR’s policies, he passed the National Labor Relations Act with greatly strengthened unions and put the power of government behind them. This caused businesses to hire even fewer workers, aggravating an already disastrous situation.
But perhaps his most lasting failure is the fact that he almost single-handedly turned America into a welfare state. By passing the Social Security Act in 1935, he put America on an un-reversible course towards dependency on government. Not only is Social Security itself insolvent, but it paved the way for Medicare and Medicaid, two of the most disastrous government programs ever (Medicare and Medicaid were introduced to America in 1965 in an amendment to the Social Security Act).
Medicare and Medicaid are directly to blame for the healthcare debacle currently being experienced in this country. Rising healthcare costs have pushed Obama to try to “reform” the system, but in fact he’s only made it worse. But perhaps healthcare wouldn’t have been so broken in the first place if it weren’t for Medicaid and Medicare. This is just one clear example of how FDR’s failed policies are still hurting us today, over 65 years after his death.
So while my biggest gripes with FDR are his failed social welfare policies, I would be remiss if I failed to mention the very tragic and oft-overlooked aspect of FDR’s presidency - his decision to inter Japanese-American citizens during WWII and his refusal to allow Jews to emigrate from Europe; basically sentencing thousands to death.
Furthermore, FDR blatantly disregarded the long-held, unspoken tradition of presidents serving no more than two terms in office. When George Washington was first elected, observers in Europe became resigned to the fact that the new United States would become a monarchy. Nobody expected Washington, once he attained power, to give it up.
Washington set perhaps the most respected and important precedent of our nation by willingly and voluntarily stepping down after two terms and ensuring a peaceful transition of power. That had basically never been done before. Washington set America on the right path and made is an excellent example to the world of what peaceful transitions of power should look like.
Since Washington’s time, no president ever wanted to tarnish or undermine Washington’s legacy, or erode the precedent by serving more than two terms. It was a hallowed tradition. Unfortunately, FDR didn’t care much about that and only sought to consolidate and accumulate power. Who knows what would have happened if he hadn’t died in office?
The country was so disturbed by FDR’s lust for power that Congress immediately passed the 22nd Amendment to the Constitution, ensuring no president could serve more than two terms. It was ratified by the states in 1951. To amend the Constitution requires broad and deep support from across every political spectrum across the entire United States. It’s not an easy thing to do. The fact that such an Amendment was written and passed so easily is a testament to the bad taste FDR left in people’s mouths.
A by-product of FDR’s illegitimately long tenure in office was his influence on the Supreme Court. He first tried to unconstitutionally “pack” the Supreme Court with 15 Justices. FDR sought this measure because he wanted to control the Court because he was frustrated that it rightly declared unconstitutional many of his New Deal programs.
Even though his quest to pack the court failed, due to his long term in office FDR was successful in appointing eight Justices, second most of any president, behind George Washington. At one point in the composition of the court, 7 of the 9 Justices were appointed by FDR and the remaining two were appointed by FDR’s Vice President-turned-President Truman.
I’d say FDR was successful in his plan to transform the court and thus transform the country. FDR changed the character of America. Most students, from grade school through college are only given the rosy picture of FDR as America’s savior during its greatest crises. Unfortunately FDR disregarded individual liberty and sound economic policy – two mortal wounds from which the US will never recover – in order to become the “greatest” president ever. If that’s what greatness means, then the world truly is upside-down.
Monday, August 16, 2010
The Supply of Economic Education
This is a very interesting website, created by the American Council of Trustees and Alumni, that grades schools according to if they require their students to take certain “core” subjects that are fundamental to a sound education. From the website:
I was happy to see economics among their core subjects, along with composition, literature, foreign language, US history, mathematics and science.
I have long been saying that education in economics is severely lacking in this country and I think it’s why so many Americans are so easily led astray politically. I firmly believe that if people had a better understanding of economics, they wouldn’t choose such foolish political policies.
With that in mind, I eagerly dived in to see what the website had to say about economics. The results frankly did not surprise me: economic education is almost non-existent. Of the more than 700 schools that were graded, only 25 required their students to learn economics - 25 schools, not 25 percent of schools. In fact the 25 schools that made the list make up just 3.5% of the schools that were graded. Of the seven categories studied, economics was by far the most underrepresented category, with only 25 schools.
So, by this informal, unscientific survey, we can extrapolate this to say that only 3.5% of college students are being required to learn economics. And of those that are required, the bar is set pretty low. A school qualifies if it requires “A course covering basic economic principles, preferably an introductory micro- or macroeconomics course taught by faculty from the economics or business departments.” Economics is such a broad and deep subject that requiring students to simply be introduced to it in no way ensures that they actually understand economics. So even with the bar set so low, only 25 out of more than 700 schools clear it. What a shame.
Some other interesting facts that the website revealed: virtually every notable college or university in this country is absent from the economics list. You won’t find Harvard, Yale, Princeton or Stanford on the list. Perhaps the only notable school to make the list is the Air Force Academy. Now, of course this doesn’t mean that those schools fail to teach quality economics (one of the greatest economists in the country, in my opinion, teaches at Harvard – Greg Mankiw); it just means that these great schools don’t find economics important enough to be required.
Another tidbit I found interesting (and not surprising either I might add), was that the average grade for the schools in the economics category was “B+”, while the overall average for schools was probably a “C-“ at best (there is no overall or average ranking on the website. I just perused the grades and guessed at what an average is. Also, there are no “+” or “-“ given either, just a straight letter grade).
The lowest graded school in the economics category is a “B” and nine of the 16 “A” schools are in the economics category. The economics category is the only one without a “C” school or lower. Since 9 out of 25 schools received an “A”, the economics category had an “A” rate of 36%, which trounced the overall “A” rate of just 2.2%.
While this website is mostly just for fun and no real conclusions can be drawn from it, it does expose the critical lack of requiring economic education in our higher learning institutions. Also, it’s no surpise that the majority of schools receiving an “A” ranking recognized the importance of requiring students to learn economics.
“Many studies have shown that our college graduates are ignorant of the basic principles on which our government runs. For starters, most cannot identify the purpose of the First Amendment, what Reconstruction was, or the historical context of the Voting Rights Act. If you peruse this website, you will see why: the vast majority of our colleges have made a course on the broad themes of U.S. history or government optional. This is especially dangerous in America, where nothing holds us together except our democratic principles. If universities don’t pass them down, our children will not inherit our nationhood genetically. They can receive that heritage only through learning. That’s one key reason that during the college search you must ask: what will they learn?”
I was happy to see economics among their core subjects, along with composition, literature, foreign language, US history, mathematics and science.
I have long been saying that education in economics is severely lacking in this country and I think it’s why so many Americans are so easily led astray politically. I firmly believe that if people had a better understanding of economics, they wouldn’t choose such foolish political policies.
With that in mind, I eagerly dived in to see what the website had to say about economics. The results frankly did not surprise me: economic education is almost non-existent. Of the more than 700 schools that were graded, only 25 required their students to learn economics - 25 schools, not 25 percent of schools. In fact the 25 schools that made the list make up just 3.5% of the schools that were graded. Of the seven categories studied, economics was by far the most underrepresented category, with only 25 schools.
So, by this informal, unscientific survey, we can extrapolate this to say that only 3.5% of college students are being required to learn economics. And of those that are required, the bar is set pretty low. A school qualifies if it requires “A course covering basic economic principles, preferably an introductory micro- or macroeconomics course taught by faculty from the economics or business departments.” Economics is such a broad and deep subject that requiring students to simply be introduced to it in no way ensures that they actually understand economics. So even with the bar set so low, only 25 out of more than 700 schools clear it. What a shame.
Some other interesting facts that the website revealed: virtually every notable college or university in this country is absent from the economics list. You won’t find Harvard, Yale, Princeton or Stanford on the list. Perhaps the only notable school to make the list is the Air Force Academy. Now, of course this doesn’t mean that those schools fail to teach quality economics (one of the greatest economists in the country, in my opinion, teaches at Harvard – Greg Mankiw); it just means that these great schools don’t find economics important enough to be required.
Another tidbit I found interesting (and not surprising either I might add), was that the average grade for the schools in the economics category was “B+”, while the overall average for schools was probably a “C-“ at best (there is no overall or average ranking on the website. I just perused the grades and guessed at what an average is. Also, there are no “+” or “-“ given either, just a straight letter grade).
The lowest graded school in the economics category is a “B” and nine of the 16 “A” schools are in the economics category. The economics category is the only one without a “C” school or lower. Since 9 out of 25 schools received an “A”, the economics category had an “A” rate of 36%, which trounced the overall “A” rate of just 2.2%.
While this website is mostly just for fun and no real conclusions can be drawn from it, it does expose the critical lack of requiring economic education in our higher learning institutions. Also, it’s no surpise that the majority of schools receiving an “A” ranking recognized the importance of requiring students to learn economics.
Friday, August 13, 2010
Property Rights Fall Through New York's Nets
The New Jersey Nets basketball team announced that they will change their name when they move into their new stadium. Why is this significant? Well, the fact that they’re changing their name isn’t significant at all. What is significant, and it’s a shame and an outrage that it has gone largely unnoticed or uncared by the media and public at large, is that the land the stadium is to be built on was taken through eminent domain.
The stadium is part of a larger commercial development that includes high-rise office and residential towers. The ruling granting the eminent domain is outrageous – outrageous! This is a clear violation of the 5th Amendment, which clearly states, “No person shall be…deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
The issue thus becomes what does “public use” mean? Since the disastrous case of Kelo v. New London, the courts have come to interpret “public use” to mean “public purpose” and indeed it’s exactly this misinterpretation that the New York Court, in its foolish decision, chose to use:
They continue:
Grrr. No, it hasn’t! Damn you Kelo! The Founders had a very clear idea on the vision for their new country. The Constitution is only about 10 pages, but they left 400 pages of Federalist Papers and volumes of other writings to leave little doubt as to what the Constitution means. The Constitution is purposefully simple and direct. It means what it says it means. When the Founders say “public use”, they don’t mean “public purpose”. If they meant “public purpose”, they would have said “public purpose”! As James Madison says in Federalist No. 62:
Because they knew the Constitution would be basically inaccessible if it contained the detail found in the Federalist Papers, it was intentionally left simple and concrete with the understanding that people would refer back to original intent when interpreting it.
So how do we know that the original intent of the Founders was to hold private property in an almost sacred light? Well, they tell us. First, their inspiration for government becomes clear when we understand who they looked to as their mentors. The Declaration of Independence verges on plagiarism of John Locke, who wrote extensively of the importance of private property and the government’s duty to protect it.
More clearly, Madison himself clearly explains the government’s role in protecting private property in his work “Property”. He says:
And further:
Very clearly, the Founders did not intend that private property could be taken to achieve a “public purpose”. “Public purpose” is such a nebulous concept that virtually any reason could be considered as achieving a “public purpose”. If private property can be taken for a public purpose, then it ceases to become an inherent and unalienable right and therefore government has no duty to protect it. Once we are not secure in our property, we are not secure in our life or our liberty either. Private property is the lynchpin that holds it all together. Indeed, if our private property rights are undermined, the Constitution becomes meaningless.
As if that’s not outrageous enough, the court took an almost glib attitude in this case, as if they weren’t debating a person’s very livelihood, as if they weren’t gambling with the foundation of our entire way of life. The court states:
First of all, urban blight is not an “indisputable” reason to take away a person’s property, but even if it were, if guarding against blight is necessary for the “clearance, replanning, reconstruction and rehabilitation of substandard and insanitary areas”, that would fall under the state’s police power and thus it wouldn’t be a taking.
Either 1) the property can be put to better use if it serves a “public purpose”, or 2) it is dangerous to the health, morals and safety of the community and thus under the authority of the police power. By trying to argue both fronts shows the state doesn’t really have a good reason to take the property and they are hoping nobody will notice if they build the strongest case possible by throwing the entire arsenal at it.
In what would be almost comical if it weren’t so serious, they undermine their own strategy:
So the Appellate Court basically says that they don’t consider the area blighted, and therefore not subject to condemnation, but they defer completely to the lower courts and the legislature:
It’s a sad day indeed when a court fails in its most basic duties of judicial review and instead punts on such an important issue. This ruling is a failure all the way around. And just to add insult to injury, the court recognizes it is continuing a tradition of dangerous precedent and opening the door to moral hazard but seeks to rationalize it away:
Right. That’s what they said about the Kelo case and look how far we’ve fallen since.
When the New Jersey Nets have their home opener to kick off the 2011-2012 season, there will be plenty of celebration. Unfortunately, when the people dance, they will have their fellow citizens’ property rights under their feet. When our government fails to protect the basic liberties of the minority it has failed in its most basic duty. I for one will not be celebrating.
The stadium is part of a larger commercial development that includes high-rise office and residential towers. The ruling granting the eminent domain is outrageous – outrageous! This is a clear violation of the 5th Amendment, which clearly states, “No person shall be…deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
The issue thus becomes what does “public use” mean? Since the disastrous case of Kelo v. New London, the courts have come to interpret “public use” to mean “public purpose” and indeed it’s exactly this misinterpretation that the New York Court, in its foolish decision, chose to use:
“…the proposed land use improvement project will, by removing blight and creating in its place the above-described mixed-use development, serve a ‘public use, benefit or purpose’…”
They continue:
“…while the State Constitution, literally read and in its early construction, permitted the taking of property only for ‘public use,’ ‘public use’ had since come to be understood as entailing no more than a dominant public purpose.”
Grrr. No, it hasn’t! Damn you Kelo! The Founders had a very clear idea on the vision for their new country. The Constitution is only about 10 pages, but they left 400 pages of Federalist Papers and volumes of other writings to leave little doubt as to what the Constitution means. The Constitution is purposefully simple and direct. It means what it says it means. When the Founders say “public use”, they don’t mean “public purpose”. If they meant “public purpose”, they would have said “public purpose”! As James Madison says in Federalist No. 62:
“It will be of little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; that no man who knows what the law is today can guess what it will be tomorrow.”
Because they knew the Constitution would be basically inaccessible if it contained the detail found in the Federalist Papers, it was intentionally left simple and concrete with the understanding that people would refer back to original intent when interpreting it.
So how do we know that the original intent of the Founders was to hold private property in an almost sacred light? Well, they tell us. First, their inspiration for government becomes clear when we understand who they looked to as their mentors. The Declaration of Independence verges on plagiarism of John Locke, who wrote extensively of the importance of private property and the government’s duty to protect it.
More clearly, Madison himself clearly explains the government’s role in protecting private property in his work “Property”. He says:
“Government is instituted to protect property of every sort; as well that which lies in various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government, which impartially secures to every man, whatever is his.”
And further:
“That is not a just government, nor is property secure under it, where the property which a man has in his personal safety and personal liberty, is violated by arbitrary seizures of one class of citizens for the service of the rest.”
Very clearly, the Founders did not intend that private property could be taken to achieve a “public purpose”. “Public purpose” is such a nebulous concept that virtually any reason could be considered as achieving a “public purpose”. If private property can be taken for a public purpose, then it ceases to become an inherent and unalienable right and therefore government has no duty to protect it. Once we are not secure in our property, we are not secure in our life or our liberty either. Private property is the lynchpin that holds it all together. Indeed, if our private property rights are undermined, the Constitution becomes meaningless.
As if that’s not outrageous enough, the court took an almost glib attitude in this case, as if they weren’t debating a person’s very livelihood, as if they weren’t gambling with the foundation of our entire way of life. The court states:
“…it is indisputable that the removal of urban blight is a proper, and, indeed, constitutionally sanctioned, predicate for the exercise of the power of eminent domain. It has been deemed a ‘public use’ within the meaning of the State's takings clause….and is expressly recognized by the Constitution as a ground for condemnation. Article XVIII, § 1 of the State Constitution grants the Legislature the power to ‘provide in such manner, by such means and upon such terms and conditions as it may prescribe . . . for the clearance, replanning, reconstruction and rehabilitation of substandard and insanitary areas’…"
First of all, urban blight is not an “indisputable” reason to take away a person’s property, but even if it were, if guarding against blight is necessary for the “clearance, replanning, reconstruction and rehabilitation of substandard and insanitary areas”, that would fall under the state’s police power and thus it wouldn’t be a taking.
Either 1) the property can be put to better use if it serves a “public purpose”, or 2) it is dangerous to the health, morals and safety of the community and thus under the authority of the police power. By trying to argue both fronts shows the state doesn’t really have a good reason to take the property and they are hoping nobody will notice if they build the strongest case possible by throwing the entire arsenal at it.
In what would be almost comical if it weren’t so serious, they undermine their own strategy:
“Petitioners, of course, maintain that the blocks at issue are not, in fact, blighted and that the allegedly mild dilapidation and inutility of the property cannot support a finding that it is substandard and insanitary within the meaning of article XVIII. They are doubtless correct that the conditions cited in support of the blight finding at issue do not begin to approach in severity the dire circumstances of urban slum dwelling described by the Muller court in 1936, and which prompted the adoption of article XVIII…”
So the Appellate Court basically says that they don’t consider the area blighted, and therefore not subject to condemnation, but they defer completely to the lower courts and the legislature:
“…judges may substitute their views as to the adequacy with which the public purpose of blight removal has been made out for that of the legislatively designated agencies; where, as here, "those bodies have made their finding, not corruptly or irrationally or baselessly, there is nothing for the courts to do about it, unless every act and decision of other departments of government is subject to revision by the courts’…”
It’s a sad day indeed when a court fails in its most basic duties of judicial review and instead punts on such an important issue. This ruling is a failure all the way around. And just to add insult to injury, the court recognizes it is continuing a tradition of dangerous precedent and opening the door to moral hazard but seeks to rationalize it away:
“There is no reason to suppose that serial condemnation litigation will now become the order of the day.”
Right. That’s what they said about the Kelo case and look how far we’ve fallen since.
When the New Jersey Nets have their home opener to kick off the 2011-2012 season, there will be plenty of celebration. Unfortunately, when the people dance, they will have their fellow citizens’ property rights under their feet. When our government fails to protect the basic liberties of the minority it has failed in its most basic duty. I for one will not be celebrating.
Anti-Immigration and Protectionism
The argument on immigration usually goes something like this,
“Legal immigration is good, but illegal immigration is bad.”
For now, I will ignore the logical and economic fallacies inherent in such a statement, and simply shake my head that the US is further restricting the former in an effort to battle the latter.
If legal immigration is a good thing, why would we restrict it in order to battle illegal immigration? The United States massively raised the cost of visas for Indians coming to this country. The new legislation raises the visa fee to $2,000 per application, and of course, there is no guarantee that an applicant will actually receive the visa.
Why has the U.S. put such an extreme burden on potential Indian immigrants? The answer is to fund the $600 million border security bill, also passed by Congress.
This makes no sense. While I understand the need to protect our border, illegal immigration is not only unharmful, but even beneficial. It’s unfortunate that it has been turned into a bogeyman that politicians of all stripes seek to capitalize on. So not only are we going to great pains to stop something that is beneficial to our economy, we are actually hurting ourselves to do it!
Not only are we restricting legal immigration, thus voluntarily giving away its positive economic benefits, this visa rate hike is simply a measure to protect U.S. IT firms and therefore amounts to nothing more than a tariff.
With such a tariff, we lose out on the clear benefits of Comparative Advantage plus we expose ourselves to retaliatory measures which are commonplace in response to protectionist attitudes.
Immigration restrictions and protective tariffs are both very harmful to any economy so to implement one to “save” us from the other makes no sense at all.
“Legal immigration is good, but illegal immigration is bad.”
For now, I will ignore the logical and economic fallacies inherent in such a statement, and simply shake my head that the US is further restricting the former in an effort to battle the latter.
If legal immigration is a good thing, why would we restrict it in order to battle illegal immigration? The United States massively raised the cost of visas for Indians coming to this country. The new legislation raises the visa fee to $2,000 per application, and of course, there is no guarantee that an applicant will actually receive the visa.
Why has the U.S. put such an extreme burden on potential Indian immigrants? The answer is to fund the $600 million border security bill, also passed by Congress.
This makes no sense. While I understand the need to protect our border, illegal immigration is not only unharmful, but even beneficial. It’s unfortunate that it has been turned into a bogeyman that politicians of all stripes seek to capitalize on. So not only are we going to great pains to stop something that is beneficial to our economy, we are actually hurting ourselves to do it!
Not only are we restricting legal immigration, thus voluntarily giving away its positive economic benefits, this visa rate hike is simply a measure to protect U.S. IT firms and therefore amounts to nothing more than a tariff.
With such a tariff, we lose out on the clear benefits of Comparative Advantage plus we expose ourselves to retaliatory measures which are commonplace in response to protectionist attitudes.
Immigration restrictions and protective tariffs are both very harmful to any economy so to implement one to “save” us from the other makes no sense at all.
Thursday, August 12, 2010
How Unions Hurt Workers and the Economy
Unions are certainly a hot-topic right now as they’ve seen a resurgence in power under the Obama administration. In many circles, it’s almost sacrilege to speak out against unions. Unfortunately the economic consequences of unions are not immediately obvious. Typically, the argument in favor of unions goes something like this:
“Unions are a valuable tool in maintaining both a living wage for workers, and safe working conditions.”
This is the classic argument for unions and it may, MAY have had merit 100 years ago. Laws have since been passed to protect workers’ rights and guarantee their safety. What does a union do for workers and consumers that OSHA, overtime laws, trade associations, and a 40-hour work week don’t do?
In the past, workers’ rights often weren’t recognized and maybe organizing was the only way to have their voice heard. Those days are long gone. Workers’ rights are guaranteed and affirmed through legislation; not to mention a change in culture. Any business that tried to exploit its workers would quickly find itself without employees or in jail, or both. Unions are simply not necessary to achieve this end.
Therefore, the argument that unions promote safe working conditions is hollow. So what is their true motive? People are much closer to the truth when they talk about high wages. I talk about bootleggers and Baptists often: During prohibition, there were two groups that really wanted to see alcohol outlawed. One group was the Baptists who wanted to see prohibition passed for the “right” reasons (immoral, destructive, etc.). The other group was the bootleggers because they knew they would make a ton of money.
We can think of unions in the same light. Many people have honest, albeit misguided, ideas of unions being good for the worker. These people are the Baptists. The bootleggers are the Union organizers, and once they have a few recruits, the union members themselves, because they know they stand to make enormous amounts of money. Unions are very good for the union worker. In fact, too good. It’s no wonder they fight so hard to keep their union power.
In the 1930s, in a wrong-headed response to the Great Depression, unions’ collective-bargaining power was greatly strengthened by the government as enforced by the National Labor Relations Act (NLRA). This backs unions up with force of government and gives them the power to strike without any repercussions. If the idea was to shift power from the companies to the workers, the NLRA went too far. Now, once unions are formed, they have ALL the power and companies are virtually powerless.
What are companies’ options when negotiating with unions? If they don’t pretty much cave to every union demand, the union strikes and the company is powerless to continue with its business. The union workers can’t be fired and they use intimidation and force to prevent anyone else from doing their work.
The result of all this? The union demands unreasonably high wages (the average UAW wage was about $29/hr., but if you add in benefits, it equaled $65/hr. This includes all UAW workers, even those that clean the hallways and cut the grass. One of the major reasons GM filed for bankruptcy was to get out from under the crushing weight of union wages and benefits. There is no reason an unskilled worker should be making such high wages. It is contrary to all the forces of economics).
What is the practical effect of such high wages? Wages are simply the price of labor. And like everything else, if the price goes up, quantity demanded goes down. A very real consequence of unions is that companies hire fewer workers.
Unions are great for the fortunate few that are part of a union, but they severely hurt non-union workers and cause companies to produce less (labor is one of the four factors of production. If factors of production change, supply is changed. In this case, since the price of labor goes up, not only do firms demand less workers, but they actually produce less because the cost of production has gone up).
Therefore, the economic effect of unions on the average worker is twofold: First, since the price of inputs is higher, it costs more to produce every unit, therefore firms produce less. In basic economic terms, the rise in the cost of inputs causes the supply curve to shift left, lowering the equilibrium quantity produced and raising the price.
source(click to enlarge)
Okay, so the market for the good being produced has been severely depressed, raising the price hurting consumers. Within that market for the good, the high wage demanded by the unions causes firms to hire fewer workers because the wage demanded is well above the market wage for that work, causing a labor surplus – more commonly called unemployment. In other words, at such a high wage, many workers are willing to work for such a wage, but employers aren't willing to pay that high wage. As a result, the quantity of labor supplied (Qs) far exceeds the quantity of labor demanded by firms (Qd).
source (click to enlarge)
So we end up with a situation where firms demand less labor overall because they produce less. Of that labor that they do demand, firms are forced to hire even fewer workers than they otherwise would because of high wage. Those few workers that do get hired are much better off, but it comes at an enormous expense to consumers and other workers.
Thus, companies are not as profitable as they could be, goods that could and should be being produced aren’t, the average workers finds it much harder to find a job, and the result of all this is a significant hit to GDP. Unions very seriously hurt economic production. In short, unions make the individual workers better off at the expense of the companies, other workers and the general economy.
The free market is very capable of creating wealth for everybody without causing anybody harm. If left to its own devices the market would efficiently allocate goods and services and the collective self-interest of workers and firms would naturally contribute to the common good. Insert government intervention into the market, in whatever form (except for a very few special cases), including unions, and the market has gone from a non-zero sum game to very much a zero-sum game: people can only profit at the expense of others.
To further aggravate the problem, unions, in an attempt to maintain their illegitimate market share, resort to coercive tactics in other businesses besides their own. Take a plumbing company that is controlled by the unions. If another plumbing company wants to open up their business, they could gain a competitive advantage in the marketplace if they used non-union workers. Their cost of production would be much lower, thus they could charge lower prices, and thus they could siphon business away from the union company.
Since union workers are guaranteed a very high wage and they cannot be fired, they have no incentive to work hard and their production goes way down (to say nothing of the union-mandated breaks and strict labor rules, i.e. a painter can only paint. If he needs to take off a light-switch cover to complete his job, he has to wait for the electrician to come and remove it. If the painter did it, he would be “stealing” work from the electrician.)
Therefore since the new plumbing company can offer much more efficient service at a lower price, unless the unions take action, their company would go out of business and they would find themselves without a job.
Thus, the unions use coercive measures to get the new companies’ employees to unionize, or they lobby very heavily to get the laws changed in their favor. These laws could take the form of mandating companies to unionize, or it could be getting congress to pass some type of law that makes it impossible for the new company to enter the marketplace.
Related to this, unions remove the incentive to innovate. For a real-world example of this, read this article. Refer above the first graph that shows the supply curve shifting left because of the increased cost of inputs. Another reason the supply curve may shift is due to a change in technology. If we improve our technology, producers can produce more with less, thus lowering their cost of production, causing them to supply more at every price. This is reflected as a rightward (or downward) shift of the supply curve, which increases output and lowers the price. Union tactics, such as in the article referenced to above, prevent this shift. In a very real way, unions prevent the economy from advancing and moving forward.
The result of all this is reduced competition, lower quality work, a restricted labor market and depressed GDP. Unions are very damaging to the economy. Their actual results to the economy are exactly opposite of what they claim to do.
I understand that it’s not apparently obvious that unions cause so much damage. Once you’re inside, you’re blinded by the “glamour” of high wages and a secure job; of course you would fight to keep it.
One final point about high wages. The argument typically goes something like this: "If a worker has more money in his pocket, his standard of living is increased, he has more to spend and everybody becomes wealthier." Sounds nice; if only it were true.
Money or wages do not equal wealth. Production equals wealth. How are we as an economy any wealthier if the union worker has a lot of dollars in his pocket, but because of economic impact caused by unions, the price of goods is higher as well? In fact, the union worker getting an artificially high wage is actively harmful as it comes at the expense of the economy. Are we better off if we have more dollars in our pockets but our production has gone down?
The idea that money or wages equal wealth is a huge economic misunderstanding. Unfortunately this misunderstanding has been used to justify stimulus spending on public works projects, unemployment and minimum wage. Only production equals wealth and we need labor to produce things.
By unions restricting and depressing the labor market and by stifling innovation, much less is getting produced than otherwise would be causing us all (even union workers) to be poorer, not wealthier.
“Unions are a valuable tool in maintaining both a living wage for workers, and safe working conditions.”
This is the classic argument for unions and it may, MAY have had merit 100 years ago. Laws have since been passed to protect workers’ rights and guarantee their safety. What does a union do for workers and consumers that OSHA, overtime laws, trade associations, and a 40-hour work week don’t do?
In the past, workers’ rights often weren’t recognized and maybe organizing was the only way to have their voice heard. Those days are long gone. Workers’ rights are guaranteed and affirmed through legislation; not to mention a change in culture. Any business that tried to exploit its workers would quickly find itself without employees or in jail, or both. Unions are simply not necessary to achieve this end.
Therefore, the argument that unions promote safe working conditions is hollow. So what is their true motive? People are much closer to the truth when they talk about high wages. I talk about bootleggers and Baptists often: During prohibition, there were two groups that really wanted to see alcohol outlawed. One group was the Baptists who wanted to see prohibition passed for the “right” reasons (immoral, destructive, etc.). The other group was the bootleggers because they knew they would make a ton of money.
We can think of unions in the same light. Many people have honest, albeit misguided, ideas of unions being good for the worker. These people are the Baptists. The bootleggers are the Union organizers, and once they have a few recruits, the union members themselves, because they know they stand to make enormous amounts of money. Unions are very good for the union worker. In fact, too good. It’s no wonder they fight so hard to keep their union power.
In the 1930s, in a wrong-headed response to the Great Depression, unions’ collective-bargaining power was greatly strengthened by the government as enforced by the National Labor Relations Act (NLRA). This backs unions up with force of government and gives them the power to strike without any repercussions. If the idea was to shift power from the companies to the workers, the NLRA went too far. Now, once unions are formed, they have ALL the power and companies are virtually powerless.
What are companies’ options when negotiating with unions? If they don’t pretty much cave to every union demand, the union strikes and the company is powerless to continue with its business. The union workers can’t be fired and they use intimidation and force to prevent anyone else from doing their work.
The result of all this? The union demands unreasonably high wages (the average UAW wage was about $29/hr., but if you add in benefits, it equaled $65/hr. This includes all UAW workers, even those that clean the hallways and cut the grass. One of the major reasons GM filed for bankruptcy was to get out from under the crushing weight of union wages and benefits. There is no reason an unskilled worker should be making such high wages. It is contrary to all the forces of economics).
What is the practical effect of such high wages? Wages are simply the price of labor. And like everything else, if the price goes up, quantity demanded goes down. A very real consequence of unions is that companies hire fewer workers.
Unions are great for the fortunate few that are part of a union, but they severely hurt non-union workers and cause companies to produce less (labor is one of the four factors of production. If factors of production change, supply is changed. In this case, since the price of labor goes up, not only do firms demand less workers, but they actually produce less because the cost of production has gone up).
Therefore, the economic effect of unions on the average worker is twofold: First, since the price of inputs is higher, it costs more to produce every unit, therefore firms produce less. In basic economic terms, the rise in the cost of inputs causes the supply curve to shift left, lowering the equilibrium quantity produced and raising the price.
source(click to enlarge)
Okay, so the market for the good being produced has been severely depressed, raising the price hurting consumers. Within that market for the good, the high wage demanded by the unions causes firms to hire fewer workers because the wage demanded is well above the market wage for that work, causing a labor surplus – more commonly called unemployment. In other words, at such a high wage, many workers are willing to work for such a wage, but employers aren't willing to pay that high wage. As a result, the quantity of labor supplied (Qs) far exceeds the quantity of labor demanded by firms (Qd).
source (click to enlarge)
So we end up with a situation where firms demand less labor overall because they produce less. Of that labor that they do demand, firms are forced to hire even fewer workers than they otherwise would because of high wage. Those few workers that do get hired are much better off, but it comes at an enormous expense to consumers and other workers.
Thus, companies are not as profitable as they could be, goods that could and should be being produced aren’t, the average workers finds it much harder to find a job, and the result of all this is a significant hit to GDP. Unions very seriously hurt economic production. In short, unions make the individual workers better off at the expense of the companies, other workers and the general economy.
The free market is very capable of creating wealth for everybody without causing anybody harm. If left to its own devices the market would efficiently allocate goods and services and the collective self-interest of workers and firms would naturally contribute to the common good. Insert government intervention into the market, in whatever form (except for a very few special cases), including unions, and the market has gone from a non-zero sum game to very much a zero-sum game: people can only profit at the expense of others.
To further aggravate the problem, unions, in an attempt to maintain their illegitimate market share, resort to coercive tactics in other businesses besides their own. Take a plumbing company that is controlled by the unions. If another plumbing company wants to open up their business, they could gain a competitive advantage in the marketplace if they used non-union workers. Their cost of production would be much lower, thus they could charge lower prices, and thus they could siphon business away from the union company.
Since union workers are guaranteed a very high wage and they cannot be fired, they have no incentive to work hard and their production goes way down (to say nothing of the union-mandated breaks and strict labor rules, i.e. a painter can only paint. If he needs to take off a light-switch cover to complete his job, he has to wait for the electrician to come and remove it. If the painter did it, he would be “stealing” work from the electrician.)
Therefore since the new plumbing company can offer much more efficient service at a lower price, unless the unions take action, their company would go out of business and they would find themselves without a job.
Thus, the unions use coercive measures to get the new companies’ employees to unionize, or they lobby very heavily to get the laws changed in their favor. These laws could take the form of mandating companies to unionize, or it could be getting congress to pass some type of law that makes it impossible for the new company to enter the marketplace.
Related to this, unions remove the incentive to innovate. For a real-world example of this, read this article. Refer above the first graph that shows the supply curve shifting left because of the increased cost of inputs. Another reason the supply curve may shift is due to a change in technology. If we improve our technology, producers can produce more with less, thus lowering their cost of production, causing them to supply more at every price. This is reflected as a rightward (or downward) shift of the supply curve, which increases output and lowers the price. Union tactics, such as in the article referenced to above, prevent this shift. In a very real way, unions prevent the economy from advancing and moving forward.
The result of all this is reduced competition, lower quality work, a restricted labor market and depressed GDP. Unions are very damaging to the economy. Their actual results to the economy are exactly opposite of what they claim to do.
I understand that it’s not apparently obvious that unions cause so much damage. Once you’re inside, you’re blinded by the “glamour” of high wages and a secure job; of course you would fight to keep it.
One final point about high wages. The argument typically goes something like this: "If a worker has more money in his pocket, his standard of living is increased, he has more to spend and everybody becomes wealthier." Sounds nice; if only it were true.
Money or wages do not equal wealth. Production equals wealth. How are we as an economy any wealthier if the union worker has a lot of dollars in his pocket, but because of economic impact caused by unions, the price of goods is higher as well? In fact, the union worker getting an artificially high wage is actively harmful as it comes at the expense of the economy. Are we better off if we have more dollars in our pockets but our production has gone down?
The idea that money or wages equal wealth is a huge economic misunderstanding. Unfortunately this misunderstanding has been used to justify stimulus spending on public works projects, unemployment and minimum wage. Only production equals wealth and we need labor to produce things.
By unions restricting and depressing the labor market and by stifling innovation, much less is getting produced than otherwise would be causing us all (even union workers) to be poorer, not wealthier.
Wednesday, August 11, 2010
The Laffer Curve and Limited Government
Ezra Klein from the Washington Post had an interesting piece on the Laffer Curve and where the US currently sits on that curve.
For some background information, the Laffer Curve is an idea popularized by and named after economist Arthur Laffer. It basically says that as the tax rate rises, the tax base falls. Therefore the government can maximize revenue by striking just the right balance between tax rate and base.
Think of a standard bell-curve. On the vertical Y-axis is tax revenue, and on the horizontal X-axis is the tax rate. The top of the curve (maximum revenue) will be somewhere near the middle of the X-axis (before revenues start to fall with a higher rate).
In other words, a tax rate of 0% won’t raise any revenue because nobody would be paying taxes, and a tax rate of 100% would likely raise no revenue either because there would be no incentive to go to work because people wouldn’t be able to keep any of what they earn.
Therefore, as the tax rate rises, the number of people paying that tax declines. Some people might leave the workforce, move their operations out of the country, simply hide their earnings or practice other measures of tax avoidance.
The lesson here is that government might actually raise revenue if it lowered the tax rates.
So back to the article, Klein asks prominent economists, accountants and politicians where does the Laffer Curve actually peak and where does the US currently sit? Are we on the wrong side of the Laffer Curve?
The answers differ greatly, but I think Greg Mankiw’s answer is the best:
I also like Martin Feldstein’s answer, in that he addresses another often-neglected economic reality – deadweight loss:
Deadweight Loss, or excess burden, is the loss to the economy above and beyond the cost of the tax. Without a tax, the economy efficiently allocates resources. Consumer and Producer Surplus are maximized. Add a tax, and the tax incidence ensures that consumers pay a higher price AND sellers receive a lower price than they otherwise would – both parties lose out. This means that consumer and producer surplus no longer maximized because consumers are paying for a product or service that they are not receiving and producers are providing a product or service that they are not getting paid for.
Beyond just raising revenue, taxes come with an extreme backlash because the public doesn’t like having money forcibly taken from them. Even beyond this, the hidden costs to the economy are tremendous. As Feldstein states, it is very possible to cause $1 billion worth of damage to the economy to raise revenue by $100 million.
Taxes are necessary. There is no doubt about that. But because they come with such a high social and economic cost, it is imperative for government to be prudent and responsible. What does that look like? Well a prudent and responsible government is one that does its core functions well and nothing else. These core functions are:
Provide for the common defense;
Protect and enforce property rights;
Protect individual liberty;
Enforce freedom to contract;
Provide a criminal justice system;
Correct any market failures (i.e. monopolies, public goods and externalities).
Beyond these core functions, there is not much for the government to do; therefore the tax burden should be as minimal as possible. Remember, the government’s job is not to raise as much revenue as possible. The government’s job is to raise enough revenue to carry out its duties.
Therefore, to try to find where the Laffer Curve peaks and strive to get there may do much more harm than good because it may mean that government is involved in too many aspects of our lives and has greatly over-extended its reach.
For some background information, the Laffer Curve is an idea popularized by and named after economist Arthur Laffer. It basically says that as the tax rate rises, the tax base falls. Therefore the government can maximize revenue by striking just the right balance between tax rate and base.
Think of a standard bell-curve. On the vertical Y-axis is tax revenue, and on the horizontal X-axis is the tax rate. The top of the curve (maximum revenue) will be somewhere near the middle of the X-axis (before revenues start to fall with a higher rate).
In other words, a tax rate of 0% won’t raise any revenue because nobody would be paying taxes, and a tax rate of 100% would likely raise no revenue either because there would be no incentive to go to work because people wouldn’t be able to keep any of what they earn.
Therefore, as the tax rate rises, the number of people paying that tax declines. Some people might leave the workforce, move their operations out of the country, simply hide their earnings or practice other measures of tax avoidance.
The lesson here is that government might actually raise revenue if it lowered the tax rates.
So back to the article, Klein asks prominent economists, accountants and politicians where does the Laffer Curve actually peak and where does the US currently sit? Are we on the wrong side of the Laffer Curve?
The answers differ greatly, but I think Greg Mankiw’s answer is the best:
"My guess is that that the short-run answer and the long-run answer areAs I have argued before, I think one of the greatest policy failures of government is being too focused on the short-run and therefore neglecting or even hurting long-run growth.
quite different. For example, if you raised the top rate from 35 to, say, 60 percent, you might raise revenue in the short run. Over time, however, you would get lower economic growth, so the additional revenues would fall off and eventually decline below what they would have been at the lower rate.... I will pass on offering a specific number, as it would require more time and thought than I can offer just now, but I will opine that I think the long-run answer is actuallymore important for policy purposes than the short-run answer."
I also like Martin Feldstein’s answer, in that he addresses another often-neglected economic reality – deadweight loss:
"Why look for the rate that maximizes revenue? As the tax rate rises, the
"deadweight loss" (real loss to the economy rises) so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue.... I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living."
Deadweight Loss, or excess burden, is the loss to the economy above and beyond the cost of the tax. Without a tax, the economy efficiently allocates resources. Consumer and Producer Surplus are maximized. Add a tax, and the tax incidence ensures that consumers pay a higher price AND sellers receive a lower price than they otherwise would – both parties lose out. This means that consumer and producer surplus no longer maximized because consumers are paying for a product or service that they are not receiving and producers are providing a product or service that they are not getting paid for.
Beyond just raising revenue, taxes come with an extreme backlash because the public doesn’t like having money forcibly taken from them. Even beyond this, the hidden costs to the economy are tremendous. As Feldstein states, it is very possible to cause $1 billion worth of damage to the economy to raise revenue by $100 million.
Taxes are necessary. There is no doubt about that. But because they come with such a high social and economic cost, it is imperative for government to be prudent and responsible. What does that look like? Well a prudent and responsible government is one that does its core functions well and nothing else. These core functions are:
Provide for the common defense;
Protect and enforce property rights;
Protect individual liberty;
Enforce freedom to contract;
Provide a criminal justice system;
Correct any market failures (i.e. monopolies, public goods and externalities).
Beyond these core functions, there is not much for the government to do; therefore the tax burden should be as minimal as possible. Remember, the government’s job is not to raise as much revenue as possible. The government’s job is to raise enough revenue to carry out its duties.
Therefore, to try to find where the Laffer Curve peaks and strive to get there may do much more harm than good because it may mean that government is involved in too many aspects of our lives and has greatly over-extended its reach.
Tuesday, August 10, 2010
Spain's Failed Economic Experiment
Spain’s program to put 2000 electric cars on the road by the end of 2010 has failed. So far, despite massive government subsidies to encourage sales, only 16 electric cars have been sold in all of Spain.
The government invested almost $1 Billion into the program, including giving subsidies of more than $7,800 to buyers. Despite heavy government propaganda, a very “green” friendly populous and massive subsidies, the program still failed.
Why?
The answer is because the cars still cost $31,400 even after the subsidy and there have only been 20 charging stations built across the entire country (only 1 in Madrid). These two factors combined make the price of owning one of these cars very expensive, a killer in tough economic times.
Spain is also cutting in half its massive subsidies it provides to firms willing to invest in solar technology in the country. Spain says it is cutting the subsidies in order to save money. It also says that cuts are justified because the subsidies have allowed the industry to grow and it can remain profitable on its own.
Half of that story is correct: Spain is going bankrupt by trying to steer its economy towards green energy. This is a laudable goal and alternate energy should certainly be encouraged, but bankrupting your economy in order to get there is clearly the wrong tactic, as is evidenced by Spain’s current troubles.
If solar electricity was so successful, the demand for electric cars would be evident. If the demand were evident, charging stations would pop up all across the country in order to cash in. Cars wouldn’t need to be subsidized in order to get sold.
Spain is conducting a valuable economic experiment that we can all benefit from by paying attention. The lesson? A government that tries to control the economy and force it off of fossil fuels before it’s cost effective to do so is a recipe for failure.
This is no longer a debate suitable only for theoretical ivory tower discussion. Spain has provided a real-world example (yet again) that you cannot stifle market forces, that a command-and-control type economy will always fail, and that by just throwing untold amounts of money at alternate energy does not necessarily make it viable.
The government invested almost $1 Billion into the program, including giving subsidies of more than $7,800 to buyers. Despite heavy government propaganda, a very “green” friendly populous and massive subsidies, the program still failed.
Why?
The answer is because the cars still cost $31,400 even after the subsidy and there have only been 20 charging stations built across the entire country (only 1 in Madrid). These two factors combined make the price of owning one of these cars very expensive, a killer in tough economic times.
Spain is also cutting in half its massive subsidies it provides to firms willing to invest in solar technology in the country. Spain says it is cutting the subsidies in order to save money. It also says that cuts are justified because the subsidies have allowed the industry to grow and it can remain profitable on its own.
Half of that story is correct: Spain is going bankrupt by trying to steer its economy towards green energy. This is a laudable goal and alternate energy should certainly be encouraged, but bankrupting your economy in order to get there is clearly the wrong tactic, as is evidenced by Spain’s current troubles.
If solar electricity was so successful, the demand for electric cars would be evident. If the demand were evident, charging stations would pop up all across the country in order to cash in. Cars wouldn’t need to be subsidized in order to get sold.
Spain is conducting a valuable economic experiment that we can all benefit from by paying attention. The lesson? A government that tries to control the economy and force it off of fossil fuels before it’s cost effective to do so is a recipe for failure.
This is no longer a debate suitable only for theoretical ivory tower discussion. Spain has provided a real-world example (yet again) that you cannot stifle market forces, that a command-and-control type economy will always fail, and that by just throwing untold amounts of money at alternate energy does not necessarily make it viable.
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