Category: Economics

This video is brilliant. I’m blown away. “I want to steer markets.” “I want them set free.”

Unlike FDR’s wage and price controls, destruction of agricultural crops, and massive cartelization schemes, the New Deal’s make-work spending actually left something to show for the effort. Ed Quillen, neglecting to review the most obviously destructive aspects of the New Deal, points to the “infrastructure” projects that continue to enhance our lives. He pushes his point: “The post- World War II population growth along the Front Range couldn’t have happened without those Depression-era water projects.”

Letter writer Cora Scherma praises Quillen’s analysis and New Deal make-work: “[P]erhaps the neocons and libertarians among us should consider the following: Don’t attend concerts or religious services at Red Rocks; don’t enjoy IMAX films at Phipps Auditorium; avoid sections of the Denver Zoo lest you be tainted by big government…”

But Quillen and Scherma commit a basic economic fallacy. Henry Hazlitt explains in Economics In One Lesson:

There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemployment? That is obviously due to “insufficient purchasing power.” The remedy is just as obvious. All that is necessary is for the government to spend enough to make up the “deficiency.”

An enormous literature is based on this fallacy… [A]ll government expenditures must eventually be paid out of the proceeds of taxation; that inflation itself is merely a form, and a particularly vicious form, of taxation. …

I am here concerned with public works considered as a means of “providing employment” or of adding wealth to the community that it would not otherwise have had. …

For every dollar that is spent on the bridge [or other public work] a dollar will be taken away from taxpayers. … Therefore, for every public job created by the bridge project a private job has been destroyed elsewhere. … [Consider also] the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs. (1979 edition, pages 31-34)

Of course an artificial boom or bubble — such as the modern one caused by federal easy credit policies — necessarily triggers a consequent recession, which tends to generate temporary unemployment. If the government has imposed wage controls, including wage floors and union favoritism, this will dramatically exacerbate unemployment, as it did during the Great Depression clear through the late ’30s. The solution is to remove the political impediments to economic activity and allow a recovery. Federal make-work may soak up some of the unemployment, but only at the costs that Hazlitt reviews. These funds are desperately needed in the market economy; they will instead be diverted to politicized projects.

Quillen errs also in imagining that government is the only entity capable of conducting certain projects. But there is no reason to expect that a market cannot provide water as it provides so many other goods and services.

Scherma adds a double error to the above. First she suggests that the only ones to oppose federal make-work are “neocons and libertarians”; I am neither. Second she implies that, when politicians force people to fund projects, those most opposed to that use of force should also refrain from benefiting from that which they were forced to fund. But that would only add a second injustice to the first, first stripping people of their wealth, then of even any marginal benefits of it.

The seen, as Hazlitt puts the matter, consists of the projects funded by politicians with other people’s money. These projects are visible, and their use is obvious. They offer something tangible for which the politicians can take credit. The unseen are all the investments and expenditures prevented by the forced wealth transfers. Politicians can take little credit for allowing individuals to produce without their “help.” So the next time you read about New Deal spending, or federal spending under Obama, consider not only the jobs and projects created, consider also the jobs and projects prevented.

Two stories from the newspapers today suggest something interesting about the attractiveness of economic liberty.

The Denver Post reports:

Rollie Heath, a Boulder Democrat elected to the [State] Senate, said that as lawmakers grapple in the coming session with cutting as much as $600 million from the budget because of declining revenues, they should also look at TABOR [the Taxpayer’s Bill of Rights], a revenue-capping provision of the state’s constitution.

The state is in a timeout from TABOR’s tax-revenue limits, but that timeout expires in 2010, when Colorado will have to begin refunding to taxpayers any revenue it collects over TABOR’s prescribed limit. …

Sen. Shawn Mitchell, R-Broomfield, who also is a member of the Committee on Job Creation and Economic Growth, shuddered at the idea.

“When did job creation become about maximizing the government’s budget?” Mitchell said, “TABOR isn’t constricting state revenues at all right now. When TABOR resumes, it won’t cut anything…. If someone thinks that’s a chokehold, they have emphysema.”

It’s good to see that some Republicans continue to take seriously the virtues of economic liberty.

The second story comes from the Rocky Mountain News:

Colorado may not be booming these days, but it remains among the fastest-growing states in the nation, placing third, along with Texas and North Carolina, with population growth of 2 percent.

Utah outstripped Colorado for the No. 1 spot nationwide, growing at 2.5 percent, while Arizona came in second, with growth of 2.3 percent between July 2007 and July 2008.

Still, Colorado gained 96,686 people, according to the U.S. Census Bureau, with total population reaching 4.9 million, up from 4.8 million in July 2007.

Unlike Utah, where much of the growth comes from natural births, Colorado’s surge in head count is due largely to an influx of 52,398 migrants from other states and countries, according to Robert Bernstein, a spokesman for the U.S. Census in Washington, D.C.

Is it merely coincidence that people like to move toward economic liberty? No. True, Colorado is attractive for a variety of other reasons, particularly the mountains. Yet, accounting for other variables, people tend to move toward economic liberty and away from economic political controls.

The U.S. Economic Freedom Index: 2008 Report explains the connection. The summary states:

The net migration rate for the 20 freest states was 27.36 people per 1,000, while it was a low 1.17 people per 1,000 for the 20 most economically oppressed states. “People are moving to the freest states and fleeing the least free states as our market-based migration metric of economic freedom predicts,” said Lawrence J. McQuillan, Ph.D., director of Business and Economic Studies at PRI and director of the project. “By measuring economic freedom and studying its effects, people will gain a fuller appreciation of the important imprint it makes on the economic and political fabric of America and will encourage new state legislation that advances economic liberty.” …

South Dakota, Idaho, Colorado, Utah, Wyoming, Nevada, and Oklahoma rank among the top 10 most economically free states in the nation.

Unfortunately, none of the states is very free, and all suffer from a bloated federal government. So Colorado is freer only on a relative scale. But liberty ought not be graded on a curve. Individual rights deserve respect all of the time, not merely sometimes. What Colorado needs is more economic liberty and less political control of the economy.

Let us say that, out of fifty people, Ethan has a cold. In a health evaluation, Ethan ranks well in cardiovascular health, blood pressure, body weight, muscle tone, and general attractiveness. Overall, he is ranked the fifth-healthiest person of the group. What would you think of a newspaper that praised colds as the cause of Ethan’s good health? Perhaps you’d think the newspaper is about as idiotic as The Denver Post.

Here’s what the Post claimed in an editorial today:

CNBC has just ranked Colorado as the fifth-best state for doing business — the first time our state has finished in the coveted top five.

The biggest reason for Colorado’s leap up the charts, according to CNBC analysts, is that it “has been actively courting what it calls the New Energy Economy — wind and solar. The effort has paid off in jobs, and a big jump in our business friendliness category, finishing fifth this year, from number 12 in 2007.”

First of all, who are these “CNBC analysts,” and why should we believe any of their opinions about the economy?

Second, the Post misquotes CNBC, which notably does not claim that the “New Energy Economy” is the “biggest” reason for Colorado’s leap. Instead, here’s what CNBC actually claims:

Colorado, among the first states to be hit by the housing crisis, has been actively courting what it calls the New Energy Economy — wind and solar. The effort has paid off in jobs, and a big jump in our Business Friendliness category, finishing fifth this year, from number 12 in 2007.

Note that CNBC does not make any claim whatsoever about the effect of the so-called “New Energy Economy” on Colorado’s success, other than to say that it has “paid off.” Really? How much has it paid off? Where’s the evidence that it has paid off? CNBC does not offer any evidence.

These energy schemes have been “successful” only because they have forcibly redirected money from elsewhere in the economy. As Environment Colorado reminds us, Colorado law requires an eventual 20 percent of energy to be produced in “alternative” ways. Obviously, this is more costly. If it weren’t, it wouldn’t have to be forced by legislation. This drives up people’s energy bills. This results in less money available for people to spend with other businesses.

Sure, there are more jobs in the “New Energy” sector. But this comes at the expense of jobs elsewhere. As I wrote last year:

If the environmentalists and their supporting politicians actually took their own claims seriously, they would not stop at forcing a mere 20 percent “renewable” energy. They would require a full 100 percent. After all, if generating “more jobs” to produce energy is good, if that makes Colorado “open for business,” then let’s really open up for business by requiring that all energy used in Colorado must be “renewable.” And why wait till 2020? Think of all the additional jobs that could be generated if we moved up the schedule, say to 2010. Just think of all the people who could be producing windmill blades!

Why, then, is Colorado’s economy relatively healthy? Despite Democratic rule, Colorado still benefits by the Taxpayer’s Bill of Rights, though the Democrats are currently trying to gut that. Colorado’s Democrats have been less rabidly left-wing than Democrats elsewhere, due to the demographics in which they rule. They haven’t been successful in pushing through their worst socialist schemes, such as government-controlled health care. Colorado attracts a lot of out-of-state talent because of our relatively business-friendly climate, the existence of established tech firms, good colleges (which are mostly privately funded, by the way), and beautiful climate and landscape. And, notably, despite Democratic efforts to hobble the oil and gas industry, Colorado and Wyoming have experienced booms in those industries. If you want to look at Colorado’s economic success, oil has a lot more to do with it than windmills.

I don’t know to what extent Colorado’s “alternative” energy companies get national subsidies. If these subsidies are large, then Colorado is benefiting at the expense of people elsewhere. But I don’t think letting politically-correct corporations steal from people in other states is necessarily something to crow about. Of course, these same corporate-welfare takers, along with leftist politicians, tax-funded bureaucrats, and environmentalist zealots provide the original sources for claims that robbing Peter to pay Paul somehow helps the economy.

Just another day at the mighty Denver Post.

Recently The Economist published an article about the endowment effect: “[O]nce someone owns something, he places a higher value on it than he did when he acquired it — an observation first called ‘the endowment effect’ about 28 years ago by Richard Thaler, who these days works at the University of Chicago.”

The magazine calls this “a squishy, irrational bit of human behaviour.” One experiment “found that students were surprisingly reluctant to trade a coffee mug they had been given for a bar of chocolate, even though they did not prefer coffee mugs to chocolate when given a straight choice between the two.”

I propose that the endowment effect is perfectly rational for three main reasons.

1. When we acquire an object, we perform mental work to figure out how we’ll use it and what it’s good for. True, we do much of this work before we purchase an item. Yet I routinely find that, after I acquire something, I think of more ways to integrate it into my life. To take a simple example, all of my usual mugs are currently in storage, so I just acquired two new ones. As soon as I did, I thought, “These would fit perfectly on that short shelf in the kitchen, where nothing else fits well.” An object that we’ve spent mental energy figuring out how to better utilize is more valuable to us.

2. Automated habits are very valuable. As soon as we acquire something new, we start to work it into our regular routines. We develop habits for a reason; they’re necessary time-savers. Granted, this point has force only after we’ve had an object for some (often short) period of time.

3. We reasonably avoid risk. Once we get the mug, we can look it over and make sure it isn’t cracked or have any other unanticipated problem. (Before getting the two new mugs, I looked at a mug that I discovered has an irregular surface inside, making it difficult to clean; I ditched that mug.) Meanwhile, I’ve had the experience of opening a chocolate bar and finding that it has turned white and flakey — yuck. Recently I also purchased some chocolate bars that didn’t taste as good as I anticipated, relative to other chocolate I like. Though I might equally prefer a shelved mug and a shelved chocolate bar, a mug in the fist is better than a chocolate bar on the shelf.

The Economist closes:

Other “irrational” phenomena include confirmation bias (searching for or interpreting information in a way that confirms one’s preconceptions), the bandwagon effect (doing things because others do them) and framing problems (when the conclusion reached depends on the way the data are presented). All in all, the rational conclusion is that humans are irrational animals.

But those other things are simply logical errors. (However, joining a bandwagon is not always irrational, absent additional information.) They are problems that can be avoided with careful methods and checks. The fact that we know about these problems, and can take steps to solve them, demonstrates that we are fundamentally rational, not irrational, at least in capacity.

The endowment effect is not a logical fallacy; it is a perfectly sensible preference of the integrated, the habituated, and the known to the unfamiliar, the awkward, and the untested.

The following article originally was published on May 12, 2008, by Grand Junction’s Free Press.

Politics imposes external harms

by Linn and Ari Armstrong

In our last article, we pointed out that a tax-funded recreation center unfairly charges people who don’t use the center and pushes out competing voluntary services. We argued that, if a recreation center is a good idea, “then it will be profitable on a free market. Those who want the center can… pay for it all by charging their customers (or collecting voluntary donations).”

Keith J. Pritchard sent a reply to FreeColorado.com, your younger author’s web page. Pritchard argued that we’re “missing an important economic concept — beneficial externalities.” We supposedly aren’t “considering the marginal social benefit. For example, it could provide a nurturing environment for youth who might otherwise be on the street experimenting with drugs. If the center kept these youth out of trouble with the law and out of prison (paid for by taxpayers), that is a beneficial externality.”

How silly of us: we didn’t realize that the only two choices in life are going to a tax-funded recreation center or doing drugs and going to prison.

There is a little problem with Pritchard’s case: every recreational activity offers an external benefit. Children who attend Boy or Girl Scouts are not “on the street experimenting with drugs.” Other alternatives include going to the movies, reading a book, joining 4H, dancing, martial arts, skiing, going out to eat, cooking a family meal at home, playing games, and so on. All the money forcibly redirected to the recreation center is not available for all the other goods and services that people otherwise would buy.

What is an externality? It is any benefit not funded by the beneficiaries or any harm not funded by the party causing the harm. The problem is that “beneficial externalities” are ubiquitous. If the government should subsidize every activity that offers external benefits, then the government should subsidize nearly everything.

Pritchard has no way of knowing that the external benefits of a recreation center exceed the external benefits of the recreational activities that would otherwise be funded. Thus, by his logic, government should also subsidize theaters, dance studios, restaurants, board games, camping stores, and so on. Not a single provider of recreation should be excluded from the tax trough.

But why stop with recreation? Children need good shoes so that they can walk to and around school. They need cool shoes so that they can have good self-esteem. Obviously, then, the government should subsidize all shoe makers and stores. Children need food so they can develop their minds and get good jobs, so perhaps Fruita should open up a tax-funded grocery store. Books provide all sorts of positive externalities, so clearly government needs to run the book stores.

But let’s not stop with businesses! Attractive people walking down the street offer an external benefit to those who appreciate their appearance. What’s needed, by Pritchard’s logic, is a subsidy for good-looking people and a tax on ugly people. We also need an Attractiveness Index, so that the best looking people get the most tax subsidies while the ugliest pay the highest fees. (Your authors could be in trouble.)

If the government is going to be in the business of subsidizing positive externalities and taxing negative ones, the government should control not only the entire economy but all of our personal choices. Pritchard cannot point to a single human activity for which we cannot show some externality.

Pritchard is “missing an important economic concept” himself, the concept of Public Choice, the branch of economics popularized by Gordon Tullock and James Buchanan (who won a Nobel for his efforts). One of the many interesting implications of Public Choice economics is that politics is a gigantic source of negative externalities.

In the name of “fixing” externalities, politicians impose high taxes, slow the rate of economic growth, hamper the flow of economic information by distorting market prices, create tax-sucking bureaucracies and commissions, impose protectionism, waste funds, and subject our paychecks to special-interest warfare.

The alternative is a free market in which government’s only role is to protect individual rights by preventing violence and preserving private property. With rights consistently protected, people are best able to apply their reason to the problems of living and enter into voluntary, mutually-beneficial exchanges.

A system of individual rights is best able to handle externalities. Negative externalities such as pollution of specific properties are resolved through the courts. Social negative externalities, such as rudeness and body odor, are solved by such measures as social pressure, the property holder’s right of invitation, and soap commercials. Positive externalities are captured by private businesses and philanthropies.

Those who invoke the theory of externalities to rationalize tax subsidies for their pet projects in fact sanction the greatest contributer of negative externalities, the political process of robbing Peter to pay Paul. The system of individual rights provides justice as well as the best framework for solving economic problems.

Linn is a local political activist and firearms instructor with the Grand Valley Training Club. His son Ari edits FreeColorado.com from the Denver area.

The following article originally was published by Grand Junction’s Free Press on April 14, 2008.

Presidential candidates play zero-sum games

by Linn and Ari Armstrong

When you walk into any store and trade your money for a product, often both you and the clerk will say, “Thank you.” The reason for this is that, in a voluntary exchange, both parties benefit. The same is true at your job. Employers value the labor of employees and pay for it, while employees value the paycheck and other benefits enough to do the work.

In a free-market system that bars fraud, stops the initiation of force, and protects people’s property rights, one person’s gain is another person’s gain. And when people can count on the legal protection of their property, they invest in new skills, machines, factories, technologies, and other capital. Over time, this raises people’s productivity and real wages, leading to a growing economy.

A thief rejects mutually-beneficial exchange. If a hold-up man takes $100 from you by force, then the thief is better off financially for the moment, but you are worse off by the same amount. Such a situation is sometimes called a “zero-sum game.” Some people gain at the expense of others.

When a society becomes plagued by zero-sum interactions, the result is economic destruction. To the extent that people fear that the fruits of their labor will be taken from them by force, they stop producing, trading, and investing. For example, look at much of Africa.

Unfortunately, while the United States was founded on the ideals of liberty, government limited to the protection of rights, and secure property, today’s presidential candidates actively promote the zero-sum games of political controls.

In his famous speech on race, Barack Obama worried that, for many working people, “opportunity comes to be seen as a zero sum game, in which your dreams come at my expense.” He added, “the path to a more perfect union… requires all Americans to realize that your dreams do not have to come at the expense of my dreams; that investing in the health, welfare, and education of black and brown and white children will ultimately help all of America prosper.”

But by “investing” Obama does not mean that individuals should be free to invest in their children’s education or a company, or even to donate voluntarily to charity. Americans don’t need Obama to tell them that getting an education, contracting for quality health care, and saving for the future are good ideas.

No, what Obama means by “investing” is that he wants to take more of your money by force and give it to others, of course with a huge chunk taken out to pay the salaries of bureaucrats.

For example, Obama wants to socialize medicine. That means that you will have to pay through the nose in taxes in order to wait in line to get “free” health care that sucks. (For some of the problems that other countries are experiencing with health care, see Michael Tanner’s recent Cato paper, “The Grass is Not Always Greener.”)

Forced welfare, as opposed to voluntary charity, tends to promote dependency and irresponsible behaviors. And tax-funded “investment” in jobs means siphoning money out of the productive economy to reward special interests.

In other words, most of Obama’s policies promote zero-sum games, in which some gain at the expense of others.

But it’s not like John McCain is much better. Last November, Matt Welch wrote for the Los Angeles Times, “McCain… wants to restore your faith in the U.S. government by any means necessary, even if that requires thousands of more military deaths, national service for civilians and federal micromanaging of innumerable private transactions. He’ll kick down the doors of boardroom and bedroom, mixing Democrats’ nanny-state regulations with the GOP’s red-meat paternalism in a dangerous brew of government activism.”

To pick out one of those examples, forcing people to “serve” others (a practice we thought was outlawed in the United States) fails to recognize the benefits of liberty and mutually-beneficial exchanges. In a free society, people are free to give of their time and money to others. But the choice is left to them, and people are not free to forcibly give away the time or money that belongs to somebody else.

McCain asks you to “sacrifice your life” to “a cause greater than yourself.” In general, we’re opposed to human sacrifices, but especially when a political leader defines how and for what you are to sacrifice yourself. Didn’t we already do the century in which political leaders asked their countrymen to sacrifice their lives to the state?

Given McCain’s guiding principle of sacrifice, we expect him to be a fair-weather friend — at best — to voluntary, mutually-beneficial, free-market exchanges, despite his occasionally market-friendly rhetoric.

We don’t know who will become the next president. But we fear that whoever wins will do his or her damnedest to make sure that the rest of us lose.

Yes! Finally a comedian for the rest of us. This guy — Yarom Bauman, Ph.D. — tells jokes about marginal choices and libertarians. His web page, StandUpEconomist.com, links to various video clips in exchange for your e-mail. But here are a couple of direct links:

Principles of economics, translated

Stand-up economist at Caroline’s

A few days ago I discussed ticket scalping. Today Grand Junction Free Press published an article by my dad and me that looks at the economics of scalping: “World Series ticket meltdown a boon for scalpers.”

“… What would happen if, absent any other change, every grocer suddenly cut the price of oranges in half? Or what if everybody suddenly fell in love with oranges, but grocers barely raised prices? More people would buy oranges, until the oranges ran out. Maybe some of those lucky enough to buy oranges early in the day would ‘scalp’ their oranges for more than ‘face value.’ Or maybe grocers would institute a lottery system, so that shoppers could have a fair shot at buying cheap oranges.

“But why don’t the grocers simply raise the price of oranges until shoppers choose to limit their purchases to existing supplies? …”