When I was a kid, I loved watching “Happy Days,” even at its shark jumpiest. A big part of the appeal was the adolescent power fantasy of Arthur Fonzarelli, a disco-era caricature of a 1950s motorcycle hoodlum-with-a-heart-of-gold. As the series progressed, Fonzie developed an almost mystical aura, becoming somebody who could make almost anything happen through the sheer power of his cool.
The Fonz could knock down doors with a slap of his hand, summon any girl with a snap, and most often on the show displayed his classic power of fixing the jukebox by banging on it. It’s a seductive fantasy that one might be able to fix a complex piece of machinery through an application of blunt force, without having to worry about the intricate mechanisms that actually allow the machine to work.
Unfortunately, this is the mentality that has reigned for decades in applied public policy.
Is the economy broken? Bang on it. That’ll get it chugging along again. Wait, that didn’t work? You didn’t bang it hard enough. Or maybe your leather jacket needs to be a little cooler next time. At any rate, it’s your fault. If you’d only smacked the economy the way that Fonzie showed you, it totally would have worked.
Economic prescriptions thereby stem from a non-falsifiable tenet of faith in a grown-up power fantasy.
This kind of magical thinking convinces many because it is accompanied by a veneer of rigorous thought. There are even equations! Surely, equations are scientific! But as economist Don Boudreaux pointed out at Cafe Hayek:
Keynesian macroeconomic variables lump heterogeneous goods and services into undifferentiated masses, no longer to be understood as the complex workings of a dynamic system of social cooperation. But just because you can gather a bunch of statistics and aggregate them into a variable doesn’t mean that the variable has a meaningful application to the real economy.
If you want to fix a jukebox in real life, a mechanic might be able to get the job done by tinkering with the machinery until each piece once again functions correctly. It’s easy for people who have a facility with physical forms of engineering to take a similar view of the economy, thinking that if only the right people were in charge, they could tweak policy here and there to ensure successful outcomes for everyone. Adam Smith explained why the economy can’t be successfully engineered in such a way:
Even though an economy can’t be planned, or even tailored, successfully from on high, that form of scientism is at least understandable. It at least takes into account a small measure of the complexity of decentralized economic activity, even if it doesn’t — indeed, can’t — consider the rest. Keynesian macroeconomics is far worse, shunning even the scientistic attempt to grapple with at least some heterogeneous microeconomic factors as being the causal source of economywide trends. Instead, they insist that policymakers expropriate as much cash as humanly possible and wallop the economy with it as hard as they can.
In the end, the economy is not a jukebox, and neither a mechanic nor Ben Bernanke in the coolest leather jacket ever made can save it from its turmoils. Instead, the economy is made up of hundreds of millions of people with billions of plans, many of which fail but some of which succeed. Nobody knows for sure which plans will pan out in advance — not the people making them, and certainly not their public officials.
Only by letting individuals, alone or in voluntary association with others, respond to local conditions with unique knowledge can the best plans be discovered, expanded, and replicated. That process is made much more difficult when they face continual interference from central planners who only pretend they can know what’s best.
[Cross-posted at Shrubbloggers.]
Filed under: Economic Theory, Efficiency, Government Spending, Market Efficiency, Regulation, Spontaneous Order, Unintended Consequences
Comments: 1 Comment
The rich on Wall Street are demanding more bailouts:
Wait, you didn’t think I was talking about corporate bailouts, did you?
No, I’m talking about the rich people who make up the Working Group of Occupy Wall Street.
There is a very inconvenient and awkward question that is not being answered by the OWS crowd, as it pertains to wealth. Even making the assumption that the majority of those protesting are lower-middle class (a very liberal assumption, by anecdotal evidence), that would still mean that they are richer than 80 to 90 percent of the world’s population.
In fact, the poorest 5 percent of the United States is still richer than 68 percent of the world’s population. When compared to the poorest in India, China, or Afghanistan, the inequality is breathtakingly staggering. That college kid who is 60 grand in debt may as well be Bill Gates to a girl born in parts of rural China or Afghanistan.
Whenever this is brought up, you will inevitably hear this as a riposte:
In other words, you cannot ignore what is bad here because things are worse elsewhere.
Well, that statement may well have merit, were it argued in another context. In this context, it is meaningless. Here’s why.
The above “demands” have everything to do with trying to bring the classes to a parity rather than fixing the economy. We are constantly barraged with the 99 percent vs. the 1 percent rhetoric. This, in itself is a lie. At worst, the people protesting on Wall Street are the 32 percent. More likely, they are the 20 percent and up.
If there were one shred of intellectual honesty in this movement, the above demands would be much, much different. They would be calling for taxing everyone in America at a much higher rate and redistributing that money to the poor in China and India. As the holders of 20 percent of the world’s wealth, they surely can afford it. After all, there are millions upon millions of people living in soul-crushing, abject poverty at this very moment. A vast number of them can never hope to make more than $1 per day, if that.
Instead, we get demands for free education and free housing for all (well, for all the rich people living in the United States, anyway — everyone else can go get stuffed). This is nothing more than the rich seeking taxpayer money for bailouts through the use of force.
I’m not being flippant, here. When it comes to entitlements, tariffs, trade barriers, immigration or where I purchase my goods, I’ve not yet heard a convincing argument for why I should regard a middle-class or working poor American in any higher regard than the absolute poor of other countries.
When I’m told that I should buy American in order to save American jobs, I wonder why a South Korean’s job is of any less importance. When I’m told that I must pay my fair share to help the deserving and undeserving (relatively) poor of this country, I wonder why the absolute poor from other countries shouldn’t get that money first.
But this is what it’s come to, now.
Rich college-age kids asking for taxpayer funded bailouts in order to relieve them of a debt (paid by the taxpayers) that they voluntarily took on with full knowledge that they would have to pay it back. Not only that, the vast majority of them have the means to pay off said debt through hard word and dedication.
Now, tell me again why I should care that a rich kid got a liberal arts degree that didn’t pan out, when tens of millions are living in absolute poverty around the world. Tell me again why rich kids with liberal arts degrees aren’t sacrificing their income, well-being, and happiness to redistribute their wealth to those more in need.
It’s time that we stopped focusing on this murderous idea of “inequality” when we should be thinking instead of relative standards of living over time.
Maybe then we can focus on what’s wrong with our economy rather than just fight about which rich group of people get which bailouts.
[Cross-posted at Shrubbloggers.]
Filed under: Economic Theory, Government Spending, Labor, Politics, Taxes, Trade
Comments: 3 Comments
Here’s a great cartoon from Completely Serious Comics published earlier this year, currently being passed around on Facebook by critics of Keynesian stimulus:
I doubt the cartoon’s creators were thinking about government stimulus of aggregate demand when they conceived this, so it has become a piece of appropriated satire. And, like pretty much all great satire, it doesn’t play completely fair with its target. Even so, it contains a substantial nugget of truth.
Readers of this blog who are familiar with the book from which it takes its name will be well-acquainted with the broken window fallacy, first created as a parable by Frédéric Bastiat and later appropriated by Henry Hazlitt, who applied it to a mid–20th century economy.
In a nutshell, the parable explains why destruction doesn’t make a society wealthier. It may stimulate short-run economic activity as people rush to replace and rebuild what they’ve lost, but always at the expense of overall prosperity.
Within the past few years, Bastiat’s and Hazlitt’s critical heirs have applied the fallacy again and again to modern Keynesians. Here’s a video that does exactly that to Paul Krugman’s application of Keynesian theory to the destruction wrought by terrorist attacks (featured on this blog last year):
One objection to this line of thought could be that the broken window parable doesn’t apply to general stimulus, because government spending absent a disaster isn’t the same thing as destruction, and so isn’t analogous with a broken window. One response to this objection would be that the broken window parable is part of a larger essay about the unseen effects of various types of economic action. People explaining the arguments in the larger essay, which does indeed include government spending, might reasonably refer to them by invoking the best-known portion of that essay, the parable of the broken window. Conjuring the whole of an essay by referring to one part would be a kind of allegorical synecdoche, if you will.
Another response would be that spending may not destroy useful physical objects, true enough, but it does divert resources from more productive to less productive uses. Although private-sector businesses can’t be sure what their most productive potential investment will be, the government is by nature even less informed and therefore less capable of investing wisely. Siphoning resources from the private sector to the public sector destroys wealth, even if it doesn’t destroy specific goods. An allegory of a destroyed object certainly applies to the reality of destroyed wealth.
Keynesian apologists, and even some non-Keynesians, have cried foul in still more nuanced ways, pointing out that advocates of government stimulus don’t per se want destruction, and may not even think it will bring increased wealth, but think instead that it will increase short-term economic activity, increasing employment and smoothing over economically troubled times.
There are indeed shades of meaning and intent here. Believing that destruction may benefit the economy in some structural way, thereby sustaining short-term damage for long-term gain, isn’t the same thing as thinking that any individual act of destruction will increase economic wealth. After all, as Joseph Schumpeter pointed out, entrepreneurs engage in short-term “creative” destruction all the time, writing off temporary losses as a necessary cost of pursuing their visions for long-term productive investment.
The evidence, however, shows that government spending intended to stimulate the economy and smooth out the business cycle instead exacerbates the business cycle, leading both to higher peaks and lower valleys.
When there’s a downturn in the business cycle, there’s a structural problem with the economy — too many people in some occupations, not enough people in others. General stimulus provides no economic information about where people should go to find sustainable productive work, meeting real demands by providing the goods and services that people want rather than the trumped-up illusory demand prompted by government spending. You can’t build a healthy body on a string of sugar rushes, and you can’t build a healthy economy on a series of artificial top-down influxes of cash.
Stimulus only spurs some sectors of the economy by dampening others, whether present or future. The more that government officials tamper with the economic signals that let entrepreneurs know when they should invest and when they should steer clear, the more skittish investors become. Regime uncertainty entrenches malinvestment, and keeps the economy limping along.
So, Keynesians, please stop celebrating destruction as a cure for economic ills. If truly creative destruction needs to happen in order to move less productive resources into more productive uses, private-sector entrepreneurs have the decentralized knowledge necessary to determine which of their own resources need to be replaced or reshuffled. Government officials do not.
The only real cure for our lagging economy is for the government to quit breaking windows.
[Cross-posted at Shrubbloggers.]
Filed under: Economic Theory, Efficiency, Government Spending, Market Efficiency, Regulation, Spontaneous Order
Comments: 1 Comment
Let’s attempt the program of “economic stimulus” on a desert island. Five persons have survived the shipwreck. Joe is good at gathering berries and reeds, and dressing wounds; Al is good at fishing, hunting and basket-weaving; Bob is good at making huts and gourd-bowls; and Sam, who wants to spend all his time sharpening sticks, and who regards any other kind of employment as beneath him, cannot produce a tool of any usefulness.
Let more and more of the resources that would have been exchanged in life-fostering and productivity-fostering trade between Joe, Al and Bob be confiscated by a fifth person, the king (who happens to have the only gun, a Kalashnikov that he grabbed from the ship before it crashed; elsewise no one would listen to him). And let this confiscated wealth (after a suitably large finder’s fee for the king has been deducted) be given to Sam to subsidize his slow and pointless blunt-stick production, since it would allegedly be unacceptable for Sam to have to accept alms in accordance with the sympathies and judgments of his fellows. And let the king perpetually demand more and more “revenue” to distribute and perpetually bray that criticism of his taxing and spending policies by “economic terrorists” is undermining confidence in the island’s economy.
What are the effects of this confiscatory and redistributive process on the prospects for the islanders’ survival? Discuss.
Filed under: Culture, Economic Theory, Efficiency, Finance, Food Policy, Gains From Trade, Government Spending, Health Care, Labor, Law Enforcement, Local Government, Market Efficiency, Nanny State, Philosophy, Politics, Property Rights, Taxes, Trade, Unintended Consequences
A Saint Louis production company is planning to focus on reality television series, and it is looking into tapping the Missouri film tax credit program to do it. According to an article in the St. Louis Business Journal:
First, there is a fiscal problem. The state government in Missouri is facing historically low revenues, and has to make cuts to services that are arguably more important than reality television — such as education and public safety.
Second, there is a fundamental problem: This program diffuses the cost of reality television production onto the taxpaying population, and concentrates the benefits on reality television producers. Missourians will pay a marginally higher amount of taxes as a direct consequence of this policy.
I have many questions. Will Brett Michaels ever find love, and will he find it in Missouri? How much money in state incentives will it take for the “Rock of Love” bus to park in the Central West End of Saint Louis?
Additionally, what is the economic multiplier on reality television production? I know that contestants on dating shows like “The Bachelor” and the “The Bachelorette” purchase a considerable number of restaurant meals, so I suspect that it may be high. Similarly, if Kate brought her gaggle of Gosselins to Missouri, she’d probably buy a lot of diapers and children’s clothes in state.
Coupled with a lower marginal tax rate on income relative to other states, will this policy incite reality television stars to move to Missouri? Perhaps Snooki would consider moving to Missouri because the top marginal state income tax rate in New Jersey is 8.97 percent, whereas it is only 6.0 percent in Missouri.
Could a producer receive tax credits for making a reality television show about an activity that is also financed by state tax credits? Perhaps “Extreme Home Makeover: NorthSide Saint Louis” could feature a large private development that uses tax credits for historic preservation, low-income housing development, and/or brownfield remediation.
For the purpose of this post, I tried to brainstorm a list of titles of Missouri-specific reality shows that the state could subsidize with its film tax credit program. I encourage our blog readers to leave additional ideas for titles the comments section of this post.
** A reality show that follows the personal lives of several Italian-American young adults living in the Hill neighborhood of Saint Louis.
*** David Stokes tells me that a reality show about the Lake of the Ozarks’ Party Cove would make the stars of Jersey Shore look like participants in the Algonquin Round Table, and I concur.
Filed under: Culture, Government Spending, Politics, Taxes
The State of Missouri has cut funding to its Parents as Teachers program. I hope the drop in funding will redirect Parents as Teachers to focus on people who need the most help.
Maybe I’m not a pure libertarian, but I’m actually not opposed to government programs that give poor people free stuff or try to improve the odds for children in bad situations. I’m even okay with limited home-visiting programs, as long as they’re voluntary (and Parents as Teachers is) and as long as there’s no better way to provide the services.
But Parents as Teachers, as it’s currently run here in Missouri, goes way beyond intervening with at-risk children. The program accepts children from wealthy homes; in some participating families, the parents are pediatricians. Parents as Teachers provides the same costly home-visiting services to people who own two cars and drive their kids to gymnastics every day as it does to people who don’t have transportation and really do need someone to come to their house.
Parents as Teachers also conducts research activities that do nothing to help the kids now enrolled in the program. For example, this blog post written by a participant mentions the questions Parents as Teachers asked her for a study about autism. Of course, there’s a need for research, but it’s not clear that it should be conducted by this publicly-funded program. For one thing, there are benefits to specialization; some programs concentrate on research, while others teach parents and distribute children’s books. Most programs can’t do both well. It’s also questionable whether research should be tied to programs that ostensibly support vulnerable people, opening up the possibility that participants will feel pressured to go along with the research because they want to continue receiving services.
Parents as Teachers should learn from the funding cuts that taxpayers won’t help it do everything for everyone. The program should target people who most need help–either through geographic boundaries, like the Harlem Children’s Zone or Kansas City’s Zone 27, or through income limits. It could also seek out more private donations, or charge wealthy participants for some services.
Filed under: Child Policy, Government Spending, Nanny State
In an op-ed published on Thursday, the editorial board at the Wall Street Journal criticizes Washington’s latest attempt to bail out homeowners. They argue that this intervention will be as ineffectual as the those that preceded it, and that homeowners would be better off if the government hadn’t intervened. From the editorial:
The practice of bailing out homeowners has several unintended negative consequences. The following are among the most egregious, in my opinion.
(1) Bailouts discourage employment.
Just like any other type of unemployment benefit, payments to homeowners decrease an individual’s incentive to be employed. This contributes to a higher and longer-lasting unemployment rate.
(2) They penalize individuals who borrowed responsibly, and they encourage people to live outside of their means.
Why put 20% down for a cramped ranch-style when you could buy a McMansion and have the taxpayers pay for it?
(3) Many people bought houses that they couldn’t afford anyway, and they will foreclose on them in the future. For many people, a bailout is just delaying the inevitable.
As described in a relatively recent article in the New York Times:
(4) They cause housing prices to be artificially high.
Here is a Washington Post article on the subject. The latest proposal, like many of its predecessors, inflates home prices. Additionally, the $8000 homeowner tax credit allowed individuals to buy a more expensive house than they could otherwise afford.
(5) There is a moral hazard problem. If a person knows that they are likely to be bailed out, then they are more likely to assume risk.
I oppose bailing out people who bought houses that they couldn’t afford, and I disagree that the government should encourage homeownership. When a person invests her money, she assumes risk. Higher returns are supposed to be the payoff for accepting larger amounts of risk. Buying a house is just like any other investment outside of Treasury Bonds — there is a possibility that the individual will lose money. In some aspects, real estate is riskier than stocks because houses are not diversified (i.e., in the event of a natural disaster, a person’s entire investment is wiped out). A person should do thorough research before she makes what will be one of the largest financial decisions of her life.
I recommend the article “5 myths about home sweet homeownership” by Joseph Gyourko, chairman of the real estate department at the University of Pennsylvania, in the Washington Post. It repudiates the commonly-held idea that homeownership is a investment that has good returns and no risks. To me, the following is the most eye-opening statistic in the article:
[Cross-posted at Amateur Philosophy.]
Filed under: Government Spending, Market Efficiency, Uncategorized, Unintended Consequences
Working as an intern for the Cato Institute in 1997 was one of the most formative experiences of my life. During that time, I participated with the other interns in a series of lunchtime discussions with Tom Palmer, a Cato senior fellow, director of Cato University, and also now with the Atlas Economic Research Foundation, where he’s vice president for international programs. I’ve written elsewhere about my high esteem for Tom, and his considerable impact on my own intellectual development, and I could say more — but for now, I’ll get to the point.
The very first reading assignment that Tom gave to the interns was Frédéric Bastiat‘s essay “What Is Seen and What Is Not Seen.” It’s pretty powerful stuff, even today, and even for those of us for whom the ideas contained in that essay are old hat. That may be partly because of Bastiat’s clear, lucid, illustrative way of making abstract economic concepts understandable and unmistakable, but also because the economic fallacies that Bastiat debunked are still widely believed today, so his points remain relevant to modern political and social problems. When journalists — and even a Nobel laureate economist — begin to credit wanton destruction as a form of economic stimulus, it becomes obvious that Bastiat is more relevant than ever. Henry Hazlitt updated Bastiat’s essays for a new generation in his book for which this blog is named. Tom Palmer is helping to bring them to the YouTube generation.
Tom has begun producing a series of video clips with Atlas that aim to take these fallacy-busting arguments viral. I’m far from the first person to link to this clip, and I’ll be far from the last. The belief that destruction — or, for the same reasons, government spending — can stimulate the economy in a useful way is a symptom of lack of forethought. Anybody reading this right now can help stem the tide of economic ignorance by passing on the link to friends, or suggesting it to the reading audience of whatever forum you might participate in.
[Cross-posted at Shrubbloggers.]
Filed under: Economic Theory, Government Spending
Comments: 5 Comments
After reading the comments that appeared on Andrew Veen’s re-posting of Jen Pierce’s excellent post on a newcomer’s perspective of libertarian arguments, I wanted to address one of the major problems I’ve encountered when having political debate with libertarians and non-libertarians alike: false comparisons.
This is especially a problem when talking about health care, which admittedly is a difficult topic. The argument people sometimes present is “perfect government” (in which the efficient government delivers services efficiently) versus “imperfect markets.” Other times, it’s “perfect markets” versus “imperfect government.” Neither is very useful, as what really needs to be looked at is the actuality of how markets and government play out. Any debate that happens needs to involve what can be realistically expected from both the market and the government.
Market solutions, even in “perfect markets,” are relatively upfront about their negative points. A market solution, like one for health insurance, may not “include” everyone; a competitive market will bring the price down to a certain point so as to include more people (and sometimes, even most people) but there may be people who are still priced out and cannot afford the service, or insurance, or good. This is a flaw that is often used to attempt to discredit the solution.
The problem is that the government solution has flaws that are not initially apparent. For instance, in places like Massachusetts, Canada, and Great Britain, everyone has health insurance and coverage, but that equates to long wait times and rationing of care and quality. A lack of competition (and an excess of bureaucracy) stifles innovation possibilities and slows any moves toward efficiency. Also, governmental solutions have the backing of the law behind them; if one is unhappy with the service, there are limited legal methods to bypass them.
(Tangential note: Some may argue that rationing happens currently in the system we have, but rationing by price is a very different and more efficient mechanism than rationing by political clout. At any rate, the current system is too distorted by special interests and governmental infrastructure to be considered a market.)
The case of the sick little girl that Jen mentioned draws upon another part of the argument oft overlooked by pro-government solution proponents: the role of private charities. In the competitive market solution, people have more money to spend on other goods, including private charity. Private charities must do good work in order to garner further donations; so in the long-term, the better charities will receive the most money and make the most impact. The market may leave some people out, but the private sector can pick up the loose ends.
So, while the market solution admittedly does not “include” everyone, it is disingenuous to compare it to a governmental solution that does “include” everyone. Each has their own faults, but the market solution has mechanisms to fix them, whereas one must resort to the black market to get around the flaws in the governmental solution.
(Also posted at Lady Libertarian)
Filed under: Economic Theory, Government Spending, Health Care, Uncategorized
Comments: 1 Comment
Say it with me: We told you so.
Over the years, I’ve tried to help citizens regain control over their prodigal representatives. Sometimes I got called a radical for these activities. An extremist. But I think of myself as a moderate, as someone promoting moderation.
In government spending, for example.
Among the most moderate of these many statewide initiatives have been what are sometimes called the Taxpayer Bill of Rights, or TABOR, initiatives. These proposals are designed to limit spending increases to a formula of population growth-plus-inflation.
Sometimes we succeeded. Too often we failed.
The consequence of our failures, of each defeat at the hands and promotional budgets of groups that called us, of all people, extremists?
Now, state after state has become what Reason magazine dubs “Failed States.” They did what politicians demanded, spent at rates far greater than moderation would allow. And now that we’ve hit hard times, and state revenues have drastically fallen, how the politicians whine! Indeed, they demand bailouts.
Say it with me, you who’ve voted for TABOR in the past: “We told you so. Lacking our measures, the states have become part of the out-of-control federal deficits and ballooning debt.”
And remember, you who opposed our moderate measures to limit state spending: You are the radicals. You are the ones who helped set our country on its current, self-destructive course.
This is Common Sense. I’m Paul Jacob.
[Originally posted at ThisIsCommonSense.com]
Filed under: Government Spending, Taxes