Reason Magazine asks free-market economists their opinion of the proposed bailout plan, and collects their results. Click here to read this excellent article.
Category Archives: Economics
The Bailout Reader
The Ludwig von Mises Institute has compiled The Bailout Reader, a collection of articles relevant to the current situation.
Not all these articles are from the past few weeks, as Austrian economists have long understood the dangers of government interventionism, the fruits of which we see today.
The events taking place in the financial market offer an illustration of the soundness of the Austrian theory of money, banking, and credit cycles, and Mises.org is your source not only for analysis of these events but also the economic theory that helps explain what is happening and what to do about it.
Click here to access The Bailout Reader.
Lure of Earmarks Impossible to Resist, Even in Crisis
Bill Smith of ARRA News Service reports on earmarks worming their way in the agreement to end the current financial crisis. This agreement may have imploded on itself, but the lesson is clear. See the post Major “Earmark” in Democrat Bailout Agreement .
Ron Paul’s Wisdom on the Current Financial Crisis
Ron Paul writes My Answer to the President, noting that the “financial meltdown the economists of the Austrian School predicted has arrived.” He introduces a quotation from Hayek this way:
F.A. Hayek won the Nobel Prize for showing how central banks’ manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day — and which are being proposed, just as destructively, in our own.
In my opinion, a great danger we face is that just as the Great Depression lead to Roosevelt’s huge expansion of government, so too this current situation will lead to similar expansion of government power. This has already happened with the Federal Reserve system.
I urge you to read My Answer to the President by Ron Paul.
Laissez faire in Washington? On what planet?
Sheldon Richman of the Foundation for Economic Education contributes analysis of the current economic situation in the article Government Failure. A few quotes:
Laissez faire in Washington? On what planet? Governments at all levels have regulated the financial industry from the time of the founding. …
At the Division of Labour blog, economist Lawrence H. White asks: “What deregulation have we had in the last decade? Please tell me.” …
What about greed? Here White also has something important to say: “If an unusually large number of airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual.” Likewise, greed (however you define this essentially useless concept) can’t explain the current economic troubles. Why didn’t these troubles occur earlier? Were people less greedy then? …
What about irresponsibility? Now we are getting to the crux of the matter. There was irresponsibility — but only because the government for decades has pursued a policy of relieving big companies of the responsibility that otherwise would have been imposed by market discipline and competition. …
Good intentions count for nothing in this context. The laws of human action (praxeology) can’t be repealed or got around.
Praxeology. Ludwig von Mises has an explanation for everything, it seems.
Drug Runaround: Solved by Universal Health Care?
A letter writer in the July 12, 2008 Wichita Eagle has issues with his health insurance coverage, and wants us to discard our present system in favor of universal health care coverage.
Mr. Ronald Voth of Halstead (a candidate for the Democratic party nomination for the U.S. House of Representatives for the fourth district of Kansas in 2006) criticizes the health insurance company he uses. He doesn’t say how he obtained this coverage, but if he’s like most Americans that don’t receive their health care from the government, he and his family probably have an insurance policy selected and paid for by his employer. While many employers let their employees choose from a few variations of coverage, for most employees, they have to take what their employer is willing to provide. There isn’t much of a market for individual health insurance policies in America.
If there were a large market for private health insurance, customers would have the benefit of companies competing for your business in free markets. This means that if Mr. Voth doesn’t like the coverage he’s getting from his current provider, he can change. But for most people whose policies are provided and largely paid for by their employers, switching insurance carriers is not a realistic option. This employer-provided coverage, a relic from the circumvention of World War II price controls, results in less competition for customers.
With market-based competition comes innovation. With universal health care provided by government comes the opposite. I wonder if Mr. Voth knows that Canadians come to places like Wichita to get the health care they can’t get under their universal system? See Wichita’s Galichia Provides What Government Health Care Doesn’t.
Mr. Voth claims that universal care systems in other countries are cheaper than ours, and that’s true. But we should ask why. The article referenced below states: “… because the U.S. is so much wealthier than other countries, it isn’t unreasonable for it to spend more on health care. Take America’s high spending on research and development. M. D. Anderson in Texas, a prominent cancer center, spends more on research than Canada does.”
(By the way, the high cost of health care can’t be blamed on high-paid CEO’s. If the CEO of a large insurance company that has 10 million customers is paid, say, $100 million a year, that’s only $10 per customer per year.)
For more information about universal health care in other countries, the article The Ugly Truth About Canadian Health Care provides balanced criticism of the Canadian health care system.
Where’s Leadership on Oil Speculation?
In the July 12, 2008 Wichita Eagle, Kenneth James Crist of Wichita blames oil speculators for ruining the U.S. Economy, writing that politicians should “do something positive to halt the rampant speculation in the stock market and oil futures that is really driving these runaway prices. All it really amounts to is tremendous greed on the part of a few, at the expense of the many.”
I wish that Mr. Crist had read Futures Markets by the economist Walter E. Williams before writing this letter. In this article we learn this:
The futures market, which takes into account both the present and the future availability of goods, is a vital part of a smoothly functioning economy. Unfortunately, that fact provides little comfort to people frustrated over the high prices of food and fuel. As such, it provides fodder for political demagogues, charlatans and quacks who rush in with blame and prepare “solutions” for the problems they themselves have created — the high prices for food and fuel are directly linked to the policies of the White House and Congress.
That’s right. Futures markets — that’s where speculators buy and sell — provide a valuable service by assuming risk that others are not willing to take on, and by smoothing the price of commodities over time. Speculators assume risk. That is their essence. They may make huge profits in their leveraged trades, but they also bear the risk of, and the actual realization of, equally huge losses when their guesses are wrong.
That illustrates an often overlooked property of futures markets. For one person — the “evil” speculator — to bet on the price of oil going up, someone has to take the opposite position, betting that the price will fall. Both can’t be right. One wins and the other loses. Is there sympathy for these speculators that lose in these trades?
The action of a speculator taking a “long” position in markets is to buy low and sell high. This benefits consumers in the long run. By buying when prices are low, the speculator does cause prices to rise and be higher that they would be without the speculator’s buying. Then, selling when the price is higher, the speculator causes the prices to be lower than it would be if not for his selling. This is how the speculator smooths prices and assumes risk.
Speculators can’t wait too long, either. From Greedy Speculators? published at the Cato Institute:
The current political charge is, “the speculators are driving up the price of oil.” But think about it for a moment. If the price of oil is being driven above the market clearing price where supply equals demand, demand will fall and the speculators will be stuck holding huge, unintended stocks of oil. Holding oil in tanks and ships is costly, and speculators will not incur these costs for long, so the price will drop.
We need to recognize the valuable role that speculators play in our economy. By focusing on an easy target, we fail to look elsewhere to find the true causes of our problems.
For more information on the valuable role that speculators play in the economy, see chapter 22 of Walter Block’s book Defending the Undefendable.
Price Controls Will Harm Iowa
In the article Price Controls Create Man-Made Disasters we learn that although the Iowa attorney general has imposed Iowa’s anti-price-gouging rule (Price-gougers beware, Attorney General says), the likely effect will be “shortages of needed supplies, long lines, delayed repairs, and, perhaps, increased incivility.”
The price system is very good at allocating scarce resources. That’s certainly the case after natural disasters, where things as necessary as drinking water may be in short supply. Allowing the price of even essential items rise to high levels means that hoarding is discouraged, leading to more widespread availability of goods as necessary as drinking water.
Officials appear humanitarian when they impose anti-price-gouging measures, but this is just another example of the actual effect of something being very different from the intended effect.
Wichita’s Galichia provides what government health care doesn’t
A recent editorial in The Wichita Eagle (Dr. Bill Roy: Universal care is most economic, efficient) contains several mistaken impressions. One may be disproved by recent developments in Wichita.
The writer states “It has never been a secret that a single-payer system is the most economic, efficient and fair way of providing universal care.” Here’s something interesting that I’m sure the author of this opinion piece knows, but somehow disregards. In Canada, home to the type of health care system the writer favors, many people come to the United States for care. In fact, Wichita is now providing service to Canadians who, for one reason or another, are not satisfied with their own government-provided free care. “[Wichita’s] Galichia Heart Hospital treated its first out-of-country patient last month, a Canadian who needed a hip replacement and was willing to pay cash instead of waiting months — or even years — for what is considered elective surgery in Canada.” (Some U.S. hospitals try to draw foreigners with flat-rate care, May 29, 2008 Wichita Eagle.)
Someone needing a hip replacement in the United States probably doesn’t consider their need for surgery to be “elective.”
While we in the United States may complain about high drug costs and drug advertisements on television and in print, at least we have new drugs. We may complain about waiting a few weeks to see a specialist, but we usually get to see one. And some people complain that expensive advanced medical equipment has been installed in two of Wichita’s hospitals, when one should be sufficient. But we have these things. Countries with government health care often don’t: “All provinces continue to use rationing in an effort to contain the growth in government health spending. Governments ration health care with policies that reduce the effective supply of health professionals, reduce the availability of advanced medical equipment, and restrict the scope of coverage for new medicines under public drug insurance plans. Such rationing drives up waits for specialist medical care and inhibits access to new drugs.”
This passage is from a report titled Paying More, Getting Less 2007 from Canada’s Fraser Institute. The report makes this conclusion: “Based on the data and analysis in this report, we conclude that public health insurance, as it is currently structured in Canada, tends to produce rates of growth in government spending on health care that are not financially sustainable through public means alone. This is occurring while governments are restricting and reducing the scope of benefits covered under publicly funded health insurance.”
The Entrepreneur As American Hero
This is an excerpt of a speech given by Walter E. Williams on February 6, 2005 at Hillsdale College. The complete speech, titled “The Entrepreneur As American Hero,” can be read here: http://www.hillsdale.edu/imprimis/2005/03/.
At this juncture let me say a few words about the modern push for corporate social responsibility. Do corporations have a social responsibility? Yes, and Nobel Laureate Professor Milton Friedman put it best in 1970 when he said that in a free society “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
It is only people, not businesses, who have responsibilities. A CEO is an employee, an employee of shareholders and customers. The failure of the corporate executive community to recognize this, and its willingness to engage in activities unrelated to the pursuit of profits, means national wealth will be lower, product prices will be higher and the return on investment lower.
If we care about people’s wants, rather than beating up on profit-making enterprises, we should pay more attention to government-owned non-profit organizations. A good example are government schools. Many squander resources and produce a shoddy product while administrators, teachers and staff earn higher pay and perks, and customers (taxpayers) are increasingly burdened. Unlike other producers, educationists don’t face the rigors of the profit discipline, and hence they’re not as accountable. Ditto the U.S. Postal Service. It often provides shoddy and surly services, but its managers and workers receive increasingly higher wages while customers pay higher and higher prices. Again, wishes of customers can be safely ignored because there’s no bottom line discipline of profits.
Here’s Williams’ law: Whenever the profit incentive is missing, the probability that people’s wants can be safely ignored is the greatest. If a poll were taken asking people which services they are most satisfied with and which they are most dissatisfied with, for-profit organizations (supermarkets, computer companies and video stores) would dominate the first list while non-profit organizations (schools, offices of motor vehicle registration) would dominate the latter. In a free economy, the pursuit of profits and serving people are one and the same. No one argues that the free enterprise system is perfect, but it’s the closest we’ll come here on Earth.
The Candlemaker’s Petition
By Frederic Bastiat
A PETITION
From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.
To the Honourable Members of the Chamber of Deputies.
Gentlemen:
You are on the right track. You reject abstract theories and little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.
We come to offer you a wonderful opportunity for your — what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice — your practice without theory and without principle.
We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation.
This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.
We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.
Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.
First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?
If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.
If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.
Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate.
Thus, there is not one branch of agriculture that would not undergo a great expansion.
The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.
But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.
There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.
It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.
We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and the principle behind all your policy.
Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense?
We have our answer ready:
You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.
Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, “Yes,” you reply, “but the producer has a stake in their exclusion.” Very well, surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.
“But,” you may still say, “the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.”
Very well, If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.
Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?
But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else’s would be tantamount to accepting the equation: + x + = -; in other words, it would be to heap absurdity upon absurdity.
Labour and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labour that constitutes value and is paid for.
If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.
Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.
Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labour withstand the competition of foreign labour when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?”
But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.
To take another example: When a product — coal, iron, wheat, or textiles — comes to us from abroad, and when we can acquire it for less labour than if we produced it ourselves, the difference is a gratuitous gift that is conferred up on us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production.
Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!
Frédéric Bastiat (1801-1850), Sophismes économiques, 1845
Henry Hazlitt explains Frederic Bastiat, or, a broken window really hurts no matter what the New York Times says
This simple lesson from Henry Hazlitt’s Economics in One Lesson explains so much, yet so little people realize and apply the truths explained here. Even trained economists like Paul Krugman, writing in The New York Times, fail to recognize the truth of Bastiat’s lesson as explained by Hazlitt when he remarked that “the terror attack [of 9/11/2001 that destroyed the World Trade Center] could even do some economic good.”
Part TWO
THE LESSON APPLIED
THE BROKEN WINDOWLet us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.
A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business?
Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever- widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
Gambling study flawed. Ask casino workers.
Did you know that a study used to promote the economic development benefits of gambling in Wichita has casino workers paying for a large part of the social costs of gambling?
There is a document titled “Economic & Social Impact Anlaysis [sic] For A Proposed Casino & Hotel” created by GVA Marquette Advisors for the Wichita Downtown Development Corporation and the Greater Wichita Convention and Visitors Bureau, dated April 2004. One presentation concludes that the average cost per pathological gambler is $13,586 per year. Quoting from the study in the section titled Social Impact VII-9:
Most studies conclude that nationally between 1.0 and 1.5 percent of adults are susceptible to becoming a pathological gambler. Applying this statistic to the 521,000 adults projected to live within 50 miles of Wichita in 2008, the community could eventually have between 5,200 and 7,800 pathological gamblers. At a cost of $13,586 in social costs for each, the annual burden on the community could range between $71 and $106 million.
If all we had to do was to pay that amount each year in money that would be one thing. But the components of the cost of pathological gamblers include, according to the same study, increased crime and family costs. That is, people are hurt, physically and emotionally, by pathological gamblers. Often the people harmed are those such as children who have no option to leave the gambler.
But this study makes the argument that the economic benefits of gambling will more than pay for this social misery: “While this community social burden could be significant, its quantified estimate is still surpassed by the positive economic impacts measured in this study.”
How does the report make this conclusion? The largest components of the positive economic impacts are employee wages ($37 million), additional earnings in the county, and state casino revenue share, along with some minor elements. Together these total $142 million, which is, as the authors point out, larger than the projected costs shown above.
But this analysis is flawed. Casino employee wages can’t be used to offset the social costs of pathological gamblers, as these employees probably want to spend their wages on other things!
Economic impact studies like this often assume that any economic activity the proposed development might create is due solely to its existence, and that these monies can be used to pay for whatever problems or costs the development causes.
Just ask the prospective casino employees where they want their wages to go: into their own pockets, or be used, as this study uses them, to pay for the social costs of gambling.
The law vs. markets
One of the criticisms of raising the minimum wage is that it is Congress substituting its judgment for the market’s in determining pay. While Congress can force an employer to pay an employee a minimum amount, it can’t force the employer to keep the employee.
In a similar fashion, the Mississippi Attorney General has forced an insurance company to pay for damage its policies didn’t cover. He used a court of law to do that. What the court can’t do, however, is force the insurance company to keep writing policies in Mississippi.
State Farm, the nation’s largest home insurer, announced this week that it would no longer be writing new homeowner or commercial policies in Mississippi. Magnolia Staters wondering whom to thank for their rising insurance bills, assuming they can get insurance at all, should direct their catcalls at Attorney General Jim Hood. … State Farm will now be paying at least tens of millions of dollars in claims that it never factored into its risk premiums, and it has reasonably chosen not to make itself vulnerable again to Mr. Hood’s extortion. … State Farm joins Allstate, which last year also stopped writing policies along Mississippi’s coast. Together, the two insurers make up 40.5% of the Mississippi market. Homeowners looking for coverage will now have fewer companies to choose from, with higher premiums the likely result. If the rest of the industry follows suit and also exits Mississippi, consumers could have no choice at all.
— From “Steal Magnolia,” February 16, 2006 Wall Street Journal
Sugarcane not so sweet
Writing from near Thibodeaux, Louisiana
Driving though the sugarcane fields of southern Louisiana during harvest, it is impossible not to dwell upon the politics behind it all. Those politics being the sugar subsidy and the benefits it brings to these farmers, and the cost of it to the rest of us.
Sugar in the United States costs from two to three times what it does elsewhere, even in Canada and Mexico. It is purely the government, through the sugar subsidy, that causes sugar to cost more in our country. There is no other explanation for this difference. The goal of the sugar subsidy is to keep the price of sugar in America high, for the benefit of the sugar farmer.
While helping farmers may seem like a noble goal, consider how that help is given. First, money is transferred from the American taxpayer to the sugarcane farmer. From a liberty-based frame of reference, this is intolerable.
Second, the effect of the subsidy is that Americans pay much more for sugar and sugar-containing foods than we would if the sugar subsidy was not in place. Sugar substitutes, such as corn sweeteners, are likely more expensive than they would be if not for high-priced sugar.
Then, consider the effect of expensive sugar in America. George Will reported in 2004 this about candy-making jobs in Chicago: “In 1970, employment by the city’s candy manufacturers was 15,000. Today it is under 8,000, and falling.” Brachs moved to Mexico. Lifesavers moved to Canada. There, sugar can be bought at the world price.
This is almost always the effect of subsidies: a small number of people benefit greatly, while the rest of us pay just a little more. We may not even notice that little bit, but these little bits do have large cumulative effects on the economy. Some people are devastated by these cumulative effects, like the American candy workers who lost their jobs due to expensive sugar.
The effect on our political system is corrosive. The subsidy payments (or equivalent tax breaks for special industries) are so valuable that the recipients will expend great effort to secure them. The result is scandal and corruption.
Here in Kansas we receive large farm subsidy payments each year. The first congressional district of Kansas, represented by Jerry Moran, for the years 1994 to 2004, received $6,225,124,802 in subsidy payments. That placed this district in second place amongst all congressional districts, trailing the at large district of North Dakota by about $3 million, and representing 4.3% of all farm subsidy payments. It is little wonder that Rep. Moran won re-election in 2006 with 79% of the vote.
For the same time period the fourth district on Kansas, represented by Todd Tiahrt, received $697,262,571 in farm subsidies, even though only 0.5% of the workers in his district work in agriculture. These subsidies represent large transfers of wealth from taxpayers at large to a relatively small number of farmers.
What would happen if farm subsidies were eliminated?
It is likely — in fact, almost certain — that farmers will have to change. The Louisiana sugarcane grower will have to become more efficient in order to match the world price for sugar, or change and grow something else. Same for subsidized farmers in Kansas. It is likely that the market prices for some farm products might increase. At the same time, tax payments to farmers will drop to zero, so we will save in taxes.
We would be much better off if we eliminated these payments and let markets decide the prices of farm commodities. Instead of government bureaucrats deciding how much of what will be grown, consumers will let farmers know what to grow through the prices they are willing to pay for farm products.
Unintended but foreseeable harms of the minimum wage
Understanding the minimum wage, and why an increase will be harmful to those it is meant to help, requires thinking beyond stage one.
Commentary by David R. Henderson in the August 1, 2006 Wall Street Journal shows how the unintended effects may harm those who are still working after an increase in the minimum wage:
… because the minimum wage does not make employees automatically more productive, employers who must pay higher wages will look for other ways to compensate: by cutting non-wage benefits, by working the labor force harder, or by cutting training. Interestingly, the Economic Policy Institute (EPI), a union-funded organization in Washington that pushes for higher minimum wages, implicitly admits the last two of these three. On its Web site, EPI states, “employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.” How would an employer get higher productivity and decreased absenteeism? By working the employers harder and firing those who miss work. Lower training costs? By training less.
Other things employers might to do compensate for higher labor costs include these:
- Reduce non-wage benefits such as health insurance.
- Eliminate overtime hours that many employees rely on.
- Substitute machines for labor. We might see more self-service checkout lanes at supermarkets, for example.
- Use illegal labor. Examples include paying employees under the table, or requiring work off-the-clock.
- Some employers may be more willing to bear the risks of using undocumented workers who can’t complain that they aren’t being paid the minimum wage.
- Some employers may decide that the risks and hassles of being in business aren’t worth it anymore, and will close shop.
Increasing the wellbeing of low-wage workers requires more work than passing a mere law.
Problem of low wages not easily solved
It seems like an easy fix for social injustice: pass a law requiring employers to pay workers more than they would otherwise. Magically, everyone has more wealth.
It would be nice if it were so easy and simple. Looking at only the immediate effects and listening to the rhetoric of some politicians and editorial writers, it would seem that a higher minimum wage is good. But considering all effects of a higher minimum wage reveals a different situation.
As Milton Friedman writes in Capitalism and Freedom:
Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. … The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be.
There are those who say that increasing the minimum wage won’t have any impact on the demand for labor, and therefore people won’t lose jobs. But that is false. If it weren’t false, why not raise the minimum wage to, say, $25? Most people would say that at that level, employers wouldn’t hire low-skill workers because they aren’t “worth” that much. But some workers aren’t “worth” even the present minimum wage, or they could find jobs at this wage.
(When we say workers aren’t “worth” a certain wage, we are really saying that the marketplace — that’s you and me — places a certain value on the output the worker is able to produce. It has nothing to do with their worth as a person. It has everything to do with their ability to produce goods and services that people are willing to pay for.)
Furthermore, if we are willing to agree that raising the price of employing certain workers won’t decrease the demand for their labor, we also have to be willing to ignore the law of supply and demand, which states that as the price if something increases, less will be demanded. I am confident that this law applies.
The problem is that an increase in the minimum wage does nothing to increase the productivity of workers, and increasing productivity is the only way that workers can make real progress.
How do we increase worker productivity? One way is through education. Sadly, as documented in many articles on this website, our public education system is failing children badly.
Capital — another way to increase wages — may be a dirty word to some. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption) and invested in a piece of equipment that helped workers to increase their output. Those who call for higher taxes — often the same people calling for a higher minimum wage — make it more difficult to accumulate capital.
These are the things we must do to increase productivity, and with it, real wealth. If the solution was really as simple as some claim, that in order to increase the wellbeing of low-wage workers we could merely pass a law, shouldn’t we be outraged that this law wasn’t passed a long time ago?
Then, if a law is passed to raise the minimum wage to x, shouldn’t we insist that it have been increased to x + $1, or x + $2, or x + …?
No, the solution to low wages is much more difficult than that.
The AirTran subsidy and its unseen effects
Writing from Natchez, Mississippi
In a June 16, 2006 column, Wichita Eagle editorial writer Rhonda Holman again congratulates local and state government for its success in renewing the AirTran subsidy, and for getting the entire state of Kansas to help for it.
We should take a moment to understand, however, that while the allure of the subsidy is undeniable, it may eventually extract a high price on Wichita. Currently, the legacy airlines provide service to Wichita and other small markets partly because they feel a duty to provide comprehensive, nationwide service. But that may be changing. In an article titled “Major Airlines Fuel a Recovery By Grounding Unprofitable Flights” from the June 5, 2006 Wall Street Journal, we learn that this may change:
The big carriers, which for decades have doggedly pursued market share at any cost, now are focusing just as aggressively on the profitability of each route and flight.
The so-called legacy carriers — those like American Airlines and Delta Air Lines, with big pension and other obligations that predate the industry’s deregulation in 1978 — have abandoned many of the tactics that have led to their cyclical weakness. They are increasingly unwilling to fly half-empty aircraft to stay competitive on a given route just for the sake of feeding their nationwide networks.
As I have written before, if AirTran — one of the newer airlines without the baggage of high costs that plague the legacy airlines — can’t earn a profit on its service to Wichita, it may be that other airlines are not, either. This article tells us that we may be in danger of losing the service of the legacy airlines. And, as I have written earlier, there are a great many destinations you can’t get to on AirTran.
(The same article also tells us that during much of the time of the subsidy, airfares were falling nationwide anyway: “… the Air Travel Price Index, a quarterly measure of changes in airfares, rose 9.1% in the fourth quarter of last year from a five-year low a year earlier.” So we might have had lower fares even without the subsidy. Of course, we can’t know that, just as subsidy advocates can’t know how much we’ve saved from the subsidy, no matter what they may say.)
Our local government leaders simply do not have the knowledge needed to successfully run a planned economy, which, in essence, is what they are doing when they apply price controls to the airfare market in Wichita. That’s right. The subsidy is a form of price controls. After all, if the subsidy didn’t serve to reduce the price of airfare, what would be its reason for existence?
No government has ever been able successfully impose price controls without the people suffering harmful consequences. As economist Thomas Sowell wrote in a 2005 column:
Prices are perhaps the most misunderstood thing in economics. Whenever prices are “too high” — whether these are prices of medicines or of gasoline or all sorts of other things — many people think the answer is for the government to force those prices down.
It so happens there is a history of price controls and their consequences in countries around the world, going back literally thousands of years. But most people who advocate price controls are as unaware of, and uninterested in, that history as I was in the law of gravity.
Prices are not just arbitrary numbers plucked out of the air or numbers dependent on whether sellers are “greedy” or not. In the competition of the marketplace, prices are signals that convey underlying realities about relative scarcities and relative costs of production.
Those underlying realities are not changed in the slightest by price controls. You might as well try to deal with someone’s fever by putting the thermometer in cold water to lower the reading.
Municipal transit used to be privately owned in many cities, until local politicians’ control of fares kept those fares too low to buy and maintain buses and trolleys, and replace them as they wore out. The costs of doing these things were not reduced in the slightest by refusing to let the fares cover those costs.
All that happened was that municipal transit services deteriorated and taxpayers ended up paying through the nose as city governments took over from transit companies that they had driven out of business — and government usually did a worse job.
The immediate effect of the subsidy is a drop in airfares. The long-term effects, the effects that we can’t really see right now (even though the number of daily flights to and from Wichita has decreased in the last year) are unknown, but are likely to be quite bad for our town. These unseen effects of a policy are important, and, being unseen, are hard to spot, even if you’re looking. Frederic Bastiat, in his pamphlet titled “That Which is Seen, and That Which is Not Seen” http://bastiat.org/en/twisatwins.html said this:
Between a good and a bad economist this cons
titutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil.
Henry Hazlitt writes of the fallacy of unseen effects, but realizes they are often obfuscated by “the special pleading of selfish interests.”
Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for then plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.
In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.
We must hope that the legacy airlines choose to continue their service to and from Wichita, in spite of our government’s action.
Economics In One Lesson, 50th Anniversary Edition
Economics In One Lesson, 50th Anniversary Edition
Henry Hazlitt
Laissez Faire Books, 1996
This book, first published in 1946, explains common fallacies (a false or mistaken idea) that are particularly common in the field of economics and public policy. At the very start of the book Mr. Hazlitt explains:
Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for then plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.
In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.
At first it seems as though not much has changed since the end of World War II. What has changed, though, is the scope of the dangers Mr. Hazlitt identifies. That’s because government is much expanded and more assertive today than when this book was written. In 1946 the New Deal was not very old, and the tremendous expansion of government social programs was still in the future. We should take these lessons as even more important today.
It is the overlooked consequences that cause harm. They are overlooked sometimes because they are difficult to see, as in the broken window fallacy explained by Frederic Bastiat and also in this book. They are also “overlooked” because, as Mr. Hazlitt tells us, one group wants special favors from the government, and although there is no way to grant these favors without harming some other group, the favor-seeking group will seek to hide, obfuscate, muddle, or minimize the bad effects. At the same time they promote the policy as good for everyone. This is largely the job that lobbyists perform, and billions are spent on it each year. That’s because a powerful government has the ability to bestow valuable favors, those favors being paid for by someone else, someone often not easily seen.
An example of overlooked secondary consequences is government spending. When government spends, it means it must tax or borrow. What government spends is not available for individuals to spend. When we see magnificent public works (say a new downtown arena in Wichita), we don’t see all the things that would have been bought had the government not taxed to build the public work. We see the jobs created by the public work — all the construction workers that will be building the new arena — but we don’t see the jobs destroyed because people had to reduce their spending elsewhere.
Foreign trade is a case where people often fail to grasp the complete picture. We often see exports as something good for our economy, while imports are seen as bad. Imported things are things that American workers can’t compete with, and so American jobs are lost, it is often said. But as Mr. Hazlitt says: “It is exports that pay for imports. The greater exports we have, the greater imports we must have, if we ever expect to get paid. The smaller imports we have, the smaller exports we can have. Without imports we can have no exports, for foreigners will have to funds with which to buy our goods.” So those wanting restrictions on imports are also — although they do not say this, either because they do not recognize it or it doesn’t matter to them — calling for fewer exports.
In recent years we have been told that our is a “consumer-driven” economy, fueled by people tapping their home equity that accumulated from increased home values, or spending by going into debt. It is as though if consumers started saving rather then spending on immediate consumption, the American economy would collapse. But Mr. Hazlitt tells us that “saving is only another form of spending.” After all, what is done with money that is saved? Today, few put their savings under the mattress. Instead, it is loaned to a bank or invested. Then it is spent on capital goods, which businesses use to increase their productive capability. The key fact is that businesses spend it. And, they spend it on capital goods that either expand their capacity to produce, or decease their present costs of production. Either way, that is good for everyone. It means more jobs, and better jobs. But this saving is derided as not being “productive.”
As a conclusion Mr. Hazlitt tells us:
And this is our lesson in its most generalized form. For many things that seem to be true when we concentrate on a single economic group are seen to be illusions when the interests of everyone, as consumer no less than producer, are considered.
To see the problem as a whole, and not in fragments: that is the goal of economic science.
This is a very valuable book, which while dated a bit, cuts through the fog and haze of economics and public policy and lets us understand the effects of our government’s policies.
The Undercover Economist
The Undercover Economist
(Exposing Why the Rich Are Rich, The Poor Are Poor — And Why You Can Never Buy a Decent Used Car)
Tim Harford
Oxford University Press: 2006
This is an enjoyable book that explains the basics of how economics works, which is to say, how the world works. Mr. Harford doesn’t go into any technical detail at all, so there are no charts and graphs to decipher (although a very few are used for illustration), and there are no mathematical formulas.
Mr. Harford seems to believe more than I do that government may need to step in and correct some types of market failures. All in all, though, I agree with almost everything Mr. Harford writes.
In one chapter, Mr. Harford correctly assesses the current U.S. health care payment system as a mess. What he proposes as a solution is health savings accounts, where a low cost (about $1,500 per year) insurance policy to cover catastrophic charges is combined with individually owned health care savings accounts. People manage their own health care savings accounts. They get to keep what they don’t spend, so there is an incentive to spend wisely and reduce the need for health care through prevention.
Mr. Harford, with slight modification, believes in the random walk theory of security prices. I don’t think I would trust an economist who doesn’t.
In a chapter titled “Why Poor Countries Are Poor” he explains, using his trip to Cameroon, how terrible a plague political corruption is. That alone, he says, is the most important reason why most poor counties stay poor. He didn’t mention lack of formal property systems as described in Hernando De Soto’s book The Mystery of Capital.
A chapter on globalization explains relative advantage and how it contributes to the increased wealth of nations that participate in free trade. A quote:
Contrary to popular belief, it is simply not possible for trade to destroy all of our jobs and for us to import everything from abroad and export nothing. If we did, we would have nothing to buy the imports with. For there to be trade at all, somebody in America must be making something to sell to the outside world.
He explains the Lerner theorem, which says that a tax on imports is exactly equivalent to a tax on exports. Another interesting insight:
Trade can be thought of as another form of technology. Economist David Friedman observes, for instance, that there are two ways for the United States to produce automobiles: they can build them in Detroit, or they can grow them in Iowa. Growing them in Iowa makes use of a special technology that turns wheat into Toyotas: simply put the wheat onto ships and send them out into the Pacific Ocean. The ships come back a short while later with Toyotas on them. The technology use to turn wheat into Toyotas out in the Pacific is called “Japan,” but it could just as easily be a futuristic biofactory floating off the cost of Hawaii. Either way, auto workers in Detroit are in direct competition with farmers in Iowa. Import restriction on Japanese cars will help the auto workers and hurt the farmers; they are the modern-day equivalent of “frame breaking” [what Luddites did to mills and machines in England].
(Perhaps Mr. Harford has never been to Iowa, because in my experience, Iowa wheat fields are rare. Corn, however, is abundant.)
The problem is that the change that trade brings about affects different groups in different ways. Politicians love trade protection measures because they generally help a small, well-defined group immensely, at a lower and perhaps unnoticed cost to the rest of the people.
This book, combined with a few others such as Thomas Sowell’s works and Common Sense Economics: What Everyone Should Know About Wealth and Prosperity (all reviewed on this site) will work to increase anyone’s understanding of how economics works.