Voice For Liberty

Tag: Role of government

  • The miracle and morality of the market

    The Miracle and Morality of the Market
    Richard M. Ebeling (Click here to read the article.)

    In this short article we learn the simple mechanism that makes our economy work so well. Interference with that mechanism is not only harmful, it is immoral.

    Prices convey the information that we need to make our economy work. Here is why:

    How are the activities of an increasingly larger group of individuals successfully coordinated, so that all the multitudes of demands and supplies are brought into balance and harmony? The Austrian economist and Nobel Laureate Friedrich Hayek showed how all of the knowledge and information in society can be encapsulated in the price system of the free-market economy. In our roles as both consumers and producers we communicate to one another what we think goods, resources, capital, and labor services are worth to us in their various and competing uses through the prices we are willing to pay for them. These “price signals” serve as the means for all of us to decide and coordinate what we want and are willing to do together with other members of society.

    Because of the information conveyed by prices, is not necessary for a government to rule over the economy to cause it to function properly. In fact, government intervention in the economy is harmful, because the market is so complex that it is impossible to guide effectively.

    The moral dimension of the market refers to how in a free society, people enter into transactions freely, choosing those that they believe will benefit them:

    There are none who are only masters and others who are simply servants. In the market society we are all both servants and masters, but without either force or its threat. In our roles as producers … be it as men who hire out our labor for wages, resource owners who rent out or sell our property for a price, or entrepreneurs who direct production for anticipated profits … we serve our fellow men in attempting to make the products and provide the services we think they may be willing and interested in buying from us.

    Yet we know there are those who wish to interfere with the working of a free market through various means. All attempts to do this reduce the amount of liberty we are able to experience.

    Too many want to dictate how others may make a living, or at what price and under what terms they may peacefully and voluntarily interact with their fellow human beings for purposes of mutual material, cultural, and spiritual betterment.

    Often the concept of free markets is viewed as contrary to a moral society. Those who advocate government programs to make us better off are portrayed as noble, virtuous, and smarter than the rest of us. This article shows us that they are not that at all — they are immoral. Why? Almost all these programs forcibly take money from one person and give it to another to whom it does not belong. There is no moral right for anyone or any government to do that, no matter how noble the cause appears.

  • The Rise of Government and the Decline of Morality

    At the time when we have voted on a major issue that was framed in terms of morality, when we have prominent preachers attempting to impose their version of morality on us through the power of government, when we have a mayor who opposes certain businesses for moral reasons, and we have government at all levels spending more and more, we should remember that government is not the basis of morality. In fact, the growth of government has displaced morality. James A. Dorn of The Cato Institute explains why in this article: The Rise of Government and the Decline of Morality.

  • AirTran Subsidy Remarks

    Following are remarks I am delivering to several groups, including the Wichita City Council, in April 2005.

    AirTran Subsidy is Moving in Wrong Direction

    We were persuaded to accept the AirTran subsidy in 2002 as a temporary measure, to allow AirTran to build a presence here, and that the subsidy would no longer be needed at some time. But now we see that the situation is moving in the opposite direction, as AirTran asks for even a larger subsidy.

    Economic Impact Overstated

    The argument that many Fair Fares supporters make is flawed. They are grossly — I would say even speciously — overstating the importance of the airport to our local economy.

    As an example, Mr. Troy Carlson, then Chairman of Fair Fares, wrote a letter that was published on September 16, 2004 in the Wichita Eagle. In that letter he claimed $2.4 billion economic benefit from the Fair Fares program ($4.8 billion for the entire state). I was curious about how these figures were derived. Through correspondence With Mr. Steve Flesher, air service development director for the city of Wichita, I learned that the basis for them is a study by the Center for Economic Development and Business Research at Wichita State University that estimates the economic impact of the airport at $1.6 billion annually. In this study, the salaries of the employees of Cessna and Bombardier, because these companies use the airport’s facilities, are counted as economic impact dollars that the airport is responsible for generating.

    To me, this accounting doesn’t make sense on several levels. For one thing, if we count the economic impact of the income of these employees as belonging to the airport, what then do we say about the economic impact of Cessna and Bombardier? We would have to count it as very little, because the impact of their employees’ earnings has been assigned to the airport.

    Or suppose that Cessna tires of being on the west side of town, so it moves east and starts using Jabara Airport. Would Cessna’s economic impact on Sedgwick County be any different? I think it wouldn’t. But its impact on the Wichita airport would now be zero. Similar reasoning would apply if Cessna built its own runway.

    Or it may be that someday Cessna or Bombardier will ask Sedgwick County for some type of economic subsidy, and they will use these same economic impact dollars in their justification. But these dollars will have already been used, as they were attributed to the airport.

    It is a convenient circumstance that these two manufacturers happen to be located near the airport. To credit the airport with the economic impact of these companies — as though the airport was involved in the actual manufacture of airplanes instead of providing an incidental (but important) service — is to grossly overstate the airport’s role and its economic importance.

    To its credit, the WSU CEDBR study does provide some figures with the manufacturing employees excluded. The impact without the manufacturing employees included is estimated at $183 million, or about 11 percent of the $1.6 billion claimed earlier.

    Structural Changes in Airfares

    In the past few months, most American airlines have simplified their fare structures. Notably they have dramatically cut last-minute walk-up fares, which are the type of high fares that AirTran was supposed to provide an alternative to. In light of these structural changes in airfares, we do not know what would happen to airfares in Wichita if AirTran left.

    Fares to the West May Hold Clue

    Since AirTran doesn’t fly to the west, it may be that looking at westbound fares could give us a clue as to what eastbound fares would be in AirTran’s absence. I took three eastern cities (all served by AirTran) and three western cities and compared airfares for a Tuesday through Thursday trip booked two days in advance. The westbound tickets averaged $74 higher than eastbound — an increase, but not anywhere near the magnitude that subsidy supporters claim fares would rise by if AirTran leaves. I would welcome someone with more experience than me researching this.

    Subsidies Distort Markets

    The subsidy distorts the market process through which individuals and businesses decide how to most productively allocate capital.

    Subsidies Create Dependence on Government

    When government pays a subsidy to one company or industry, it creates an environment where others expect a subsidy, too. For example, we shouldn’t expect any other airline to start service to Wichita unless they receive a subsidy like AirTran does.

    Companies in other industries see local government as a source of subsidy, so they ask for subsidies to locate to Wichita. Even local established companies threaten to leave Wichita unless they receive subsidies. This creates an environment where, year after year, local governments make investment decisions for us instead of relying on the collective judgment of free market allocation of resources. This corporate welfare — which is what the AirTran subsidy is, plain and simple — is very harmful.

    Other Articles

    “The Downside of Being the Air Cap” by Harry R. Clements at wichitaliberty.org/wichita-government/the-downside-of-being-the-air-cap/. Mr. Clements’s article makes a striking conclusion as to why airfares in Wichita were so high.
    “Stretching Figures Strains Credibility” at wichitaliberty.org/wichita-news-media/stretching-figures-strains-credibility/. This article contains a link to the WSU CEDBR study.
    “Letter to County Commissioners Regarding AirTran Subsidy” at wichitaliberty.org/sedgwick-county-government/letter-to-county-commissioners-regarding-airtran-subsidy/
    “End Corporate Welfare, Starting with Industrial Revenue Bonds” at wichitaliberty.org/role-of-government/end-corporate-welfare-starting-with-industrial-revenue-bonds/

  • Why government spending is (mostly) bad

    Government spending replaces the judgment of the market with the judgment of politicians. The judgment of the market refers to the billions of decisions that we collectively make each day, decisions that we freely make, that we believe will advance our self-interest. That is to say, the market is characterized by mutual agreement and voluntary consent.

    What about the judgment of politicians? In a free market, in order to effect a transaction with someone, each side has to please the other. But politicians have the tax system, which allows them to take money from us by force. Then, when they decide how to spend money, decisions are often made to satisfy those who seek political favoritism instead of participating in meaningful economic activity. So government spending, then, grossly distorts the free market system.

    The more government makes spending decisions for us, the poorer we become.

    There is a limited set of things that government does well and should spend money to do. At the national level, we know that there are those who wish to do us harm, so we need a national defense. Locally we need police, courts, and prisons to keep us safe from criminals. There may be cases involving infrastructure where government is more efficient than private industry.

    At the federal level, though, about two-thirds of the budget consists of the government taking money from one person and giving it to someone else to whom it does not belong. Both major parties are equally guilty of this. This type of government spending is wrong, no matter who does it. As the economist Walter E. Williams says:

    Can a moral case be made for taking the rightful property of one American and giving it to another to whom it does not belong? I think not. That’s why socialism is evil. It uses evil means (coercion) to achieve what are seen as good ends (helping people). We might also note that an act that is inherently evil does not become moral simply because there’s a majority consensus.

  • The Law by Frederic Bastiat

    About a year ago I became acquainted with the writings of the economist Walter E. Williams. After reading his foreword to this book, I understand — as Williams says himself — how important Bastiat’s writings are. As Williams says:

    Reading Bastiat made me keenly aware of all the time wasted, along with the frustrations of going down one blind alley after another, organizing my philosophy of life. The Law did not produce a philosophical conversion for me as much as it created order in my thinking about liberty and just human conduct.

    And then this:

    …Bastiat’s greatest contribution is that he took the discourse out of the ivory tower and made ideas on liberty so clear that even the unlettered can understand them and statists cannot obfuscate them. Clarity is crucial to persuading our fellowman of the moral superiority of personal liberty.

    I am tempted to repeat in full Dr. Williams’s foreword, but you would do well to read it yourself.

    The Law is a book about liberty and justice. One of the most important things I learned from reading this book is that the proper function of the law is not to create justice, but to prevent injustice. This makes the laws we should have quite simple. Instead of deciding how much to take from us in the form of taxes (plunder) and how to distribute it, laws should protect us from plunder.

    This book may be found in its entirety at several places online. One, which includes Walter Williams’s excellent foreword, is at http://www.econlib.org/library/Bastiat/basEss0a.html.

    I wish to thank my friend John Todd, who sent this book to me.

  • End Corporate Welfare, Starting with Industrial Revenue Bonds

    “While corporate welfare has attracted critics from both the left and the right, there is no uniform definition. By TIME’s definition, it is this: any action by local, state or federal government that gives a corporation or an entire industry a benefit not offered to others. It can be an outright subsidy, a grant, real estate, a low-interest loan or a government service. It can also be a tax break — a credit, exemption, deferral or deduction, or a tax rate lower than the one others pay.” (Time Magazine, Nov. 9, 1998)

    States and localities aggressively compete with each other to see which can put together the grandest package of benefits to induce companies to locate there. Or, as becoming increasingly common, a company threatens to move away from a city or state unless it receives incentives. Often these incentives are given in the form of industrial revenue bonds. IRB supporters are quick to remind citizens that the local government is merely helping the company to borrow the money — it is not giving the bond money to the company. Therefore, it doesn’t really cost the taxpayers to offer these IRBs.

    In fact, issuing IRBs does cost local taxpayers. Here’s some information about IRBs in the City of Wichita. Quoting from the City of Wichita’s IRB Overview web page, located at http://www.wichitagov.org/Business/EconomicDevelopment/IRB/IRBOverview.htm:

    “IRB’s [sic] require a governmental entity to act as the ‘Issuer’ of the bonds, who will hold an ownership interest in the property for as long as the IRBs are outstanding. The Issuer leases the property to the business ‘Tenant’ on a triple-net basis for a term that matches the term of the IRBs, with lease payments which are sufficient to pay the principal and interest payments on the IRBs.”

    In my analysis, it is the City of Wichita that owns the financed property for the duration of the bond lifetime. What if the business fails? It appears that the city owns the property then, and is responsible for paying the remainder of the bond balance. So, the taxpayers of the city assume credit risk.

    Continuing from the same page: “The issuer can provide property tax abatement for up to ten years for property financed with IRBs.” The city, county, and state don’t receive property taxes from the business, yet they must provide services such as police and fire protection to the business. The cost of these services is born by the rest of the taxpayers.

    Continuing further: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.” Again, the government does not receive tax revenue it would otherwise have received, if not for the IRBs. The remainder of the taxpayers must make up the difference.

    It appears, then, that issuing IRBs costs everyone but the firm that receives the benefits.

    There are other issues with IRBs and other forms of corporate welfare, importantly involving the disruption of the free market allocation of resources. When governments instead of markets act to allocate resources, resources are allocated unproductively. These points come from “Ending Corporate Welfare As We Know It,” a Cato Institute Policy Analysis by by Stephen Moore and Dean Stansel, May 12, 1995, available at this url http://www.cato.org/pubs/pas/pa225.html:

    1. Government is not good at picking winners and losers. “The function of private capital markets is to direct billions of dollars of capital to industries and firms that offer the highest potential rate of return. The capital markets, in effect, are in the business of selecting corporate winners and losers. The underlying premise of federal business subsidies is that the government can direct the limited pool of capital funds more effectively than can venture capitalists and private money managers. But decades of experience prove that government agencies have a much less successful track record than do private money managers of correctly selecting winners.”

    2. Corporate welfare is very expensive considering the few benefits it produces. “Corporate welfare is supposed to offer a positive long-term economic return for taxpayers. But the evidence shows that government “investments” have a low or negative rate of return.”

    3. Corporate welfare rewards those companies who look to government for help, rather than concentrating on satisfying market needs. “Business subsidies, which are often said to be justified because they correct distortions in the marketplace, create huge market distortions of their own. The major effect of corporate subsidies is to divert credit and capital to politically well-connected firms at the expense of their politically less influential competitors. Those subsidies are thus inherently unfair.”

    4. “Corporate welfare fosters an incestuous relationship between business and government.”

    5. Many corporate welfare programs increase the costs to consumers. Trade restrictions do this. Subsidy programs may reduce the cost to a small few at the cost of everyone else. Tax breaks increase the tax burden for those who don’t receive the breaks.

    6. “The most efficient way to promote business in America is to reduce the overall cost and regulatory burden of government. Corporate welfare is predicated on the misguided notion that the best way to enhance business profitability in America is to do so one firm at a time. But a much more effective way to enhance the competitiveness and productivity of American industry is to create a level playing field, which minimizes government interference in the marketplace and substantially reduces tax rates and regulatory burdens.”

    7. “Corporate welfare is anti-capitalist. Corporate welfare converts the American businessman from a capitalist into a lobbyist.” What a sad waste of time and effort — courting politicians instead of developing products and services the market wants.

    I disagree with the Cato analysis on one point. The analysis states: “Nonetheless, we reject the notion that allowing a company to keep its earnings and pay less in taxes is somehow a ‘subsidy.’” I, however, contend that reducing a company’s taxes is the same as giving them money outright, as the impact on the bottom line is the same. I do agree with Cato that it is better if firms and individuals pay less taxes rather than more. But often corporate welfare measures like industrial revenue bonds are given to one company at the exclusion of its competitors. This, whether it is giving money to a company or reducing its taxes, is unfair to the company’s competitors. It is a distortion of the free market allocation of resources.

    Supporters of corporate welfare claim that we in the United States must subsidize our corporations because other countries subsidize theirs. But the more corporate welfare we have, the more we have a socialized economy, and the more we become like European economies. This we do not want.

    Other corporate welfare supporters claim that without incentives, businesses will not invest and create jobs. First, if taxpayers did not have to bear the cost of providing incentives, we would have more money to spend and invest ourselves as we see fit, not as politicians desire. Second, and most important, if a company does not believe in itself strongly enough to invest its own capital in itself, or if the capital markets have decided not to invest in a company, why should the taxpayers then have to invest in the company? It would seem like the taxpayers get to make only the most unproductive investments.

    Finally, if we in Wichita or Kansas were to stop issuing IRBs and other forms of incentives, we would place ourselves at a disadvantage in competing with other states and cities. Therefore, I believe that the leadership to stop these types of corporate welfare incentives must start in Washington, so that it is ended nationwide. Then, localities can compete for jobs in meaningful ways.

  • Vioxx and personal liberty

    A recent column by Thomas Sowell titled Free lunch ‘safety’: Part II (a link to part one is here) started with this paragraph:

    “The government will allow you to risk your life for the sake of recreation by sky-diving, mountain climbing or any number of other dangerous activities. But it will not allow you to risk your life for the sake of avoiding arthritis pain by taking Vioxx.”

    I was quite astonished to see the issue of Vioxx framed this way, but it is perfectly valid to do so.

    It appears that taking large doses of Vioxx increased the risk of a cardiovascular event by a factor of two. In other words, people taking large doses are twice as likely to be afflicted as those who were on placebo.

    That may seem like a large increase in risk. Consider, however, the risk of some other common activities. The death rate for motorcyclists in 2001 was 33.4 deaths per 100 million miles traveled. Passenger car riders have a death rate of 1.3 per 100 million miles traveled, a rate just 4% of that for motorcyclists. Yet riding a motorcycle is perfectly legal. The success of Harley-Davidson in manufacturing and selling them is saluted.

    Now compare the value of the pleasure of riding a motorcycle with relief from the pain of arthritis. And it’s not just a little ache in the knee once in a while. Many arthritis sufferers are in constant misery, and Vioxx helped some. An informed decision by the patient and doctor to accept an increase in the risk of a cardiovascular event in exchange for relief from miserable pain should be allowed. (That is, unless patients start to feel so well that they take up motorcycling.) But the hysterical media coverage of events like this, along with swarms of attorneys advertising for plaintiffs, eliminates this choice for patients and their doctors.

    Dr. Sowell’s article makes the point that drug companies like the makers of Vioxx are “denounced for ‘corporate greed’ by making money at the risk of other people’s lives.” But what about the motorcycle manufacturers and companies that promote dangerous recreational activity? Are they similarly denounced?