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Friday

1

February 2013

0

COMMENTS

No, Defense Spending Decline Not Behind Lackluster Economy

Written by , Posted in Big Government, Economics & the Economy

President Obama has found a new way to blame Republicans for his poor economic record. The government released preliminary GDP numbers for the 4th quarter of last year, and they were not good. The popular spin coming from the White House, his ideological echo chamber and the sycophantic media has been that government spending cuts, namely to defense, are to blame. In other words, it’s the fault of those wascally Wepublicans.

The claims being made are partly true, in that reducing government spending will, at least in the short run, reduce GDP. But that’s a tautology – GDP is defined to produce that result. It tells us nothing about the drivers of economic growth. Where the claims go wrong is in asserting that the same relationship exists between government spending and actual economic health. GDP is just a tool for measuring the economy, and it’s not even the best one. Dan Mitchell explains:

GDP numbers only measure how we spend or allocate our national income. It’s a very indirect way of measuring economic health. Sort of like assessing the status of your household finances by adding together how much you spend on everything from mortgage and groceries to your cable bill and your tab at the local pub.

Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable?

The same principle is true – or should be true – for a country.

That’s why the better variable is gross domestic income (GDI). It measures things such as employee compensation, corporate profits, and small business income.

These numbers are much better gauges of national prosperity.

Consider this. We are being asked to believe that the US economy took a hit because the government spent less on defense. For that to be true, we must accept the flip side that defense spending grows the economy? But is that true? Certainly defense spending, up to a debatable level and excluding waste, has value to society in that it protects us from harm. But that’s not the same as making us wealthier. In fact, we accept that we are sacrificing a bit of wealth to pay for security. But let’s not pretend there’s no sacrifice at all – that we wouldn’t have an even higher standard of living if government wasn’t taking that money in the first place. Of course we would. Every tank is a neighborhood never built, or an office building that couldn’t be funded, or a business that wasn’t be expanded.

Put another way, if defense spending grew the economy, then all it would ever take to end a recession is to increase defense spending. That’s essentially the Keynesian stimulus argument, though for ideological reasons they typically prefer other forms of government spending than defense. But that’s not how the economy works.

The point is that how we measure things can deceive us if we do not differentiate the statistical tool itself from the thing it is measuring. The economy does not grow because government redistributes wealth, it grows when capital accumulated through savings and investment is put to use.

Wednesday

5

December 2012

0

COMMENTS

An Unconvincing Case for Protectionism

Written by , Posted in Economics & the Economy, Free Markets

A few weeks ago, Rep. Tom Rooney took to the Daily Caller to make “a conservative case for sugar tariffs.” He failed in my view, but he did succeed in proving my recent point that bringing home the bacon and handing out political “gifts” is a bipartisan disorder.

Rep.  Rooney makes the following arguments, as I understand it:

1) All countries use protectionist and interventionist policies in the sugar market – therefore we must too.
2) Brazil has captured a lot of the market and will drive out US producers with low prices if they don’t receive government assistance.
3) Jobs will be lost and prices will rise if that assistance isn’t provided.

He goes on to say that government assistance shouldn’t be too high, nor should it involve dictating business practices. That’s not enough; it shouldn’t exist at all. I agree with Milton Friedman’s view that even unilateral free trade is a better option than meeting subsidies with subsidies and tariffs with tariffs. If Brazil wants to “plow another $1 trillion into its sugar market over the next few decades,” we should let them. It’s money straight from their taxpayers pockets and into the hands of US consumers. It harms them, not us. As for the 142,000 US jobs supposedly on the line, it’s not either/or. The choice is not between subsidizing US sugar or seeing those people forced into unemployment. Their labor can be used elsewhere, and when combined with lower sugar prices than we would have otherwise seen if not for Brazilian subsidies, the net result is greater production for us. We get cheap sugar and we get whatever else those 142,000 people are able to produce. The only real loser in this equation is the Brazilian taxpayer.

Sure, the decline of US sugar producers would be disruptive to the people whose jobs were lost, but I think the social safety net (more like hammock these days) is more than big enough to handle it. And disruptions happen in all markets in a competitive system. Whether or not its because another firm has developed a more efficient business model or because of foreign subsidies doesn’t really make any difference, so long as it’s not our taxpayer doing the subsidizing. The real issue is that bad government policy has so encumbered the market that absorption of displaced workers is difficult, but more taxpayer handouts are not the solution to that problem.

Rooney repeatedly warns of a Brazilian led OPEC for sugar, presumably to explain his seemingly contradictory (amazingly, I find myself in agreement with Think Progress of all places) concern that Brazilian control over the market will mean both lower prices (to drive out American producers) and higher prices (to hurt US consumers), but OPEC strikes me as a bad comparison. An oil cartel can be effective (somewhat) at manipulating prices because oil production is necessarily concentrated in places where oil can be found, and the major national producers are few. If you have no oil deposits, it doesn’t matter how high and enticing prices get, you can’t join the market. It’s true that sugar cane cannot grow just anywhere, but the barriers to entry are not near so significant as oil. Non-Brazilian producers can simply increase production to offset any attempts by Brazil to artificially raise prices. In other words, even if US producers dwindle because Brazil is able to charge below-market prices thanks to subsidies, any later attempt to raise prices and charge above-market rates after capturing a dominant position would result in the return of US producers, or other new entrants to the market.

There is also a national defense issue with regard to oil that doesn’t exist for sugar. Interruption in the supply of sugar does not pose the same concerns as interruptions in the supply of oil.

What I think it comes down to is whether we adopt the protectionist view that within all arbitrarily designated political borders there must be complete self-sufficiency, or we instead allow ourselves to be blessed by the productive advantages brought about by global trade. Free trade is best, to be sure, but if the only available choices are between letting others foolishly distort their markets or joining them and doing the same to ours, I think it’s an easy decision which path to follow.

Tuesday

30

October 2012

0

COMMENTS

The 3 Myths of Disaster Shysters

Written by , Posted in Economics & the Economy, Energy and the Environment, Liberty & Limited Government

It’s that time of year again – when a major natural disaster is dominating the news cycle, and every economic, scientific and political snake oil salesman or huckster comes out of the woodwork to peddle their magical wares. Here are three myths with which the disaster opportunists are trying to swindle you:

1) There’s an economic silver lining to all this destruction because it will spur economic activity. This one isn’t so much trying to sell you anything as it is cheer you up, but its widespread acceptance nevertheless can have devastating policy consequences – like passage of foolish economic “stimulus” bills. This myth is basically just Bastiat’s broken window fallacy:

Paul Krugman is rather infamous for his love of destruction as economic catalyst, crediting as he does the destruction of WWII for ending the Great Depression and having noted the economic good that could come from the 9/11 attacks. And then there’s his belief that what the economy really needs to get turned around is an alien invasion. Krugman is utterly fixated on what is seen – such as the making of bombs or the rebuilding of homes – while he ignores what is unseen – like everything not built so that resources can be used instead to fight little green men.

Krugman is not the only one to fall for this myth. Commentators are quick to highlight the expected economic gains from Hurricane Sandy, with some only concerned that Sandy won’t cause enough destruction, and that hurricanes like it don’t happen regularly enough, to really get the economy rolling.

For a more in depth critique at the flawed logic behind this persistent myth, check out this excellent column by Tim Worstall.

2) Hurricane Sandy (or whatever the disaster de jour may be) proves that Global Warming is real! In the minds of some, anything that happens today must be more severe than anything that came before, if for no other reason than that it affects them. That sort of narcissism is almost certainly behind the blathering of Meghan McCain, who thinks the wandering of a mere Category 1 hurricane into her northern enclave is proof positive that Republicans are Neanderthal deniers.

This interpretation was also given the official blessing of Al Gore, the high priest of Global Warming hysterics:

The images of Sandy’s flooding brought back memories of a similar–albeit smaller scale– event in Nashville just two years ago. There, unprecedented rainfall caused widespread flooding, wreaking havoc and submerging sections of my hometown. For me, the Nashville flood was a milestone. For many, Hurricane Sandy may prove to be a similar event: a time when the climate crisis—which is often sequestered to the far reaches of our everyday awareness became a reality.

While the storm that drenched Nashville was not a tropical cyclone like Hurricane Sandy, both storms were strengthened by the climate crisis.

…Hurricane Sandy is a disturbing sign of things to come. We must heed this warning and act quickly to solve the climate crisis.

Every major weather event these days is proffered as anecdotal proof of global warming (or “climate change”). But anecdotes are not evidence, and major storms are nothing new. In fact, global hurricane frequency is trending down, and as Patrick Michaels points out, we’re setting records for the longest drought of Cat 3+ hurricanes hitting shore:

It’s been 2,535 days since the last Category 3 storm, Wilma in 2005, hit the beach. That’s the longest period—by far—in the record that goes back to 1900.

But don’t expect any of these facts to stop the reflexive blaming of global warming for all natural disasters.

3) Only Big Government can save us from chaos and natural destruction. Any time destruction lurks, statists can be counted on to furiously construct strawmen for public whipping to placate the frightened masses. The most ridiculous example comes, naturally, from the ever dependable shills of big government at the New York Times, which editorializes that “A Big Storm Requires Big Government,” before going on to outline a list of government functions that comprise probably less than a percent of the federal budget. Good job, New York Times, I’m now convinced that we need a massive welfare state, pointless “green energy” loans, wasteful stimulus bills and a cumbersome and counter productive regulatory structure, all because of a Category 1 hurricane. Well done.

Reason appropriately takes them to task, noting that not only has big government failed, and miserably so, at disaster response in the past, but it actually stood in the way of private action. That’s right, big government – being the angry and jealous God that it is – actively prevented help from other sources during Katrina:

Even as they fumbled their own responses to the disaster, government officials found time to block private relief efforts. The Salvation Army was initially forbidden to send boats to rescue refugees sheltered in one of its facilities, one of the group’s officials told the press. It seems the private relief organization’s efforts didn’t fit the government’s schedule. Likewise, the American Red Cross said. Days after the storm hit, “The state Homeland Security Department had requested — and continues to request — that the American Red Cross not come back into New Orleans following the hurricane.”

Aaron Broussard, Jefferson Parish president, put it best when he told interviewers, “Bureaucracy has murdered people in the greater New Orleans area and bureaucracy needs to stand trial before Congress today.”

But in the eyes of some, any failure of government is just proof that it needs more money (success, meanwhile, is proof that it needs more money), and so we get hand wringing over potential, hypothetical or imagined FEMA cuts from the same people who blamed FEMA for everything wrong that happened during Katrina.

The Reason post also notes, as I have here in the past, that there are in fact alternative and better sources of disaster response. This is not to say that government has no role or purpose, as the statist strawman would imply, but that it might be better to only leave government in charge of monitoring, analyzing and disseminating information, while bringing in those who know what they are doing and have actual experience to handle the logistics of rapidly moving goods and services into devastated communities.

Whatever their miracle cure of choice, consumers should cast a wary eye on those who see disaster coming and can only think to lick their chops at the opportunity to advance their agenda.

Monday

3

September 2012

2

COMMENTS

In Need of Capital Day

Written by , Posted in Economics & the Economy, Free Markets, Taxes

The Department of Labor cites Labor Day as “dedicated to the social and economic achievements of American workers,” adding that “it constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.” Celebrating the hard work of Americans with a yearly day off is fine with me, but there are additional forces contributing to the “strength, prosperity, and well-being of our country” also worthy of recognition. Perhaps the time as come, for instance, for a Capital Day.

Hard work is important. Americans have long considered a strong work ethic a virtuous quality, and this has been to our advantage. But hard workers are all over the world, and the US hardly leads the world in average hours worked. Yet America is consistently at or near the top in worker productivity. What accounts for this discrepancy? Simply put, capital.

Another way to look at American prosperity is this: hard work is a necessary, but insufficient, condition for achieving prosperity. Give even the hardest worker a spoon, and it will take a long time to build a ditch. Give that same worker a shovel, and it will take less time. Now give that worker an expensive digging machine and that ditch will be completed exponentially faster. That is where growth in worker productivity comes from.

The mixing of capital and labor is where the true magic happens, and American prosperity is due to our once unique devotion to an economic system – the free market – that most efficiently matches these two ingredients.  Unfortunately, America today is no longer the most devoted to economic freedom, and the trend is heading in the wrong direction. A less free economy, generally speaking, will mean more inefficient distributions of capital and labor, resulting in a less productive workforce and thus a less prosperous economy.

In order to invest capital in our workers, we first need capital to invest, and that means savings. Unfortunately, neo-Keynesian economic thought can be reasonably accurately summed up as “savings = bad; spending = good.” Just consider the examples of politicians asserting that unemployment checks or food stamps boost economic growth because the recipients are more likely to spend it.  And then there’s the many government policies which reduce or inhibit capital formations, like direct taxes on capital such as the capital gains tax or death taxes, financial regulations and laws which discourage US investment, and other costly burdens on business – such as Obamacare.

So while we celebrate the contributions of hard working Americans of all stripes, we should keep in mind the importance of capital in achieving prosperity, a fact all too often forgotten by policymakers. Perhaps a yearly reminder in the form of a Capital Day is needed to do the trick.

Monday

30

January 2012

0

COMMENTS

Lasting Economies Are Not Built

Written by , Posted in Economics & the Economy, Free Markets

During his State of the Union speech, President Obama expressed his desire for an “economy built to last,” an oxymoron emblematic of the President’s embrace of Keynesianism and other failed economic philosophies. Simply put, strong economies are not built; they emerge.

To be built implies that there be a builder. Naturally, Obama envisions himself in this role. But it doesn’t matter who the builder is, they will necessarily be incapable of processing all the information required for managing something so complex as a national economy. No individual or group of individuals can succeed in such a task.

Rather than being built, strong economies emerge through the aggregate actions of free individuals advancing their interests, and works best within a system of basic political and legal infrastructure designed to foster economic liberty. In contrast to Obama’s vision for an activist government picking and choosing industries to support, high tax rates and political motivated government spending, this infrastructure limits itself to neutral provision of legal services, property rights and free trade.

This is, in other words, the typical battle between freedom and collectivism. In his State of the Union Speech, President Obama reaffirmed his support for the side of collectivism, economic stagnation, and misery, rather than for freedom and prosperity.

Thursday

16

June 2011

0

COMMENTS

Obama’s Fatal Conceit

Written by , Posted in Big Government, Economics & the Economy

I, like many others, made light of the President’s recent shocking display of economic ignorance.  In an interview on NBC’s TODAY, the President claimed that productivity, the source of our prosperity, is really a “structural issue” holding back the job creating benefits of his policies. Hogwash, obviously. But what came later in the interview was perhaps even more disturbing (the transcript at the link wasn’t completely accurate so I cleaned it up):

[T]here are some structural issues with our economy, where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM; You don’t go to a bank teller. Or you go to the airport and you’re using a kiosk instead of checking in at the gate. So all these things have created changes in the economy and what we have to do now, and that’s what this job counsel is all about, is identifying where the jobs of the future are going to be, how do we make sure that there’s a match between what people are getting trained for and the jobs that exist, how do we make sure that capital is flowing into those places with the greatest opportunity.

Obama’s fundamental problem – his fatal conceit, if you will – is that he thinks we need him and his jobs counsel to figure out what the jobs of the future are going to be. We no more need this today than it was necessary for past leaders to identify the jobs of today. This is a task for the private sector, and one which only its vast network of dispersed information and decentralized decision-making is capable of determining.

What does Barack Obama know about the technologies of today, much less the future? Why does he imagine he can direct capital and resources to the right place better than investors? When has history ever shown politicians capable of doing so?

As F.A. Hayek wrote in The Fatal Conceit: The Errors of Socialism, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Barack Obama is clearly too enamored with his own intelligence to recognize how little he knows – or that any one individual or group of individuals could possibly know – about where the next economic breakthroughs will emerge, or where future resources will need to be deployed. Who even 20 years ago possibly could have imagined the range of technological innovation from which we benefit today, and the subsequent new jobs and roles it has created in the economy? There is no such person, which proves the impossibility of Obama’s desired model of central planning.

Tuesday

14

June 2011

10

COMMENTS

Ignorance on Display: Obama Blames Increases in Productivity for Bad Economy

Written by , Posted in Economics & the Economy

Why can’t people find work? It’s the ATMs, stupid!

President Obama explained to NBC News that the reason companies aren’t hiring is not because of his policies, it’s because the economy is so automated. … “There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate.”

This is really a special kind of ignorance. It is also the product of so much focus on jobs simply as an end. If the objective s just for everyone to have jobs, you think stupid things like that if you eliminate automation more people will have work. As the apparent leader of the new regressive movement, Obama has caught on to the fact that technology allows us to do more for less work. Clearly, eliminating the technological gains of the last decade, half-century, century, or more, would mean more people working for less output. A jobs utopia!

I’m sure my learned readers see the fault in this reasoning. If it takes more labor to produce less output, then everyone has less, because there is less to go around. Once upon a time, it took a lot more labor to produce the food needed to feed the populace. In the late 18th century, more than 90% of US workers were employed in agriculture. But thanks to technological innovation, the number of workers required to produce the amount of food the population needed soon plummeted. By Obama’s reasoning, that should have been a disaster for the economy! In reality it was quite the opposite. With all that labor freed up for other purposes – and the necessary food still being produced – the economy soared, ushering in the industrial revolution.

There is no end to the productive purpose for which labor can be employed. Making current endeavors more efficient does not, as Obama claims, reduce unemployment – it merely shifts labor to new sectors, where new waysare found to make our lives better. And that, ultimately, is what work is all about.

So no, improved efficiency is not a “structural issue” in the economy; it’s a structural benefit. Structural issues are the things created by big government proponents – such as Barack Obama and his predecessors – that punish productive people for being productive (capital gains taxes, excessive regulations, highly progressive tax rates, etc. etc) and reward unproductive people (often those with particularly strong political connections).

Not that we needed any further evidence against the futility of central planning, but is there any case at all remaining when the would-be planners are this ignorant?

Friday

29

April 2011

0

COMMENTS

From Where Do These Magical Regulators Come?

Written by , Posted in Economics & the Economy

George Soros recently penned an interesting Op-ed in Politico, coinciding with an appearance at the Cato Institute (is there a libertarian equivalent to Holy Water, and was it burning?) for an event reflecting on the impact of F.A. Hayek (I think).

I actually found the Soros article rather interesting. In it he recounts his view of an ideological battle of sorts between Hayek and his colleague Karl Popper, under whom Soros studied. There were many things I found wrong with the piece, both in terms of facts and opinions, but I want to address only one here. Soros ultimately claims to find value in both views, but what I really keyed on was the presence of a bit of magical thinking common on the left. First, here’s a snippet of the conclusion to the Soros piece:

Because perfection is unattainable, it makes all the difference how close we come to understanding reality. Recognizing that the efficient market hypothesis and the theory of rational expectations are both a dead end would be a major step forward.

As I see it, the two sides in the current dispute have each got hold of one half of the truth. which they proclaim to be the whole truth.

…I recognize that the other side is half right in claiming that the government is wasteful and inefficient and ought to function better.

But I also continue to cling to the other half of the truth — namely that financial markets are inherently unstable and need to be regulated.

Earlier in the piece, he makes the case that perfect knowledge is not attainable, which inevitably leads to the “inherently unstable” nature of markets. This argument is internally inconsistent and fails on its own premise.

If financial markets are inherently unstable because perfection is unattainable, why would government regulators not be subject  to the same constraints? Are they not bound by the same inability to achieve perfect knowledge? It is a common fallacy of the statists to believe that regulators can magically rise above all the problems faced in the market, but this is not the case. In fact, they face even greater challenges because politics has been thrown into the mix.

As regulators have no greater ability to achieve perfect knowledge than market participants, how does placing more power in fewer hands improve the situation? It seems to me the more stable system is the one that sees less power in each individual hand, while spread out among many more decision-makers.

On a related note, EconStories.tv dropped round 2 of the Hayek vs. Keynes rap. I highly recommend checking it out:

Sunday

6

February 2011

0

COMMENTS

TARP Pays Off

Written by , Posted in Economics & the Economy

The special inspector general for the TARP program says that it makes future government bailouts more likely:

The financial rescue fund known as TARP has actually the increased the likelihood of more bank bailouts in the future, Neil Barofsky, the program’s special inspector general, told CNBC Wednesday.

“As long as the market perceives that the government is going to be a backstop…(it will) encourage more and more risk-taking and put us right back where we were in late 2008,” said Barofsky.

When government bails out businesses that took big risks that didn’t pan out, it is encouraging yet more risk taking than otherwise would occur.  This is known as moral hazard, and it played a part in causing the financial crisis in the first place.

It’s painful to watch people in power learn absolutely nothing from the disasters they create.

Sunday

12

December 2010

0

COMMENTS

Don’t Fall Into the Keynesian, Demand-Side Trap

Written by , Posted in Economics & the Economy, Liberty & Limited Government, Taxes

This post from Pejman Yousefzadeh on the tax deal is a few days old, but it’s worth talking about because it illustrates a trap into which conservatives too often fall. His point is that the temporary extension of the tax rates likely will not help the economy. I don’t dispute this, as whatever benefit the tax rate extension provides comes from the fact that it means taxes won’t be going up. It’s good only insofar as it prevents politicians from doing something really bad, at least for another 2 years.

What I take issue with is his reasoning. Here’s what he says:

The thing is, a temporary extension of the Bush tax cuts will not be enough to stimulate the economy. Per Milton Friedman’s permanent income hypothesis, consumption patters (sic) even in the aftermath of a temporary extension of the Bush tax cuts will be tempered by long term expectations that eventually, the tax cuts may be allowed to expire. As a consequence, consumers are more apt to save money that comes from a temporary tax cut, rather than spending it in order to offer the economy any kind of economic stimulus.

My problem is his implication that the primary benefits from cutting taxes comes from increases in consumption.  This is essentially the Keynesian view of economic growth. It is this consumption-based view of growth which has led both Bush and Obama to try “stimulating” the economy through gimmick rebates and handouts. Each attempt has failed more miserably than the last.

Just to be clear, I’m not disputing Friedman’s permanent income hypothesis (that personal decisions on spending are based not on current income, but long-term expectations),  just its relevance to this situation. It’s not germane here because even if it were not true and consumption would increase in response to a temporary extension, it wouldn’t have any significant pro-growth impact. Otherwise, the other stimulus attempts would have worked.

The benefit from lowering tax rates, particularly those on capital, comes when it reduces government disincentives to savings, investment and entrepreneurship. Increased consumption is just the consequences of growing the economy. To see it as something to try to increase in its own right is to implicitly admit the validity of the Keynesian, interventionist approach which has never worked.

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About Me

profileI serve as Vice President of the Center for Freedom and Prosperity, a non-profit think tank dedicated to preserving tax competition and free markets. This site features my personal views, which are not reflective of CF&P.

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