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economic theory Archive

Monday

6

December 2010

2

COMMENTS

The Keynesian Stimulus Fallacy Refuses to Go Away

Written by , Posted in Economics & the Economy

They say that doing the same thing over and over again while expecting different results is the definition of insanity. If that is the case, then Keynesian politicians are completely bonkers.

Given the disappointing nature of the recent employment numbers, as well the ongoing failure of government “stimulus” plans to spur economic growth, you’d expect sane leaders to consider changing course. Yet just recently we’ve seen comments from Nancy Pelosi and Sherrod Brown touting the great stimulative qualities of jobless benefits – essentially a government subsidy of unemployment. Nor is this the first time Pelosi has made such remarks.

Now the White House is reportedly demanding yet another round of unemployment subsidies, along with a conglomeration of gimmicky tax credits which do nothing to lower marginal tax rates, before it will agree not to raise taxes in the midst of a recession. They should be more focused in providing an environment where jobs are likely to be created, rather than turning what was originally intended to be a temporary cushion into a permanent entitlement.

These leaders are in desperate need of a lesson in the fallacies of Keynesian economics, and it just so happens that one is available in the form of this recent video by the Center for Freedom and Prosperity, narrated by Hiwa Alaghebandian of the American Enterprise Institute:

Originally posted at American Thinker.

Wednesday

12

May 2010

0

COMMENTS

Better Than Regulation

Written by , Posted in Energy and the Environment, The Nanny State & A Regulated Society

When big accidents like the BP oil spill occur, there is predictably a call for “more regulation” as a solution.  “If only government had required more robust/redundant safety mechanisms!”  This reasoning is easy, but also sloppy.

Government safety regulations are capable of being harmful as well as helpful.  Once regulators set safety standards, for instance, they are less likely or capable of keeping up with the latest and newest measures as time goes by compared to industry.  Moreover, meeting government regulations provides businesses an easy excuse for not having done more if something goes wrong.

In my last post on the spill I identified other government policies that might have contributed to the situation, such as the cap on liability a company faces for a spill.  And now Jonathan Finegold Catalán of Economic Thought has articulated the economic argument much better than I am capable.

The White House, meanwhile, is proposing to raise the liability cap, along with a host of other measures, in response to the spill.  Some of the other proposals look dubious, but I think raising the liability cap is a positive policy response.

Sunday

9

May 2010

2

COMMENTS

Best Way To Defeat Progressives Is To Teach Economics

Written by , Posted in Economics & the Economy

There’s no doubt that the general failure of the public to understand basic economic principles affects how they evaluate politicians and their policy proposals.  Economics is barely even taught in public schools. For those of us on the right, this is particularly frustrating when most of those who are economically illiterate tend to fall for the utopian promises of big government “progressives.”

This study on economic enlightenment provides some particularly interesting results regarding the relationship between economic knowledge and ideology.  Basically, the further to the left a person is, the less they know about economics. This probably has to do with the simple fact that leftwing policies deny basic economic realities, leaving only the economically illiterate as possible supporters of those policies.

Monday

3

May 2010

1

COMMENTS

Is Oil Liability Cap A Dangerous Moral Hazard?

Written by , Posted in Energy and the Environment

Following up on my comments regarding what should be BP’s responsibility to compensate individuals, businesses and governments economically damaged by the oil spill, relevant federal law caps the liability of oil companies at $75 million.  Oil Spill Liability Trust Fund was established in 1986 and funded by the Oil Pollution Act of 1990, which imposed a tax on oil companies in exchange for a cap on direct liabilities.

The fund serves a good purpose by insuring that an industry where there is always risk of causing major damage will be able to pay for that damage, even if the company responsible is small and lacks the funds itself.  On the other hand, is it also possible that companies like BP might be encouraged to take greater risk, knowing that they are only on the hook directly for $75 million if something goes wrong?

Obviously there are plenty of other incentives to insure the quality of their rigs.  A broken rig can’t produce oil and bring in profits.  But might they also be encouraged to create a rig in a dangerous location or to a greater depth than they otherwise would?  It’s something to ponder.

Tuesday

13

April 2010

0

COMMENTS

White House To Open New Front In Assault On The Economy

Written by , Posted in Economics & the Economy, Energy and the Environment, Free Markets

Not satisfied with the destruction that Obamacare has wrought, or will when it finally goes into effect, the White House is shifting focus and looking for another industry to destroy.

With the bruising health care debate over, President Obama’s top economic adviser left little doubt last week that energy and climate has taken its place atop the administration’s agenda.

During a 30-minute speech (pdf) at a Washington energy conference, Larry Summers, the head of the White House’s National Economic Council, used lofty rhetoric to warn of the long-term consequences if Congress fails to follow through this year on a sweeping overhaul of how the nation generates and uses energy.

“Read the history of great nations,” Summers said. “Read how they succeed and read how they fail. Their ability to mobilize to solve problems before they are absolutely imminent crises is what determines their longevity. That’s why this task of economic renewal is so important broadly. And that’s why I believe it is so important that we move for economic reasons to pass comprehensive energy legislation.”

The ability to mobilize to solve problems is indeed important. What Mr. Summers neglects is any consideration for how societies mobilize. What methods are best? He blows right by that question and just assumes that mobilization requires government direction.

The opposite is true. Free markets are much more capable of marshaling resources to deal with problems than governments. It requires a lot of information in order to centrally plan the use of capital and other resources. No one person or group of people are capable of taking into consideration all the data which is carried routinely and without significant notice through the free market price system. Yet history is full of failed attempts to do so.

Economic renewal of the kind which Larry Summers desires does not depend upon “comprehensive” legislation of any sort. It needs only for government to get out of the way.

Tuesday

30

March 2010

0

COMMENTS

Monday

8

March 2010

0

COMMENTS

The "Rationing" Must Stop!

Written by , Posted in Health Care, Welfare & Entitlements

Don Boudreaux takes the President down in an open letter:

Dear Mr. Obama:

CBS radio news this morning ran a clip of one of your recent speeches.  In it, you criticize insurance companies because they “ration coverage … according to who can pay and who can’t.”

My first thought was “not exactly; coverage is rationed according to who pays and who doesn’t.”  Ability to pay isn’t the same thing as actually paying, and what insurers care about is the latter.  Many folks – especially young adults – have the ability to pay but choose not to do so.  They get no coverage.

But further pondering of your point leads me to look beyond such nit-picking to see fascinating possibilities.  Not only insurers, but all producers who greedily refuse to supply persons who don’t pay should be set aright.  Now I’m sure that you don’t ration the supply of the books you write according to any criteria as sordid as requiring people actually to pay for them.  But our society is full of people less enlightened than you.

For example, the typical worker rations his labor services according to who pays and who doesn’t.  That must stop.  Oh, and supermarkets!  Every single one rations groceries according to who pays.  Likewise with restaurants, clothing stores, home-builders, furniture makers, even lawyers!  You name it, rationing is done according to who pays.  Indeed, my own county government has been corrupted by this greedy attitude: if I don’t pay my taxes, the sheriff takes my house – effectively booting me out of the county merely because I didn’t pay for its services.

Preposterous!

I look forward to your changing this selfish and unfair system of rationing that for too long now has kept Americans impoverished.

Sincerely,
Donald J. Boudreaux

Wednesday

24

February 2010

0

COMMENTS

How Not To Bring Down Health Care Prices

Written by , Posted in Health Care, Welfare & Entitlements, The Nanny State & A Regulated Society

Health care can be expensive.  There are lots of reasons why this is.  Some of them we don’t want to change, such as the fact that modern health care is capable of miracles.  Miracles aren’t cheap.  Other causes we don’t want to change, such as the fact that third-party payers eliminate normal market pressure to keep prices down.

Obama has another idea, however.  Control insurance prices!

President Obama will propose on Monday giving the federal government new power to block excessive rate increases by health insurance companies, as he rolls out comprehensive legislation to revamp the nation’s health care system, White House officials said Sunday.

Two reasons this is dumb:

1) Price controls don’t work.  It’s like trying to legislate away gravity.  Michael Tanner explains some of the consequences:

Insurers unable to charge more for an increasingly expensive product can be expected to trim costs in one of two ways:

  • They can drop their most expensive customers — in this case, the sickest, who consume the most health care. Many companies are already doing this, a major source of dissatisfaction with the health-care system. In fact, the president wants to prohibit companies from doing this.
  • They can cut back on their reimbursement rates to hospitals and physicians. But neither doctors nor hospitals, any more than insurance companies, are willing to operate at a loss. If payments fall below their costs, they’ll simply stop taking patients. One only has to look at government programs like Medicare and Medicaid to see how this works.

2) Insurance prices go up because health care prices go up.  Not only is Obama attempting to apply the wrong remedy, but he’s targeting the wrong problem.  It’s stupidity squared.

Monday

22

February 2010

0

COMMENTS

Memo To Obama: Economists Do Not Agree

Written by , Posted in Economics & the Economy, Taxes

President Obama likes to assert that economists across the political spectrum agree that big government spending is necessary to fight off recession.  “Economists on the left and right,” he insisted early in 2009, “agree that the last thing the government should do during a recession is cut back on spending.”  Essentially, he’s saying that all economists are Keynesians.  This is simply false, as Harvard Professor Jeffrey Miron tells us today at the Daily Caller.

..That brings us to the second argument for higher spending: the Keynesian claim that spending stimulates the economy. If this is accurate, it might seem the U.S. should continue its high-spending ways until the recession is over.

But the Keynesian argument for spending is also problematic. To begin with, the Keynesian view implies that any spending—whether for vital infrastructure or bridges to nowhere—is equally good at stimulating the economy. This might be true in the short term (emphasis on might), but it cannot be true over the long haul, and many “temporary” programs last for decades. So stimulus spending should be for good projects, not “digging ditches,” yet the number of good projects is small given how much is already being spent.

More broadly, the Keynesian model of the economy relies on strong assumptions, so we should not embrace it without empirical confirmation. In fact, economists find weak or contradictory evidence that higher government spending spurs the economy.

Substantial research, however, does find that tax cuts stimulate the economy and that fiscal adjustments—attempts to reduce deficits by raising taxes or lowering expenditure—work better when they focus on tax cuts. This does not fit the Keynesian view, but it makes perfect sense given that high taxes and ill-justified spending make the economy less productive…

Recently, Obama again cited the entire spectrum of economists as supporters of his agenda: “Now, if you hear some of the critics, they’ll say, well, the Recovery Act, I don’t know if that’s really worked, because we still have high unemployment. But what they fail to understand is that every economist, from the left and the right, has said, because of the Recovery Act, what we’ve started to see is at least a couple of  million jobs that have either been created or would have been lost.”

Economist Robert Barro explains in the Wall Street Journal what a load that is.

Monday

15

February 2010

0

COMMENTS

Confused In Vancouver

Written by , Posted in Economics & the Economy

Moonbattery points out that the usual suspects are taking advantage of the attention generated by the Winter Olympics to do their typical song and dance.

Calling themselves the “Anti Poverty Committee,” moonbats dressed in black “assaulted police officers, spray-painted cars and buses, smashed windows, and terrorized passers-by.”

They seem quite confused.  How is it they think that destroying wealth will help fight poverty?

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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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