Economics in Two Blog Posts

Economic illiteracy is the root of most human problems: poverty, crime, unemployment, inflation, war, and even Pennsylvania’s government liquor monopoly. Otherwise bright folks (and many not-so-bright folks) approach economics as a child believes in Santa Claus and the Tooth Fairy. Prosperity and happiness come out of a fat man’s bag and obsolete body parts are exchanged for fiduciary media by winged pixies. In the adult version, prosperity and happiness are created by government spending and monetary policy. But just as Santa doesn’t actually slide down your chimney with a bag full of toys made by a tribe of indentured arctic elves, politicians cannot create wealth from legislating, regulating, taxing or money printing.* (*But they can and do divert and destroy wealth, phenomena that will be addressed in Part 2).

The best primer refuting economic myths and superstitions is Henry Hazlitt’s Economics in One Lesson first published in 1947. But for many, the suggestion to read economic treatises in one’s limited free time ranks behind an offer for a root canal sans anesthesia. The supply and demand curves caused brain aches in high school or college. No thank you, they say, you can keep your charts and theorems.

But charts and theorems are not needed to appreciate economic truths. Instead, common sense and an understanding of human action is all you need. In what follows I give you the basics.

  1. Wealth creation. Let’s start with a multiple choice question:

Aggregate national wealth is increased by:

  1. Money printing
  2. Government Spending
  3. High Import Tariffs
  4. Productivity

The answer is D. Wealth can only be created by production of goods and services. If you pick two bushels of apples, you’ve created two bushel of apples of wealth that you can consume or trade for other things. If you are a masseuse, you trade the value of the massage for stuff other people created. The more massages you can give (your productivity), the more you can trade for other people’s goods and services.

Your family’s wealth and real wages are related to what you produce versus what you consume. The more you can trade for your productivity (as a mechanic, lawyer, bricklayer, shopkeep, drug dealer, doctor, gardener, babysitter, tour guide, etc.), the wealthier you become. In other words, the more stuff you can buy from your earnings, the more prosperous you are. One hundred fifty years ago most Americans produced barely enough to eat. If their kids worked, it wasn’t because they were bad parents, but they needed all hands on deck to put food on the table and wood in the fireplace. They traded their limited productivity (based upon available technology) for food, modest shelter and little else. With the massive gains in productivity over the last century (thanks to both technological advances and capital accumulation), we are no longer so limited. Today, the average middle class worker exchanges his productivity for food, housing (with indoor plumbing and electricity!), cars, gasoline, shirts, Xboxes, iPhones, baseball tickets, craft beer, movies and literally millions of other consumer goods and services.

And just like families consider themselves better off if their real wages buy more stuff (rather than less stuff), countries also benefit in the same manner. The only way we can buy lots of imports like Hondas, plastic spider rings and $130 running shoes from other countries is that we, through our own productivity, have collectively acquired more wealth with which to buy stuff. Just as you prefer to “import” more stuff in your household (restaurant visits, ultra-premium dog food, plasma televisions and fuzzy bunny slippers) than you “export” (your productivity at your day job), so too you should rather live in a country that imports more, cheaper and varied things that collectively increases everyone’s real wages. On the other hand, when stuff costs more, your real wages go down. Common sense, right? Apparently not, though, for special interests that argue for trade tariffs which always (yes, always) result in higher consumer prices (and thereby lower the real value of your wages to prop up some politically-connected floundering industry).

  1. Prices.

Forget for a moment all that boring stuff about supply and demand curves. The basic rule is common sense. You will buy more apples at ten cents each than you would for a dollar each. You’d be more interested in selling your 1994 Honda for $10,000 than for $100. Thus, as general rule, we like to buy low and sell high. Billions of prices are set every day by people making voluntary exchanges. If the selling prices are perceived to be too high, demand slows and producers will reduce production. If selling prices are too low, demand increases and producers increase production. What anything is worth is entirely subjective and constantly changing, but the availability of price information guides people and producers decisions on how to best allocate their resources.

What happens, then, if the government sets a minimum price on apples, say $5 an apple? If the market price for apples is $2 an apple, fewer apples will be sold. Sure, rich people who are less price sensitive will still buy apples and others might forego other purchases to buy the occasional apple, but the laws of economics, like the laws of gravity, will eventually cause the supply of apples to match the lowered demand.

Wages are also prices, no different than prices for apples, iPhones, massages, haircuts or wallpaper. When a business plans its annual budget, it must include the prices of all inputs: labor, materials, software, machines, advertising, office supplies, all of the foregoing also known as the factors of production. For a business to be profitable, the factors of production must all be priced at or lower than their marginal productivity. A retail store, for instance, must pay for cash registers, shelving fixtures, rent, inventory, signs, utilities, insurance, employee wages and benefits, warehousing (assuming a bigger chain), transportation and so on. All these are factors of production. In a complex commercial environment, each of these factors must be priced in a way that still entices you, the consumer, to still want to buy the product. If they price wrong for too long, hello Chapter 11.

Otherwise perfectly smart people go haywire about wage prices. These Normally Smart People – who drive three miles out of their way to pay ten cents less per gallon in gas – believe that prices don’t matter for wages, that the government can mandate certain wages and benefits and that magically, the laws of scarcity and opportunity cost no longer apply.

The funny thing is, though, wages are just like apples, bowties and Steelers tickets. The more they cost, the fewer are bought. Thus, federal minimum wage law is a de facto mandatory unemployment law. Think for a moment about how the government discourages behavior. Cigarette taxes are designed to curb smoking. Carbon taxes disincentivize polluting. Speeding fines are meted out to deter speeding. These all work on the same formula – make the disfavored behavior more expensive and rational economic actors will act accordingly and reduce such behaviors. But for some paradoxical reason, the government that well understands the deterrent effect of fines and taxes is unable to perceive that increasing wage prices similarly discourages employment (and especially employment of those with low or no skills). In the politicians’ defense, it is conceivable that they are fully aware of the economic (and common sense) consequences of mandatory wage prices but are instead guided by some ulterior political motive; but such discussion, while undoubtedly interesting, is not germane to understanding basic economics.

In Part 2, I’ll address inflation and government spending.

Confirmation Bias

Last week my wife shared an article that made a really good argument for not killing centipedes in your house. Apparently centipedes – those long, wiggly and generally horrid creatures that lurk in your basement when they aren’t surprising you with a quick dash across the living room wall as you are attempting to relax for the evening – are in the good bug category. By good bug, I mean a bug that eats worse bugs – like cockroaches, houseflies, clothes moths, silverfish, termites – and does not eat or burrow through your house, pantry or eardrums.

So I chalk that up to a ‘Gee, who knew?’ And from now on, I’m resolved to peacefully co-exist with centipedes.

It’s also an example of overcoming a “confirmation bias,” in my case, a 40-plus year belief that centipedes were leggy, insectoid demons that needed to be squished with the nearest available shoe or rolled-up magazine. I was so sure that they were disease-carrying, eardrum-eating vermin that I never bothered to research the facts. I assumed they were bad which meant I knew they were bad. Case closed.

We all fall victim to confirmation biases; we all tend to seek information that agrees with our worldview and ignore that which does not.

Take for instance partisan politics. A core belief of Republicans is that small government is better than larger government and free markets are better than highly regulated ones. Yet there are a still decent number of Republicans who consider George W. Bush a good president, despite his clear record of favoring larger, more expensive and more intrusive government. These Republicans’ confirmation bias requires them to ignore or gloss over the huge growth of government entitlements (Medicare Part D), regulatory expansion (Sarbanes-Oxley), deficit spending, the Patriot Act, the Department of Homeland Security, No Child Left Behind, an inflationary Federal Reserve, and the public bailout of private businesses (Bear Stearns, Citigroup and AIG) that all occurred with W’s blessing.

Likewise, many Democrats regard themselves as anti-war, anti-corporatist and pro-civil libertarian. Candidate Barack Obama promised to close Guantanamo Bay prison, wind down foreign wars, shut down the NSA domestic spying program, and help the flagging middle class. And yet why is there no Democrat revolt against a president who escalated a drone war in Pakistan and Afghanistan, killing hundreds of non-combatants; advocated for the flow of weaponry and money to aid rebels in Libya and Syria; endorsed the NSA sifting through the electronic records of every single American; increased the military budget (even in inflation-adjusted dollars) over what Ronald Reagan spent during the height of the Cold War; and supported an inflationary Federal Reserve that enriched Wall Street investment banks while commodity inflation ate away at the paychecks of the working class? Again, as among Republicans, I suspect that confirmation bias prevents the recognition of facts that do not mesh with one’s pre-existing worldview.

Which leads me to my thought of the day. If I can overcome a long-held confirmation bias and welcome creepy-crawly centipedes into my home, when are folks going to overcome theirs and finally recognize that political parties and politicians are really just creepy-crawly frauds that often deliver the exact opposite of what they promised?

Turnkey Tyranny: The Novel

I’ve got a brilliant idea for a new dystopian novel. If you can spare me a moment, here’s a sketch of the plot:

The setting is a once experimental nation, birthed in liberty and then gradually seduced by the power of government. The seduction was perpetrated by vain and ambitious politicians and political parties, and abetted by profiteers who grew wealthy with government connections. This nation’s citizens were alternatively starved, made wards of the state through entitlement programs, and then ultimately given to believe that prosperity and freedom were available thanks to the beneficent hand of a central authority.

This nation engaged in constant warfare abroad, for reasons unclear and even unpopular with most citizens, but accepted as the price of living in a prosperous and safe nation. On occasion of any security lapses, the central authority further consolidated its control over the daily lives of its citizens. Also, as an inconvenient by-product of the social dysfunction created by state dependency and the geometric expansion of laws and regulations, the central authority imprisoned a growing percentage of its citizens in order to give the appearance of, well, order.

To further ensure the placidity of its citizens, the central authority gradually took control of all labor, retirement, health care, education and transportation choices of its citizens, with a robust combination of subsidy and regulation. At the same time, in order to maintain both control and financial patronage, the central authority continued to escalate the cost and scope of its security-surveillance state, all with the parasitic assistance of corporations which reaped rich rewards from its role in the security-industrial complex.

This all grew very costly. Early in the nation’s history and during its most prosperous growth periods, the central authority did not control money. This changed when the central authority realized that by controlling money, it could control everything. Funding the central authority was of no small concern. Soon taxes were collected with alacrity, but the central authority still depended on compliant citizens, which meant that other sources for its growth had to be found.

Borrowing added to the central authority’s ability to create passivity and dependency among the majority of its citizens, but borrowing inevitably faces the limitation of willing creditors. The main alternative to borrowing – taxing – was already past the point of diminishing returns, and potentially at a destabilizing level of support for the central authority.

So the central authority began printing its own money, and lots of it, to pay for twin costs of a subsidizing a compliant public and its ever expanding role keeping the public secure and compliant. This newly printed money was used to buy its own debt obligations, thereby freeing it – at least briefly – from the lack of willing creditors for such questionable debt. The printed money was also used to provide the illusion of prosperity (i.e., expanded home ownership, stock market growth, public sector employment) through both its subsidized debt expenditures and through purchases of paper assets from the central authority’s supporters in high finance.

Meanwhile, advances in communication and surveillance technology increased the central authority’s grasp on the economic, political and personal motivations of its citizens. Wireless phone technology, the ubiquity of cameras in public spaces, a public enthusiastically using personal computers, self-disclosure of social media, cash-less wages and payments, smart cable boxes, smart power meters, GPS tracking and black boxes in cars, gave the central authority a near total awareness of each citizen’s habits, proclivities, affiliations, friends, family, and, through easy deduction, thoughts and beliefs.

http://citizenshift.org/system/files/imagecache/dossier_wide_image/images/page2.15.jpg

The citizens, made pliable by a one-party system masquerading as two distinct parties, variously ignored or quibbled about cultural issues while the central authority quietly consolidated its influence and growth. The leaders in the central authority, characteristic of those temporally limited to power, sought to maximize their influence both with a dependent citizenry and the corporations aligned with the central authority’s growth. Thus they continued to spend, continued to borrow and continued to print money.

Unfortunately for the central authority, the laws of economics were like the laws of gravity. The borrowing and printing of money to maintain prosperity for a few and the illusion of prosperity for many eventually gave way. Most citizens were caught unprepared for the financial meltdown and the inability of the central authority to maintain its promised subsidies. At the same time, disturbing stories began to emerge of the central authority’s Panopticon, shattering for some the image of the beneficent state.

And….

And I’m still working out the final few chapters. But what I really want is a star vehicle for Matt Damon, a few dramatic car chases, and of course, some improbable romance. Any ideas, give me a shout!

Anti-Nullifiers: the Grave Diggers of Liberty

My latest piece featured at the Tenth Amendment Center:

http://tenthamendmentcenter.com/2013/05/17/anti-nullifiers-the-grave-diggers-of-liberty/

PS – If you love liberty, ‘like’ the Tenth Amendment Center on Facebook. Our growing number of state legislative successes are proving that TAC is demonstrably more effective at securing individual liberty than any think tank or lobbyist group spinning its wheels to effect change in Washington, DC. States are the bulwark of liberty against centralized tyranny, a fact which many are finally waking up to.

Emancipation Tuesday

There is something a bit freeing about Tuesday evenings. As a Monday through Friday wage earner, I get this special feeling – picture the old York Peppermint Patty ads – when the week’s involuntary servitude for the Government is over. For two days I’ve toiled to forfeit thick and thin slices of my paycheck to my borough, school district, county, Pennsylvania and the federal government. The next three days my earnings are all mine!

Emancipated from government shackles, I can save, invest or consume freely; well, except for the sales taxes, gasoline taxes and beer taxes I encounter later in the week. But at least I don’t smoke or use toll roads very often. (A bit of an anarchist I am, avoiding both tobacco and turnpike.) For those three days I am free to pursue life, liberty and happiness, just like they say in the Declaration of Independence, living in a land where freedom is more than bald eagles and flags, content that our experiment in limited government is a smashing success, with small exceptions, of course, for mowing the lawn, sorting the recycling into the proper bins and de-pooping the yard.

No doubt critics will regard my Tuesday celebration as premature. If forced to account for the 9% annual inflation let loose by the Federal Reserve’s prodigious money printing, I’d have to postpone my Zen moment until about lunchtime on Wednesday. And I definitely can’t think about the $200 trillion in IOUs piled up through federal deficits and unconscionable shortfalls in Social Security, Medicare and Obamacare. My share of that is ballpark $600,000, or $2.4 million for my household. But since Paul Krugman isn’t concerned about money printing and infinite debt, why should I be? After all, I’m still savoring tonight’s freedom.

In Defense of Obama (No, Really)

Under his watch, the national government grew without regard to constitutional limits, trillions in new unfunded entitlements were added, our national debt rose, the Department of Homeland Security blossomed, Federal Reserve policies continued to create toxic economic bubbles, and trillions were spent on foreign wars that have done little but kill and maim the populations of pre-industrial Asia.

Am I referring to Barack Hussein Obama? Or George W. Bush? Yes and yes.

This week my Facebook newsfeed was clogged with articles and editorials reporting nostalgia for W, inspired, as I understand, by the opening of his presidential library in Dallas, Texas. To prevent from vomiting, I tried to avert my eyes. Mostly.

For some, the naïve bumbling of W’s press conferences and the patriotic nationalism inflamed by the 9-11 terrorist attacks disguised the historic fact that George was just another caretaker of a runaway, post-Constitutional nanny state, and a proud central planner who bailed out investment banks and biggie-sized federal involvement in public schools. Yes, Republican cheerleaders will blanch at this characterization, but that doesn’t change the data. As I’ve written previously, fanatics of team sports share the same DNA as fanatics in political parties.

At this point the reader is itching to find out why I am defending – per my headline – Barack Obama, a politician who proudly wears his contempt for the Constitution and personal liberty on his well-tailored sleeves. On those points, our current president is guilty as charged; his embrace of money-inflation, public debt, government dependency, crony capitalism and foreign wars are impoverishing our freedom and our prosperity. His disrespect for rule of law and the non-aggression principle is as legendary as FDR’s.

But I will defend Obama against charges that he is singularly corrupting the Constitution or that his Keynesian-influenced borrowing and spending policies are starting us down the road to national bankruptcy. Barack has many predecessors to thank for paving his way, including the goofy and now apparently lovable George W. Bush.

On Cowards & Cranks

I was a few blocks away drinking beer with friends when the bombs went off. Not an hour before I was crossing the finish line, dizzy with euphoria and fatigue, looking forward to a night of well-earned revelry.

My friends Derek and Paul had run 2:49 and 2:45 respectively, personal records both. Jesse, Kai, Brett and Barclay ran solid races, and variously toasted good cheer on their days’ performances. I came in at 3:11, not my fastest Boston, but maybe my most enjoyable, thanks to the humor and conservative pacing by Brett, the ringleader of my former running club.

The explosions and real-time television coverage instantly subdued the crowded pub. As my Blackberry began flooding with worried texts and calls, the runner’s high from the brisk 26.2 miles and the mind-ice of several pints of Guinness disappeared. Deval Patrick, Governor of Massachusetts, appeared on television and suggested everyone avoid crowded places and return to their hotel rooms. A few blocks away, dozens of marathon spectators were in critical care triage in a medical tent equipped for not much more than dehydrated runners, and three, including one child who had been excitedly waiting for his father to cross the finish line, were dead.

The coward who did this will be found, no doubt. He (it will be a he) will, if caught live, will be given a lengthy media trial to promote his murderous ideology, and then sentenced to life in prison, the toughest punishment allowed in the Bay State.

In the meanwhile, in network and social media, cranks of the first water are co-opting the event for their own political purposes. The Left, represented by CNN’s Wolf Blitzer and MSNBC’s Chris Matthews, absurdly implicate their bête noir, the Tea Party, as the probable cause. Maybe it’s fashionable opinion, an attempt to buoy ratings, or an unholy coordination with the administration’s political attack dogs. But the exact reason is immaterial; they are propagandists, not journalists.

No better are the cranks on the Right who immediately suspect a government conspiracy and traffic in doctored memes claiming it was an inside job. A proper libertarian has no reason to saturate others’ Facebook pages with Sandy Hook forensics or chemtrails over New Jersey; we are too busy battling the seen and the known of spiraling taxes, staggering debt and the kudzu-like growth of our central government.

If I were in charge of righting the universe’s wrongs, I would feed the Coward to sharks or Komodo dragons; any Crank that can’t beat me in a marathon would be forced to wear a clown costume in public for a period of five years; and above all, we’d have a do-over for yesterday, a yesterday that doesn’t leave us thinking about Cowards and Cranks.

Boston #4

One week from today my sweaty remains will be found upright on a bar stool near Boylston Street, ideally celebrating a respectable finish to the Boston Marathon. The world’s oldest annual marathon will be celebrating its 117th anniversary; it will be my fourth consecutive. Having already qualified for the 118th, I am halfway to my goal of running 10 in a row.

This is the part of the essay where the reader expects me to drone on about all the hard miles, track workouts, horrid weather and various leg cramps that I overcame to run yet another marathon. Or where I labor to detail each blister, the pros and cons of the Brooks Ghost, or my hydration plan for April 15th.  Today I will spare you from that. The real story is how I was able to train almost invisibly, preferring to apportion my time to family, work and liberty activism. Sure, I snuck in a couple of twenty mile runs here and there, but I’m finding much more joy in being a 3:10 marathoner with life balance than a 2:59 marathoner with an obsession.

Or maybe a 3:15 marathoner. That’s still a BQ, if I can wing it.

Family-Sustaining Jobs & Other Euphemisms

My late grandmother always called dog poop ‘dog dirt,’ which to this day makes me picture little heaps of potting soil around the yard rather than the wretchedly stinky deposits that ruin your day if stepped on. That’s the beauty of euphemisms; they don’t always turn poop into gold, but they can magically turn it into dirt.

Potting Soil

Euphemism is the lingua franca of politics. Larceny and slavery become ‘taxes.’ The government doesn’t spend your property, it ‘invests’ it. Social welfare programs that ensnare generations in poverty are called ‘anti-poverty programs’.

Even the names of actual legislation are designed to intentionally mislead. The federal Patient Protection and Affordable Care Act is provably false on both premises, making quality care harder to get and massively more expensive. Recall that Americans aren’t booking flights to Canada or the UK for state-of-the-art surgeries and cancer treatments. But if Democrats would have instead titled the bill the “Government Rationing and Expensive Care Act,” I’m not even sure Nancy Pelosi would have voted for it.

A new one that grills me is ‘family-sustaining jobs,’ used by politicians – usually but not exclusively from the Left – to defend the taking of wealth and jobs from certain families and giving to those whose lips are firmly latched on the government teat. It does not take Sherlock Holmes to infer that the users of this euphemism are defending the indefensible.  Two recent examples:

“Should the state divest the system, nearly 5,000 well-trained employees will experience the loss of good, family-sustaining jobs. For a state that ranks 13th in the nation for highest unemployment, we should be working on creating jobs in Pennsylvania, not cutting the workforce. “  — Pennsylvania State Senator Wayne Fontana, on defending government owned liquor stores. (March 27, 2013, response email to constituent).

“Our region has a longstanding tradition of providing highly qualified and skilled workers to the airline industry. This week brought news of a possible closure to US Airways’ operation center in Moon Township. The operations center alone supports nearly 700 family-sustaining jobs. Few major cities can boast a world-class facility and surrounding infrastructure, a competent and experienced workforce, and growth potential at the airport and region at large.” — Pennsylvania State Senator Matt Smith, on defending use of public funds to incentivize a private business. (March 28, 2013, email newsletter to constituents).

This euphemism is not without its truthiness. If I were to steal your plasma television and give it to my brother for his birthday, my brother would be better off by one plasma television. By the same token, if a government taxes away the wealth of individuals and businesses to provide jobs and incentives to other individuals and businesses, yes, someone will end up with a family-sustaining job. But that’s where the stolen television analogy ends. Rather than end up with jobs equal to those destroyed through taxation (which would just be immoral), the economy nets out less jobs than the ones destroyed by wealth confiscation (which is immoral and stupid). The examples abound: public works expenditures that extended the Great Depression, the Obama stimulus of $800 billion that destroyed wealth and created embarrassingly few new jobs, Japan’s lost decades in which hundreds of billions of dollars in deficit spending did nothing to lift the country out of economic malaise; or Greece, where half the country seemed to “work” for the public sector.  There are no examples where government spending financed from borrowing, taxing or money-printing created more family-sustaining jobs than it destroyed. None. None. None.

If that goofy theory actually worked, Obama, Fidel Castro’s brother and whoever the Prime Minister of Greece is would be presiding over economic miracles where every able-bodied worker had a job, a robust bank balance and a fridge full of the government’s best craft-brewed beer. But invariably those pesky laws of economics have a way of thwarting the government’s best laid plans and revealing that the political class is full of… dirt.

Genetically Partisan

I am not a geneticist, but by all apparent evidence the human species are wired to be partisan. Take the inhabitants of my home city of Pittsburgh, for example. The collective wisdom is that the Steelers, Penguins, and to a lesser extent, the Pirates are an unalloyed good; and that all other teams, notably the Baltimore Ravens and Philadelphia Flyers, are chock-full of sub-human bounders sent to this earth with the singular purpose of annoying Pittsburghers.  A Steeler could – only hypothetically and probably not in the state of Georgia – commit sexual assault, and a Raven could donate his brain for scientific research, yet the Steeler fan would remain unmoved in his allegiance.

These genetic predispositions also figure prominently in politics. The Democratic Party, along with its many scoundrels and profiteers, counts among its numbers those who sincerely believe in economic justice or are strongly anti-war. This partisan attachment seems to absolve its members from knowing that the plain, un-contradicted data show that Keynesian economics and central planning have been an unmitigated failure, impoverishing hundreds of millions throughout modern history. And partisan blinders also seem to shield anti-war types from the fact that nearly ever war in the last 100 years was started (or enthusiastically continued) by Democrats, or that Barack Obama and Eric Holder initially claimed they could use drones to assassinate Americans on American soil.

The Republican Party is also home to scoundrels and profiteers, as well as those who believe in constitutionally limited government and free enterprise, per the original system set up by our Founding Fathers. As typical among partisans, Republican esprit de corps blinds its most ardent supporters from the contradictory fact that government spending continues an upward climb even when Republicans are running things. Much anti-government and anti-Obama rhetoric emanates from the U.S. House of Representatives, which has been fully controlled by Republicans since 2011. With a one vote, Republicans could defund and neuter Obamacare, DHS bullet purchases, the ATF, and all the other various unconstitutional alphabet soup Departments and Commissions that Republicans claim they are against.  But they don’t, and partisan Republican voters don’t seem to notice.

Sports partisanship is harmless fun, unless you happened to be the Santa Claus pelted by snowballs at a Philadelphia Eagles game. Political partisanship, on the other hand, gave us the debt-ridden, security-industrial complex we call home.  Fun for some, I’m sure, but not so harmless.