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Starbucks and The ‘Social Responsibility’ of Business to Increase its Profits

March 21, 2015/in Budget and Finance, Culture War, Featured, News/by Dr. Rich Swier

There has been controversy surrounding the decision by Starbucks to require its employees (baristas) to discuss race relations with customers when they purchase their lattes. What is the role of a corporation when it comes to social issues? Some corporations use their power to push social issues but at what cost? Is this a hidden tax passed on to customers in the name a a false promotion of social justice? Are corporations using social justice issues to increase their profits by attracting a certain type of customer (e.g. millennials)?

Is Starbucks, “ In fact they are–or would be if they or anyone else took them seriously–preaching pure and unadulterated socialism.”

Any conversation about any social topic must include all points of view. Are the baristas at Starbucks prepared for a very long conversation?

Perhaps Howard Schultz, CEO of Starbucks and other CEOs, should read “The Social Responsibility of Business is to Increase its Profits” written by Nobel Prize Laureate Milton Friedman in The New York Times Magazine on September 13, 1970:

Milton Friedman, Nobel Laureate.

The Social Responsibility of Business is to Increase its Profits

When I hear businessmen speak eloquently about the “social responsibilities of business in a free-enterprise system,” I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are–or would be if they or anyone else took them seriously–preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.

The discussions of the “social responsibilities of business” are notable for their analytical looseness and lack of rigor. What does it mean to say that “business” has responsibilities? Only people have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom. Presumably, the individuals who are to be responsible are businessmen, which means individual proprietors or corporate executives. Most of the discussion of social responsibility is directed at corporations, so in what follows I shall mostly neglect the individual proprietors and speak of corporate executives.

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for example, a hospital or a school. The manager of such a corporation will not have money profit as his objectives but the rendering of certain services. In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them. Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straight-forward, and the persons among whom a voluntary contractual arrangement exists are clearly defined.

Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he recognizes or assumes voluntarily–to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to devote part of his income to causes he regards as worthy, to refuse to work for particular corporations, even to leave his job, for example, to join his country’s armed forces. If we wish, we may refer to some of these responsibilities as “social responsibilities.” But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are “social responsibilities,” they are the social responsibilities of individuals, not business.

What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman?

If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire “hardcore” unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his “social responsibility” reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employees, he is spending their money.

The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct “social responsibility,” rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it. But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.

This process raises political questions on two levels: principle and consequences.

On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public–after all, “taxation without representation” was one of the battle cries of the American Revolution. We have a system of checks and balances to separate the legislative function of imposing taxes and enacting expenditures from the executive function of collecting taxes and administering expenditure programs and from the judicial function of mediating disputes and interpreting the law.

Here the businessman–self-selected or appointed directly or indirectly by stockholders–is to be simultaneously legislator, executive and jurist. He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds–all this guided only by general exhortations from on high to restrain inflation, improve the environment, fight poverty and so on and on.

The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for “social” purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil servants–insofar as their actions in the name of social responsibility are real and not just window-dressing–should be selected as they are now. If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expenditures to foster “social” objectives, then political machinery must be set up to make the assessment of taxes and to determine through a political process the objectives to be served.

This is the basic reason why the doctrine of “social responsibility” involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses.

On the grounds of consequences, can the corporate executive in fact discharge his alleged “social responsibilities”? On the one hand, suppose he could get away with spending the stockholders’ or customers’ or employees’ money. How is he to know how to spend it? He is told that he must contribute to fighting inflation. How is he to know what action of his will contribute to that end? He is presumably an expert in running his company–in producing a product or selling it or financing it. But nothing about his selection makes him an expert on inflation. Will his holding down the price of his product reduce inflationary pressure? Or, by leaving more spending power in the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce less because of the lower price, will it simply contribute to shortages? Even if he could answer these questions, how much cost is he justified in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropriate share of others?

And, whether he wants to or not, can he get away with spending his stockholders’, customers’ or employees money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have reduced the corporation’s profits and the price of its stock.) His customers and his employees can desert 3
him for other producers and employers less scrupulous in exercising their social responsibilities.

This facet of “social responsibility” doctrine is brought into sharp relief when the doctrine is used to justify wage restraint by trade unions. The conflict of interest is naked and clear when union officials are asked to subordinate the interest of their members to some more general purpose. If the union officials try to enforce wage restraint, the consequence is likely to be wildcat strikes, rank-and-file revolts and the emergence of strong competitors for their jobs. We thus have the ironic phenomenon that union leaders–at least in the U.S.–have objected to Government interference with the market far more consistently and courageously than have business leaders.

The difficulty of exercising “social responsibility” illustrates, of course, the great virtue of private competitive enterprise–it forces people to be responsible for their own actions and makes it difficult for them to “exploit” other people for either selfish or unselfish purposes. They can do good–but only at their own expense.

Many a reader who has followed the argument this far may be tempted to remonstrate that it is all well and good to speak of Government’s having the responsibility to impose taxes and determine expenditures for such “social” purposes as controlling pollution or training the hard-core unemployed, but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.

Aside from the question of fact–I share Adam Smith’s skepticism about the benefits that can be expected from “those who affected to trade for the public good”–this argument must be rejected on the grounds of principle. What it amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures. In a free society, it is hard for “evil” people to do “evil,” especially since one man’s good is another’s evil.

I have, for simplicity, concentrated on the special case of the corporate executive, except only for the brief digression on trade unions. But precisely the same argument applies to the newer phenomenon of calling upon stockholders to require corporations to exercise social responsibility (the recent G.M. crusade, for example). In most of these cases, what is in effect involved is some stockholders trying to get other stockholders (or customers or employees) to contribute against their will to “social” causes favored by activists. Insofar as they succeed, they are again imposing taxes and spending the proceeds.

The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his “social responsibility,” he is spending his own money, not someone else’s. If he wishes to spend his money on such purposes, that is his right and I cannot see that there is any objection to his doing so. In the process, he, too, may impose costs on employees and customers. However, because he is far less likely than a large corporation or union to have monopolistic power, any such side effects will tend to be minor.
Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.

To illustrate, it may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects. Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to charities they favor by having the corporation make the gift than by doing it themselves, since they can in that way contribute an amount that would otherwise have been paid as corporate taxes.

In each of these–and many similar–cases, there is a strong temptation to rationalize these actions as an exercise of “social responsibility.” In the present climate of opinion, with its widespread aversion to “capitalism,” “profits,” the “soulless corporation” and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified on its own self-interest.

It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundation of a free society. That would be to call on them to exercise a “social responsibility”! If our institutions, and the attitudes of the public make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them. At the same time, I can express admiration for those individual proprietors or owners of closely held corporations or stockholders of more broadly held corporations who disdain such tactics as approaching fraud.

Whether blameworthy or not, the use of the cloak of social responsibility, and the nonsense spoken in its name by influential and prestigious businessmen, does clearly harm the foundations of a free society. I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely far-sighted and clearheaded in matters that are internal to their businesses. They are incredibly short-sighted and muddle-headed in matters that are outside their businesses but affect the possible survival of business in general. This short-sightedness is strikingly exemplified in the calls from many businessmen for wage and price guidelines or controls or income policies. There is nothing that could do more in a brief period to destroy a market system and replace it by a centrally controlled system than effective governmental control of prices and wages.

The short-sightedness is also exemplified in speeches by businessmen on social responsibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse.

The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate. There are not values, no “social” responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form.

The political principle that underlies the political mechanism is conformity. The individual must serve a more general social interest–whether that be determined by a church or a dictator or a majority. The individual may have a vote and say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.

Unfortunately, unanimity is not always feasible. There are some respects in which conformity appears unavoidable, so I do not see how one can avoid the use of the political mechanism altogether.

But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collective doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

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Profits Are the Only Business of Business by D.W. MACKENZIE

March 21, 2015/in Budget and Finance, Economy, News, Taxes/by Foundation for Economic Education (FEE)

Forty-three years ago today Milton Friedman published his article “The Social Responsibility of Business Is to Increase its Profits.” It is to Friedman’s credit that most of this short article rings as true today as it did on September 13, 1970. It is at the same time disappointing that this piece remains timely precisely because too few Americans have understood and accepted Friedman’s arguments against corporate executives promoting social welfare over private profit.

How do the specifics of Friedman’s article look today? Does an executive who spends profits to promote “social ends,” to fund education, or to “fix the environment” impose what amounts to a tax? Yes, Friedman is correct.

Is the imposition of such a de-facto tax undemocratic? Perhaps it is. Friedman admits that the shareholders could fire a CEO for imposing a de-facto “social responsibility tax”- so the shareholders can vote against their CEO. Legally, the CEO is an agent of the stockholder, their employee. However, proposals to spend part of corporate profits on socially responsible ends aim at overriding the interests of shareholders; it undermines the democratic element of corporations.

Do arguments for redirecting corporate policies toward social responsibility erode personal liberty, aim at conformity, and promote socialism and collectivism? Yes. Stockholders invest in a corporation for profit, for personal gain. If the CEO starts aiming at social ends at the expense of private shareholder interests, then the corporations is effectively being run as if it were owned by society. This is, in effect, socialism. As Friedman put it, the social justice doctrine “would extend the scope of the political mechanism to every human activity.” The idea of aiming at social responsibility actually means directing corporate funds toward one person’s particular opinion about the interests of “society.” Social welfare and social justice are, at very best, vague concepts. As Ludwig von Mises put it in his 1949 treatise, “under socialism one will dominates.”

Friedman also claims that taxation by the state is the legitimate mechanism for collecting funds to promote socially responsible ends. We have constitutional, legislative, and judicial mechanisms to collect and spend legal tax dollars. Is this claim true? Are legal tax mechanisms better at promoting social responsibility than the illicit use of corporate funds for these purposes? Friedman notes, quite correctly, that people who push for socially responsible corporate policies are those who have failed to convince their fellow citizens to support their personal version of social responsibility. Having failed in an attempt to use the political mechanism, they resort to trying to politicize the market mechanism. Friedman is right, but this brings us back to my assessment of Friedman’s article: Friedman has himself failed to convince his fellow citizens that his view of profit is correct.

I agree that democracy can only work if public discourse works. The best ideas will rise to the top of an open and free debate among rational, reasonable people. I agree that people who press for corporate social responsibility are usually collectivists who press for conformity and disdain opposite points of view. However, the fact that political debate involves a high degree of intransigence and emotion means that the democratic process does not function very well.

Consequently, I must disagree with Friedman’s assertion that the public sector can work effectively to promote social responsibility. The fact that so many people continue to press for social responsibility and economic justice against Friedman’s advice shows that his support of government taxation for social responsibility is unfounded. Friedman is correct in noting that the great merit of private enterprise is that it makes people responsible for all their actions, either selfish or unselfish. However, lack of personal responsibility in the public sector does not promote responsibility in thinking about how to best use tax dollars in a socially responsible manner.

The main elements of Friedman’s article are correct. The sum of these elements is highly questionable when it comes to his confidence in political mechanisms. Profits are the only business of business. Social responsibility should be the business of government, but it is time to recognize that the modern tax and regulatory state has failed in this endeavor.

ABOUT D.W. MACKENZIE

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.

Why the World Bank can’t compete with Chinese AIIB

March 18, 2015/in Budget and Finance, Economy, News, Policy/by Don Hank

My translation into English of a press conference given by the top China monetary policy expert Chen Yulu appeared in December of 2014 at American Daily Herald. Mr. Chen showed that the internationalization of the RMB had nearly doubled YOY in 2013 and reported that RMB clearing centers were opening up in major European capitals and in Asian countries allied with the US. Based on such data, he predicted meteoric growth of the RMB, namely, in 3-5 years, the Chinese yuan (RMB) could be the third most widely used currency in world trade, even though at the time it was ranked only ninth. Though Mr. Chen emphasized that China did not intend to replace the dollar in world trade, it would be hard to conclude otherwise from the facts and figures he presented.

Yesterday, a report came in regarding the Asian Infrastructure Investment Bank (AIIB), a venture launched by Beijing. Germany, France and Italy had followed Britain’s lead in joining this bank. More ominously for the petrodollar, Saudi Arabia was already a founding member. The U.S. warned other countries to “think twice” about joining. We shall examine why.

Earlier that day, we learned that Australia had also joined this Chinese banking venture.

The U.S. has at least two reasons to fear that the Third World will prefer the new bank over the World Bank:

The World Bank is increasingly enforcing “Western values” which boil down to social Marxism, plus climate change ideology. Thus its policies encroach on Third World national sovereignties.
The World Bank is funded essentially by Keynesian debt-based economies, notably the US, whose currency is propped up by a flimsy agreement with the Saudis enjoining the latter to sell their oil only in US dollars, which are rapidly losing intrinsic value, regardless of their apparent value compared to other currencies with debt-based “value.”

I had shown here how Keynesianism and social Marxism are the result of the same sort of mind set and carry the seeds of their own failure within them.

Financial experts have warned us that a debt based economy has an expiration date. Many people ignored the warning, putting all their faith in the petrodollar agreement, which is threatened by China. Recall the Nixon was eager for free trade with China and for the petrodollar agreement with the Saudis. How ironic – and fitting, and predictable in retrospect – that both countries have now embraced each other to the detriment of the country that lent them their strength.

I had pointed out here that the petrodollar agreement with the Saudis is a veritable pact with the devil and the ulterior motive for the shedding of US and foreign blood in proxy religious wars that invariably redound to the deaths of Christians and other minorities in Muslim countries.

Some more-moderate Republicans and orthodox investors keep insisting that the dollar continues to rise and the stock market is going up and up, so not to worry.

All very true, so far. But you can’t measure the strength of a debt-based currency against that of another debt-based currency. You need to gage it against a currency backed by a real, productive economy, like China’s, the economic giant with the largest precious metal and foreign cash reserves in the world.

Lately, the RMB has been tracking the dollar in almost a flat line, showing great stability so far. And the RMB is not backed by an agreement with the Saudis to protect them from enemies real and imagined in exchange for artificially propping up the currency. But that could change.

A scan of the above referenced Reuters article on the gaggle of European countries joining the AIIB revealed the source of U.S. concerns:

Quote: Washington has questioned whether the AIIB will have high standards of governance and environmental and social safeguards. [my emphasis]

Can you guess what “social safeguards” might include?

The U.S. dominates the World Bank, and here is a glimpse of what these “social safeguards” entail:

“JIM KIM, the president of the World Bank, wants it to promote gay rights. He has declared the “fight to eliminate all institutionalized discrimination” to be an “urgent task”. He recently put on hold a $90 m loan to Uganda’s health sector after its government introduced one of Africa’s most draconian anti-gay laws. He has ordered an overhaul of the bank’s lending policies to make sure that no loan assists discrimination. At this week’s Spring Meetings in Washington, D.C., he is convening discussions with gay activists on how best to do so.”

It seems the U.S. has transformed the World Bank into a social change agent and intends to enforce its ideas of gay marriage and the like, and that is no doubt why it is not in a hurry to join the AIIB.

The World Bank partners with Millennium Challenge Corporation (MCC), which develops guidelines for social and environmental policies for the bank. In the introduction to its pamphlet “Guidelines for Environmental and Social Assessment,” MCC writes:

“Unlike biology, gender is mutable, and women’s and men’s roles, behaviors, and responsibilities change over time and are different in different societies.”

The concept that “gender is mutable” is not further explained but it encapsulates the LGBT ideology of “queer theory,” which holds that the male-female distinction is not preset by biology but rather by individual choice. This contradicts not only common sense but the teachings of every world religion. And since no justification for this is provided in the literature targeting the lendee, it constitutes a quasi-religious decree reflecting what could be called “queer theology.” In fact, in enforcing this ideology, the World Bank is encroaching on the moral teachings, including religious teachings, prevailing in the countries to which it lends.

The environmental restrictions for lending by the World Bank prohibit lending for projects that provide the kind of amenities existing throughout the First World. It will not lend for projects involving oil refineries and most smelting processes, for nuclear power facilities or for

“Construction of motorways, express roads and lines for long-distance railway traffic and of airports with a basic runway length of 2,100 meters or more; construction of a new road of four or more lanes, or realignment and/or widening of an existing road so as to provide four or more lanes, where such new road, or realigned and/or widened section of road would be 10 kilometers or more in a continuous length.”

Thus it in effect supports a worldwide caste system where only the rich countries that can afford their own financing may enjoy modern highways and modern international airports.

Assuming the AIIB’s lending rates are reasonable, then as long as the Chinese bank imposes none of the above-outlined ideologically based restrictions on its lendees, it will easily compete with our sclerotic and moribund U.S. hegemony.

After all, in business, the formula for success is filling the voids left by competitors’ offerings of goods and services.

The lack of respect for clients’ sovereignty in making free-market choices is a hidden reason for a decline in the prestige of the World Bank, and since the trend in BRICS countries like China is to trade in non-dollar currencies, this dedollarization policy can only lead to a decline in the dollar in the future.

U.S. enforced social and environmental Marxism is slowly turning financial clients away and the Chinese are providing a vital missing ingredient, namely, respect for thenational sovereignty of client countries.

The importance of sovereignty and the way it is abused by the U.S. is discussed here and here by yours truly at American Daily Herald and here and here by international law expert Bernard Chalumeau (in translation) at my own web site. Europe’s participation in the AIIB is a natural and predictable reaction to this lack of respect for it sovereignty.

So with all these strikes against the U.S.-backed World Bank and its absurd policies, and in view of the dedollarization policies of China and the BRICS, what kind of future can we reasonably expect for the dollar?

AMEinfo.com, a Middle East trade site, carries a little-noticed fact that could be a game changer:

“The Saudi minister supported China’s plan to establish the Asian bank for investment in infrastructure projects in which the kingdom agreed to become a member.“

Obviously, the Saudis are turning away from their one-time most favored trading partner and embracing the world’s largest economy, one that is perfectly capable of providing the same kind of military guarantees to the Saudis as the U.S. now provides.

Can we look forward to a “petroyuan” in the not-so-distant future?

Save Money with Adjunct Professors, Spend It on Bureaucrats

March 18, 2015/in Budget and Finance, Education, Must Read, Policy/by Dr. Mary Grabar

Jordan Schneider, like many part-time college instructors, teaches on two community college campuses in order to cobble together a living. He earns a paltry $21,000 per year with no benefits for teaching a larger-than-normal load of four courses per semester. Non-tenure track full-time professors earn $47,000. Established professors’ salaries have remained flat, at between $60,000 and $100,000. As a former instructor of English at Georgia Perimeter College and elsewhere, these figures, from the 2014 Delta Cost Project, sound right.

In “Letter to Full-Time Faculty Members,” in the Chronicle of Higher Education, Schneider deviates from the typical call for redress through unionization, and appeals to full-time colleagues’ self-interests by arguing that a class of “super adjuncts,” paid more than regular adjuncts but less than full-time faculty ($20,000 to $25,000 per term with benefits), with some of the duties and voting privileges of full-time faculty, would take away administrators’ “trump cards”: the threat of replacing full-timers with cheap adjuncts, who, along with teaching assistants, now account for half of instructional staff (up from one-third in 1987).

But the number of full-time professors on short-term contracts (like “super adjuncts”) has already increased, by 30 to 50 percent between 2004 and 2012.

Goodbye, Full-Time Faculty

In spite of increasing reliance on contingent faculty, higher education costs tripled between 1975 and 2005. Tuition at public four-year colleges and universities increased nearly 160 percent between 1990 and 2012. At private bachelor’s institutions it has almost doubled since 1987. Yet, the proportion of all employees who were full-time faculty has declined 5 to 7 percent at four-year colleges and 16 percent at community colleges between 2000 and 2012.

While students have less access to faculty members, especially full-time faculty members, they are paying for the services of administrators and their professional staffs. Since 1987, this number has more than doubled and increased at a rate twice as fast as the growth in the number of students.

The Delta report states that there is “no single smoking gun” to explain such growth in administration.

Why So Many Administrators?

Huffington Post’s Jon Marcus cannot pin down the reasons either, claiming more resources are being devoted to such things as marketing, diversity, sustainability, security, athletic programs, and conference centers. He quotes Dan King, president of the American Association of University Administrators, who claims that government regulations and demands for such services as remedial help and counseling are responsible. Yet, graduation rates of students at four-year bachelor’s institutions have barely inched up, from 55 percent to 58 percent since 2002.

Political science professor Benjamin Ginsberg seems to have a good diagnosis. In his 2011 Washington Monthly article, “Administrators Ate My Tuition” he noted that well-paid professional bureaucrats have taken over duties once handled by faculty members on a temporary, part-time basis. Unlike faculty members, their motivation is not academic improvement, but growing the bureaucracy, with make-work projects developed at far-away conferences and retreats.

Goodbye to Real Instruction

This is evidenced by the questionable academic value of many of the initiatives coming out of their offices. In fact, many of the programs substitute for real academic instruction. More and more money is spent on diversity, social justice, and sustainability initiatives at the expense of real teaching.

The students who can least afford such diversions, those attending community colleges, are seeing the largest shift from funding for teaching to administrative programs.

I saw this happening at Georgia Perimeter College where I was a part-time instructor from 2007 to 2010. As we were being asked to squeeze several more students into our classes (that were maxed out at 22) for the same $2100 per class, college president Anthony Tricoli was rallying faculty to embrace civic learning.

Around the same time, 2009, the federal government put out the 136-page report, A Crucible Moment: College Learning and Democracy’s Future, for which Tricoli served as a roundtable member. The college’s Atlanta Center for Civic Engagement & Learning was one of about 100 participating organizations that included campuses, non-profits, and government agencies. However, real “civic learning” is the farthest from the report’s objectives.

Model centers, such as at the University of Maryland and Salt Lake Community College, show students working in soup kitchens, reading to school children, and cleaning up nature trails. Organizations such as Campus Compact (which GPC joined) and the Association of American Colleges & Universities (the lead writer of A Crucible Moment) provide direction. One instructional ASC&U video shows a statistics professor “collaborating” with an “anti-poverty” representative on a lesson publicizing free tax preparation services in target zip codes for Earned Income Tax Credits. (If there is any doubt about the agenda, a “social justice” sign appears prominently.) Instead of formal essays or research papers, students write “reflection papers.”

At my college, the associate vice president for civic engagement and service learning, attorney Deborah Gonzalez, made $104,000 for offering “infrastructure and resources, to share best practices and technical assistance . . . , to [help faculty] implement initiatives to help their students engage in their communities, both locally and globally”—all while presumably helping students strengthen their “academic goals and objectives.” In response to her call for courses with a “Civic-engagement or Service-learning component,” a colleague shared having students serve as docents at the Margaret Mitchell House. I failed to see how such activities, whether “global” or ushering at a local historic site, would help students struggling with grammar.

The grand new Center for Civic Engagement and Service-Learning opened in 2010 with much fanfare and a keynote address by former President Jimmy Carter. The program listed a good number of individuals drawing salaries or partial salaries for their efforts: the Associate Vice President for Academic Affairs, the Executive Director, the Service-Learning Coordinator, the Administrative Secretary, and eleven faculty members.

In 2012, however, Tricoli was forced to resign over a $25 million budget deficit; he is now suing, charging conspiracy to ruin his reputation. I don’t know what percentage the civic engagement initiative represented, but such programs are not cheap.

Rather than pleading for part of the increasingly smaller portion of budgets allocated to academic instruction, it seems that Schneider and others ought to be demanding the ouster of bureaucrats and the restoration of higher education to its rightful purpose.

Does Florida want ‘Rubber Stamp’ School Boards?

March 16, 2015/in Budget and Finance, Education, Featured, Labor & Unions, News, Politics/by Dr. Rich Swier

Diverse views are needed on every board or committee, not one opinion to the exclusion of all others. Political discourse is healthy. One mindedness is dangerous and is called tyranny.

The Sarasota County School Board supports diversity, the exception being if one talks about diverse positions on school board matters. Recently this came to light when school board members went to Tallahassee to lobby the state legislature on matters of importance to students and parents. One of the issues of importance is vouchers for students provided by businesses.

Supporters of public charter schools, school voucher programs, equal funding for charter schools and home schooling are persona non grata to the Florida School Board Association, Florida Association of District School Superintendents, Florida’s teachers unions and Florida Democrats and some Republicans. Anyone who opposes the government public school monopoly is immediately classified as a “rival.” This is particularly true of school board members who support programs to give parents and students choices as to where they would like children to get an education.

Diversity and choice are one way streets to some elected officials and school bureaucrats. Going down the wrong road is considered blasphemy and creates discord. This discord must be stamped out at all cost.

Well there is a light of hope in the sunshine state from those who truly support diversity and choice in education.

Zac Anderson and Shelby Webb from the Sarasota Herald-Tribune reported, “Sarasota County’s five School Board members used the school district’s spring break this week to lobby legislators and talk education policy in the state capital. But they weren’t all always working from the same playbook.” Question for Zac and Shelly: Since when are school board members required to work from any playbook? Aren’t school board members elected to represent the best interest’s of children and parents?

Anderson and Webb go on to report on “rival” school board organizations. The Florida School Board Association (FSBA) is presently suing the state of Florida to stop a voucher program to help students go to a school of their choice. The other organization is pro-choice and wants to stop the strangle hold of the FSBA on public education in general and school choice in particular.

Anderson and Webb wrote:

Another school board member from Escambia County, Jeff Bergosh, said he considers himself a “real threat to the status quo” and is intending to introduce a motion at his next board meeting asking the district not pay his portion of the $21,766 in dues owed to the Florida School Board Association.

“I’m tired of sending my money every year to an organization that’s working against school choice and suing the governor and Legislature,” Bergosh said.

Why would any school board member support using taxpayer money to fund an organization that does not have the best interests of students and parents in mind?

Another issue raised by one school board member was “bias” in the current professional development opportunities offered to school board members. School board members, like students under Common Core, are being told what to think, not how to think, about public education.

For some school board members like Carolyn Zucker, president-elect of FSBA, it is all about the money, not the student. Zucker is worried about “…[Florida] House legislation that would allow certain businesses to solicit and collect contributions for the construction and maintenance of public education facilities. Zucker worries, “[I]t means the legislators will decrease capital funds going to districts and will instead rely on private contributions.”

Sheldon Richman in “Can the Free Market Provide Public Education?” writes:

The short answer, of course, is: yes, look around. Right now, private enterprise and nonprofit organizations provide all manner of education—from comprehensive schools with classes in the traditional academic subjects, to specialized schools that teach everything from the fine arts to the martial arts, from dancing to dieting, from scuba diving to scrutinizing one’s inner self.

[ … ]

The free market—and I include here both for-profit and nonprofit organizations—would provide even more education than it does now but for the “unfair competition” from government. Since government has a resource that private organizations lack—the taxpayers—it’s able to offer its services for “free.” They’re not really free, of course; in the government context, “free” means that everyone pays whether he wants the service or not. Clearly, as long as government can tax its citizens and then provide educational services to them at a marginal price of zero, much private education will never come into being. How ironic that government vigilantly looks for predatory pricing in the private sector when it is the major offender.

Richaman concludes, “Thus it is not only the case that the free market can provide education. We may conclude further that only the free market should provide education.”

Now that is divergent thinking.

America is based upon an educated public. The public education monopoly is another matter all together.

IRS: Legally Blind…Literally!

March 7, 2015/in Budget and Finance, Must Read, News, Taxes/by Cynthia Canevaro

“One should judge a man mainly from his depravities. Virtues can be faked. Depravities are real.” – Klaus Kinski

The last two years have once again provided the American people with great illumination into the arrogant, deceitful and nefarious ways in which the IRS treats the hardworking citizens who pay their tab. Hardly a day, week or month has gone by without a new revelation that left most of us dropping our jaws further and further and further.

In fact, there has been so much lawlessness that people became almost immune to the escalating nature of their egregious conduct. This week’s vile and disgusting revelation: the agency had a legally blind individual conducting the inspection of Lois Lerner’s hard drive. Yes, you read that right – the IRS used a blind employee to inspect Lerner’s hard drive.

Political appointees who play cat and mouse with Congressional investigators are something we’ve come to expect. But for a federal agency like the IRS to engage a blind employee as a pawn in a political chess match is best described in terms of moral depravity.

It’s yet another reason Congress must pass the FairTax Plan as soon as possible.

The FairTax is the only tax reform/replacement plan that disbands, defunds and eliminates the IRS. The flat tax doesn’t, the proposed income tax reforms don’t and neither do the other plans bantered about by various Members of Congress. Nope – they have to pass the genuine article, the real deal, the one and only FairTax Plan.

Peggy Green-Ernst to lead AFFT government relations

This is why I am so pleased to announce the FairTax campaign’s newest secret weapon for getting the FairTax passed. Enter Texas FairTax supporter, Peggy Green-Ernst, who has joined AFFT as our new Director of Government Relations. In this role Peggy will be directing AFFT’s federal and state government relations and lobbying activities, and will be expanding the FairTax Memorial initiative that was first initiated by the Florida FairTax team.

Peggy hails from the great state of Texas where she serves as the volunteer legislative director for the Texas FairTax organization. Her professional and political career encompassed the corporate, business, academic and nonprofit sectors, where she was:

Executive Director of the Housing Roundtable
Director of Government Relations for the National Gypsum Company
Commissioner, Texas National Research Laboratory Commission (appointed by then-Texas Governor Ann Richards)

Peggy is a seasoned political strategist who excels in coalition building, policy analysis, political action committee (PAC) administration and media management. She’s smart, engaging and politically savvy.

A Texan by birth, Peggy spent her formative years enjoying an international education while supporting her father’s military career. She graduated from Southern Methodist University (SMU) in Dallas, TX with a master’s degree in business administration.

Peggy will be joining AFFT Chairman and President Steve Hayes in Washington in a few weeks and has already begun to aggressively book meetings with cosponsors, cosponsor prospects and other influencers. It’s going to be a great week in Washington when Peggy comes to town. I can’t wait to hear all about it!

Minnesota Mythbusting

March 6, 2015/in Budget and Finance, Economy, News, Policy, Politics, Regulation/by Foundation for Economic Education (FEE)

A Huffington Post blogger claims the state’s recovery debunks laissez faire by COREY IACONO, MATT PALUMBO…

“US Uncut” founder Carl Gibson is known for creating shocking, if dubious, viral memes about the economy.

On the progressive group’s Facebook page, he’s claimed that Switzerland is such an equal society because they have a minimum wage of $50,000 a year and strict caps on CEO pay (despite the fact Switzerland has no minimum or maximum wage laws). He’s also attributed Iceland’s success after the financial crisis to their government’s heroic refusal to bail out the banks (as long as we don’t count the $4.6 billion bailout they got from the IMF). His solution to the US national debt is to follow the example of Norway, which taxes oil profits at an astounding 78 percent and has no national debt (we’ll just assume he’s never typed “Norway national debt” into Google).

His heroic battle with facts continued last week in his column at the Huffington Post. This time he’s managed to single-handedly disprove “trickle-down economics,” a school of thought that doesn’t actually exist. In his words, “It’s official — trickle-down economics is bunk. Minnesota has proven it once and for all.”

What has Minnesota done? Hike the top income tax rate to 90 percent? Raise corporate taxes? Increase the minimum wage to $15 an hour? No, but under the governorship of Mark Dayton, who took office in 2011, Minnesota raised the state income tax rate on individuals earning over $150,000 (and households earning over $250,000) by a whopping 2 percentage points.

According to Gibson’s narrative, everything was on the wrong track in the Gopher State under the prior conservative governorship: “Between 2003 and late 2010, when [Governor Tim] Pawlenty was at the head of Minnesota’s state government, he managed to add only 6,200 more jobs.… Between 2011 and 2015, Gov. Dayton added 172,000 new jobs to Minnesota’s economy — that’s 165,800 more jobs in Dayton’s first term than Pawlenty added in both of his terms combined.”

While the global recession did have devastating impacts on the Minnesotan labor market at the end of Pawlenty’s term, it’s true that employment growth has been superior under his successor. In the first four years of Pawlenty’s tenure, employment in the state grew by 99,100 jobs, substantially less than the 182,100 in Dayton’s first four years. But is this really a result of progressive policies, or just the natural result of the economic recovery?

Gibson attributes Minnesota’s recovery to three of Governor Dayton’s policies: raising the minimum wage, raising taxes on the wealthy, and guaranteeing equal pay for women. But these changes were all quite small, and none corresponded with the turnaround in Minnesota’s employment, suggesting that they could not have been the cause.

Consider Governor Dayton’s plan for raising Minnesota’s minimum wage to $9.50 an hour by 2018. Under Dayton’s plan, the minimum wage is set to rise gradually:

[Prior to August 2014] Minnesota law set the minimum wage at $5.25 for companies with annual revenues up to $625,000 and $6.15 for companies that have revenues of $625,000 or more. The new law will change the threshold for small and large businesses to those making more or less than $500,000 in annual revenues. For those above that line, the wage will go from $6.15 per hour to $8. The small employer wage will go from $5.25 per hour to $6.50.

Considering that the federal minimum wage (which covers almost all hourly workers) is already at $7.25 per hour, a $0.75 increase in Minnesota’s minimum wage, applicable only to workers earning less than $8 an hour at businesses grossing more than $500,000 a year, isn’t exactly a radical move, nor would its effects be visible in raw employment data. Moreover, the minimum wage increase only went into effect in the summer of 2014, almost four years after Minnesota’s job market began to recover.

Similarly, the Women’s Economic Security Act, which guarantees equal pay for women working for state contractors (not businesses in general) by certifying that they are in compliance with non-discrimination laws that already exist, wasn’t put into effect until May 2014.

And Dayton’s tax hike, which increased the top marginal tax rate by 2 percent? That didn’t occur until 2013, and it only increased state revenues by $1.1 billion (or 0.35% of Minnesota GDP).

In fact, all of the policies Gibson praises were implemented well after Minnesota started experiencing its impressive job growth, and they weren’t especially ambitious in the first place.

As for the supposed benefits of higher taxes, Gibson states that “even though Minnesota’s top income tax rate is the 4th-highest in the country, it has the 5th-lowest unemployment rate in the country at 3.6 percent.” But this is the definition of a cherry-picked statistic. If you want to establish a correlation between top marginal tax rates and unemployment, you really have to use more than one data point and control for more than zero variables. (Speaking of cherry-picked statistics, among Midwestern states ranked by job creation from March 2013–2014, Minnesota ranked dead last).

In addition, an international study found that in industrialized countries, such as the United States, higher top marginal tax rates are associated with higher rates of unemployment. This suggests that higher top marginal tax rates may lead to less job creation than would otherwise occur.

The belief that higher minimum wages and higher taxes lead to better economic outcomes is not well-supported by the empirical evidence. Consider a study that found that reductions in state top marginal tax rates are associated with increases in income growth for all income quintiles (and vice versa). This result is diametrically opposed to Gibson’s depiction of reality.

Regarding the minimum wage, the empirical literature is mixed, but recent research by Jeffrey Clemens of the University of California raises some serious concerns. His analysis involved tracking thousands of real individuals across the country, comparing the experiences of low-skilled workers in states that increased their minimum wages to that of low-skilled workers in states that did not. Clemens and his co-author used a number of controls to ensure that their findings represented the actual effects of the minimum wage increase, rather than the effects of other variables. The results? Minimum wage increases had “significant, negative effects on the employment and income growth of targeted workers.”

Similarly, a study on economic freedom and income inequality in the states found that “reductions in both state minimum wages and tax burdens would be the most helpful in promoting higher levels, growth rates, and shares of income for the lowest quintile [that is, the poorest households].”

Clearly, controlled studies like these provide much more compelling evidence on the effects of minimum wage and tax hikes than a few uncorrelated data points scrounged from one state during a period of general economic recovery. It’s true that Dayton passed a few minor progressive policies during this time, but just because you jump in front of a parade doesn’t mean you’re leading it.

While Gibson and his ilk would like people to believe that interventionist policies are necessary for growth, research from the St. Louis Fed has found that, after controlling for other variables known to correlate with economic growth, states with less government interference in the economy experienced faster rates of employment growth than their interventionist peers. Other research suggests that the states with less economic intervention also tend to have lower unemployment rates and higher labor force participation rates.

Unlike Gibson, we will not be so ambitious as to claim that this evidence definitively debunks the entire progressive agenda. But we will suggest that there is compelling evidence that free markets work, and it can’t be refuted by a handful of cherry-picked data points from a single state.

ABOUT COREY IACONO

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

ABOUT MATT PALUMBO

Matt Palumbo is the author of The Conscience of a Young Conservative and In Defense of Classical Liberalism.

Adam Smith: Zen Master East and West converge on the “power of now” by SANDY IKEDA

March 6, 2015/in Budget and Finance, Economy, News, Policy, Regulation/by Foundation for Economic Education (FEE)

According to Eckhart Tolle, the popular author of spiritual books including The Power of Now, happiness is only possible in the present, the now. Past and future are beyond reach, and so “the present moment is all you ever have.” He writes:

Nothing ever happened in the past; it happened in the Now. Nothing will ever happen in the future; it will happen in the Now.

His message isn’t that we should forget the past or abandon planning for the future. Rather, he’s expressing a psychological attitude consistent with many spiritual and religious traditions, Eastern and Western.

Economists, Ludwig von Mises and Adam Smith among them, have written in similar terms about the meaning and significance of the Now.

The praxeological Now

It’s true that Mises’s focus on the Now isn’t to explain how to achieve happiness. In fact, in the tradition ofCarl Menger that Mises helped to develop, one of the requirements for human action is that we feel uneasy about our current situation, and uneasiness isn’t consistent with most concepts of happiness. But the relevant point for Mises is that human action only takes place in the present. Specifically, “from the praxeological aspect [that is, the aspect relevant to economics] there is between the past and the future a real extended present. Action is as such in the real present because it utilizes the instant and thus embodies its reality,” he writes.

And he doesn’t quite say, with Tolle, that it’s only in the present that we can tap into reality. But he does say that the only time available to us in which to act — to apply the knowledge gained from the past to change the future in accordance with our expectations — is the “real extended present.” The Now exists between memory and expectation.

Smith also wrote about the power of Now, and in much the same spirit as Tolle.

A Smithian perspective

Smith’s Wealth of Nations, published in 1776, is considered the first extended and systematic treatment of economics. Its lessons are still relevant, and I highly recommend it to anyone who seriously wants to learn about economic theory and economic history. But it’s not my favorite work by Smith.

My favorite, because of its subject matter and especially its beautiful writing, is Smith’s Theory of Moral Sentiments, published in 1759. I won’t attempt to summarize it except to say that it concerns the nature and origins of sentiments, such as sympathy, and the role they play in our social relations, similar to what today would fall under the heading of “cultural economics.”

The very first chapter, “On Sympathy,” begins:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner.

If you only know Smith from The Wealth of Nations, with its important lesson that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest,” it may surprise you to see this opening observation on compassion. Personally, I was surprised by the level of psychological analysis contained in The Theory of Moral Sentiments, especially the insights into human happiness and unhappiness:

The great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another. Avarice over-rates the difference between poverty and riches: ambition, that between a private and a public station: vain-glory, that between obscurity and extensive reputation.

So avarice and misplaced pride and ambition are the sources of misery to anyone, regardless of status or station. And the social distinctions we make between people in different professions aren’t due to differences in nature, a point Smith makes in a famous passage in The Wealth of Nations:

The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were, perhaps, very much alike, and neither their parents nor playfellows could perceive any remarkable difference.

This passage reflects Smith’s characteristically liberal (in the original, classical sense of the word) belief that all persons are created equal. And that, in turn, leads me to this wonderful passage in The Theory of Moral Sentiments:

What the favourite of the king of Epirus said to his master, may be applied to men in all the ordinary situations of human life. When the King had recounted to him, in their proper order, all the conquests which he proposed to make, and had come to the last of them; And what does your Majesty propose to do then? said the Favourite. — I propose then, said the King, to enjoy myself with my friends, and endeavour to be good company over a bottle. — And what hinders your Majesty from doing so now? replied the Favourite.

How wise! Smith goes on to explain,

In the most glittering and exalted situation that our idle fancy can hold out to us, the pleasures from which we propose to derive our real happiness, are almost always the same with those which, in our actual, though humble station, we have at all times at hand, and in our power.

This isn’t merely about stopping to smell the roses. Smith is saying that it’s always in our power to be happy, whoever and wherever and whenever we are. Happiness is and can only be here and now, and never “just around the corner.” In this sense, the relentless pursuit of happiness is the very source of our misery.

The inscription upon the tomb-stone of the man who had endeavoured to mend a tolerable constitution by taking physic; “I was well, I wished to be better; here I am”; may generally be applied with great justness to the distress of disappointed avarice and ambition.

Tolle couldn’t have expressed it better.

ABOUT SANDY IKEDA

Sandy Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.

Unemployment Benefits: The Government Gets What It Pays For

February 28, 2015/in Budget and Finance, Culture War, Economy, News, Taxes/by Foundation for Economic Education (FEE)

Have the perverse incentives been proved? by ROBERT P. MURPHY…

Just about everyone agrees that incentives affect behavior, but economists really mean it. That’s because economists take the logic of incentives further than most other people are willing to. Such analysis often reveals that government policies have unintended consequences that seem shocking to the average person. The list includes welfare programs that lead to higher rates of birth out of wedlock, seat-belt laws that lead to more pedestrian deaths, and even the possibility of changes in estate taxation that lead to people strategically timing their deaths.

But perhaps one of the most perverse distortions comes from unemployment benefits. Economists argue that these can provide an incentive for people simply not to work. Indeed, a new NBER working paper by Marcus Hagedorn, Iourii Manovskii, and Kurt Mitman estimates that the abrupt end of unemployment benefit extensions led to 1.8 million additional new US jobs created in 2014.

The theory here is straightforward: when the government subsidizes an activity, other things equal, people will engage in more of it.

If politicians want to encourage more people to go to college, what do they do? Provide financial support, either directly in the form of tuition assistance, or indirectly through loans with lower interest rates than students could obtain in a free market. If politicians want to encourage people to reduce their consumption of fossil fuels, they might offer tax rebates for the purchase of electric cars or insulation in their homes.

By the same token, then, suppose that politicians wanted to encourage laid-off workers to refrain from accepting a new job. What would they do? Naturally, they would offer to send the jobless workers checks so long as they remained unemployed. This logic, of course, is exactly why “unemployment insurance benefits” are perverse. Even though their avowed purpose is to provide a safety net for those unfortunate enough to lose work, it is undeniable that the existence of such a program provides an incentive for job seekers to prolong their search for new positions.

Whenever an economist proposes something “heartless” in this fashion, the tenderhearted critic reacts with outrage and points out that real human beings aren’t the soulless robots that populate economic models.

This is certainly true, but it misunderstands the claim. The economist is not arguing that the existence of government unemployment benefits will cause every single worker to “rationally” remain on the couch. Rather, a more nuanced model of the labor market is one of “search,” where job applicants and employers are trying to find each other. The longer the search lasts, the better the match will be, but of course the longer the spell of unemployment. By introducing financial payments during unemployment, the government tips the scales in favor of a longer search before accepting an offer. It might not change the behavior of any particular worker, but with a pool of many millions of unemployed people, surely a generous unemployment insurance program will have a noticeable impact.

I hasten to point out that it’s not merely Chicago-school or Austrian economists who subscribe to this view. For example, Paul Krugman, Robin Wells, and Kathryn Graddy wrote in the 2010 edition of their popular textbook:

People respond to incentives. If unemployment becomes more attractive because of the unemployment benefit, some unemployed workers may no longer try to find a job, or may not try to find one as quickly as they would without the benefit. Ways to get around this problem are to provide unemployment benefits only for a limited time or to require recipients to prove they are actively looking for a new job.

So we see that this view really is standard among professional economists. (This fact led to some awkwardness when Krugman in early 2014 excoriated heartless Republicans for endorsing this theory, without mentioning that he himself included it in his textbook.) The only argument is over the empirical size of the effect.

Here is where the new NBER paper provides results that surprised many readers.

Keynesian economists in particular argue that the supply-side impact of unemployment benefits is swamped during a slack labor market by the direct demand-side impact. In other words, many Keynesians argue that during the Great Recession, the frequent extensions of federal unemployment benefits increasedemployment, because the checks allowed unemployed workers to continue spending and hold up aggregate demand. That is why it was so significant that the authors of the new paper found the following (from their abstract):

We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero.… In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

The interested reader can directly consult the paper to review the particular econometric technique the authors used to try to tease out causation from correlation (relying on discontinuities at state borders, for example).

The interesting takeaway for the general reader is that the surprisingly robust growth in the US economy in 2014 may have been due to Congress’s late 2013 decision to cease extensions of unemployment benefits. In short, when the federal government stopped sending checks to people who remained unemployed, more of them found work.

ABOUT ROBERT P. MURPHY

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal. He is also the Senior Economist with the Institute for Energy Research and a Research Fellow at the Independent Institute. You can find him at http://consultingbyrpm.com/.

Florida Subsidizing Corporate Tax Dodgers

February 26, 2015/in Budget and Finance, Economy, News, Policy, Politics, Taxes/by Dr. Rich Swier

As Florida policymakers consider cutting corporate profits tax revenues, nonpartisan research institute Integrity Florida released a study to provide more transparency about the actual corporate profit tax rates being paid by the Fortune 500 corporations headquartered in Florida to state governments in the U.S.

Key Findings about the Fortune 500 corporations headquartered in Florida:

While the corporate profits tax rate in Florida is 5.5 percent, the 13 profitable Fortune 500 corporations headquartered in Florida paid a 2.7 percent average corporate profits tax rate to state governments in the U.S. between 2011 and 2013.
The 13 profitable Fortune 500 corporations headquartered in Florida made $35.1 billion in estimated corporate profits between 2011 and 2013.
The 13 profitable Fortune 500 corporations headquartered in Florida paid $945.7 million in total estimated corporate profits taxes to all state governments in the U.S. between 2011 and 2013.
Florida taxpayers paid more than $2.4 billion to 10 of Florida’s 17 top Fortune 500 corporations for state government contracts between 2011 and 2013.
Florida taxpayers have provided 13 of the 17 Fortune 500 corporations headquartered in the state more than $147 million in subsidies.
Floridians gave the largest profitable corporations in the state more public money through government contracts and subsidies than those corporations paid back in state taxes on their profits nationally between 2011 and 2013.
Policies that allowed these corporations to take advantage of low corporate profits tax rates, along with large government contracts and subsidies, could be a result of the corporations’ significant lobbying and campaign contributions, including the more than $22 million they spent for those purposes in Florida just between 2012 and 2014.

Key Policy Recommendations:

Florida policymakers should consider adoption of the model state corporate profits tax disclosure act. At a minimum, any corporation seeking a government contract or taxpayer-funded subsidy should be required to disclose publicly the organization’s corporate profits tax rate and amount of state and local tax revenue paid during the years the entity receives a government contract or subsidy.
The Florida Department of Economic Opportunity’s Economic Development Incentives Portal should be expanded to publicly disclose the details of every state and local subsidy deal.
Florida’s lobbyist disclosure laws should be enhanced to detail the exact compensation provided by clients to their lobbyists as well as the specific legislative and executive policies being influenced by their lobbying activities.
Site selection consultants and other professional services firms that seek subsidies for corporations should be required to register as lobbyists.
The Florida Legislature should implement the budget transparency recommendations of the User Experience Task Force to help the public follow their money.

Click here to read the report “Subsidizing Corporate Tax Dodgers”.

ABOUT INTEGRITY FLORIDA

Integrity Florida is a nonpartisan, nonprofit research institute and government watchdog whose mission is to promote integrity in government and expose public corruption. Our vision is government in Florida that is the most open, ethical, responsive and accountable in the world. Integrity Florida and its research have been cited by major news outlets including CNN, the BBC, the Wall Street Journal, New York Times, Washington Post, Reuters and the Associated Press.

Integrity Florida policy solutions have been incorporated into 10 new laws increasing government transparency and accountability in Florida. Founded in January 2012 by Dan Krassner, Nicole Krassner and Michael Dema, Integrity Florida is based in Tallahassee, Florida. Research Director Ben Wilcox joined the organization in February 2012. Learn more about Integrity Florida by clicking here.

Buffaloed by Obamacare’s Hidden Taxes

February 25, 2015/in Budget and Finance, Featured, News, Regulation, Taxes/by Foundation for Economic Education (FEE)

Obamacare’s costs are starting to show by D.W. MACKENZIE:

Someone at Buffalo Wild Wings decided to make the costs of the so-called Affordable Care Act (ACA) explicit in the restaurant’s register receipts. An estimated ACA cost of 2 percent was charged to each paying customer.

BW3’s customers complained. Apparently, they’d rather keep these costs hidden. But hiding costs won’t make Obamacare’s higher prices go away.

Adding the cost of a specific government program to a receipt is unusual. Normally, the only tax itemized on register tapes is sales tax — but these are a fraction of the true costs of governmental activity. There are, in fact, too many different government programs to list on each register receipt. Because the price of regulation is usually built into the prices of goods and services, we tend to pay for regulatory costs unwittingly.

Obama’s “Affordable” Care Act imposes regulations, taxes, and subsidies as a means of income redistribution. As usual, the goal is to tax and regulate higher-income people to subsidize those with lower incomes — but that’s never the way things work out.

Real people do not simply pay taxes and regulatory costs as required by written laws. Everyone tries to avoid taxes by whatever means are available. Tax avoidance usually stems from bargaining over prices in markets. Sellers push for higher prices, and buyers push for lower prices.

Sellers have costs to cover: labor, capital, and taxes. It is a simple fact of economics that when an entrepreneur’s taxes rise, he or she will pass part of that additional cost on to customers.

Regulations are de-facto taxes. There is no economic difference between taxing money from someone to fund some activity and a regulatory requirement to achieve the same goal. The ACA is a complex set of taxes.

How do entrepreneurs respond to ACA taxes? The same way they respond to all taxes, explicit or regulatory: by raising the price of whatever they sell.

There is an inescapable fact of taxation: tax burdens are always shared. Taxes charged to upper-income earners for redistribution are in some measure always redistributed to those with lower incomes through price increases.

While ACA benefits have been touted as “free” to lower-income recipients, this proposition is false — and impossible. Somebody always pays for insurance, or any other good. Goods that seem to be paid for by government only appear to be free because their costs are hidden or obscured. Costs of government programs, like the ACA, are just added into the total costs of taxation, and the costs of taxation are partly factored into the prices of all goods.

Taxpayers cannot buy the same amount of goods when final tax-adjusted prices go up. Economists call the effect of taxes on consumer purchases the tax wedge, because taxes drive a wedge between what consumers pay and what entrepreneurs receive. Taxes make goods more expensive for consumers and less profitable for entrepreneurs.

The explicit 2 percent ACA surcharge at Buffalo Wild Wings may or may not have been intended as permanent. The restaurant chain’s executives have already cancelled the policy after customers reacted negatively. But there is a lesson to be learned from the surcharge. Government programs have the superficial appearance of being free, but they never are.

Government’s lack of financial transparency often leads to an ironic outcome: things that appear to be government gifts end up costing more. Why? Because the public sector’s hidden costs mean less cost control in the public sector.

Private enterprises make costs clear with prices. Prices don’t itemize each cost, but because costs are more easily perceived in the private sector, people make greater efforts to control costs. Some find the explicit nature of costs in the private sector unpleasant. Conversely, the fantasy of a free lunch from the state does have a certain emotional appeal. But the inability of most people to perceive the costs of government makes it almost certain that these costs will be higher, compared to the efficiency the private sector can achieve.

As Buffalo Wild Wings made clear, the ACA is just another example of a government program that makes a false promise of free benefits. Rational economic analysis tells us that there ain’t no such thing as a free lunch, yet politicians continue to use that fantasy for political gain.

Let’s abandon the myth of gifts from government. Every action has an economic cost, public or private.

ABOUT D.W. MACKENZIE

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.

Bitcoin: Currency of Currencies

February 21, 2015/in Budget and Finance, Economy, News/by Foundation for Economic Education (FEE)

Might fiat currency one day be denominated in bitcoin? by STEVE PATTERSON:

Bitcoin’s creation represents a watershed moment in monetary history. For the first time, a currency combines the strengths of commodity money with the convenience of fiat money, while avoiding the problems with both. Bitcoin is a new type of currency created for a new type of world: the digital world. And as more people trust bitcoin, it has the potential to completely overturn the established financial system.

Around the globe, nearly everybody uses fiat money — paper currency not redeemable in anything. But this wasn’t always the case. With few exceptions, paper emerged as a popular currency for a specific reason: it was redeemable in precious metals. Only recently has this not been the case. This concept of redeemability, when applied to bitcoin, suggests that history might repeat itself in a big way.

For the last millennium, a key storyline in the history of money has been the relationship between precious metals and paper. Gold, silver, and paper have all been used as currencies. At times, precious metals were used directly as currency; circulating coins were stamped in gold or silver. At other times, paper bills were used as currency — either redeemable in gold or silver, or not backed by anything at all.

Given enough time, all experiments with fiat paper money have ended in failure. So I want to focus on the success story: paper currency, redeemable in precious metals, emerging as the dominant form of money. How did it happen?

The story goes like this: several centuries ago, gold and silver were the most popular currencies in the Western world. (For the sake of brevity, I will refer to “gold and silver” as just “gold” in this article.) People often stored their gold in vaults with goldsmiths to keep it safe. On depositing their gold, they would be issued a paper receipt, which they could redeem on demand — like a coat check at a fancy hotel.

So, if person A wanted to trade with person B, he could pick up his gold from a goldsmith and exchange it for whatever good or service he wanted with person B. Then, person B could take his new gold back to a goldsmith who would issue him a new receipt. Not the smoothest process, but it worked.

As you can imagine, people found a way to streamline this system. Instead of trading physical gold, person A could simply trade his paper receipt — his claim for the gold — to person B. That way, gold ownership transferred without the hassle of lugging physical gold around. The paper receipt was essentially as good as gold.

Person B could also now avoid carrying metal around by trading his paper receipt. He might exchange it with person C, who could turn around and trade it again with person D, and so on. Physical gold needed not actually circulate, unless people wanted to redeem their receipts for it. Thus, paper receipts emerged as a popular form of currency. And as I’ll argue in a moment, this system has huge implications for bitcoin.

In theory, under this system, the total supply of paper currency was limited by the amount of gold stored in vaults. But in practice, the goldsmiths would sometimes create fake receipts, not backed by anything; it’s called “fractional-reserve lending,” and it’s a topic for another time. The important part is this: the monetary system relied on trust placed in goldsmiths. You had to believe that the paper receipts were tied to something concrete — that they weren’t just created out of thin air.

Under this system, paper currency is valuable because it represents a claim to a finite amount of gold. If the supply of currency becomes unlimited, detached from the finite supply of gold, that currency eventually becomes worthless. The paper is no longer as good as gold; it’s only as good as paper, which isn’t very good at all. Unfortunately, this process of currency devaluation has happened dozens of times throughout history.

Governments have also denominated their currencies in relation to precious metals. For example, during half of the 20th century, one US dollar could officially be redeemed for 1/35th an ounce of gold. But, due to political mischief, the United States canceled its policy of redeemability during the 1970s, and the dollar has been a fiat currency ever since.

What does this have to do with bitcoin? Here’s my theory: the same phenomenon that happened with gold and paper can happen again with bitcoin and paper. The redeemability of bitcoin will give it incredible use as a currency. It’s more convenient to use than paper — just as paper is more convenient to use than gold — but unlike paper, it is inflation proof.

If that sounds like a bunch of abstract mumbo jumbo, here it is in more concrete terms: right now, people across the world are accepting bitcoin through payment processors like Bitpay, and they immediately convert their bitcoin into local currency. They might sell a product for 1 BTC, but they instantly redeem that bitcoin for, say, dollars, euros, or yen. It’s this process that I imagine will change in the future, with huge implications.

Naturally, people are redeeming their bitcoin right now because they’re unsure; it’s a new type of currency, and they don’t want to get stuck holding something worthless. But what happens when the fear and uncertainty around bitcoin diminish? If you know you can immediately redeem your bitcoin safely, the incentive to actually do so lessens. It’s like holding a goldsmith’s receipt; yes, you can go to the vault and get your gold, but it’s an unnecessary hassle when you could just hold on to the receipt instead.

Bitcoin is easier to transact than paper; you can send it anywhere on the planet. Plus, it is protected from counterfeiting, unlike paper money. And nobody has to worry about fractional-reserve bitcoin receipts — every bitcoin is publicly viewable by visiting the corresponding address on the blockchain. And, you, not a goldsmith, have final access to your bitcoin if you hold the keys. With all of these advantages, the incentive to redeem your bitcoin shrinks.

Here’s where it gets really exciting: if bitcoin is held as this sort of meta-currency, one feature cannot be overstated: it is inflation proof. Paper is way more convenient than gold, but it has a catastrophic Achilles’ heel: it can be printed out of thin air. Bitcoin is way more convenient than paper, and we don’t have to worry about its inflation. It merges super portability with super security. Historically speaking, no currency has ever existed with both of these properties.

And this convenience says nothing about the technical potential for bitcoin; keep in mind, bitcoin is software, and it can evolve even greater properties in the future. You can’t say that about gold.

Just as paper emerged on the back of gold, bitcoin might emerge on the back of paper. If redeeming bitcoin for local currency becomes superfluous, the monetary world might be turned on its head. Instead of denominating bitcoin in fiat currency, fiat currency might end up being denominated in bitcoin. After all, it was the connection with precious metals that protected paper currency from inflation and gave it significant appeal. And it could be argued that bitcoin has an even more strictly limited supply than precious metals.

It might sound idealistic, but bitcoin could represent the beginning of a new financial world built on a solid, digital, noninflationary foundation. As with the emergence of gold, silver, and paper as money, the market will ultimately decide which currency is best.

ABOUT STEVE PATTERSON

Steve Patterson is a freelance motion graphics producer and writer. He is the creator of The Truth About… educational animation series. You can follow him at steve-patterson.com.

Dear Ultra-Rich Man: An ultra-middle-class man’s letter to Nick Hanauer by Max Borders

February 10, 2015/in Budget and Finance, Culture War, Economy, Labor & Unions, News, Policy/by Foundation for Economic Education (FEE)

You probably don’t know me, but unlike you, I am one of the 99 percent, a proud and unapologetic advocate of free and open markets. I’m writing you because your letter to other rich guys has gone viral. Each time I saw it, I thought, “Somebody should respond to this guy.” I got tired of waiting. So I hope you’ll read this. I leave your prose in italics so I can address your major points in turn.

You probably don’t know me, but like you I am one of those .01%ers, a proud and unapologetic capitalist.

I admit I’m already suspicious. If you were a proud and unapologetic capitalist, I doubt you’d write the things you did. Now, maybe you’re an unapologetic investor, or even an entrepreneur. But to my mind, a capitalist is one who understands and advocates for a system of free and open markets—as opposed to other economic systems—such as State capitalism, crony capitalism, mercantilism, or Keynesian interventionism. If by capitalist, you mean, “guy who likes to make money in business,” then great. I just want to make sure we’re not talking past each other.

I have been rewarded obscenely for my success, with a life that the other 99.99 percent of Americans can’t even imagine. Multiple homes, my own plane, etc., etc.

Did you create something of value for people, or make it possible for people to get something of value in return? Did they willingly hand over what economist Walter Williams calls “certificates of performance”? Or did you take subsidies or lobby the government for competitive advantages? If the former, I certainly don’t begrudge you your airplane. If the latter, then you are a crony capitalist (crapitalist), or rent-seeker. There is a big difference.

I was so excited by the potential of the web that I told both Jeffs that I wanted to invest in whatever they launched, big time. It just happened that the second Jeff—Bezos—called me back first to take up my investment offer. So I helped underwrite his tiny start-up bookseller. The other Jeff started a web department store called Cybershop, but at a time when trust in Internet sales was still low, it was too early for his high-end online idea; people just weren’t yet ready to buy expensive goods without personally checking them out (unlike a basic commodity like books, which don’t vary in quality—Bezos’ great insight). Cybershop didn’t make it, just another dot-com bust. Amazon did somewhat better. Now I own a very large yacht.

What if the other Jeff had called first? You might be living next door to me. The point is not that you were successful, but rather that—at that time—the capital you gave to either Jeff could not be used for any other purpose. As it happens, Jeff Bezos was a good steward of your capital. He has created value for hundreds of millions of people, so both you and he have since been rewarded for being good stewards of capital. Without either of you, there would have been no Amazon (and thus no Amazon Prime, which lets me watch good TV cheaper than cable).

What sets me apart, I think, is a tolerance for risk and an intuition about what will happen in the future. Seeing where things are headed is the essence of entrepreneurship. And what do I see in our future now? I see pitchforks.

We might quibble about the essence of entrepreneurship. You get it partially right, at least. But if you see pitchforks, it’s only because egalitarian ideologues are spreading bad economic ideas and fomenting the worst instincts in people: cruder emotions such as envy. Yet the poorest quintile of Americans is wealthier and healthier than two-thirds of the entire world. We should not be brandishing pitchforks at you. We should keep on sending you our certificates of performance—if, that is, you keep satisfying our wants and needs, and solving our problems.

At the same time that people like you and me are thriving beyond the dreams of any plutocrats in history, the rest of the country—the 99.99 percent—is lagging far behind.

Guess what? I, too, am thriving beyond the dreams of any plutocrats in history! Later, in this very letter, you admit that on the things that matter, there isn’t really much of a gap between us at all. You write, “I earn about 1,000 times the median American annually, but I don’t buy thousands of times more stuff. My family purchased three cars over the past few years, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men.” Looks to me like we’re pretty equal where it counts. Because when it comes to consumption power, we little guys also have it made, yachts notwithstanding. (You’re more likely to find me on a pontoon boat. That’s okay.) You leave those surpluses to be used as capital—hopefully by other able entrepreneurs.

The divide between the haves and have-nots is getting worse really, really fast. In 1980, the top 1 percent controlled about 8 percent of U.S. national income. The bottom 50 percent shared about 18 percent. Today the top 1 percent share about 20 percent; the bottom 50 percent, just 12 percent.

Accepting this statement on its face: So what? These statistical abstractions tell us nothing about how well people live today compared with the past. The more important questions are: Compared to 1980, is any one of us more likely to have greater access to the goods and services we need to live a decent life? Can plebs like me get mobile devices we couldn’t in 1980? Are we living longer than in 1980? Can we buy food, shelter, pants, TVs, transportation—on a website? Is total compensation (including non-wage benefits) more than it was in 1980? (Yes, yes, yes, yes, and yes.)

Now, might any of this have to do with entrepreneurs and investors directing capital to productive uses?

According to Michael Shermer, writing in Scientific American of all places, the American dream is not dead.

The top-fifth income earners in the U.S. increased their share of the national income from 43 percent in 1979 to 48 percent in 2010, and the top 1 percent increased their share of the pie from 8 percent in 1979 to 13 percent in 2010. But note what has not happened: the rest have not gotten poorer. They’ve gotten richer: the income of the other quintiles increased by 49, 37, 36 and 45 percent, respectively.

Not only that, but all quintiles have access to Netflix, Trader Joe’s, and mobile devices.

Now, there are desperately poor people out there. But worrying about what the desperately poor lack is very different from worrying about what the ultra-rich have. Surely guys like you can find creative solutions to helping the least advantaged without making them dependent on State largess, or without placing any more burdens on business.

Our country is rapidly becoming less a capitalist society and more a feudal society. Unless our policies change dramatically, the middle class will disappear, and we will be back to late 18th-century France. Before the revolution.

This could be true, but not for the reasons you think. Again, there is a big difference between those who lobby politicians to transfer resources into their coffers through subsidies, regulations, and other political means and those who actually serve customers in order to make their lives better. The former should be called “crapitalists,” and there are way too many of them in the world. But crapitalism is a consequence of too much government power, power that ends up on auction. Such was the case in Rome, Paris, and Saint Petersburg. As long as poor people aren’t systematically excluded from entrepreneurial opportunities, the pitchforks will pitch hay.

(Note: Minimum wage laws can exclude poor people from opportunities.)

In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It’s not if, it’s when.

Sure there are counterexamples: Singapore. Hong Kong. Switzerland. These days the pitchforks are coming out in societies where the poor don’t have access to real property, collateral, and low-cost legal institutions that help them become upwardly mobile—places like Egypt, Brazil, and Turkey. (See the work of Hernando de Soto). The pitchforks come out not when there is inequality of outcomes, but when political power is being sold to the highest bidder, or put differently, where political powers pick winners and losers and where business and government collude unfairly to become a “monstrous hybrid.” Pitchforks come out when the welfare well runs dry, as in Greece.

Many of us think we’re special because “this is America.” We think we’re immune to the same forces that started the Arab Spring—or the French and Russian revolutions, for that matter.

I agree. We are certainly not immune to populist uprisings. But this is no justification for wealth redistribution or minimum wage hikes, which are likely—revolution or no—to make those with the pitchforks worse off than they would otherwise have been. “People don’t like that other people have gotten rich” is not an argument for confiscating wealth.

The model for us rich guys here should be Henry Ford, who realized that all his autoworkers in Michigan weren’t only cheap labor to be exploited; they were consumers, too. Ford figured that if he raised their wages, to a then-exorbitant $5 a day, they’d be able to afford his Model Ts. What a great idea. My suggestion to you is: Let’s do it all over again. We’ve got to try something. These idiotic trickle-down policies are destroying my customer base. And yours too.

Wait, didn’t you say you were “rewarded obscenely”? Looks to me like your customer base is doing just fine. Do you really want to use the “company town” as the model for the good society? Good luck with that. Now, if we’re being charitable in interpreting you, we might point to companies like Costco that pay more for labor. It works for them. If it works for you, then what’s stopping you? If any such model works so splendidly, people will replicate it.

Finally, don’t you think it’s a bit rich (no pun) to call “trickle-down” policies “idiotic” and then propose them in the same breath? What’s more “trickle-down,” after all, than the notion that raining free money from on high—whether via fiat wages or welfare checks—will “stimulate” a middle class to burgeon? If anything, it will stimulate them to do more of less. These tired Keynesian nostra only end up in perfectly good capital being misallocated. (Burning planks from a ship at sea might keep you warm for a night, but it won’t get your ship to port.)

It’s when I realized this that I decided I had to leave my insulated world of the super-rich and get involved in politics.

Why not help people with charity? Why not create better-faster-cheaper goods? Politics, at its root, is just some group compelling other people with the threat of violence to try to refashion the world as they see it in their minds. If that’s not inequality, I don’t know what is. But more importantly, you have already demonstrated that you can make the world a better place. It is better with Amazon than without. People are employed. I buy products and services from you that enrich my life. Thank you. Now, if you have more money than you can spend, why not build more businesses that solve more human problems? Why not engage in superphilanthropy instead of amateur economics?

I wanted to try to change the conversation with ideas—by advancing what my co-author, Eric Liu, and I call “middle-out” economics. It’s the long-overdue rebuttal to the trickle-down economics worldview that has become economic orthodoxy across party lines—and has so screwed the American middle class and our economy generally. Middle-out economics rejects the old misconception that an economy is a perfectly efficient, mechanistic system and embraces the much more accurate idea of an economy as a complex ecosystem made up of real people who are dependent on one another.

So far neither you nor Mr. Liu have demonstrated anything to suggest you understand the nature of the economy as an ecosystem. You seem to be selling the same old ideas that brought us mechanistic economics like “priming the pump” or “fixing” the economy with economic stimulus, fiscal transfers, and price controls—none of which takes into account effects on real flesh-and-blood people involved in that complex ecosystem, and instead reduces them to macroeconomic abstractions. (I’m bracing for more Keynesianism from you, Mr. Hanauer.)

Which is why the fundamental law of capitalism must be: If workers have more money, businesses have more customers. Which makes middle-class consumers, not rich businesspeople like us, the true job creators. Which means a thriving middle class is the source of American prosperity, not a consequence of it. The middle class creates us rich people, not the other way around.

Ah, more magical thinking from Keynes. First, it’s simply a myth that the American middle class is disappearing. And Mr. Hanauer: You get things entirely wrong about the sources of prosperity. Most of the planet is poor, in fact, though it’s getting richer all the time.

The question we have to ask ourselves—inequality notwithstanding—is: Why did the rich countries get rich to start with? If we go by your logic, all we have to do to make sub-Saharan Africa rich is transfer massive amounts of wealth there until a “middle class” has enough money to go buy stuff. (Oh yeah, that didn’t work.) But the arrow of causation doesn’t run that way. Instead, wealth originates from people like the pillow makers in your family—perhaps starting small—operating within stable rules, creating goods and services that people value enough to trade their time and labor for it—that is, if they have nothing else to trade. Economies of scale and specialization kick in. Then, like a great coral reef, the economic ecosystem emerges through distributed processes of interdependency that flow from within simple rules (such as property, prices, and profit-or-loss).

Of course, time and labor are not enough to make society wealthier. If they were, then we really could dig ditches and fill them up again, as Keynes suggested, to become rich. Yes, entrepreneurs figure into a wider economic ecosystem that includes consumers. But Hong Kong did not become the richest rock on earth because of wealth transfers. It became rich because entrepreneurs and investors did not squander capital, but rather used it in wildly diverse ways to expand the base of capital goods so entrepreneurs could produce consumer goods and services—better, faster, and more cheaply. It started with little sweatshops and ended up with megacompanies. But this required savings, investment, ideas, innovation and entrepreneurship. Lather, rinse, repeat. You can try to shortcut this process with Keynesian manna. But rich guys have to get rich by creating wealth first.

So, without Henry Ford, no company town. Without a stable business environment, no Henry Ford. Yes, the open market is a virtuous ecosystem, but it is not improved by zero-sum (or negative sum) wealth transfers like you’re proposing. The ecosystem is seeded with ideas that make people more productive. More productivity creates surpluses that end up as investment in more capital goods or more consumption goods—all of which feeds better ideas that make people more productive and create further surpluses. Creative entrepreneurs, willing to take risks, get the ball rolling (not the other way around). They are the prime movers.

On June 19, 2013, Bloomberg published an article I wrote called “The Capitalist’s Case for a $15 Minimum Wage.” Forbes labeled it “Nick Hanauer’s near insane” proposal.

Forbes was right. I’m sorry. But it is near insane. Price controls don’t work in the energy markets. Price controls don’t work in healthcare. Why would price controls work in labor markets? Your proposal amounts to nothing more than price controls. But prices are information signals wrapped in incentives. When you try to control prices, you’re distorting both the information and the incentives.

You go on to brag that your idea saw implementation in Seattle. I’m surprised a businessman of your caliber would do that. You see, we have to look at outcomes, not inputs. I know, you said you left business to go into “politics.” And politics is that bottomless well of aspirations in which people reward themselves for good intentions—that is, for getting things passed. But what are the effects of a policy?

Back in the business world, people have to live with the consequences of politics. And so far, the minimum wage in Seattle has already resulted in perverse effects. As businesses are forced to adapt—cutting back labor, hours, and substituting labor with technology—your policy hastens this process. You may think you’re making big companies pay their “fair share,” but you’re hurting small businesses: restaurateurs with slim margins, someone opening a little child care center, maybe a guy who runs a body shop. And more importantly, you’re depriving people of opportunities. When you raise the minimum wage by 25 percent, you are raising the costs of hiring a minority teenager by 25 percent. If the minimum wage makes it too costly to open another store, the business owner won’t open another store.

The thing about us business people is that we love our customers rich and our employees poor.

This doesn’t sound like a sentence written by a businessperson at all. Labor, like any other market phenomenon, has a market value. That may sound crass. But it’s true. If it weren’t true, we could set the minimum wage to $150 per hour. Now, it may be that some companies want to pay their work forces more than comparable wages in an area—perhaps in exchange for loyalty, or so that they’ll spend more at the company store. Maybe they attract better, more reliable workers. For some employers, it’s worth it: They value the labor that much based on their particular circumstances. In North Dakota, Walmart employees are being offered $17 per hour. Why? Labor supply and demand. For other companies, it might be a form of charity. But the truth is, we don’t know from one company to the next. One thing we do know, however, is that blanket policies don’t do a good job of determining which companies have which circumstances.

Every time the capitalists said exactly the same thing in the same way: We’re all going to go bankrupt. I’ll have to close. I’ll have to lay everyone off. It hasn’t happened. In fact, the data show that when workers are better treated, business gets better. The naysayers are just wrong.

The most comprehensive study of minimum wages is by Neumark and Wascher (and you can buy it on Amazon). These scholars have determined that the net effects of minimum wage laws over the years have been primarily deleterious. (And predictably so.) Treating an employee “better” may or may not have positive effects for a given business. But the thing about entrepreneurs is they are highly attuned to such opportunities. And if such opportunities are a win-win, they will pursue them. But the net effect of assuming you or anyone else knows what’s best for all companies has been shown to be negative in theory and in practice.

Most of you probably think that the $15 minimum wage in Seattle is an insane departure from rational policy that puts our economy at great risk. But in Seattle, our current minimum wage of $9.32 is already nearly 30 percent higher than the federal minimum wage. And has it ruined our economy yet?

$9.32 versus $15.00? That’s a big difference. Normally politicians set minimum wages right around where they might otherwise be—say in a large, gentrified area like Seattle—and so the ill effects go away pretty quickly as companies adapt, if they need to at all. Politicians do this to create the illusion that they are making things better with policy, when actually they are getting out in front of a trend in order to take credit for it. But if entry-level wages are hovering around $9 in Seattle or San Francisco, they aren’t in Stockton (where the unemployment rate is 14 percent). Indeed, no one should believe for a second that a jump of more than 50 percent is going to be easy for companies to adapt to, and won’t require wrenching ill effects. Again, the labor pool and conditions are heterogeneous, so blanket policies are ill-advised. Remember, you said yourself the economy is like an ecosystem, not a machine. Wage rates can’t be set by a single rheostat.

The two cities in the nation with the highest rate of job growth by small businesses are San Francisco and Seattle.

Raise it to $15 tomorrow and you’ll slam on the brakes. Or you’ll see lots of small businesses with fewer employees or just the owners.

Guess which cities have the highest minimum wage? San Francisco and Seattle. The fastest-growing big city in America? Seattle.

My sources show my home city Austin is the fastest growing, despite a minimum wage of $7.25. Other major Texas cities—sucking in Californians by the day—have similar minimum wages. But let’s not facts get in the way of your hypothesis.

Fifteen dollars isn’t a risky untried policy for us. It’s doubling down on the strategy that’s already allowing our city to kick your city’s ass.

Did I mention I live in Austin, one of four Texas cities among the 10 fastest growing? How is this kicking our ass? While San Francisco’s unemployment rate may be low and its small start-ups doing okay for now, the rest of the state is a mess. You’ll have to look at other factors besides wage rates to see why.

It makes perfect sense if you think about it: If a worker earns $7.25 an hour, which is now the national minimum wage, what proportion of that person’s income do you think ends up in the cash registers of local small businesses? Hardly any.

It would make perfect sense if there weren’t so many counterexample cities that completely belie your claim—many here in Texas. But what’s more, the United States already has an income support system called the Earned Income Tax Credit (EITC). That means rich people like you already subsidize wages for workers under a certain income threshold. So it’s not clear to me why shifting the burden directly onto individual businesses is going to create some sort of magic. If your argument is that there should be a bigger EITC, that’s a separate discussion.

Please, please stop insisting that if we pay low-wage workers more, unemployment will skyrocket and it will destroy the economy.

A $15 per hour wage is not likely to destroy the economy. It will certainly destroy prospects for groups like African-American teens, whose unemployment rate currently hovers around 40 percent. Minimum wages don’t destroy the economy, they remove the bottom rungs of the income ladder for people who need to gain skills and experience to be upwardly mobile. And they often raise prices for consumers, including those making low wages.

The most insidious thing about trickle-down economics isn’t believing that if the rich get richer, it’s good for the economy. It’s believing that if the poor get richer, it’s bad for the economy.

It depends upon which straw man you’re beating up here, Mr. Hanauer, but neither of your “trickle down” claims is true. The rich getting richer is an effect, not a cause. The poor getting richer is an effect, not a cause. If all groups are becoming better off—as they have been (I refer you to the Shermer citation above) then the causes of those improvements across quintiles are good for the economy.

Indeed, what is good for the economy—and human well-being—is when people get richer due to becoming more productive, solving more problems, and satisfying more wants and needs. The value of a worker’s effort is determined according to the subjective valuations of individual entrepreneurs in unique circumstances. You can’t possibly know these circumstances, Mr. Hanauer, because you are not treating the economy like a complex ecosystem. How do I know? Because you say…

In order for us to have an economy that works for everyone, we should compel all retailers to pay living wages—not just ask politely.

But again, a “living wage” is a numerical abstraction—detached from any real economic ecosystem. If we were to view the economy as an ecosystem, we would have to reckon with its complexity and heterogeneity. Price controls treat the economy as a static thing that can be jump-started by edicts from a central committee.

[Instead of buying stuff…] I sock my extra money away in savings, where it doesn’t do the country much good.

What makes you think your savings don’t do the country much good? If it’s gaining interest at all, then it most certainly is doing the country good. You seem to be laboring under the mistaken notion that consumption drives production. But consider for a moment that Lord Keynes was wrong. When you save, somebody is going to use that money for something (unless the Fed has other ideas). Now, if you’re just letting it sit in a zero-interest account, or you’re bathing in dollars, I would encourage you to diversify and/or use your savvy to create more wealth for both yourself and the country. If you’re a true capitalist, you know more interest/income is a signal that you’re doing something right—that you’re making the world a better place, even if you’re just leaving your money in the bank.

Bottom line: If you don’t agree, you can always give it away. One wonders why you haven’t.

So forget all that rhetoric about how America is great because of people like you and me and Steve Jobs. You know the truth even if you won’t admit it: If any of us had been born in Somalia or the Congo, all we’d be is some guy standing barefoot next to a dirt road selling fruit. It’s not that Somalia and Congo don’t have good entrepreneurs. It’s just that the best ones are selling their wares off crates by the side of the road because that’s all their customers can afford.

If this were true, Hong Kong would be a backwater, poor as it was 100 years ago. As Nobel Laureate Douglass North said in his prize speech:

The organizations that come into existence will reflect the opportunities provided by the institutional matrix. That is, if the institutional framework rewards piracy then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations—firms—will come into existence to engage in productive activities.

And entrepreneurs start firms. In the Congo, piratical organization is rewarded by the institutional matrix. It’s been a corrupt dictatorship for years, so people who take bribes and join the army get the rewards. Make no mistake: Changes to Congo’s institutional matrix—along with the entrepreneurial culture—will give rise to dramatic changes in living standards, as they did in Hong Kong. There are 75 million potential customers in the Congo.

So why not talk about a different kind of New Deal for the American people, one that could appeal to the right as well as left—to libertarians as well as liberals?

Edge of my seat.

If people are getting $15 an hour or more, they don’t need food stamps. They don’t need rent assistance. They don’t need you and me to pay for their medical care.

Raising the minimum wage is effectively no different than raising the corporate tax for welfare benefits for assistance, except that one has greater potential to harm businesses. In both cases, people are getting something for nothing.

If the consumer middle class is back, buying and shopping, then it stands to reason you won’t need as large a welfare state.

How’s that? If fewer poor people are being hired—a la Neumark and Wascher—more poor people will require assistance.

And at the same time, revenues from payroll and sales taxes would rise, reducing the deficit.

If all these positive effects were to come about, how does this address the so-called “problem” of inequality? If you’re correct that all this crazy consumption is going sustainably to push up company revenues (which I doubt), aren’t guys like you still going to get richer under your theory?

There are three main problems with any proposal to raise the minimum wage in lieu of welfare:

First, there are better, more pragmatic proposals out there for a minimum income, including the negative income tax (i.e., expanding the EITC and getting rid of welfare). Charles Murray’s In Our Hands is a good start, though his numbers might need updating. That proposal reduces the direct burden on companies compared with your proposal, because it redistributes after profits rather than before. Minimum wage laws are indifferent to whether a firm is profitable, which makes them dangerous by degree.

Second, any policy that simply transfers wealth can have incentive effects that discourage upward mobility. That being said, I will grant that your proposal would help people avoid “welfare traps” if there were no negative effects on employment. But if your government-set wage rates are pricing people out of the labor market, there will be just as many unemployed workers, if not more.

Third, any such grand compromise ideas about minimum income—as much as we might like to think about them—are very likely not to be implemented. How do you plan to combat the welfare-industrial complex? There are armies of vested interests in the welfare bureaucracy. They will be extremely difficult to send packing.

Capitalism, when well-managed, is the greatest social technology ever invented to create prosperity in human societies. But capitalism left unchecked tends toward concentration and collapse.

I think you might be confused about what capitalism is. If by capitalism, you mean crapitalism, then you’re right. It’s not sustainable. And only checking the State’s power to assist cronies will we rein in the excesses of crapitalism. If by capitalism, you mean free and open markets, then you are simply mistaken. In competitive environments, it’s very difficult for firms to hold on to market dominance for very long. Firms have to consistently deliver on quality and price. Almost all monopolies and cartels are created and shored up by corporate-State collusion. And corporate-State collusion almost always starts with the State trying to “manage” capitalists. Regulation is inherently anticompetitive.

Now there will be resource concentrations in a free and open market, as with any natural system, but they too are difficult to maintain over time. In other words, there is incredible churn at the top—because only the best stewards of capital can stay there.

My family, the Hanauers, started in Germany selling feathers and pillows. They got chased out of Germany by Hitler and ended up in Seattle owning another pillow company. Three generations later, I benefited from that. Then I got as lucky as a person could possibly get in the Internet age by having a buddy in Seattle named Bezos.

You may feel guilty about this. After all, your forebears were real value creators. Maybe you inherited a fortune and got lucky knowing Jeff Bezos. Maybe you really aren’t that good at predicting the future, identifying trends, etc.—just lucky. Maybe Bezos just called you first and you simply rode the wave. Still, we shouldn’t begrudge you your fortune, any more than we should pity a guy who loses at the tables.

Things get tight for me and my family. We’re trying to figure out how to fix the fender on my car (my fault) and renovate the old house we just bought. But at least we’ve got a car to fix. We’ve got a house to fix up. We eat nutritious food. My son has a Kindle Fire. And my wife and kid are about the best family a guy could have. We don’t have much, but we have enough to make Louis XVI positively green.

Yeah, you might be lucky, Mr. Hanauer. But so am I.

Max Borders is author of Superwealth: Why we should stop worrying about the gap between rich and poor, which you can buy for your Kindle at Amazon.

ABOUT MAX BORDERS

Max Borders is the editor of The Freeman and director of content for FEE. He is also co-founder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.

Androscoggin’s Wealth Building Home Loan

February 9, 2015/in Budget and Finance, Economy, News/by Edward Pinto

Androscoggin Bank of Lewiston, ME introduced the first market rate program Wealth Building Home Loan with a soft launch back in November (called the Wealth Builder Home Loan). The response has been enthusiastic—5 closed loans and a total pipeline (including closed loans) of $3.3 million in the dead of winter—impressive results for a $700 million asset bank. The bank had its formal launch on February 4 (see attached PowerPoint for more detail). The bank added an innovative feature–a 15 year 2-step loan with the bought down rate fixed for 7 years and then stepping up to a pre-set rate for the remaining term (described in detail below).

Also see https://www.androscogginbank.com/Personal/Loans/Mortgage/Wealth-Builder. The February 4 event was attended by about 40 realtors and the bank described the response as “unprecedented” —92% and 8% of attendees said they would be either be “very likely” or “likely” to recommend to their clients (see realtor survey results attached).

The bank also offers a 103% LTV 15 year loan that minimizes the cash needed at closing, while still greatly reducing default risk (see worksheet below).

For a larger view click on the image.

The chart below compares an FHA loan (96.5% loan + upfront fee, with 0.80% annual MIP) to Androscoggin Bank’s 100% LTV and two-step 15-year loan (no MI). Home price of $100,000 used for simplicity:

FHA 30 year*	Androscoggin 15 year 2-step**
Rate/P&I (inc. MIP for FHA) on $100,000	4%/$535	1.75%/$632
Pre-tax annual income/buying power vs. FHA	$27,374/100%	$29,449/93%
Net equity after 7 years (10% selling expenses, 2% annual appreciation)	$18,828	$46,798
90% LTV reached in month?	54	21
80% LTV reached in month?	108	40
Payment shock (year 8)	NA	13.3% (1.9% per yr.)

*96.5% LTV + upfront fee, with 0.80% annual MIP. No use of residual income, based on 28% housing debt-to-income

**100% LTV plus 3 buydown points. Rate fixed for years 1-7, steps to 5% for years 8-15. Use of residual income allows for 2% higher housing debt-to-income (30%).

In this next chart, you will see that the bank has a 100% or 103% LTV, max. 45% DTI, min. 4-6 months reserves, min. 660 FICO, and uses the residual income approach (the residual income #s are the same as used by the VA). This makes for a compelling loan offering, yet results in a much lower risk loan than with FHA.

DTI	FICO	Reserves	LTV	Residual income $ and household size
				1	2	3	4	5	6+
45.00	660	4 mo.	100	$450	$755	$909	$1025	$1062	$1062
45.00	660	6 mo.	103	$450	$755	$909	$1025	$1062	$1062

Down and Out in the Middle-Class Economy

February 9, 2015/in Budget and Finance, Culture War, Economy, Policy, Politics/by Foundation for Economic Education (FEE)

The truth about growth, recovery, and unemployment by D.W. Mackenzie:

The president recently boasted of the success of his administration’s economic policies, which he calls “middle-class economics.” He describes his approach as “helping working families feel more secure in a world of constant change.” Who can blame him? People like to feel secure.

Given the nature of politics, we should expect politicians to embellish their policy accomplishments and downplay their failures. But Obama’s recent claims regarding our true economic conditions have gone well beyond embellishment and evasion to outright falsehoods. It’s either mendacity or denial.

One need only look at the facts to get some perspective on the real state of the economy.

1. Economic growth

President Obama claims that “we’ve seen the fastest economic growth in over a decade” — but there is no evidence for this claim. Actual GDP growth rates have been unusually low in recent years, even as GDP measures liberally include both fat and muscle.

A casual glance at the above graph is enough to disabuse the electorate of the idea that growth has been fast or stellar. Yet, President Obama would like to craft the narrative that his administration’s policies have not only rescued the economy, but set it ablaze.

2. Recovery

The “recovery” of the last six years is even worse than the above graph indicates. While the GDP growth rate has been historically low, it should have been at historic highs. Why? The economy has much untapped potential.

Potential GDP has been well above actual GDP since 2008. Potential GDP is an estimate of what would be produced if labor employment and capital utilization were as high as can reasonably be expected. The next graph shows that there have been unsustainable booms in the past 25 years. Actual GDP fell slightly below potential GDP during the 1991 and 2001 recessions. Actual GDP reached unsustainable levels above potential GDP during the dot-com and subprime booms. Growth during these booms was limited by availability of labor and capital goods.

Growth in the past six years has barely reduced the gap between actual and potential GDP. Given the large untapped potential in the economy, GDP growth should have been faster than it was during any other expansion in the past half century, but that didn’t happen.

3. Unemployment

Real statistics reveal a boom-bust cycle in the economy up to 2008 and a persistent gap between actual and potential GDP since 2008. The lack of a real economic recovery since 2008 has had dire consequences for American workers. President Obama claims that “our unemployment rate is now lower than it was before the financial crisis,” but this statement is also false. The U-6 unemployment rate gives us a true indication of economic conditions when it comes to putting people back to work.

Full accounting of unemployment shows the unemployment rate in double digits since 2008. The lack of a real recovery has left millions unemployed. The president dodges the failure of the “economic stimulus” in his 2009 Recovery and Reinvestment Act by focusing on the official U-3 unemployment rate — a statistic that ignores millions who have simply given up looking for work in recent years, but are able.

Something new?

The president said something recently that we should take seriously, however: “When what you’re doing doesn’t work for fifty years, it’s time to try something new.”

Federal officials have been trying to “manage the economy” with fiscal and monetary stimulus for half a century. Presidents began taking the advice of demand-side economists during the 1960s, and there has been little deviation from this practice since then, even during President Reagan’s supposed “supply-side” years. The results of the policies favored by both President Obama and his predecessors are clear: management of the economy delivers a boom-bust cycle at best and relative stagnation at worst.

The real evidence indicates that we are living in the worst period of this federally managed economy. President Obama’s “middle-class economics” is nothing more than the same old demand-side economics, only on steroids. Fiscal and monetary “stimulus” policies of the past six years have been some of the most ambitious ever tried.

ABOUT D.W. MACKENZIE

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.