Economy Archives - Page 130 of 170

How the State Keeps You Working Long Hours by Iain Murray

November 14, 2015/in Culture War, Economy, Policy, Regulation/by Foundation for Economic Education (FEE)

Entrepreneur Tim Ferriss found he had a mega-hit on his hands with his 2007 book, The 4-Hour Workweek, a paean to a new attitude toward work. In it, Ferriss recommends a four-step approach to balancing work and life in a way that leads to a more rewarding lifestyle. We are now nearing the day when his concepts can be applied to the economy as a whole.

Ferriss directly challenges notions of the firm and employment that are fundamental to how we think about — and regulate — work. While he doesn’t directly mention them, Ferriss puts Ronald Coase’s and F.A. Hayek’s theories to use in a way that CEOs, regulators, and legislators should follow.

Ferriss advises a four-step framework for rethinking your work life, which goes by the acronym DEAL (though for many people it will be DELA). The steps are as follows:

Work out what you really want from life (“What excites you?”) and what it will take to get you there.
Eliminate tasks that take up time for little result; be effective rather than efficient.
Automate not just tasks but income streams as well.
Work when and where you want to by liberating yourself from the 9-to-5 routine and the physical office location (through remote working arrangements and flexible scheduling).

While Ferriss aims his framework at individuals trying to escape drudgery and live their dreams, there’s a lot here for a CEO to ponder. In fact, a lot of startups aim to be 4-hour companies.

Entrepreneurs, after all, launch businesses to follow a dream. Few companies are started without a vision of something greater — the definition. But failure to achieve the next three steps often drags a business down.

Companies can become burdened with processes that make them not just inefficient but ineffective. Tasks that should be automatic become lengthened with other processes. The business’s physical location and workday rules can also become burdens.

Why does this happen? To answer that, we need to turn to Coase and Hayek.

Coase and Transaction Costs

It was Ronald Coase’s insight that firms exist because the costs of market transactions are often higher than those of an employment relationship.

Employment, since its origins as a form of contract in common law, has always been seen as a master-servant relationship, where the employer instructs the employee. Because of this understanding, firms have mostly gravitated toward a command-and-control structure (which was encouraged by Frederick Winslow Taylor’s The Theory of Scientific Management).

Hayek and the Knowledge Problem

Yet we also know from Hayek that command-and-control structures suffer from a knowledge problem, because the commanders cannot possibly know as much as they need to know to make rational decisions.

To counteract this knowledge problem, companies often introduce complex procedures and feedback loops that can be inefficient or ineffective. Managers opt to “fight the last war,” introducing procedures to prevent a problem from recurring, only to see new problems arise while laying the groundwork for unintended consequences in the future.

In the end, Ferriss notes, they succumb to the Pareto principle — also known as the 80-20 rule, where 80 percent of a company’s activities produce only 20 percent of its output.

The Knowledge Problem versus Transaction Costs

The solution to the knowledge problem, says Hayek, is to use markets, which contain the sum of information necessary. But then we run into the problem Coase identified — transaction costs are higher in markets than in firms. If they weren’t, firms wouldn’t exist. Firms exist until their transaction costs get too high, and then they collapse. Some large companies have avoided this fate by using market-based processes within their organizational structures. The franchising business model also introduces these processes.

The emerging economy, however, goes beyond the master-servant relationship, as I noted in “Depression-Era Laws Threaten the Sharing Economy.” Increasingly, people want an employment relationship more like what Ferriss describes.

The Sharing Economy to the Rescue?

Contractual relationships aided by technology can reintroduce market processes into a corporation. Smart contracts can automate those processes. Ineffective processes can be eliminated, and the entire company can be liberated from physical offices and fixed hours.

The fact remains, however, that regardless of the actual work arrangement, the overriding legal and regulatory structure assumes a master-servant employment relationship within a firm. And these days, the Department of Labor and the National Labor Relations Board are going out of their way to freeze old-economy rigidities in place by punishing firms that use contractual relationships as part of their business models. That may be why, despite all the changes in technology and attitude, the traditional firm continues to dominate the employment market.

The 4-hour company and the 4-hour workweek are feasible — but only if the government allows them. Until then, they remain tantalizingly out of reach.

Iain Murray

Iain Murray is vice president at the Competitive Enterprise Institute.

Do Capitalists Manipulate, Deceive, and Cheat? Not as Much as Politicians Do by Michael Makovi

November 10, 2015/in Budget and Finance, Economy, Policy, Politics, Regulation/by Foundation for Economic Education (FEE)

Real-world markets, according to Nobel laureate economist Robert Shiller, are all about manipulation and deception.

So he argues in a New York Times article summarizing his new book, coauthored with fellow Nobel laureate economist George Akerlof: Phishing for Phools: The Economics of Manipulation and Deception. According to Shiller, merchants and vendors regularly “phish for” ignorant consumers who they can mislead into acting less in their own interests and more in those of the phishermen.

Shiller claims that the theoretical defense of the free market depends on consumers being rational and well informed — a condition that doesn’t hold true in the real world. Drawing on behavioral economics, he argues that consumers are often possessed with cognitive biases that allow them to be systematically deceived by unsavory merchants. For this reason, Shiller argues, consumers need government regulation to protect their interests. The internal forces of the market are not sufficient.

Deux ex Nirvana

But government regulation is not an infallible deus ex machina. The question is not whether the market fails, but whether the government is more likely than the market itself to correct those failures. Economist Harold Demsetz coined the term “nirvana fallacy” to make this point: it is not enough to find flaws in the real world; one must prove that some feasible alternative is likely to be less flawed. James Buchanan, one of the fathers of public choice economics, compared advocates of government regulation to the judges of a singing contest who, after hearing an imperfect performance from the first contestant, immediately award the second contestant, reasoning that he must be better.

No, the market is not perfect, and consumers are often ignorant and manipulable. But the real question is this: Will government do any better?

Just because the first singer offered a less-than-perfect performance is no proof that the second singer will be any better. Ironically, Nudge author and former member of the Obama administration Cass Sunstein, no friend of economic freedom, accidentally makes this very point in his positive review of Shiller and Akerlof’s book.

According to Sunstein,

Bad government is itself a product of phishing and phoolishness, for “we are prone to vote for the person who makes us the most comfortable,” even when that person’s decisions are effectively bought by special interests.

So yes, people behave irrationally in their capacities as market participants, but they are no more rational in how they cast their votes than in how they spend their dollars.

Buying What You Don’t Want

The difference is that in a market, there are feedback signals, however attenuated. If a vendor cheats his customer by holding back information about his product, at least the customer will learn about the product’s faults after he purchases it, and he will buy from someone else next time. He will likely warn others, too. The consumer may have cognitive biases, but he has the opportunity to learn from his mistakes, prevent others from making them, and correct them in the future. The deceptive merchant will develop a bad reputation, and paying customers are motivated to learn about merchants’ reputations — especially as 21st-century technology develops ever-more-robust reputation markets, accessible through anyone’s smartphone.

By contrast, there are fewer feedback signals in politics and even fewer opportunities to act on that feedback. One vote barely counts, and each voter must vote not for specific policies, but for politicians with a range of policies. Electoral politics doesn’t really offer a choice so much as it imposes a bundle. A vote for a particular candidate implies endorsement of all the policies in that bundle, when the truth is more likely that the voter has selected the least bad option. In the market, customers can easily split their “dollar votes” to purchase only the specific products they want.

In Freedom and the Law, Bruno Leoni notes that we are all doubly unrepresented by politics: we vote for A, but B defeats A in the election. Then, when B is sitting in the legislature, he is outvoted on a bill by C. So in the end, a person is governed by politician C who beat B, who in turn beat the voter’s preferred choice, A.

When Phoolishness Is Rational

In such a situation, it makes sense for voters to be rationally ignorant of the effects of government policies they are helpless to affect. Politicians are free to peddle shoddy products when they know voters have few opportunities to learn from their mistakes — and even fewer opportunities to correct them.

Meanwhile, markets tend to concentrate benefits and costs on the consumers who use a specific product. This internalization of costs and benefits promotes learning and feedback. In a market, a person must bear the consequences of his or her own actions.

In politics, benefits are concentrated on those whom the politician wishes to favor — such as financial donors and special interests whose attention is narrowly focused — while costs are dispersed among those whose attention is elsewhere, including many who focus on producing wealth instead of transferring it.

The combination of rationally ignorant voters and informed and motivated special interests encourages rent seeking. Private benefit and social cost diverge as the political process encourages the creation of new externalities. While markets tend to internalize the costs, politics encourages externalities.

So yes, consumers are often “irrational” and deceived and make mistakes. But, as Sunstein himself tells us, this is true in both politics and markets. The question is, Which institutional environment is more likely to promote learning from mistakes? And which institution — the market or politics — maximizes a person’s ability to correct those mistakes? Shiller and Akerlof have failed to prove that government regulation will detect or correct mistakes better than the market itself can.

Michael Makovi

Michael Makovi recently graduated from Loyola University in New Orleans, where he majored in economics.

Serious flaws uncovered in Federal Reserve’s Bank Lending Practices

November 6, 2015/in Economy, Policy, Politics, Regulation/by Edward Pinto

New analysis by Tobias Peter, research analyst at AEI’s International Center on Housing Risk (ICHR), uncovered serious flaws with respect to the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices when compared to ICHR’s much more comprehensive and timely National Mortgage Risk Index (NMRI).

Earlier this week the Fed released the closely-watched quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS).[1] The survey of loan officers is widely viewed as providing a key signpost for trends in mortgage lending standards in the United States. Unfortunately, the information provided by the survey has always been limited at best, and useless at worst. Limited because it only reports on the results based on about 60 loan officers. But even if these were representative for the fifty percent of mortgage lending originated by banks, it ignores the other half, consisting largely of much riskier originations by nonbanks. And useless because it showed no systematic loosening in mortgage lending standards in the run-up to the 2007/08 financial crisis, which runs contrary to everything we now know.

Fortunately, policymakers are no longer forced to rely on the SLOOS. A much better measure of mortgage lending standards now exists. With the creation of theNational Mortgage Risk Index (NMRI), published each month by AEI’s International Center on Housing Risk (ICHR) and covering an estimated 78 percent of all home purchase loans and 90 percent of all primary owner-occupied home purchase loans, we are now able to quantify the risk in mortgage lending and provide accurate, timely, and in-depth tracking of trends in lending standards.

A quick comparison of the two measures clearly shows why the NMRI is superior to the SLOOS. First, and most important, the NMRI is based on hard data – millions of loan records – rather than opinions. Second, as noted above, the loan officers included in the SLOOS are all from commercial banks. Third, the SLOOS weights all survey responses equally, rather than by their share of originations. Wells Fargo alone accounts for nearly 15 percent of purchase loan originations market wide, yet it receives the same weight in the survey as banks that are barely on the radar screen. The NMRI, in contrast, includes the loans with a government guarantee originated by all lenders, and each lender is properly weighted by its share of originations. In addition, because the NMRI is based on loan-level data, it can focus on mortgages used to purchase primary owner-occupied homes, the type of lending toward which the Federal government’s housing policies are aimed. The SLOOS doesn’t distinguish between such loans and those that are used to buy second homes or finance investor purchases. Finally, the NMRI allows for separate tracking of first-time and repeat buyers, a key metric in any analysis of mortgage lending trends.

The SLOOS shows that mortgage lending standards have loosened on net over the past year. This is the right signal, but the SLOOS arrives there by accident, rather than by design. In a head-to-head comparison with the NMRI for only bank-originated loans, the results do not line up. Where the SLOOS shows a loosening of bank lending standards over the past year for loans guaranteed by Fannie Mae and Freddie Mac, the NMRI, with its nearly complete census of such loans, shows little change in standards. Roughly the same discrepancy holds for bank-originated loans backed by Ginnie Mae (principally FHA and VA loans).

By focusing solely on banks, the Fed’s SLOOS misses two crucial mix shifts underway in mortgage lending that are responsible for the easing in standards that is clearly documented in the composite NMRI, which covers the entire government-guaranteed market. The first shift is that large banks have ceded substantial market share to higher-risk nonbank lenders. This has been largely due to concern over the risks associated with government guaranteed lending (particularly FHA’s extremely expansive credit standards), past and future legal liability, reputational risk, and greater capital requirements. The second shift is from loans guaranteed by Fannie and Freddie toward higher-risk FHA loans, which resulted from HUD’s reduction in FHA mortgage insurance premiums earlier this year.[2]

While the SLOOS can shed some light on mortgages without a government guarantee, which are not currently covered by the NMRI, the same flaws apply. Instead of basing evaluation of lending standards on a small survey of bankers that will send the correct signal only by accident or even worse, the wrong signal, policymakers and the public should direct their attention to an index grounded in facts, not opinions. Next year, the ICHR plans to add loans without a government guarantee to the NMRI.

FOOTNOTES:

1. http://www.federalreserve.gov/BoardDocs/snloansurvey/201511/default.htm

2. http://www.wsj.com/articles/u-s-federal-housing-administration-to-reduce-premiums-1420644685

Everyone Is Talking about Bitcoin by Jeffrey A. Tucker

November 5, 2015/in Economy, Policy, Politics, Regulation/by Foundation for Economic Education (FEE)

I’m getting a flurry of messages: how do I buy Bitcoin? What’s the best article explaining this stuff? How to answer the critics? (Might try here, here, here, and here.)

Markets can be unpredictable. But the way people talk about markets is all too predictable.

When financial assets go up in price, they become the topic of conversation. When they go way up in price, people feel an itch to buy. When they soar to the moon, people jump in the markets — and ride the price all the way back down.

Then while the assets are out of the news, they disappear from the business pages and only the savviest investors buy. Then they ride the wave up.

This is why smart money wins and dumb money loses.

Bitcoin Bubbles and Busts

It’s been this way for seven years with Bitcoin. When the dollar exchange rate is falling, people get bored or even disgusted. When it is rising, people get interested and excited. The challenge of Bitcoin is to see through the waves of hysteria and despair to take a longer view.

In the end, Bitcoin is not really about the dollar exchange rate. It is about its use as a technology. If Bitcoin were only worth a fraction of a penny, the concept would already be proven. It demonstrates that money can be a digital product, created not by government or central banks but rather through the same kind of ingenuity that has already transformed the world since the advent of the digital age.

When the Bitcoin white paper came out in October 2008, only a few were interested. Five years would pass before discussion of the idea even approached the mainstream. Now we see the world’s largest and most heavily capitalized banks, payment processing companies, and venture capitalists working to incorporate Bitcoin’s distributed ledger into their operations.

In between then and now, we’ve seen wild swings of opinion among the chattering classes. When Bitcoin hit $30 in February 2013, people were screaming that it was a Ponzi-like bubble destined to collapse. I’ve yet to see a single mea culpa post from any of these radical skeptics. It’s interesting how the incessantly wrong slink away, making as little noise as possible.

For the last year, the exchange rate hovered around $250, but because this was down from its high, people lost interest. What is considered low and what is considered high are based not on fundamentals but on the direction of change.

What Is the Right BTC Price?

The recent history of cryptocurrency should have taught this lesson: No one knows the right exchange rate for Bitcoin. That is something to be discovered in the course of market trading. There is no final answer. The progress of technology and the shaping of economic value knows no end.

On its seventh birthday, Bitcoin broke from its hiatus and has spiked to over $350, on its way to $400. And so, of course, it is back in the news. Everyone wants to know the source of the last price run up. There is speculation that it is being driven by demand from China, where bad economic news keeps rolling in. There has also been a new wave of funding for Bitcoin enterprises, plus an awesome cover story in the Economist magazine.

Whatever the reason, this much is increasingly clear: Bitcoin is perhaps the most promising innovation of our lifetimes, one that points to a future of commodified, immutable, and universal information exchange. It could not only revolutionize contracting and titling. It could become a global currency that operates outside the nation state and banking structures as we’ve known them for 500 years. It could break the model of money monopolization that has been in operation for thousands of years.

Technology in Fits and Starts

Those of us in the Bitcoin space, aware of the sheer awesomeness of the technology, can grow impatient, waiting for history to catch up to technical reality. We are daily reminded that technology does not descend on the world on a cloud in its perfected form, ready for use by the consuming public. It arrives in fits and starts, is subjected to trials and improvement, and its applications tested against real world conditions. It passes from hand to hand in succession, with unpredictable winners and losers.

Successful technology does not become socially useful in the laboratory. Market experience combined with entrepreneurial risk are the means by which ideas come to make a difference in the world at large.

Bitcoin was not created in the monetary labs of the Federal Reserve or banks or universities. It emerged from a world of cypherpunks posting on private email lists — people not even using their own names.

In that sense, Bitcoin had every disadvantage: No funding, no status, no official endorsements, no big-name boosters. It has faced an ongoing flogging by bigshots. It’s been regulated and suppressed by governments. It’s been hammered constantly by scammers, laughed at by experts, and denounced by moralists for seven straight years.

And yet, even given all of this, it has persisted solely on its own merits. It is the ultimate “antifragile” technology, growing stronger in the face of every challenge.

What will be the main source of Bitcoin’s breakout into the mainstream? Commentary trends suggest it will be international remittances. It is incredible that moving money across national borders is as difficult and expensive as it is. With Bitcoin, you remove almost all time delays and transaction costs. So it is not surprising that this is a huge potential growth area for Bitcoin.

The Economist takes a different direction. It speculates that Bitcoin technology will be mostly useful as a record-keeping device. It is “a machine for creating trust.”

One idea, for example, is to make cheap, tamper-proof public databases — land registries, say, (Honduras and Greece are interested); or registers of the ownership of luxury goods or works of art. Documents can be notarised by embedding information about them into a public blockchain — and you will no longer need a notary to vouch for them.

Financial-services firms are contemplating using blockchains as a record of who owns what instead of having a series of internal ledgers. A trusted private ledger removes the need for reconciling each transaction with a counterparty, it is fast and it minimises errors.

We Need Bitcoin

No one knows for sure. What we do know is that we desperately need this as a tool to disintermediate the world, liberating us from the governments that have come to stand between individuals and the realization of their dreams.

In 1974, F.A. Hayek dreamed of a global currency that operated outside governments and central banks. If governments aren’t going to reform money, markets would need to step up and do it themselves. Bitcoin is the most successful experiment in this direction we’ve yet seen.

And that is true whether or not your friends and neighbors are talking about it.

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World. Follow on Twitter and Like on Facebook.

The Enemy of Affordable Housing by Sandy Ikeda

November 3, 2015/in Culture War, Economy, Policy, Politics, Regulation, Waste, Fraud and Abuse/by Foundation for Economic Education (FEE)

Will restricting housing options for the wealthy benefit the poor? Is more regulation the solution to problems created by past regulations? And how can we avoid the interventionist cycle that Ludwig von Mises warned us about?

Critics of Airbnb are not asking these questions. In California, they have proposed stringent regulations to reign in the Internet-based, home-sharing business.

Aligning Interests

One of the marvels of the unhampered market is the way it aligns the interests of buyers and sellers. If the price is too high, a potential buyer is better off keeping her money; if the price is too low, a potential seller is better off keeping his product. When the price is right, trade happens because both expect it to make them better off.

Even when economists note possible exceptions to this harmony of interests — such as market power, asymmetric information, externalities, or behavioral “irrationalities” — most recognize that entrepreneurial competition in a free market will limit or even eliminate their negative effects over time.

In this case, which would be better? Having the government regulate the behavior you disapprove of, or getting rid of the bad rules that prevent people’s own choices from regulating it? When there is public outcry over certain entrepreneurial practices, the political reaction is to compel an outcome that those with political power approve of. In contrast, the scientific approach is to listen to the objections but then try to find the underlying source of the problem.

What Is Seen

From the economic point of view, Airbnb serves to significantly lower the costs of listing, finding, or renting lodging to the general public. Other things equal, it improves the well-being of those involved. In San Francisco, Proposition F would considerably tighten regulations on this popular service.

Among other things, as the ballot initiative reads, Prop F

would restrict all such private rentals to 75 nights per year and impose provisions designed to ensure such private rentals are paying hotel taxes and following city code. It would also require guest and revenue reports from rental hosts and “hosting platforms” every three months.

Prop F’s advocates argue that in San Francisco, wealthy, profit-hungry owners use Airbnb to charge high rents to short-term customers for their vacant residences. They contend that this practice takes much-needed units from an already extremely tight, long-term housing market. That, in turn, shrinks the pool of housing available to lower-income families who are already having trouble renting in one of the most expensive areas of the country. So it appears that the relatively wealthy are profiting at the expense of the relatively poor.

Similar disputes are happening in other cities, such as New York.

Those who support Prop F and call for regulation apparently believe they have the moral and intellectual high ground.

No reasonable and compassionate person likes to see low-income families struggle for housing. Unfortunately, if you question the effectiveness of some cherished public policy, there are too many people who reflexively question your motives, your intelligence, or both.

But a win-at-all-costs attitude in political debate is not conducive to rational and civil discourse.

What Is Unseen

Why don’t entrepreneurs in San Francisco respond to sky-high rents, as economics suggests, by increasing the supply of housing instead of using Airbnb? What’s hard to see in the heated, off-the-cuff political debates are the consequences of rent regulations in San Francisco. According to journalist Meagan McArdle, San Francisco’s rent regulations have meant that “a growing number of landlords don’t want to rent their places at all; it’s too much hassle for too little reward.” Under the circumstances, Airbnb brings at least some of that housing supply into a segment of the rental market.

Also, as Business Insider recently pointed out:

Since San Francisco is located on a peninsula, there’s pretty much only one way for the city to add new housing units: by growing vertically. With taller buildings, San Francisco would be able to fit more housing and thus lower rents. But as Y Combinator partner Garry Tan pointed out in a tweet this weekend, that’s not even an option under current city zoning regulations.

And there’s more.

The surrounding cities and suburbs of San Francisco are also subject to strict building codes. Those who might like to live on the outskirts of San Francisco, and redirect some of the high demand from the city, have fewer options because residents in outlying areas support building codes they think will protect the value of their homes.

Indeed, a housing advocacy group is trying to sue the East Bay town of Lafayette to force it to relax building restrictions on housing density. (See my February 2015 Freeman article, “Shut Out: How Land-Use Regulations Hurt the Poor,” on the regressive effects of building restrictions.)

The Political Economy of Housing Regulations

Passage of Prop F would mean a significant loss of business to Airbnb, which is why the company is reportedly spending millions of dollars to fight it. On the other side, concerned citizens and organizations have reportedly been getting help from the hotel industry, which is anxious to restrain the competition from the sharing economy.

Airbnb, Uber, and other “gap economy” businesses are themselves attempts to address markets that are underserved because of overregulation.

The great Austrian economist Ludwig von Mises described the cycle this way: profit-seeking entrepreneurs respond to the incentives created by bottlenecks and shortages that prior interventions have artificially created. Political activists in turn respond with more regulations. It’s an almost endless cycle that history teaches us usually doesn’t end well.

What’s the best way to improve housing options for low-income families? Taking time to scientifically question the wisdom of Prop F doesn’t make us bad people, and it’s not irrational to refrain from imposing political solutions on problems created by prior political “solutions.” Indeed, looking behind what is obvious and beyond the passions of the moment is the only way of breaking that vicious cycle.

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.

Government Is Why the Rent Is Too Damn High by Randal OToole

November 3, 2015/in Budget and Finance, Culture War, Economy, Policy, Politics, Regulation, Taxes/by Foundation for Economic Education (FEE)

Rising home prices and apartment rents have been in the news lately, but almost no one is looking at the real causes behind these problems.

Instead, they are proposing band-aid solutions that will do little to help most people afford housing but will greatly benefit special interest groups.

According to the news, Boston, Los Angeles, Miami, New York, Portland, San Francisco–Oakland, San Jose, Seattle, and Washington, DC, among other major urban areas, are all suffering from housing crises. Economists who have studied these regions know why their housing is becoming less affordable.

First, urban-growth boundaries and other land-use regulations in most of these regions have limited the amount of land available for new housing. Urban planners say these regulations are needed to control the externalities caused by urban sprawl.

However, as New Zealand’s Deputy Prime Minister recently noted in a speech about a similar housing crisis in Auckland, urban planning itself “has become the externality” that is making housing the most expensive.

Second, in many of these regions — specifically, Los Angeles, New York, San Francisco-Oakland, San Jose, and Washington — rent control has only made housing less affordable for everyone not lucky enough to live in a rent-controlled apartment.

Even though some of these cities exempt new developments from rent-control rules, developers know that such exemptions could be eliminated at any time and are wary of investing in new housing.

Many of these and other cities have also passed “inclusionary zoning ordinances” that force developers to sell or rent 10 to 20 percent of the new housing units they build at below-market rates, which both discourages new development and increases the cost of the market-rate units that are built.

Although these problems are obvious to anyone who understands the rudiments of supply and demand, they are almost completely ignored by politicians, housing officials, and low-income housing advocates.

Instead, the almost exclusive focus is on building government-subsidized (or, in the case of inclusionary zoning, developer-subsidized) housing. Yet this does nothing to solve the problem for the vast majority of homebuyers and renters.

California has the nation’s second-least affordable housing (after Hawaii), and probably has some of the most aggressive subsidized housing programs. Yet a recent report from the state legislative analyst’s office found that these programs have produced only about 7,000 subsidized housing units per year, or about 5 percent of new housing.

In a state that has nearly 14 million homes and apartments, adding 7,000 subsidized units per year will have no measurable influence on overall prices, especially in the face of growth boundaries and other factors that make housing expensive.

So why is so much emphasis placed on a policy that won’t work while a policy of deregulating land markets is ignored? The answer is that long-standing federal subsidies to housing have created an affordable-housing-industrial complex that thrives on subsidies in unaffordable housing markets and whose reason for existence would be severely diminished if those markets were deregulated.

Take, for example, Enterprise Community Partners (ECP), whose mission (as described on its IRS Form 990) is “to create opportunities for low and moderate-income people through affordable housing.”

ECP is heavily funded by your tax dollars to promote affordable housing, getting much of its tax support through Section 4 of the HUD Demonstration Act of 1993, which specifically designates ECP as a grant recipient.

Enterprise Community Partners has certainly found the business of promoting a few units of affordable housing, as opposed to making all housing more affordable, to be quite lucrative, at least for many of its staff.

According to its tax form, only a quarter of the organization’s $58 million annual expenses went to grants aimed at making more affordable housing, while 62 percent went for salaries, benefits, and professional service contracts. (The rest went for things like conferences, travel, rent, and office expenses.)

More than two dozen of its staff members earned more than $200,000 in salaries and benefits in 2013. The United States of America gets along with just one vice president; ECP has sixteen of them, half of whom make more than the $230,700 per year taxpayers pay to Joe Biden.

The organization’s tax form also admits that it spent nearly $600,000 on lobbying in 2013. Thus, groups like ECP that focus on creating a few units of affordable housing, while they ignore the real problem, become self-perpetuating. They use taxpayer dollars lobby to continue their tinkering at the edges of affordability while they and the people who listen to them do nothing about the overall affordability problem in regions with strict land-use regulation and rent control.

This post first appeared at Cato @ Liberty.

Randal OToole

Randal O’Toole is a Cato Institute Senior Fellow working on urban growth, public land, and transportation issues.

China’s Crazy New Five-Year Plan by Richard Lorenc

November 3, 2015/in Culture War, Economy, Must Read, Policy, Politics/by Foundation for Economic Education (FEE)

Earlier this week, the Chinese Communist Party rolled back one of the most egregiously illiberal vestiges of its bloody recent past by replacing the one-child policy with a new and improved limit of two children. Going forward, urban Chinese are permitted legally to grow their families slightly larger than before, even if their first child is a boy. (Rural Chinese were previously allowed to “try again” if their first child was a girl.)

The one-child policy was implemented in 1979, nominally, to allay social and environmental concerns that would supposedly be caused by “overpopulation.” China’s population had reached a level just shy of 1 billion. One of the policy’s originators calculated China’s optimal population to be 700 million; he estimated that a one-child policy would reduce the number of Chinese to that level by 2080 without famine or genocide.

It was an abrupt reversal of Mao’s decades-long encouragement to grow the Chinese labor force by having as many children as possible.

As times changed, so did the trendy Communist policies. By the time Deng Xiaoping took over as China’s dictator, he opened China to foreign trade, dismantled the farm commune system, and permitted greater freedom for peasants to bring their goods to market.

Beijing wanted to plan economic growth, so it expanded freedom in the market and drastically reduced freedom in the family. Reducing the birthrate, they thought, would automatically increase per capita GDP as previous generations faded.

Of course, the Chinese economy during Deng’s time did grow dramatically, thanks to its opening to the world and economic liberalization, setting the stage for the Chinese economic powerhouse of today.

The Futile Hamster Wheel of Planning

Despite implementing market-oriented reforms, Deng remained a central planner at heart. His policies were part of a new kind of five-year plan used by China for decades and modeled after Stalin’s controlled-economy approach in the Soviet Union. Five years at a time, the government would announce its economic goals and how it planned to reach them.

Soviet five-year plans were infamous for their ludicrous precision, including setting quotas for output of nails. When evaluated by quantity, Soviet factories would produce minuscule nails. When evaluated by weight, they would produce gigantic, heavy nails. Both varieties were useless to people who needed nails, but that was irrelevant to the economic planners seeking to reach their arbitrary goals, and the bureaucrats who sought to appease them.

The five-year-plan approach remains a mainstay of China’s government’s policies, and at the Communist Party conference this week, the state announced the 13^th five-year plan — the shi san wu, literally meaning “13 five.”

No one outside of the Chinese Communist Party really knows what the 13^thfive-year plan contains (another unveiling is scheduled for March 2016), but speculation is that it will focus on welfare-state reforms, environmental policies, and subsidies for local government spending.

To generate buzz for the plan outside of China, the government commissioned a flashy video that extols the virtues of experts and planning.

One of the most revealing parts of the video is its focus on experts and consultation. A segment of dialogue highlights this approach.

But how do they make all the plans?

First there’s research, views collected. Then discussion and views projected.

Reports get written and passed around. Then there’s…there’s actually more research, and more discussion, more research, and more discussion. Like, at every level! Over and over, like, through hundreds of rounds.

Like, through hundreds of rounds!

Ok, we got it! Hundreds of rounds!

Oh, my God.

Crazy, right?

Yes, crazy.

Just ask F.A. Hayek.

The Curious Task of Economics

Hayek understood the market as a process for gathering all of the tiny bits of constantly changing information dispersed among all the individuals in an economy. He saw experts as overly confident in their information and completely unequipped to make decisions on behalf of people they don’t even know.

In his great book The Fatal Conceit, Hayek articulated one of the most blistering critiques of those who would plan the lives of others: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

He expounded on this provocative idea by explaining how economic order is not so much a state to be reached as a constantly evolving flow, changing by the moment as it responds to the needs, wants, and desires of individuals.

To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.

Instead of five-year plans (or central, top-down plans of any duration), Hayek argued the only way to “plan” an economy would be to decentralize economic decision making to the lowest possible level. In most cases, that would mean permitting individual decisions to accumulate into an emergent economic order, moment by moment.

Despite the best-laid plans of Chinese Communist Party leaders, an unplanned order emerges, based on what individual Chinese people value. A five-year plan doesn’t prevent market forces from acting, but it does make them less effective in serving people well.

When fully announced, the shi san wu will probably include some good market-based ideas, but it continues the Chinese Communist Party’s admittedly crazy notion that it can forcibly design an economy for normal people based on the ideas of experts.

Richard Lorenc

Richard N. Lorenc is the Chief Operating Officer of FEE and Publisher of the Freeman.

Adam Smith’s Wealth of Nations and the FairTax by Rep. Dave Brat (VA-7)

October 31, 2015/in Economy, Policy, Politics, Regulation, Taxes/by Steve Hayes

Adam Smith, the father of economics, published An Inquiry into the Nature and Causes of the Wealth of Nations nearly 240 years ago[i]. Soon after, an extraordinary flourishing of innovation and human well-being took off and transformed the globe. According to economist Deirdre McCloskey, the average American today is roughly 30 to 100 times better off than our ancestors in 1800[ii], the point when humanity began to escape crushing poverty. Notwithstanding modern prosperity, however, human nature hasn’t changed much. Smith’s insights remain relevant.

The Wealth of Nations considers taxation in Book V, Chapter 2: “Of the Sources of the General or Public Revenue of the Society.” In the prior chapter, “Of the Expenses of the Sovereign or Commonwealth,” he describes the primary functions of the national government. Some—like defense—need to be paid for by general revenue, while others—like transportation infrastructure—can be built and maintained with fees paid by users.

Revenue policy should fund the necessary expenses of the government. Not to benefit this or that industry. Not to advance social objectives. Certainly not to suppress political speech.

Smith set out four goals for evaluating tax options. First, tax contributions should be proportionate to abilities. Second, the rules should be certain and not arbitrary. Third, taxes should be levied when and how its payment is most convenient. Fourth, collection should minimize administrative overhead.

He then evaluated possible tax bases using those principles: rents of land and houses, profits, wealth, wages, head taxes, and consumption. He concluded that the ideal tax bases are residential property and consumption, particularly on luxury goods.

What does Adam Smith have to do with the FairTax? Everything. Setting aside property taxes—a state and local issue—consider how his principles relate to a consumption tax like the FairTax.

Is it proportionate to abilities? Yes. Those who earn more also consume more, thus contributing proportionately more to the general revenue. Savings—which our current tax system discourages but the FairTax would not—provide no current consumption benefits. They are deferred consumption, which in the meantime enables others to borrow to finance education, infrastructure, factories, and much more while also reducing the trade deficit.

Is the FairTax certain and not arbitrary? Yes. Everyone pays the same, known rate on consumption.

Is it convenient to pay? Yes. Merchants include the tax in the prices of final goods and services, which consumers pay all at once. Businesses simply remit the revenue to the government from time to time.

The FairTax also minimizes administrative overhead. The U.S. has around six million businesses.[iii] Not all would collect revenue under the FairTax, since many don’t sell directly to consumers. Current tax law requires the processing of six million business returns, 150 million individual and household tax returns[iv] (some overlap), and various trust, foundation, and other returns that are processed today, all under a complex, burdensome, and unFairTax code.

A broad-based consumption tax like the FairTax has other benefits. It eliminates the bureaucratic discretion that enabled the illegal and corrupt targeting of political speech, as the Richmond Tea Party experienced first-hand. Less taxation on productive activities yields greater physical and human capital investment by businesses and individuals, which makes workers more productive, boosting their compensation and standards of living while also increasing returns to saving.

It eliminates a major source of favor trading between Congress and big businesses. The concentrated interests of businesses associations create enormous pressure for Congress to provide tax preferences. The FairTax dramatically reduces the ability of political insiders to manipulate the tax system.

After nearly a decade of poor economic performance, we need comprehensive, pro-growth, simplifying tax reform like the FairTax. That’s why I’m a proud cosponsor of H.R. 25. To fully restore the American Dream, however, we must also pursue major regulatory and spending reforms.

We can have even more of the market-tested innovations that improve our lives and that would have astounded Adam Smith and our ancestors. Smart policy reforms—like the FairTax—can clear the path.

[i] http://www.econlib.org/library/Smith/smWN.html

[ii] https://www.aei.org/publication/perhaps-the-most-powerful-defense-of-market-capitalism-you-will-ever-read/

[iii] http://www.census.gov/content/dam/Census/library/publications/2015/econ/g12-susb.pdf, Appendix Table 1, pp. 7.

[iv] https://www.irs.gov/uac/SOI-Tax-Stats—Individual-Statistical-Tables-by-Size-of-Adjusted-Gross-Income, “All Returns: Selected Income and Tax Items: 2013”

ABOUT CONGRESSMAN DAVE BRAT

Congressman Dave Brat represents Virginia’s 7th congressional district, serving since 2014 when he won a special election. Brat is a member of the House Budget Committee, Education and the Workforce Committee, and Small Business Committee. He has a Ph.D. in economics, formerly was a professor of economics and chairman of the economics department at Randolph Macon College, and previously worked for the World Bank and Arthur Andersen.

EDITORS NOTE: To learn more about the FairTax please click here.

There’s No Escaping Competition by Steven Horwitz

October 29, 2015/in Culture War, Economy, Policy, Politics, Regulation/by Foundation for Economic Education (FEE)

People Need a Way to Decide Who Gets What.

“The motives of fear and greed are what the market brings to prominence,” argues G.A. Cohen in Why Not Socialism? “One’s opposite-number marketeers are predominantly seen as possible sources of enrichment, and as threats to one’s success.”

Cohen further notes that these are “horrible ways of seeing other people” that are the “result of centuries of capitalist civilization.”

If only we had a different economic system where people viewed each other as brothers and sisters in a common effort rather than competitors trying to grab the largest share of the economic pie.

Implicitly drawing on Marx’s idea that the forces and relations of production determine the ideas people have and the way they behave, this criticism imagines that competition is a contingent feature of human interaction caused by capitalism.

But is it? Are we only competitive because capitalism makes us so?

By contrast, consider a line in my class notes for the day we start talking about competition in my Introduction to Economics course: “Competition is not a product of living in a capitalist society — it’s a product of not living in heaven.”

Despite the dreams of the socialists, competition is not going away any time soon. As long as resources are scarce and not all of our wants can be fulfilled, humans require some way of determining who will get which goods.

Competing Versions of Competition

Suppose for a moment that we want to figure out how best to allocate goods to consumers. In a market economy, we allow people to engage in competitive bidding to try to acquire the things they think are most valuable to them. But we can imagine other ways of allocating goods. Perhaps we ask people to line up. Or maybe we try to figure out who is more deserving. Perhaps we do it by the pure discretion of bureaucrats. Or we decide things Fight Club style. Would those end competition?

I don’t think so. All that those methods would accomplish is to divert competition into less productive forms. For example, if we distributed resources first come, first served, does anyone doubt that people would find new ways to compete for an early place in line? Or think of the people who camp out for sports or concert tickets and the opportunity cost of the time they spend waiting rather than doing other things.

Or if we did it by evaluating who is more deserving, wouldn’t people simply compete over what should count as the relevant moral criteria — and then compete to demonstrate that they deserve goods more than others do?

Imagine if a board of economic planners said they would distribute resources to the people who are most honest. It wouldn’t surprise us to see people then start to expend resources to convince the planners that productivity or intelligence were more important than honesty in distributing resources, nor would it surprise us for people to then compete to prove to the planners that they were the most honest, or productive, or intelligent. All of those forms of competition are wastes of resources compared to competing for consumers in the marketplace.

Or imagine goods distributed by government fiat. Wouldn’t people find new and creative ways to compete to persuade the relevant bureaucrats to favor them? In fact, isn’t this exactly what we see right now as lobbyists engage in competitive rent-seeking to persuade legislators and bureaucrats to allocate more government goodies in their direction? The rent-seeking that takes place in Washington and the state capitals is just another form of competition — appealing to politicians rather than customers.

Were resources distributed through might-makes-right, we can easily imagine the competition that would ensue for people to have the best weaponry or armor, or to hit the gym to get the strength and endurance they would need to survive the fighting. This, too, is competition, but of a very different sort.

As long as goods and services are scarce compared to wants, decisions will have to be made that involve some number of people not getting access to those goods. The fact of scarcity is what makes competition ubiquitous. And if there is a heaven, one of its defining characteristics is surely the absence of scarcity. Humanity has long dreamed of a Land of Cockaigne where roast chickens fly into our mouths without effort and where the seas are made of lemonade. Until that heaven arrives on earth, competition of some sort will rule the roost.

How Is Market Competition Better?

If we are going to have competition, then why prefer one sort over any other?

The competition we see in the marketplace has the important advantage of creating benefits for the rest of society and not just the competitors.

Consider rent-seeking. It’s true that the exchange between a lobbyist and a politician is mutually beneficial. The rent-seeker, if successful, gets resources allocated in her direction, while the politician receives the free lunches and fawning attention from the rent-seeker — as well as some possible leverage over the rent-seeker down the road.

The competition associated with rent-seeking, however, does not benefit anyone else. In fact, the whole criticism of rent-seeking behavior is that expending resources to generate transfers of wealth — not to create new wealth — is socially wasteful. We would be better off if those resources were used to produce new and better products rather than to persuade others to transfer wealth to us, or to reduce the wealth of others.

Similar arguments can be made about all other forms of nonmarket competition. They all involve expending resources in ways that do not benefit society as a whole because they do not create wealth. They just divert resources from other uses to become part of the attempt to transfer existing wealth to another person or group.

Why Price Competition?

The other problem with all of those other forms of competition is that they ignore the question of where resources come from. There is no connection between the distribution of resources (and the form of competition that generates) and the supply of those resources.

Put differently, how do any of those other processes create the knowledge signals and incentives needed to know what to produce and how to produce it to ensure that there are future supplies of goods? Think about Fight Club-style distribution. If everyone is busy pummeling each other to death to get existing resources, what incentive does that create for anyone to produce anything if they will have to spend even more resources to defend any wealth they might create? How would anyone know what to produce in such a world, and why would anyone want to produce it in the first place?

In a system where competition takes place through offering money to acquire resources, we get the emergence of prices, which serve as both the incentive for ongoing production and the information about what to produce. When buyers compete with buyers to acquire a good and thereby bid up the price, it tells existing and prospective producers that this good is more valuable and that they should produce more of it. Similar competitive bidding for the inputs into a production process informs other producers about what should and should not be used to make various goods and services.

Competition through money prices connects the competition over the distribution of goods with the production of goods in a way that no other form of competition does. In this way, market competition benefits not just the direct parties to the competition but all of us by encouraging the ongoing production of goods in ways that economize on resources.

Scarcity is a defining characteristic of the human condition, and scarcity means there will be competition over who gets what. Market capitalism has the great advantage of channeling that competition through the price system, which not only ensures an ongoing supply of goods but also encourages their efficient production.

We may not be in heaven, but the peaceful and socially beneficial competition of the market is downright heavenly compared to the alternatives.

Steven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

Bernie Sanders and the Fixed Pie Fallacy by Chelsea German

October 28, 2015/in Economy, Elections, Policy, Politics, Regulation/by Foundation for Economic Education (FEE)

“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since.

Senator Sanders is not alone in his belief. Three out of four Americans agree with the statement, “Today it’s really true that the rich just get richer while the poor get poorer.”

Senator Sanders is half right: the rich are getting richer. However, his assertion that the poor are becoming poorer is incorrect. The poor are becoming richer as well.

Economist Gary Burtless of the Brookings Institute showed that between 1979 and 2010, the real (inflation-adjusted) after-tax income of the top 1% of U.S. income-earners grew by an impressive 202%.

He also showed that the real after-tax income of the bottom fifth of income-earners grew by 49%. All groups made real income gains. While the rich are making gains at a faster pace, both the rich and the poor are in fact becoming richer.

label

In addition to these measurable real income gains, decreases in prices have given the poor increased purchasing power, helping to raise living standards for the worst off in society. As a result of falling prices such as for groceries and material goods, along with gains in real income, Americans have more income left after basic expenses.

Technology has also become cheaper, improving our lives in unexpected ways. For example, consider the spread of cell phones. There was a time when only the wealthiest Americans could afford one. Today, over 98% of Americans have a cellular subscription, and the rise of smart phones has made these devices more useful than ever.

Unfortunately, progress has been uneven. In those areas of the economy where competition is hobbled, such as education, housing, and healthcare, prices continue to increase.

Still, the percentage of the population classified as living in relative poverty has decreased over time. Why then do three quarters of Americans, including Senator Sanders, believe that the poor are “getting poorer?”

A simple logical error underlies Sanders’ belief. If we assume that wealth is a fixed pie, then the more slices the rich get, the fewer are left over for the poor. In other words, people can only better themselves at the expense of others. In the world of the fixed pie, if we observe the rich becoming richer, then it must be because other people are becoming poorer.

Fortunately, in the real world, the pie is not fixed. US GDP is growing, and it’s growing faster than the population.

Poverty remains a pressing issue, but Senator Sanders is incorrect when he says that the poor are becoming poorer. In the words of HumanProgress.org advisory board member Professor Deirdre McCloskey,

The rich got richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, lower child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university, and respect.

This post first appeared at HumanProgress.org.

Chelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

The Federal Reserve’s Counterfeit Prosperity

October 27, 2015/in Budget and Finance, Economy, Policy, Politics, Regulation, Taxes/by Dan Bongino

When I was a young Secret Service agent on a local financial crimes task force between 2000 and 2002, I was inundated with an explosion of new counterfeit cases. There were a number of causes for this explosion in currency counterfeiting but the main ones were: the rapid advancement in ink-jet printing technology, the declining costs, and correspondingly increased availability of affordable home printers. Prior to these technological advancements, counterfeiting U.S. currency was the near exclusive purview of state-sponsored actors, sophisticated criminals and criminal syndicates.

With the growth in ink-jet printing, any thirteen-year-old with a printer could counterfeit money. I, along with hundreds of other Secret Service agents, were so preoccupied with tracking down this new class of counterfeiters and stemming the tidal wave of new counterfeit making its way into the money supply that I never had the time to philosophize on the deeper reasons why this crime is so dangerous to national cohesion.

We are lucky enough to live in a time where the authenticity of the physical currency in our wallets is taken for granted, but when the Secret Service was founded in 1865 to combat counterfeiting—the Secret Service’s role in Presidential Protection didn’t formally begin until 1901 after the assassination of President William McKinley—it was estimated that approximately half of the currency in circulation was counterfeit. Think about that: you had a roughly 50 percent chance, when engaged in commerce, of receiving money with ZERO value. That people had faith in their currency was so important to the U.S. government at the time that the Secret Service was established and charged with hunting down and prosecuting counterfeiters in order to re-establish public trust in the battered dollar.

The Minimum Wage Fairy Tale by Donald J. Boudreaux

October 27, 2015/in Commentary, Culture War, Economy, Policy, Politics/by Foundation for Economic Education (FEE)

I spend a lot of time talking and writing about the minimum wage. I do so because it sears my economist’s soul to encounter a policy that is as popular with people as it is poorly understood by them.

Opinion polls consistently show that an overwhelming portion of Americans — about 75 percent — support raising the minimum wage. Yet there is no economic principle that is more solid than the one that explains that raising the cost of engaging in some activity (such as employing low-skilled workers) results in people engaging less in that activity.

Just as someone trying to sell a house knows that the higher the asking price, the fewer are the prospective buyers for the house, everyone should know that the higher the wage that a worker charges for his labor services, the fewer the prospective employers for that worker.

This fact holds when the government — through minimum-wage legislation — forces the worker to raise the wage he charges.

Although it’s obvious to me that artificially pushing wages up through minimum-wage legislation causes some low-skilled workers to lose their jobs (or to not be hired in the first place), it’s clearly not obvious to most of my fellow Americans. So I ask, “Why not?”

One reason, I believe, is that many of the same politicians and pundits who praise the minimum wage also loudly complain about the alleged greed and profiteering of business owners. An economically uninformed voter can therefore be forgiven for supposing that a hike in the minimum wage is fully paid for out of the “excess” profits of greedy businesses.

But, notes the economist, most minimum-wage jobs are in highly competitive industries such as food service and retailing. Being under intense competitive pressures, firms in these industries don’t rake in excess profits; they earn just enough to satisfy their investors.

If those profit rates fall even just a bit, investors scale back their support or even pull the plug. So, the typical employer of minimum-wage workers must find some way other than eating into profits to cover the added costs of a higher minimum wage.

One way is to reduce the number of low-skilled workers who are employed, combined with obliging those who remain employed at the higher minimum wage to work harder.

What about raising prices? Might that tactic raise enough revenue to fully cover the costs of a higher minimum wage?

Almost anything is possible, but higher prices charged by employers of minimum-wage workers are unlikely to result in all such workers getting a raise with none of them losing jobs. The reason is that when prices rise for restaurant meals, motel rooms and other goods and services supplied by employers of minimum-wage workers, consumers buy fewer of these goods and services.

The result? Restaurants, motels and similar employers supply fewer such goods and services — which means that these employers need fewer workers.

Tales can indeed be told about how, under just the right set of circumstances, a government policy of artificially raising firms’ costs of employing low-skilled workers will inflict no harm on such workers. But none of those tales is realistic.

Donald J. Boudreaux

Donald Boudreaux is a professor of economics at George Mason University, a former FEE president, and the author of Hypocrites and Half-Wits.

3 Ways to Destroy American Prosperity

October 20, 2015/in Culture War, Economy, Policy, Politics, Regulation/by Dan Bongino

If you absolutely had to draw up a set of policy proposals to dislodge the United States from its position as the most prosperous country in the world, how would you do it?

Your first step would be to pinpoint which factors have produced levels of prosperity unseen in human history and which exist here in the United States. Step two would be to convince impressionable citizens that their eyes and ears are deceiving them, and that the policies that have produced our unprecedented prosperity are failures. Your third step would be to get those same impressionable people to become advocates for legislation which will ensure that the deterioration of the United States occurs slowly, so the contrast between a less prosperous today and a more prosperous yesterday is less noticeable; the regression of prosperity becomes accepted as the norm. Your fourth step is to laser-focus all blame for this regression on your ideological opponents.

Understandably this is an extremely touchy subject, so in this piece I’m going to avoid speculation about the motives of any particular individual or individuals, as I feel conjecture may obscure the seriousness of our subject matter.

With that caveat, here are a set of policy proposals which will ensure the destruction of prosperity.

POLICY OF DESTRUCTION PROPOSAL #1

The first policy priority would be to separate Americans from their money and to convince them that bureaucrats and elected officials can spend their money—for them—better than they can spend it on themselves.

After all, you cannot have both vibrant economic and political liberty and expect to implement your anti-prosperity platform at the same time. Separating people from their own hard-earned money is not easy and requires some slick marketing. Here’s how to do it: Find a charismatic speaker, with no qualms about bending the truth, and ensure he or she depersonalizes and demonizes hard-working taxpayers.

Very few Americans, when asked about specific people (i.e. their neighbors, family members, or friends) want to confiscate their money for their own personal use, but when the charismatic speaker engages in a full blown class-warfare campaign and avoids specifics, using terms such as “the rich,” “pay your fair-share,” and “big business,” it becomes easier to convince others that they are entitled to the earnings of fellow citizens. What many of these people fail to understand, when they buy into the big lie about income confiscation and redistribution, is that their own prosperity is next.

POLICY OF DESTRUCTION PROPOSAL #2

The second policy priority would be to separate Americans from control of their health and medical care.

You cannot destroy American prosperity while allowing people to freely choose when and where they seek medical care, whether acute or chronic. There are only two ways to organize a healthcare distribution system. Healthcare can either be rationed by those in power or priced through free-markets; there is no other way. Medicine, a hospital bed, and a doctor or nurse’s time are resources that can only be allocated by rationing or pricing. In dismantling the pricing signals of healthcare by inserting the government as a third-party payer of healthcare services, and disconnecting the patient from his or her own healthcare provider, you can convince the public that the inevitable exploding health care costs are the fault of greedy boogeymen. This will allow the government to come in and save the day, even after having caused the problem in the first place.

Once this step is achieved, grab your charismatic leader again, and encourage him to demonize “profits” in healthcare—despite the fact that he or she doesn’t work for free—and you’re on the road to government rationing of healthcare and the destruction of your health and prosperity.

Policy of Destruction Proposal #3

The third and final step is to expand the government bureaucracy and ensure it has maximum discretion in the implementation of regulations.

You cannot destroy American prosperity with a Constitution and laws that limit government power and maximize individual freedom. The way around this dilemma is to expand and empower the government bureaucracy and write a series of regulations that mimic laws by giving the bureaucrats power to interpret what the regulations say.

Go get your charismatic leader again and ask him or her to give a series of apocalyptic speeches about our future and man’s role in the inevitable destruction of the planet, and while giving the speeches, be sure to demonize any opposition as “deniers.” This will pave the road to establishing an unchecked government bureaucracy with the power to take your private property, your business, and your bank account. It will most certainly destroy the path to prosperity.

Ask yourself: Who are these charismatic leaders?

EDITORS NOTE: This column originally appeared in the Conservative Review. The featured image is by Robert F. Bukaty | AP Photo.

Which Is More Valuable: Deodorant or Apple’s New iPhone 6s? by Barry Brownstein

October 16, 2015/in Culture War, Economy/by Foundation for Economic Education (FEE)

Many college students are eager to upgrade to Apple’s new iPhone 6s — or so my daughter tells me. But she’s not. The battery life of her $100 Android phone is at least 48 hours on one charge; her friends can’t get through the day without charging their iPhones. She’s okay with her smaller screen and its lower resolution; battery life is her value driver.

“What presidential candidate are your iPhone-using friends supporting?” I asked her.

“Bernie Sanders,” she reported, “They’re huge fans.”

Her response surprised me. It was Sanders who said, “You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country.” If Sanders thinks consumer choice is unimportant as long as we face unresolved social problems, why would his supporters feel compelled to spend their money on an upgrade to the latest marginally improved iPhone when they could be donating that money, or the time they spend earning that disposable income, to charity?

Do they experience any cognitive dissonance between their enthusiasm for Sanders and their urgency to buy the latest iPhone? Perhaps they believe they are victims of our culture’s “crass consumerism” — and that they themselves need greater guidance from above.

Or maybe they believe that if a socialist planner came to power, only those things that they think are wasteful will be eliminated. But how likely is that? Clearly those who delight in the latest iPhone are free to do so only if others are free to delight in the newest brand of deodorant.

I thought about how consumer choice and “waste” play out in my own life. Every fall, I drive 70 miles round trip to buy freshly picked apples from an orchard. Am I wasting gas and money? The apples in the supermarket might look the same as those I buy at the orchard, but my tongue tells me otherwise. Could my taste buds prevail in a blind taste test? I think so; but even if I failed the taste test, I’d be unrepentant. I believe freshly picked apples are more nutritious and less tainted by chemicals; I will continue to drive way down the road, past the supermarket, to buy my apples.

Fast Company magazine sums up an important lesson about value:

Value isn’t fixed or tangible; it rests in perceived benefit. In other words, value is in the mind of the beholder. This is a key point. Innovators work hard to understand exactly what value means to their customers so they can generate and provide it. Value is an emergent property of supplier and consumer; it cannot take place with only one or the other.

Clearly those who delight in the latest iPhone are free to do so only if others are free to delight in the newest brand of deodorant.

Whether we’re talking about freshly picked apples, deodorant, or the latest iPhone, understanding that value is in the mind of the beholder leads to important corollaries. No one else knows better than you what is valuable to you, and you can’t assume or decide what is valuable to someone else.

When we don’t understand the subjective nature of value, we think we can improve outcomes through government manipulation.

In his latest book, How Adam Smith Can Change Your Life, economist Russ Roberts writes that failed governmental policies are often the consequence of the chessboard fallacy, the belief that we can “improve or manipulate people who don’t necessarily want to be improved or manipulated.”

Roberts is building on Smith’s wise observation in The Theory of Moral Sentiments: “In the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”

In other words, live and let live.

Just think of the mental bandwidth we will free up if we don’t judge others for engaging in peaceful activities around what they think is valuable.

Barry Brownstein

Barry Brownstein is professor emeritus of economics and leadership at the University of Baltimore.

Bernie Sanders Wants Us to Be Like Denmark by Marian L. Tupy

October 14, 2015/in Culture War, Economy, Policy, Regulation/by Foundation for Economic Education (FEE)

For those of you who did not watch the Democratic Party presidential debate last night, Senator Bernie Sanders says he wants America to be more like Denmark.

In some ways, that is an excellent idea. Denmark, it turns out, has freer trade and better business environment than the United States. Its overall economic freedom is almost identical to that of the United States, as is its well-being index.

But don’t take my word for it. Look at the United Nations and World Bank data brought to you courtesy of HumanProgress.org.

The one area where the United States might not want to copy Denmark is the size of government, which is a proxy measure of taxation and redistribution.

1. Free trade