The New Congress Must Save the USA from the EPA

When the Republican Party takes over majority control of Congress in January, it will face a number of battles that must be fought with the Obama administration ranging from its amnesty intentions to the repeal of ObamaCare, but high among the battles is the need to rein in the metastasizing power of the Environmental Protection Agency.

In many ways, it is the most essential battle because it involves the provision of sufficient electrical energy to the nation to keep its lights on. EPA “interpretations” of the Clean Air and Clean Water Acts have become an outrageous usurpation of power that the Constitution says belongs exclusively to the Congress.

As a policy advisor to The Heartland Institute, a free market think tank, I recall how in 2012 its president, Joe Bast, submitted 16,000 signed petitions to Congress calling on it to “rein in the EPA.” At the time he noted that “Today’s EPA spends billions of dollars (approximately $9 billion in 2012) imposing senseless regulations. Compliance with its unnecessary rules costs hundreds of billions of dollars more.”

Heartland’s Science Director, Dr. Jay Lehr, said “EPA’s budget could safely be cut by 80 percent or more without endangering the environment or human health. Most of what EPA does today could be done better by state government agencies, many of which didn’t exist or had much less expertise back in 1970 when EPA was created.”

The EPA has declared virtually everything a pollutant including the carbon dioxide (CO2) that 320 million Americans exhale with every breath. It has pursued President Obama’s “war on coal” for six years with a disastrous effect on coal miners, those who work for coal-fired plants that produce electricity, and on consumers who are seeing their energy bills soar.

AA - EPA the EnemyAs Edwin D. Hill, the president of the International Brotherhood of Electrical Workers, noted in August, “The EPA’s plan, according to its own estimates, will require closing coal-fired plants over the next five years that generate between 41 and 49 gigawatts (49,000 megawatts) of electricity” and its plan would “result in the loss of some 52,000 permanent direct jobs in utilities, mining and rail, and at least another 100,000 jobs in related industries. High skill, middle-class jobs would be lost, falling heavily in rural communities that have few comparable employment opportunities.”

“The United States cannot lose more than 100 gigawatts of power in five years without severely compromising the reliability and safety of the electrical grid,” warned Hill.

In October the Institute for Energy Research criticized the EPA’s war on coal based on its Mercury and Air Toxics Rule and its Cross State Air Pollution Rule, noting that 72.7 gigawatts of electrical generating capacity have already, or are scheduled to retire. “That’s enough to reliably power 44.7 million homes, or every home in every state west of the Mississippi river, excluding Texas.” How widespread are the closures? There are now 37 states with projected power plant closures, up from 30 in 2011. The five hardest hit states are Ohio, Pennsylvania, Indiana, Kentucky, and Georgia.

If a foreign nation had attacked the U.S. in this fashion, we would be at war with it.

The EPA is engaged in a full-scale war on the U.S. economy as it ruthlessly forces coal-fired plants out of operation. This form of electricity production has been around since the industry began to serve the public in 1882 when Edison installed the world’s first generating plants on Pearl Street in New York City’s financial district. Moreover, the U.S. has huge reserves of coal making it an extremely affordable source of energy, available for centuries to come.

The EPA’s actions have been criticized by one of the nation’s leading liberal attorneys, Harvard law professor Laurence Tribe, who has joined with Peabody Energy, the world’s largest private coal company, to criticize the “executive overreach” of the EPA’s proposed rule to regulate carbon emissions from existing power plants. He accused the agency of abusing statutory law, violating the Constitution’s Article I, Article II, the separations of powers, the Tenth and Fifth Amendments, and the agency’s general contempt for the law.

It is this contempt that can be found in virtually all of its efforts to exert power over every aspect of life in America from the air we breathe, the water we use, property rights, all forms of manufacturing, and, in general, everything that contributes to the economic security and strength of the nation.

That contempt is also revealed in the way the EPA spends its taxpayer funding. Senator Jeff Flake (R-AZ) released a report, “The Science of Splurging”, on December 2 in which he pointed to the $1,100,000 spent to pay the salaries of eight employees who were not working due to being placed on administrative leave, the $3,500,000 spent to fund “Planning for Economic and Fiscal Health” workshops around the nation, $1,500,000 annually to store out-of-date and unwanted publicans at an Ohio warehouse, and $700,000 to attempt to reduce methane emitted from pig flatulence in Thailand! “After years of handing out blank checks in the form of omnibus appropriations bills and continuing resolutions,” said Sen. Flake, “it’s time for Congress to return to regular order and restore accountability at the EPA.”

Whether it is its alleged protection of the air or water, the only limits that have been placed on the EPA have been by the courts. Time and again the EPA has been admonished for over-stating or deliberately falsifying its justification to control every aspect of life in the nation, often in league with the Army Corps of Engineers.

If the Republican controlled Congress does not launch legislative action to control the EPA the consequences for Americans will continue to mount, putting them at risk of losing electricity, being deprived of implicit property rights, and driving up the cost of transportation by demanding auto manufacturers increase miles-per-gallon requirements at a time when there is now a worldwide glut of oil and the price of gasoline is dropping.

The United States has plenty of enemies in the world that want it to fail. It is insane that we harbor one as a federal agency.

© Alan Caruba, 2014

RELATED ARTICLE: How Obama and His Environmental Base Are Planning to Eradicate the Oil and Gas Industry

Adventures in Economic Fairyland: Sometimes it’s easier to believe economic myths than realities

One of the most intractable problems of economics is not that it’s a dismal science, although that can be true. It’s that it’s easy to use the discipline to justify telling people what they want to hear.

There is a Wizard of Oz quality about economics, especially these days. Data are treated as tea leaves or Rorschach blots. Macroeconomists, in particular, have become an elite cadre of charlatans. These accusations may seem unfair coming from an organization called the Foundation for Economic Education. But as Hayek wrote, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” We take that task very seriously.

In other words, practitioners of economics not only use numbers to mislead the public; they use both theory and data to self-deceive. This may sound harsh. But no social scientist can operate free of his own values and biases. We all do it. The question is, to what extent do our biases interfere with our understanding of the world around us? And if no one is able to break the spell of ideology, how can we be better truth seekers despite our colored lenses?

Unfortunately, most people crave palatable narratives a lot more than they crave truth. And once a narrative starts to spread — right or wrong (and usually wrong) — it can infect the national psychology for years. Don’t believe us?

Ask yourself which of the following are accepted as common knowledge:

  • Government spending make-work programs got the United States out of the Great Depression.
  • Scandinavian countries are proof that you can have high taxes and income redistribution without negative economic effects.
  • International trade makes some countries richer and others poorer.
  • Encouraging consumer spending stimulates the economy.
  • Minimum wages have a net positive effect on employment and on the living standards of the poor.

Most economic myths like the examples above have one or two of a few common features that make them good candidates as memes:

  1. They offer the illusion of control by experts.
  2. They offer the illusion that the economy can be fixed.
  3. They seem plausible or intuitive.
  4. They seem motivated by good intentions.
  5. They are just-so stories that can be “proven” by data legerdemain.
  6. They provide the wielder with a “gotcha” or “told ya so” in arguments.
  7. They can be reinforced by technically obscure, impenetrable studies.
  8. They reinforce what we wish were the case.
  9. They are costly to debunk.
  10. They are easy to remember and share.

So what do we do about these myths? Thus far, it seems we have been tasked with something rather insurmountable.

Let’s assume that the sort of economics we propound in these pages is almost entirely correct and overwhelmingly tracks with the truth. Sure, we are biased. But let us stipulate that we are biased toward reality, not ideology or fantasy.

If we are in the business of educating people about the truth, is ours too costly and difficult a road? How many of the 10 qualities of the false narratives above do our counternarratives have? By our estimation: not many. Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas.

So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.

If we are on the side of truth in economic matters, we have to be more creative in how we demonstrate such truths. We have to tell better stories, use better illustrations, use metaphors and cognitive shortcuts that help us with the immensity of this task. And we have to be prepared to stay engaged in an ideological struggle that will last long after we have passed from this life.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

5 Priceless Tips I Gave My Uber Driver

Big ideas most people don’t understand about the economy. by Richard Lorenc:

I was in an Uber car the other day, returning from a conference. I love Uber and used it for years in Chicago before returning to my hometown, Atlanta. There are a lot of amusing exposés out there contending that the majority of Uber drivers hate their jobs and feel enslaved by corporate overlords.

Virtually every driver I encounter tells me they love working with Uber; an off-duty Uber driver once overheard me saying something about the company over lunch, and he volunteered enthusiastically that he loves his job. There was no driver rating at stake in that exchange.

I’ve had interesting discussions in Uber cars. One driver told me he had walked a young woman into the ER minutes before picking me up (he thought she had overdosed). Another driver explained how he had escaped New Orleans just hours before Katrina hit, only to return to complete destruction. And there have been quite a few who’ve told me they drive to earn money to build other businesses. Uber drivers are by definition entrepreneurs. And many see driving as a stepping-stone to something bigger.

Occasionally, Uber drivers will volunteer economic views as they relate to their business. My driver the other day — his name was Chris —  even identified himself as a “free-market guy” while talking about Uber.

Naturally, this got my attention, but I decided not to spill the beans until he asked what my colleague and I do. I explained that we work for an organization called the Foundation for Economic Education, which teaches young people about the free market.

Chris is a big guy, and on hearing my words, he shook the car with laughter as we drove on the interstate.

Then he asked for tips.

“Stock tips?” I asked.

“No, big ideas that most people don’t get about the economy.”

I gave him those tips. I thought I would share them with you, too.

Big idea 1: Trade is win-win.

My colleagues and I teach our students that trade is win-win by saying, “Trade is made of win.”

I asked Chris to imagine being a customer at Starbucks. He wants a venti café au lait so much that he’s willing to part with $5 to get it. For the customer, the coffee is worth more than the money; why else would he surrender his cash at the register? The opposite is true for the seller: $5 is worth more than the coffee. The buyer and seller exchange property rights, and each says, “thank you.” (This is sometimes called the “double-thank-you phenomenon.”) The transaction makes them both better off — they have created value for each other through trade.

Big idea 2: Entrepreneurs create value.

Entrepreneurs create massively greater value for society generally than they create in profits for themselves.

An estimated 98 percent of the innovators profits generated by nonfarm businesses in the United States between 1948 and 2001 were never captured directly by the individual innovators or firms. Innovators profits — or “Schumpeterian profits” —vary by industry. Apple did not fully capture the Schumpeterian profits generated by the debut of the iPhone, for example. Instead, the iPhone created entirely new business categories and lowered the consumer price of supercomputers that fit into your pocket. But Apple captured enough of its innovators profits that it has an incentive to continue to innovate — and potential competitors had an incentive to enter the market. Competition lowers prices, benefitting consumers.

Big idea 3: Everything has a cost.

This idea is the lynchpin of what we call economic thinking: that is, the application of economic concepts to help explain why people and groups make the choices they do.

Normally, we introduce this concept by calling it an opportunity cost. If all of us understood clearly how the choices we make today necessarily limit the choices available to us tomorrow, we would solve 95 percent of the problems caused by economic illiteracy.

At FEE’s seminars, many students are deciding whether to go to college. Not only is there a direct cost to college, but there is also the opportunity cost of spending time cloistered in academia when you could be launching the next Facebook. In many cases, college is worth the cost, but not in every instance.

We take pains at FEE to practice what we preach. We’ve gotten away from advertising that our seminars are free to attend and offer free accommodations and meals. Instead, we say they are offered at “no charge.”

After all, TANSTAAFS — there ain’t no such thing as a free seminar. You have to sit and take it for three whole days. And that carries a cost.

Big idea 4: Emergent order rules.

The world we live in is the product of countless interactions among individuals, not the result of some master plan. Even if there is a plan, the traditions, mores, and informal institutions that guide behavior dominate. F.A. Hayek named this phenomenon spontaneous order, but I prefer contemporary economist Russ Roberts’s term emergent order. The concept goes back to Scotland, to Adam Ferguson, and later to Adam Smith’s invisible hand metaphor.

The invisible hand, by the way, is probably one of the most misunderstood concepts in economics. It’s as if those who mock it as some sort of supernatural occurrence have never heard of a metaphor, which depicts how individuals working in their own interest also create value for others.

The idea boils down to this: The world we live in is the product of human action, not human design.

Big idea 5: Markets are moral.

Finally, we have what is perhaps the most important tip of all when talking to young people: commerce makes us better people.

It civilizes us. It permits us opportunities to practice politeness with strangers. FEE’s founder, Leonard Read, captured this concept in his famous essay “I, Pencil,” and Milton Friedman popularized it in the Free to Choose TV series.

The market is a process of ever-growing interconnectedness. As the market grows, our individual opportunities for specialization grow with it, and we each become wealthier through our access to goods and services we could never fathom creating ourselves. By creating value for others, we tend to become less concerned with the nationalities or races or religions or sexual orientations of those who bring to market the goods we depend on. A deal is a deal, and the more we become acclimated to making deals with those who are different from us, the closer we grow as human beings.

This last concept is vital, because students today are looking for ways to explain the world and their places in it through dimensions beyond material efficiency. Certainly, the coordination of market activities through the information conveyed by prices is superior to the commissar’s desk-bound decision-making, but advocates of economic freedom must first listen to the concerns of those undiscovered libertarians who are fundamentally idealistic and decent people, and whose only hang-up with the free market is that it sometimes appears irrational.

Why, for instance, would GM, a hallmark of American ingenuity and industry, be more valuable if it were closed? Why can’t the government just give spoons to all of the unemployed so they can stay busy constructing roads? Why shouldn’t fast food workers make $15 per hour? Why can’t everyone have inexpensive health care?

Appealing to personal values is the gateway to economic thinking that helps to explain our complex world.

Uber redux

The Uber phenomenon represents something important happening now in the human consciousness, and millennials (people born between 1980 and 2000, roughly) may be noticing it the most.

Individuals are now free to exchange goods and services with each other around the world. They are able to take innovations such as the concept of ride sharing and the proliferation of apps to use otherwise unproductive capital — their cars — to serve others.

This is great news for our world as millennials begin to assume positions of influence and leadership and are now beginning to see a real choice between the philosophy of control versus the philosophy of freedom.

This article is excerpted from a speech the author made to The Discussion Club, a Bastiat Society affiliate, in St. Louis, Missouri.

ABOUT RICHARD LORENC

Richard Lorenc is the director of programs at FEE.

Steal Our Stuff, Please

Permission is hereby granted to reprint these essays in whole or in part. by Jeffrey A. Tucker:

There’s been a big change at FEE that we hope will inspire you to appreciate and share our work more than ever before. What’s interesting about this change is how it both embodies the philosophy we represent and recaptures the deep history of this institution.

The Foundation for Economic Education has always been incredibly generous with reprint permissions. Now, we’ve codified that generosity and announced to the world. As the footer of this site now says, everything on the site that is not otherwise marked is part of the Creative Commons. The license we chose is CC BY 4.0, which means that you can email, repost, share, reprint, adapt, sell or do anything else with our content. The only proviso is that you must credit FEE as the source and note if you’ve made any changes. That’s it.

This is a free-market answer. Not every action of government imposition on market institutions allows for a way out. But in the case of copyright — a regulatory intervention that has become a major source of mischief in the digital age — Creative Commons is the answer that freedom-lovers can embrace.

I will explain more about the origin of this new license, but let’s first note this striking fact: since FEE’s founding in 1946, all its publications have eschewed conventional copyright in favor of a market-based answer.

If you look at printed books by Leonard Read or any issue of The Freeman all the way back to the 1950s, you will find this note: “Permission is hereby granted to reprint these essays in whole or in part.” Here is the way the note looked to readers:

The plainness of this sentence underplays the sheer radicalism of the notion. It represented a complete departure from how the publishing industry operated. FEE founder Leonard Read didn’t come out of the publishing industry, nor was he an academic. He did not know about publishing conventions, and thank goodness.

Read was a wholesale grocer in Michigan and then head of the chamber of commerce in Los Angeles. He brought his real-world experience to the world of ideas. He learned from business that it is impossible to succeed if people don’t know about your product. No matter how good a product or service is, you can’t sell it if your potential customers don’t know you exist. A merchant has to be a salesperson, which means marketing in every way possible. Obscurity is an entrepreneur’s biggest enemy.

He also learned that persuasion — not coercion — is the only way to be a success in the long run. It’s never a good idea to threaten your customers with warnings to do this or to not do that. Making them happy is the best way forward.

In those days, the “free sample” was a major way that merchants got customers hooked and coming back for more. This was great advertising. Further, if customers who shared with others could help the merchant’s cause, that was all the better. Read took these lessons with him when he started his ideological venture.

FEE’s product was an idea: the philosophy of freedom. An idea is not like a physical good. Once it is produced, it can be reproduced infinitely. Ownership of ideas is shared by all. You can’t take an idea from me. You can adopt the same idea as your own, transform it, and pass it on without reducing the supply or depreciating the original idea.

Copyright introduces a coerced artificiality — by legislation enforced by bureaucracies — into what would otherwise be a good that could be distributed to the whole world, forever. Every copyright claim is an implicit threat to use government coercion against a person who wants to evangelize for what you produce.

Put that way, it must have struck Leonard Read as crazy to prohibit reprints and copying of material from FEE.

While The Freeman had a copyright notice, if only to prevent others from grabbing the material and using the law to exclude others from its use, the teeth of that notice were pulled completely with the simple sentence above. It removed the fear associated with sharing. It took government out of the business of promoting freedom.

In taking this radical step, Read completely departed from publishing conventions. It was FEE’s secret weapon. The economics texts and interventionist literature of the time all used restrictive copyrights. FEE, on the other hand, was available to the world. And it worked. Freeman articles were reprinted in newspapers all over the country. They reappeared in magazines. When the mimeograph machine came along, it was common for FEE subscribers to make as many copies as they could and hand them out to all.

But didn’t Read charge for sending the publication out? Yes, most of the time. But charging for a service is different from charging for an idea. As with many Internet startups today, Read gave away his core product for free and sold the scarce good to whomever was willing to buy. The results were amazing. He built a large and influential institution, the first free-market think tank. It was the pro-freedom app that the world needed.

Half a century would pass before others began to catch up to his vision. Vexed by the incredible problems afflicting the digital world, three scholars in the field — Lawrence Lessig, Hal Abelson, and Eric Eldred — founded Creative Commons in 2001 to be an alternative to conventional copyright. The least restrictive license is akin to what Leonard Read put in his notice. The most restrictive (no remixing, no selling, for example) is closer to conventional copyright, meaning that it still holds a coercive threat to consumers.

Today, it is normal to see books published in the commons. Indeed, the entire industry of open-source software uses the commons model to encourage widespread collaboration. Wikipedia itself uses a license called Creative Commons Sharealike, meaning that you can reprint so long as Wikipedia is allowed to reprint you. The beauty of CC is twofold: it gets around a barrier erected by government and it offers a much larger range of options on the terms of publishing.

To be sure, in a truly free market, there would be no such thing as the institution of copyright at all, simply because ideas are not subject to the constraints of ownership. You can own a book. You can own a CD. You can own a film reel. You can own an image. But the ideas and images and arrangements of notes they broadcast publicly are not scarce goods and therefore not commodifiable or excludable absent the use of aggressive force.

The history of copyright itself is bound up with the state and its ambitions to control the population, the same as any other government plan. In the 16th-century political struggles of England, Queen Elizabeth had an idea for suppressing religious dissent. She declared that the government had to approve anything printed. It was the first action of what eventually became known as copyright. It was a tool for censorship through the creation of monopolies.

As the centuries went on, copyright took on new forms, but the principle remained the same. Government would assign rights to what should really be free for all. Even then, modern copyright didn’t become what it is today until the late 19th century (internationalized with the Berne Convention of 1886), meaning that most authors and composers didn’t use it.

Did authors make money without copyright? Of course they did. So did composers, sculptors, painters, and architects. They all relied on good marketing and the first-mover advantage to promote their works. Before the Berne Convention, copyright could only be enforced within a nation’s borders, which is why so many American schoolkids in the 19th century were reading British literature. It was possible to print and distribute cheaply, unlike the protected American literature.

In the course of the 20th century, the law became ever tighter. Copyright once lasted 28 years. You had to apply for it to be “protected” by it. Today, copyright is automatic. And it lasts not only throughout your lifetime, but up to 70 years past your death. Such ridiculous terms are a result of lobbying by powerful commercial interests like the Walt Disney Company — even though Disney made its corporate empire by taking from the commons! The extension has been a disaster for literature, causing many decades of great writing to vanish into the ether rather than be put online for the world.

Even now, major sectors of economic life thrive without copyright. There is no copyright in the design of clothing, for example, which is one reason that fashion is such an exciting and competitive industry. You can’t copyright recipes, and yet somehow, recipe books and restaurants thrive. It’s the same with fonts, football plays, and architecture. Without “intellectual property,” which really just creates a government-protected monopoly, you get that beautiful market feature called competition.

Today’s most exciting innovations and major swaths of economic progress are made possible by the Internet, which is, at its root, the world’s largest copy machine. There can be no real future for copyright as we know it in such a world.

The laws are gradually breaking down, as they must. Even the movie industry is realizing that it made a mistake in treating its customers and potential customers as thieves.

In adopting an unrestricted Creative Commons license, FEE is taking a giant step toward embracing the freedom model, getting ahead of the technological curve, and recapturing Read’s brilliant legacy.

As Read wrote,

Honest thinkers are always stealing unconsciously from each other.… There is, in fact, no way to fasten ownership claims to an idea, which is spiritual, as we do with material things — copyright laws and legal jargon to the contrary notwithstanding. Might as well try to draw property lines around a cloud or a wish or a dream or Creation. Ideas are forever in a state of fusion and/or flux and they defy any precise earmarking.

Fear not, readers. “Steal” this article or any article on this site not otherwise marked. Dig through our 70 years of archives and spread the good word to the world. FEE will never use the power of the state to block the spread of what we believe.

ABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow 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.

Is the Job Market Sexist?

Or do wages reflect the choices we make? by Corey Lacono:

Is it an embarrassment that women are paid so much less than men? That’s what the president says. Over and over.

“Today, the average full-time working woman earns just 77 cents for every dollar a man earns,” President Obama reported in a speech back in April. “In 2014, that’s an embarrassment. It is wrong.”

But what’s wrong is the claim itself — or at least what Obama and his fellow Democrats regularly imply that the numbers mean. What we are supposed to be embarrassed about is the way the market discriminates against half the population. Isn’t it unfair that women make so much less than men do, and for the same work?

Behind the differences in pay are a number of straightforward reasons that we should understand before attributing the problem to sexist employers.

While the 77-cent figure is technically true, the statistic does not account for occupations held, hours worked, length of tenure, or marital status, which are all factors that influence the wage an individual earns. Indeed, given the differences in the occupational choices of men and women, there is good reason to expect men to earn more on average. According to the Federal Reserve Bank of St. Louis,

Men are more likely to be lawyers, doctors and business executives, while women are more likely to be teachers, nurses and office clerks. This gender occupational segregation might be a primary factor behind the [gender] wage gap.

Other choices also affect the numbers. “Indeed,” writes Glenn Kessler in his Fact Checker blog for the Washington Post, data from the Labor Department’s Bureau of Labor Statistics “show that women who do not get married have virtually no wage gap; they earn 96 cents for every dollar a man makes.”

Using data from a sample size of over 74,000 men and over 72,000 women in dozens of industries and in nearly two dozen occupations, and after accounting for many of the aforementioned wage determinants, a study by CONSAD Research Corporation found that the gender wage gap narrowed to 5–7 percent. However, even this remaining wage gap is not in itself evidence of systematic discrimination. The authors only examined wages and not overall worker compensation  — a combination of wages and benefits — and they make an important note: “Research indicates that women may value non-wage benefits more than men do, and as a result prefer to take a greater portion of their compensation in the form of health insurance and other fringe benefits.”

In other words, there is evidence that women prefer benefits to cash, which the gender wage gap completely ignores. The authors also state that they did not account for work experience or job tenure, and that these factors likely explain the remainder of the gap:

This study leads to the unambiguous conclusion that the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action. Indeed, there may be nothing to correct. The differences in raw wages may be almost entirely the result of the individual choices being made by both male and female workers. [Emphasis added.]

Proponents of the belief that a wage gap does exist often counter this research with other studies that insist that a large wage gap does exist, even after accounting for other explanatory variables. However, none of these studies has been as comprehensive as the CONSAD study and, more importantly, almost all of them fail to examine nonwage earnings like employer-provided health insurance. In fact, the Federal Reserve Bank of St. Louis has noted,

Some researchers believe that it is not enough to compare wages of similar men and women. They argue that total compensation (wages together with benefits) must be compared. Women of child-bearing age may prefer jobs with a lower wage but with employer-paid parental leave, sick leave and child care to jobs with a higher wage but without such benefits.… Economists Eric Solberg and Teresa Laughlin applied an index of total compensation, which accounts for both wages and benefits, to analyze how these benefits would affect the gender gap. They found a gender gap in wages of approximately 13 percent. But when they considered total compensation, the gender gap dropped to 3.6 percent.”

According to the study cited by the Federal Reserve economists, “any measure of earnings that excludes fringe benefits may produce misleading results as to the existence, magnitude, consequence, and source of market discrimination.”

Beyond the above considerations, there is reason to doubt that the remainder of the wage gap is due to discrimination. According to a recent study published in the American Economic Review by Harvard economist Claudia Goldin, the gender wage gap exists because of the differences in the particular hours men and women choose to work. According to Goldin,

The gap exists because hours of work in many occupations are worth more when given at particular moments and when the hours are more continuous. That is, in many occupations earnings have a nonlinear relationship with respect to hours. A flexible schedule often comes at a high price, particularly in the corporate, financial, and legal worlds.…

The gender gap in pay would be considerably reduced and might even vanish if firms did not have an incentive to disproportionately reward individuals who worked long hours and who worked particular hours.

While discrimination against women (or men) may exist in particular circumstances, the bad news for advocates of greater government intervention in the workplace is that there doesn’t appear to be any solid evidence of a meaningfully large gender pay gap. Indeed, what’s left of the gender wage gap that isn’t explained by common wage determinants is likely a result of factors that simply haven’t been accounted for.

The good news for the interventionists is that few will look too deeply into what is behind the numbers. Nor will they question the government’s role in engineering a rigid equality to replace the market’s flexible response to diverse individual preferences in balancing work and home life.

ABOUT COREY IACONO

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

The Laffer Curve: Will Tax Cuts Pay for Themselves?

“Voodoo economics” versus straw-man arguments by Robert P. Murphy:

In a recent speech in Little Rock, former president Bill Clinton said, “In the first eight years of trickle-down economics under President Reagan, we tripled the debt.” The former president claims his “first job” in the White House was to “get rid” of “trickle-down economics,” as critics like to call the economic policy associated with Reagan and with economist Arthur Laffer. Generations since Reagan have come, mostly uncritically, to accept the term and its association with Laffer.

As someone who worked for Laffer (in 2006–07), I thought I would clarify some of the misconceptions that leftist progressives and even many libertarians have about supply-side economics and the Reagan years.

In my view, Laffer’s biggest contribution to policy debates was to show the ambiguity in the terms “tax cut” and “tax hike.” In his own writings, Laffer would always distinguish between a tax rate reduction and a drop in tax revenues. If the analyst adopts a static model of the economy, and assumes households and businesses act the same regardless of tax rates, then the two ways of speaking are identical. In debates over government policy, people typically rely on the static approach. For example, they refer to a “tax cut of $x billion” or say that the president’s proposal would “raise taxes by $x billion over 10 years.” Laffer’s insight demonstrates that the world is a far more complicated place.

If people respond to incentives — as they always do — then changes in the tax rate and tax revenues may be quite different, and can even go in opposite directions. For example, when it comes to the personal income tax, did the Reagan administration “cut taxes”? Well, tax rates certainly fell sharply: the top personal income tax rate went from 70 percent in 1980 down to 28 percent in 1988. However, during the Reagan years, tax receipts went up — from $599 billion in fiscal year 1981 to $991 billion in FY 1989 (in historical dollars), an annualized growth rate of 6.5 percent.

It’s definitely true that the federal debt mushroomed under Reagan’s tenure. In my view, this is one of the failures of Reagan’s “conservative” and “small government” legacy. However, it is ludicrous that critics deride his “tax cuts for the rich” as the source of the deficits; total federal outlays went from $678 billion in FY 1981 to $1,144 billion in FY 1989, for an annualized growth rate of 6.8 percent. Over the whole period, therefore, total federal tax receipts grew by a cumulative 65 percent while total outlays grew 69 percent. The problem with “Reaganomics” wasn’t that it “starved the beast” of revenue, but rather that the federal government let spending grow faster than tax receipts.

Of course, my discussion above relies on what has become known as the “Laffer curve,” which is the source of both confusion and ridicule among economists and pundits alike. The Laffer curve epitomizes the distinction between tax rates and total receipts by plotting them against each other. The two endpoints are easy enough to calculate. At a tax rate of 0 percent, the government will collect $0 in tax receipts. However, at a tax rate of 100 percent, the government will also collect (virtually) $0 in total receipts, because people will either stop generating income, or they will operate in the black market and fail to report their income to the IRS.

Between these extremes, the government will collect positive revenue. If we assume a smooth curve, then there is a tax rate — greater than 0 percent but smaller than 100 percent — that maximizes total tax revenues. This has been dubbed the “Laffer point” by some, but the title may sow seeds of confusion. In neither his scholarly nor his popular writings did Laffer ever argue that this point is optimal. (You can read about it at the Laffer Center website if you don’t believe me.) Rather, his modest point was simply to underscore the trade-offs involved. Clearly, it made no sense to set tax rates above the inflection point on the Laffer curve, because then the government would not only cripple economic growth, but also forfeit potential tax revenue.

In other words, the only rhetorical significance of the “Laffer point” would be to convince all sides in the policy debate that surely tax rates should be reduced at least to that level, because doing so would allow citizens to keep more after-tax income while also allowing the government to increase its revenue. To repeat, the purpose for this rhetorical point wasn’t that Laffer himself was holding up “more government spending” as a goal; it was instead to avoid truly absurd rates of taxation that were counterproductive even from the perspective of big-government liberals.

Critics like to deride the Laffer curve as “voodoo economics” by pointing to counter examples, say of tax rate reductions that didn’t increase total revenue, or by pointing to tax rate hikes that brought in more revenue. But these possibilities were contained in the original Laffer curve itself. Specifically, if the tax rate starts below the inflection point, then a tax rate reduction will shrink receipts, while a tax rate hike will increase receipts. Laffer never drew his curve with the inflection point hovering above 1 percent, so how in the world did critics get the idea that Laffer thought “tax cuts always pay for themselves”? Did the critics think Laffer couldn’t read his own curve?

Now what Laffer did stress — and I can speak with authority here, because at his firm I had occasion to read plenty of his old papers going back to the early 1980s — is that a tax rate reduction would have a smaller impact on tax receipts than a “static” scoring analysis would indicate. So, for example, if California cut its marginal personal income tax rates across the board by one percentage point, the drop in total tax receipts would be smaller than one percent. The increase in economic activity would not only increase the base of the personal income tax, but it would also increase receipts from sales taxes, property taxes, and so on. Depending on how onerous the initial tax rate was, it was even theoretically possible that the drop in revenue would be negative — meaning that total tax receipts would actually increase — but that was never a blanket prediction of the Laffer approach.

Let me close with one last analytical twist I learned while working for Laffer. When it comes to assessing the incentives from a tax rate change, you need to look at the after-tax return on the margin from additional activity. For example, at first it might seem as if a tax rate hike from 10 percent to 20 percent is a bigger deal than a hike of 90 percent to 95 percent, because the first hike is a 10-percentage-point increase and a doubling of the rate, while the second hike is a 5-percentage-point increase and a comparable jump in the proportion. Yet, if someone is considering investing in a project that will pay $1,000, in the first scenario his after-tax return goes from $900 to $800, while in the second scenario it goes from $100 down to $50. The measured rate of after-tax return has been cut in half in the second scenario, while it only fell about 12 percent in the first scenario.

The Reagan years were certainly not a textbook model of small government and fiscal conservatism, but the derision of the theoretical apparatus of supply-side economics — and of the Laffer curve in particular — is misplaced. The point here was and is a simple one, yet to this day it is routinely ignored in policy debates.

20141014_RobertMurphyABOUT 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/

President Admits Regulations are a Mess, But Fact is His Administration is Making Things Worse

In a meeting with business leaders, President Obama had some interesting things to say about regulations, the Washington Times reports:

You have regulations that are poorly written. You’ve got regulations that are not properly synced up so that you have different agencies with different responsibilities, and so compliance costs end up skyrocketing. You have regulations that squash innovation.

He sounds like he works at the U.S. Chamber.

When asked what his administration was doing to improve the regulatory environment, President Obama answered:

“We’re spending a lot of time on the regulatory look-back process, digging back into old rules and seeing what [ones] don’t make sense.”

This also sounds good, but take his words with a grain of salt. Actions by his administration have spoken louder.

For instance, when the U.S. Chamber made a Freedom of Information Act request for any studies EPA undertook thatlooked back at the employment effects from regulations it wrote over the decades, the agency admitted it couldn’t find any information. And when the administration has reexamined some regulations, the end result has been higher“new net costs.”

The other stubborn fact is this administration is making the regulatory situation worse. The Washington Times story notes this irony about the President complaining about regulations:

[B]usinesses have been hit with nearly 50 percent more “economically significant” regulations under Mr. Obama than under the presidency of George W. Bush.

Mr. Obama has issued 406 of these regulations, estimated to cost businesses more than $100 million per year, over his first six years in office — an average of 68 per year. Mr. Bush issued 277 such regulations over his first six years in office, for an average of 46 annually.

This chart shows the high plateau of number of “economically significant” regulations produced while President Obama has been in office.

Between 2000 and 2013 federal agencies issued 4,468 significant rules.

Here are a few proposed regulations by the Obama administration that have been covered extensively on this blog:

  • Carbon regulations for both current and future power plants. These will drive coal out of America’s energy mix.
  • Redefining the Waters of the United States in such a way as to force farmers, retailers, manufacturers, and other land owners to spend time and money getting federal permits to develop their own land.
  • Changing the ozone standard to make most Americans live in noncompliant areas and restrict economic development.
  • Obamacare redefining full-time work from 40-hours-per-week down to 30-hours-per-week incentivizes employers to cut workers’ hours.
  • Insisting that insurance companies be treated like banks under the Dodd-Frank financial regulation law, even though they have different business models.

It’s obvious that we must reform the process of how regulations are made. U.S. Chamber President and CEO Tom Donohue laid out four principles of effective regulatory reform:

  1. Restoring accountability.
  2. Greater transparency.
  3. Meaningful public participation.
  4. A safe but swift permitting process.

Instead of aspirations and talk about making regulations more effective and rational, President Obama should tell regulatory agencies to reconsider the many costly regulations they’re proposing and developing. He should also work with Congress to reform how regulations are made.

Let’s turn words into meaningful, productive action.

EDITORS NOTE: Meet Sean Hackbarth @seanhackbarth Follow @uschamber. The featured image of President Obama is by Andrew Harrer/Bloomberg.

The Great Renewable Energy Rip-Off

One of the lesser known attempts to prove that renewable energy, wind and solar power, can replace traditional energy sources–coal, oil, and natural gas–went belly up in much the same way current wind and solar companies depend on tapping the taxpayer for government subsidies in order to stay in business. Google’s Renewable Energy Cheaper than Coal initiative begun in 2007 and shut down four years later.

Two members of the Institute of Electrical and Electronics Engineers, Ross Koningstein and David Fork, worked on the project. Both men have excellent credentials in aerospace engineering and applied physicals, respectively, but neither had a clue about climatology. Expertise in one field rarely translates to another unless it is closely allied.

At the start of the project “we shared the attitude of many stalward environmentalists. We felt that with steady improvements to today’s renewable energy technologies, our society could stave off catastrophic climate change. We now know that to be a false hope, but that doesn’t mean the planet is doomed.”

Environmentalists start off with several thoroughly incorrect beliefs that are not supported by science. The first is that climate change has anything to do with human activity such as carbon dioxide and other so-called “greenhouse gases.”

The Earth is not a greenhouse. It is always in the process of absorbing and discharging heat via the atmosphere and the oceans. If it retained heat all life on Earth would die. Even on a hot summer’s day, it will cool at night. Deserts, too, are often cooler at night. As for carbon dioxide, it is a trace gas in the atmosphere at barely 0.04%, but it is also the gas which all vegetation requires. In turn, vegetation gives off oxygen while we humans and other animals exhale carbon dioxide.

Secondly, environmentalists mistakenly believe that carbon dioxide emissions from the use of energy, particularly coal and oil, are so great that it affects the weather defined as what is happening now and the climate whose trends can only be determined decades and centuries from now. The constant claims about carbon dioxide emissions are blatantly false.

There is no basis in science for nations to reduce so-called greenhouse gas emissions. Indeed, more carbon dioxide would be a good thing for the planet’s vegetation, yielding healthier forests and greater crop yields on farms.

Thirdly, environmentalists believe that we shall run out of coal, oil, and natural gas at some point. The current estimates put that point very far in the future and, since new reserves are being found, they show no indication of not being available for a very long time to come.

Solar Panels“Trying to combat climate change exclusively with today’s renewable energy technologies simply won’t work,” said the two IEEE engineers. They’re right. Of all the forms of energy available wind and solar are so expensive and so unpredictable that they make no sense based on the false notion that humans can impact the Earth’s climate now or ever.

The public is never told that wind turbines and solar farms all require a traditional electrical energy producer—coal, oil, or natural gas-based—because they don’t function if the sun is not shining or the wind is not blowing. These days, we can add nuclear plants to those deemed traditional. Hydro-electrical plants are also traditional.

It is the American taxpayer who is paying the price for renewable energy that is more costly to produce than traditional coal-fired plants or those now benefiting from the reduced cost of natural gas thanks to fracking technology that Is securing more of it, as well as oil.

A Fox News headline recently reported that the “World’s largest solar plant applying for federal grant to pay off federal loan.” The wealthy investors in a California solar plant, the Ivanpah solar plant, owned by Google and the renewable energy giant, NRG, not only received a $1.6 billion construction loan from U.S. taxpayers, but they are now requesting a $539 million grant to pay off their loan!

William La Jeunesse of Fox News reported that “In 2013, the Obama administration handed out $18.5 billion in renewable energy grants, with $4.4 billion going to solar projects.” Now one of those projects wants the government to give them money to help pay off their construction loan.

La Jeunesse reported, “the plant produced only about a quarter of the power it’s supposed to, a disappointing 254,263 magawatt-hours of electricity from January through August, not the million megawatt-hours it promised.”

Renewable energy is a huge taxpayer and consumer rip-off.

Where solar leaves off, wind energy has been tapping taxpayers by means of the wind energy Production Tax Credit, (PTC) a form of welfare for wind energy companies. The Institute for Energy Research released a white paper in November noting that “A two-year extension will cost $13.35 billion, which is enough to pay 124 million Americans’ monthly electricity bills.”

The PTC “allows wind producers to pay the grid to take their power and still profit.” This “negative pricing” forced two nuclear plants to close their doors because they could not compete against the practice. This would be a good time to let your congressman know that you don’t want to have the PTC extended any further.

Still think wind energy is a good thing? Fully 65% of voters think that two decades of tax credits is enough! Wind energy, like solar, tends to produce more electricity when it is needed least. To top off reasons to stop throwing money at it, the Institute for Energy Research has found that “wind energy costs $109 per megawatt hour, which is twice as much as this year’s average wholesale electricity price of $54 per MWh.”

To wrap up this look at renewable energy the Obama administration’s “war on coal” is going to cause utility bills to surge. As reported on Bloomberg News, according to the Brattle Group, a Cambridge, Massachusetts-based consulting company, “the loss of the cheaper coal units will boast power prices by as much as 25% on grids that serve about a third of the nation’s population. The biggest impact may be in the Midwest and Northeast, where demand for gas for heating jumps during the cold-weather months.”

The Environmental Protection Agency has come up with more ways to shut down the provision of electrical power as its proposed Mercury and Air Toxics Standards go into effect, requiring coal-fired plants to install scrubbers or close their doors.

The EPA is not protecting anyone’s health. It is forcing them to pay more for what should be the most traditional and affordable sources of electricity in the world. It is putting people’s lives at stake if the power is not available.

© Alan Caruba, 2014

Regulation of Lodging by the Market Process by Howard Baetjer Jr.

Does the lodging industry need government regulation? I don’t think so, and I’m more convinced than before after listening to a fascinating EconTalk conversation between host Russ Roberts and Nathan Blecharczyk, a founder of the lodging service Airbnb.

Blecharczyk explains that every Airbnb customer rates every property in which she stays for cleanliness, value, and the accuracy of its description on the website, and every property owner rates every customer who stays with him. Roberts then responds as follows (the emphasis is mine):

To a large extent, your trust system and the reviews that you generate on both sides of the transaction are the regulators. Right? So, the guest that came before me is the person who inspected the property for me. So in some sense the technology and the way it brings people together is a substitute for regulation.

I think Roberts is almost exactly correct here. The regulator of housing quality in today’s world is best understood not as a person or agency but as a process. First, the customers rate the properties; then, Airbnb posts the customers’ ratings; and then, both Airbnb’s prospective customers and other property owners react to that information. Property owners who would like to rent their properties via Airbnb are effectively forced to meet the standards upheld by the other properties offered, in order to win customers. That process of judgment, communication, and reaction is not “a substitute for regulation,” as Roberts says; it is a substitute for government regulation. It is a superior kind of regulation, provided by the market process.

Here are some of the ways in which it is superior:

  • Instead of being inspected every year or so, each property is inspected every time it is rented.
  • Instead of getting a cursory look-over by a government employee just doing his job, the property gets a thorough examination by someone with her own comfort and money involved.
  • Instead of being enforced by authorities’ restrictions on the choices of renters and property owners, standards of quality are enforced by those choices.
  • Instead of being subject to “capture” by the regulated insiders of the industry—hotels and motels eager to use regulation to suffocate these new competitors—this regulatory process is itself regulated (kept fair) by outsiders’ freedom to participate in the industry.
  • Instead of staying on the books for years after they stop making sense—if they ever did—the standards generated by this regulatory process are constantly being reevaluated, and they’re cast off as soon as they don’t make sense.

Airbnb’s collection and publication of customer ratings is something that every other hotel, motel, and lodging house is free to imitate. This freedom eliminates the rationale for government regulation of lodging services.

That rationale is based on “market failure” due to imperfect information. In the standard story, we need government regulation because lodging is not a repeat-purchase item, so the market fails to give consumers information on which to judge its quality before using it. Hence consumers might be taken advantage of, so they need government to regulate quality. Maybe that argument had some merit in days past—I’m doubtful—but it surely has no merit now. The quality of Airbnb offerings is as closely regulated as I can imagine it being.

Now that real-time customer ratings over the Internet are easy, governments should stop regulating hotels. The market process does that better than governments can.

ABOUT HOWARD BAETJER JR.

Howard Baetjer Jr. is a lecturer in the department of economics at Towson University and a faculty member for seminars of the Institute for Humane Studies. This article is based on ideas from his book, Free Our Markets: A Citizens’ Guide to Essential Economics.

Our Inflated Thanksgiving by Chuck Grimmett

What does the Federal Reserve have to do with your Thanksgiving dinner?

INTERACTIVE GRAPH:

For the past 29 years, the American Farm Bureau Federation has conducted an informal survey of the price of a classic Thanksgiving dinner for 10 people. At first glance, it looks like the price of food has been steadily rising. But when you adjust the numbers for inflation, you get a different story. It isn’t the cost of our food that has been rising, but the amount of US currency in circulation.
This year, we’re thankful for technologies like bitcoin breaking the Federal Reserve’s grip on money.
Happy Thanksgiving!
The individual prices of a traditional Thanksgiving dinner this year:
(Hover for items and prices.)

20130829_CAGCHUCK GRIMMETT

Chuck Grimmett is a project manager at eResources. Previously, he was FEE’s director of web media. Get in touch with him on Twitter: @cagrimmett.

So Long 113th Congress – Hello 114th

“For last year’s words belong to last year’s language. And next year’s words await another voice. And to make an end is to make a beginning.” – T.S. Eliot

On Tuesday, Rep. Paul Ryan (WI-1) succeeded Rep. Dave Camp (MI-4) as the new Chairman of the House Committee on Ways and Means. This powerful committee oversees the nation’s tax legislation and Ryan has already signaled that major tax reform is going to be a high priority.

When interviewed by the Washington Examiner in September, Ryan indicated his focus would be pro-growth legislation and moving away from static scoring if he became Chairman of Ways and Means.

This is game changing for the FairTax because static scoring is the traditional scoring methodology for proposed tax legislation that estimates revenue generation, but it does not reflect the impact a piece of legislation may have on economic growth or recession.

Senate Finance Chairman Orrin Hatch went so far as to label static scoring as a “downright dumb and intellectually dishonest” methodology.

To illustrate Hatch’s point, Dailer Caller’s Rachael Stolzfoos pointed out, “Under the CBO and JCT’s current “static” scoring system, an income tax rate increase from 30 percent to 100 percent would give the government a 70 percent increase in tax revenue — an analysis which leaves out the obvious fact that few people would be willing to work at all if 100 percent of their paycheck went to the federal government.”

Given the way that HR 25 has been previously scored by the JCT (Joint Committee on Taxation), we wholeheartedly agree with Chairman elect Ryan that it is long past time that Congress use dynamic scoring when evaluating tax reform legislation.

Ryan also indicated he likes “specifics” and wants “ideas” that “people are willing to fight for,” even “if they don’t go all the way.” That’s great news for the FairTax.

H.R. 25 / S. 122, The FairTax Act, is the most specific, most detailed most researched of any tax reform plan before Congress. And for 15 years the American people have stood behind and fought for its’ passage. And our fight continues today.

We congratulate Chairman-elect Ryan and look forward to working with him in the coming months. And, we thank outgoing Chairman Dave Camp for his efforts towards getting a first ever, Ways and Means vote on H.R. 25.

Save serious time and cash at FairTaxRewards.org

If you were going to shop online, please sign up for and use FairTaxRewards.com. There is no cost to sign up and it is simple to use. You can use this mega mall to get Black Friday and Cyber Monday bargains at over 2,500 of America’s favorite retailers including Walmart, Best Buy, Target, Kohl’s, PetSmart, Macy’s, 1-800 Flowers and Old Navy – and lots of local retailers too!

And your FairTaxRewards.com mega mall gives you exclusive access to daily deals and coupons that provide significant savings along withCashBack earnings for you and a payment to the FairTax campaign on everything you buy. So, this year relax, register and let the savings fly!

The FairTax – the best gift of all

The FairTax is the only tax replacement plan that will generate jobs, stimulate the economy and eliminate the IRS. That’s a gift worth giving! So why not buy an AFFT membership for everyone on your shopping list. For as little as $5 per person, you can sponsor someone for AFFT membership. Just click here or go to FairTax.org and click on the membership button.

Finally, next Thursday is Thanksgiving. Erma Bombeck once said, “Thanksgiving dinners take eighteen hours to prepare. They are consumed in twelve minutes. Half-time takes twelve minutes. This is not coincidence.”

Happy Thanksgiving and happy half time!

Jonathan Gruber’s Big, Benevolent Fraud by D.W. MacKenzie

Obamacare, the noble lie, and cognitive dissonance at MIT.

It seems that critics of the so-called Affordable Care Act (ACA ) have a new ally in our efforts to expose the deficiencies of the legislation: Jonathan Gruber.

This development comes as a surprise, because Gruber was the ACA’s primary architect. He has made public remarks that expose problems with the ACA’s adoption and future operation. However, Gruber still supports the ACA and labors under the idea that it can be fixed.

Gruber admits that the ACA is a kind of fraud — that is, it was deliberately written in a misleading way. The ACA was presented as a way to increase the affordability and accessibility of health care. In reality, the ACA is a transfer scheme.

If the ACA benefits Americans, why did it need to be misrepresented? According to Gruber, transparent spending and transparent taxing are impossible: “You just can’t do it.… Lack of transparency is a huge political advantage.… Basically, call it the stupidity of the American voter.”

The ACA was written to hide the fact that it is designed as a transfer from healthier, younger people to less healthy, typically older people.

Why is a lack of transparency severely problematic? Because bureaucrats and politicians are supposed to serve the public in modern social-democratic welfare states. But why would we expect bureaucrats and politicians to actually serve the public?

Some scholars have suggested that competition in democratic elections can push politicians to serve the public, and elected politicians will therefore keep a watchful eye on bureaucrats. This is called the “median voter theorem.”

The problem is that political competition fails to discipline people in the public sector when governance is opaque. A well-informed electorate is a necessary condition for effective political competition.

Gruber is probably correct in saying that passing the ACA required misinforming the electorate. However, the opaque governance that Gruber lauds opens the door for large-scale waste and abuse by special interests. Opaque governance and a misinformed, or uniformed, electorate make it virtually certain that the ACA will be administered inefficiently, whatever one thinks of its merits.

Indeed, a lack of information causes adverse selection problems whereby the most corrupt people make the greatest efforts to rise in politics and within bureaucracies. Opaque governance thus guarantees abuse of the ACA by public officials and special interests.

What makes Gruber’s remarks particularly worthy of criticism is that he is employed as an economist — and at a top university. Worse still, he teaches public finance and policy at MIT: he really should understand the importance of transparency. And he does. Gruber is the author of Public Finance and Public Policy, chapter nine of which covers the median voter theorem. So, Gruber does understand the necessity of political openness and an informed electorate for efficiency in the public sector. Efficiency requires more than an informed electorate, but it is a necessary condition.

Anyone who understands even the basics of the median voter theorem knows full well that transparency is strictly required for efficiency. Anyone who simultaneously believes that transparency and opaqueness are both necessary for good public policy has cognitive dissonance. Jonathan Gruber has unwittingly helped reveal the incoherence of the case for the ACA.

Gruber is an economist who fancied himself able to reengineer dynamic markets through social policy. His conceit as a social engineer is matched by his disrespect for the American electorate. He thought that an opaque political process and obscure legal language could keep people in the dark. On top of that, Gruber fathered lies because he knew voters would reject the ACA if they were aware of the wrenching changes the legislation would bring. As his lies became obvious, he blamed poor legal phrasing for the federal government’s inability to hide the costly consequences of his transfer scheme behind the subsidies in the federal exchange.

It’s the conceit of the “nudger” — the classic case of an elite policymaker who thinks he is smart enough to design what’s best for you, even if you’re too stupid to understand why and too ignorant to check up on him.

Didn’t Gruber realize such monumental legislation would be under tremendous scrutiny? Didn’t he realize the painful economic effects would be felt by real voters with common sense? And didn’t he realize that it would only take pulling back one of the curtains to expose the totality of this Wizard-of-Oz-like scheme?

Fortunately, it has gotten much easier for people to become informed about the real facts concerning the ACA, as well as other social programs. Citizens will never be well-informed about all of the backroom politics and the internal operations of bureaucracies. But we can at least learn about their true nature in the abstract — and with regard to the ACA in particular.

Perhaps most importantly, we can be on the lookout for those claiming to be wizards in Washington.

20141117_mackenziethumbABOUT D.W. MACKENZIE

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

Greenhouse Gas Deal with China is an Attack on the American Economy

Ignore the cheers from the White House, the State Department, Mother Jones, and elsewhere over the U.S.-China greenhouse gas agreement. It’s simply another attack on abundant American energy and the economy.

Secretary of State John Kerry detailed the deal in the New York Times: “For the first time China is announcing a peak year for its carbon emissions – around 2030 – along with a commitment to try to reach the peak earlier.” In exchange, the “United States intends to reduce net greenhouse gas emissions by 26 to 28 percent below 2005 levels by 2025.”

Here are a few points:

1. Reason’s Ronald Bailey estimates how much the United States will have to reduce its greenhouse gas emissions under the agreement:

In 2005, the U.S. emitted the equivalent of 7.26 gigatonnes of carbon dioxide. So cutting emissions by 28 percent by 2025 implies emissions of 5.23 gigatonnes in 2025, which is about the amount that the U.S. emitted in 1992. Assuming that Chinese emissions did peak in 2030, the country could by then be emitting three times more than the U.S.

2. China’s peak emissions year will be “around” 2030? Does that mean 2031, 2035, 2040? For international commitments to be meaningful and effective, they need to be precise. To put it mildly, “around” is not very precise.

3. This agreement is nonbinding and according to Reuters’ analysis is loaded with nebulous “intentions”:

The joint announcement employs language very carefully. Throughout, the operative word is “intend” or “intention”, which makes clear the statement is not meant to create any new obligations.

China’s 2030 emissions target is set in terms of a date but says nothing about the level at which emissions will peak.

4. Did China really agree to something that it expects will happen anyway? Ben White in Politico’s Morning Moneypoints to a 2012 story in The Guardian:

[B]arring any significant changes in policy, China’s emissions will rise until around 2030 – when the country’s urbanisation peaks, and its population growth slows – and then begins to fall.

5. Along those same lines, under the International Energy Agency’s baseline scenario (IEA-NPS) of greenhouse gas reductions, China’s emissions are projected to peak by 2030 anyway [see slide 17].

6. There’s plenty of international skepticism. A German newspaper commented on the deal, “[It’s] as if a grizzly bear and tiger discuss how the world can be more vegetarian.”

Add this all up and you have a one-sided agreement in China’s favor, as Karen Harbert, president of the U.S. Chamber’s Institute for 21st Century Energy said in a statement:

If actually implemented, this agreement would give an unfair advantage to Chinese manufacturers while forcing dramatic changes to America’s energy supply that will raise prices, threaten reliability, and increase the burden on hard working American families.

EDITORS NOTE: The featured image is of workers moving coal out from a mine in Shanxi Province, China. China is the largest producer and consumer of coal in the world. Photo credit: Nelson Ching/Bloomberg.

The Four Core Beliefs of Enterprise by Lawrence W. Reed & Wayne Olson [+Video]

How to solve complex business problems.

The term tunnel vision carries such a negative connotation that no one ever really wants it, even if they’re traveling through a tunnel. We say we want to be conscious of as much of our surroundings as possible, not simply a narrow sliver. We want to perceive all the relevant factors and remain aware of new things that might improve our situation.

Alas, that’s almost always easier said than done.

Just ask Bartley J. Madden, author of a new, 122-page book, Reconstructing Your Worldview. Better yet, if you’re an aspiring entrepreneur, read the book and visit his website LearningWhatWorks.com, or watch this insightful video:

Madden has spent decades trying to understand the business world during his career in money management, investment research, and university teaching. His longtime fascination with methods of solving complex business problems led him to realize that the way we say we want to see the world and the way we actually do are two very different things. It takes a conscious, thoughtful effort to open wide our mind’s eye, so to speak. If you learn to do it systematically, the result can be a new worldview that will reshape how you notice opportunities and capitalize on them.

Nearly 40 years ago, we heard Austrian economist Israel Kirzner lecture on his specialty, entrepreneurship. He employed an analogy we’ll never forget. He asked his audience to imagine a free, dynamic economy as a place where a quiet blizzard of 10-dollar bills is raging just overhead. Most people never notice it, but one very special kind of person does: the entrepreneur. He sees the bills and musters the courage to reach up and grab one. In other words, he deploys his “entrepreneurial alertness” to seize an opportunity: to buy low and sell high, to assemble factors of production to make a product or service worth more than its input costs, or to move a good from one place to another where it’s more desired. Perhaps an even more apt analogy would be a blizzard in which most of the flying bills are fake and worthless, and only a few are “winners.” But in any event, it’s the entrepreneur whose powers of observation are great enough to see any of them at all.

Entrepreneurial alertness is essentially what Madden implores us to cultivate. We must start by recognizing what he calls “the four core beliefs” we need to solve problems in business:

  1. Past experiences shape our current assumptions.
  2. Language is perception’s silent partner.
  3. Improving any system’s performance requires that we identify and fix its key constraints.
  4. Human behavior is purposeful; we act not simply in response to stimuli (much as a ball rolls in the direction in which it’s pushed) but in a conscious, living fashion. We compare our actual experiences to our preferred experiences and then act to create new experiences that come as close to the preferred ones as possible.

These four core beliefs are more profound than Madden believes we commonly assume.

Each teaches a vital lesson. On a whole, their underlying message for economics concerns how innovation develops when the market is open to new entrants. Established businesses get caught up in the same old ways of looking at the world and the opportunities for value creation. So do government bureaucracies, but the difference is that government bureaucracies tend to institutionalize the conventional ways of looking at the world and create barriers to anyone trying to change them; private industries who fail to change will be swept away.

The book is thoroughly researched and rich with citations that allow the reader to pursue the subject in depth. Madden even delves into how people form beliefs and act on them, using the latest findings.

He beautifully illustrates the first two of the four core beliefs with a Kmart-versus-Walmart example. Kmart’s management had in their minds the word “store” and defined it in ways they’d always seen a “store” behaving and delivering profitable results for them: freestanding and run independently by its own manager. So they stuck to that business model, namely: put a big box in a big town and assume that is necessary for generating the desired economies of scale. In contrast, as Madden explains, “in Sam Walton’s worldview, each store was an integrated part of a networked system” that could create value in the wide-open small-town markets.

A “worldview” is not about one innovative idea that turns out well, but about openness to experimentation and knowledge building. Madden continues, “Walmart’s networked system of stores and distribution centers resulted in fast-paced learning and high efficiencies.… Over time, Walmart greatly expanded and improved its business processes at a far more rapid pace than did Kmart,” eventually leaving Kmart in the dust, even in the larger towns.

The third core belief is that in order to make a complex process create more value, it’s not enough to pick individual components and improve them; you have to identify where the constraints are in the process. If the bottleneck is at process B in the production line, improving the efficiency of process A will merely increase the size of the problem at process B. The problem is that the managers of process A in centralized operation have every incentive to propose “improvements” that actually create no value.

Madden follows this thought to an in-depth discussion of the merits of distributed systems over centrally planned systems, including “lean thinking” concepts, where he makes this key point: “A lean culture has a horizontal orientation in order to better coordinate work and reduce waste along the entire value streams that end with the customers.… In contrast, a command-and-control orientation is composed of vertical silos with incentives to improve local efficiencies.”

Placing this belief in a much broader context, he observes that “nature has a propensity for distributed solutions” and, echoing Hayek, “when a society’s institutions evolve through a naturally “evolutionary” process, rather than one of an imposed human design, the result tends to reflect decentralization and a selection of whatever works best.”

The fourth core belief should appeal to all those who have read Ludwig von Mises’s magnum opus, Human Action or are even moderately familiar with the central insights of the Austrian school that Mises represents. When you’re dealing with people, you’re dealing with independent actors who will respond to stimuli according to their own “control systems,” which Madden likens to a thermostat. Their reaction to something depends on whether it will move them closer to a desired state that represents their goals. So you can’t ignore the incentives — you can’t move people around like pieces on a chessboard, as Adam Smith’s central-planning “man of system” tries to do.

This is where government programs almost always fall down, but Madden makes it clear that private businesses can easily fall into the same trap if they’re not mindful — in which case, the market gives them the feedback that they’ve made a mistake, something that rarely if ever happens to the people running government programs.

In the summary video above, Madden offers an example in Michelin run-flat tires. Company managers got trapped in their historical line of thinking and their accustomed vocabulary: engineering breakthrough in tire technology leads to enormous profits. They fell in love with the run-flat technology, and so, apparently, did a bunch of industry observers. You could dispense with spare tires forever! How cool is that? Michelin failed, however, to see the total value stream ending with the customer; in particular, the company failed to take into account how the customer was supposed to get a tire repaired once he experienced a flat. Repair shops have their own control systems around whether they want to invest in the physical and human capital that would be required to handle this new product. And in the end, repair shops decided not to, so the product was dead on arrival.

One outstanding example of a dysfunctional interruption in the value stream from manufacturers to customers is the approvals process for new pharmaceuticals at the Food and Drug Administration (FDA). Madden has fully discussed this problem and a practical means to overcome some of the worst effects in his earlier book (see Reed’s review of Free to Choose Medicine). And in the final chapter of his current book, he demonstrates that the situation at the FDA is an excellent case study in the violation of the principles underlying the four core beliefs.

If you take Madden’s advice and reconstruct your worldview through the prism of his four core beliefs, you’re likely to think and behave more like a seasoned entrepreneur. Success becomes more probable, though never assured in an uncertain world. In an age in which changes happen fast, labor and capital are more mobile than ever, and technology opens doors widest to those who grasp it first, every little bit helps.

larry reed new thumbABOUT LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

ABOUT WAYNE OLSON

Wayne is FEE’s Executive Director.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

CLICHÉS OF PROGRESSIVISM #31 – “Labor Unions Raise Wages and the Standard of Living” by Hans F. Sennholz

To believe that labor unions actually improve the lot of working people is to suggest that the capitalist economy fails to provide fair wages and decent working conditions. It is to imply that a free economy does not work satisfactorily unless it is “fortified” by union activity and government intervention.

The truth is that the unhampered market society allocates to every member the undiminished fruits of his labor. It does so in all ages and societies where individual freedom and private property are safeguarded. (The process works faster and more efficiently in our high-tech, information age with a labor force more mobile than ever before but it worked in previous times too, so long as individuals were free to accept or reject the offers of employers, or to leave one employer and work either for another or for himself–Editor.)

The reason your great-grandfather earned $5 a week for 60 hours of labor must be sought in his low productivity, not in the absence of labor unions. The $5 he earned constituted full and fair payment for his productive efforts—a voluntary contract he likely entered into because it represented his best opportunity. The economic principles of the free market, the competition among employers, a man’s mobility and freedom of choice, assured him full wages under the given production conditions.

Wages were low and working conditions primitive because labor productivity was low, machines and tools were relatively primitive, technology and production methods were crude when compared with today’s. If, for any reason, our productivity were to sink back to that of our forebears, our wages, too, would decline to their levels and our work week would lengthen again no matter what the activities of labor unions or the decrees of government.

In a free market economy, labor productivity determines wage rates. As it is the undeniable policy of labor unions to reduce this productivity (as measured per man-hour) by forcing compensation up or spreading out the work with restrictive work rules, they have in fact reduced the wages of the masses of people although some privileged members have benefited temporarily at the expense of others. This is true especially today when the unions enjoy many legal immunities and considerable political powers. And it also was true during the nineteenth century when our ancestors labored from dawn to dusk for low wages.

Through a variety of coercive measures, labor unions merely impose higher labor costs on employers. The higher costs reduce the returns on capital and curtail production, which curbs the opportunities for employment. This is why our centers of unionism are also our centers of highest unemployment; they are also the industries that have seen the most dramatic declines in numbers of existing jobs, because like anything else, the higher the price, the less will be purchased. (It’s also why compulsory unionism states for years have shown lower rates of both employment growth and wage rates than so-called “right-to-work” states. See http://www.mackinac.org/4290  – Editor.)

True enough, the senior union members who happen to keep their jobs do enjoy higher wages. But those who can no longer find jobs in unionized industries then seek employment in nonunionized activity. This influx and absorption of excess labor tends to reduce their wages. The resulting difference between union and nonunion wages rates gives rise to the notion that labor unions must indeed benefit workers. In reality, the presence of the nonunionized sectors of the labor market hides the disastrous consequences of union policy by preventing mass unemployment. (Nonetheless, with 94% of today’s private sector workers being completely non-union, and many of them enjoying very high wage rates, it’s increasingly difficult for unions to argue that workers without unions are exploited and unprotected. – Editor.)

Summary

  • Wages can only be paid out of what is produced (no production, no wages), therefore greater productivity is the key to higher wages.
  • Unions typically hamper production. Union activity may result in some people getting more but without an increase in productivity, that simply means that some other people must get less. Either you bake a bigger pie for everybody or you just slice the pie up differently.
  • It looks sometimes like unions have actually forced wages higher because of the lower wages in non-unionized businesses. But the latter are caused in part by the outflow of labor from unionized sectors to non-unionized ones. Unionized auto-workers today, for example, may make a little more per hour than their nonunionized counterparts but there are a lot fewer of them too!

For further information, see:

“Why Wages Rise—Part I” by F. A. Harper

“Why Wages Rise—Part II” by F. A. Harper

“Can Labor Unions Really Raise Wages?” by Henry Hazlitt

ABOUT HANS F. SENNHOLZ

Editor’s Note: This essay, with minor updates, was first published in the 1962 book, “Cliches of Socialism.” Prior to serving as president of the Foundation for Economic Education from 1992 to 1997, the late Hans F. Sennholz was chairman of the department of economics at Grove City College in Pennsylvania from 1956 to 1992. A noted economist and teacher of the “Austrian” school, he earned his PhD under the tutelage of Ludwig von Mises. Read more about him here. The featured image is courtesy of FEE and Shutterstock.