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CLICHÉS OF PROGRESSIVISM #45 – “Robots and Computerization Cause Unemployment” by WENDY MCELROY

Report Suggests Nearly Half of U.S. Jobs Are Vulnerable to Computerization,” screams a headline. The cry of “robots are coming to take our jobs!” is ringing across North America. But the concern reveals nothing so much as a fear—and misunderstanding—of the free market.

In the short term, robotics will cause some job dislocation; in the long term, labor patterns will simply shift. The use of robotics to increase productivity while decreasing costs works basically the same way as past technological advances, like the production line, have worked. Those advances improved the quality of life of billions of people and created new forms of employment that were unimaginable at the time.

Given that reality, the cry that should be heard is, “Beware of monopolies controlling technology through restrictive patents or other government-granted privilege.”

Actually, they are here already. Technological advance is an inherent aspect of a free market in which innovators seeks to produce more value at a lower cost. Entrepreneurs want a market edge. Computerization, industrial control systems, and robotics have become an integral part of that quest. Many manual jobs, such as factory-line assembly, have been phased out and replaced by others, such jobs related to technology, the Internet, and games. For a number of reasons, however, robots are poised to become villains of unemployment. Two reasons come to mind:

1.Robots are now highly developed and less expensive. Such traits make them an increasingly popular option. The Banque de Luxembourg News offered a snapshot:

The currently-estimated average unit cost of around $50,000 should certainly decrease further with the arrival of “low-cost” robots on the market. This is particularly the case for “Baxter,” the humanoid robot with evolving artificial intelligence from the U.S. company Rethink Robotics, or “Universal 5” from the Danish company Universal Robots, priced at just $22,000 and $34,000 respectively.

Better, faster, and cheaper are the bases of increased productivity.

2.Robots will be interacting more directly with the general public. The fast-food industry is a good example. People may be accustomed to ATMs, but a robotic kiosk that asks, “Do you want fries with that?” will occasion widespread public comment, albeit temporarily.

Comment from displaced fast-food restaurant workers may not be so transient. NBC News recently described a strike by workers in an estimated 150 cities. The workers’ main demand was a $15 minimum wage, but they also called for better working conditions. The protesters, ironically, are speeding up their own unemployment by making themselves expensive and difficult to manage.

Compared to humans, robots are cheaper to employ—partly for natural reasons and partly because of government intervention.

Among the natural costs are training, safety needs, overtime, and personnel problems such as hiring, firing and on-the-job theft. Now, according to Singularity Hub, robots can also be more productive in certain roles. They “can make a burger in 10 seconds (360/hr). Fast yes, but also superior quality. Because the restaurant is free to spend its savings on better ingredients, it can make gourmet burgers at fast food prices.”

Government-imposed costs include minimum-wage laws and mandated benefits, as well as discrimination, liability, and other employment lawsuits. The employment advisory Workforce explained, “Defending a case through discovery and a ruling on a motion for summary judgment can cost an employer between $75,000 and $125,000. If an employer loses summary judgment—which, much more often than not, is the case—the employer can expect to spend a total of $175,000 to $250,000 to take a case to a jury verdict at trial.”

At some point, human labor will make sense only to restaurants that wish to preserve the “personal touch” or to fill a niche.

The tech site Motherboard aptly commented, “The coming age of robot workers chiefly reflects a tension that’s been around since the first common lands were enclosed by landowners who declared them private property: that between labour and the owners of capital. The future of labour in the robot age has everything to do with capitalism.”

Ironically, Motherboard points to one critic of capitalism who defended technological advances in production: none other than Karl Marx. He called machines “fixed capital.” The defense occurs in a segment called “The Fragment on Machines” in the unfinished but published manuscript Grundrisse der Kritik der Politischen Ökonomie (Outlines of the Critique of Political Economy).

Marx believed the “variable capital” (workers) dislocated by machines would be freed from the exploitation of their “surplus labor,” the difference between their wages and the selling price of a product, which the capitalist pockets as profit. Machines would benefit “emancipated labour” because capitalists would “employ people upon something not directly and immediately productive, e.g. in the erection of machinery.” The relationship change would revolutionize society and hasten the end of capitalism itself.

Never mind that the idea of “surplus labor” is intellectually bankrupt, technology ended up strengthening capitalism. But Marx was right about one thing: Many workers have been emancipated from soul-deadening, repetitive labor. Many who feared technology did so because they viewed society as static. The free market is the opposite. It is a dynamic, quick-response ecosystem of value. Internet pioneer Vint Cerf argues, “Historically, technology has created more jobs than it destroys and there is no reason to think otherwise in this case.”

Forbes pointed out that U.S. unemployment rates have changed little over the past 120 years (1890 to 2014) despite massive advances in workplace technology:

There have been three major spikes in unemployment, all caused by financiers, not by engineers: the railroad and bank failures of the Panic of 1893, the bank failures of the Great Depression, and finally the Great Recession of our era, also stemming from bank failures. And each time, once the bankers and policymakers got their houses in order, businesses, engineers, and entrepreneurs restored growth and employment.

The drive to make society static is a powerful obstacle to that restored employment. How does society become static? A key word in the answer is “monopoly.” But we should not equivocate on two forms of monopoly.

A monopoly established by aggressive innovation and excellence will dominate only as long as it produces better or less expensive goods than others can. Monopolies created by crony capitalism are entrenched expressions of privilege that serve elite interests. Crony capitalism is the economic arrangement by which business success depends upon having a close relationship with government, including legal privileges.

Restrictive patents are a basic building block of crony capitalism because they grant a business the “right” to exclude competition. Many libertarians deny the legitimacy of any patents. The nineteenth century classical liberal Eugen von Böhm-Bawerk rejected patents on classically Austrian grounds. He called them “legally compulsive relationships of patronage which are based on a vendor’s exclusive right of sale”: in short, a government-granted privilege that violated every man’s right to compete freely. Modern critics of patents include the Austrian economist Murray Rothbard and intellectual property attorney Stephan Kinsella.

Pharmaceuticals and technology are particularly patent-hungry. The extent of the hunger can be gauged by how much money companies spend to protect their intellectual property rights. In 2011, Apple and Google reportedly spent more on patent lawsuits and purchases than on research and development. A New York Times article addressed the costs imposed on tech companies by “patent trolls”—people who do not produce or supply services based on patents they own but use them only to collect licensing fees and legal settlements. “Litigation costs in the United States related to patent assertion entities [trolls],” the article claimed, “totaled nearly $30 billion in 2011, more than four times the costs in 2005.” These costs and associated ones, like patent infringement insurance, harm a society’s productivity by creating stasis and preventing competition.

Dean Baker, co-director of the progressive Center for Economic Policy Research, described the difference between robots produced on the marketplace and robots produced by monopoly. Private producers “won’t directly get rich” because “robots will presumably be relatively cheap to make. After all, we can have robots make them. If the owners of robots get really rich it will be because the government has given them patent monopolies so that they can collect lots of money from anyone who wants to buy or build a robot.”  The monopoly “tax” will be passed on to impoverish both consumers and employees.

Ultimately, we should return again to the wisdom of Joseph Schumpeter, who reminds us that technological progress, while it can change the patterns of production, tends to free up resources for new uses, making life better over the long term. In other words, the displacement of workers by robots is just creative destruction in action. Just as the car starter replaced the buggy whip, the robot might replace the burger-flipper. Perhaps the burger-flipper will migrate to a new profession, such as caring for an elderly person or cleaning homes for busy professionals. But there are always new ways to create value.

An increased use of robots will cause labor dislocation, which will be painful for many workers in the near term. But if market forces are allowed to function, the dislocation will be temporary. And if history is a guide, the replacement jobs will require skills that better express what it means to be human: communication, problem-solving, creation, and caregiving.

Summary

  • The use of robotics to increase productivity while decreasing costs works basically the same way as past technological advances, like the production line, have worked. Those advances improved the quality of life of billions of people and created new forms of employment that were unimaginable at the time.
  • Compared to humans, robots are cheaper to employ—partly for natural reasons and partly because of government intervention. Natural costs include training, safety needs, overtime, and personnel problems such as hiring, firing and on-the-job theft. Unnatural, non-market costs stem from cronyism dispensed by governments.
  • An increased use of robots will cause labor dislocation, which will be painful for many workers in the near term. But if market forces are allowed to function, the dislocation will be temporary.

For further information, see:

“Technology and the Work Force: Work Will Not End” by Donald Jonas

“Good Economists, Bad Economists, and Walmart” by Lawrence W. Reed

“The Birth of the Modern: World Society 1815-1830” by Raymond J. Keating

If you wish to republish this article, please write editor@fee.org.

ABOUT WENDY MCELROY

Contributing editor Wendy McElroy (wendy@wendymcelroy.com) is an author, editor of ifeminists.com, and Research Fellow at The Independent Institute (independent.org).

EDITORS NOTE: 

The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government. See the index of the published chapters here.

The Pursuit of Profit Is Pro-Social by Matthew McCaffrey

A value-creating business is “social” whether it pursues an explicit social agenda or not.

You can’t throw a rock these days without hitting someone who’s talking about entrepreneurship and why we need to encourage more of it. In the public and private sectors — especially in higher education — innovation, enterprise, and entrepreneurship are buzzwords like never before.

A big beneficiary of this trend is the field of social enterprise. Unlike ordinary businesses, the conventional explanation goes, social enterprises use their commercial activities to promote a broader aim of human well-being rather than simple profit maximization. An example is Jamie Oliver using the restaurant business to provide culinary training to disadvantaged youth or sell food that encourages healthier living, even if doing so hurts the bottom line. Because of these kinds of expansive goals, social enterprises tend to be looked on favorably by business students, governments, and the media.

But while social enterprises certainly do create value, emphasizing “social” goals over profits can be misleading because it implies that traditional profit-seeking entrepreneurship fails to produce wide-ranging benefits for large numbers of people. Thinking of social enterprise as distinct from conventional business helps obscure the vital truth that profit seeking is not only compatible with increases in human welfare, it is probably the most powerful force for producing them ever devised.

In fact, that’s the beauty of free-market enterprise: it’s social whether it pursues an explicit social agenda or not. Critics of government intervention often point out that good intentions don’t equate to good policies. Likewise, the absence of good intentions doesn’t equate to bad policy, and lacking a specific social goal doesn’t make entrepreneurs antisocial. Think of Adam Smith’s observation about the butcher, brewer, and baker, which reveals that commerce is social because it’s mutually beneficial, not because entrepreneurs necessarily have a larger agenda.

When a company like Uber charges a price for its services, it’s being social in the sense that it’s creating value for consumers, not just for itself. And the market is simply an elaborate network of voluntary exchanges in which buyers and sellers constantly make each other better off — which is why they do business to start with.

Free enterprise is therefore social enterprise, but the reverse is true as well: enterprise is social if and to the extent that it’s free. We are truly social when we choose our relationships and refrain from choosing our neighbors’. In a free market, the term “social enterprise” is redundant because it’s in the marketplace that human beings express some of their most fundamental social instincts. Buying and selling teach us about peaceful interaction for mutual gain — and reveal to us just how profoundly our well-being depends on our commitment to benefiting others.

However, if we choose coercion over peaceful cooperation, we abandon hope of a working social order. Any social enterprise worthy of the name is therefore hostile to economic intervention, because every intervention is a step away from social cohesion and toward conflict.

Unsurprisingly, the corporate state is the primary cause of antisocial tendencies in real-world enterprises. Take, for example, intellectual-property law. What could be more antisocial than prohibiting people from sharing ideas and using them to improve the welfare of others? Yet many who promote enterprise take it for granted that “protecting” ideas is an essential part of entrepreneurship.

This attitude hints at a broader institutional problem: the sort of enterprise supported by public rhetoric is rarely the kind of healthy economic activity that would be produced in a free economy. Instead, public support for enterprise tends to mean support for a few privileged ventures at the expense of others. Sadly, it’s common for governments the world over to emphasize the need for more entrepreneurship while simultaneously promoting policies that distort, penalize, or even outlaw it. That’s why it’s more important than ever to be wary of the different meanings attached to words like “social” and “enterprise” and how these useful terms come to be associated with harmful economic ideas.

If economics tells us anything, it’s that we can’t effectively promote enterprise without first abandoning the networks of privilege and regulation that undermine entrepreneurship and divert human talent into destructive practices. A vital step toward that goal is seriously considering the rhetoric we use to describe the market. Language radically alters perceptions of commerce and can make the difference between thinking of enterprise as zero-sum profit seeking or as the key to the countless benefits of peaceful exchange.

ABOUT MATTHEW MCCAFFREY

Matthew McCaffrey is assistant professor of enterprise at the University of Manchester and editor of Libertarian Papers.

 

Obama Has Two More Years Left to Destroy the U.S. Economy

As 2015 began the Journal Editorial Report on Fox News was devoted to having its reporters, some of the best there are, speculate on what 2015 holds in terms of who might run for president and what the economy might be. The key word here is “speculate” because even experts know that it is unanticipated events that determine the future and the future is often all about unanticipated events.

How different would the world have been if John F. Kennedy had not been assassinated? One can reasonably assume there would not have been the long war in Vietnam because he wanted no part of the conflict there. Few would have predicted that an unknown Governor from Arkansas would emerge to become President as Bill Clinton did. Who would believe we are talking about his wife running for President? That is so bizarre it is mind-boggling.

Most certainly, few would have predicted that an unknown first term Senator from Illinois, Barack Hussein Obama, would push aside Hillary Clinton to become the first black American to be nominated for President and to win in 2008. Despite the takeover of the nation’s healthcare system with a series of boldfaced lies, he still won a second term.

Obama now has two more years in which to try to destroy the U.S. economy; particularly its manufacturing and energy sectors. The extent to which he is putting in place the means to do that still remains largely unreported or under-reported in terms of the threat it represents.

Obama Says Planet is WarmingThe vehicle for the nation’s destruction is the greatest hoax of the modern era, the claim that global warming must be avoided by reducing “greenhouse gas” emissions.

A President who lied to Americans about the Affordable Care Act, telling them they could keep their insurance plans, their doctors, and not have to pay more is surely not going to tell Americans that the planet is now into its 19th year of a cooling cycle with no warming in sight.

To raise the ante of the planetary threat hoax, he has added “climate change” when one would assume even the simple-minded would know humans have nothing to do with the Earth’s climate, nor the ability to initiate or stop any change.

In 2015, the White House is launching a vast propaganda campaign through the many elements of the federal government to reach into the nation’s schools with the climate lies and through other agencies to spread them.

In particular, Obama has been striving to utilize the Environmental Protection Agency to subvert existing environmental laws and, indeed, the Constitution unless Congress or the courts stop an attack that will greatly weaken the business, industrial and energy sectors. It will fundamentally put our lives at risk when there is not enough electricity to power homes and workplaces in various areas of the nation. At the very least, the cost of electricity will, in the President’s own words, “skyrocket.”

Why doesn’t anyone in Congress or the rest of the population wonder why White House policies are closing coal-fired plants that provided fifty percent of our electricity when Obama took office and now have been reduced to forty percent? Did you know that more than 1,200 new coal-fired plants are planned in other nations with two-thirds of them to be built in India and China? We live in a nation that has such huge reserves of coal we export it.

The EPA attack on these plants is so illegal and unethical that one of the nation’s leading liberal attorneys, Laurence H. Tribe, who began teaching about environmental law 45 years ago, went on record to declare the EPA’s proposed Clean Power Plan is unconstitutional.

The plan is a regulatory proposal to reduce carbon emissions from the nation’s electric power plants. Tribe pointed out that a two-decade old Supreme Court precedent forbids the federal government from taking action to commandeer the powers of state governments by leaving them no choice but to implement it.

“The brute fact,” said Tribe “is that the Obama administration failed to get climate legislation through Congress. Yet the EPA is acting as though it has the legislative authority anyway to re-engineer the nation’s electric generating system and power grid. It does not.”

As 2014 came to a close, the Obama administration either proposed or imposed more than 1,200 new regulations on the American people.

Alex Newman, writing in the New American, calculated they will add “even more to the already crushing $2 trillion per year cost burden of the federal regulatory machine.” Not surprisingly, “most of the new regulatory schemes involve energy and the environment—139 during a mere two-week period in December, to be precise.”

“In all,” Newman reported, “the Obama administration foisted more than 75,000 pages of regulations on the United States in 2014, costing over $200 billion, on the low end, if new proposed rules are taken into account.” Just one, the EPA’s “coal ash” regulation, “is expected to cost as much as $20 billion, estimates suggest.”

Then add to that the EPA’s “ozone rule” that is estimated to cost “as much as $270 billion per year and put millions of American jobs at risk under the guise of further regulating emissions of the natural gas.” Released the day before Thanksgiving, “Experts also pointed out that the EPA’s own 2007 studies showed no adverse health effects from exposure to even high levels of ozone.”

These are just two examples of the regulatory strangulation of the nation’s economy and energy infrastructure.

This is Obama’s agenda for the remaining two years of his second and thankfully last term in office. Whether you know anything about the science of the climate or have ever even read the Constitution, the sheer disaster of ObamaCare should have told you by now that everything Obama has put in motion has had the single objective of destroying the nation’s economy in every possible way.

The voters have put Republicans in charge of both houses of Congress and their primary responsibility will be to reverse and repeal the damage of Obama’s first six years. The courts will play a role, but this is a job for our elected representatives.

© Alan Caruba, 2015

CLICHÉS OF PROGRESSIVISM #40 — “The Rich Are Getting Richer and the Poor Are Getting Poorer”

Imagine you could go back in time 50 years. Suppose the reason you are doing so is to put policies into place that would ensure that the rich got richer and the poor got poorer. (Why anyone would want to do this is beside the point, but stay with me.) What policies would you set?

  1. You would want to price poor, unskilled people out of the labor market with an ever-increasing minimum wage;
  2. You would provide special favors, artificial competitive advantages, and taxpayer subsidies to the politically well-connected (i.e., those already rich);
  3. You would stifle new, small businesses with stacks of regulations and bureaucratic paperwork;
  4. You would (literally) pay people to stay in poverty, to be dependent on government, so that any work ethic would be suppressed and eroded.
  5. You would implement an erratic and largely inflationary monetary policy that erodes savings and creates destructive booms and busts.

All five of these in combination might do the trick. Throw up barriers to the progress of the poor, or pay people to stay poor, or rig the system so the rich and politically well-connected get artificial economic advantages and chances are, the poor will indeed get poorer and the rich will get richer.

By now you have probably noticed that every one of the policies above has been implemented to varying degrees since the Great Society. And yet the poor have still not gotten poorer in the United States.

According to professional skeptic Michael Shermer:

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

Detractors will try to argue that the poorest quintiles have a smaller percentage of the overall pie. And that might be true, but the pie is much, much bigger. Would you rather have 50 percent of a million or 20 percent of a billion? Another way of putting this is: Would you rather be better off, even if that meant certain people were super well off? Or would you rather everyone were worse off, as long as everyone were relatively equal?

That the poorest among us are still, on balance, doing better today than they were 50 years ago is a remarkable testimony to what relatively free people and markets can do, even as governments put up roadblocks. So if the poor aren’t getting poorer, why do people say they are?

If one starts with the assumption that an equal distribution of wealth is the ultimate goal, then he or she is not terribly concerned with how much of that wealth is created to begin with. But some people, at least, understand that wealth has to be created and that when there is more wealth created the poorest among us will tend to be better off. The choice of starting points boils down then to whether one cares about distributing wealth evenly or growing overall wealth through productive activity.

One reason this particular cliché manages to hang around is that people generally take a static view of the economy. The idea is that wealth is like a giant pie, which neither grows nor shrinks, but gets carved up and distributed certain ways. So, some people end up with the false idea that the only way the rich can be richer is if part of the wealth pie is taken from the poor. From this they conclude justice demands a different distribution of the pie. Advocates of “meritocracy” believe the static pie should be divided according to talent and hard work. Advocates of “social justice” think the pie should be divided according to some concept of equality. Both are wrong, but the fundamental error is in thinking that wealth is a static pie to start with. It is not.

Wealth can better be imagined as a growing pie, or better, a growing ecosystem. Of course, wealth doesn’t always grow, but it tends to—as long as people have the incentives to be productive. Merit and hard work tend to be rewarded in this growing pie, but rewards more generally accrue to those who create value for others.

In other words, someone who works really hard might not be rewarded if no one finds his work valuable—say, a man who digs ditches and fills them up again. Likewise, work that might be considered meritorious in an obscure academic journal might not confer any earthly good on humanity outside of the journals’ four-person review committee.

Advocates of so-called social justice want the wealth pie to be divided according to an arbitrary and subjective abstraction like “fairness” or equal outcomes. But carving up wealth according to some nebulous concept of justice ignores the actual ecosystem in which people operate. In other words, such a concept ignores the behaviors, incentives and exchanges that encourage people to be productive—i.e. to generate wealth. By distributing from rich to poor, you end up paying poorer people to be less productive, while punishing more productive people. The distribution that would flow from people making more goods and services available to all is lost by degree, making everyone worse off. If taxation and redistribution for the sake of equal outcomes makes us all worse off than we would otherwise have been, how is this social justice?

Egalitarian concepts of social justice also ignore any moral considerations that might attach to how an unequal distribution might have come about. If growing overall wealth is about people creating different degrees of value for each other, and taking different risks, then the rewards of value creation will never flow equally. Some people will make more money than others, for example, whether it’s because they were smarter investors, cleverer innovators, or better organizers. The rest of us enjoy the fruits of those efforts, so we might want successful people to keep investing, innovating and organizing — even if that means they get richer. And we might want to acknowledge that they deserve what they have.

(Editor’s Note: Economist Thomas Sowell has said, “Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?” I often ask this question of a redistributionist in the presence of another person and ask the former to specifically tell me how much is his ‘fair share’ of what the other person in our presence has earned. I’m still waiting for a satisfactory answer.)

Those of us who are not as productive (or, politically well-connected, as the case may be) still enjoy remarkable abundance in relatively free societies. In the United States, for example, all quintiles have become wealthier overall, over the last 30 years.

It is also true that there are fewer desperately poor people around the world. In only 20 years, extreme global poverty has been cut in half.  That is a remarkable achievement—one that is attributable to policies of liberalization (freer markets) around the world, which progressive activists and egalitarians decry. In other words, those who say the poor are getting poorer are simply wrong. And there are hundreds of millions of people thriving today who can talk about how much better things have gotten.

Summary

  • Progressives should be honest and admit that the anti-free market policies they’ve promoted and achieved in the last half-century have disadvantaged the poor and conferred favors upon the rich and politically well-connected.
  • Amazingly, in spite of those policies, the poor overall are still better off than they were 50 years ago. Imagine the progress that might have happened had these policies not been in place!
  • Redistributing wealth is just slicing the pie differently, at the risk of shrinking the pie. It’s a static view of wealth, one that’s greatly inferior to a view of baking a bigger pie for everybody.

For further information, see:

How the World is Getting Better” by Phil Harvey

The World is Getting Better” by Sam Harris

The Free Market: Lifting All Boats” by Don Mathews

Dear Ultra-Rich Man” by Max Borders

Free the Poor” by Julian Adorney

The Quackery of Equality” by Lawrence W. Reed

If you wish to republish this article, please write editor@fee.org.

ABOUT MAX BORDERS

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

(Editor’s Note: The author is director of content at the Foundation for Economic Education and editor of its journal, The Freeman.)

Please Protect Us from Santa Claus

A modest proposal by David J. Hebert and Austin Middleton:

Dear Mr. President:

We applaud your valiant efforts to protect the American economy from the pernicious effects of cheap imports, but we fear you have overlooked one of the worst culprits.

Readily available goods for the consumer at reasonably low prices have been shown time and again to be toxic to domestic producers, who are the backbone of any advanced society. We urge you to expand your scope and protect us from someone your predecessors have neglected to stop: Santa Claus.

Every year on December 24, we struggle to fall asleep, anxious over the arrival of the villain known as Father Christmas. Santa’s crimes are not breaking and entering or stealing foodstuffs. No, Santa is guilty of the much more serious crime of destroying American jobs. Products imported from abroad and consumed domestically make Americans worse off. Every “gift” from Santa represents a reduction in measured American welfare; this is one of the fundamental assertions of national income accounting when calculating gross domestic product. In fact, the North Pole is worse than other countries, for the North Pole does not receive any goods produced for export from the United States. Thus, the US trade deficit with the North Pole is entirely one-sided.

American jobs lost due to Santa

Mr. President, using the methodology your own Council of Economic Advisors employed in evaluating the effect of the American Reinvestment and Recovery Act, where the volume of dollars spent by government equated jobs created or saved, we can estimate the employment impact the North Pole deficit has.

A recent Gallup poll reports that 77 percent of Americans identify as some sort of Christian and are therefore eligible to receive presents from Santa for good behavior. Crime-rate data published in the National Crime Victimization Survey, which gives a sense of the prevalence of naughty behavior, indicates that in 2013, there were 2,905 property crimes reported for every 100,000 people. Unreported crimes, however, are not reflected in these data, and Santa, of course, knows if you’ve been bad or good. As a means of attempting to capture this unreported bad behavior, assume that 90 percent of crimes go unreported, or that actual bad behavior is 10 times as common as the data suggest. This means that there are approximately 68,895,000 people who have been “good” for the year and are thus eligible for Christmas gifts.

Economist Joel Waldfogel’s groundbreaking analysis estimates that the average person receives $462 worth of Christmas gifts each year (in 1992 dollars), meaning that Santa takes away from us a potential $53 billion (2013 dollars) worth of economic activity. This is enough economic activity to employ another 1,193,000 full-time workers at the median household salary of $44,389. With the economy recently experiencing one of the worst downturns since the Great Depression, these jobs have never been more crucial to a nation’s recovery. But Santa’s economic terrorism does not stop there.

Santa as an anti-competitive monster

Recognizing the serious problems with monopolies, the US government passed a trilogy of bills (the Sherman Antitrust Act in 1890 and the Federal Trade Commission Act and the Clayton Antitrust Act in 1914) as a sort of last resort to counter the oppressive behavior of corporations, which tended to grow to an unreasonable size. History is rife with examples, from John D. Rockefeller and Standard Oil to Bill Gates and Microsoft, where the government successfully stepped in and corrected obvious market failures and improved the lives of all citizens.

“How does this apply to jolly ol’ Saint Nick?” you ask. His company has successfully integrated both vertically (Santa’s elves do everything in house, from production to distribution) and horizontally (while Santa is best known for making toys, he has expanded his empire into tablets, personal computers, and even automobiles, as recent car commercials attest). What’s more, he is also likely to be the single biggest violator of intellectual property rights in all of human history. Santa has an unfair advantage compared to other businesses, which must purchase their materials and shipping services from other companies.

This unfair business advantage has forced companies in the United States to kick off the holiday shopping season the day after Thanksgiving with a ritual known as “Black Friday.” In an attempt to capture what little of the market they can before Santa and his band of thieves dump toys, electronics, and other consumer goods on the world economy, some stores advertise sales as great as 50 percent off suggested retail price. This business practice is clearly unsustainable.

Illegal labor practices

Santa has managed to grow his empire through perhaps the most nefarious of means: child and slave labor. According to the critically acclaimed 1994 documentary The Santa Clause, starring Tim Allen, Santa has been using child elf labor since the beginning of his operation. Will Farrell’s 2003 documentary, Elf, confirms that once a worker becomes a part of Santa’s conglomerate, he or she is bound there for life, as we see when Santa personally comes to New York City to collect the rogue elf, Buddy.

Further, the working conditions of Claus’s cadre of elf labor are unknown. We do, however, know from NASA and the National Geospatial Intelligence Agency’s geothermal imaging of the North Pole that no significant thermal activity exists. This means that elves lack basic necessities like lighting and heat; it also means that their work must be done by hand. Forced to endure six months of night, the elves’ working conditions fail every reasonable standard set by the Fair Labor Standards Act of 1938. The United States has historically led the charge of correcting these practices elsewhere, which has had the demonstrable effect of improving people’s lives worldwide. Yet, Mr. President, you and Congress refuse to act in this situation, leaving elves perpetually impoverished.

Bypassing border control

Santa’s ability to penetrate the woefully unmonitored Canadian border highlights the potential threat of other undocumented immigrants’ entry. The US Customs and Border Protection division of the Department of Homeland Security, sharing responsibility with the Federal Aviation Administration (FAA), has proven incapable of securing entry into the country and collecting the duties levied by law on all imported goods. Despite the tracking of Santa’s whereabouts each year by the North American Aerospace Defense Command (NORAD), nothing has been done to protect our borders from this scoundrel. We must agree, though, that attempting to capture Santa may be a moot point, as he has been estimated to travel in excess of 650 miles per second, which no current military technology can keep up with.

Recommendations

The fact of the matter, Mr. President, is that all foreign producers have a degree of Santa in them from a domestic perspective. Foreign producers sell us goods and services, and while they do not do so at zero price like Santa, they still charge a lower price that our domestic counterparts are either unwilling or unable to match. Unlike Santa Claus, however, these foreign producers send us their “gifts of good cheer” 24 hours a day, 365 days a year. What’s more, they do not restrict their gift giving to any particular religious group, but instead offer their gifts to all the boys and girls regardless of religious affiliation.

We therefore urge you to be logically consistent: either recognize every foreign producer that sends exports to the United States as if they were like Santa Claus, celebrating their efforts at enriching our lives, or recognize that Santa is simply another foreign producer, and condemn his activity as destroying American jobs.

ABOUT DAVID J. HEBERT

David Hebert is an Assistant Professor of Economics at Ferris State University. His interests include public finance and property rights.

ABOUT AUSTIN MIDDLETON

A lifelong resident of Northern Virginia, Austin Middleton is a PhD student of the history of economic thought specializing in Adam Smith’s political philosophy at George Mason University.

The Minimum Wage Poison Pill

As we approach the 2014 General Election, with president Barack Obama set to occupy the White House for two more years, the stakes are higher than ever. As usual, Democrats across the country focus on phony issues, such as a Republican “War on Women,” the widening income gap between the rich and the non-rich, and bogus claims of being champions of the middle class.

In terms of domestic policy, they express support for the “middle class,” while doing everything in their power to turn America into a two-class society: the very rich… whose wealth they only wish to plunder… and the very poor, who, in return for an endless array of government handouts, will be expected to do nothing more than to pull the Democrat lever on Election Day.

In foreign affairs, they express outrage over the gruesome crimes of radical Islam… such as the recent beheading of an Oklahoma City woman by a radical Muslim co-worker… yet they oppose any and all effort at what they see as “racial profiling.” They find moral equivalency between the anti-Christian genocide of radical Islam throughout the Middle East, and the bombing of a Birmingham, Alabama abortion clinic in years past.

They express support for high quality public education, but the teachers unions… who own a controlling interest in the Democrat Party… dictate that Democrats oppose any and all voucher proposals, causing the greatest damage to the hopes of minority parents who want to see their children receive a quality education. They ignore the fact that throwing more money at public schools does nothing to increase the quality of a public school education. Instead, at the behest of the teachers unions, they demand that class sizes be reduced, that new school buildings be constructed, and that teacher salaries be increased… all the while regaling their low-information voter base with the cynical lie that Republicans want to “cut benefits to kids.”

They express a desire for the budget discipline of the 1990s… a direct result of Ronald Reagan’s “trickle down” economic policies and the election of a Republican Congress… and they support the notion of cutting the deficit in half, while supporting every new spending scheme hatched by liberal social planners. (In their 2000 platform, they announced that Democrats would entirely eliminate the public debt by the year 2012. Clearly, they had not heard of Barack Obama.)

While expressing a desire to curb the influence of lobbyists, they attempt to convince low-information voters that Republican administrations are dominated by lobbyists for business interests. Yet, no previous administration has been as heavily staffed and influenced by special interests as is the Obama administration. And while they express strong support for an electoral system that is “accessible, auditable, and accurate,” they insist that every attempt to curb vote fraud is nothing more than a Republican scheme to oppress the black vote.

On the healthcare front, they express a desire to provide healthcare insurance for 30-40 million uninsured, to improve the access to and quality of healthcare for all Americans, to substantially reduce the cost of healthcare for everyone, and to do it all without increasing the number of doctors, nurses, and hospitals. Like president Barack Obama, they see no contradictions in any of this. These are obviously people who would promise, with a straight face, that they could stuff 10 lb. of (excrement) into a 5 lb. Bag. All we need to do to make these magical things happen is to elect more Democrats to public office.

Democrats want to use the tax code to discourage the outflow of jobs overseas. Yet they have no problem with the fact that the United States has the highest corporate tax rate of any developed nation. They express a desire to cut taxes for every working family, including those who pay no federal or state income tax, but they exclude tax relief for the “millionaires” who are expected to provide good-paying jobs for the poor and the middle class.

And finally, while fast food workers go on strike demanding a $15.00 per hour minimum wage, a 107 percent increase, Democrats prescribe a poison pill for the U.S. economy with a proposed increase in the federal minimum wage standard from $7.25 cents per hour to $10.10 per hour a 39.3 percent increase. In doing so, they scoff at studies which show that, for each 10 percent increase in the minimum wage, 1-2 percent of jobs in the nation simply go away. For unskilled entry-lever workers, each 10 percent increase in the minimum wage results in a decrease of 4-5 percent in the number of entry-level jobs available… the jobs most often held by teens, the poor, and the unskilled.

According to a recent report by the Bureau of Labor Statistics, a majority of those who worked at minimum wage jobs in 2013 were 24 years old, or younger, while only 0.8 percent, less than one in a hundred, of those 24 years old, or older, work for a minimum wage.

Minimum wage increases are major job-killers. According to a 2014 report by the non-partisan Congressional Budget Office, an increase in the minimum wage from the current $7.25 per hour to $10.10 per hour would reduce the total number of jobs available by approximately 500,000. For the most part, these are the jobs currently held by all those fast food workers who fill the streets, demanding a $15 per hour minimum wage. And if those who clamor for a $15 per hour minimum wage are anxious to learn what happens to a job market with a minimum wage of that magnitude, they won’t have to wait long. In early June 2014, the Seattle city council voted to increase the minimum wage in that city to $15 per hour, the highest in the nation.

A report by the National Restaurant Association (NRA) tells us that, of every dollar of revenue coming into restaurant cash registers, approximately 33 percent goes to salaries and wages. The remainder of that dollar of revenue goes to cover the cost of food and beverages, other costs of doing business, and a small net profit for the owner. According to NRA statistics, the profit margin of restaurants varies, depending on the size of the average check per patron. Those with average checks under $15 per person… e.g., McDonalds, Burger King, Taco Bell, etc… produce average profit margins of 3 percent, while those with checks of $15 to $24.99… e.g., The Olive Garden, Red Lobster, The Cheesecake Factory, etc… produce profit margins of roughly 3.5 percent, the highest in the industry.

According to a recent report by Gingrich Productions, a good measure of the impact of minimum wage laws can be found in the European experience. Among those countries with no minimum wage… Austria, Germany, Sweden, and Switzerland… the median unemployment rate is just 5.2 percent, while the median jobless rate stands at 11.1 percent in countries with minimum wage laws… more than twice that of those without minimum wage laws.

But there is a much larger issue than the question of whether we should have a statutory minimum wage of $10.10 or $15 per hour… an issue that Barack Obama and congressional Democrats are not anxious to talk about. I refer to the question that more and more minimum wage workers are asking themselves, which is, “Why should I work 40 hours a week at $10.10 per hour, when I can earn more by staying at home and living off the public dole?”

A 2013 Cato Institute study tells us that, in 33 states and the District of Columbia, welfare benefits pay more than the current $7.25 per hour, while in 13 states, welfare benefits pay more than $15 per hour. In Hawaii, for example, the pre-tax “salary” of stay-at-home welfare recipients is $60,590 per year, or $29.13 per hour when compared to a 40-hour work week, while in Washington, DC, the hourly rate for just staying at home is $24.43 per hour. At the lower end of the spectrum among states where sloth is more lucrative than honest toil, the hourly rate for stay-at-home welfare recipients in South Carolina is $10.53 per hour… 43 cents more than the $10.10 minimum wage proposed by Democrtats.

So what do we do to fix the problem?

Instead of catering cynically to the poorest of the poor as a political constituency, as Democrats do, we should be asking exactly how an individual in this, the land of opportunity and economic freedom, can still be working at a minimum wage job when he/she is 24 years old, or older. That circumstance can only be explained by pointing out that a great many people simply make very bad choices in their lives.

But Democrats are clearly more interested in purchasing a “nanny state” constituency than they are in doing what is necessary to really help people lift themselves out of poverty. As one writer, Charles M. Blow, has said, “Much of what happens in Washington occurs at the intersection of political advantage and earnest intentions.”

What is clear is that we cannot perpetuate a system in which it is more lucrative to take a welfare check than it is to earn an honest living. In order to throw off the bonds of that insanity our options are only two. First, one might ask, why not raise the minimum wage to $25 or $30 per hour so that those who work can earn more than those who don’t, or won’t? The answer is, a $25 or $30 minimum wage would literally wreck whatever is left of our fragile economy and price us completely out of world markets.

The one remaining option is to do what we did in the mid-90s when a Republican-controlled Congress forced a Democrat president, Bill Clinton, to sign what was called “welfare-to-work” legislation, requiring those on public assistance to also find honest employment. The country experienced real economic growth, balanced budgets, and a pay-down in the national debt.

The choice is ours. What was done in the 1990s can be done again. But in order to do that we must first have a president who understands at least a “smidgen” about the intricacies of the U.S. economy. That means that our first priority must be to rid ourselves of Barack Obama, sending him back to his Kenyan roots where he can actually learn a thing or two about micro-economics.

RELATED ARTICLES:

Wages and the Free Market, Part 1 — Dispelling labor market myths with theory and data

Wages and the Free Market, Part 2 — Innovation Is the Lifeblood of a Healthy Economy

Raise the Minimum Wage? A Socratic Dialogue

Happy Capital Day? Why not? by Lawrence W. Reed

Any good economist will tell you that as complementary factors of production, labor and capital are not only indispensable but hugely dependent upon each other as well.

Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan.

Capital can refer to either the tools of production or the funds that finance them. There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture funding behind him. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

Harmony of Interest

This is not class warfare. I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business.

And yet, we have a “Labor Day” in America but not a “Capital Day.”

Perhaps subconsciously, Americans do understand to some extent that those who invest and deploy capital are important. After all, most people would surely have an easier time naming the “top ten capitalists” in our history than the “top ten workers.” We take pride in the kids in our neighborhoods when they put up a sidewalk lemonade stand. President Obama continues to be roundly excoriated for his demeaning remark, “You didn’t build that; somebody else made that happen.”

Bad Eggs

That’s not to say there aren’t bad eggs in the capitalist basket. Some use political connections to get special advantages from government. Others cut corners, cheat some customers or pollute a stream. But those are the exception, not the rule, in a society that values character. Workers are not all saints either—who among us doesn’t know of one who stole from his employer, called in sick when he wasn’t, or abused the disability or unemployment compensation rules? Those exceptions shouldn’t diminish the importance of work or the nobility of most workers.

Like most Americans, I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. Nothing at all wrong about that!

But this year on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. Indeed, what could possibly be wrong about having a “Capital Day” in odd numbered years and a “Labor Day” in the even-numbered ones?

Labor Day and Capital Day. I know of no good reason why we should have just one and not the other.

EDITORS NOTE: This article first ran on September 3, 2012.

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.

Witnessing a Failed Presidency

When we elect someone—anyone—to the office of President, it is only natural that we attribute great political skills, intellect, and judgment to that man. We want to believe we have selected someone with the ability to do what must be done in a dangerous and very complex world.

This may explain why Presidents who have presided in times of war are more highly regarded than those that have not. Washington brought the nation into being by patiently pursuing a war with Great Britain, Lincoln saw the Civil War to a successful conclusion, preserving the Union

The last century offered two world wars and several lesser ones, Korea and Vietnam. Voters put Franklin D. Roosevelt in office in 1933 and then kept him there until his death in 1945 just before the conclusion of World War Two. They had no wish to disrupt his conduct of the war with anyone else. It fell to Harry Truman to wrap up World War Two and to pursue the Korean War to repulse communist North Korea’s invasion.

The Vietnam War had its genesis in the JFK years, but it was Lyndon Johnson who committed to it with a massive influx of infantry and massive bombing, neither of which was able to deter the North Vietnamese from uniting the nation. Having lied the nation into the war LBJ concluded at the end of his first term which he had won in a landslide that he should not run again given the vast level of unhappiness with the conflict.

The failure to respond in a strong way to the Iranians who took U.S. diplomats hostage left Jimmy Carter with a single failed term in office. Neither domestically, nor in the area of foreign affairs did he demonstrate strength or much understanding.

After 9/11 George W. Bush used U.S. military strength to send a message to the world in general and al Qaeda in particular. By the end of his second term, a completely unknown young Democrat emerged as the Democratic Party candidate for President by campaigning on a promise to get out of Iraq and offering “hope and change.”

AA - Going from bad to worseBarack Hussein Obama captured the imagination of the voters. He was black and many Americans wanted to demonstrate that an African-American could be elected President. He was relatively young, regarded as eloquent, and seemed to project a cool, self-composed approach throughout his campaign.

The only problem was that he lacked a resume beyond having been a “community organizer.” He had graduated from Harvard Law School, but all of his academic and other public records had been put under seal so they could not be examined. Twice he ran against relatively lackluster, older men who did not possess much charisma, if any.

In his first term, his “stimulus” to lift the economy out of recession was a trillion-dollar failure. By his second term, however, the singular first term “achievement” was the passage of the Affordable Patient Care Act—Obamacare. When finally ready to enroll people it instantly demonstrated technical and policy problems. Obama began to unilaterally make changes to the law even though he lacked the legal power to do so.

The war in Iraq whose conclusion he had ridden to victory in 2008 and 2012 came unraveled and the Syrian civil war in which he had resisted any involvement metastasized into a barbaric Islamic State that seized parts of Iraq and northern Syria.

Halfway through his second term, it was increasingly evident that Obama did not want to fulfill the role of the Presidency to provide leadership in times of foreign and domestic crisis.

On August 28 Gallup reported “Americans are more than twice as likely to say they “strongly disapprove” (39%) of President Barack Obama’s job performance as they are to say they “strongly approve” (17%). The percentage of Americans who strongly disapprove of Obama has increased over time, while the percentage who strongly approve has dropped by almost half.”

His passion for golf became noticeable in ways that went beyond just a bit of vacation time. The time he spent fund raising seemed to be more of a priority than dealing with Congress. Not only did he fail to develop strong political working relations with members of his own party, his churlish talk about the Republican Party began to grate on everyone.

Though no President cares much for the demands of the press, they play an essential role in a democracy. His administration went to extremes to close off access to its members and by striking out at the press in ways that turned it from one that had gone out of its way to support him in the first term to one that actively, if not openly, disliked him in the second.

One characteristic about Obama had become glaringly obvious. He lies all the time. He lies in obvious and casual ways. In politics where one’s word must be one’s bond, this is a lethal personality trait. He dismissed the many scandals of his administration as “phony.”

Given the vast implications of what is occurring in the Middle East, in Ukraine, and elsewhere around the world his response was to interrupt his golf game to give a short speech and then return to the greens. In a recent press conference he said he has “no strategy” to address the threat that ISIS represents.

What Americans have discovered is that they have twice either voted for (or against) someone with fewer skills and even less desire to do the job for which he campaigned. This lazyness combined with his radical liberal politics have finally become obvious even to his former supporters.

His statement that he had no strategy to deal with the threat of the Islamic State and that it was perhaps too soon to expect one to have been formulated has led to the conclusion that he was far less intellectually equipped to be President than many had thought.

Now he must be endured and survived.

© Alan Caruba, 2014

EDITORS NOTE: The featured image was taken by the AP on May 12, 2014 of President Obama speaking during a press availability in the Oval Office of the White House in Washington.

America, Our Debt-Ridden Nation

Let’s look at just some of the latest news about the U.S. economy:

  1. According to the Treasury Department’s Bureau of Fiscal Services, the federal government paid $2,007,358,200,000—over $2 trillion—in benefits and entitlements in the 2013 fiscal year, October 1, 2012 to September 30, 2013. Most of the benefits, 69.7% came from non-means tested government programs that provide them to recipients who qualify regardless of income. That would include Medicare, Social Security, unemployment compensation, veteran’s compensation, and railroad retirement, to name a few.
  2. The total federal government spending in 2013 totaled $3,454,253,000,000—over $3.4 trillion—encompassing defense, highway and transportation costs, public education, immigration services, and government worker salaries, to name a few.
  3. An astonishing amount of that spending constitutes wasted taxpayer money. In July the Government Accountability Office (CAO) testified before Congress that federal agencies made more than $100 billion in improper payments in 2013. That is an amount comparable to the combined total budgets of the Coast Guard, U.S. Immigration and Customs Enforcement agency, Border Patrol, Secret Service, and the Federal Emergency Agency, et cetera. Improper payments result when people collect money from government programs for which they are ineligible.
  4. By August, the total U.S. federal debt had increased to more than $7 trillion during the five and a half years since Barack Obama has been President. That is more than the debt increased under all U.S. Presidents from George Washington through Bill Clinton—combined! More debt than was accumulated in the first 227 years from 1776 through 2003.
  5. During the time President Obama has been in office the number of unemployed reached 37.2%, a 36-year high for those 16 or older who do not have a job and are not actively seeking one. From December 2013 through May of this year, the labor participation rate had been at 62.8%. The last time the labor participation rate was that low was February 1978 when Jimmy Carter was President.
  6. As the nation sank deeper into debt by the end of 2012 there were 109,631,000 Americans living in households that were receiving one or more federally funded “means-tested programs”, more generally referred to as welfare. Combined with those receiving non-means-tested benefits and it added up to 49.5% of the population.

Money BombIt is always tempting to blame everything on the President and, despite the usual rebound from a recession that has occurred in the past, it has not occurred during his first term, nor into his second at this point. In fact, the latest data reveals that the U.S. economy shrank at a 2.9% annual rate during the first quarter of 2014. Its long-run average rate of growth has been 3.3%, but the highest since Obama took office was 2.8%.

According to the World Bank, in 2013 the U.S. Gross Domestic Product, the value of its goods and services, was $16,800,000,000,000. The federal, state and governments took their share via taxation on income and/or property. The rest was saved or spent by those either holding a job or receiving government benefits; very nearly half of the population old enough to be employed if there were jobs for them.

The problem that affects all of us is the imbalance of the U.S. budget where more money is going out than coming in. The difference is deemed the “deficit.” In order to pay bills, Congress has to agree to raise the limit on how much the nation can borrow.

Nick Dranias, the constitutional policy director for the Goldwater Institute, has come up with a proposal, “The Compact for a Balanced Budget”, and it was been published by The Heartland Institute, a free market think tank, in July.

As Dranias points out, “The U.S. gross federal debt is approaching $18 trillion. That figure is more than twice what was owed ($8.6 trillion) in 2006, when Barack Obama was a junior U.S. Senator from Illinois and opposed lifting the federal debt limit.” It represents more than $150,000 per taxpayer.

“What if states could advance and ratify a powerful federal balanced budget amendment in only twelve months, asks Dranias. His proposal is “a new approach to state-originated amendments under Article V of the U.S. Constitution.

Two states, Georgia and Alaska, are expected to establish a Balanced Budget Commission, an interstate agency dedicated to organizing a convention—before 2014 ends—to propose an amendment to achieve a balanced budget. The amendment would put “an initially fixed limit on the amount of federal debt.” It would ensure Washington cannot spend more than tax revenue brought in at any point in time, with the sole exception of borrowing under the fixed debt limit. It would force Washington to reduce spending long before borrowing reaches its debt limit, preventing any default on obligations; something threatening many other nations as well.

Suffice to say, the proposed amendment involves some complex elements and, if the Compact does not receive sufficient support from many more states than just the two that have signed on, it won’t see the light of day.

What the rest of us understand, however, is that federal spending is out of control at the same time as the amount of money it takes in is more than what it “redistributes.” Add in a sluggish economy, not growing at its usual rate, and you have a recipe for a lot of trouble ahead.

Republicans are usually credited with being more financially prudent. If true, we need to elect a Congress controlled by the GOP in November and a Republican President in 2016. If we don’t, all bets are off.

© Alan Caruba, 2014

CLICHES OF PROGRESSIVISM #19 – “Big Government Is a Check on Big Business”

A myth runs through most of America today, and it goes like this: Big business hates government and yearns for an unregulated market. But the reality is the opposite: Big government can be highly profitable for big business.

Many regulations restrict competition that would otherwise challenge existing firms. At the same time, government institutions—many created during the New Deal—funnel money to the largest corporations.

When government regulates X industry, it imposes high costs that hurt smaller firms and reduce competition. Imagine that the Department of Energy imposes a new rule that dishwashers must be more energy efficient. Coming up with designs, retrofitting factories to produce these energy-efficient models, and navigating the forms and licenses around this rule might cost a dishwasher-producing firm thousands of dollars. An industry giant, with more revenue and sizeable profit margins, can absorb this cost. A small dishwasher factory that’s only a year or two old, with little revenue and less profit, cannot. The latter would have to shut down. That means less competition for the industry giant, enabling it to grow even bigger and seize even more market share.

Barriers to entry, such as expensive licenses, also cripple start-ups and reduce competition. The Progressive New Republic speaks favorably of how Dwolla, an Iowa-based start-up that processes payments and competes with credit card agencies, had to pay $200,000 for a license to operate. Rather than hire employees or build a better product to compete with its entrenched competition, Dwolla was forced to spend its first $200,000 on a permission slip. Dwolla could afford it; but how many less-well-funded competitors were forced from the market? How many were deterred from even starting a payment-processing business by this six-figure barrier to entry?

For big businesses, which often sacrifice agility for size, smaller competitors are a major threat. By limiting smaller competition, government helps the industry giants at the expense of everyone else. Barriers to entry can kill the next innovative firm before it can become a threat to its giant competition. When this happens, we don’t even know it: The killed-before-it-can-live company is a classic example of the “unseen” costs of regulation.

While regulations minimize competition, government entities subsidize big business. The Export-Import Bank, established in 1934 as part of the New Deal, exists to subsidize exports by U.S.-based firms. The primary beneficiaries? Large corporations. From 2009 to 2014, for instance, the Ex-Im Bank financed over one-quarter of Boeing’s planes. Farm bills, a key element of the New Deal that still exists today, subsidize huge farms at the expense of smaller ones. The program uses a variety of methods, from crop insurance to direct payments, to subsidize farmers. The program is ostensibly designed to protect small farmers. But 75 percent of total subsidies—$126 billion from 2004 to 2013—go to the biggest 10 percent of farming companies. The program taxes consumers to funnel money to large farms.

Nor are these programs unique. National Journalism Center graduate Tim Carney argues, “The history of big business is one of cooperation with big government.” In the time of Teddy Roosevelt, big meat packers lobbied for federal meat inspection, knowing that the costs around compliance would crush their smaller competitors. New Deal legislation was only passed with help from the national Chamber of Commerce and the American Bankers Association. The Marshall Plan, which subsidized the sale of billions of dollars of goods to Europe, was implemented by a committee of businessmen. President Johnson created the Transportation Department in 1966, overcoming resistance from shipping interests by agreeing to exempt them from the new rules. Costly regulations for thee, but not for me.

If Progressives want to see what free enterprise looks like, they need only look at the Internet. For the past 20 years, it’s been largely unregulated. The result? Start-ups erupt and die every year. New competitors like Facebook bring down existing giants like MySpace and are in turn challenged by a wealth of social media competitors. Yahoo was the Internet search king until two college kids founded Google. Google has been recently accused of monopoly status, but competitors like DuckDuckGo spring up every day.

Let’s imagine if the Internet—a playground of creative destruction—had been as subject to big government as brick and mortar businesses have been. Yahoo would have been subsidized. Facebook would have had to pay six figures to get a licensing fee, crushing college-kid Zuckerberg before he got started and preserving MySpace’s market dominance. Businesses that learned to play the lobbying game would have been allowed to write regulations to crush their competitors.

For those who doubt, the proof of business’s collusion with big government is in the pudding. In 2014, a surprising number of libertarian-leaning men and women are in Congress. How has big business responded? K Street has spent millions of dollars working to replace laissez-faire advocates with those who are establishment-friendly. Sadly, cronyist businesses are fighting to keep free market advocates out of power.

A final note: I have criticized Progressives here, but the institution of big government, which enables businesses to hire lobbyists to write regulations or give themselves a subsidy, is the primary problem. The bigger government grows, the more powerful a tool it becomes for businesses prone to use it for private advantage. That’s not capitalism; it’s what one economist properly labeled “crapitalism.”

Julian Adorney
Economic Historian, Entrepreneur, Fiction Writer

Summary

  • Big Government and Big Business often play well together, at the expense of start-ups, little guys, and consumers.
  • Artificial, politically instigated barriers to entry make markets less competitive and dynamic, and make established firms more monopolistic.
  • A free market (true capitalism, not its adulterated “crapitalism” version) maximizes competition and, therefore, service to the consumer.

For further information, see:

“Of Meat and Myth” by Lawrence W. Reed
“Atlas Shrugged and the Corporate State” by Sheldon Richman
“Ending Corporate Welfare As We Know It” by Lawrence W. Reed
“The Rise of Big Business and the Growth of Government” by Robert Higgs
“Theodore Roosevelt: Big Government Man” by Jim Powell

ABOUT JULIAN ADORNEY

Julian Adorney is an economic historian, entrepreneur, and fiction writer. He writes for the Ludwig von Mises Institute and other websites. You can find his collected work at adorney.liberty.me.

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

EPA Still Wants to Garnish Your Wages Without a Court Order

A few weeks ago, EPA quietly tried to reinterpret its authority and wanted to garnish wages from those who owe it a debt. After a storm of criticism from Members of Congress and the public, EPA pulled back.

However, the agency is still trying to grant itself this power, only this time it’s going through the standard notice-and-comment process that most federal regulations go through.

What’s is the problem EPA wants to solve by having the ability to dig to go after your wallet? Will this stop polluters? Is EPA inundated with deadbeats?

Apparently not, according to Catrina Rorke and Sam Batkins at the American Action Forum who looked at EPA’s data.

They point out that, over the past six years, EPA has imposed more than $2.3 billion in “non-major” fines against companies and individuals that committed “infractions that do not involve large facilities emitting tons of toxic pollutants annually.”

However, Rorke and Batkins found, “the majority of fines for individuals involve paperwork infractions – not environmental contamination.” Individuals or businesses were fined for failing to file notification or reports with EPA.

And as for a delinquency problem, here’s their key finding:

[T]he average length of time that individuals were delinquent paying EPA was zero quarters. In other words, people generally pay their fines on time.

So why does EPA want to be able to garnish an individual’s wages? Based on its data, it’s not to ensure a cleaner environment nor solve delinquency problems. Roark and Batkins conclude (correctly in my view):

EPA’s proposal to grant itself wage garnishment authority more closely resembles a power grab than an appropriate administrative step to rectify an observed issue in their fine repayment process.

Stay tuned.

Conflicting Court Rulings May Have Big Implications for Employer Mandate

Within a few hours of each other, two federal appeals courts issued conflicting rulings on Obamacare. The final outcome could have major implications for employers.

The legal question of involves whether the Patient Protection and Affordable Care Act allows people to receive subsidies for health plans purchased on federally-run exchanges—covering 34 states and the District of Columbia–or only through state-run exchanges. In a 2-1 decision, the DC Circuit ruled in Halbig v. Burwell that under the law, only those buying through state-run exchanges are eligible.

Judge Griffith wrote in the court’s split opinion:

The fact is that the legislative record provides little indication one way or the other of congressional intent, but the statutory text does. Section 36B plainly makes subsidies available only on Exchanges established by states. And in the absence of any contrary indications, that text is conclusive evidence of Congress’s intent.

Judge Randolph concurred:

[A]n Exchange established by the federal government cannot possibly be “an Exchange established by the State.” To hold otherwise would be to engage in distortion, not interpretation. Only further legislation could accomplish the expansion the government seeks.

A few hours later, in King v. Burwell the 4th Circuit unanimously upheld those same subsidies:

For reasons explained below, we find that the applicable statutory language is ambiguous and subject to multiple interpretations. Applying deference to the IRS’s determination, however, we uphold the rule as a permissible exercise of the agency’s discretion.

Why is it important to know who is eligible for a health plan subsidy? As the DC court’s Judge Edwards explains in his dissent, it triggers the employer mandate, [emphasis mine]:

Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees “enroll[s] . . . in a qualified health plan with respect to which an applicable tax credit . . . is allowed or paid with respect to the employee.” (linking another penalty on employers to employees’ receipt of tax credits). Thus, even more than with the individual mandate, the employer mandate’s penalties hinge on the availability of credits. If credits were unavailable in states with federal Exchanges, employers there would face no penalties for failing to offer coverage. The IRS Rule has the opposite effect: by allowing credits in such states, it exposes employers there to penalties and thereby gives the employer mandate broader reach.

No subsidies, no employer mandate penalties.

Michael Cannon, the Cato Institute health policy expert, estimates that if the Halbig ruling stands, more than 250,000 firms would not be subject to the employer mandate.

There is no immediate change to the law, since the courts are a long way from settling the subsidies question. There will be appeals, other courts may weigh in with additional rulings, and since two circuit courts issued conflicting rulings, the Supreme Court may hear the case. Also, Congress could pass a bill to clarify the law. Not likely in the current political environment but possible.

What we do know is that the employer mandate imposes complex reporting costs and isn’t necessary. At the same time it gives employers the perverse incentive of either not hiring workers or hiring part-time workers instead of full-time ones. Obamacare is a law packed with problems that needs to be fixed in order to have a health care system that has high quality, expanded access, and lower costs.

Follow Sean Hackbarth on Twitter at @seanhackbarth and the U.S. Chamber at @uschamber.

EDITORS NOTE: The featured image is of President Obama signing the Patient Protection and Affordable Care Act (A.K.A. “Obamacare”) in 2010. Photographer: Andrew Harrer/Bloomberg.

Military/Veterans Poll: 66% disapprove of Obama and 63% disapprove of Obamacare

The Tarrance Group released its veterans survey on key issues facing the nation. Below are key findings from the survey using a representative sample of N=834 Veterans and members of the military.  Interviews were conducted 3/8-16/14 using a mixed methodology of live telephone interviews and online interviews. The margin of error is +/- 3.5%.

  • Sixty-eight percent of veterans believe the country is off on the wrong track (vs. 21% say right direction), and by a margin of more than two to one, veterans disapprove of the way President Obama is handling his job (66% disapprove  vs. 29% approve).
  • Veterans also hold negative views toward President Obama’s healthcare law.  Over six in 10 (63%) of veterans disapprove of Obamacare (vs. 28% approve), and nearly half (46%) believe Obamacare will be worse than VA healthcare.
  • All surveyed—veterans and members of the military— believe the top issues facing Congress are dysfunction in Washington (23%), followed by government spending and debt (19%) and economy/jobs (17%). 
  • In addition to the concern over spending and the debt, nearly three-quarters of veterans and members of the military (73%) agree with former member of the Joint Chiefs of Staff Admiral Mike Mullen’s statement that our national debt is “the greatest threat to our National Security.”
  • There is widespread awareness of the backlog of claims at the Department of Veterans Affairs (66% of veterans/members of the military have seen, read, or heard about the backlog), and nearly one- quarter (22%) report having experienced the backlog.  Of those who have experienced the backlog, 58% report currently having a backlogged claim. Those who have experienced the backlog report it lasting at least 7 months (60%), with 36% saying it lasted more than one year.

Below is a breakdown of sample military status and branch of service in the survey:

CVA poll image

RELATED STORY: When veterans become victims: Reform the VA now

For the Love of Money? by Gary M. Galles

Money at the margin, not everything for money.

It’s not unusual to hear market systems criticized for relying too much on money, as if this comes at the expense of the altruistic relationships that would otherwise prevail. Ever heard the phrase “only in it for the money”? It’s as if self-interest has a stink that can corrupt transactions that generate benefits for others, turning them into offenses. So this line of thinking suggests reliance on market systems based in self-ownership would be tantamount to creating a world where people only do things for money, and lose the ability to relate to one another on any other terms.

People Don’t Do Everything for Money

One need not go far to see the falsity of the claim that everything is done for money in market systems. My situation is but one example: I have a Ph.D. in economics from a top graduate program. It is true that, as a result, I have an above-average income. But I did not do it all for the money. One of my major fields was finance, but if all I cared about was money—as my wife reminds me when budgets are particularly tight—I would have gone into finance rather than academia and made far more. But I like university students. I think what I teach is important, and I value the ability to pass on whatever wisdom I have to offer. I like the freedom and time to pursue avenues of research I find interesting. I enjoy the ability to tell and write the truth as I see it (particularly since I see things differently from most) and I prefer a “steady job” to one with far more variability.

Every one of those things I value has cost me money. Yet I chose to be a professor (and would do it again). While it’s true that the need to support my family means that I must acquire sufficient resources, many things beyond just money go into choosing what I do for a living. And the same is true for everyone.

Ask any acquaintances of yours who they know that only does things for money. What would they say? They would certainly deny it about themselves. While they might apply this characterization to people they don’t know, beyond Dickens’s Ebenezer Scrooge and his comic book namesake, Scrooge McDuck, they would be unable to provide a single convincing example. If market critics performed that same experiment, they would recognize that they are condemning a mirage, not market arrangements.

Confusing Ends and Means

Beyond the fact that all of us forego some money we could earn for other things we value, the fact that every one of us gives up money we have earned for a vast multitude of goods, services, and causes also reveals that individuals don’t just do things for the money. Each of us willingly gives up money up to further many different purposes we care about. Money is not the ultimate end sought, but a means to a vast variety of possible ends. Mistakenly treating money as the end for which “people do everything” is fundamentally flawed—both for critics of the market and for the participants in it.

To do things for money is nothing more than to advance what we care about. In markets, we do for others as an indirect way of doing for ourselves. This logic even applies to Scrooge. His nephew Fred’s assertion that he doesn’t do any good with his wealth is false; he lends to willing borrowers at terms they find worth meeting, expanding the capital stock and the options of others.

That an end of our efforts is to benefit ourselves, in and of itself, merits neither calumny nor congratulations. Money’s role is that of an amoral servant that can help us advance whatever ends we ultimately pursue, while private property rights restrict that pursuit to purely voluntary arrangements. Moral criticism cannot attach to the universal desire to be able to better pursue our ends or to the requirement that we refrain from violating others’ rights, only to the ends we pursue.

To do things for money in order to achieve world domination could justify moral condemnation. But the problem is that your intended end will harm others, not the fact that you did some things for money, benefitting those you dealt with in that way, to do so. Using money to build a leprosarium, as Mother Teresa did with her Nobel Prize award, does not justify moral condemnation. Similarly, using money to support your family, to live up to agreements you made with others, and to try not to burden others is being responsible, not reprehensible. Further, there is nothing about voluntary arrangements that worsens the ends individuals choose. But by definition, they place limits on ends that require harming others to achieve them.

It is true that money represents purchasing power that can be directed to ends others object to. Money is nothing more than a particularly powerful tool, and all tools can be used to cause harm. Just as we shouldn’t have to forego the benefits of hammers because somebody could cause harm with one, there’s no reason to think society would be better off without money or the market arrangements it makes possible just because some people can use those things for harmful ends. And if the ends aren’t actually causing harm, then the objections over them come down to nothing more than disagreements about inherently subjective valuations. Enabling a small class of people to decide which of these can be pursued and which can’t makes everyone worse off.

Those who criticize people for doing everything for money also do a great deal for money themselves. How many campaigns have religious groups and nonprofit organizations run to get more money? How much of government action is focused on getting more money? Why do the individuals involved not apply the same criticism to themselves? Because they say they will “do good” with it. But every individual doing things for money also intends to do good, as he or she sees it, with that money. And if we accept that people are owners of themselves, there is no obvious reason why another’s claims about what is “good” should trump any “good” that you hold dear, or provide for another in service through exchange.

Criticizing a Straw Man

Given that the charge that “people do everything for money” in market systems is both factually wrong and logically lame, why do some keep repeating it? It creates a straw man easier to argue against than reality, by misrepresenting alternatives at both the individual and societal level.

At the individual level, this assertion arises when people disagree about how to spend “public” resources (when we respect private property, this dispute disappears, because the owner has the right to do as he or she chooses with it, but cannot force others to go along with or allow it; “public” resources are obtained by force). The people who wish to spend other people’s confiscated resources in ways the original owners disagree with claim a laundry list of caring benefits their choice would provide, but foreclose similar consideration of the harms that would be caused to those they claim care only about money. That, in turn, is used to imply that the purportedly selfish person’s claims are unworthy of serious attention. (Something similar happens when politicians count “multiplier effects” where government money is spent, but ignore the symmetrical negative “multiplier effects” radiating from where the resources are taken.)

This general line draws support from a misquotation of the Bible. While more than one recent translation of 1 Tim 6:10 renders it “the love of money is a root of all sorts of evils,” the far less accurate King James Version rendered it, “the love of money is the root of all evil.” When one simply omits or forgets the first three words, it becomes something very different—“money is the root of all evil.” Portray those who disagree with your “caring” ends as simply loving money more than other people, and they lose every argument by default. Naturally, it’s a seductive strategy.

At the societal level, criticizing market systems as tainted by the love of money implies that an alternate system would escape that taint and therefore be morally preferable. By focusing attention only on an imaginary failing of market systems that would be avoided, it allows the implication of superiority to be made without having to demonstrate it. This is a version of the Nirvana fallacy.

By blaming monetary relationships for people’s failings, “reformers” imply that taking away markets’ monetary nexus will somehow make people better. But no system makes people angels; all systems must confront human flaws and failings. That means a far different question must be addressed: How well will a given system do with real, imperfect, mostly self-interested people? And it shouldn’t be necessary, but most political rhetoric makes a second question nearly as important: Does the given system assume that people are not imperfect and self-interested when they have power?

Given that the utopian alternatives offered always involve some sort of socialism or other form of tyranny, an affirmative case for them cannot be made. Only by holding the imaginary “sins” of market systems to impossible standards, while holding alternatives to no real standards except the imagination of self-proclaimed reformers, can that fact be dodged. But there’s nothing in history or theory that demonstrates that overwriting markets with expanded coercion makes people more likely to do things for others. As Anatole France noted, “Those who have given themselves the most concern about the happiness of peoples have made their neighbors very miserable.” And as economist Paul Heyne wrote, “Market systems do not produce heaven on earth. But attempts by governments to repress market systems have produced . . . something very close to hell on earth.”

Money at the Margin

Money is not everything. But changes in the amounts of money to be earned or foregone as a result of decisions change our incentives at the many margins of choice we face, and so change our behavior. Such changes—money at the margin—are the primary means of adjusting our behavior in the direction of social coordination in a market system.

Changes in monetary incentives are how we adapt to changing circumstances, because whatever their ultimate ends, everyone cares about commanding more resources for those purposes they care about. It is how we rebalance arrangements when people’s plans get out of synch, which is inevitable in our complex, dynamic world. In such cases, changing money prices allow each individual to provide added incentives to all who might offer him assistance in achieving his ends, even if he doesn’t know them, doesn’t know how they would do so, and doesn’t think about their wellbeing (in fact, it applies even if he dislikes those he deals with, as long as the benefits of the arrangements exceed his perceived personal cost of doing so).

For instance, consider a retail gas station faced with lengthy lines of cars. That reflects a failure of social cooperation between the buyers and the seller. Those in line are revealing by their actions that they are willing to bear extra costs beyond the current price to get gas, but their costs of waiting do not provide benefits to the gas station owner. So the owner will convert those costs of waiting in line, which are going to waste, into higher prices (unless prevented by government price ceilings or antigouging directives) that benefit him. That use of money at the margin benefits both buyers and sellers and results in increased amounts of gasoline supplied to buyers.

Further, people can change their behavior in response to price changes in far more ways than “outsiders,” unfamiliar with all the local circumstances, realize. This makes prices, in turn, far more powerful than anyone recognizes.

Consider water prices. If water prices rose, your first thought might well be that you had no choice but to pay them. You might very well not know how many different responses people have already had to spikes (ranging from putting different plants in front yards to building sophisticated desalinization plants). Similarly, when airline fuel prices rose sharply, few recognized in advance the number of changes that airlines could make in response: using more fuel-efficient planes, changing route structures, reducing carry-on allowances, lightening seats, removing paint, and more.

If people recognized how powerful altered market prices are in inducing appropriate changes in behavior, demonstrated by a vast range of examples, they would recognize that the cost of abandoning money at the margin, which enables these responses by offering appropriate incentives to everyone who could be of assistance in addressing the problem faced, would enormously exceed any benefit.

Massive Improvements in Social Cooperation

If we could just presume that individuals know everyone and all the things they care about and the entirety of their circumstances, we could imagine a society more focused on doing things directly for others. But in any extensive society, there is no way people could acquire that much information about the large number of people involved. Instead, this would extend the impossible information problem that Hayek’s “The Use of Knowledge in Society” laid out in regard to central planners. You can care all you want, but that won’t give you the information you need. Beyond that insuperable problem, we would also have to assume that people cared far more about strangers than human history has evidenced.

Those information and other-interestedness requirements would necessarily dictate a very small society. But the costs of those limitations, if people recognized them, would be greater than virtually anyone would be willing to bear.

Without a broad society, the gains from cross-pollination of ideas and different ways of doing things would be hamstrung. The gains from comparative advantage (areas and groups focusing on what they do best, and trading with others doing the same thing) would similarly be sharply curtailed. A very small society would eliminate the incentive for large-scale specialization (requiring more extensive markets) and division of labor that makes our standard of living possible. Virtually every product that involves a large number of separate arrangements—such as producing cars or the gasoline to power them—would disappear, because the arrangements would be overwhelmed by the costs of making them without money as the balance-tipper. As Paul Heyne once put it,

The impersonal transactions that constitute the market system . . . have, over the course of a few centuries, enormously expanded our ability to provide [for] one another . . . while at the same time vastly extending our freedom both by offering us a multitude of options and by freeing us from arbitrary restrictions on our choice of life goals and on the means to further those goals. To reject impersonal transactions as unethical amounts to rejecting the foundation of modern life.

Conclusion

A pastiche of false premises leads many to reject out of hand what Hayek recognized as the “marvel” of market systems, which, if they had arisen from deliberate human design, “would have been acclaimed as one of the greatest triumphs of the human mind.” This is great for those who seek power over others—they have an endless supply of bogeymen to promise to fight.

But it’s a disaster for social coordination. The record of disasters inflicted on society demonstrates what follows when voluntary arrangements are replaced by someone else’s purportedly superior vision.

But it’s often forgotten. We must continue to make the case.

ABOUT GARY M. GALLES

Gary M. Galles is a professor of economics at Pepperdine University.

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

Climate Consensus: Do Little for Now by DANIEL SUTTER

The 2007 report of the Intergovernmental Panel on Climate Change (IPCC) projects that continued emission of greenhouse gasses (GHG) will raise the earth’s temperature by 1.8°C (3.2°F) and sea level by one foot by 2100. Projected climate changes, if they come to pass, will have a number of effects on society, though not all of those effects will be negative.

Although debate over the IPCC’s projections continues, less attention has been focused on the ultimately more important result: Cost-benefit analysis (CBA) implies we should do very little to prevent climate change. Instead, we should create wealth. Expanding the productive capacity of the economy will compensate future generations better than reductions in GHG will. A richer world in 2100, after all, will be able to afford to do things like relocating people affected by rising sea levels and constructing new port facilities and seawalls.

report by the liberal Global Development and Environment Institute at Tufts University observes, “Economists frequently . . . calculate the optimal policy response [to climate change]. This calculation often leads to the conclusion that relatively little should be done for now.”

Cost-Benefit Analysis

Businesses operate under the discipline of profit and loss based on market prices. Profit signals that an action generates benefits for the economy. Government does not face the discipline of profit and loss, but CBA, performed honestly, offers guidance about whether government actions benefit society.

Measures to reduce GHG emissions today typically fail a cost-benefit test due to the discounting of benefits. Discounting refers to applying a real interest rate to future values. Two arguments support discounting in CBA. The first is impatience, or what economists call time preference: $100 is worth more today than it is one year from now, even without inflation. The second is the return on savings and investment, or the opportunity cost of capital. Money spent now to reduce GHG could be saved and invested instead. The interest rate equates impatience and the return on investment on the margin, as investors must be compensated for delaying consumption.

Discounting

The mathematics of discounting makes values more than about 50 years in the future worth little today. The federal government makes cost-benefit calculations using 3 percent and 7 percent annual real (or adjusted for inflation) interest rates, approximating the historical risk-free interest rate and the annual real return on stocks. The present value of $1 million 100 years from now is $52,000 at a 3 percent discount rate, and $1,150 at a 7 percent discount rate. To see how this affects climate change economics, suppose that spending $100 billion annually—starting right now—we could prevent $1 trillion in annual damage, beginning in 100 years. The ratio of $10 in benefits to every $1 in costs appears favorable, but this fails a benefit-cost test at either a 7 percent or 3 percent real discount rate.

Some observers respond to this math by arguing against discounting in climate change economics. Time preference is a questionable argument in intergenerational settings because future beneficiaries will not have to wait 100 years to realize climate benefits. But the opportunity cost argument remains. The Stern Commission in the U.K. applied an implausibly low discount rate to its calculations. Others imagine current benefits from GHG reductions rendering discounting irrelevant. For example, the Environmental Protection Agency (EPA) included private benefits in a CBA of higher fuel economy standards to reduce GHG emissions, arguing that making people purchase higher-mileage cars than they prefer makes car buyers better off. Creating benefits today effectively makes reducing GHG a free lunch.

Wealthier is Healthier

Resources put into reducing GHG can’t be invested elsewhere, so the opportunity cost of GHG reduction amounts to the returns that could have been expected, based on historical rates. Maintaining opportunities to invest and create wealth for future generations requires the institutions of a market economy, or a high level of economic freedom, as the Fraser Institute’s Economic Freedom of the World: 2012 Annual Report demonstrates. Bequeathing a higher standard of living to future generations also requires preserving economic freedom. Discounting mathematics ultimately tells us that economic freedom addresses climate change more effectively than energy central planning through carbon taxes or cap-and-trade.

Compensating the “victims” of climate change with extra wealth does have a potential limit. Extra resources provide inadequate compensation if climate change dramatically alters the world. Money will not typically fully compensate for a catastrophic injury; a quadriplegic is unlikely to enjoy the same level of utility or satisfaction after his injury, even if his medical bills and care needs are paid. Wealth accumulation would not adequately compensate future generations if climate change produced a world like those depicted in Waterworld and The Day After Tomorrow. Future generations would not be adequately compensated if climate change destroyed the economy’s ability to produce goods and services. Fortunately Waterworld is the stuff of Hollywood fiction; the largest of the upper range of sea level rise in any 2007 IPCC climate scenario is about 2 feet. That will have serious consequences, but it will hardly flood the entire world. It can be offset by wealth accumulation.

A Hundred-Year Plan?

Property rights and prices lead basically self-interested people to worry about the future. For example, property rights and markets for existing homes provide owners with incentives to keep their houses livable long after they plan to own them. And yet the mathematics of discounting implies that events too far in the future should not affect decisions much today. Growth, progress, and creative destruction limit the horizon for detailed planning in a market economy. Imagine a business in 1900 trying to plan its operations in 2000. The plan could not have included automobiles, planes, television and radio, satellites, computers, and many other conveniences of modern life.

Now let’s project ahead and consider planning for climate change. A number of fundamental innovations could substantially reduce if not eliminate the threat from climate change, such as effective, low-cost carbon sequestration or effective weather modification to smooth out precipitation patterns. And the development of a radical new clean energy source like nuclear fusion could render remaining stocks of fossil fuels uneconomic at any price.

Conclusion

A dynamic market economy will feature too much creative destruction to allow detailed planning for the distant future. Nothing is sure in a market economy 10 years from now, much less 100 years, and discounting in cost-benefit analysis simply reflects this reality. The economic future becomes more predictable when government controls economic activity, but then stagnation results. Discounting in climate change economics tells us to create wealth to protect future generations. Economic freedom and the institutions of the market economy, not central planning of energy use, are the prudent policy approaches to a changing climate.

ABOUT DANIEL SUTTER

Daniel Sutter is the Charles Koch Professor of Economics at the Johnson Center for Political Economy at Troy University.

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