Libertarian Leanings

James Buchanan 1919-2013

James Buchanan, 1986 winner of the Nobel Prize for economics, died yesterday at the age of 93.

Among his conclusions was that public officials often act in their own self-interest instead of the public's interest. Thus, he argued, bureaucracies tend to grow and politicians tend to favor new spending and tax cuts, leaving the bills for the future.

To prevent such choices, Mr. Buchanan advocated a constitutional amendment requiring a balanced federal budget, to force politicians to curtail spending.

Within the field of economics, Mr. Buchanan's ideas were seen as a challenge to John Maynard Keynes, who called for government intervention in the economy, including running up budget deficits, to provide stimulus in lean times.

Judging by today's standards of government intervention Keynes has certainly withstood Buchanan's challenge.  We are watching Buchanan's theories played out right before our eyes.

So, for example, he could explain why bureaucracies had an incentive to expand their turf in order to increase their financial resources and power. Or why politicians keep tax rates high so they can dole out special credits and exemptions for those who would reward those same politicians. Or why pork-barrel politics is the abiding concern of legislators.

Buchanan acknowledged that public-choice analysis had not "dislodged the prevailing socialist mindset in the academies." But he could rightfully claim to be a major influence in helping the public understand why the modern state produces such poor outcomes. His work should be required reading for everyone in a government job.

I'm not sure how helpful that reading assignment would be for the rest of us.  Let me re-word that.  I'm not sure how helpful it would be for the rest of us for everyone in government to complete the reading assignment.  Buchanan's work would most likely become a "How to..." manual for aspiring potentates.

The theme of his life's work is best summarized in the title of his 1997 article "Politics Without Romance." With longtime colleague Gordon Tullock, Jim launched a research program—public-choice economics—that challenged the widespread notion that politicians in democratic societies are more nobly motivated and trustworthy than are business people and other private-sector actors. In a wide river of books and papers, Jim warned against the foolishness of romanticizing government.

It's surprising and more than a little disheartening how many people subscribe to the notion that government actors are so much more nobly motivated than the rest of us.

BS from the Oracle of Omaha

I've been wondering why nobody thinks to call Warren Buffet on his disingenuous challenge on taxes.

SUPPOSE that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

Buffet must think we are such stupid people.  No, Warren.  We don't forego buying into investment based on our individual income tax rates.  But we would think twice about sellling an asset depending upon on the capital gains taxes.  The prospect of a future hike in capital gains might encourage us to sell assets sooner, while the prospect of a future drop might make us hold onto an asset a little longer.

Let's say you have a piece of commercial real estate you'd like to unload, not that this is a particularly good time to unload real estate, but work with me here.  There are some weirdos who actually try to figure what they're going to get out of a sale after all the taxes and commissions are paid.  Not only that, they might actually include capital gains taxes in that calculation. 

Now strange as this may sound, some of these folks might actually ask a higher price if the bottom line comes to less than they'd like to get.  Yeah, the greedy bastards.  And that higher price might make the investment a little less attractive.  In fact it might make it so unattractive that a buyer and a seller never reach a deal.  And all because of the capital gains taxes.

So, while capital gains taxes may never discourage investors from making investments, they can discourage or even prevent an investment opportunity.

Warren Buffet knows this.  He also knows Obama's proposal for taxing the rich won't get us to a balanced budget, and he knows that it won't even put an appreciable dent in Obama's projected annual deficits.  Guess whoses taxes have to go up to tackle that problem.

Telling Us What We Already Know

The Wall Street Journal expects the SEC lawsuit against against six former Fannie Mae and Freddie Mac executives will show that those two companies were central to the housing crisis, contrary to popular progressive fiction.

Far from being peripheral to the housing crisis, the SEC lawsuit shows that Fan and Fred were at the very heart of it. Private lenders made many mistakes, but they could never have done as much harm if Fan and Fred weren't providing tens of billions in taxpayer-subsidized liquidity to lend on easy terms to borrowers who couldn't pay it back.

We knew that, but it won't hurt to hear it again.

How Things Work

Bill Frezza explains the difference between Crony Capitalists and Market Capitalists.

By setting nominal corporate tax rates high while marketing tax breaks to specific companies and industries, Congress assures itself a steady stream of campaign contributions from companies looking to lighten their tax load. While there is no shame in reducing one's tax burden from 35% to a more globally competitive 20%, is it any wonder that people get sore when some extremely profitable corporations manage to get their tax burden down to nearly 0%?

Market Capitalists do not go to Washington. They strive to please customers, not politicians.

The Students Demand

Earlier this month Harvard Economics 10 students demanded that Professor Gregory Mankiw refrain from teaching them economic theories with which they intend to disagree. 

Wednesday November 2, 2011

Dear Professor Mankiw—

Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.

As Harvard undergraduates, we enrolled in Economics 10 hoping to gain a broad and introductory foundation of economic theory that would assist us in our various intellectual pursuits and diverse disciplines, which range from Economics, to Government, to Environmental Sciences and Public Policy, and beyond. Instead, we found a course that espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.

The students complained that Adam Smith’s economic theories should not be presented as "more fundamental or basic than, for example, Keynesian theory," apparently not realizing that Keynes is covered later on in the course.  The students continue:

Harvard graduates play major roles in the financial institutions and in shaping public policy around the world. If Harvard fails to equip its students with a broad and critical understanding of economics, their actions are likely to harm the global financial system. The last five years of economic turmoil have been proof enough of this.

We are walking out today to join a Boston-wide march protesting the corporatization of higher education as part of the global Occupy movement. Since the biased nature of Economics 10 contributes to and symbolizes the increasing economic inequality in America, we are walking out of your class today both to protest your inadequate discussion of basic economic theory and to lend our support to a movement that is changing American discourse on economic injustice.

Scary thought, that students like these might someday have a major impact on public policy, free from the encumbrances of unwanted and distasteful economic theory. 

Reaganomics Vs. Obamanomics

From Stephen Moore of the Wall Street Journal:

The Reagan philosophy was to incentivize production—i.e., the "supply side" of the economy—by lowering restraints on business expansion and investment. This was done by slashing marginal income tax rates, eliminating regulatory high hurdles, and reining in inflation with a tighter monetary policy.

The Keynesians in the early 1980s assured us that the Reagan expansion would not and could not happen. Rapid growth with new jobs and falling rates of inflation (to 4% in 1983 from 13% in 1980) is an impossibility in Keynesian textbooks.

...

The economy would soon take flight for more than 80 consecutive months. Then the Reagan critics declared what they once thought couldn't work was actually a textbook Keynesian expansion fueled by budget deficits of $200 billion a year, or about 4%-5% of GDP.

...

Fast-forward to today. Mr. Obama is running deficits of $1.3 trillion, or 8%-9% of GDP. If the Reagan deficits powered the '80s expansion, the Obama deficits—twice as large—should have the U.S. sprinting at Olympic speed.

It Was a Only Sales Pitch

Economics21.org is taking another look at the Obama administration's 2009 unemployment predictions.

Back in January 2009, Christina Romer and Jared Bernstein produced a report estimating future unemployment rates with and without a stimulus plan. Their estimates, which were widely circulated, projected that unemployment would approach 9% without a stimulus, but would never exceed 8% with the plan...

In May 2011, using the latest figures available from the BLS, the unemployment rate reached 9.1%. In contrast, the Romer and Bernstein projections estimated that the unemployment rate would be around 8.1% for this month without a recovery plan, or 6.8% with a stimulus plan (which was ultimately passed).

I would just like to point out that the aforementioned predictions were essentially a sales pitch.  The Obama administration was after more money to spend.  They got it, and they spent it.  The predictions served their purpose in that regard, and if the econoomic picture impoved, so much the better.

But in typical Keynesian fashion they based their projections on economic multipliers calculated with little or no regard to the microeconomic implications.  They gave not the slightest thought about how individuals might make decisions in this new economic and regulatory climate.  Instead, they just dusted off whatever old macroeconomic formulas they had laying around and ran the numbers.  This much money equals this much economic growth, which means unemployment will be thus.  According to e21,

Romer and Bernstein simply assumed that a dollar of spending would increase GDP by $1.55. If this assumption proved to be wrong, then all of the knock-on effects of the stimulus would simply not follow.

So into the candy store went the administration, a crisis being a thing not to be wasted.  They ramped up hiring in the public sector.  They rescued the United Auto Workers union by bailing out GM and Chrysler.  By doing these and other similar things, the administration sought to secure future income streams for the Democratic party.  Union dues, both public and private sector, wind up in large part in Democratic party coffers.  And maybe even more important than the money is the union activism that would be brought to bear on behalf of Democratic positions and candidates.  An army of paid protesters, sign carriers, and thugs to be deployed at a moment's notice.

The plan was supposed to usher in a new era of progressive politics, one that was going to last 30 or 40 years.  But, as is usualy the case with progressives, they overlooked people. 

When people looking for jobs find them, they get hired by other people.  This concept seems foreign to the progressive intellect.  Administration experts apparently didn't consider the impact that mountains of new regulations on health care, finance, and the environment would have on people who make hiring decisions — small business owners in particular.  And now it looks like our era of progressive politics would have been more accurately measured in months rather than years.

The case for stimulus made by Romer and Bernstein was primarily intended to get the money into administration hands, and it did.  It shouldn't be so much of a surprise that the their spending had almost exactly the opposite effect than what was intended, since their primary purpose was political rather than economic.  Get the money and secure progressive majorities.  The improved economy was perhaps an anticipated side effect. 

But the political strategy hasn't been working so far.  It may be that it just needs more time.  Maybe when 2012 rolls around we'll find that Obama's strategy has worked, but his administration has overlooked the people for this long.  It's hard to imagine that he'll begin to see them, now.

They're Not Optimists

They're just misinformed.

Yet some economists still see a silver lining for Japan’s economy in the wake of the disaster, claiming reconstruction efforts will create jobs and stimulate growth.

They’re not optimists; they’re just misinformed.

Larry Summers managed to put his foot in his mouth last week when asked about the effect of the earthquake. The former top economic adviser to President Barack Obama, former Harvard University president, former Treasury secretary and now ordinary professor at Harvard’s Kennedy School of Government, told CNBC the earthquake and its aftermath “may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.”

General Theory of Nonsense

Stuck in the Dark Ages

That's what Caroline Baum says about macroeconomics.

There are no control studies in economics, no way to hold everything else constant to determine the impact of one variable, no way to falsify conclusions that models spit out. Financial Times columnist John Kay, writing yesterday about risk modelers, referred to them as “alchemists and quacks.”

A bit harsh, perhaps, but he’d probably hold macroeconomic models in the same high regard.

Whenever oil prices spike, modelers instantly project how much the increase will subtract from GDP growth. No mention of why prices are rising. Is it the result of a supply shock, which results in higher prices and reduced quantity demanded, or an outward shift in the demand curve, which equates with higher price and quantity demanded? There is a difference.

Hear, hear!

Speed Bump On The Road To Utopia

Immediately after taking control of both houses of congress in 2007, euphoric Democrats rammed through legislation that took a step towards the long-cherished lefty goal of reducing income inequality.  They imposed the federal minimum wage on two U.S. territories, American Samoa and the commonwealth of the Northern Mariana Islands.  But then last month congress quietly backed away from it.

Just three years after a Democrat-led Congress imposed the federal minimum wage on two U.S. territories in the Pacific, lawmakers last month halted the program in its tracks, acknowledging the move had sapped thousands of jobs from American Samoa and the commonwealth of the Northern Mariana Islands.

The two-year delay in the case of American Samoa and one-year reprieve for the Northern Mariana Islands was imposed even as both parties have sparred over the effects of the minimum wage in the U.S. during the troubled economy.

"We said this increase would be harmful in 2007, and the Democrats did it anyway," said Rep. Patrick T. McHenry, North Carolina Republican. "It proves our point that the federal government setting wage rates is destructive to job creation, whether it's in American Samoa or western North Carolina."

Let's not jump to any conclusions here by assuming that Democrats aren't bright enough to understand basic economic principles of supply and demand, or that they are so obtuse as to be oblivious to history's many lessons on the impact of price controls.  Nancy Pelosi, herself,  stands as testament to their firm grasp of the concepts. 

Ms. Pelosi was careful to include an exemption from the new minimum wage legislation for American Samoa, a fact which implies she knew just what the law would do.

It so happens that StarKist, a company famous for annoying us with years of Charlie the Tuna ads, owns a cannery which is located in American Samoa.  Del Monte owns StarKist.  Del Monte also has its headquarters in San Francisco, which happens to be in Nancy Pelosi's congressional district.  There's an excellent chance that Pelosi got a quick Econ 101 refresher from Del Monte, which prompted her, in her boundless gratitude, to write in the special favor for American Samoa.

Fortunately for egalitarian-minded Democrats who didn't happen to have Del Monte headquarters in their congressional districts, the downtrodden sub-minimum wage workers of American Samoa got some help from an unlikely source.  Rep. Mark Steven Kirk, the Illinois Republican who happens to be running for Barack Obama's Senate seat, stepped in to insist that American Samoa to be included in the legislation along with the Northern Mariana Islands.  What a guy!  What a heart!

What a mess.  The law of unintended consequences, or maybe it was the law of obvious-consequences-that-weren't-supposed-to-apply-to-our-friends took effect.  The impact of the legislation manifested itself in late August when downtrodden sub-minimum wage workers became downtrodden unemployed workers.

Business
Saturday, Aug. 28, 2010
The Associated Press

PAGO PAGO, American Samoa -- Nearly half of the 800 workers StarKist Co. planned to lay off at its American Samoa tuna cannery this year will lose their jobs this weekend.

StarKist Samoa General Manager Brett Butler said the rest of the layoffs would occur in October.

The job cuts will shrink StarKist's work force in American Samoa to less than 1,200, down from a peak of more than 3,000 two years ago.

StarKist has had to contend with federally mandated minimum-wage increases.

The layoffs follow September's closure of Chicken of the Sea's tuna cannery in American Samoa, which cost the jobs of 2,100 workers.

As you might imagine, when news of this oopsy-doopsy got out, egalitarian-minded Dems were quick to point the finger of blame at Kirk, who was strangely unavailable for comment.  I have a delightful mental image of Representative Kirk resting comfortably as he recovers from injuries sustained while laughing hysterically at the Democrats' predicament, which he so artfully engineered.  

Amidst a chorus of Republican I-told-you-sos, Democrats reimposed the lower minimum wage.  Credit Dems for thinking outside the box.  A higher minimum wage is the typical progressive answer to the injustices of capitalism.  But this time they've righted their earlier right.  Or something.  It doesn't matter.  Contradictions are no problem for the Democrats.

By now ardent lefties will have identified several dozen greater goods that they achieve through surrender on the American Samoa minimum wage issue.  Maintaining congressional majorities is always near the top of that list.  The fact that more cannery workers will be gainfully employed in American Samoa is probably not on it.

Which leads me to think, maybe Democrats really don't have a clue when it comes to the economy.  Not that they aren't smart enough.  For them, the economy is something they can use to boost their power.  They're not really interesting in using their power to boost the economy, and it's going to cost them big this time around.