Thursday, December 24, 2009

Seasonal Myths

Each year around Christmas time, the Dickens story of Scrooge makes the rounds. Poor Scrooge, making lots of money, paying market prices for labor, is visited by ghosts (quite scary ones to most kids), who make him see the light. He turns generous, giving funds away, cutting working hours, and so on. It is too bad that we don't celebrate the good that Scrooge did or does by creating jobs, offering work, providing opportunities for people to make better of themselves. The story is just building on the age old myth that making money and creating jobs is worse than giving the money away. Provide a man a fish and you feed him once. Teach him how to fish and you feed him forever. This is not to say that old Scrooge can not get a lot of enjoyment out of providing Tiny Tim a turkey. Gift giving can be beneficial to the giver.

Speaking of gift giving, the other myth that is being created by some economists is that the gift giving tradition of Christmas is wrong. People maximize utility by having cash, and spending on what they want, not getting a specific item from someone else -- who decides what will make you most happy. But, if so, why is this voluntary action so popular? Why has it existed for so long? I am not a utilitarian, but if I were, I would say that the utility maximization problem is leaving out an important variable -- the joy of giving and of receiving. The utility of receiving a gift from a friend or loved one exceeds the cash that was used to purchase the gift. And, the expenditure of the cash for some friend or loved one generates more utility than giving the cash to the friend or loved one.

If something exists and works voluntarily, then it must be efficient. If gift giving and receiving was not of higher value to the participants than not giving and receiving gifts, the gift giving would not exist.

Wednesday, December 23, 2009

scale creep and scope creep

This excellent post over on The Austrian Economics evokes Arnold Kling's excellent phrase to describe the ratchet effect in government evolution in the US.

Sunday, December 20, 2009

Incentives, individualism and the state

Over the past week Boyes reinforces the Higgs ratchet effect as the US government expands in scale and scope. His December 12 post - How Big is Government describes the emergence and evolution of the state in society - both in its welfare manifestation and in its war guise. I could not help but think of Melville's The Confidence Man in reflecting on Boyes' description of the expansion of the state and his next two posts that provide an excellent example of the process of state power.

The imposition of state power results in uncertainty which inevitably leads to loss of liberty as state power expands to counter this uncertainty. Thus, all policy action is a confidence game, and as Melville reminds us:

The sly "bedraggled" boy [at the end of the Confidence Man] provides a "Counterfeit Detector," whose interpretation of a money-text only suggests confusion and uncertainty about all interpretive vision: "I don't see right," declares the old man in the last chapter, "--or else-- dear, dear me--I don't know what else to think" (389).

This is precisely the challenge confronting society - uncertainty and the reaction to not knowing. To the extent that agents in society are self confident and have a sense of expectation that the Hayekean evolution will emerge allowing for some exercise of liberty within the context of known property rights then a check on state expansion will remain. See previous post HT: Peter Boettke

To the extent that agents in society are fear governed and lack confidence in their own ability to react to an uncertain world, the welfare state expands.

Earlier I referenced the Heritage Economic Freedom rankings and the decline of this measure over time in our country. In discussing this issue with my brother, he correctly observed - I would much rather live in a developed country with declining economic freedom than a developed country with increasing economic freedom.

This is both true and illustrative of the acceptance of the state in our lives - whether in the guise of the welfare state or the war state the power is a MASQUERADE.

Saturday, December 19, 2009

Health Care

It seems the democrats have enough votes, 60, to pass their health bill without the problem of a filibuster. Ben Nelson from Nebraska was purchased. While about 20 million people who are currently uninsured will be forced into the Medicaid program, only Nebraska will be exempt from the costs of this unfunded mandate. In fact, Nebraska will be exempt forever. All other states will have to pay more. Of course, all this occurs while states are in serious budgetary problems.

Regime Uncertainty Revisited

Robert Higgs has been arguing that the reason the recession of 1929 turned into the Great Depression was regime uncertainty. While FDR was attacking business, he was increasing taxes, and moving the economy toward a socialist system. Any of that sound familiar? A week ago Barak Obama referred to private bankers as "fat cats".

This along with suggested taxes on transactions, on estates, on income, all add to uncertainty. Why invest if you do not know whether you will be allowed to retain your profits?

Friday, December 18, 2009

The Reclamation of Responsibility

Peter Boettke writes:

Richard Cornuelle is one of the most insightful men I have ever had the good fortune to interact with in my career. The author of Reclaiming the American Dream (1965), De-managing America (1975), and Healing America.

. . . led him to declare that politics is never the solution, that if the people were to be empowered they would have to do it themselves. It is the voluntary sector, not the political sector, that will bring hope and change.

Three examples that Cornuelle uses to demonstrate the power of the people to address social problems far better than rule by experts from government agencies are:

(1) Home schooling;

(2) Alternative mail service;

(3) Private neighborhood associations.

Thursday, December 17, 2009

Heritage Economic Freedom Rankings

Boyes describes the growth of government in US society. This growth is further documented by the Heritage Economic Freedom rankings.

The US continues a slide in economic freedom:

Weaknesses remain in fiscal freedom and government size. Total government spending equals more than a third of GDP. Corporate and personal taxes are high and increasingly uncompetitive. In 2008, the sub-prime mortgage crisis had far-reaching effects, and the government's unprecedented interventionist measures could severely undermine economic freedom in the future.

Saturday, December 12, 2009

How Big is Our Government?

A few years ago I began examining the percent of the economy that was owned or controlled or influenced by the government. It turns out this is a very difficult statistic to derive. Much of government activity is off budget and effects are like Bastiat’s broken window – the true effects are unseen. Nevertheless, there were some rough estimates that could be made. Everything seems to point to somewhere between 30 and 40 percent being run or controlled by the government with about 100 percent influenced by the government. Here are some data collected from academic studies, think tanks, and government agencies.

All told, industries and sectors representing more than a third of the U.S. economy are being reshaped by government (

General measures such as government spending as a percent of GDP, tax revenues as a percent of GDP and Government Debt as a percent of GDP lie between 30 and 40%. Right now all US governments together are spending about 45% of GDP. As recently as 1948 – shortly after WWII – total government spending in the US amounted to about 23% of GDP. Since 1970, federal spending has risen 7 times faster than median income.

Government employment as a percent of total employment is about 21%. Yet, a recent study by the Heritage Foundation estimates that around a quarter of a million new federal government workers will be needed just to spend the massive new budget.

While state and local governments employ over 20 million people already, the federal government has become the largest single employer in the country with almost three million employees (not including contractors and military personnel). For comparison, after the New Deal from 1933 to 1939 there were about 700,000.

The Bureau of Labor Statistics reports that in 2008 there were over 150,000 jobs added in government at all levels, while the private sector lost close to four million. Almost 100,000 people were hired by the federal government in fiscal year 2007, according to the Office of Personnel Management.

Several other fields dominated by government are forecasted to expand, even in the midst of an economic downturn. Expect companies like that deal in carbon credits and related fields to expand even more. While not directly employed by the government, many of these “environmental” workers depend on government regulations for business. Moreover, the $787 billion American Recovery and Reinvestment Act provides billions of dollars for “green” projects, as well as for other sectors of the economy such as education.

The total staffing of regulatory agencies went up nearly as much, from 172,000 employees to over 244,000— a 41 percent increase.

The federal government alone enforces thousands of pages of regulations that impose a burden of some $1.1 trillion—an amount that is comparable to total federal income tax receipts. Since 2001, the federal government has imposed almost $30 billion in new regulatory costs on Americans. About $11 billion was imposed in fiscal year (FY) 2007 alone.
Over 50 agencies ranging from the Animal and Plant Health Inspection Service to the Bureau of Customs and Border Protection have a hand in federal regulatory policy.

Appropriations for federal regulatory agencies have increased from $27 billion in FY 2001 to $44.9 billion in FY 2007—a 44 percent increase in inflation-adjusted dollars.[12] The total staffing of regulatory agencies went up nearly as much, from 172,000 employees to over 244,000— a 41 percent increase.

Estimates by several researchers on the total cost to the private sector of federal regulation of the private sector found it to be about $850 billion in 2000 . The federal government’s Small Business Administration found that complying with federal regulations costs companies $1.1 trillion a year. That’s about 10 percent of the whole U.S. economy.

For large firms, the regulatory burden comes to about $5,300 per employee. But for small businesses with fewer than 20 workers, the cost is closer to $7,600 per employee – just about equal to the cost of providing a family with health coverage.

The federal government owns or runs several businesses. These GSEs and other organizations include:
· Ginnie Mae
· National Mortgage Association and the Freddie Mac.
· The Federal Home Loan Banks
· Agricultural Credit Bank
· Farm Credit Banks
· Federal Agricultural Mortgage Corporation,
· National Flood Insurance Program (NFIP)
· Postal Services.
· Air Traffic Control.
In addition, the government owns nearly all Highways, Airports and

The federal government owns almost 700 million acres of land - roughly a million square miles. That's four times the area of California and New York combined, and one-third of the entire country. This federal footprint is heavily concentrated in the West. Uncle Sam owns 85 percent of Nevada, 70 percent of Alaska and nearly half of California.

Tuesday, December 8, 2009

From Greg Mankiw

Greg Mankiw writes today of his freshman seminar at Harvard:

I took a poll of the students' favorite readings. The winners were

1. Capitalism and Freedom by Milton Friedman
2. Nudge by Richard Thaler and Cass Sunstein
3. The Worldly Philosophers by Robert Heilbroner.

This reflects on the discussion that Boyes and I have presented dealing with the emergence of an ideology of state welfare on this blog.

While the first title engenders a sense of hope, the second two suggest that the high achieving students at the elite schools are open to the siren song of socialism.

Click over to Mankiw for more disturbing news from Cambridge.

Monday, December 7, 2009

Four Problems with Spontaneous Order

This is the December 2009 discussion over on the CATO blog and is provocative. Well worth a read.

It's Over!

Let's see if I have this right. The unemployment rate showed a small downward blip -- from 10.2% to 10% last month and officials declare that it is proof the stimulus is working. We are told that the Fed will now be able to unwind from its zero interest rate, super expansionary policies and redo its balance sheet. If this is what is going on, it is simply not logical. First, the environment is not conducive to investment and real growth. There is too much regime uncertainty -- businesses don't know what the EPA will do if it labels CO2 a danger, they don't know what taxes are coming, they don't know how or if the government will intervene in their activities, and they aren't assured enough of future growth to invest or hire new people. Moreover, the unfunded liabilities of medicare and social security sit on the horizon as a huge black hole.

Au contrair, we are told. The Fed has been infusing money into the system and with all this money around, spending has to go up. And if consumer spending goes up, GDP naturally will because consumption is about 70% of GDP.

The problem with this viewpoint is that banks decided not to lend and now sit on a massive amount of cash. So far in November, banks' excess cash reserves stand at $1,046 billion. This would seem to place the economy on a knife edge. If the economy did grow and the uncertainty was reduced, this amount of liquidity would mean rapid inflation. If the economy is to move upward without inflation, the liquidity will have to have been drawn out of the system, and this means higher interest rates and less lending in the future.

I remain pessimistic about the progress of the economy over the next couple of years.

Friday, December 4, 2009

Edmund Phelps on Capitalism

Don Boudreaux references an important view of capitalism that may shed some insight into the current "ambivalence" toward liberty and freedom. The trade off between liberty and security is a stark one, demanding some level of personal confidence as well as personal responsibility. To the extend that self confidence and acceptance of responsibility are virtues, then this trade off suggests something profound about morality and ethics.

Boudreaux writes:

True, capitalism creates disruption and uncertainty. But we should not lose sight of the other side of that coin. Capitalism is unique in stimulating entrepreneurs to dream up new commercial ideas and develop them for the market, and generating excitement for consumers in discovering the new.

The events in life are uncertain and it is this risk that informs the liberty v security trade off. Like Boyes, I wonder to what extent age influences this trade off? On this blog we have examined the role of the institutions of society, individuality and the evolution of the two.

I see some level of distrust of government in my daily interactions, but no real articulation of the virtues of liberty nor a commitment to freedom. The question that comes to mind - is this a new development or has there been a complacent view of liberty over time?

Tuesday, December 1, 2009

Youth and Libertarians

Pratt's recent post regarding the potential demise of libertarians as we older folks pass on suggests there may be a relationship between the importance of liberty to one and one's age. "Freedom is nothing left to lose" the song goes. Is that true? Those supporting status quo surely don't want the freedom of libertariansim. It should be those on the lowest rung of the totem pole that most support freedom. So have government programs destroyed this -- are the youth losing any interest in freedom as they believe in larger and larger entitlements? Some research on this topic might be of interest; all I have is anectdotal evidence that there are few young or old who understand what liberty is.