Bastiat’s Bastions

Before there was any sort of scientific explanation of how the world worked, people developed and retold myths.  It was a way for them to understand the workings of the world.  The would see one event followed another, and like Pavlov’s dog, seeing a replay of the first event would lead them to expect the predicted follow-up event.  Often, when we don’t understand how things work, we associate a false cause to events, because one time we saw one event follow another and we falsely developed a cause-and-effect association between the two.

George Bush has been in office for almost 8 years and the stock market is in the toilet and we are slipping into a recession, therefore Bush and his policies caused the stock market crash and the coming recession.  Huh?  By what mechanism? If you don’t understand things, you can easily make such a false association.

This is a fallacy in logic, a major mistake, that goes by the Latin name “Post Hoc, Ergo Propter Hoc.”  My Mom’s Latin is much better than mine, but after four years of Catholic School Latin, her’s should be.  I think she would tell you that the phrase translates into “After this, therefore because of (due to) this.” Just because two things are observed to follow in time does not mean that one caused the other.

In the late 1990s I wrote a column for the local Bayou Business News, a New York Times bi-weekly.  I wrote a piece then about giving Presidents too much blame and too much credit for the state of the national economy.  I think looking at that piece from time to time can be worthwhile.

While Bush’s Presidency has had its problems, such as nation building in a country that could only be held together as one country by the horrible dictator, Saddam Hussein.  It was arrogance couple with a naivete about democracy that led them to believe that create a nation from people who distrust one another.  Still, it is quite possible, quite likely, that the seeds of the current economic disaster were sewn in earlier years, such as the Clinton years, when housing prices began soaring and lenders began making loans to people who may not have been credit worthy.

If you learn the wrong lessons from history, you are bound to make big mistakes.  Before assessing blame and credit, it makes sense to understand the cause and effect relationships, what causes what, and to understand those things well.  If not, you may as well start staring at tea leaves and the entrails of slaughtered animals.

-MC

Imagine this: A representative of the Federal government knocks on your door, and the following conversation takes place.

Federal Agent: Hi, we hear that you are having trouble paying your bills.

You: No, I’m OK.

Federal Agent: So, we’re going to loan you $50,000.

You: But, I don’t need a loan.

Federal Agent: Oh, and, you will have to pay us 5% interest on the $50,000. But, if you don’t pay back the $50,000 in 5 years, your interest rate will go up to 9%.

You: I really don’t need the money, please leave.

Federal Agent: OK, so, we’re all done here. We’ll start drafting payments out of your account.

Scary? Impossible, you say? Unfortunately, this is exactly what the “bailout” program is going to do. Even though many banks do NOT want/need taxpayer dollars, they are going to be forced to take the cash.

It is all explained in this Washington Post article here.

According to President Bush: “These measures are not intended to take over the free market but to preserve it.” Sounds perfectly reasonable to me. Forcing business owners to pay interest on loans they don’t want. Free market 101, right?

NM

From the time we were young, we were told that the key to a good job is to get a good education. Is this right? I am sure we all know people who dropped out of school and were quite successful, and others who have Ph.D.s and cannot hold a job. Both of these types of exceptions to the general rule of better jobs with better education occur time and again. But these are exceptions. Getting a good job without finishing high school is betting against the odds. And that is a sucker bet.

The U.S. Current Population Report for 2002 found that on average, high school graduates made 50% higher incomes than did high school dropouts, and those with 4-year college degrees made almost twice what those who finished high school without additional education. The average doctoral earner made more than 3 times what the average high school only worker made. Also, high school dropouts make only about half of the average income for all those over 18.

More education is clearly related to higher incomes. Higher education gives people more options. If age or experience is taken into account, education becomes even more important.

In my home state of Louisiana, we have natural resource wealth in many forms and in great quantities. Oil, natural gas, farmland, water, timber, fish and wildlife are abundant in this state. A few years ago, I discovered that my own lot was above 3 of 4 natural gas formations below my subdivision. But in Louisiana, amid great natural resource wealth, our rates of poverty are among the highest in the country. Why is this? It is because Louisiana has among the lowest rates of high school completion in the country, with less that 75% of our above 25 population having completed high school, compared to high school completion rates in the upper 80s in states such as Iowa, Vermont, and Minnesota.

The wealth that states such as Louisiana and Mississippi lack is something economists call “human capital.” Human capital is the knowledge, education, skills, training, and experience that a person has that enables them to be more productive. Good health is also a form of human capital, as healthier people have more work days. What economists find time and time again is that more productive people earn more. And people who are able to produce things that people will pay a lot for get paid more. Along these same lines, education that is easy to come by, such as a degree purchased that requires little or no study is of very little value.

Adam Smith, the father of modern economics, noted over two hundred years ago that areas where education was highly subsidized, such as theology, had far greater supplies and far lower pay than areas where there were few scholarships.

In a study I did with Gohkan Karahan for Applied Research in Economic Development, we found that states with more high school completers and college completers had substantially higher levels of income, even when controlling for factors such as the percent of those under 18 (kids who don’t work much) and those over 65 (seniors who don’t work much) and for those in the latter years of their work lives.

Another factor to consider that makes it less likely that high school dropouts will make dropping out even more costly: high school dropouts are much more likely than high school completers to land in jail with more than 50% of African-American male dropouts and more than 10% of white male dropouts getting prison records before they turned 30.

Does more education guarantee someone a better job? No, but it sure makes better jobs easier to get and unemployment much less likely. Is all poverty due to a lack of education? Certainly not, poverty has many causes. But people who are not able to complete high school for some reason or other start off with two strikes against them and must face the next pitch with a blindfold on.

Want to fight poverty? Help a child stay in school.

-MC

If the popular TV show Mythbusters was about economics, I could easily envision the following scene at the end of the show:

Jamie: So, socialism, as a viable economic system, busted?
Adam: Oh, it’s busted.

Of course, if the show really was about economics, it wouldn’t be popular. Want proof? Barack Obama is on the verge of being elected President of the United States, and he unabashedly says something like: It’s not that I want to punish your success…..I think when you spread the wealth around it’s good for everybody. Check out the video here.

The reason this isn’t the end of his campaign? I guess it’s because the Republicans are only marginally better. I also have it on good authority (me) that people in high places in Washington DC policy organizations – conservative places – are completely on board with wealth re-distribution.

Hardly anyone cares (as far as I can tell) that a major party candidate has actually spoken the socialist credo: make money, it’s OK, we’ll just take it away from you and give it to others. No problem at all, the economy will be fine.

It is beyond difficult to be a pro free-market economist.

NM

I remember an old joke from when I was a child, a “Little Johnny” joke. It went something like this:

Little Johnny was sitting at his desk in class, crying his eyes out. The teacher asked Little Johnny what the problem was, why he seemed so sad. Little Johnny replied that his dead Daddy came down from Heaven to vote for Lyndon Johnson for Senate and did not bother to come see him (Little Johnny).

As I said, it was an old joke. What isn’t a joke is that dead people seem to be coming back to register to vote and some may come back to vote. Fraudulent registration, enabling fraudulent voting is occurring at an alarming rate.

If people believe that rampant insider trading is going on, that the “fix is in,” and that the market is not fair because people are stacking the deck, then that market is in danger of collapse, as soon no one is willing to participate in an unfair game. By the same token, if people believe that the “fix is in” in elections, that someone or some group is fixing the election, as was feared in Florida in the 2000 election, then democracy itself and the legitimacy to rule by those elected, comes under attack and is subject to destruction.

Currently, in Missouri, Wisconsin, New Mexico, Nevada, Michigan, Ohio and North Carolina, many of which are considered swing states, the community group, ACORN, is being investigated for voter registration fraud.

My distrust of ACORN is not new.  In 2006, I wrote a post here about ACORN, and mentioned the registration fraud case that was shaping up in Missouri.  This past April,  guilty pleas were entered for eight ACORN workers in St. Louis for submitting false registration cards in that 2006 election.  And now, ACORN is up to its same old tricks.  Registrations in this election are sure to break records, with registrations of dead people, of people who have already registered a dozen times, of cartoon characters and baseball players, and of people with non-existent addresses, social security numbers and drivers license numbers.  People are getting paid to register with money and with cigarettes (and who knows what other forms of enticement).

One wonders what drives a group like ACORN to obtain false registrations if they do not intend to have someone vote using those registrations, and swing outcomes in swing states.  It looks as if a tree is taking root from ACORN, a tree upon which our democracy can be hung until death.

-MC

Somehow, I missed this the other day….

John Allison, the CEO of Branch Banking & Trust, Co. (BB&T) wrote an open letter to Congress saying that the “bailout” is a bad idea.

He has several key points and the first one leaves no doubt as to what he believes:

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.

It isn’t just econ professors, detached from the actual industry, that are calling out the government on this. Maybe there is still a ray of hope for capitalism….?

NM

The current credit crisis and the massive failure of financial institutions brought the usual Washington response: do something, do anything, even if it is wrong. What was done was a bailout of several institutions, especially the government inspired, government created, and government sponsored enterprises, Fannie Mae and Freddy Mac. I am not going to get into whether the bailout was the right or wrong thing to do—at least not here and now. There is another point I intend to address, the issue of pork, or fat to grease the political wheels of Congress.

I should mention that this is something that I have written about elsewhere (with Robert Tollison in this conference paper, that was later published with Gohkan Karahan in the journal, Public Choice. Our opening line in that paper is “Like other exogenous shocks, the 9/11 attack on U.S. targets opened up the possibilities for wealth transfers as public policy toward terrorism emerged in the aftermath of the horror.” In professional econ-speak, “wealth transfers” is robbing Peter to pay Paul.  The point is this: when our politicians encounter a situation that they can convince voters is a “crisis,” politicians see this as an opportunity to sell voters and their colleagues in Congress on extra spending beyond the scope of the initial problem.

Congressmen trade their votes on one project that they care very little about in order to get their way on projects that they do care about. Congressmen in New York did not mind that some money would go to Wyoming, where the threat of terror was very small, as long as they got their protection. Similarly, many congressmen did not seem to mind that some funds were going to makers of wooden arrows or research on wool as long as the bailout was passed. Of course, other congressmen may have voted for the bailout to get their wooden arrow or wool subsidies for their districts. Even worse, some congressmen may holdout for a bigger piece of the pie, withholding their support for a bill they really do want to see passed so that they can bargain for more spending in their district’s direction, basically using a tragic situation to enrich their friends and supporters.

Political trading, known as log-rolling, is much like trade in the marketplace, but the ones doing the trading or not the ones paying the bills. Often, special spending that is buried in larger spending bills usually flies under the radar, so the ones noticing the pork spending are the recipients of that pork, while others hardly notice.

There was a telling scene in a 2007 Tom Hanks movie, Charlie Wilson’s War. In the movie, Hanks as Congressman Charlie Wilson explains that he can that he can sneak through Congress the financing of a war against the Russians in Afghanistan Congress because he represented the only district in America where the voters don’t ask for much more than for them and their guns to be left alone. He was able to collect a lot of IOUs from other congressmen.

What happens is that by combining two bills or by combining them implicitly through trading support for one bill by promising support on another, two bills can get passed that would not have passed on their own, two minorities sometimes equal a majority.

This is just another face of stealth politics.

-MC

What is seen and what is unseen: Government programs and stealth taxes

In listening to the Obama-Biden team on their tax policy, I have repeatedly heard the phrase, “no one who makes under $250,000 will see their taxes increase by one penny under our plan.” That may be so, but be careful: sometimes it is what you don’t see that gets you, like the car in your blind spot when you switch lanes. In graduate school one of my professors, Nobel laureate James Buchanan, constantly pointed out how many taxes remain unseen by those who pay them. Many times taxes are levied on sellers and then passed forward to buyers in price increases, seen as price increases, not as tax increases. In particular, Buchanan constantly fought against deficit financing and hidden taxation as what he referred to as “fiscal illusion,” where the ones who face the burden of the taxes do not notice they are actually footing the bill.

This is especially seen with taxes on corporations. The truth is corporations pay no taxes in the end. Taxes always and everywhere are paid by people. Corporate taxes are paid by customers in the form of higher prices, by workers in the form of lower pay, by vendors in the form of lower prices, and by shareholders in the form of lower share values and lower dividends. None of the burden falls on the corporation, itself, but rather on real people. Such taxes are stealth taxes as most people seldom see them coming.

Talk of taxing only the rich is similarly misleading. Here is what happens. If taxes are raised on the “rich,” fewer people go into fields where people get rich. That is likely to mean fewer doctors. With fewer doctors than we would have had at lower tax rates on the rich, the supply of doctors is decreased and doctors’ fees increase. If one can get another job which pays only slightly less after taxes without requiring going to school for so many years, and without enduring difficult study and years of poverty while in medical school, why make such a heavy investment in education when the return is so small. With fewer going into medical school, the before-tax pay of doctors goes up, leaving the after-tax pay of doctors practically unchanged. Similarly, more people go into fields that are paid less and have a fun side to them, such as bartending and rock-band roadie, so the supply goes up in roadies and bartenders and their before-tax pay goes down. Admittedly, such changes in the pay of doctors near the top of the pay scale, and bartenders and roadies at the bottom of the pay scale will take place over a decade or so. It is also something people will not notice that much, as pay for doctors goes up at a faster rate than pay increases for bartenders.

Not only are taxes that we call taxes always and everywhere a burden on real people, but alternatives to taxes also burden someone somewhere. The real alternative to taxation in funding programs is to run a deficit. And deficits are financed in two basic ways, by inflating the money supply (creating money through the Federal Reserve System) and by issuing government securities, which means borrowing. Inflation, by reducing the value of the dollar, taxes every dollar in everyone’s pocket, in everyone’s bank account. Borrowing, by using credit that could have gone to businesses that could have purchased equipment that would have increased worker productivity and worker pay, as well as profits for business owners, or to consumers for homes and automobiles by raising interest rates.

Professor Buchanan was particularly critical of an idea referred to as “the Ricardian equivilance theorem.” The Ricardian equivalence theorem is based on the work of an early 19^th century economist, David Ricardo, who is better known for his comparative advantage theory of trade. Ricardo suggested that borrowing to pay for government spending or taxing people to pay for that spending are equivalent because people will have to pay for the borrowing through higher taxes (or lower government spending, that should benefit someone) in the future. The taxpayers could borrow the money themselves to pay for their taxes which would amount to the same level of borrowing as would occur if the government went ahead and borrowed it by running a deficit. Ricardo, contrary to the theorem that bears his name, goes on to discuss why people fail to realize that the future tax burdens from deficit spending are their own.

So here, with the fiscal illusion problem, the cost of any government-financed program is often not fully grasped by the voter-taxpayer. Thinking that someone else is really paying for the program, the voter-taxpayers choose to take on more public spending, more programs, than they would have if they fully realized the cost they bear. Hidden taxes, whether taxes that someone else is paying or deficit financing or inflation, lower apparent government costs and entice us to buy more government.

Fiscal illusion, what I call “stealth taxation,” deludes us to agreeing to government programs we would not have chosen if we knew their real costs to us. Whether it is government monopoly provided healthcare as Obama wants paid for by taxes on the rich, which are really taxes on us all, or deficit financing of a war that McCain may want, stealth taxation in any of its forms distorts reality the way too much beer distorts our own vision leading us to make various unwise decisions of the moment. Politicians always make sure we see how wonderful their spending plans are. But just as we have laws against drunk driving and that require corrected vision for those of use whose eyesight needs help, perhaps there should be fiscal choice rules, constitutional-level rules, requiring that fiscal choices be made only when we can fully see our costs.

-MC