Bastiat's Bastions

In this article from the U.K. newspaper, The Telegraph, Ambrose Evans-Pritchard writes about how increasing food prices and food scarcity, while not causing the tumult in Tunisia and Egypt, may have triggered recent riots and revolution in those countries, the straw that broke the camel’s back, so to speak.

When prices for major necessities, such as food, begin to rise sharply, people become very desperate.  While not taking the sting out of rising prices, it does help to understand what lies at the root of price changes and what social purpose prices serve, how prices both help us to conserve the food we do have and give food producers the incentive to produce more food.  International trade in food also gives merchants the incentive to move food from low scarcity to high scarcity realms, to get food to where it is most wanted and least available.

Bastiat’s compatriots in England, Bright and Cobden, worked furiously to rid the U.K. of is corn laws, which made it difficult to import food, a factor that made the Irish Potato Famine more severe.

Learning about the social role of prices and exchange really is important.

-MC

John DeSantis at the Houma Courier wrote this story, “New state programs for kids raise concerns.” A seemingly well-meaning regulation to increase the quality of care for children in group homes or facilities, mostly supported by charitable organizations just may make operating these facilities too costly, putting them out of business.  Then, children may just end up in worse situations as a result. 

People are sometimes made worse off when the legislature and sometimes special interests pushing for the legislation think that they no better what is good for people than those affected.  We see this with non-profits, but we tend to see it more with for-profit businesses.  Such regulation often reduces the number of suppliers, especially smaller suppliers, and limits the choices of consumers.  Instead of making things better for the customers, the rules make things worse for the customers.  Only the surviving businesses whose competition is cut gain from such regulations.  

-MC

In this article from CNN,”TSA shuts door on private airport screening program,” , reporters Mike Ahlers and Jeanne Meserve tell of the Transportation Safety Administration’s (TSA) decision to no longer allow airports to contract with private firms to provide  screening services at airports instead of using the TSA.   A program known as the Screening Partnership Program “allowed airports to replace government screeners with private contractors who wear TSA-like uniforms, meet TSA standards and work under TSA oversight.”  Sixteen airports have opted for private screeners instead of the TSA, such as the airports in San Francisco and Kansas City.

In the article, TSA Chief John Pistole says the he has decided to end the Screening Partnership Program beyond the current 16 airports with private screeners.  He states as his reason that he does not see any advantage in the program.  On the other hand, airports throughout the country might see an advantage to using it.  For instance, this past November and December, there were many complaints from travelers about the intrusive naked body scans and groping pat downs of private parts by the TSA which were discussed in previous posts (“Safety in the sky and safety on the highway”   and “An update…”) of this blog.  Travelers in this country have been most unhappy with the TSA’s unprofessional performance.

Some possible advantages of private screeners is lower costs and their employees are easier to discipline and terminate.  From the point of view of public sector unions, private screeners represent competition.  The CNN article notes:

A union for Transportation Security Administration employees said it supported the decision to halt the program.

“The nation is secure in the sense that the safety of our skies will not be left in the hands of the lowest-bidder contractor, as it was before 9/11,” said John Gage, president of the American Federation of Government Employees. ‘We applaud Administrator Pistole for recognizing the value in a cohesive federalized screening system and work force.’

However, GOP Congressman John Mica of Florida states that private screeners did “statistically significantly better” than the TSA government screeners on airport checkpoint performance tests.  On the other hand, the Government Accountability Office states that there was no noticeable difference in checkpoint tests conducted in 2007.

Government bureaucrats certainly do not like private competition, as private competition both tends to reduce their budgetary size and their ability to overstate costs of programs.  In addition, such bureaus often become dominated by public sector unions, as seems to be the case here and these unions certainly do not want performance comparisons or the replacement of their member workforce by non-union or even members of competing unions. 

Just as private firms would rather not have competition, public firms or bureaus hate to face competitors.  Pistole saw no advantage in allowing more competition.  I bet Bill Gates might say something similar about operating systems.  But should it be Bill Gates to decide what operating systems consumers are allowed to buy?  If there is no advantage in going with private screeners, surely the airports will not try to do so.  But if there might be, shouldn’t the airports have the choice? 

-MC

This past Tuesday, President Obama delivered the annual “State of the Union” message .  His theme was “Winning the Future.”  He correctly noted that a major component of winning the future is investment in research and development, the production of new technologies, new ways of doing things.

President Obama noted:

 “The first step in winning the future is encouraging American innovation.  None of us can predict with certainty what the next big industry will be or where the new jobs will come from.  Thirty years ago, we couldn’t know that something called the Internet would lead to an economic revolution.  What we can do — what America does better than anyone else — is spark the creativity and imagination of our people….

“Our free enterprise system is what drives innovation.  But because it’s not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need.”

President Obama correctly suggests that innovation, the development of new technology, is crucial for our society, for our economy, and that the profit motive is behind such innovation.  He is also right in understanding that the profit incentive does not work well in providing the incentive for investment in basic research.

Economists have long made a distinction between goods that can be profitably produced and marketed to individual buyers and goods with benefits that are shared amongst the general public and cannot be sold through voluntary markets because once provided, others will free ride on those who provided the good in the first place.  The first type of good, a private good , is like a sandwich—if one person buys that sandwich, he can consume it and that means less for others.  Sellers of private goods can decline to provide their goods to those who are unwilling to pay for them.  Private goods can be profitably sold in voluntary markets. 

On the other hand, some goods have a shared consumption characteristic.  For example, in a city, air quality is mostly shared.  Protection from foreign invasion of military forces is a shared good as is protection from terrorists.  If I am protected from terrorist attacks, so are those who are near me.  This type of good, called a public good http://en.wikipedia.org/wiki/Public_goods, has benefits that cannot be denied to non-payers, not from some law, but because it is just too costly to do so. 

Similarly, research is divided into several types, one of which is referred to as basic research (http://en.wikipedia.org/wiki/Basic_research) and another as applied research (http://en.wikipedia.org/wiki/Applied_research).  Basic research delves into theories and generally cannot be kept from being used by others, but does not have immediate commercial use.  Some applied research has immediate commercial use, while some applied research has a commercial use.  Applied research is often patentable, while basic research is not.  Basic research is a type of public good, while applied research is a private good.

These distinctions help us understand why universities, especially large research universities, have more of an emphasis on basic research, while companies do most of the applied research, developing patentable products.  Private firms have what economists call a “comparative advantage” in producing private goods, because there is a profit to be made.  Comparative advantage (http://en.wikipedia.org/wiki/Comparative_advantage) is about producing at a lower opportunity cost (http://en.wikipedia.org/wiki/Opportunity_cost) than others, and in this case, lower costs than other types of entities, such as governments and non-profit organizations. 

A good example of the problem when tasks are inefficiently done, in other words, not done by those who can do them at least cost, not done according to what economists call “comparative advantage” would be to have a gifted athlete, such as New Orleans Saints star quarterback, Drew Brees, selling hot dogs in the stands at the games, rather than making spectacular plays on the field.  He might be better at selling hot dogs than anyone else, but he is so much better at the quarterback position and so valued at that position, the Saints and their fans would be worse off if he sold hot dogs in the stands instead.  (Be sure to read the Wikipedia definitions and explanations of these ideas that are given above in the provided links.) 

Private for-profit firms, because of the profit incentive, enabled by the use of enabled by constitutionally mandated patents, are much better at applied research that involves product development than governments.  The profit incentive induces profit-seekers to find ways of accomplishing things that are less costly.  This includes finding lower cost ways of providing incentives to supplier operators, such as the scientists whom they employ.    

Governmental entities, having no incentive to earn profits, and so, no incentive to cut costs, are ill-suited to developing products at a low cost.  Just as President Obama noted in his “State of the Union” message, we cannot predict where the “next new thing” will be, and so, it is better left to entrepreneurs to develop new products.  Public bodies, however, are better suited to financing basic research than for-profit firms, as firms will spend little time, effort and money on developing something that suffers from the free-rider problem.

So, what we see is that the development of new products is better carried out by private firms who have both the incentive to carry out this work at least cost and are better suited to risk-taking involved in deciding which research path to try, with many leading to dead ends, and only a few being profitable.  On the other hand, basic research which results in general findings which usually have no immediate applications in profitable enterprises, but sometimes lead to a host of applications, is best financed by government because private firms are not able to keep others from using their basic research, as it is not patentable.

Imagine, then, the surprise of many when it was recently announced in this Gadiner Harris New York Times article  that officials with the National Institutes of Health “have decided to start a billion-dollar government drug development center to help create medicines.”

The reason that the government should do invest in developing new patentable products, they claim, is because of the sharp slowdown in patent applications by pharmaceutical firms.  They also claim that a billion dollars is a small initiative when it often takes a pharmaceutical firm a billion dollar investment in research to create just one new product.   

If government experts cannot tell what the most promising area for research is, and if governments are ill-suited to developing new products, it seems that taking these funds out of other places, whether basic research or from private industry, such as the oil industry, as the President suggested as the place to get funds for his new research initiatives, and using them for government directed research into new products, is like taking Drew Brees off of the field and into the stands to hawk hot dogs.

What the Obama administration should ask before beginning this new quest into the drug development enterprise is “why have patent applications fallen so drastically from 2008 to now?”  Two possible reasons should be obvious and should be examined.  First, could it be that just as investment in other areas have dropped off because of the recession and the lack of confidence people have in the future, the same reluctance to invest may have hit the pharmaceutical industry.  A second possibility that the administration may not want to believe, but, nonetheless should be examined, is that the push for health-care reform by the administration, with its likely impact on lower profitability of pharmaceuticals, may have reduced the incentive to invest in new drug development so much that patent applications fell.  But whatever the reason, it should be clear that the government’s role in research is one of supporting basic research, while private industry is better suited to developing new products, such as new drugs.  We will be in a better position to “Win the Future” if we have the players in the process in the roles for which they are best suited, where they have a comparative advantage.

-MC

Here is a “Special Report” from Reuters, titled “Special Report: Is America the sick man of the globe?”  Reuters, a respected news organization, right?  You would expect a little bit of fact checking, wouldn’t you?  The author states, in passing, ”As U.S. manufacturing declined, starting in the 1980s Congress and successive administrations focused instead on the financial sector and relied on debt — its own and that of the U.S. consumer — to foster economic growth.”

Everyone knows that U.S. Manufacturing has been declining since the 1980s.  The problem is, it just is not so.  The facts are easy enough to check out.  You can go to the Federal Reserve’s web page on Industrial Output.  Here is the combined data, from 1972 t0 2010, using the seasonally adjusted values for January of each year in a time-series graph.

While there are noticeable dips in 2001 and again starting in 2008, the long-term trend since the 1980s has clearly been an increase in manufacturing output. 

What has made manufacturing jobs so attractive, their high wages, is the high growth in output possible in manufacturing by the use of equipment to subsitute for people.  Growth in production means for the same amount of labor we can produce more, so manufacturers can cut costs per unit and pay more to their workers as well.   What has declined in the U.S. since the 1980s is the number of jobs in manufacturing, not the amount of manufacturing. 

Perhaps the author, while in Michigan, should have talked to one of the University of Michigan’s economic professors, Mark Perry, who notes here that the decline in manufacturing jobs is the result of the productivity of American workers, not the reduction of manufacturing in America. 

Daniel Ikenson wrote this article  in the Pittsburgh Business Times in November of 2007, reprinted here at the Cato Institute website. 

Output per worker has dramatically increased over the years.  Machines, while replacing some workers, have so increased the productivity of the remaining workers, that those highly productive workers are able to fetch higher pay.  The high pay has also contributed to the incentive for manufacturing innovation, as businesses seek to find ways to do without so many expensive workers.  Technology and the education and training that make that technology usable have increased the output per worker, raising manufacturing wages.

The lesson is that some things become part of general knowledge that may not be so–check out media claims–go to the data.   So much information is publicly available and easy to check out.  Be on the lookout for undocumented, “supposed” facts. 

-MC