Bastiat's Bastions

John Stossel, once again, brings sense in the land on nonsense.  In this Stossel video, he talks about Walter Block’s book, Defending the undefendable.  Walter Block, I should note, is the Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans.

Professor Block is to be congratulated, as this next Saturday, he is being awarded the Schlarbaum prize for Lifetime Achievement in Liberty by the Mises Institute, a prize well deserved, to be sure (the program announcement is here).  One of my old graduate school mates, Tom DiLorenzo, Loyola University Maryland is speaking at this event, as well as the Independent Institute’s Robert Higgs, who now resides in Mandeville.

A recent study   released by the Tax Foundation and reported by the Pelican Institute (here) states that extended unemployment benefits, which has been part of the stimulus programs passed by Congress, have increased the unemployment rate and slowed our recovery.

Under ordinary conditions, an unemployed individual is eligible for up to 26 weeks of unemployment benefits.  Through several federal extensions, supposedly for stimulus purposes, eligibility for unemployment benefits has been extended to 99 weeks.  President Obama’s “American Jobs Act of 2011” would extend the date for starting their 99 weeks of eligibility.  Notice that these extensions have lengthened eligibility for collecting assistance from half a year to slightly less than two years.  Under three recently passed free trade agreements with South Korea, Panama and Columbia, Democrats added extra weeks of eligibility for unemployment benefits under the guise of “trade adjustment assistance” for those losing jobs because imports from these countries.

What is pointed out in the Tax Foundation’s study, is that the supposed countercyclical nature of unemployment benefits, that benefits rise in bad times and fall during good times, is destroyed by the way that states have financed their portion of the funds to pay these benefits, raising unemployment insurance taxes when their unemployment funds get depleted during sharp recessions and lowering them in better times.

The Pelican Institute’s story includes discussion of what economists have long known, when you increase payment for certain behavior or reduce the costs to individuals for living in certain conditions, that behavior or condition increases.  Dr. Walter Block at Loyola University New Orleans is quoted in the Pelican Institute piece saying “The more you subsidize something, the more of it you get. If the government wanted the unemployment rate to fall, it would find a way to tax unemployment.”

Even Obama’s former economic advisor, Larry Summers, states in the Concise Encyclopedia of Economics:

Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.

First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not…

The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment  insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

Many people while unemployed get job offers or could get, but often at wage rates far less than what they have been accustomed to.  Their “reservation wage,” while falling over time, is sometimes not low enough to accept a low-paying job.

Another way to understand the point is to see these benefits as the opportunity costs of taking a job while still eligible for benefits.  Once one runs out of eligibility, the opportunity costs of taking a job fall considerably and job offers are more likely to be accepted.

The economics Nobel laureate and liberal columnist, Paul Krugman, in his college economics textbook co-authored with his wife, Robin Wells, states

[P]ublic policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. Most economically advanced countries provide benefits to laid-off workers as a way to tide them over until they find a new job. In the United States, these benefits typically replace only a small fraction of a worker’s income and expire after 26 weeks. In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.

Michael Elsby, Bart Hobijn and Aysegul Sahin report in the spring 2010 Brookings Papers on Economic Activity that the extensions in unemployment benefits we have seen from various stimulus programs that have increased the length of eligibility “correspond to between 0.7 and 1.8 percentage points of the 5.5 percentage point increase in the unemployment rate witnessed in the current recession.”  In other words, almost a fourth of the increase in the unemployment rate we have witnessed from the recession and lagging recovery is due to the extensions of unemployment benefits.

We need to be careful in how we structure these benefits and what we do to extend them.  While these benefits to ease the pain of unemployment, such pain killers lead to dependency and make it harder to get “afford” to take a job.

-MC

Here is an ABC News report on GDP growth for this year’s 3rd quarter, the months of July, August and September.  In a month, the 3rd quarter figures will be revised and more data comes in for September.  The report from the government agency that gathers this information, the Bureau of Economic Analysis, is here. This updates a blog post I had earlier this summer.

-MC

Today, I note the passing of Bill Niskanen, who, at the age of 78, died of a stroke this last week (see David Segal’s obituary of Niskanen  in the 10-28-11 New York Times).  Niskanen was not only an important and influential economist, but at 6’4”, he stood tall figuratively as well as literally.  Niskanen earned his undergraduate degree at Harvard and his Ph.D. in Economics from the University of Chicago, studying with Milton Friedman.  He later taught at UCLA and UC Berkeley and had various positions in the Office of Management and Budget and the Defense Department.

Niskanen served as chief economist for Ford until he was fired for being critical of Ford for seeking trade protection from Japanese automakers, noting that the problem of the American auto industry was their reluctance to producing the more fuel-efficient type of cars that Americans wanted to drive and that is was wrong for corporations to ask Washington for special treatment, writing in a Ford memo “A common commitment to refrain from special favors serves the same economic function as a common commitment to refrain from stealing.”

His criticism of Ford cost him his job there.  Niskanen rebounded, though, serving on Reagan’s Council of Economic Advisors, and then becoming the Chairman of the Cato Institute, a free-market think tank in Washington, where he served until 2008.  Though an admirer of Reagan, he was critical of the Reagan administration’s inability to cut government spending, stating that there was really no Reagan revolution.

As a graduate student in the late 1970s and early 1980s, I read many of his works on the economics  of government bureaucracies.   As a fellow member of the Public Choice Society, where Niskanen served as president in the 1990s, I would often see him at annual conferences, and having similar interests, we were often in the audience in the same sessions, if not in each other’s sessions.  In 2005 I was invited by the book review editor of Public Choice to review a book of his, Autocratic, democratic, and optimal government: Fiscal choices and economic outcomes. I saw Niskanen in May of that same year for the last time, as Niskanen presented one of the thirteen papers at the “Political Economy of Terrorism” at George Mason University’s School of Law and Economics where I was privileged to be among the remaining presenters.

Niskanen, ever critical of big government and special favors handed out by big government, especially to businesses, I am sure he saw ideas he could agree with from both the Tea Party and the Occupy movements, though I think he would have disagreed with both on several fronts, too.

Niskanen, while always a thoughtful gentleman in discourse, always stood on principle, committed to free markets, the rule of law and ethical behavior.

-MC

As I am sure you have heard, to finance his Jobs bill, a plan costing over $400,000,000,000, President Obama has proposed raising several taxes, all supposedly on the rich.  While President Obama flies around the country in Air Force One and various Speakers of the House fly around in a more modest 12-eater jet, President Obama has determined that those who fly around in personal jets are too rich for the country’s own good and should be taxed accordingly as we see in this article from the Huffington Post.  This corporate jet tax is a luxury tax, much like the tax in the board game, Monopoly.

I know that President Obama is a few years younger than I am, but surely he was around in 1990, when Democrats in Congress pushed President Bush to break his “Read My Lips, No New Taxes” pledge.  In that 1990 bill was a luxury tax.  A component of that luxury tax was a tax on big yachts.  However, within 2 years, the Democrats were back with a new proposal for President Bush.  This time, it was a proposal to repeal the tax on yachts.

It seems that the Democrats failed to understand the basics of public finance, the economics of taxation.  This economics of a tax on a particular good, an excise tax, is fairly easy to understand if you have the basics of supply and demand down.

Suppose we pass a tax on yacht buyers.  Yacht buyers will now begin to take the tax into account when making a purchase, understanding that the tax will be part of the price that they will have to pay.  So, buyers willingness to pay sellers will be reduced by the amount of the tax, so that the grand total they will pay for a yacht and pay for taxes for that yacht will be the same as before the tax was passed.  The “Demand” shifts down by the amount of the tax.  Ok so far?

Now recall that “Supply” represents the marginal costs to producers.  Below, I have drawn a supply and demand diagram for the large yacht market with Prices in millions of dollars.

A $1M tax reduces the total price that the buyers will pay the producers by $1M, and cuts the demand to the sellers to the new demand, “Demand with $1M tax.”  Notice that while the buyers do pay more than they used to pay, they pay only a little more because their demand is, in the vicinity of the first equilibrium, rather elastic, because these buyers can do other things than buy yachts in the US, such as buy yachts in other countries and register them abroad.  Sellers, on the other hand, have trained in yacht building and cannot find other work and other business quite so easily.  This makes the burden of the tax fall more heavily on the sellers and less so on the buyers.  The incidence of the tax or the distribution of the tax burden, fell more on the working-class yacht-building employees, the suppliers, than on the buers.

This is what happened in the 1990s.  With very elastic demand and not so elastic supply, thousands of yacht building employees lost their jobs, while the rich just found other games to play.  How different is the market for corporate jets?  Not that much.  Even if the demand were less elastic than the supply, the tax on corporate jets will still cost jobs.  With several hundred thousand corporate jet employees in the US, mostly in the Wichita, Kansas area, do we really want a jobs plan paid for by lost jobs in the jet industry, an industry that happens to pay pretty well?

-MC

In 2008, Bernie Madoff became famous when he was charged with investment fraud,  operating a Ponzi Scheme, a scheme the SEC defines as

an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

And, as the SEC page for “frequently asked questions” on Ponzi schemes points out, such schemes tend to collapse because

With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

Recently, Republican frontrunner and Texas governor, Rick Perry, has come under attack for calling our Social Security system a “Ponzi Scheme.”   While no fan of the governor, I am not sure he is as far off the mark in his criticism of the program as his critics claim.

On one of the New York Times’ blogs, The Caucus, there was this item:

Social Security, by contrast, is a pay-as-you-go retirement system by design. Current workers and employers pay taxes that are used to pay benefits to current retirees. For many years, the program took in more money than it paid out, and invested the surplus — the “Social Security trust fund” — in treasuries. In 2010, Social Security began paying out more in benefits than it received in taxes. As more baby boomers retire, and there is a shortage of new workers, that shortfall is expected to grow.

The Social Security Administration issued a briefing paper in 2009 noting the differences between Social Security and a Ponzi scheme. “There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go programs in that in both money from later participants goes to pay the benefits of earlier participants,’’ it wrote. “But that is where the similarity ends.”

The paper noted that a program with 40 million people receiving benefits, and 40 million people paying taxes, could be sustained forever. “It does not require a doubling of participants every time a payment is made to a current beneficiary, or a geometric increase in the number of participants,’’ it found.

Well, I guess such a retirement system could theoretically be sustained, but consider this, the average social security payment received at the beginning of 2011 was $1,177, so for 40 million workers to support 40 million social security recipients, the average worker would have to pay $1,177 into the system every month of their work life. They would have to continue to do this knowing that they are paying into the system for about 40 years, but with the confidence that they will receive payments themselves for about 15-20 years, given no change in benefits or retirement ages.    But if we assume that the person will live until he or she is 90 years old, then that  monthly payment of $1177, if invested at only a rate of 2%, would amount to about $864,430 by the time they reach 65.  If the person were to retire at 65, they could receive $3663 for every month until they reach 90, which would be a much better deal than the social security promise of only getting back $1177 per month.  How politically viable would such a social security system be?   Imagine having to pay over $1000 a month just for social security taxes.

Whoops, I forgot that there is the overhead of the social security administration to pay as well.  So let’s make that $1200 a month for each worker to pay.  Realistically, though, there is projected to be a sustained 2 workers for each retiree, so we can figure that the social security tax would “only” amount to $600 per month.  Still, while social security is popular now among those receiving payments, a large part of that popularity may have to do with the fact that current recipients get far more in benefits than they could have earned on the amounts they paid in.

But what about the social security trust fund?  Won’t that help keep so much from being paid for by current workers?  The answer there is no.  That trust fund gets spent every year by congress.  Or should I say, they have wisely invested it in safe government securities.  Ask those holding Greek government debt how safe they feel with those investments.  Government securities, instruments of our government debt, require taxpayers to pay the debt.  The system is still “pay as you go” even when taking into account the amounts that have been invested in government securities.  While I feel rather confident that we will continue to pay our debt, and that we will continue to fund social security payments, we have to get realistic about what we can expect our younger generations to pay us.

Actually, the long term problem has been discussed over the years.  In 1998 I penned an article for the Bayou Business Review that expressed some hope for the future of Social Security.

Now back then, quite a bit was done to improve funding for Social Security.  It just was not enough to keep it funded.  Already, part of Social Security funding is coming from the general fund.  Social Security may be a promise, but is it one we can really keep any more than Bernie could keep his?

-MC

“Can a society be made better off, while, at the same time, present and future members of that society are made worse off and none are made better off?”

Imagine a society where there are only three members:  Adams, Baker and Cooper.  Suppose something happens that we will call “X.”  As a result of X, the lives of both Adams and Baker are worsened relative to what their lives would have been like had X never occurred.  Cooper isn’t really affected.  Cooper certainly finds nothing to rejoice from the misfortunes of Adams and Baker.

Is there any sense in which we can say that this small society is better off, as a result of X?  For the life of me, I just cannot understand how making some people worse off, while no life is improved, could possibly result in an improvement in the society?  Maybe my imagination is limited.

Let us think of the same society, but this time, “Z” happens.  As a result of Z, the lives of Adams and Cooper are both improved, while Baker, though not rejoicing, is not envious over the good fortune of the others.  This time, is there a way in which this society can be thought worse off than before?  Again, I just cannot understand how.

Can we definitively answer these questions one way or another? Not really.  We are dealing with normative issues here.  We cannot probe the mind of the society, as a society does not have a single mind.  Even if we asked the society which it preferred, it cannot answer with a single voice. The idea here is that it is difficult, if not impossible, to separate the well-being of a society from the well-being of its members.

However, it seems that we could probably come to some agreement that with only a small dose of compassion for this society, we would hope that they could avoid the X situations and face Z situations, instead.

Well, this Z sort of situation is what we call a “Pareto Improvement,” where no one is made worse off, while at least someone’s life, as they see it, is improved.  If this society keeps making Pareto improvements, until there are no more Pareto improvements to make, the society has reached what we will call “Pareto Optimality” or “Pareto Efficiency.”  From this position, to make anyone’s life better off, we would have to make someone else worse off.  While this could result in an improvement for the society, it could also result in the society being worse off.  Really, though, who is in a position to judge whether the society here is better or not?  To make this judgement, we would have to conclude that some people’s lives and well-being is more important than others.  Whoa!  That is a very difficult value judgement.  I know I am not ready to judge some as being more important than others.   I am not ready to sacrifice one person’s well-being to improve the well-being of another.

I am reminded here of “Menken’s Law.” Now,  H.L. Menken was an American writer, known for his satirical wit, editor of an early 20th century magazine and covered the famous Scopes trial, that he dubbed the “monkey trial,” in which a teacher in Tennessee was on trial for teaching evolution.  “Menken’s Law” came about when he had himself arrested for violating the Comstock Law  in Boston for publishing a story about a prostitute.  Quite simply, Menken’s Law is: “Whenever A annoys or injures B on the pretense of improving or saving X, A is a scoundrel.”

-MC

The U.S. economy is drowning in liquidity.  After having written about the flood that was mostly avoided this summer, I get to use the line from Rime of the Ancient Mariner: “Water, water everywhere nor any drop to drink,” but this time my use is only figurative.  I guess I could paraphrase it instead as “Liquidity, liquidity everywhere, nor a dollar to lend.”

Jeff Cox at CNBC writes here about how the Federal Reserve is planning a third round of boosting the money supply, launching what might be called QE3.  Einstein is credited as defining insanity as doing the same thing over and over and expecting different results.  Increasing liquidity has not stimulated any spending except the purchases of gold and stocks, on the expectation of future inflation. 

The problem is that banks have plenty of reserves to lend, but they are being very reluctant to make loans, being very careful not to make bad loans.  If banks don’t lend out the reserves the Federal Reserve provides them, no additional monetary easing will do a thing. 

John Maynard Keynes, the economist who gave politicians the excuse of running deficits to stimulate national economies, may have been right about something he called “The Liquidity Trap.”  He wrote that after some point, attempts at stimulating the economy by creating more money in the system stops having any simulative effect  because interest rates fall close to zero.  This explanation of the liquidity trap in Wikipedia (http://en.wikipedia.org/wiki/Liquidity_trap) should be pretty helpful.  Keynes said that monetary easing under these special circumstances, circumstances that arise in a bad recession, becomes ineffective in stimulating the economy, like trying to “push on a string.” 

What this monetary easing does, however, is create what might be called “dormant inflation.”  The banks will start lending again when they have more confidence about our prospects for prosperity.  When they start lending out all these reserves that Bernanke and the Fed have created, trillions of dormant reserves awaken and create trillions upon trillions of extra dollars, boosting prices of ordinary goods and services rapidly to exceptionally high levels, giving us very high inflation rates.  My retirement moneys will get taxed away by soaring inflation, as my dollars lose their value.  Things look as hopeful as they did to that Ancient Mariner, as even the recovery from this recession provides little hope.
 

-MC 

In today’s Houma Courier, a headline blared out to me from the news stand at a local convenience store: “Students still enroll despite recession.”  You can read the article here.  Just to make sure it was about enrollments at higher ed institutions, I tilted my head to adjust my focus to verify that, yes, the article was saying that college enrollments were up in this recession.  To me, that was a statement of the obvious.  Really though, to state the obvious, I would have written the headline as: “College enrollments up because of the recession.”

In fact, today on the test I gave in my labor economics class, one of the easier items I posed was asking students to comment on two statements, one of which was “An economic recession tends to stimulate college enrollment.”  This was not really an original question, because it was one of the back of the chapter questions I like for my exams.

Why does this seem so obvious to me?  Well besides teaching the point in a class this term, remember, I see the world through the lens of economics.  A major tenet of economics is that the real cost of something is the next best option that you had to give up to get it.  Besides the direct cost students face of tuition and very expensive textbooks, a very high cost students face is the income they could have made from a job.  If there are no good job options for them, these indirect costs of college are lower than they would have been if we were in boom times.  Few job options means much less is given up to get a degree.

Mr. Howell in the story was exactly right that enrollments go up during recessions.  Of course, the reason is that costs of education go down in recessions.  The reasoning here also suggests why it is the young more than the middle aged to go to college–the earning options are worse for the young.

I should point out something I was taught in graduate school, “When someone says that something is obvious, often, it is not.”

-MC

For those hopeful of a continued recovery, I am reminded of the inscription  Dante sees as he passes through the gate of Hell, “Lasciate ogne speranza, voi ch’intrate“, or “Abandon all hope, ye who enter here.”  While I don’t think we are in for an eternity of recession hell, the talk of recovery seems to be premature.  Here is an article from CNBC that paints a rather gloomy picture of our near term economic future, noting that our unemployment rate is once again on the rise, and that only 18,000 jobs were created in June.  Yahoo Finance paints a similar gloomy picture here, noting employment figures for April and May were adjusted downward by 44,000.

-MC