Last post you we covered the first economic argument to defeat any statist in an argument about a government policy, the broken window fallacy. Today we'll cover the second argument, Hayek's information problem. Hayek, a Nobel Prize winning economist, made the point that it's extremely difficult for any government official to efficiently manage any portion of economy because they simply do not have the information needed to do so.
A modern economy is composed of literally millions of independent actors operating through towards their own subjective preferences. Just think about all of the decisions you have to make just to manage your personal finances. What you are going to buy, how much of it you are going to buy, how much to save, how much debt to take on, how much to pay on your debts, etc. takes much deliberation by you. No one else can make these decisions for you because they simply do not have the information to do so.
How then, can a bureaucrat make decisions on an industry or economy wide basis? There's no way they can have the detailed information necessary to make wise decisions on your behalf.
So whenever a bureaucrat or politician tells you that "alternative energy is the wave of the future", or that politicians will invest your tax dollars in a stimulus package "that works", just remember that there's NO WAY politicians can know the future better than you can. They're human beings who are not capable of knowing all these things.
These decisions are best left in the hands of individuals, who know the detailed knowledge about themselves to make the decision whether or not to invest in a business pursuing certain interests such as alternative energy. If they're right, they make a profit. If they're wrong, they take a loss. In any case, they aren't spending other people's money on what are essentially gambles.
When a politicians takes a gamble, he's playing with other people's money. He doesn't stand any personal gain from correctly predicting the future. He doesn't lose if he poorly predicts the future. He simply makes decisions based mostly on ideology. That's why politicians think alternative energy is the wave of the future; because they want it to be the wave of the future.
The limited information politicians have makes them very poor managers of an economy. On the other hand, individuals do a better job of making productive decisions because they have an incentive and the information to do so. When you hear a politician say that investing in this, or that, will benefit the economy, always ask yourself, "how do they know it will benefit the economy?" Unless they are some sort of Nostradamus, the truth is that they don't know. They just think that renewable energy, or universal health insurance, or any number of things are good, and that's why they are taking your money to spend on their pet ideological causes.
Thursday, March 4, 2010
Saturday, February 27, 2010
Economics Made Easy
This will be the part of a two part series which will allow you to win almost any argument with a socialist/liberal/progressive/republican/democrat who advocates some kind of state intervention into the economy for some "public good". The "series" will feature two very easy to understand illustrations for why government programs do not work to create wealth and prosperity.
The first of these is Bastiat's "broken window fallacy". Essentially every liberal boondoggle program will be able to have its effectiveness challenged with the broken window.
Bastiat was a French free market economist in the 1800s who wrote very clearly on economics, making seemingly difficult concepts easy to understand for the layman. One of his greatest contributions to this lay education is the broken window fallacy. Imagine this situation. A boy throws a rock through the window of a bakery. The window breaks, causing the baker to have to pay a glazier to replace his window. This destruction, thus, has stimulated the business of the glazier, providing a positive stimulus to the economy, right? After all, the glazier will then spend the fee he gained by fixing the window into aspects of his business, or for his home, or on gifts for his wife and children, etc. A ripple effect of productivity will ensue, as businesses throughout the economy benefit from the broken window. Right?
Not quite. This seems fishy to the common sense reader, as it should. How, after all, can destroying something useful stimulate the economy? The answer is, it can't. If the boy had never broken the window, the baker would have the window still, and still would have spent the money on other things. Investing in his business, on his home, or on gifts for his wife and children, etc. Destruction of wealth does not, and can not, result in a gain in productivity.
Unfortunately, most of our government policies rely on the broken window mindset; that destruction and theft can stimulate. Take, for instance, the most egregious broken window policy, Cash for Clunkers, in which government literally paid people to destroy useful objects. And this was supposed to be a stimulus for America! On a more subtle level, though, ever government spending policy is a broken window policy in a way. Taxes must pay for all of the programs we use, which destroys our ability to invest those funds into our homes, our businesses, etc. All of these programs have the premise that we are dumb and politicians are smarter than we are. When the president says he's going to spend our money on things that "work", he should also say, "unlike you morons". They can break our "windows", and spend our money better than we can.
This would be fine in terms of productivity if they actually could spend our money better than we can. Debunking that assumption will be the subject of the next Moorenado.
The first of these is Bastiat's "broken window fallacy". Essentially every liberal boondoggle program will be able to have its effectiveness challenged with the broken window.
Bastiat was a French free market economist in the 1800s who wrote very clearly on economics, making seemingly difficult concepts easy to understand for the layman. One of his greatest contributions to this lay education is the broken window fallacy. Imagine this situation. A boy throws a rock through the window of a bakery. The window breaks, causing the baker to have to pay a glazier to replace his window. This destruction, thus, has stimulated the business of the glazier, providing a positive stimulus to the economy, right? After all, the glazier will then spend the fee he gained by fixing the window into aspects of his business, or for his home, or on gifts for his wife and children, etc. A ripple effect of productivity will ensue, as businesses throughout the economy benefit from the broken window. Right?
Not quite. This seems fishy to the common sense reader, as it should. How, after all, can destroying something useful stimulate the economy? The answer is, it can't. If the boy had never broken the window, the baker would have the window still, and still would have spent the money on other things. Investing in his business, on his home, or on gifts for his wife and children, etc. Destruction of wealth does not, and can not, result in a gain in productivity.
Unfortunately, most of our government policies rely on the broken window mindset; that destruction and theft can stimulate. Take, for instance, the most egregious broken window policy, Cash for Clunkers, in which government literally paid people to destroy useful objects. And this was supposed to be a stimulus for America! On a more subtle level, though, ever government spending policy is a broken window policy in a way. Taxes must pay for all of the programs we use, which destroys our ability to invest those funds into our homes, our businesses, etc. All of these programs have the premise that we are dumb and politicians are smarter than we are. When the president says he's going to spend our money on things that "work", he should also say, "unlike you morons". They can break our "windows", and spend our money better than we can.
This would be fine in terms of productivity if they actually could spend our money better than we can. Debunking that assumption will be the subject of the next Moorenado.
Saturday, February 20, 2010
Housing and Bailouts
I work a lot with finance. One of the primary issues which has faced finance in the last year, of course, were the bank bailouts, opposed by just about everyone except the people who matter. Let's face it, no one likes it when tax money goes to corporations who lost massive amounts of money. If any case can be made that big business and big government are not always diametrically opposed, the anecdote to prove it would be the Wall St. bailouts. Much of the time, bigger government means bigger profits for bigger corporations, as I have written about elsewhere.
Much has been made, though of figuring out the "source" of the crisis that triggered the bailouts. Liberals say that the "source" of the bailouts is the failure of the big banks to value long term over short term profits, the expansion of banking into non-loan business such as derivatives, securities, etc, and predatory lending by banks. Conservatives typically pin the blame on the Community Reinvestment Act, which encouraged banks to make loans to subprime borrowers.
The real source of the bailouts is closer to the conservative side; it is government intervention into the housing markets. The CRA certainly played a role in encouraging bad loans to be given out. But the U.S. housing market has government fingerprints all over it. Mortgage interest is tax deductible. Fannie Mae and Freddie Mac provide a secondary mortgage market, with nearly explicit government backing. Defaulted debtors cannot be pursued by lenders in many states. And the federal reserve's monetary policy kept interest rates extremely low for years, encouraging malinvestment in all markets. Since housing has been subsidized and favored in the tax code for years, more investment took place in this market than in others. And consistently low interest rates only fueled the unrealistic prices seen in the housing market. Further, since housing had so much government backing, banks invested big money in mortgage backed securities since they were thought to be a "sure thing".
Unfortunately, that which can't continue, won't. And government can only prop up a house of pricing cards so long before reality causes the house to collapse. And since banks had so much of their assets in mortgage backed securities, when the prices fell, the banks lost money hands over fist.
To compound problems, the government thought it would be a good idea to get even more involved and housing and banking by bailing out banks, passing a first time home owner tax credit, trying to pass "consumer financial protection" legislation (let's have a consumer government protection agency...), first time homebuyer tax credits, and counting. Government should get out of banking, and get out of bailouts. Stop subsidizing and interfering with the market. Real people get hurt when they get involved. And the worst thing they can do is to interfere even worse when the problems they create get out of control. As usual, the proposed solution for government created problems is more government. It's a brutal cycle.
Much has been made, though of figuring out the "source" of the crisis that triggered the bailouts. Liberals say that the "source" of the bailouts is the failure of the big banks to value long term over short term profits, the expansion of banking into non-loan business such as derivatives, securities, etc, and predatory lending by banks. Conservatives typically pin the blame on the Community Reinvestment Act, which encouraged banks to make loans to subprime borrowers.
The real source of the bailouts is closer to the conservative side; it is government intervention into the housing markets. The CRA certainly played a role in encouraging bad loans to be given out. But the U.S. housing market has government fingerprints all over it. Mortgage interest is tax deductible. Fannie Mae and Freddie Mac provide a secondary mortgage market, with nearly explicit government backing. Defaulted debtors cannot be pursued by lenders in many states. And the federal reserve's monetary policy kept interest rates extremely low for years, encouraging malinvestment in all markets. Since housing has been subsidized and favored in the tax code for years, more investment took place in this market than in others. And consistently low interest rates only fueled the unrealistic prices seen in the housing market. Further, since housing had so much government backing, banks invested big money in mortgage backed securities since they were thought to be a "sure thing".
Unfortunately, that which can't continue, won't. And government can only prop up a house of pricing cards so long before reality causes the house to collapse. And since banks had so much of their assets in mortgage backed securities, when the prices fell, the banks lost money hands over fist.
To compound problems, the government thought it would be a good idea to get even more involved and housing and banking by bailing out banks, passing a first time home owner tax credit, trying to pass "consumer financial protection" legislation (let's have a consumer government protection agency...), first time homebuyer tax credits, and counting. Government should get out of banking, and get out of bailouts. Stop subsidizing and interfering with the market. Real people get hurt when they get involved. And the worst thing they can do is to interfere even worse when the problems they create get out of control. As usual, the proposed solution for government created problems is more government. It's a brutal cycle.
Tuesday, February 9, 2010
The American Dream
American political philosophy has been perverted over the last 200 hundred years. We now have some sort of amorphous concept known as "The American Dream", which essentially boils down to having a wife, a house with a garage, 2 cars, some land, and 2.2 kids. When did America's dream boil down to mere physical things? When did we lose the passion of our forefathers for our liberty?
If you would have asked Thomas Jefferson or James Madison about the American Dream, they would have said that the American dream would have consisted of living in a country in which the government respected the rights of its citizens to life, liberty, and property. I honestly am puzzled that 150 years of capitalism combined with statist interventions has produced a generation of people so concerned with their material welfare that they have forgotten the real dream of their forefathers; the dream that all men were created equal, and that we all should have the right to live with minimal interference of the government into our lives.
We need to rediscover this passion for liberty, and forget about our passion for cars, houses, and meeting society's material expectations.
If you would have asked Thomas Jefferson or James Madison about the American Dream, they would have said that the American dream would have consisted of living in a country in which the government respected the rights of its citizens to life, liberty, and property. I honestly am puzzled that 150 years of capitalism combined with statist interventions has produced a generation of people so concerned with their material welfare that they have forgotten the real dream of their forefathers; the dream that all men were created equal, and that we all should have the right to live with minimal interference of the government into our lives.
We need to rediscover this passion for liberty, and forget about our passion for cars, houses, and meeting society's material expectations.
Thursday, January 21, 2010
The True Problem
Republicans are really just obstructionists. Their constant fixation is with how to keep big government from getting bigger, and how to make big government "work". And the health care debate is only the most recent iteration of this insanity.
The Republican line on this whole debate has been uniquely absurd, even for them. Here it is, in all of it's conflicting glory:
1) Obamacare represents a government takeover of health care.
2) Government takeovers of health care are bad.
3) Obamacare would result in reducing funding for Medicare, a government run health care program.
4) Somehow, this is also bad.
It just puzzles me to see Republicans railing against socialized medicine while defending the rights of seniors to socialized medicine. Their is some serious cognitive dissonance going on here. The big problem is that, as I have written before, in a nation in which my property is up for grabs through the legislative process, and can be given to other "deserving" groups, tiny interests (such as seniors) have a large interest in supporting big government programs that benefit them. All the while, the rest of us only lose a tiny chunk of our pay check. This doesn't seem so bad. Except for the fact that there are hundreds of interests suckling at the breast of the American working public. In the aggregate, farmers, seniors, the indigent, children, homeowners, contractors, etc. are killing the very foundation that America was built on. That an American is responsible to take care of himself. We band together for protection, but we are in the end personally responsible.
Once we've given up on that basic principle, we've lost hope. Which is why I don't hold out too much hope for the Republicans or the Democrats. They are a bunch of sniveling cowards. And I can't blame them really. If you turn against every organized interest as a politician, save for the extremely rare exceptions such as Ron Paul, you lose elections. And that's what it comes down to. Our system is simply flawed, and politicians are forced to allow tiny creeping steps on our liberty. At some point, it must stop. Tyranny has been coming slowly for about 100 years. And what can't continue, won't. And this can't go on.
The Republican line on this whole debate has been uniquely absurd, even for them. Here it is, in all of it's conflicting glory:
1) Obamacare represents a government takeover of health care.
2) Government takeovers of health care are bad.
3) Obamacare would result in reducing funding for Medicare, a government run health care program.
4) Somehow, this is also bad.
It just puzzles me to see Republicans railing against socialized medicine while defending the rights of seniors to socialized medicine. Their is some serious cognitive dissonance going on here. The big problem is that, as I have written before, in a nation in which my property is up for grabs through the legislative process, and can be given to other "deserving" groups, tiny interests (such as seniors) have a large interest in supporting big government programs that benefit them. All the while, the rest of us only lose a tiny chunk of our pay check. This doesn't seem so bad. Except for the fact that there are hundreds of interests suckling at the breast of the American working public. In the aggregate, farmers, seniors, the indigent, children, homeowners, contractors, etc. are killing the very foundation that America was built on. That an American is responsible to take care of himself. We band together for protection, but we are in the end personally responsible.
Once we've given up on that basic principle, we've lost hope. Which is why I don't hold out too much hope for the Republicans or the Democrats. They are a bunch of sniveling cowards. And I can't blame them really. If you turn against every organized interest as a politician, save for the extremely rare exceptions such as Ron Paul, you lose elections. And that's what it comes down to. Our system is simply flawed, and politicians are forced to allow tiny creeping steps on our liberty. At some point, it must stop. Tyranny has been coming slowly for about 100 years. And what can't continue, won't. And this can't go on.
Thursday, January 14, 2010
Puritanical Shortsightedness
I have recently become convinced that evangelical American Christians do essentially two things pretty well. They keep their kids from swearing, and they keep them from having sex before marriage, or at least they clearly express their displeasure with those two specific sins. And I believe that they are sins (for the most part). For the first sin, as Ephesians 5 says, "Nor should their be obscenity, foolish talk or coarse joking, which are out of place, but rather Thanksgiving." And the latter should be clear from many verses about purity. So I'm not saying that Christians are off base by discouraging these sins in their children. I just wish that they would treat other sins with the same tenacity that they do these two.
Imagine if a parent would wash their child's mouth out with soap for gossiping? Or for using coarse language that's not included in our society's list of "swear words"? Or if they would give their children lectures on the dangers of coveting? Or jealousy? What a better church we would have! What a more Christlike body of believers we would have! If only Christians could harness their cursin' and sex fighting zeal to every area of their children's lives.
Imagine if a parent would wash their child's mouth out with soap for gossiping? Or for using coarse language that's not included in our society's list of "swear words"? Or if they would give their children lectures on the dangers of coveting? Or jealousy? What a better church we would have! What a more Christlike body of believers we would have! If only Christians could harness their cursin' and sex fighting zeal to every area of their children's lives.
Monday, January 11, 2010
The Crucial Question
I feel a little like the man from the Ayn Rand Institute who was on Glenn Beck. Not that I'm an Objectivist by any stretch. But I feel like the whole debate regarding health care reform misses the point. The debate here is no debate at all. Conservatives rail against a government takeover of health care. Liberals claim that every person deserves health care. But the roots of this problem go back to basic questions of political philosophy. And the debate reveals the generally homogenous philosophies of our politicians.
As the man from ARI rightly pointed out, the real debate here should be about whether or not government has the right to take your money and give it to someone else. And this debate rests on whether or not we agree with our Founders that rights come from God and that if government has the right to define our rights, then our rights are never safe. But we are actively trying to create new rights. No longer do you have the right to life, liberty, and property. You now have the right to health care. Not only do you have the right to health care, but you MUST have health care. Regardless of whether or not you want it.
Few Republicans would worry about natural rights principles (Ron Paul, and perhaps Bachmann, Demint, and Coburn. Perhaps.). But this is the critical issue at play here. Because when government tells you that you must do something, inevitably, someone has to pay for it. Which means that property rights suffer. When government creates rights, other rights suffer. This is the question, and where we should be focused. Until entitlements are dealt with, nothing will be solved. And until we once again embrace principles of natural rights, entitlements will never die.
As the man from ARI rightly pointed out, the real debate here should be about whether or not government has the right to take your money and give it to someone else. And this debate rests on whether or not we agree with our Founders that rights come from God and that if government has the right to define our rights, then our rights are never safe. But we are actively trying to create new rights. No longer do you have the right to life, liberty, and property. You now have the right to health care. Not only do you have the right to health care, but you MUST have health care. Regardless of whether or not you want it.
Few Republicans would worry about natural rights principles (Ron Paul, and perhaps Bachmann, Demint, and Coburn. Perhaps.). But this is the critical issue at play here. Because when government tells you that you must do something, inevitably, someone has to pay for it. Which means that property rights suffer. When government creates rights, other rights suffer. This is the question, and where we should be focused. Until entitlements are dealt with, nothing will be solved. And until we once again embrace principles of natural rights, entitlements will never die.
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