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.

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.

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.