Author: Bob Weeks

  • The Mystery of Capital

    The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
    Hernando De Soto
    Basic Books, 2000

    The problem with most third world countries, Mr. De Soto tells us, is not that there is no capital, it’s that the capital is dead. Dead in the sense that it can’t be used to its full economic potential. It can’t be mortgaged, it can’t be divided into shares, and it simply can’t be used in the same way we make productive use of our assets in the West.

    What is the difference between the West and the third world? The answer is formal property systems that allow the economic potential stored in property to be put to work. Until these poor countries develop the type of formal property systems that Western countries did, mostly during the 19th century, they are destined to remain poor.

    The obstacles in the way of development of formal property systems are many, including social, political, and legal issues. One interesting fact is that third world countries do have property systems, in the sense that it is possible to know who “owns” property, but that knowledge is extralegal and local. It isn’t as valuable as the knowledge contained in formal property systems, but it is there nonetheless.

    We see advocates for poor people in third world countries constantly calling for more aid or debt relief for these countries. It is sadly true that many people are hungry and in poor health, and formal property system that unlock capital won’t help these people tomorrow. But until poor countries start the process of developing formal property systems, they are unlikely to change and develop economies that can support themselves.

    Unfortunately, everyone does not hold capital and private property rights in high regard. In 1992 Libya burned all land titles. Former socialist states are reverting to their former ways. In America, not all people agree that capitalism is good.

    This book contains some interesting history of how private property systems developed in the United States.

  • Lack of Literacy is Threat to Liberty

    Writing in a recent commentary, Stephen M. Lilienthal of the Free Congress Foundation expresses concern over the literacy skills of recent college graduates. The findings of some recent studies are quite troubling.

    A recent study by the American Institutes for Research (“AIR”) contains what should be very unsettling news. The study, funded by the Pew Charitable Trusts, surveyed the literacy skills of graduates of four-year colleges and two-year community and junior colleges. The ability of the students to analyze newspaper stories, comprehend documents and balance a checkbook was assessed. Over half the graduates of four-year colleges and three-quarters of the graduates of junior and community colleges could not be categorized as possessing these “proficient” skills. A link to the press release announcing the study is at http://www.air.org/news/documents/Release200601pew.htm. Here are a few of the findings:

    More than 75 percent of students at 2-year colleges and more than 50 percent of students at 4-year colleges do not score at the proficient level of literacy. This means that they lack the skills to perform complex literacy tasks, such as comparing credit card offers with different interest rates or summarizing the arguments of newspaper editorials.

    Students in 2- and 4-year colleges have the greatest difficulty with quantitative literacy: approximately 30 percent of students in 2-year institutions and nearly 20 percent of students in 4-year institutions have only Basic quantitative literacy. Basic skills are those necessary to compare ticket prices or calculate the cost of a sandwich and a salad from a menu.

    Students about to graduate from college have higher prose and document literacy than previous graduates with similar levels of education; for quantitative literacy, differences between current and former college graduates are not significant.

    There are no significant differences in the literacy of students graduating from public and private institutions. Additionally, in assessing literacy levels, there are no differences between part-time and full-time students. No overall relationship exists between literacy and the length of time it takes to earn a degree, or between literacy and an academic major.

    The AIR study is not the only source of bad news regarding adult literacy. As Mr. Lilienthal reports:

    The AIR Study follows the release last November of a study by the Association of American Colleges and Universities (“AACU”) which reported a disparity between what students believed they were learning in college and national studies that measure their writing, mathematical and critical-thinking skills. An AACU press release issued in conjunction with the report states, “While 77 percent of students report significant improvements in their writing skills in college, standardized tests show that only 11 percent of seniors scored at a ‘proficient’ level in writing. Standardized tests results indicate that only 6 percent of seniors graduate at the ‘proficient’ level in critical thinking skills, while 87 percent of students believe that college contributed a great deal to improving their skills in this area.”

    A significant point of the AIR study is that “rapid changes in technology make it necessary for adults of all ages to use written information in new and more complex ways.” Higher levels of literacy are needed to enable workers to adjust to increased demands.

    Some conclusions that we may make:

    First, what does this tell us about the state of our schools, especially public schools and universities? When the majority of college graduates — presumably having learned at least something more than what they knew when they graduated from high school — aren’t considered proficient at basic intellectual tasks, how can we have confidence in the quality of our schools? For those who believe our schools are performing well, I would ask what they make of these findings.

    Second, it is not surprising that people who can’t balance a checkbook have trouble with other financial matters. Things like understanding a credit card offer and agreement, what it means to be in debt, understanding the implications of different types of mortgages, understanding the powerful effects of compounding over time, or how to save and invest for the future seem to be beyond the grasp of someone who has trouble with a checkbook.

    Third, we should also not be surprised that people fail to understand, or even to be interested in, the policies of our various governmental bodies and how they impact our lives. That is, how these policies really impact us, rather than how politicians say they impact us. This is what I see as the greatest threat to liberty. A society with more liberty, which is to say one with less government, places greater responsibility on individuals to provide for themselves and their families. In order to defend our liberty, we must be on the alert for false arguments and faulty reasoning. This requires citizens who care about liberty and are equipped to defend it.

    As an illustration, recently I wrote how an advocate for increased spending on schools in Kansas (I was going to say increased spending on education, but given the findings of the above studies, I am hesitant to call it that) made a misleading argument. (See Kansas Families United for Public Education (KFUPE) on State Aid to Schools.) To show how it is misleading, I had to perform some calculations to convert nominal dollars to real dollars, that is, spending adjusted by the rate of inflation. Now I wonder if many people understand the difference and its importance, much less whether many people could analyze this evidence in the way that I did. Converting nominal dollars to real dollars, I should mention, is not very difficult to do.

    If converting nominal dollars to real dollars appears difficult, then what about more thoughtful analysis of our economy and government policies? Analyzing policy means looking at the obvious effects, but also seeking to discover what might not be obvious: the unseen effects. Frederic Bastiat, in his pamphlet titled “That Which is Seen, and That Which is Not Seen” http://bastiat.org/en/twisatwins.html said this:

    Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil.

    The economist Walter E. Williams summarizes the broken window fallacy that Bastiat recognized in his article:

    Bastiat wrote a parable about this that has become known as the “Broken Window Fallacy.” A shopkeeper’s window is broken by a vandal. A crowd forms, sympathizing with the man, but pretty soon, the people start to suggest the boy wasn’t guilty of vandalism; instead, he was a public benefactor, creating economic benefits for everyone in town. After all, fixing the broken window creates employment for the glazier, who will then buy bread and benefit the baker, who will then buy shoes and benefit the cobbler, and so forth.

    Those are the seen effects of the broken window. What’s unseen is what the shopkeeper would have done with the money had the vandal not broken his window. He might have employed the tailor by purchasing a suit. The broken window produced at least two unseen effects. First, it shifted unemployment from the glazier, who now has a job, to the tailor, who doesn’t. Second, it reduced the shopkeeper’s wealth. Explicitly, had it not been for the vandalism, the shopkeeper would have had a window and a suit; now, he has just a window.

    As Professor Williams also brought to our attention, even educated people such as Princeton economist Paul Krugman failed to take into account all factors — the broken window fallacy that Bastiat illustrates — when he wrote in The New York Times that the destruction of the World Trade Center “could do some economic good.”

    By failing to perform a little analysis on our own, we are liable to fall for whatever arguments politicians may make. But given the state of adult literacy, literacy that is a product of our public schools, how can we expect to be any different?

  • More good computer and Internet things

    Bloglines

    “Bloglines is a FREE online service for searching, subscribing, creating and sharing news feeds, blogs and rich web content.” That quote from Bloglines accurately describes what Bloglines is, but doesn’t really communicate its benefit. Here’s what Bloglines does for me: I like to keep current with the content of about two dozen blogs, mostly blogs in Kansas that might not publish new articles very often. (You can see a list of some of them here.) Instead of visiting each of these sites every day or so, I simply add them to my list of “feeds” in Bloglines. Then, Bloglines periodically checks the blogs for me and shows me which blogs have new or revised items. I can view the blogs through the Bloglines website, or by visiting the blog itself.

    Bloglines works very well, but for it to work at all for a blog, the blog you’re interested in must publish a feed, and not all do. Try it at http://bloglines.com.

    Microsoft AntiSpyware

    Previously I have been recommending Sypbot: Search and Destroy for antispyware. Recently I started to use Microsoft Antispyware and now recommend it. I believe its ease of use, automatic updating, and continuous background monitoring is better for most people. You can download it at http://www.microsoft.com/athome/security/spyware/software/default.mspx.

    Google Analytics

    If you have a website, you may be interested in knowing how many people visit your site. There are many web counters and other services to give counts of visitors and other statistics, but nothing I have seen comes close to Google Analytics. This free service, available at http://www.google.com/analytics, provides detailed analysis of the traffic that visits your website. I recommend it for anyone with a website who wants to know more about the site’s visitors.

  • Tax increment financing in Iowa

    Writing from Cedar Rapids, Iowa

    Readers of The Voice For Liberty in Wichita are well aware that I believe that when the government provides subsidies to businesses — either in the form of cash payments or preferential tax treatment — we create a corrosive business environment. Government picks winners and losers for political reasons, rather than letting the market decide which companies are doing a good job. Government also spends money inefficiently. Instead of letting the market decide where to best allocate capital, government chooses who receives capital taken from the people through taxation according to the whims of politicians spending other peoples’ money.

    It is no wonder that government-favored enterprises rarely do well. Capital markets are quite efficient, and if there is an unmet need, capital usually flows to fill the need. The fact that capital is not flowing to fill a need strongly suggests that the need is not real. Yet, governments may feel that a need is not being met, and they will allocate taxpayers’ capital to fill it, even though taxpayers on their own do not select to invest in the subject project.

    This practice is not limited to the State of Kansas. There is a paper titled “Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth?” written by two economics professors at Iowa State University. (The paper may be read at http://www.econ.iastate.edu/research/webpapers/paper_4094_N0138.pdf.) This paper shows that despite the claims of politicians and the very obvious benefit to the companies that receive the TIF financing, there is no benefit to the state as a whole.

    Following are some quotes from the paper’s conclusion:

    “There are several issues to consider about TIF ordinances and TIF outcomes in Iowa. From our research here and from our larger study of the topic, it seems apparent that the ease with which TIF district designation can be done in Iowa, along with the multiplicity of uses that TIF districts can be put, that the law now has become a de facto entitlement for new industry and housing development in much of the state with little to no evidence of overall public benefit or meaningful discussion of the mean costs of the practice. It also seems apparent that given the ease with which these districts can be developed that many cities may be preemptively capturing new valuation and tax revenues in the name of economic development, but that in the main, this preemption is likely yielding much more collective fiscal harm across taxing districts in the long run than good.”

    “City officials believe that the TIF action was instrumental in job growth in their town and in their region. How could it not be? We have an investment, and we have a firm with jobs. On net, however, except for the increment to manufacturing jobs, there is no evidence of economy wide benefits (trade, all nonfarm jobs), fiscal benefits, or population gains. There is indirect statistical evidence that this profligate practice is resulting in a direct transfer of resources from existing tax payers to new firms without yielding region-wide economic and social gains to justify the public’s investment.”

    “This analysis suggests that the enabling legislation for tax based incentives deserves revisiting. Though the TIF programs is highly popular among city government officials, and why wouldn’t it be given the growth in property tax yield over the years, there is virtually no evidence of broad economic or social benefits in light of the costs.”

  • Kansas Families United for Public Education (KFUPE) on state aid to schools

    As of today (February 2, 2006), the website for Kansas Families United for Public Education (KFUPE) (located at http://fundourpublicschools.com) states, under the heading “The Crisis”: “State aid has failed to keep pace with inflation.”

    I was puzzled by this statement, as I thought we were spending more and more on education each year. So I decided to investigate.

    The Kansas State Department of Education has a table of recent education expenditures in Kansas. The data is located at http://www.ksde.org/leaf/data_warehouse/total_expenditures/d0Stateexp.pdf.

    Here is the table of spending data:

    Spending in Nominal Dollars
    Total SpendingPer Student
    SchoolFTE*StateFederalLocalTotalStateFederalLocalTotalTotal
    YearEnrollmentAidAidRevenueExpenditures**AidAidRevenueExpendituresIncrease
    1993-1994437,210.11,468,606,823137,260,1141,011,858,0242,617,724,9613,3593142,3145,9873.44
    1994-1995440,684.21,558,335,916140,485,2961,012,554,5702,711,375,7823,5363192,2986,1532.77
    1995-1996442,465.91,604,933,171150,316,6231,061,918,7932,817,168,5873,6273402,4006,3673.48
    1996-1997445,767.31,618,449,030181,533,3201,121,816,1832,921,798,5333,6314072,5176,5552.95
    1997-1998448,609.01,815,684,144189,120,4621,058,428,6633,063,233,2694,0474222,3596,8284.16
    1998-1999448,925.72,035,194,082202,565,7251,004,736,6393,242,496,4464,5334512,2387,2235.79
    1999-2000448,610.32,110,484,390220,780,3501,071,444,1323,402,708,8724,7044922,3887,5855.01
    2000-2001446,969.92,152,622,486261,038,1531,172,918,4803,586,579,1194,8165842,6248,0245.79
    2001-2002445,376.62,200,529,799310,104,6781,269,928,1133,780,562,5904,9416962,8518,4885.78
    2002-2003444,541.42,277,804,680340,728,6481,335,185,5463,953,718,8745,1247663,0048,8944.78
    2003-2004443,301.82,124,578,761376,908,1211,592,564,7284,094,051,6104,7938503,5939,2353.83
    2004-2005441,867.62,362,223,172398,667,0401,528,524,3314,289,414,5435,3469023,4599,7075.11

    Here is the Consumer Price Index for the relevant years:

    CPI
    (1982-84 = 100)
    YearCPIInflation
    1993144.5
    1994148.22.6%
    1995152.42.8%
    1996156.93.0%
    1997160.52.3%
    1998163.01.6%
    1999166.62.2%
    2000172.23.4%
    2001177.12.8%
    2002179.91.6%
    2003184.02.3%
    2004188.92.7%

    Applying some arithmetic to the figures in the spending table produces this table of inflation-adjusted spending:

    Spending Change Year to Year, Real Dollars
    Total SpendingPer Student
    SchoolFTE*StateFederalLocalTotalStateFederalLocalTotal
    YearEnrollmentAidAidRevenueExpenditures**AidAidRevenueExpenditures
    1993-1994
    1994-19950.8%3.5%-0.2%-2.4%1.0%2.6%-0.9%-3.2%0.2%
    1995-19960.4%0.2%4.0%2.0%1.0%-0.3%3.6%1.6%0.6%
    1996-19970.7%-2.1%17.3%2.6%0.7%-2.8%16.3%1.9%0.0%
    1997-19980.6%9.7%1.8%-7.8%2.5%9.0%1.4%-8.4%1.8%
    1998-19990.1%10.4%5.5%-6.5%4.2%10.3%5.2%-6.6%4.2%
    1999-2000-0.1%1.5%6.6%4.3%2.7%1.5%6.7%4.4%2.7%
    2000-2001-0.4%-1.3%14.4%5.9%2.0%-0.9%14.8%6.3%2.3%
    2001-2002-0.4%-0.6%15.5%5.3%2.5%-0.2%15.9%5.6%2.9%
    2002-2003-0.2%1.9%8.2%3.5%3.0%2.1%8.3%3.7%3.2%
    2003-2004-0.3%-8.8%8.2%16.6%1.2%-8.5%8.5%16.9%1.5%
    2004-2005-0.3%8.3%3.0%-6.5%2.1%8.6%3.4%-6.2%2.4%

    As you can see, there are some years, most notably 2000 to 2004, where the “State Aid” figures, adjusted for inflation, are mostly decreasing. The statement on the Kansas Families United for Public Education website, therefore, could be construed as true. But over the period 1994 to 2005, “State Aid” increased by 61%, while inflation increased by 41%. So to make that statement true, you have to be looking at only recent history.

    Also, to make that statement true, you have to be looking at only a small part of the total picture. “State Aid” is only part of the total source of funds that schools have. Schools also receive money from “Federal Aid” and “Local Revenue.” For 2004-2005, “State Aid” was 55% of the total spent on schools in Kansas, and for the period in the tables above, “State Aid” was 57.6% of total spending. When you consider the total amount spent, there is no year in which the increase in total spending was less than the rate of inflation for that year.

    Then, there is even the larger picture. In recent years the number of students in Kansas has been declining. This means that the total spent per student increases at a faster rate than total spending.

    Does it matter that “State Aid” might not be increasing as fast as total school spending? I don’t think the schoolchildren in Kansas can tell. But I should not make such a hasty conclusion. Given the mountain of regulations that public schools must comply with, there may be restrictions on how funds from certain sources may be spent, and those regulations might mean that the total available for schools to spend can’t be allocated optimally.

    But I think I can safely conclude this: when advocates for school spending make the case that “State aid has failed to keep pace with inflation,” we should examine the total picture.

  • Political Decision Making Increases Conflict

    A column by economist Walter E. Williams (Why we’re a divided nation) strongly makes the case for more decision making by free markets rather than by the government through the political process.

    When decisions are made through free markets, Dr. Williams says, both parties win, because in a free market, parties voluntarily enter into only those transactions that benefit them.

    When decisions are made for us by the government, however, it is almost always the case that one party’s gain is someone else’s loss. Therefore, there is conflict. The more decisions made through politics, the more potential for conflict. Coalitions arise in order to try to get more from the government, and the most effective coalitions “are those with a proven record of being the most divisive — those based on race, ethnicity, religion and region.”

    The final paragraph of the column is this: “The best thing the president and Congress can do to heal our country is to reduce the impact of government on our lives. Doing so will not only produce a less divided country and greater economic efficiency but bear greater faith and allegiance to the vision of America held by our founders — a country of limited government.”

    In an earlier post, I mentioned some columns by Dr. Williams that I thought were important. This column is certainly one of his best, as it very simply, in one short page, shows us a major fault in our current political landscape.

  • John Bogle on Investing: The First 50 Years

    John Bogle on Investing: The First 50 Years
    John C. Bogle
    McGraw-Hill, 2001

    “The one great secret of investing is that there is no secret.”

    “Investment success, it turns out, lies in simplicity as basic as the virtues of thrift, independence of thought, financial discipline, realistic expectations, and common sense.”

    John C. Bogle, whom I greatly admire, founded Vanguard investment management company, a mutual fund company owned by its shareholders. He pioneered the no-load mutual fund and the index fund. These two ideas have made it possible for the average person to be in charge of their investments and do better than any of the Wall Street professionals that make up the financial establishment.

    A no-load mutual fund is one that charges no sales fee or commission, either to buy or sell the funds.

    An index fund is one that is managed to match the performance of a broad market index, such as the S&P 500 Index or the Wilshire 5000 Index for stocks. There are bond indexes, too. Investing in an index mutual fund is like buying everything (“the haystack”) instead of searching for needle.

    Actively managed funds employ high-powered investment professionals who use many different techniques to select securities that they believe will perform better than other funds. It would seem that these funds should do much better than the passive index fund strategy. But the results don’t show this to be true. That’s what Mr. Bogle means when he says there is no secret.

    For the period 1987 through 1997 (this is from a speech given in 1999), Morningstar selected what they term the equity fund “Manager of the Year.” For these managers, not even one of them beat the S&P 500 Index in the following year. Not even one was able to turn in an above average result.

    From 1993 through 1998 the New York Times asked five investment managers to manage a hypothetical portfolio. The portfolios started with $50,000. At the end the average advisor portfolio grew to $103,500. Does that seem like a lot of growth? Most people would probably be happy with that. But the market average, as represented by the S&P 500 Index, grew to $156,100 over the same period.

    Any comparison of index funds to actively managed funds will show that, over time, the index funds do better. For short periods, some actively managed funds will do better than the index funds. The problem is that we don’t know which funds will do better.

    Why do index funds outperform actively managed funds over time? The answer, according to Mr. Bogle, is costs. Investors pay costs in the form of sales charges or loads when they buy (and sometimes when they sell) funds, actively managed funds often have some portion of their assets held as cash reserves, actively managed funds incur high transaction costs as they buy and sell securities, and actively managed funds usually charge higher management fees. Plus, actively managed funds can generate tax bills for their holders, too. These costs substantially reduce the return to investors in actively managed funds. The tyranny of compounding tells us that even small differences in returns can make huge differences in the amount of money one can have as they start retirement. An investment in the S&P Index would be worth about twice as much as an investment in the average equity fund over the period 1949 to 1998.

    The innovations that Mr. Bogle has been responsible for are invaluable. The collections of speeches in this book are fascinating to read, and following the advice in them will lead to a lifetime of success in investing. It is not, however, the same advice you’ll get from a stockbroker or from most financial advisors.

  • John Todd on Eminent Domain in Kansas

    To: The Kansas House/Senate Joint Committee on Economic Development.

    Subject: Testimony Regarding Eminent Domain at the October 11, 2005 hearing.

    My name is John Todd. I am a real estate broker and land developer from Wichita.

    I support the proposition to amend article 15 of the constitution of the state of Kansas by adding a new section thereto, concerning eminent domain as follows:

    “Private property shall not be taken except for public use, and private property shall not be taken without just compensation. The taking of private property with the intent to or in anticipation of selling, leasing or otherwise transferring any interest in the property to any private entity is not a valid public use and is prohibited.”

    I also support the immediate passage of legislation that would codify into law the exact meaning of the above amendment language. This would replace existing statutes.

    I do not support any additional language in the amendment or in any immediately passed legislation that would in any way mitigate the private property rights protection contained therein.

    The keys to the economic freedoms we enjoy in this country are “individual liberty”, “private property rights” and the “free market system”. Examples of failed economic systems like the former Soviet Union emphasized the “collective good”, “state owned property” and “state controlled markets”. Allowing governments the power to take privately owned homes and businesses from individuals and turn them over to private developers for potentially more profitable, higher-tax uses, is a good example of eminent domain abuse done for the “collective” benefit of a community. Using eminent domain to seize property for private/public partnerships projects is the rage today, privatizing profits for the inside group, and reserving losses for public taxpayers. The governments participation in the process of taking private property from one private group for the benefit of another private group, and placing governments in a position to choose which business groups wins and which fails, flies in the face of private property rights, freedom, and free market economics.

    A quote by Nobel Prize winning economists Milton Friedman, and Gary Becker as well as economics history Professor Douglass North in Tom Bethell’s book “The Noblest Triumph, Property and Prosperity Through The Ages” is appropriate here. “In an economically free society, the fundamental function of government is the protection of private property and the provision of a stable infrastructure for a voluntary exchange system. When a government fails to protect private property, takes property itself without full compensation, or establishes restrictions (and follows policies) that limit voluntary exchange, it violates the economic freedom of its citizens.”

    Please support the eminent domain reforms I have suggested.

  • Public Access, or lack there of

    Dear Bob’s Blog, I recently moved to wichita from chicago… a while b4 i decided to move I had completed my Comcast public access certification. Comcast is basicaly the equivalence to Cox here. Un / Fortunately I was unable to put it to any good use while in Chicago due to some circumstances…. however I was searchin around the web and came across your blog entry on the lack of public acess for the public here in wichita. I wondered if you had any luck with your letter and/or knew any sources of information on the subject. I would be willing to put forth some effort in helping our voice be heard…