Voice For Liberty

Tag: Economics

  • Economic competition isn’t like sports

    A while back USA Today carried an editorial by an Alexandria, Virginia school teacher that contains an unfortunate misunderstanding of the term competition as it applies to economics and education.

    In the article, Patrick Welsh makes one of the most inept analogies that I’ve ever seen. Here’s the heart of it:

    Being an English teacher, I prepared a little analogy to ask him about the rationale for labeling schools on the basis of Adequate Yearly Progress. Duncan’s biographies often mention that he was co-captain of the Harvard basketball team during the 1986-87 season, his senior year. I reminded him that that team won only seven games and lost 17. Such a record, I told Duncan, was the mark of a “persistently low achieving” team, which made no “annual yearly progress.” I meant the analogy to be humorous, but teachers sitting near Duncan said he didn’t seem to take it that way.

    I went on to say that I assumed Duncan and his teammates did the best they could with the talent they had, and that no matter what improvements they tried to make, it would be foolish to think their team could ever reach the highest benchmark in college basketball — the Final Four.

    The ineptness is this: A basketball game is a competition that is designed to produce a winner and a loser (or maybe a tie in some sports). By definition — except for ties — there can’t be two winners. Someone has to lose.

    But learning things in school is not a competition of the same type. When one student learns something (wins, in other words), it doesn’t mean that someone else doesn’t get to learn (loses). In fact, if all students master the lesson, then everyone wins, and there are no losers.

    But maybe Welsh isn’t writing about that type of competition. He might be speaking of market competition. An example of this might be schools competing with other schools for students.

    This type of competition doesn’t necessarily produce a winner and a loser. Explaining competition in the The Concise Encyclopedia of Economics, Wolfgang Kasper explains one of the benefits of market competition:

    Discovery. Human well-being can always be improved by new knowledge. Competitive rivalry among suppliers and buyers is a powerful incentive to search for knowledge. Self-interest motivates ceaseless, widespread, and often costly efforts to make the best use of one’s property and skills. Central planning by government and government provision are sometimes advocated as a better means of discovering new products and processes. However, experience has shown that central committees are not sufficiently motivated and simply cannot marshal all the complex, often petty, and widely dispersed knowledge needed for broad-based progress.

    Competition inspires people to improve, while central planning is the opposite.

    Applying this locally to Kansas: As Kansas has a very weak charter school law that requires charter school approval by local school boards, there are very few charter schools. Combined with the lack of school choice implemented through vouchers or tax credits in Kansas, local school districts face very little competition.

    This lack of market competition means that Kansas schools do not benefit from the dynamic discovery process that market competition fosters. The beneficiaries of this are those who favor the status quo in the Kansas education establishment and bureaucracy, including the Kansas National Education Association (KNEA, the teachers union) and the Kansas Association of School Boards (KASB). The losers are Kansas schoolchildren.

  • Why Washington only cut $38 billion: A public choice perspective

    From LearnLiberty.org: “Why do politicians never seem to cut government spending? Using public choice economics, or the economics of politics, Prof. Ben Powell shows how voters are rationally ignorant of what politicians do. This leads to a phenomenon called ‘concentrated benefits and dispersed costs,’ which favors recipients of government payments at the expense of the average taxpayer.”

    We see this type of behavior every day, in government at all levels. The people who seek subsidy at the public trough are highly motivated to seek it, and they will go to great lengths and expense to obtain it. The bureaucratic and political classes, both of which benefit from the subsidies, are motivated, too. Everyone else is less motivated, because the expense of most programs to them is very small.

    This imbalance in interests is part of the reason why government tends to grow, and why cutting anything at all is very difficult.

    The speaker in the video is Benjamin Powell, professor of economics at Suffolk University and also of The Beacon Hill Institute. He delivered a lecture last year in Kansas.

  • Kansas and Wichita quick takes: Thursday April 21, 2011

    Can anything Think Progress says about the Kochs be believed? Mark Tapscott, Washington Examiner Beltway Confidential: “Almost certainly not, to answer the question posed by the headline above. Here’s the latest example of why. Think Progress is all atwitter about a Nation magazine report concerning the Koch Industries 2010 Election Packet. This dastardly document, according to Think Progress, was “mailed to 50,000 employees instructing them on who to vote for in the 2010 midterm elections.” Curious, I clicked over to the Nation and read the cover letter in the packet. Here’s what it said about how Koch employees should decide for whom to vote: “For most of you, we’ve also enclosed a listing of candidates supported by Koch companies and KOCHPAC, the political action committee for Koch companies. Of course, deciding who to vote for is a decision that is yours and yours alone, based on factors important to you. (emphasis added)” … At RedState, Erick Erickson contrasts the behavior of unions: “Think Progress and Lee Fang love them some unions. And what do unions do? Unions send out fliers encouraging union members to vote for union backed candidates. Hell, unions even get union members to go door to door for candidates and give union dues to candidates — something KOCHPAC cannot do with all employees, just executives. Additionally, unions will often bus employees to the polls and have a poll monitor watch to make sure the union members have voted. Koch Industries does not do that. But here’s where the real intellectual dishonesty or stupidity come in. Lee Fang and Think Progress support card check. They want unions to be able to stand over a business’s employees and find out whether or not the employee has signed a card to unionize and, if not, intimidate and cajole the employee until he does (not that Think Progress or Lee Fang are on record supporting that last bit).” … Lee Fang is apparently assigned full time to digging up dirt on Charles and David Koch, and Fang’s reporting has been found to be unreliable and misinformed.

    Kansas governor on first 100 days. In a press release, Kansas Governor Sam Brownback listed some accomplishments of the first 100 days of his administration. Highlights mentioned were: “First Month Commitments” in the Governor’s Road Map for Kansas accomplished, including releasing a Strategic Economic Development Plan and establishing the Office of the Repealer. … Six Executive Reorganization Orders designed to restructure state government to become law on July 1, 2011 to increase efficiency, restructure government, and cut overhead costs. … Numerous Road Map for Kansas goals achieved through bi-partisan-supported legislation signed into law including the “Rural Opportunity Zones” bill, several deregulation bills, two pro-life bills, a voter ID bill, and a workers compensation reform bill. … On challenges ahead, the Governor said: “I am pleased with what we have accomplished in our first 100 days but our state continues to face a multitude of fiscal challenges that need to be addressed. More than 100,000 Kansans are still out of work. This administration will continue to focus on building a pro-growth environment that includes allowing businesses of all sizes to expense their investments and abolishing burdensome regulations to protect Kansans and encourage job creation.”

    Freeloaders come in all types. Recently John Stossel had an hour-long special show that focused on freeloaders. The show is now available on the free hulu service by clicking on Stossel: Freeloaders. The freeloaders Stossel profiles are not just panhandlers, although Stossel did work in disguise as a panhandler and discovered he could make over $90 a day — tax free, he added. One segment of the show uncovered farmers who received $50,000 because they were discriminated against by lenders. But — some of these farmers merely grew potted plants or fertilized their lawn to qualify as a farmer. Another reported on homeowners who stopped paying their mortgages on advice of a website. The homeowners and the website operator said there is no moral obligation to pay their mortgage loans. Corporate freeloaders didn’t escape, as General Electric was mentioned as a large recipient of government handouts. And, they won’t pay taxes: “Despite billions in profit, they’ll pay no taxes this year,” reported Stossel. … The severe poverty of American Indian tribes that live on government-managed reservations and living on government handouts is contrasted with a tribe that accepts no handouts and has no casinos. … Stossel covered his own beach house, which was covered by low-cost subsidized federal fund insurance. It suffered losses twice. … Standing in front of the U.S. Capitol, Stossel said “We rich people freeload off you taxpayers all the time, because the over-promisers in there keep churning out special deals for politically-favored groups. And they tend to be rich people, because the rich can afford lobbyists. … Think about how much money we could save if these guys just didn’t pass so many laws that encourage freeloading. But they do, year after year. They micromanage life with subsidies. And the winners are not so much the needy, but people like Bon Jovi, Ted Turner, Maurice Wilder, and — me. So let’s hope for an end to all this freeloading.”

    Are taxes the solution? From Bankrupting America: “It’s Tax Day 2011! And while it isn’t the most pleasant thing to think about, it doesn’t sting as bad as when you consider we’re $14 trillion in debt and face a $1.6 trillion deficit. So what got us into this mess? We’ve had an unfortunate habit of spending far more than we can afford — and have been doing it for years. The logical solution is to … well … stop doing that. But some have suggested we should tax our way out of the hole. Beyond the question of whether we should, there’s a more important question: can we?” … The site has an interesting infographic relating to taxes.

    The spontaneous society — centralized planning not required. In the following excerpt from Austrian Economics — A Primer Eamonn Butler explains that we don’t need centralized government planning in order to have great human accomplishment. Also, markets process far more information than any central planner could: Many people find it hard to believe that a society or an economy could survive — much less create and distribute wealth in any organised and rational way — without central planning and authority. Hayek has provided the explanation, however: the liberal human society and economy is, he says, an example of a spontaneous order. Just because something is not planned from the centre does not mean that it is wild, unkempt, random and disorderly, he points out. Societies of bees and termites are very orderly, but they are hardly planned. Human language, similarly, was never “invented”, but evolved, and grew and survived because it is useful. … The market and the price system, similarly, was never planned, but evolved as people exchanged different goods. Nor do they need any central command structure to maintain them: they have survived and expanded because they deliver such enormous benefit to us. In other words, there is a great deal of wisdom in these institutions, despite the fact that they have never been consciously designed and planned. The price system, for example, quickly and efficiently steers resources to their highest value uses, without anyone ever having deliberately invented it. The fact that there is no central planning does not mean that it is “unplanned” and irrational. We are all planners, says Hayek, in that we consciously act in order to satisfy our ambitions with the materials and information that are available to us. In the market order there is in fact far more planning taking place, and far more information being used and acted upon, than could ever be achieved by the single mind of any central authority. … In the case of the liberal market order, the rules are principles like the respect for private property and the right to hold or dispose of it, the rejection of violence and coercion, the freedom of people to enter into voluntary contracts, and the honouring of such contractual promises. Astonishingly, a few simple liberal rules such as these are sufficient to create what Rothbard calls an “awe-inspiring” harmony and co-ordination between individuals, and a precise, swift arrangement to guide resources to the greatest possible satisfaction of consumers’ desires.

  • Huffington Post says ‘tax it all.’ Seriously.

    Yesterday the Huffington Post’s Jeffrey Sachs criticized a recent Wall Street Journal editorial, claiming that the Journal “distorts the truth about taxes.”

    In the Journal piece, the claim is made that even if we taxed all the income of the top one percent of taxpayers, that would not raise enough funds to close the deficit. Sachs takes issue with the numbers, he claiming that taxing “total income of the top 1% would close the budget deficit entirely.” He sees an error in the numbers the Journal uses, and I think he might be right. I can’t figure out the arithmetic the Journal uses.

    But while Sachs takes great relish in showing — at least in his mind — that the Journal is wrong in its numbers, Sachs himself can’t be taken seriously. After all, he is proposing to tax 100 percent of the adjusted gross income income of the top one percent of earners.

    While liberals might want to take all the income of our country’s high-earning people, this is a plan that can’t be taken seriously, especially by a purportedly serious person as Sachs. It could possibly work for one year — if you could pull off a surprise and make the 100 percent tax rate retroactive, after everyone has already earned the money for the taxable year. Any other plan will fail. That’s because we know that when marginal tax rates rise, people takes steps to have less income. Some decide to work and risk less, so they have less income. Others seek to shelter income from taxes, and since almost all such tax shelters are an economically unproductive use of funds, we are all poorer as a result. And some people lie and cheat in order to avoid taxes. But we can be sure that people will takes steps to have less taxable income as tax rates rise.

    Try as we might, raising tax rates won’t generate higher revenues (as a percentage of gross domestic product), due to Hauser’s law. W. Kurt Hauser explains in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”

    People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income and make investments in unproductive tax shelters. There is less incentive to work and invest. These are some of the reasons why tax hikes usually don’t generate the promised revenue.

    Any plan to reduce the deficit by raising tax rates will have to overcome this tax-avoiding behavior. Hauser’s law says this is not likely to happen.

    The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.”

    Hauser's LawHauser’s Law illustrated. No matter what the top marginal tax rate, taxes collected remain an almost constant percentage of GDP.

  • ThinkProgress and Lee Fang: wrong again

    Earlier this week we noted that Center for American Progress Action Fund (an arm of the Center for American Progress, a think tank closely associated with President Barack Obama’s administration and left-wing financier George Soros) was launching an “ideologically driven news organization.” Its implementation would be through the ThinkProgress blog, which has been active for some time, including a role as a vocal — and often highly misinformed — critic of Charles and David Koch.

    This bit of background is important because ThinkProgress has shown to be an unreliable source of information. Case in point: Yesterday John H. Hinderaker of Powerline examined a recent post on ThinkProgress that is critical of Koch Industries and found it and its author Lee Fang to be highly lacking in a number of areas, such as facts, knowledge, and understanding of economics. One comment left to the article included: “Based on 25 years of scholarly research and market experience, I can say that Fang the Farcical knows not the first thing about either manipulation or commodities pricing. You would think that Soros could have found a junior assistant trader to teach Fang the basics. But then there wouldn’t have been a story, would there?”

    Here’s just a small example: One of the most telling parts of Fang’s article is this: “Big banks and companies like Koch employ a contango strategy by buying up oil and storing it in massive containers both on land and offshore to lock in the oil for sale later at a set price.”

    Here Fang is criticizing Koch Industries for speculation in oil markets. Hinderaker notes that unlike banks — which aren’t in the oil business — Koch Industries is actually in the oil business: “Koch certainly does buy oil and store it; it is in the oil business. However, I would be curious to know what ‘big banks’ ‘buy[] up oil and stor[e] it in massive containers both on land and offshore.’”

    Buying something when the price is low and storing it for later use seems a rather innocent act. I wonder if Fang has ever done like I have: When I notice the grocery store has Diet Pepsi on sale, I buy extra and store it for later use when I expect the price will be higher.

    Contango Confusion

    By John H. Hinderaker

    The Think Progress web site is a Soros-funded mouthpiece for the Obama administration. Someone at Think Progress or its parent, the Center for American Progress, has instructed cub reporter Lee Fang to devote full time to attacking Charles and David Koch and their company, Koch Industries. (It would be interesting to know who gave that instruction, and why.) We have deconstructed several of Mr. Fang’s attacks, all of which have been juvenile. But his latest effort is perhaps his most pitiful yet.

    In “The Contango Game,” Fang tries to show that Koch Industries “manipulates the oil market for profit.” Unfortunately, young Mr. Fang has neither the business experience nor the intelligence to understand the issues about which he writes. The result is that nearly every sentence is a howler. Among other things, while a contango market is the main subject of Fang’s post, he doesn’t know what the phrase means.

    Fang begins with the claim that oil prices are high these days because of speculation. Whether it is even possible for “speculators” — some call them investors — to have a material impact on the price of oil over time is dubious. While partisans like to blame speculators for rising oil prices–never, however, for falling prices–objective studies, like this one by the Commodity Futures Trading Commission in 2008, have failed to document any such influence.

    Continue reading at Powerline.

  • Kansas economic indicators not rising

    Economic indicators from the Federal Reserve Bank of Philadelphia indicate that the Kansas economy is not yet in a state of sustained recovery from the recession.

    KSPHCI is the Coincident Economic Activity Index. It includes four indicators, according to its creators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing, and wages and salaries. This is the index of current economic activity in Kansas. It’s plotted in blue, and measured against the left axis. Data is through February 1, 2011.

    The course of the index over the past five years clearly shows the effect of the recession. It also shows a recovery, but also a slow drift downwards over the past several months, having reached its most recent maximum in June, 2010.

    KSSLIND is the leading index for Kansas, which predicts the six-month growth rate of the state’s coincident index. According to its creators, in addition to the coincident index, “the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.” This index is plotted in red, and measured against the right axis. Data again is through February 1.

    This index, which is again a leading indicator with a six-month time lag, has lately hovered around zero or, in the case of the last six months, negative values. This explains why the current economic activity index is not rising.

    Today the Kansas consensus revenue estimating group meets to arrive at a forecast of revenue for the next fiscal year, and perhaps adjusting the estimates for the last few months of the current fiscal year (2011, which ends on June 30, 2011). It will be interesting to see how this group’s estimates compare to KSSLIND. Based on this index, I would not expect a very rosy forecast for next year, or as Kansas Policy Institute has pointed out, for the remainder of the current fiscal year.

    Kansas economic indicatorsKansas economic indicators, current in blue, and leading in red.

  • ‘I, Pencil’ in audio argues for economic freedom, not government control

    The Foundation for Economic Education has released an audio version of the booklet I, Pencil. Written by FEE’s founder Leonard E. Read and first published in 1958, its message proclaiming the importance of economic freedom has not diminished with the passage of time.

    This audio recording, which you can listen to on your computer or mp3 player, is just short of 15 minutes in length. But it this short span it makes a compelling case for economic freedom instead of government control and planning.

    In Wichita, we have a mayor, city council, and business leaders that are steering us down the path of government control instead of freedom. We locally — and in Topeka and Washington too — need to heed the lesson of I, Pencil on the impossibility of government planning to control and regulate our economy:

    I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies — millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

    The above is what I meant when writing, “If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.” For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand — that is, in the absence of governmental or any other coercive master-minding — then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

    Listen to the recording by clicking on I, Pencil. Or, read it by clicking on I, Pencil.

  • Liberals and economic knowledge

    Who might you guess is better informed on issues of economics: liberals who promote government intervention in the economy, or conservatives and libertarians who oppose it?

    A recent study found some surprising — or maybe not surprising — results. The study is titled Economic Enlightenment in Relation to College-going, Ideology, and Other Variables: A Zogby Survey of Americans. At this link you can read an abstract of the study and the entire document, too.

    An article by one of the authors that appeared in the Wall Street Journal is Are You Smarter Than a Fifth Grader? Self-identified liberals and Democrats do badly on questions of basic economics.

    In the study, researchers asked a series of questions designed to “gauge economic enlightenment.” Conclusions included these: First, and surprisingly, “for people inclined to take such a survey, basic economic enlightenment is not correlated with going to college.”

    Perhaps more importantly, who scored best: conservatives or liberals? Here’s the rundown:

    Adults self-identifying “very conservative” and “libertarian” perform the best, followed closely by “conservative.” Trailing far behind are “moderate,” then with another step down to “liberal,” and a final step to “progressive,” who, on average, get wrong 5.26 questions out of eight.”

    The authors say “we should acknowledge that none of the eight questions challenge typical conservative or libertarian policy positions.”

    The authors also note:

    At least since the days of Frédéric Bastiat, many have said that people of the left often trail behind in incorporating basic economic insight into their aesthetics, morals, and politics. We put much stock in Hayek’s theory that the social-democratic ethos is an atavistic reassertion of the ethos and mentality of the primordial paleolithic band, a mentality resistant to ideas of spontaneous order and disjointed knowledge. Our findings support such a claim, all the caveats notwithstanding. Several of the questions would seem to be fairly neutral with respect to partisan politics, particularly the questions on licensing, the standard of living, monopoly, and free trade. None of those questions challenge policies that are particularly leftwing or rationalized on the basis of equity. Yet even on such neutral questions the “progressives” and “liberals” do much worse than the “conservatives” and “libertarians.”

    Author Daniel B. Klein concludes in the Wall Street Journal piece: “Adam Smith described political economy as ‘a branch of the science of a statesman or legislator.’ Governmental power joined with wrongheadedness is something terrible, but all too common. Realizing that many of our leaders and their constituents are economically unenlightened sheds light on the troubles that surround us.”

  • Kansas and Wichita quick takes: Tuesday April 12, 2011

    Kansas Medicaid overhaul ideas. Kansas Reporter: “A collection of 120 ideas to overhaul the Kansas Medicaid program will become the groundwork for the state’s effort to transform its health program for the poor.” Full article at Lt. Gov. releases Medicaid overhaul ideas.

    Moody’s down on Kansas finances. From Dow Jones: “Moody’s Investors Service lowered its outlook on Kansas to negative, citing several budget challenges for the Midwestern state. The move indicates an increased likelihood of a near-term downgrade and comes as U.S. states face a host of hurdles, such as the funded status of pensions for public employees, mounting costs for programs such as Medicaid and tax revenue that remains pressured amid tepid economic growth. Moody’s noted Kansas’ general fund balance was negative for the second-straight year in fiscal 2010 and is likely to remain in the red in the current year. Meanwhile, the state legislature appears unlikely to include significant reserve-rebuilding provisions in the budget for the 2012 fiscal year, which begins July 1, it said. Kansas has used non-recurring measures to bolster its budget, such as a proposed $200 million from the state highway fund, the rating agency added. It also said pension under-funding ‘remains a significant challenge.’” … Moody’s has Kansas at Aa1, a step below its coveted Aaa rating. It said the state’s strengths include “strong management, with financial flexibility and adherence to best practices.”

    Kansas tax revenue. Following is a chart of the composition of Kansas general fund tax revenue through 2009. Note the general trends of personal income tax rising, and retail sales tax declining. This chart does not cover the time period since the statewide sales tax was increased last year.

    Composition of Kansas General Fund Tax Revenue

    Kansas consensus revenue estimating group. Within the next week the Kansas consensus revenue estimating group will meet to arrive at a forecast of revenue for the next fiscal year, and perhaps adjusting the estimates for the last few months of the current fiscal year (2011, which ends on June 30, 2011). This group is composed of “representatives of the Division of the Budget, Department of Revenue, Legislative Research Department, and one consulting economist each from the University of Kansas, Kansas State University, and Wichita State University.” All of these people are Kansas state government employees, and their institutions are dependent to different degree on appropriations from the legislature. Could this composition lead to a conflict of interest or possible bias in the forecasts? … The chart below shows the percent error between the group’s initial estimate of revenue for a year and the actual results. It seems that the group has a tendency to underestimate the magnitude of the swing of actual results, both good and bad. During the recession years of the early 2000s, the group was too high in its estimates (leading to a negative error percentage). Then during the following boom years the group underestimated. For the past two years the group forecast much more revenue than the state actually received, leading to some of its largest errors, in relative terms. … Forecasting the economy, of course, is a very difficult task, subject to all sorts of uncertainty that can’t be forecast.

    Kansas Consensus Revenue Estimating Group Error