Voice For Liberty

Tag: Economics

  • Ticket scalping is a market function, not a criminal activity

    At the Intrust Bank Arena in downtown Wichita, some concerts are very popular, which leads to people frustrated at two things: the inability to buy tickets when they go on sale, and then the high prices that ticket scalpers ask for tickets on the aftermarket.

    I understand the frustration of the stymied ticket buyers. Who wants to pay $300 for a ticket that was sold by the arena’s box office for $50? It would be great if everyone who wanted to attend could do so for $50 — or for $5, for that matter. And that gets to the heart of the problem and why it isn’t likely to be solved: human behavior and economics.

    Walter Block has a chapter in his book Defending the Undefendable that defends the ticket scalper. (The book in pdf form is here.)

    As it turns out, scalping is a beneficial economic activity. But even if you don’t believe this, scalping could be avoided if venues like the arena would sell tickets in a different manner.

    According to Block, scalping requires “a fixed, invariable supply of tickets.” After all , if the supply of tickets was unlimited, everyone could buy all they wanted at list price (the price printed on the ticket, and what the venue sells them for).

    Also, scalping requires “the ticket price chosen by management be lower than the ‘market clearing price.’” Markets clear when people want to buy the same number of tickets that are for sale. This balance is achieved by allowing the price of the tickets to freely adjust. When the list price of the ticket is less than what some people are willing to pay, that’s when scalpers have an opportunity to earn profits.

    This points to one way that scalping could be eliminated, if concert promoters wanted to: They could sell tickets like shares of stock or bushels of wheat are sold. These items don’t have a list price. Instead, their price is whatever people are willing to pay.

    Why would concert promoters price tickets at less than some people are willing to pay? If a scalper can get say, $300 for a ticket that the box office sells for $50, why doesn’t the box office price the ticket at $300? Or maybe $200? Here’s what Block writes:

    For one thing, lower prices invite a large audience. Long lines of people waiting to enter a theater or ballpark constitutes free publicity. In other words, management forgoes higher prices in order to save money it might have had to spend on advertising. In addition, managers are loath to raise ticket prices — even though they would have little difficulty selling them for a big event or special movie — for fear of a backlash. Many people feel that there is a “fair” price for a movie ticket, and managers are responsive to this feeling.

    There are several other motivations, less compelling, for keeping prices fixed at below equilibrium levels. Taken together they ensure that this pricing policy — the third condition necessary for scalping — will continue.

    In other words, better for scalpers to bear the brunt of public ire for setting market-clearing prices. Can you imagine the public backlash at the Intrust Bank Arena and Sedgwick County if ticket prices for very popular concerts were set at market-clearing prices?

    The chapter goes on to explain the two ways that scarce goods — concert tickets in this care — are rationed: price rationing, and non-price rationing. Price rationing, as you might imagine, relies on the price mechanism to determine a market-clearing price so that supply equals demand.

    Non-price rationing, on the other hand, relies on something else. Block mentions “first-come, first served” (camping out the night before at the box office window) and favoritism (those connected to or favored in some way by arena management get special privileges) as two methods of non-price rationing. The Intrust Bank Arena has used another method — a lottery — for some concerts.

    So which is “fair?” Does price rationing favor those with the ability to pay high prices? Certainly scalping makes it easier for rich people to obtain scarce tickets. But Block says that scalping provides entrepreneurial opportunities. Someone with a small amount of capital (just enough to buy one or more tickets) but a lot of spare time (someone without a job) can camp out in line and earn profits by selling the tickets. Or, they could simply wait in line and be paid a wage.

    By the way, scalpers are not guaranteed profits. If there is not much demand for tickets for an event, scalpers will have to sell the tickets at a loss — or they may not be able to sell them at any price.

    Back to Wichita: According to a Wichita Eagle article, a group named Taxpayers for Tickets has been formed to take action against scalping. Reading the website, it seems that the group’s focus is on more laws and enforcement of them to effect the goal of getting tickets in the hands of the taxpayers who paid for the construction of the Intrust Bank Arena.

    I don’t favor this approach. First, as we’ve seen, scalping is a socially beneficial activity that provides market-clearing prices for tickets.

    Second, there is plenty of actual crime in our community that causes death, injury, and loss of property. We don’t need to squander law enforcement resources on victimless crimes like people willingly and voluntarily engaging in market transactions.

    In a letter published in the Wichita Eagle, Todd Allen, head of Taxpayers for Tickets, wrote “I figured that since the taxpayers paid for the arena, that makes us the owners.” I hate to disappoint Mr. Allen, but that’s far from the case. Try requesting a contract, as in Sedgwick County keeps lease agreement secret. Not even Sedgwick County Commissioners are able to see the lease of the arena’s flagship tenant.

    Another article on ticket scalping is Ticket Scalpers Are Hidden Heroes.

  • Wichita city council discusses economic development incentives, again

    At this week’s meeting of the Wichita City Council, underperforming companies that have received economic incentives was at issue.

    Wichita grants incentives — usually in the form of an escape from paying property taxes — to companies. Usually there are conditions attached to the incentives, such as a certain amount of capital investment or employment targets. Recently — and in the past two or so years — several companies that received incentives have not met employment goals. Should the city rescind the tax breaks in these cases? Or should there be recognition that there’s a tough economy at the moment, and should the company be excused from meeting the goals it pledged?

    During a period of questions from the bench, council member Sue Schlapp remarked: “We have to be flexible, don’t we? … Especially in today’s economy, we need to be very careful that we’re not too rigid in what we’re doing.”

    Council member Jeff Longwell said he’d like to see something that rewards companies that bring in business from outside our community. Economic development head Allen Bell answered that the policy is limited to companies that bring in wealth from outside. Businesses that are here because their customers are here are not eligible for economic incentives, he said.

    Longwell also expressed concern about companies that use temporary employees. Should that increase in payroll be included as a benefit, even if the employees are only temps? Bell said yes, even though these jobs are not as good as direct hire placements. Wichita City Manager Bob Layton interjected that we shouldn’t count seasonal peak employee ramp-up in benefit calculations.

    Longwell added that we ought to include the fact that some companies drive up hotel occupancy rates due to the nature of their business. Bell said that this is a factor in the WSU analysis.

    Vice-mayor Jim Skelton inquired about details of the model that WSU uses to calculate the economic benefit of incentives. These calculations, Bell said, are required by the Kansas Legislature. The model presently used is unique to WSU. It focuses on the fiscal impact that an economic development project has on cities, counties, school districts, and the state. It takes into account jobs created, capital that is invested, and other factors. It includes such factors as the need for additional police and other government services, additional sales and bed tax, and other revenue sources. It then performs a present value calculation and produces a ratio. A value greater than one means the benefits exceed the costs.

    City manager Layton said that these incentives represent a contract between the business and the city. The business promises to grow the economy, and the city makes an investment in the company. The council presently is struggling with how to judge the performance of companies that have received incentives in a down economy. The WSU index makes sense, he said. If economic conditions are poor, we now have a tool to judge the performance of the companies that received incentives. There are now extenuating circumstances, he said.

    Mayor Carl Brewer said that we recognize there are challenges, and that in an ideal world we shouldn’t have to provide incentives. But he said we have several options: Be competitive and provide incentives and fight to keep what we have, or don’t provide incentives and see what happens. He said we know what would happen in that case. Businesses will go where they can get these incentives, he said, and we can’t argue that. There will always be incentives, he said, and we have to be competitive.

    The council unanimously approved a revision to the policy that recognizes down periods of economic activity. Then, it approved the extension of tax breaks to three companies that had not met all their performance goals. Passage was not unanimous in two cases, with some council members voting against the extension of the incentives. Dion Lefler’s reporting in the Wichita Eagle is at Wichita City Council eases rules on tax abatements.

    Analysis

    Contrary to the belief of the mayor, council members, and city hall bureaucrats, economic development incentives aren’t all they’re promoted to be. The state of Kansas spent some $1.3 billion on incentives over five years. In a recent report produced by the Kansas Legislative Division of Post Audit, one of the summary points is this: “Most studies of economic development incentives suggest these incentives don’t have a significant impact on economic growth.” See In Wichita, let’s have economic development for all for more on this report and a link to the document.

    There is an interesting academic paper titled The Failures of Economic Development Incentives, published in Journal of the American Planning Association. A few quotes from the study, with emphasis added:

    Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

    On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

    The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.

    On the surface of things, to the average person, it would seem that spending (or granting tax breaks, it’s the same thing) to attract new businesses makes a lot of sense. It’s a win-win deal, backers say. Everyone benefits. This is why it is so appealing to politicians. It lets them trumpet their achievements doing something that no one should reasonably disagree with. After all, who could be against jobs and prosperity? But the evidence that these schemes work is lacking, as this legislative audit and article show.

    I have suggested to the city council that a broad-based tax abatement on new capital investment could propel economic growth in Wichita. See Wichita universal tax exemption could propel growth.

    But a plan like this doesn’t give bureaucrats much to do, and gives politicians little to crow about to their constituents at election time. All it’s good for is the people who want economic growth.

  • Former Congressman McEwen endorses Kelsey, talks about economics

    This week former Ohio Representative Bob McEwen appeared in Wichita on behalf of Kansas Senator Dick Kelsey and his campaign for the Republican nomination for the United States House of Representatives from the fourth district of Kansas.

    At a breakfast meeting, McEwen said that his state — Ohio — needs Dick Kelsey in Congress, and we in Kansas would be doing Ohio a favor by electing him.

    McEwen said in Washington, there are those who are good politicians, but not necessarily effective at government. Then there are those not skilled at politicking, but good at providing leadership in government. The fact that Kelsey was chosen by his colleagues to be head of the caucus shows that he is skilled in both politics and leadership.

    McEwen added that the time to have an impact in government is early on, in the primary. People ask in the fall elections: why can’t we do any better than these two candidates? The answer, he said, is to get involved now and take an interest.

    The United States has just four percent of the world’s population, but we produce more books, plays, symphonies, copyrights, and inventions than the rest of the world combined. It’s competition that makes the difference.

    Politics, McEwen said, equals integrity plus economics. Integrity is trust and reliability. It’s composed of morality, which means not doing what’s wrong, and also of character, which is doing what is right.

    On economics, McEwen said that when someone takes away some portion of your money, you have fewer choices, or less freedom. There are only two classes of people who can take money from you. One has a gun, and is a criminal. The other — government — also has a gun, and the impact is the same. America is the richest and most powerful nation in the world because we are the most free. But as more freedom is taken away from us, the nation becomes poorer.

    How does a nation become poorer because government takes its citizens’ money? McEwen explained that when you buy something for yourself, you care about both the price and the quality of the item. But when one or both of these factors — quality and price — are in the hands of someone else, less than optimal results appear.

    When you’re buying something for someone else, you’re concerned about the price — you are the one paying, after all — but the quality may not be quite as important as when buying something for yourself.

    Or when you’re going to consume something but not pay for it yourself: quality is important — you are the consumer, after all — but price is not important. Someone else is paying the bill.

    The really bad situation is when you are neither the consumer nor the payer. In this case there’s not much incentive to be concerned about either quality or price. This, McEwen said, describes government purchases. “When we run [a dollar] through a third-party system called government, we’re in the process of making the nation poorer.” Because we do less of this than any other nation is why we’re the richest nation.

    Much of the health care that’s purchased in the U.S. is purchased on behalf of people who are not paying for it, so it suffers from the problems of third-party purchases. When health care is paid for by those who are consuming it, as is the case with laser eye surgery for vision correction, price goes down and quality goes up. “It only works every time,” McEwen said.

    So why do people get elected to office and make their country poorer, McEwen asked? Some people believe that government can make people wealthy, but he said that’s never happened in history and never will. But they’re still determined to try this course. Others believe that free people create wealth.

    In public policy, one side always wants more government. The other wants to limit government.

    The starting point is “We hold these truths to be self-evident” — which McEwen said “is a gracious way of saying any idiot ought to understand this” — “that all men are created equal and are endowed by their Creator” — right there, he said, is the distinction between us and other countries.

    Life, liberty, and the pursuit of happiness — these are the ideals of the American Revolution. The French, in their revolution, had the Enlightenment, which didn’t rely upon God, McEwen said. Liberty, equality, and fraternity — the theme of the French Revolution — eliminates God and relies on groups for the source of power and equality. But since government cannot create — it can only take from one and give to another — people object. Therefore, the symbol of the French Revolution was the guillotine.

    The source of rights in America, however, was God, who gave us life and liberty. This explains the drive by liberals to remove God from public life: “They know that if you can separate a nation from God, then there is no protection for life, and for liberty.”

  • Wichita city council discusses economic development incentives

    Last week a Wichita company that’s expanding made an application for industrial revenue bonds and accompanying property tax abatements. The company’s application wasn’t timely, and for that reason is not likely to receive the requested help. The discussion surrounding the item provides insight into city council members’ ideas about the role of the city in economic development.

    Industrial revenue bonds, or IRBs, are not a loan from the city, and the city does not make any guarantee that the bonds will be repaid. The primary benefit to the recipient of IRBs is that the property purchased with the bonds will generally be exempt, in whole or in part, from property taxes for some period. Also, the company may not have to pay sales tax on the property purchased with the bonds.

    The agenda report for this item is at Request for Letter of Intent for Industrial Revenue Bonds, Michelle Becker, Inc. (District V).

    In introducing the item, the city’s economic development chief Allen Bell said that because the project has already started construction, it falls outside the guidelines for the city’s IRB program. The construction is 85% to 90% complete.

    A question by council member Sue Schlapp established that if the company had made application before the building was started, the application would have been approved as routine.

    She also asked that if we approve this action today, will we have to go back and look at other businesses that are in the same place? Wichita City Manager Bob Layton asked that the council establish guidelines that if a project has already started, a project is not eligible for this type of assistance.

    There was also some discussion about whether this company would move away from Wichita if the tax abatement was not granted. Since the building is already under construction, Bell said this is evidence that the company is intending to stay in Wichita. “It’s difficult to think of an incentive as something that’s given after the fact,” he said.

    A question by council member Paul Gray established that there have not been many cases where companies have asked for tax breaks retroactively, according to Bell’s answer. Bell also said that he didn’t think that approving the current application would spur an avalanche of similar requests.

    Gray also noted that we can create economic disparities between companies by granting incentives, so how do we justify doing this? Bell’s answer was that an important consideration is bringing business from out of state instead of taking business away from other local companies.

    Layton added that an important consideration is whether the project can more forward without public assistance.

    Council member Jeff Longwell remarked that “we really don’t have that many tools in our toolbox for emerging businesses.” Bell agreed.

    In later discussion, Longwell said “I hate to penalize this emerging company … I should have got them in on this process long before we did and we wouldn’t even be having this argument. So I suppose I am at fault in part of this delay.”

    Gray said that because we’re not competing against another community for this company — the normal use of incentives — he can’t support this application.

    Council member Janet Miller said that the appropriate time to look at incentives is, as the manager said, when we think a company can’t move forward without the incentive. She also noted that we’re being asked to approve an action for which we’re going to soon have a policy against.

    Schlapp, indicating a desire to approve the incentive, asked for justification: “We have a company here that doesn’t need an incentive but wants an incentive … can somebody justify that?”

    Longwell said it’s not as simple as a need and a want. He said the applicant is a smart, well-managed company. But we shouldn’t use the qualifier of helping only the companies that couldn’t succeed without the city’s help. “Why not reward some some of those companies that are very well managed and run smart and have the ability to grow even more with our help than without it?” Again he referred to the lack of tools for emerging businesses. “We ought to be helping these types of companies that we think can truly prosper even more with our help … I think they fully warrant our help because they’re successful …”

    Mayor Carl Brewer said that we have a proven track record of trying to help businesses and to get businesses to come to our area. He agreed with Longwell in that we need additional tools to use for economic development, as other communities have been competing successfully. We don’t have the same tools that other communities have, he said.

    Longwell suggested the city visit with the applicant about her financing. He made a motion to defer this item. Council member Williams asked about the impending completion of the project, since it’s scheduled to be completed at the end of December. The answer from the manager was that with regard to IRBs, the project would not be eligible after it’s complete. The motion passed with Council member and Vice-mayor Jim Skelton opposed.

    Analysis

    What’s striking about the discussion are these two things:

    First, many council members and some city staff believe that the city doesn’t have enough “tools in the toolbox” for shoveling incentives on companies for economic development purposes. Evidently the ability to grant exemptions from property taxation — and not only the city’s property tax levy, but also that of the county, school district, and state — along with the ability to make outright gifts of money is not enough.

    Second, many council members and some city staff believe that they can determine which companies are worthy of incentives.

    According to city manager Layton, the city is going to revisit its economic development policies soon. This would be a good time for Wichita to come up with ideas that would benefit all companies, not only those that fall within guidelines that the council or city staff creates. My suggestion, explained in Wichita universal tax exemption could propel growth, is to give all new capital investment a tax abatement for a period of five years.

    At the state level, there has been some discussion about the costs of tax abatements or exemptions. In a recent debate in Wichita, Kansas Secretary of Revenue Joan Wagnon used the term “tax expenditures” to describe these giveaways of the state’s income. The idea is that if the state (or other governmental body) didn’t create tax abatements or exemptions, revenue to the government would be higher. Her debate opponent Alan Cobb said it’s wrong to term these tax giveaways as “expenditures,” as the money belongs to the people first, a position I agree with.

    There is the related issue of these tax abatements or exemptions really being appropriations of money that, if processed through the normal process of legislative hearings, etc., would be noticed for what they are. In Wichita city government we don’t have hearings quite like the Kansas Legislature, but the idea is the same: if this company had asked for a grant from the city for $22,253 (that’s the value of the first year of the requested tax abatement, with a similar figure for the following nine years, less $2,500 a year to the city for administrative fees), citizens — news media too — would quite likely look at this matter differently. Presented as industrial revenue bonds — just what are those anyway? — and a tax abatement, well, it all seems so … so innocent, so municipal.

    A few more observations:

    Council member Jeff Longwell’s confession of being at fault for the lateness of this company’s application should be remembered by voters in the next election, should he decide to seek to retain his current post, or — as some have told me — he seeks the mayorship of the city.

    There’s also Longwell’s use of the term “reward,” in that the city should “reward some some of those companies that are very well managed and run smart.” I’d like to remind him and the rest of the council that the free enterprise system contains a very powerful reward mechanism for companies that do well: profit. That alone is sufficient.

    Coverage from the Wichita Eagle is at Wichita City Council puts off tax breaks for accounting firm.

  • In Wichita, Free Market Economics 101 to be held

    On Monday, the Wichita Chapter of Americans For Prosperity is holding an informative meeting to learn more about free market economics and its application.

    The program is:

    A trade exercise
    A private property exercise
    Group discussions of
    “I, Pencil” by Leonard Reed
    “The Law” by Frederic Bastiat
    The Platinum Triangle Redevelopment Project
    “Seven Principles of Sound Public Policy” By Lawrence Reed

    A group discussion and question answering period will follow.

    This event is on Monday, November 30, 2009, from 7:00 pm to 9:30 pm. The location is:

    Belford Electric Inc. Meeting Room
    800 East Third Street
    Wichita, Kansas

    This is at the corner of Mead St. and Third St. North in Old Town. Click here for a Google map.

    The meeting room is limited to 24 participants. Please RSVP to John Todd at john@johntodd.net, 316-312-7335 or Susan Estes at sestes@afphq.org, 316-269-4170.

  • Money, Banking and the Federal Reserve

    Events over the last year have placed our nation’s monetary system in focus. Or, at least it should be in sharp focus, as U.S. monetary policy and the Federal Reserve System bear much responsibility for the financial crisis and the accompanying recession. Few politicians, Ron Paul being one, are looking in the right places for the cause of the problem. His campaign to audit the Fed is a good first step.

    The problems with our system of money have been known for many years. This video, dating from 1996, produced by the Ludwig von Mises Institute, explains the problem and its history. It’s 42 minutes long and well worth the time. Here’s more information from the Mises Institute:

    Thomas Jefferson and Andrew Jackson understood “The Monster”. But to most Americans today, Federal Reserve is just a name on the dollar bill. They have no idea of what the central bank does to the economy, or to their own economic lives; of how and why it was founded and operates; or of the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates.

    Dedicated to Murray N. Rothbard, steeped in American history and Austrian economics, and featuring Ron Paul, Joseph Salerno, Hans Hoppe, and Lew Rockwell, this extraordinary new film is the clearest, most compelling explanation ever offered of the Fed, and why curbing it must be our first priority.

    Alan Greenspan is not, we’re told, happy about this 42-minute blockbuster. Watch it, and you’ll understand why. This is economics and history as they are meant to be: fascinating, informative, and motivating. This movie could change America.

  • Hazlitt’s ‘Economics in One Lesson’ explains today’s economics

    Economics In One Lesson
    Henry Hazlitt

    Economics In One Lesson, first published in 1946 and recently reissued by the Ludwig von Mises Institute, explains fallacies (false or mistaken ideas) that are particularly common in the field of economics and public policy.

    At the very start of the book Hazlitt explains:

    Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for then plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

    In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

    At first it seems as though not much has changed since the end of World War II. What has changed, however, is the scope of the dangers Hazlitt identifies. That’s because government is much expanded and more intrusive today than when this book was written. We should take these lessons as even more important today.

    It is overlooked consequences that cause harm. They are overlooked sometimes because they are difficult to see, as in the broken window fallacy explained by Frederic Bastiat and also in this book. They are also “overlooked” because, as Hazlitt tells us, one group wants special favors from the government, and because there is no way to grant these favors without harming some other group, the favor-seeking group will seek to hide, obfuscate, muddle, or minimize the bad effects. At the same time they will promote the policy as good for everyone. This is roughly the job lobbyists perform, and billions are spent on it each year. That’s because a powerful government has the ability to bestow valuable favors, but those favors are paid for by someone else, someone often not easily seen.

    These two ideas — the special pleading of selfish interests and the overlooking of secondary consequences — are the core ideas of the book. As Walter Block explains in his introduction (This Book is So Me) to the Mises Institute’s new edition of this book:

    … the plan of Economics in One Lesson is clear: drill these insights into the reader in the first few chapters, and then apply them, relentlessly, without fear or favor, to a whole host of specific examples. Every widespread economic fallacy embraced by pundits, politicians, editorialists, clergy, academics is given the back of the hand they so richly deserve by this author: that public works promote economic welfare, that unions and union-inspired minimum-wage laws actually raise wages, that free trade creates unemployment, that rent control helps house the poor, that saving hurts the economy, that profits exploit the poverty stricken; the list goes on and on.

    An example of overlooked secondary consequences is government spending. When government spends, it must tax or borrow. What government spends is not available for individuals to spend. When we see magnificent public works (say a new downtown arena in Wichita), we don’t see all the things that would have been bought had the government not taxed to build the public work. We see the jobs created by the public work — all the construction workers that built the new arena — but we don’t see the jobs destroyed because people had to reduce their spending elsewhere.

    Foreign trade is a case where people often fail to grasp the complete picture. We often see exports as something good for our economy, while imports are seen as bad. Imported things are things that American workers can’t compete with, and so American jobs are lost, it is often said. But as Hazlitt says: “It is exports that pay for imports. The greater exports we have, the greater imports we must have, if we ever expect to get paid. The smaller imports we have, the smaller exports we can have. Without imports we can have no exports, for foreigners will have to funds with which to buy our goods.” So those wanting restrictions on imports are also calling for fewer exports — although they do not say this, either because they do not recognize it or it doesn’t matter to them.

    In recent years we have been told that our is a “consumer-driven” economy, fueled by people tapping their home equity that accumulated from increased home values, or spending by going into debt. It is as though if consumers started saving rather then spending on immediate consumption, the American economy would collapse. But Mr. Hazlitt tells us that “saving is only another form of spending.” After all, what is done with money that is saved? Today, few put their savings under the mattress. Instead, it is loaned to a bank or invested. Then it is spent on capital goods, which businesses use to increase their productive capability. The key fact is that businesses spend it. And, they spend it on capital goods that either expand their capacity to produce, or decease their present costs of production. Either way, that is good for everyone. It means more jobs, and better jobs. But this saving is derided as not being “productive.”

    As a conclusion Hazlitt tells us:

    And this is our lesson in its most generalized form. For many things that seem to be true when we concentrate on a single economic group are seen to be illusions when the interests of everyone, as consumer no less than producer, are considered.

    To see the problem as a whole, and not in fragments: that is the goal of economic science.

    This is a very valuable book which cuts through the fog and haze of economics and public policy and lets us understand the true effects of our government’s policies.

    An excerpt of this book can be read at One Lesson.

  • Cash for clunkers clunked

    Did the “Cash for Clunkers” program work as advertised? It all depends on the meaning of the word “work,” I suppose.

    If the definition of success means moving more cars off of dealer lots than what probably would have happened anyway, that’s good. But when looking at the marginal activity — and I believe this is the correct way of looking at things — the cost of moving the additional cars is astonishingly high.

    An Edmunds.com article calculates the cost per car for the clunkers program in a different way than the government does, and finds this:

    Nearly 690,000 vehicles were sold during the Cash for Clunkers program, officially known as the Car Allowance Rebate System (CARS), but Edmunds.com analysts indicate that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway. Analysts divided three billion dollars by 125,000 vehicles to arrive at the average $24,000 per vehicle sold. The average transaction price in August was $26,915 minus an average cash rebate of $1,667.

    Not surprisingly, the Obama administration attacked the authors of this article.

    This is just the latest evidence that the clunkers program didn’t really increase the wealth of our country. Writing at the Foundation for Economic Education, Bruce Yandle doubts the glowing assessment of effectiveness of the program:

    The doubt arises for at least three reasons. First, the program was supported politically primarily for its much touted environmental benefits. Carbon emissions would be reduced. But the reduction costs are at least ten times higher than alternate ways of removing carbon. Second, there is Bastiat’s parable of the broken window to consider. And third, there is a serious matter of eroding social norms for conserving wealth. A crushed clunker with a frozen engine is lost capital. … The cost per ton of carbon reduced could reach $500 under a set of normal values for critical variables. The cost estimate was $237 per ton under best case conditions. The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates the cost of reducing a ton of carbon to be $28 when done across U.S. industries. Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it. … Before touting the total benefits of clunkers, we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation. As Tony Liller, vice president for Goodwill, put it: “They’re crushing these cars, and they’re perfectly good. These are cars the poor need to buy.”

    It’s very difficult for the government to intervene in the economy and produce a net positive result. Even if it could, the harmful effects of taking one person’s money and giving it to another so they can get a discount on a new car far outweigh the small economic benefit that might be realized.

  • Defending insider trading

    Insider trading is almost universally judged to be bad. Company insiders, using information not available to the public, making stock trades and usually very high profits: Is that fair? How could allowing abuse like this be beneficial?

    But if you value the importance of prices as conduits of information, allowing insider trading makes a lot more information available.

    The Wall Street Journal article Learning to Love Insider Trading, written by Donald J. Boudreaux, makes this argument: “Far from being so injurious to the economy that its practice must be criminalized, insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest — in keeping prices from lying to the public about corporate realities.”

    Here’s an extended explanation from the article:

    Suppose that unscrupulous management drives Acme Inc. to the verge of bankruptcy. Being unscrupulous, Acme’s managers succeed for a time in hiding its perilous financial condition from the public. During this lying time, Acme’s share price will be too high. Investors will buy Acme shares at prices that conceal the company’s imminent doom. Creditors will extend financing to Acme on terms that do not compensate those creditors for the true risks that they are unknowingly undertaking. Perhaps some of Acme’s employees will turn down good job offers at other firms in order to remain at what they are misled to believe is a financially solid Acme Inc.

    Eventually, of course, those misled investors, creditors and workers will suffer financial losses. But the economy as a whole loses, too. Capital that would otherwise have been invested in firms more productive than Acme Inc. never gets to those firms. So compared with what would have happened had people not been misled by Acme’s deceitfully high share price, those better-run firms don’t enhance their efficiencies as much. They don’t expand their operations as much. They don’t create as many good jobs. Consumers don’t enjoy the increased outputs, improved product qualities and lower prices that would otherwise have resulted.

    It’s possible that scandals like Enron and Global Crossing might have been avoided if insiders were allowed to trade. Those who knew the true condition of these companies could have made a lot of money by trading on that information, thereby sending out price signals that these companies had serious troubles — information not known by the investing public.

    Yes, these insiders might have become rich — unjustly so, say critics — and that’s the reason why insider trading is illegal. But contrast that with the tremendous losses suffered by investors in these companies who didn’t know what the insiders knew.

    Boudreaux says that there are times when information should remain secret: “There are, of course, situations in which it is in the interest of both a company and the public for that company to delay the release of information. Such information should be protected as company property.”

    So what is the regulatory solution? Let each company decide how it defines inside information, and how employees are allowed — or not — to use it. Investors will factor these policies into their investment decisions: a company that prohibits insiders from trading will be judged as riskier than companies that allow insider trading. That’s because investors will have less information about the secretive companies.

    Because of the tremendous variety of companies and business strategies, corporations should be free to select their policies regarding insider trading. Realizing, of course, that all companies compete for investor capital, and a company’s information transparency is one factor in the competition.