Voice For Liberty

Tag: Free markets

  • The “Free” Kansas Lottery Proceeds

    An article titled “Nothing’s Free” by Russell Roberts, published in The Freeman: Ideas on Liberty
    http://www.fee.org/publications/the-freeman/article.asp?aid=4419 explains that even though we might be accustomed to thinking that the state’s proceeds from taxes like those on the Kansas Lottery are “free,” this is not at all the case. As Mr. Roberts explains:

    About 55 percent of the receipts go to prizes, 10 percent to expenses, and 35 percent to education or some similar unimpeachable cause. Because 35 percent goes to neither winners nor losers, the real cost of the lottery is that you win less often and the prizes are smaller than would be the case without a government monopoly. If government allowed competition or made gambling legal, people who like to gamble would have a higher chance of winning and there would be more money distributed to winners.

    So lottery-funded education is not free after all. Subsidizing education out of lottery proceeds punishes people who like to gamble. Those turn out on average to be people who are relatively poor with less education. Can you think of a more immoral solution for funding education than to take the money from those with the least education?

    (I checked the Kansas Lottery’s website. Our state’s figures are close to the figures Mr. Roberts gives: “In fiscal year 2005 (July 1, 2004 through June 30, 2005), the Kansas Lottery paid out 54 percent in prizes. The State Gaming Revenues Fund received 31 percent of ticket sales; cost of sales was 5 percent (which covers online vendor fees, telecommunications costs and instant ticket printing); 6 percent was transferred to retailer earnings and 4 percent covered administrative expenses (salaries, advertising, depreciation, professional services and other administrative expenses.)”)

    (By the way, for Kansas in fiscal year 2005, a year in which $65,400,000 was transferred to the state, a whopping $80,000 went to the Problem Gambling Grant Fund.)

    What’s ironic is that gamblers are worse off playing against the State of Kansas than the mob-run numbers rackets. As a letter-writer in the New York Times wrote: “They [organized crime] paid out about 85 percent of the amounts that were bet, retaining 15 percent or less for profits and expenses like payoffs.”

    If we want to let people gamble, let’s at least have a lottery where players have a decent chance of winning. From Mr. Roberts again: “Under a private, competitive lottery system, the prizes would be bigger and the odds of winning would be higher. It would be a better world than the one we now live in, where people in search of hope are forced to pay a 35 percent tax to finance the college education of mostly upper-class children.”

  • 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.

  • 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.

  • Catastrophe in Big Easy demonstrates big government’s failure

    Writing from Orlando, Florida

    An excellent article by David Boaz of the Cato Institute titled “Catastrophe in Big Easy Demonstrates Big Government’s Failure” (available here: http://www.cato.org/pub_display.php?pub_id=4819) explains how miserably the government at all levels performed before and after Hurricane Katrina.

    The disaster started long before this year, when government spent a lot of money in Louisiana, but didn’t protect it from hurricanes: “During the Bush administration, Louisiana received far more money for Army Corps of Engineers civil projects than any other state, but it wasn’t spent on levees or flood control. Surprisingly enough, it was spent for unrelated projects favored by Louisiana’s congressional delegation.”

    After the hurricane struck, it seemed that government spent most of its efforts trying to keep out the scores of private-sector entities that were responding to the need. “Meanwhile, despite FEMA’s best efforts, immediately after the hurricane the private sector — businesses, churches, charities, and individuals — began to supply services to the victims.”

    What really hurts is to realize who it is that suffered the most. “Who were the people who suffered most from Hurricane Katrina? The poorest residents of New Orleans, many of them on welfare — the very people the government has lured into decades of dependency. The welfare state has taught generations of poor people to look to government for everything — housing, food, money. Their sense of responsibility and self-reliance had atrophied. When government failed, they had few resources to fall back on.”

    After all this, who could want more government? It seems that some do — quite a few, according to The New York Times, which today published an article titled “Voters Showed Less Appetite for Tax Cuts.” It contains this sentence: “It may be, some analysts suggested, that after the terrorist attacks of Sept. 11, 2001, and this year’s Gulf Coast hurricanes, Americans saw the value of government investment in infrastructure, public safety and other services and are now more willing to pay for it.”

    I think if people looked at the job that government does, compared with what the private sector can do even when it is not required to do so, they would realize that more government is not the answer.

  • Local economic development in Wichita

    Writing from Memphis, Tennessee

    Today’s Wichita Eagle (November 5, 2005) tells us of a new economic development package that our local governments have given to induce a call center to locate in Wichita. The deal is described as “one of the biggest the two-year-old economic development coalition [Greater Wichita Economic Development Coalition] has landed.”

    There is an interesting academic paper titled “The Failures of Economic Development Incentives,” published in Journal of the American Planning Association, and which can be read here: www.planning.org/japa/pdf/04winterecondev.pdf. A few quotes from the study:

    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 to attract new businesses makes a lot of sense. It’s a win-win deal, backers say. Everyone benefits. This is why it appeals so 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 article shows.

    Close to Wichita we have the town of Lawrence, which has recently realized that it as been, well, bamboozled? A September 29, 2005 Lawrence Journal-World article (“Firms must earn tax incentives”) tell us: “Even with these generous standards for compliance, to have 13 out of 17 partnerships fail [to live up to promised economic activity levels] indicates that the city has received poor guidance in its economic development activities.” Further: “The most disconcerting fact is that Lawrence would probably have gained nearly all of the jobs generated by these firms without giving away wasteful tax breaks.”

    On November 6, 2005, an article in the Lexington (Kentucky) Herald-Leader said this:

    The Herald-Leader’s investigation, based on a review of more than 15,000 pages of documents and interviews with more than 100 people, reveals a pattern of government giveaways that, all too often, ends in lost jobs, abandoned factories and broken promises.

    The investigation shows:

    Companies that received incentives often did not live up to their promises. In a 10-year period the paper analyzed, at least one in four companies that received assistance from the state’s main cash-grant program did not create the number of jobs projected.

    A tax-incentive program specifically for counties with high unemployment has had little effect in many of those areas. One in five manufacturing companies that received the tax break has since closed.

    There is spotty oversight of state tax incentives. The state sometimes does not attempt to recover incentives, even when companies don’t create jobs as required.

    …

    Unlike some other states, Kentucky makes little information about incentives public. The Cabinet for Economic Development refuses to release much of the information about its dealings with businesses, citing proprietary concerns. The cabinet has never studied its programs’ effectiveness, and it blocked a legislative committee’s effort to do so.

    The Herald-Leader’s examination of Kentucky’s business-incentive programs comes when, nationally, questions are mounting about the effectiveness and legality of expensive government job-creation efforts. The U.S. Supreme Court is expected to decide by spring whether trading tax breaks for jobs is legal or whether they amount to discrimination against other companies.

    Meanwhile, states continue engaging in costly economic battles for new jobs, even though research strongly suggests that few business subsidies actually influence where a company sets up shop.

    We might want to be optimistic and hope that our local Wichita and Sedgwick County leaders are smarter than those in Lawrence and Lexington. Evidence shows us, however, that this probably isn’t the case. Our own local Wichita City Council members have shown that they aren’t familiar with even the most basic facts about our economic development programs. How do we know this? Consider the article titled “Tax break triggers call for reform” published in the Wichita Eagle on August 1, 2004:

    Public controversy over the Genesis bond has exposed some glaring flaws in the process used to review industrial revenue bonds and accompanying tax breaks.

    For example, on July 13, Mayans and council members Sharon Fearey, Carl Brewer, Bob Martz and Paul Gray voted in favor of granting Genesis $11.8 million in industrial revenue bond financing for its expansion, along with a 50 percent break on property taxes worth $1.7 million.

    They all said they didn’t know that, with that vote, they were also approving a sales tax exemption, estimated by Genesis to be worth about $375,000.

    It is not like the sales tax exemption that accompanies industrial revenue bonds is a secret. An easily accessible web page on the City of Wichita’s web site explains it.

    But perhaps there is hope. The Wichita Business Journal has recently reported this: “The city and county are getting $2 back for every dollar they spent over the past 18 months on economic development incentives, according to an analysis of GWEDC-supplied data. The report was presented at Thursday’s GWEDC investor luncheon at the Hyatt Regency by Janet Harrah, director of the Center for Economic Development and Business Research at Wichita State University.” Personally, I am skeptical. I have asked to see these figures and how they are calculated, but I have not been able to obtain them.

  • How government insurance destroyed New Orleans

    Writing from Chicago, Illinois

    In the September 3, 2005 New York Times, columnist John Tierney educates us on the difference between private insurance and government insurance. Currently, the flood insurance that’s available through the federal government, because the premiums are so low, doesn’t fully reflect the costs of assuming that risk. And even as cheap as the flood insurance rates are, not many people bought it.

    What’s wrong with government insurance that’s priced too low to cover the risks it insures? First, the taxpayers as a whole have to pay to subsidize something that benefits only a few. Second, as Mr. Tierney writes, building strong levees is a long-term project that protects against something that probably won’t happen before the next election — the time horizon of most politicians. “Members of Congress will always have higher priorities than paying for levees in someone else’s state.”

    Also, government insurance isn’t subject to the discipline of having to make a profit. Private insurance companies must earn a profit over the long haul, so they will charge rates commensurate with the risk, and they will seek ways to reduce the risk. They might decline to insure property in the riskiest areas, and they will pressure governments to build and maintain the protections that, sadly, we learned failed in New Orleans when levees broke under conditions they should have survived. Private companies have the discipline to do this. Governments don’t.

    In his column, Mr. Tierney tells us the history of fire protection in America, and how private fire insurance has worked to ensure the fire safety we have today.

    Some may say that the poor of New Orleans couldn’t afford to live where they did if they had to pay flood insurance premiums that were priced properly. That’s something that government can’t cure — except that government will try by spending untold billions. But after New Orleans is rebuilt, it is likely that before too long the same situation will exist as did before Katrina. Do we really expect anything else?

  • Employer-paid health insurance

    In the past I have written on how the system in America where almost everyone gets their health insurance through their job (Let’s Pay for Our Own Health Insurance) does not serve us well. Now I have become aware of even more evidence as to why we should all choose and pay for our own health insurance.

    A Harvard study (Illness And Injury As Contributors To Bankruptcy) concluded that of families that declared bankruptcy, about half cited medical bills as the reason. Of those, 76% had medical insurance at the time they became sick. Some of the problem is that when people become seriously ill, they can’t work. After they lose their job they have no income, and they can’t pay the premium to continue their existing coverage.

    Many types of insurance, and some health insurance policies, I have found, offer an option called “waiver of premium.” This option, if selected and paid for, pays the policy’s premiums when the insured can’t. This would help in the case where people are too sick to work and can’t afford their premiums. They would still be covered.

    If your employer, through whom you get your health insurance, doesn’t offer this waiver of premium option, you realistically have no way to obtain it. But if we all chose and paid for our own health insurance, those who wished to could have this option. This is just one more reason why the current system of employer-provided health insurance does not work well.

  • Prices ration scarce goods

    As the price for gasoline rises, politicians hear increased calls for regulation of gas prices. We hear news stories of hotels increasing prices for victims of hurricane Katrina, and prices for needed goods in the destructed area could rise, too.

    In Wichita, when gasoline prices rose rapidly, someone told me that this was price gouging, because the price the gas stations pay for gasoline hasn’t increased yet. I’m sure that’s true, their cost hasn’t increased yet, as they’re still selling gasoline they already bought some time ago. This analysis, however, doesn’t consider the most important role of prices: to strike a balance between supply and demand. That’s what prices do.

    Consider what the economist Walter E. Williams wrote about plywood prices:

    Windfall profits are indeed profits far beyond what’s necessary for an entrepreneur to stay in business, but windfall profits also play a vital role. Windfall profits signal that a human want is not being met. Resources emerge to meet that want. For example, when Hurricane Andrew devastated parts of South Florida, plywood prices skyrocketed. Florida’s attorney general threatened actions against companies for price-gouging.

    Those windfall profits conveyed messages to the rest of the economy. Let’s say that pre-hurricane plywood prices were $10 a sheet and afterward they were $20. That profit potential created a powerful signal. Instead of plywood manufacturers selling their plywood inventory to, say, Pennsylvania wholesalers for $8 a sheet, they were more than happy to ship them to Floridian wholesalers for higher prices. Wholesalers in other states were happy to sell their plywood to Floridians for higher prices. Since plywood supplies were moving to Florida, plywood prices elsewhere rose.

    From a social point of view, this is wonderful. Say I planned to spend a Saturday afternoon building a house for my dog. I go to my neighborhood lumberyard in Pennsylvania expecting to pay $10 for a plywood sheet, and get there and find out it’s $18. I say, “The heck with the dog; let him sleep in the rain!” I have voluntarily made a plywood sheet available for a more valuable use — rebuilding the house of a human.

    None of these and other voluntary actions making plywood available to Floridians would happen if price controls were slapped on plywood making the pre- and post-hurricane prices the same. Freely fluctuating prices, including the potential for windfall profits, encourage people to do voluntarily what’s in the social interest.

    In free and open markets, profits are to be praised — not scorned, as economic and political charlatans would have us do.

    We might consider the prices for hotel rooms. As families evacuated before (or after) Katrina struck, they needed hotel rooms. If the usual price for a hotel room was, say, $50, and hotel operators can’t increase their prices, there will be a shortage of hotel rooms. Why is this? Think of the Jones family with children. At a room price of $50, the Jones family might take two rooms, one for the parents, and another for the children. If the hotel operator is allowed to increase prices, the room price might rise to, say, $100. At that price, the Jones family might decide they could all stay in one room. That makes the second room, the room the Jones family children would have occupied at a price of $50, available for the Smith family. Otherwise, the Jones family children would be in the second room, and the Smith family is on the street, or has to drive farther to find a room.

    Yes, the Smith family had to pay $100 for a room when they would prefer to pay only $50, but if the price is $50, there is no hotel room available for them.

    Some people might object that the hotel operator is unjustly enriched by being able to sell hotel rooms for $100, when normally they fetch only $50. But what is the alternative? Is there anyone who has the power to say to the Jones family that they should all stay in one room, leaving a room free for the Smith family? Or, in the case of gasoline prices held artificially low through price controls, someone has to judge whose use of gasoline is more valued.

    But if the prices of hotel rooms, plywood, and gasoline are allowed to fluctuate, each person is free to make their own judgment as to how much they want to consume. If the Jones family really wants two hotel rooms, they can have them. If Dr. Williams really wants to build the doghouse, he can. But people acting as they do — demanding less of something as its price rises — there will be more hotel rooms or plywood available for others. If the price of plywood in Florida is controlled so that it can’t increase, the cost of plywood in Pennsylvania will likely be the same $10 as it always is. So plywood is used in Pennsylvania to make doghouses as people in Florida need plywood to patch the roofs of the homes so that they can stay dry.

    That’s what is important about prices. They represent people voluntarily — and that’s a very important word that Dr. Williams used — adjusting their behavior. The alternative is shortages, gas lines, rationing, government control, and commissions deciding who gets what at what price — all the signs of a planned economy. That does no one any good.

    In the case of my friend in Wichita, who was going to make a weekend trip that would require about 100 gallons of gasoline in a vehicle that gets 12 miles per gallon, I suggested renting a car that gets better fuel economy. That’s what he did. In the end, he’s saving about $100, even considering the cost of car rental, and he’s making about 50 gallons of gasoline available to someone else. That’s the power of prices in action.

  • How to decide arts funding

    Writing from Miami, Fla.

    In an editorial in The Wichita Eagle on August 9, 2005, Randy Schofield wrote, explaining why government should support culture: “Because cultural amenities make Wichita a more desirable place to live, work and visit, and thus help realize Wichita’s quality of life and economic development goals.” We might examine some of the ideas and reasoning behind this statement.

    Do cultural amenities make Wichita more desirable? That’s quite a judgment to make. Personally, I enjoy many of the music events held at Wichita State University. I look forward to attending the recitals in the Rie Bloomfield Organ Series, and the piano recitals by Professors Paul Reed, Julie Bees, and Andrew Trechak are the highlights of my cultural season, and, sadly, largely unappreciated by the rest of Wichita. But that’s my taste and preference.

    There is a common tendency to judge “highbrow” culture — art museums, the symphony, opera, etc. — as somehow being more valued than other culture. But what people actually do indicates something different. When people spend their own money we find that not many go to the piano recital, the symphony, or the art museum. Instead, they attend pop, rock, or country music concerts, attend sporting events, go to movies, eat at restaurants, rent DVDs, and watch cable or satellite television. I’m not prepared to make a value judgment as to which activities are more desirable. In a free society dedicated to personal liberty, that’s a decision for each person to make individually.

    Because there is the tendency to judge highbrow culture as highly valued, governments, as is the case in Wichita, often subsidize it or pay for it outright. Generally, governments don’t subsidize the “lowbrow” culture events that I listed above. So why does highbrow culture require a subsidy? There can be only one reason why: the public, as a whole, does not place as much value on this culture as it costs to produce it. There is simply no way to conclude otherwise.

    Consider the movie industry. It, to my knowledge, does not receive government subsidies. Yet, it is able to make a profit most of the time, even though it faces fierce competition from many other ways people can spend their leisure dollars. The movie industry has also faced many challenges arising from new technologies: television, videocassette recorders, and cable television come to mind. How has this industry survived? By focusing on the customer, by determining what people are willing to spend their money on, and by producing products that people value enough to buy. Since the movie industry does not receive government subsidies, it has to do this. It has to meet customer needs and desires and do so efficiently. Otherwise, it starts to lose money. These losses are a signal to management that they aren’t satisfying customers, or not running their business efficiently. They have to change something, or they cease to exist.

    When an organization receives government funding, however, it is isolated from the marketplace and its customers. If the organization doesn’t generate enough revenue to cover its costs, it simply asks the taxpayer to pay the difference and it goes on to the next year. The vital imperative to change, to improve, to serve the customer, it doesn’t exist. That’s exactly what is happening with Exploration Place. It has operated at a loss for four years. By accounts, the museum’s exhibits are tired. In the face of mounting losses, they weren’t able to change in ways that the public valued. Yet, the Sedgwick County Commission has given it funding to stay open for a little while longer, and the museum is asking for $2.8 million per year.

    Some might say that it doesn’t really matter much if a government gives a little money to a highbrow cultural program. But consider from where the government gets the money. It has to tax people, and that leaves people — not by their own choice — with less money to do the things they really want to do. That makes our city, as a whole, poorer than it would be otherwise, as people aren’t able to spend their money on the things they value most. The government, instead, tells us that we have made the wrong choices, and they are going to correct our poor judgment.

    The way to determine what the people of Wichita truly value is to price things at their true cost. People, by freely choosing how they spend their money, will tell us what they value.

    In his editorial, Mr. Schofield also said: “The city needs a fair, objective way to evaluate cultural programs and award funding.” I submit that it is not fair to ask one group of people to pay for the leisure activities of another group, no matter how much we value those activities. This is what happens when the city spends tax money on culture. For the evaluation as to which programs are worthy, a free market will tell us that. People will vote, using the votes they really value — their own personal dollars — and decide which programs are valued. When governments or commissions spend taxpayer money, they don’t have to consider value.

    “It’s a good first step to bringing some discipline to the arts funding process.” The free marketplace of ideas where true costs are charged provides all the discipline required. How can we expect politicians and arts commission members to exhibit discipline when they aren’t spending their own money?

    “No, government can’t support every cultural arts organization.” Finally, a statement from Mr. Schofield that I can agree with!

    “But it can help protect Wichita’s cultural investment by providing a dependable source of funds for proven programs and clear oversight and accountability for taxpayers.” There are no “proven” programs as long as they accept government funds, especially when they know the source of funds is dependable. That dependable source of funds allows them to ignore the market and their customers. The way to prove a program’s worth is to price it so that it pays for its entire cost of production. Then, see if people are willing to buy.

    Would there be any arts and culture in Wichita if government stopped funding cultural programs? I don’t know, but I imagine there will be. It might turn out that the culture we would have would be better than what we have now, because the operators of cultural programs would have to produce what people want badly enough to pay full freight for. We don’t really know. But we do know that the alternative is worse. It’s more government and more commissions making decisions for us, deciding what we should do with our own money and time.