Category Archives: Economics

Why Dennis Prager is wrong

Dennis Prager recently wrote a column and placed it on his website that I find to be part of the endemic societal response to everything: fear and outrage. It would seem that everything that happens in America, and in the world, is the worst thing ever and clearly marks the point of no return for the human race. While sensational and profitable, it just ain’t true. So, in a totally different approach, I took Mr. Prager’s column and responded to each and every point, not to prove him wrong, instead to provide some perspective to what he is saying. The complete text of his column is initalics and offset with asterisks while my comments are in standard font.

*I cannot imagine any thinking person who does not believe the world is getting worse.

Well, I guess I might surprise him…

*The number of slaughtered and the number of refugees from slaughter is immense and growing.

Remember that hundreds of millions were slaughtered during the 20th century, not to mention other eras in history where populations were relatively much smaller and tens of millions were slaughtered.

*Islamic State now controls territories from Afghanistan to West Africa. Libya is in the process of being added to that list. And other sadistic Islamist movements hold additional territory.

Remember when the Soviets controlled a significant portion of the planet, either directly or indirectly, and had nuclear missiles a hop skip and a jump from Florida…

*According to Pew Research, approximately 10 percent of world Muslims have a favorable opinion of the Islamic State and terror against civilians. That’s more than 100 million people.

A country of more than one billion people used to be overtly hostile to the U.S. and is now a trading partner that depends on trading with us (China).

*The Iranian regime has just increased the reward it will give to anyone who murders Indian novelist Salman Rushdie, is increasing its repression at home, now has more than a hundred billion additional dollars to spend on terror and regularly calls for the annihilation of Israel.

Iran has been a rogue regime for many years and it is important to keep in mind that the existence of the current regime was in no small part due to our own intervention in wanting to depose the Shah.

*Iran just received from Russia the most powerful anti-aircraft weapons that exist outside the United States, making a successful air attack on Iran almost impossible.

Correct me if I am wrong, but didn’t the Soviets basically create the craziest regime on the planet (N. Korea) during the last century. And the idea that Iran is impregnable now is foolish and dramatic.

*Europe is allowing in another million migrants from the Middle East, few of whom share Europe’s primary moral values. One consequence is that European women are being sexually attacked in increasing numbers. Another is that European countries are making criticism of Muslims or Islam — no matter how rational the critique — a crime punishable by jail time and/or fines.

At one point in history, didn’t Catholics in Europe kill people for religious heresy and we refer to it as the Inquisition? The world recovered from that institutionalized religious attempt at eliminating competition by slaughter, and to think that this most recent attempt at the same ends will mark the end of civilization when a significant technological divide separates the aggressors from their would-be victims is sensational and hardly likely.

*The only thing stopping regular mass murder of Europeans and Americans is increased European and American police work. And no one believes that this will suffice to prevent future attacks.

I think Prager gives too much credit to both terrorists and the police; let us remember the TSA has never—to my knowledge—ever prevented an attack. If he wishes to present evidence that somehow crime rates are higher, I would be happy to see it, but most of the evidence points to diminishing crime rates in general; particularly when you control for non-violent drug offenses. This would be like making Coca Cola illegal and then stating that the rise in crime rates due to Coke related arrests is indicative of a society in collapse; it is sophomoric, illogical, and merely designed to scare people. The growth of the police state should concern Prager more. Remember those hundreds of millions killed in the twentieth century I mentioned earlier? They were all killed by governments that established police states.

*Russia is led by a KGB man who seeks to replace American influence with Russian influence wherever possible. And he is allowed to do so by the American president and the Democratic Party.

Russia—as the Soviet Union—was run by the people who invented the KGB and they also wanted to replace American influence wherever possible…and, remember Lenin and Stalin? I am quite certain that, while I do agree Putin is a security threat, his threat is hardly greater than that of his 19th and 20th century predecessors; do bad actors like Hitler and Mussolini ring a bell.

*While Russia continues to attempt, in Charles Krauthammer’s words, “to fracture and subordinate” Ukraine, the United States under Obama refuses to send Ukraine weapons.

We—at one point in history—not only stood idly by while essentially the same nation expanded by force, but we helped them (remember: FDR called Stalin Uncle Joe).

*The United States is led by a president whose primary foe seems to be the prime minister of Israel, even though the prime minister’s country happens to be the freest, most moral and most pro-American country in the Middle East.

And he is opposed by people who seem largely obsessed with the same man…just for different reasons. Perhaps if Bush would not have preached restraint to the Israelis while we carpet bombed our attackers, much of this would be a non-issue at this point. Incidentally, everyone does realize the Israel is a socialist state, right?

*The commander of the U.S. Pacific Command recently told Congress “that China is clearly militarizing the South China Sea,” in order to gain “hegemony in East Asia.”

Hmmmm…I am partial to the good ole USA, but it smacks of a bit of hypocrisy for us to spend more on defense than—I believe—the next 16 countries combined and complain when one of those 16 builds theirs too. We scoff at the notion from other nations that we are attempting to control the globe through military might, but use the same argument against China? That is politics, I guess.

*Cuba now has American recognition, and as a direct result has felt free to increase its subjugation of the Cuban people. In January, the Cuban regime arrested 1,414 political dissidents, the second-most ever recorded. It will be rewarded by a visit from President Obama.

There are five communist countries left on the planet and we have long traded with three of them (Cuba and North Korea being the exceptions); by the way, exporting capitalism was one of Reagan’s plans to topple the Soviet’s. If not trading with them is the way to break the Cuban regime, shouldn’t they be long gone by now?

*In the United States, most universities are being taken over by a fascistic expression of leftism. Student thugs take over administration offices with impunity, shout down speakers with whom they differ, and many faculty members support them. In the name of “diversity” and “tolerance,” American universities, once a jewel of free thought and intellectual inquiry, have become places Americans who cherish liberty and cherish America increasingly fear to send their children.

Universities have been leftist for a while now. Furthermore, I have a BS in political science and a Master’s in Economics (the equivalent of 6 years of higher education via several colleges/universities) and I have never encountered the iron-fisted liberalism which is often discussed on talk radio. In fact, my most liberal professor conceded multiple points to me (because I used evidence and not hyperbole). Additionally, that same professor offered to write me a recommendation for graduate school. I might suggest that the effect of liberal professors has become a convenient way for students with conservative parents to explain their mediocre grades…

*Contempt for America and its founding ideals are indoctrinated into America’s youth from high school on. If shown any of the iconic paintings of the Founders — such as signing the Declaration of Independence or deliberating at the Constitutional Convention — rather than seeing great people creating a great nation, most young Americans now only see racist, sexist, rich, slave-owning white males.

Fallacies about the founders—and much of history—are not isolated to progressives; conservatives also spread a lot of mis-information and this is not a new problem. [Example being that all settlers from Europe supposedly came fleeing from religious persecution and seeking religious freedom; the fact is that Puritans fled England because religion was too free and easy. They set up a colony with designs on imposing religion and even killed dissenters in some cases.] Furthermore, I would suggest that instead of people exhibiting the response Mr. Prager suggests most students would not know who the people they were looking at are.

*As its universities make clear, the West is committing suicide. At UCLA one doesn’t have to read a single play by Shakespeare in order to receive a degree in English. But one is fully indoctrinated regarding “White Privilege,” “systemic racism,” “income inequality,” “homophobia,” “hate speech,” “climate change” and whatever radicals care about.

First of all, while reading Shakespeare does have some entertaining value and historical context, it is effectively worthless for much of society; particularly an English major (because nobody talks like that). Secondly, those things are discussed rather sparingly, and are dependent on the field chosen. If you go into sociology you are likely to encounter a lot of leftist ideas, if you go into finance or economics, the discussions will be about markets and those things which increase economic activity like reduced taxes and the fallacy of the wage floor as a means to increase the well-being of society.

*A Republican presidential debate opens with a comment by the leading Republican candidate about the size of his penis. And the audience cheers.

I really could care less about this. Guys have been talking like that since the beginning of time and will continue to until the end. The fact that it leaked out on TV is of no measureable consequence to me (I am not a Trump fan, incidentally).

*The American president, a black man elected in the hope that he would unify the races, has overseen the greatest rift between the races since the 1960s. His repeated references to “Ferguson,” reinforcing the lie that a white policeman killed an innocent black teenager for no reason other than the young man’s race, is only one such example. One result is a rhetorical (and increasingly lethal) war on police that has led many officers to minimize proactively policing largely black areas.

This does not mean the world is doomed, just that when people make assumptions, the old adage comes true. And, FYI, he was not elected “in the hope he would unify the races.”

*The Democratic presidential race is between a socialist who has contempt for capitalism, the only economic system that has ever lifted large swaths of humanity out of poverty, and a woman who is so corrupt that she should be serving time in prison, not campaigning for president.

FDR was a socialist, Woodrow Wilson was a socialist, Johnson and Nixon (a felon, too) were authoritarians (as was GW Bush), and one of our Presidential candidates (and a founder) once killed a former Secretary of the Treasury (and founder), then fled to the west and plotted the overthrow of the government (Burr). So, to say this circumstance is unique or the worst ever is a bit of an overstatement.

*Meanwhile, the Republican race is led by a man who has mocks a POW as a loser; who repeats the libel that George W. Bush knew there were no WMD in Iraq; who calls for the killing of terrorists’ families; and, who, as noted, proudly talks to America about the size of his sexual organ.

Let us be honest, John McCain is a loser who has cost this country far more than any debt owed. As far as WMDs, if that was a reasonable cause for going to war, at least 40 other countries would likely need invaded tomorrow including China, Russia, North Korea, Great Britain, Israel, France,etc. So, guess what, invading Iraq and deposing Hussein was a bad move; I supported it at the time and am big enough to get over the fact I was wrong, maybe it is time for Prager to as well. As for the sexual organ thing again, I would suggest that Mr. Prager stop behaving like a 13 year old boy in health class when the reproductive system chart is pulled down; get over it.

*Many generations have believed that the world was getting worse. But since 1776, there was a great nation that one could still rely on to stem the decay. Now that great nation, under the influence of its own elites, men and women of the left, is itself in decay.

Prager is right, every generation swears the next is the last and he is playing into this. Over more than 200 years some ideas have taken hold I find deplorable (like Keynesian economics), but others such as slavery, Jim Crow, and the state as an institution of moral control have disappeared or lessened. I have come to find out that conservatives do not really have a problem with indoctrination at schools, only that their particular brand of indoctrination is no longer employed. The reason why we do not teach kids to think for themselves is that both sides feel threatened by such a concept; people who think hardly need others to think for them. Anytime an idea requires the point of a gun or a threat of a pain-filled eternity I am cautious; particularly if the intention is that those ideas be imposed on children. Any time an idea relies on force of any kind, we should be wary. Just to be clear, I am not anti-Prager, in fact I love his discussions on male-female interactions and relationships. I am, however, discouraged by this rhetoric that is over-inflated and largely without fact in light of other periods in human history. He intends to scare; which appears to be one of the common threads between the ideological right and left which seek to use fear to paralyze the population into inaction. For if we ever were to see that the fear is largely manufactured to control us, we would reject their fallacies and frauds and this scares them most. Political leaders have long known that fear is the greatest motivator and this is not lost on the Democrats and Republicans here.

*So, who can save the world now?

As for this last question, those who embrace liberty will.   Jefferson, Bastiat, Madison, Smith, Friedman, Williams, Sowell—some of the greatest minds in history—have one common message: that liberty is that mechanism through which all humans can advance. There is no other way. Liberty and the free market have been fighting authoritarianism on the left and right in America for several hundred years now; it has not lost yet. Instead, it has been the engine of the world and we must not let ourselves be dragged down to the level of fearmongering and the abandonment of logic.

 

 

Eat Once, Don’t Die?

      People so regularly like to spout off about the evils of capitalism and the depravity of the profit motive. Perhaps we should take a moment to gain some perspective on the matter. Human history has been dominated with periods of anti-capitalistic activities and economic structures. From the feudalist periods to the monarchies to just plain subversion to an eminent leader supposedly “ordained by God” (all three exhibit stunning similarities) and finally to an aristocracy (today we call this socialism or communism) there has been a constant throughout history when the rights of property were not identified and the profit motive was denied to the average individual.

     This constant in a world without property rights and capitalism was the motivating factor of human daily activities—eat once, don’t die. This could have been the daily motto for much of humankind throughout history—eat once, don’t die.

      Imagine this world without capitalism as people seem to fantasize about so regularly. Just imagine losing your car, your microwave, your smart phone, your internet, your air conditioning, your refrigerator, your television, your house, your job, running water, your toilet, the medicine you take to feel better (or, worse yet, the one you take to stay alive)…imagine losing your clothing and shoes in favor of animal hides to stay warm and more animal hides for your feet…imagine losing loved ones in their late twenties or early thirties, if you or them are lucky enough to live that long…imagine every day when you wake up your goal is not to merely be a pretentious ass that wishes a lack of luxury for others to make yourself feel equal, but instead you must struggle just to scrounge enough food for one meal for your family…imagine portioning that food out to your family not on the basis of fulfilling hunger, but on the basis of which family members would be more beneficial to survival if they have energy…imagine laying your head down at night being glad if nobody in your family died or not being surprised if one had.

      Imagine your daily motto was eat once, don’t die. This is the reality of the world before capitalism (and exists today outside of capitalisms reach); the human condition was that of strife, struggle, and immense physical and emotional pain. Is capitalism perfect? If by perfect you mean we all get to have what everyone else has regardless of effort, talent, or sacrifice…then no, it certainly is not. However, it is unambiguously clear throughout history that no economic system has ever brought more (or, I would argue any) people out of true poverty and complete squalor than capitalism.

P.S. By the way, capitalism and cronyism are in no way similar and the terms should not be used together, it makes people sound absurd to those of us who know better.

 

Trump is clearly no economist.

       There are a lot of Republicans these days embracing the anti-trade rhetoric of Donald Trump and, simultaneously, screaming about the ineffectiveness and unfairness of wealth redistribution through the welfare state. Interestingly enough, these two positions are equivalent to one another. You cannot be for trade protection (such as tariffs) and against wealth redistribution; they are fundamentally the same thing. Let me illustrate how.

   Wealth redistribution operates under the principal that government takes (forcibly, mind you) money from Susan and gives it to Tom. Susan is guilty of no crime besides being in an electoral minority, but nevertheless she incurs the wrath of Tom’s jealousy and greed of her accomplishments and higher earnings. Tom’s greedy vengeance is carried out by elected officials who are able to send men with guns to Susan’s house (if she doesn’t pay) to do what would be illegal for Tom to do himself, which is to steal from Susan.

     Now, this redistribution is all based on the premise that Tom should be allowed to do as he wishes (i.e. work less hours, invest less effort in his own skill set, and engage in more recreation) and still be provided with all the basic needs that life requires (including many that life does not require like cell phones, etc).   In effect, the welfare state makes inefficiency a right, one that can be subsidized. Productive capability is discounted in favor of lifestyle choice.

       This brings us now to trade protection and why the two things are indifferent. Let us imagine that Susan is now a consumer and Tom is a worker at an auto plant. We are told that tariff’s on foreign auto makers will “help” our economy (incidentally, zero of this claim is backed up by well-established economic principals or any evidence) so that Tom can keep his job and manufacturing will not be “shipped” overseas. Instead our government will place a 10% tariff on those evil foreign automakers that, for some reason or another, can supply us vehicles at a fraction of the price of Tom’s employer. If the foreign car is $20,000 and Tom’s car is $22,000 before the tariff, this new 10% tax (tariffs are taxes on consumers, by the way) will make them essentially the same price[i].

      So, now Susan (and everyone else) must pay $2,000 more per vehicle for Tom to remain employed (not to mention increased sales taxes, etc.) in his current occupation. If Susan chooses to purchase the foreign car, the government will profit after placing no value into the production of said vehicle much like the mobster running a protection racket. If Susan chooses to purchase the car Tom makes, she will pay a greater price to subsidize Tom’s relative inefficiency; because, if Tom were as efficient as the competition, his autos would be priced accordingly. Tom gets to keep his job that he is not as good at as the competitor is while everyone that purchases a car pays more to ensure this. The government has then taken money from every consumer (a tax) and given it to Tom to subsidize his inefficiency (we could just as easily call this welfare…see paragraph 3, sentence 2).

       If 50,000 people buy a car in a given year, the result is $100M that cannot be spent elsewhere or saved for the future (either choice is an investment in economic growth). Incidentally, this most adversely affects those families making relatively less money—that is right, the much maligned middle class and poor; rich people are not concerned with trivial little tariffs and will buy the foreign car anyway if they want to.

       If you think (rightly) that a redistributive tax hurts the economy by reducing consumption, which in turns reduces the amount of production required, and thus lowers employment you cannot simultaneously think a tariff—which accomplishes the same thing at an even greater cost—will not hurt the economy. Well, you can…but it is no less fantasy than unicorns or Bigfoot. Holding this belief would have led the government to ban the car to protect the wagon builder or ban the light bulb to protect the candle maker. Mass production of food through technological advances would have been outlawed so we could maintain the same volume of farmers, plow makers, and ox breeders (a decision which would have increased the likelihood of starvation due to poor conditions, a concern we no longer carry as humans in the U.S.).

       We must resist the urge to fall into emotional, unsupported arguments—such as those being made by Donald Trump—that tariffs will help the American worker and engaging in trade is bad. I know what you may be thinking now: “we want trade, but fair trade.” Did I get that right? That is hogwash, too. In no way, does us buying goods at a cheaper price—enabling us to consume more and thus produce a wider array of products ourselves—ever, never , never, ever hurt us. If this principle is true, why not only buy things from within your town, or county, or state and really help your local economy boom? If you think unemployed people in your town just need a chance, quit buying things from the mall, Walmart, or Amazon. The reason you do not do this is that you know deep down it is malarkey. Politicians like Trump can use nationalistic hubris to motivate an adverse response that goes against your own best interest. History has known another politician who was effectively able to do this…Adolf Hitler.

Unreasonable expectations: why government constantly fails us.

    The extent of government’s ability to act effectively is rather limited. It is not that government as a concept is inherently flawed or unable to function at any level. Instead, it is the expectations of its constituents that are the drivers of its inevitable failure in many of the tasks it endeavors upon.

     For example, government can effectively reduce the opportunity cost of a choice for its citizens, but it cannot cure social problems stemming from the choices people make. An opportunity cost is a concept from economics which basically states that for every task a person engages in there is something else they cannot be doing with their time. For example, if you mow grass for an hour, the opportunity cost of that choice might be an hour writing the great American novel (assuming you are capable of such a accomplishment). Let us estimate that your novel would take 100 hours to produce, then for each hour you mow grass you effectively “pay” 1/100th of the value of your novel. If said novel would net you $500,000 in profits, then your cost to mow grass (outside of fuel and equipment) would be $5,000. So, you would be much better off paying the little kid down the street $25 to mow your grass.

      Now, let’s apply this concept to regulatory government action. I will concede that, from a theoretical standpoint, it is much less costly to society if we “hire” an agency of people to check, for example, the solvency of financial companies. This agency could compile and publish information as to their effectiveness. They can be specialists that understand the industry and have an aptitude in their selected field. This agency would relieve us of the opportunity cost of having to learn the “ins and outs” of finance and researching every company when making any financial choice. Overall productivity rises because people can more easily determine which companies and products are relatively “better” and thus spend more time maximizing their own output based on their individual aptitudes.

     The problem with this is that humans hardly apply things within the constraints of theoretical effectiveness. Where government fails is that people want government to solve societal “problems,” instead of merely making information more accessible. They want government to keep companies from compensating certain employees too much or selling products that they (voters) think are too risky. Of course, they like the return while the products are on the upside; they just deplore the downside risk that affects them on the backend of the transaction.

     Additionally, there is a selection problem where people who wish to be politicians or government officials can often fancy themselves equalizers. Exacting what they deem to be justice from one entity for the “benefit” of the consumers or voters. Whether it is the voters or the employees of agencies driving these irrational expectations of government makes no real difference. Government is simply not up to the task without eliminating the human component of every decision. They cannot control the supply side of these transactions they deem dangerous or too risky, they must also impact the demand side of the equation. In essence, they must attempt to stop people from “hurting themselves.” Human desires and the balancing of risk and safety vary greatly from one person to the next and it is this which causes government to be ineffective. And, be certain, it is America’s risk tolerance mixed with liberty which has enabled us to be as prosperous as we are.

      Government cannot protect people from themselves or eliminate every risk inherent in life. Government can be a conduit of information, but can never (nor should it) eliminate the desire of people to make choices or engage in risk. We benefit much more from the risk tolerance of humans than we suffer from it. If risk aversion was the default human position, humans would have starved long ago in caves; paralyzed from the fear of predators.

       Over time, government becomes a haven for the risk adverse; both in employment and in voting. Those people on both sides of the proverbial aisle are driven by risk aversion and politicians motivate their voters by highlighting risk and danger. If you are on the right, the risk that someone may do something you do not think is “right” engenders the fear that society will suffer because your moral code was deviated from. On the left, if people are not nannied continuously throughout life, they will be unable to find happiness or will inevitably become victims. Incidentally, both situations are premised on adherence to some subjective moral code.

       Essentially, many people vote on the premise that government will not merely be an efficiency enhancer; instead, government will be an enactor of some “justice” where the only thing they can be sure of is they will be the beneficiary and society will somehow be improved because people are constrained in the fashion they know is best. People have often restated the phrase that government is a “necessary evil,” but lack perspective of why this was originally said. Government is a necessary evil because of the principle of the opportunity cost. Anytime we assume government can solve our individual or societal problems, we set it up for failure and us up for disappointment. Not to mention we yield to it the essential liberty that has enabled us to improve the overall human condition through technological and economic progress.

 

Inefficiency…the real beneficiary of trade protection

      While politicians—particularly Donald Trump—are busy promoting how protectionist trade measures will help our economy, the reality is that all of us lose when we turn our backs on free trade. Well, not all of us. There is one group that benefits…the inefficient (not to mention those politicians). And they win at the expense of everyone else.

    Inefficiency is the primary beneficiary of trade protection. [Inefficiency is defined in two ways according to dictionary.com: 1. not efficient; unable to effect or achieve the desired result with reasonable economy of means; and 2. lacking in ability, incompetent.] However, so many of us get caught up in nationalistic sentiment to realize what is abundantly clear. The popular mantras include Americans “losing” their jobs to sweat shops and foreigners; companies “outsourcing” phone centers; or auto manufacturers shipping those poor union member’s jobs south of the border. All bunk. Let me give you an example that might help clear things up because the emotion has been removed.

     Let’s say in your town you have an intersection with two gas stations. At the QuickUp—yeah, I made that up all by myself—the employees are friendly, the facilities clean, the beer extra cold, and the pumps always give you a receipt instead of having to “see cashier” (I hate that…if I wanted to “see cashier” I would not have swiped my card!). Across the way, at the Sucks2B-N the store lives up to its namesake; the facility is filthy, the bathrooms are always closed, and the employees view you as an inconvenience to their normal texting routine.

      Now, not surprisingly, the QuickUp sells more gas and has better profits than the Sucks2B-N which is clearly unfair…right? So, to keep Joe the crackhead, Rebecca the part time meth-cooker, and Jim (the owner with a gambling problem) from losing their jobs, the local government institutes some “trade protection.” Basically, if you want to stop by the QuickUp, you have to pay a tax of 5%; that way we do not lose valuable jobs in the community, because if the Sucks2B-N closes, those three people will be unemployed, right?   After 6 months people are still going to the QuickUp—because that’s how bad the Sucks2B-N sucks to be in—prompting local government to increase it to 35% to ensure success.

     As expected, people are largely unable to afford to go to the QuickUp and a significant portion shifts to the cheaper Sucks2B-N.   Joe, Rebecca, and Jim are all better off now and have secure jobs. While the QuickUp, with a staff previously at 20, now has only 8 employees left (that means we are down 11, by the way). But, on the bright side, we get 4 jobs “back” with the addition of new employees which have been hired at the Sucks2B-N (it is easier to provide crappy service as it turns out…who knew).

      Here is the bonus though. In economics, it has been empirically proven that in the light of high tariffs (trade protection) the domestic producers raise their pricing to be more in line with foreign producers’ new pricing which includes the tax. Because Sucks2B-N follows predictably with what economics has long known, the people of your town can afford less ice cream for their families and two more jobs are lost at the parlor (11-4+2=9 jobs lost to save 3…hmmm). And that example could potentially apply to any type of good. In fact, other employers have to buy fuel at the more expensive price therefore they have less money for raises and increased benefits. In the light of reduced sales in other market segments, the local government takes in less tax revenue. In short, everybody in town has essentially paid a tax—in the form of higher prices and reduced future wages—to ensure that Joe, Rebecca, and Jim stay employed…still feeling warm and tingly inside? The “Inefficient 3” (catchy, I know) has been relieved of the consequences of inefficiently operating a gas station and you have received the bill. Both trade protection and the gas station example are, for all intents and purposes, wealth redistribution; a very costly form of redistribution at that. This kind of redistribution has much higher transaction costs than simple welfare leading to an increased magnitude in the future through the compounding effect.

       We must always keep in mind that if production of a good goes elsewhere, there is a reason and we, the consumers, have made that choice. Consumers make choices based on cost and quality that drives producers (i.e. businesses and corporations) to change their production methods and sources. And this is okay. Does this mean some people lose their jobs…certainly; but people lose their jobs all the time for inefficiency, we only seem to mind when it is to someone that is not an American citizen. Additionally, the amount of future production (read as consumption and the ability to have “stuff”) goes down making us all relatively poorer to subsidize—or benefit—a few. In fact, anyone that truly favors trade protection should thank the next fast food employee that screws up their food, or the next server that brings the appetizer after the entrée. Or the next car salesman that sells them a lemon…so on and so on. At least be consistent and support inefficiency directly in all its forms.

Welfare Recipients: Moochers or Rational Actors?

      Often, people who accept and stay on welfare are accused of being mere moochers. To some extent, they do exhibit the primary characteristic of greed: the desire for something that belongs to someone else by compulsion or collusion instead of a trade of value. However, to leave it as simply as that fuels the lack of understanding as to how to remedy the welfare state problem that exists in America today.

      First, let me state it rather directly: people who seek out and stay on welfare for seemingly indefinite periods are rational actors. This may shock some people, baffle others, and even irritate a few; however, that does not diminish the fact it is true. A rational actor is someone who is concerned about their own prosperity and makes choices with the goal of maximizing this objective. In fact, all people are rational actors; we just do not always quantify what prosperity means in the same way as others do.

    The hazard at this point is to be side-tracked by a lengthy discussion that dispels the idea that humans are altruistic (which is the alternative to rational choice), but I will (mostly) avoid that for the time being. Instead, I will use a commonly cited example of altruism and explain briefly why it is incorrect. Fire fighters are often used as examples of altruistic actors; however, they get paid (rather well in many cases), have excellent work schedules, girls tend to like them, and society often idolizes them. Is there risk involved? Of course, but they face great risk—as we all do—by getting in their cars to drive to work. This idea that fear is a primary factor in all people’s decision-making is driven by those who place increased value on personal safety. To a person that is a natural thrill seeker or one that loves accomplishing things others may not dare, being a fire fighter is not altogether frightening or discouragingly risky. It is, instead, a rather rational choice.

       How does this relate to the welfare state? In a very important way, it highlights how people value things differently, some place great value on safety, some on personal “glory,” and others place increased value on wealth accumulation. People who accept being on welfare for extended—or indefinite—periods of time clearly have a high value on security. Additionally, it is likely they place a high value on rest or recreation. When we value recreation over wealth the ability to be free of the burden of work is much more important than having things or money. Conversely, those who value wealth are happy to trade hours of the day for success.

      Here is a scenario to illustrate why welfare recipients are rational actors. Let’s imagine a man named Jim—and his family—are on a myriad of assistance programs that net him the cash equivalent of $26,000/yr and he is offered a job making $32,000/yr. Will he take it? Let us look at the considerations that enter into this decision. First, Jim will have to take 40 hours of his week and trade it for $6,000/yr (that is $500/mth or $2.88/hr). On top of that Jim will have to pay payroll taxes and possibly (unlikely at that income level) income taxes. Would you do that? Ahhh, I can hear the ethical argument now…an argument that I fully sympathize with. So, let’s put it in different terms, if you made $30,000/yr working part time and got offered a full time job for $36,000/yr and this job entailed increased costs, would you take it? It is highly unlikely that you would, unless other considerations enter into your decision such as entry into the job of your dreams.

      People stay on welfare perpetually because they literally cannot afford to get off of it. Things like poor education, increasing minimum wages for entry level occupations, and an increasing menu of programs make this problem worse all the time. Individuals make choices based on individual circumstances, as they well should. What we must do is avoid continuing to lash out at people making a perfectly rational choice; instead, we would be much better served by actually trying to remedy the circumstances which drive these choices. Expanding the welfare state perpetuates the (relative) poverty it intends to cure and reduces the alternatives people have to staying mired in the muck of our burgeoning welfare state. And to completely answer the title question, they do qualify as moochers as well.

The primary factors of production: the relationship between capital and labor.

       In a capitalistic, free market economy there are, generally speaking, two basic factors of production: labor and capital.  Of course, in the US we have a “blended economy” where some of the economy is free (or relatively so) and the other portion is centrally controlled to varying degrees.  As a whole this can be either through direct ownership and operation (e.g. socialists and fascists) or through regulation and a fiat control structure (the US, etc.).  In a blended economy a third major factor of production emerges: the politician.

       However, it seems prudent to focus on the free market version for now.  Too often, labor and capital are viewed as being antagonistic to one another; this could not be further from the truth.  In fact, the two are largely compliments; however, they can at times be substitutes.  Most young, developing economies have one characteristic they all share which is an abundance of labor.  Likewise, most developed (advanced) economies share a characteristic which is an abundance of capital (although to varying degrees).  So, what are these things called capital and labor?

• Labor: Productive contributions of humans who work, involving both mental and physical activities. In other words, the things we do.
• Capital: Money, land, or assets used in the production of goods and services. In other words, the things we have done.

       One clearly begets the other.  Far too often it is assumed that capital is merely money.  Instead, it is simple tools such as a hammer, complex machines such as a tractor, or even a piece of land.  Even “human capital” represents an act or work to increase future production.  We might fairly characterize this as delayed gratification; when someone puts off current period consumption creating a surplus that can be used or leveraged to increase future production and consumption.  A great example of this might be when a small business owner “reinvests” his/her profits into the business.  They are putting off consumption until a (hopefully) later date.  The increase in the level of consumption at the later period merely represents the “interest” that delayed consumption earned.

       So, capital is the product of labor in all cases; however, not all labor results in capital—the determination is based on how the laborer spends their earnings.  If I am a fence builder and have an extra $200 over my budget and choose to spend it on personal consumption, I am less likely to increase my profits in the future without some other change in circumstance.  Conversely, if I spend it on a nail gun, I have increased the likelihood that my future profits will increase due to growth in efficiency and productivity.

       Capital is an enhancement of labor, not a diminishing factor.  Now, does increased mechanization sometimes result in a reduction of labor required to produce a given product?  Yes. However, that labor potential is not destroyed it just requires a refocus on its next best use; this is similar to the principle of comparative advantage in trade economics.  The last time I checked, the US had the second highest worker productivity in the world, behind Japan.  This is largely due to the increase in productivity caused by capital inputs like machines, etc.

       The ability for us to have the luxuries we enjoy is due in large part to that wonderful relationship between labor and capital.  It is unfortunate that cheap politics encourages the idea that one factor is subordinate to the other in all cases; thus people tend to look at owners of capital and laborers as being in a position of competition with each other.

Is government absolution?

It has often been said that government is required to help the poor and disabled; however the evidence consistently shows that government’s involvement has not reduced poverty levels. Seeing that government has never (to my knowledge) cured a societal ill like poverty, why then does there remain so much confidence in it for future success? Could it be that support for government welfare programs stems not only from those who directly benefit from being on it, but also as a path to absolution by those who advocate for it?

So, what do I mean by absolution? First, let us discuss the idea that our government has a responsibility to the poor. Milton Friedman wisely pointed out that governments cannot have a responsibility to people…instead, only individuals can have responsibility. We often hear advocates of government welfare say that we are “our brother’s keeper,” a clear reference to the book of Genesis in the Bible; however, the verse is talking about an individual’s (Cain’s) responsibility to his own brother (Abel) and not society’s responsibility to a person or people. This is a blatant misuse of a Bible verse with the intent of misleading people who, by faith, feel an obligation to fulfill Biblical mandates (at least to some extent).

The question then is how does the brother’s keeper example contrast with government welfare and where does the concept of absolution come in? Let us assume that people do feel an innate obligation to help others; which is arguable, but for the sake of this discussion we must accept it generally. What is the easiest way for people to meet that obligation to others? One could work harder and produce more so that they may transfer (via donation) some of that excess production for the consumption of others. Or, one could spend a few minutes every couple of years voting for a group of people who will give money (that is largely not theirs) to others. Both seems to meet the goal of “helping others” yet one of the two options entails significantly less hardship on the individual choosing to vote instead of donate. It is certainly much easier to vote charity to others than it is to actually provide it. Particularly when a good segment of society pays nothing to fund these programs; the estimated percentage of people in America who file tax returns and owe $0 (or less) is 43% (as of 2013).

In the case of this group of people, a vote for welfare is not only costless and potentially beneficial, but also absolves them totally of any further responsibility to be their “brother’s keeper.” In fact, an IRS analysis of the 2012 tax year showed that the most generous states (by percentage of their income donated) were “red states” that voted for Mitt Romney. This implies that those people that believe government should not engage in coerced charity (to as great of an extent) are much more likely to give of their own money while people who see government as a reasonable and righteous source of charity (albeit at the point of a gun, a fact they often ignore) sees little reason to give of their own money when they can instead vote for “charitable” actions.

Therefore, a vote for government welfare represents a much cheaper way (for the voter) to donate largely because others pay the bill. Individuals can then fulfill their sense of obligation from the pockets of others and still gain the sense of giving that usually motivates people to actually give. This leaves people who preach an obligation to the poor and disabled from actually having any responsibility for meeting that obligation personally. Thus, the individuals that choose the voting method over the donating method have effectively been absolved of their responsibility to others. Effectively, those people do not practice what they preach; instead they demand others serve as their brother’s keeper, while they hold the moral high ground through their mere demanding of action by force.  This reminds me of the brilliant words of Ayn Rand who said:

“It stands to reason that where there’s sacrifice, there’s someone collecting sacrificial offerings. Where there’s service, there’s someone being served. The man who speaks to you of sacrifice, speaks of slaves and masters. And intends to be the master.”

Interestingly, the people most hurt are the ones who do, most significantly, need the help. For the real crime is not that everyone does not have access to “assistance”; instead, the real crime lay in the reality that those who truly cannot do for themselves are left in poverty so as to satiate the majority who wishes to forgo their own personal responsibility for their own monetary gain. Simply put the absolution through government costs the absolved little, while that release from obligations is paid for dearly by those they claim to be helping. This is the danger of idealism rooted in greater good terms; for the actual good is left subjected to the eye of the beholder while the intent of actions is weighted far greater than actual outcomes. I close with the definition of absolution: “the formal release of guilt, obligation, or punishment.”

Understanding competition in different market structures.

There seems to be some surprise when different forms of competition are used in different industries and markets; however, much of this confusion can be remedied if we break the system into an array of three basic market structures and the likely competitive behavior of each.

For example, here in Florida our legislature passed a law allowing a particular form of medical marijuana, dubbed Charlotte’s Web (a non-hallucinogenic form of cannabis), to be used for the treatment of different chronic conditions. Unfortunately, in the drafting of the bill, the legislature did what government does and decided the market for this product would be best regulated by government than by market participants and consumers. This did prevent any lives from being lost to misuse of the drug, but also ensured no lives could be saved either because, after almost a year, the production of the substance has been exactly zero.   This is because the supply side has been embroiled in legal suits over who will get to produce and profit off of this new product; or, more succinctly, who will the government choose to hold monopolies over the consumer?

This circumstance prompted some to accuse the potential producers to be engaging in “greedy behavior.” Question is: is this true? No, it is most certainly false. In fact, anyone with a rudimentary understanding of economics could have predicted this very result. Instead, the problem was with the premise that government should regulate to best ensure consumer safety. Regulation has, as a matter of fact, been most successful at preventing consumer access to products, not ensuring safety (see airline deregulation).

For the sake of simplicity I will break down the market into three types: 1) free market, 2) government regulated market, and 3) black markets (where the products are illegal for sale and/or use). Within these three market types there are very predictable methods for competition between suppliers. You see, no matter the structure of the market, there is competition for market share (portion of the available consumers); it is the market structure which dictates the methods employed to compete for customers not the production side participants.

In a free market, producers are required to appeal to the consumer to sell their products; this is most commonly done through pricing and quality; although an argument could be made for the influence of advertising and endorsements in the modern market. Either way, the transaction is voluntary on both sides—the producer provides a certain good at a certain price and consumers choose from whom (and what) they will buy.

On the opposite end of the spectrum we have black markets; markets that are required to operate outside of the law and at greater risk than a traditional legal market. These markets still exist because the demand for certain illegal products exists and; with greater risk, higher levels of profits can be extracted from the consumers. Once the ratio between risk and profits become acceptable, people will enter into the market; however, it is those people with higher risk tolerance that will be induced into the market earliest.

This reality dictates that people already comfortable with high levels of risk will enter these markets. Thus, competition will take place in a very risky manner. Instead of these market participants competing with price and quality, they will instead compete with violence and intimidation. We can see this clearly illustrated in the prohibition era alcohol trade and the modern day drug trade. The contrast between those two examples also highlights how that status quo of violence ends when the legal prohibition ends; the drug trade still involves high levels of crime while alcohol involves practically none.

Finally, in a regulated market there is also competition between suppliers (and potential suppliers). This competition, however, does not take place for the benefit of the consumers; very little appeal is made to them. On the contrary, this competition takes place in the legislature and in the court room. When government determines market eligibility, the consumers are not a requisite piece of the equation; no longer is the preference of the consumers the primary concern. Bureaucrats, politicians, lobbyists, and judges become the arbiters of market share. This leads to inefficiency, cronyism, and a lack of innovation. If you have a government mandated monopoly on the distribution of a product, what is the motivation to make that product better or less expensive? There is none. Competitors are either not allowed or the obstacles to entry are so great that the likelihood of a new competitor entering is close to zero.

This is the problem with the Charlotte’s Web law. Because competition is not based on price and quality, potential suppliers must compete in the legislature or in the court room. Once these suppliers are chosen by government (and given regulatory power by their inclusion into a regulatory board) I can guarantee that it is unlikely the regulatory nature of the market for Charlotte’s Web will change. Also, we can expect supply to be relatively low, while price is disproportionately high compared to cost and value. A regulatory monopoly (or oligopoly in the case of multiple firms) is no less predatory on consumers than a natural monopoly; they just get to rest well knowing they are immune to challenge from a government that instituted the monopoly in the first place. Consumers (in this case, sick children and their families) are caught in the cooperative crossfire that exists between the suppliers and government.

 

The nature of black markets: why making commodities illegal is ineffective.

I think it is important to characterize the commodity in very a generalized manner—at least for now—therefore we will refer to our commodity in question as a widget. Now, it is of no consequence what a widget is because, when analyzing the effects of a black market, the only relevant factor is that widgets were made illegal by lawmakers. It is important to begin with a basic definition of a black market:

“A black market or underground economy is the market in which goods or services are traded illegally. The key distinction of a black market trade is that the transaction itself is illegal. The goods or services may or may not themselves be illegal to own, or to trade through other, legal channels.”

It is important to note that the definition also identifies that the goods (in our example widgets) need not be illegal to own. This refers to situations where taxation or regulations are used to limit, control, or inhibit the trade of a good or service (i.e. high cigarette taxes). However valid this discussion is, it will not be the focus of this conversation as we are assuming our commodity has been made illegal for the sake of simplicity.

Black markets develop because making a product illegal does not cause people to stop using it; instead, it merely marginalizes consumption, the production, and the distribution to those who are willing to accept and operate under greater degrees of risk. I know this may sound a little confusing which is why I created a graphic that illustrates the levels of acceptable risk for different groups of society:

Risk flow chart

In this graphic we can observe that the lower two segments (5 & 6) are those people who enjoy or are comfortable with greater risk levels; next (segments 3&4) we can observe the greatest amount of people as the average level of risk takers which would be generally averse to great risk, but partaking in some low/moderate risk; finally, in our upper two segments (1 & 2) we can see a portion of the population who range from mostly risk averse to almost exclusively averse to risk. This understanding of risk tolerance is important in the realization that making commodities illegal only serves to focus use and production on the risk loving segments which are most likely to partake in other risky behaviors (e.g. crime, violence, etc.) regardless of their use of a certain commodity. This reality is why the argument of illegality for the purpose of public safety is largely invalid.

Let us return to our concept of widgets again. If widgets are made illegal then we have some serious problems: 1) people are still demanding this product (although demand is now almost exclusively coming from groups 5&6 and a small part of group 4) so new producers will enter the market to meet this demand and receive the greater profits now offered by an illegal trade operating at monopoly pricing. 2) By compressing consumption to the risk loving segments we create a self-fulfilling prophesy – that the people using the widget will also be breaking other laws [don’t believe me?…look at why prohibition did not work for alcohol].

We can see a new and growing market segment dominated by those who are more predisposed to risky (read: criminal) behavior. Also, we have reduced competition in the production of widgets which would generally (particularly in a highly criminalized black market) lead to the production of “crappier” products at higher prices. Therefore, the risk factors of our widgets become even greater due to the lower quality. Additionally, in this market with limited competition, lower quality requirements, and huge profit margins we will observe more criminal (mob-like) activities in the production and distribution of our widget. In essence, criminal producers compete with force instead of with price or quality (or both) to gain customers; this has many negative effects on the communities in which these suppliers operate.

We are also presented with a consumption level distortion. The new consumer group—which is also isolated to higher risk tolerances—engages in the same activities they would have likely done anyway; however, now our widgets are given the credit (blame) for these activities. This creates somewhat of a paradox in that the results of prohibition become the best argument for prohibition because the correlation between widget use and other risky/criminal behavior increases due to us arbitrarily slicing segments 1, 2, 3, and most of 4 off of the consumer base. We have not eliminated any undesirable by-products of consuming widgets; we have merely magnified the (rudimentary) perception of the widgets’ effect on producing these negative by-products.

Why is this important? First, there are little to no positive effects of making products illegal beyond people making themselves feel better that they may have coerced others into not engaging in an activity this other person condemns [think Michael Bloomberg and soft drink sizes]. Second, by isolating supply to risk loving individuals we fuel illegitimate activities and isolate supply into the hands of people willing to exercise the most risk. Not only have we criminalized users, we have laid the foundation to launch a whole new and highly profitable enterprise that relies on criminal activity and violence as the primary means to restricting market entry. This incorporation excludes traditional competitive means (product differentiation and price) in favor of force, violence, intimidation, and a new criminal recruitment system resulting in social problems in these communities as well as losses in property values, tax revenues, and legitimate employment opportunities.

Gun rights advocates make this argument quite accurately and succinctly when they state that: “making guns illegal would only keep them out of the hands of the law abiding population who do not commit crimes anyhow.” This is a very astute observation. Unfortunately, this same group often fails to realize that the same is true for our widget example, or drugs, or prostitution, and was found empirically to be true with alcohol. Making any of those things illegal did not eliminate the use of them; it merely marginalized use and created a criminal enterprise where one did not previously exist. Does prohibition result in decreased use?…only a little because, if the product is inherently risky, a vast majority of the population will avoid it anyway. Does prohibition make society safer? No, in fact the evidence would indicate the opposite.

So, why does our society struggle with this idea? Because liberty is scary to so many people! Of course, liberty—like so many other things—is really only a good idea for ourselves, not for others. The false premise that one group of people has the responsibility or authority to try and save others is preposterous and, I would argue, excludes the people who hold that idea from having any real profound understanding of the concept of Natural Rights or the ideas that our founders held so dear in creating this greatest of countries. The land of the free has become the land of the busybodies, intent on utilizing their votes to gain access to the force that government wields to make individuals “mind” them. I do not wish to have a nanny state economically nor do I wish to have one for individual choices. Incidentally, one thing everyone should keep in mind, you do not get one of those without the other.