In a rational political and policy environment, the implication of all this [the fading economy] would be clear: we need more stimulus. Yes, it would add to federal debt — but isn’t that worth doing to help reduce an output gap that’s wasting our potential at the rate of more than a trillion dollars a year?

The “solution,” Krugman says, is for government to create more debt and print more money.  Since he already publicly claims the printing of money creates a “free lunch,” he would approve of nearly any way the money appropriated by Congress would be spent, just as long as there is spending.

Lest anyone think the “stimulus” is spent wisely, think again.  One building block of economic analysis is “utility theory” in which people rank their preferences from highest to lowest.  For example, while I might want to take a vacation, it is more important that I spend my income first on my house payment, then food and other expenses that will support my family.

If there is money left over, perhaps then I can take my trip.  Likewise, when we want governments to spend money on various projects, we assume that the most important items will be first in line.  (One can make a case that just about all government spending is foolish and reckless, but for purposes of this article, I will assume that at least some government spending has social value.)

According to the promoters of the “stimulus,” the money has gone to hard-pressed states and localities to fill in the gaps caused by declining tax revenues.  In some places this has meant that lower-valued projects have been abandoned or put on the back-burner, which fully reflects the human valuation process.

If the “stimulus” were about helping states and localities through hard times, the government would want them to spend it on the most-important projects, or perhaps even hold that money in reserve to ensure solvency through the recession.  Instead, Congress has directed that money be spent on things that local and state governments would never consider to be priorities.

I have to do nothing more than drive to work to see this foolishness in action, as two “stimulus”-funded projects are in my backyard.  I live in Garrett County, Maryland, and have to drive over Big Savage Mountain, a 3,000-foot-high ridge, to go to Frostburg State University, which is five miles east of my home.  If I take U.S. 40 over the mountain, I often have to stop and wait for several minutes while work crews expand the drainage ditches along the steep road on the mountain’s east side.

If ever there were a make-work project, this is it.  In the more than eight years I have lived in this area, I never have witnessed any problems caused by the old drainage ditches and there really did not seem to be any problems there caused by cascading storm water.

However, the other project on I-68 on the east side of Big Savage Mountain makes the drainage undertaking look to be fiscally sound.  The interstate highway has a narrow median with a guardrail down the middle.  This past week, drivers going east and west were shuttled into one lane to accommodate workers putting down rolls of new sod in the narrow median strip.  If ever there were a worthless project, this was it – and even my children commented on its uselessness.

If these “stimulus”-funded undertakings are typical of what the Congress directed for states and localities, then the “leaders” of the U.S. government are even more delusional than I had imagined.  Not only are they handing out money in a manner that imperils our future, but they also are demanding that it be spent on phantom things that intelligent people never would need in the first place.

This is not “change we can believe in.”  This is government as usual.

The Stimulus Helped the Economy? Not So Fast!

Actually, a government bureau is the nearest thing to eternal life we’ll ever see on this earth! –Ronald Reagan

FEE (Instant) Classic:
“Transforming America: The Bush-Obama Stimulus Programs” by Randall G. Holcombe

Enough dithering! President Barack Obama says it’s time to act on health care. I agree.

But act how? Are we really going to be happy with the pussy-footing proposals floating around Congress? All the so-called reformers want to do is tinker with insurance regulations. But how effective would that be, considering that the insurance companies themselves support the changes?

We have taken our eyes off the ball, people. Let’s get back to first principles. Mr. Obama’s premise is that we have a right to health care. A right.

America was founded on the idea of rights — inalienable rights. No one can take them away. I assume that when people say that health care is a right, they mean that health care is an inalienable right. Mr. Obama apparently agrees. In his speech before Congress he called for free services, such as physical exams, colonoscopies, and mammograms. Free! You have a right to those things.

Well, OK. But why stop at free preventive services? Why not free treatments, free surgery, free drugs, and so on? We need those things as much as a physical exam. If we have a right to health care and if we are unable to obtain those services, our rights have been denied or violated. That is something the advocates of health-care “reform” say we must not tolerate.

Okay, let’s not tolerate it. Let’s make sure no one’s right to health care is violated. Let’s get serious for a change.

But how? I can think of only one efficient way to accomplish this. Let’s enslave the providers of medical services — doctors, nurses, paramedics, dentists, chiropractors, acupuncturists, psychiatrists, and the rest. My proposal may shock people, but I am confident that this feeling will wear off as we think about how logically it flows from the principle that we have a right to health care.

First, let me point out that there is no other good alternative. Any other system designed to deliver health care as a matter of right will have gaps through which the least fortunate inevitably will slip. Isn’t that the problem we’re trying to fix? Obama’s approach isn’t much better. He wants to force the insurance companies, with taxpayer subsidies if necessary, to insure everyone — healthy or sick, young or old — at the same price. He might even like a government insurance option, though he can’t make up his mind whether or not that is an essential feature of his plan.

Regardless, it’s a bad plan. Requiring insurance companies to pay for our medical care misses the point. Where do you think insurance companies get their money? From us! What kind of right to health care is it if we end up paying for it anyway? Obama means well, but his plan is a shell game.

On the other hand, enslaving the doctors and other providers would have none of the defects of the current system or the leading reform plans. It goes right to the source. We have a right to health care? Fine. Force the doctors to provide it.

Of course, this wouldn’t be free. I’m no pie-in-the-sky utopian. The doctors and the others would have to be fed, clothed, and housed. They’d need certain comforts. That’s understood. But it would be far easier to keep a lid on costs by enslaving the providers than by the patchwork system we have now, or would have under Mr. Obama’s plan.

The biggest problem I can see is that if doctors are going to be our slaves, no one will want to be a doctor. Most people don’t relish the idea of being slaves even in the national interest. They’re selfish that way.

We certainly can’t be a world-class country without doctors and nurses, so I have a solution to this problem: conscription. President Obama should direct the nation’s schools to look out for students with an aptitude for biology and direct them into medical studies. Then, at the appropriate time, the government should draft those young people into the newly created U.S. Medical Service Corps.

I know what you’re thinking: As word of this got around, the best students will play dumb. If that happens, we’ll have no other choice than to pick our doctors by lottery.

“Throughout the summer, the administration had averaged about $4 billion in new spending obligations per week, but went on a two-week $25 billion spree just in time to meet the president’s $225 billion goal for the first 200 days. Spending plummeted to less than $4 billion in the week of Sept. 5 through Sept. 11.” (Washington Times, Monday)

Plummeted to $4 billion? Gives “hair of the dog” new meaning.

FEE Timely Classic:
“A Government Program for All” by Paul Cwik

“The road signs, which let motorists know the paving and construction projects they see are being paid for by the $787 billion economic stimulus program, have popped up across the country. In a 52-45 vote, the Senate decided the signs should stay.” (Washington Times, Thursday)

Sign should read: “The Destruction and Reconstruction of Perfectly Good Roads. Paid for by the A.R.R.A. of 2009″

FEE Timely Classic:
“The Mythology of Roosevelt and the New Deal” by Robert Higgs

I flyspecked the New York Times, and while there were editorials and columns condemning Serena Williams’s outburst at the U.S. Open and a call for lawmakers to criminalize “texting” while driving, the was silent about the tariff. Likewise, I saw nothing on the sites that claim to care about the poor, from the leftist “God’s Politics” blog to the Daily Kos and the Huffington Post.

This should be amazing, but it is not. However, before I explain why I believe this latest presidential action to be especially harmful to the poor, let me first say that most people on the left who claim to care about the poor really don’t care what happens to them. Poor people are a great prop, a nice bit of background, for those who push the collectivist agenda. We know that throughout history, collectivism always has been a disaster for the poor, and from India to Cuba to North Korea to Haiti, state control and interference in peaceful, private exchange has forced many people to live in absolute squalor.

(India has been undergoing changes and has become friendlier to private enterprise, as has China and other former communist countries, but the Indian bureaucracy has been resistant in giving up its power over the lives of ordinary people. Nonetheless, whenever governments give up even some power to control economic exchange, we see higher living standards for large numbers of people.)

Why have these “we love the poor” leftists and left-liberals been silent in the aftermath of this terrible deed? It is because they are slavishly tied to labor unions, which have promoted this latest outrage. In fact, unions always have supported protectionism, from the infamous Smoot-Hawley Tariff to President Ronald Reagan’s “voluntary” quotas for Japanese auto imports.

On the other side, the people accused of “supporting the rich” have reacted vociferously against this new tariff. From the Wall Street Journal to the Foundation for Economic Education, writers have rightly condemned this new policy as being anticonsumer and a danger to us all. I will add one more argument against it.

Before doing so, however, I wish to point out that by historical and constitutional standards, the President is on shaky ground, made shakier by the abdication of Congress and the courts to “protect and defend” the Constitution. The Law of the land clearly states that it is Congress that has the power to levy taxes, and tariffs, be they revenue or protectionist tariffs, are taxes.

There is nothing–nothing–in the Constitution that permits the executive branch to impose a tax. While it is true that Congress has passed legislation that gives the president the authority to impose tariffs in certain situations, nonetheless Congress has done so in violation of separation of powers, and the courts have done nothing to stop it.

As for the tax, it is imposed on something that anyone who drives needs: tires. What happens when government artificially raises the price of a good–which is the intent of Obama’s latest move? People buy less of it, and that includes tires.

What will happen–and this is an absolute certainty–is that people will put off buying new tires and will drive longer on their worn ones. This will lead to more accidents, more injuries, and more deaths. People in lower-income brackets will be more likely to bear the brunt of this policy.

Obama imposed new tariffs (which will lead to retaliation by the Chinese, as we have already seen) to please some of the highest-paid workers in the world: American union members. The lower-paid workers in our country, however, will pay the deadly price, all in the name of “social justice” and “protecting American workers.”

These were the recently traded clunkers whose owners were “nudged” by federal policy to accept a handsome payment from the rest of us for ridding the nation of older, more heavily carbon-emitting vehicles and replacing them with shiny new machines that required a lot of energy to produce but would, on average, yield lower carbon exhaust and greater fuel efficiency.  The clunker statute gave consumers $3,500 vouchers if they purchased vehicles that yielded a four-to-nine mpg improvement in fuel economy, and $4,500 if the yield was ten or more mpg.

In all, according to Bloomberg, some $2.88 billion in tax money was provided to those who together purchased some 700,000 vehicles made up of the popular Ford Focus, Toyota Corolla, Camry, and Prius, along with some Hummers and Ford F-150 and F-250 trucks.  These and a wide variety of other cars and trucks moved quickly from dealer lots to the homes of the blessed. In fact, the speed of the transactions was more than government could handle.  The program was wildly popular.

Taken together the average fuel economy of vehicles traded in was 15.8 miles per gallon, while the average for the clunker replacements was 24.9 miles per gallon.  And according to Ford Motor Company, this kind of fuel-economy improvement translates to a reduction of five to ten million barrels of oil consumed over the next five years. (The nation currently consumes nine million barrels a day.)  This will be oil that some other people can enjoy.

President Obama cheerfully termed the program “successful beyond anybody’s imagination.”  Secretary of Transportation Ray LaHood, who administered the program, said the effort was “a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work.”  LaHood quickly added that while all this happened, “[W]e’ve been able to take old, polluting cars off the road and help consumers purchase fuel-efficient vehicles.”  Economist John Lott surmised that “Only in Washington could a program that is spending money 13 times faster than was planned be labeled a ‘success.’”

In their sober assessment of the program, the Obama Council of Economic Advisers (CEA) found that the program will spur the economy for months as the auto industry gears up to replace inventories and meet growing demand.  Putting all this into numbers, the CEA estimates Cash for Clunkers will raise third-quarter GDP by 0.3 to 0.4 percentage points and lift total employment by 42,000 jobs by the end of 2009.

While the clunker program has been hugely successful in the eyes of Obama administration officials, the auto industry, and the consumers who received transfers from the rest of us, there is serious doubt that the program is all that successful when final costs are counted.  The doubt arises for at least three reasons.  First, the program was supported politically primarily for its much touted environmental benefits.  Carbon emissions would be reduced.  But the reduction costs are at least ten times higher than alternate ways of removing carbon.  Second, there is Bastiat’s parable of the broken window to consider. And third, there is a serious matter of eroding social norms for conserving wealth.  A crushed clunker with a frozen engine is lost capital.

Let’s consider each of these points briefly.

University of California-Berkley economist Christopher Knittel has developed a rigorous assessment of the implied cost of carbon emissions under the clunker program. (“The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program” [pdf], Center for the Study of Energy Markets, Berkeley, The University of California Energy Institute.) Knittel made plausible assumptions about the average life remaining in vehicles removed from the road, the average fuel economy associated with those vehicles, and the resulting levels of carbon emission that would have survived in the absence of clunkers.  Eventually, of course, the clunkers would have died a natural but less dramatic death.  Knittel then estimated the carbon reduction gained when the large fleet of clunkers was replaced by a new fuel-efficient fleet.  When he ran the numbers, Knittel found the cost per ton of carbon reduced could reach $500 under a set of normal values for critical variables.  The cost estimate was $237 per ton under best case conditions.   And what does this tell us?  The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates the cost of reducing a ton of carbon to be $28 when done across U.S. industries.  Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it.

Frédéric Bastiat’s brilliant parable of the broken window reminds us that a street hoodlum throwing a brick through a window generates a series of job-generating transactions that might raise GDP by a trivial amount, if it could be measured.  Indeed, the idea seems so compelling that people today often speak of the silver lining found in the clouds that create hurricanes.  Think of the roofers that become employed.  But Bastiat’s key lesson is that a window has been destroyed—and it had value.  Before touting the total benefits of clunkers, we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation.  As Tony Liller, vice president for Goodwill, put it:  “They’re crushing these cars, and they’re perfectly good.  These are cars the poor need to buy.”

Finally, over the eons, human communities have contrived all kinds of devices to transmit critical survival skills and compatible behavioral norms.  One of these has to do with conservation of wealth.  “Waste not, want not,” we are told.  “A penny saved, is a penny earned,” we are reminded.  Using politics to pay people who destroy valuable vehicles, or to hold crops off the market, or to produce ethanol that may use more energy in production than it adds when burned, teaches a lesson of anti-matter and wealth destruction.  When all these considerations are made, Cash for Clunkers sounds like a sorry idea that should not be the model for future policy.

Let’s stop Cash for Refrigerators before the idea spreads further.

Although no serious discussion is occurring in the nation about the desirability of shifting economic power from individual decision-makers to the national government, that shift is a basic characteristic of virtually every policy proposal being debated in the Congress.

Take tax policy.  A 131-page document (pdf) issued by the Treasury goes way beyond recommending the extension of some of the expiring Bush administration tax cuts.  For example, the fine print contains over a dozen ways of discouraging American firms from doing business and investing overseas.  Supposedly minor technical changes also would have a severe impact.

For example, eliminating LIFO (last in-first out) inventory accounting will raise business taxes over $60 billion in one decade.  The Treasury also wants to revive four corporate environmental taxes that were eliminated in 1969.  These four arbitrary taxes have no relation between the tax burden imposed on a company and the pollution that it generates.  This bears an uneasy resemblance to Willie Sutton, who robbed banks because that was where the money was. Inevitably a variety of technical tax provisions will increase the paperwork burden on business.  The penalties for failing to file information returns (such as Form 1099) promptly and accurately are raised in a very complicated fashion involving three tiers of penalties.

On the expenditure side, the typical stimulus project increases the power of government in private business decision-making.  The bailout of the automobile industry is really an inefficient method of financing union pension and health plans.  The stockholders are zapped and the bondholders poorly treated.  The taxpayers are left holding the bag, especially considering the restrictions on General Motors importing the really fuel-efficient cars they produce overseas.  Apparently, the new General Motors factory for building compact cars was chosen on the basis of “carbon footprint” and “community impact.”

It is hard to keep a straight face when analyzing the new “cash for clunkers” program.  For example, owners of the biggest old clunkers get a $3,500 credit for trading in the old vehicles for a new one with an improvement of just one mile per gallon.  Surely, it would save energy if the Treasury just mailed the $3,500 checks directly to Detroit!

Of course, the Obama administration is making some reductions in federal spending.  It is reportedly imposing a 9 percent reduction in the budget for the division in the Labor Department that polices fraud and other illegalities on the part of labor unions.  As noted below, a simultaneous expansion of business-oriented antitrust enforcement is taking place.

Turning to regulation, one of Ralph Nader’s biggest disappointments during his heyday as a consumer advocate was the failure of his proposal for a new Consumer Protection Agency.  However, the administration’s financial regulatory plan creates a powerful new Consumer Financial Protection Agency (CFPA).

This new free-wheeling agency takes authority now divided between the Securities and Exchange Commission (SEC) and the Federal Reserve System.  In a change guaranteed to cause confusion, the CFPA will share authority with the Federal Trade Commission.  The new regulatory agency will also have a mandate to give consumers more economic education.  Educators find that especially scary.

Moreover, the agency will have its own money pot, independent of the normal congressional appropriations process.  It will be financed directly by fees assessed on “entities and transactions” across the financial sector.

The Treasury’s financial plan contains many other expansions of government power over business.  The Federal Reserve System is given new authority to oversee any large financial entity whose failure the Fed thinks could generate “systemic risk.”  The Treasury heads a new Financial Services Oversight Council to “resolve” the inevitable jurisdictional disputes among federal agencies.  A new Office of National Insurance is to be established in the Treasury to monitor “all aspects of the insurance industry,” a sector of the economy traditionally under the province of state governments.

The SEC will require the registration of all advisers to hedge funds and other private pools of capital with assets over a given threshold.  It also will have the power to inspect the books of the advisers and to ensure compliance by their clients.  In addition, the power of the SEC will be expanded by legislative proposals to give it a more active role in guiding the compensation committees of all public companies.

The Federal Deposit Insurance Corporation will have new authority to take over and shut down financial institutions (not just banks) whose failure is deemed to pose “systemic risk.”

Viewed in their totality, these technical financial changes would represent a historic expansion of government.  Sadly, there is little comfort in the Treasury’s warning in its 88 pages of detailed proposals:  “More can and should be done in the future.”  Comparisons with the New Deal of the 1930s are too timid.  Shades of Alexander Hamilton!

The complicated climate change bill that recently passed the House of Representatives is a dramatic example of expanding government power over the economy.  Again, the fine print deserves far more attention than it has received.  For example, buried in the 1,201 pages of detail is a provision authorizing the Department of Transportation to require automotive manufacturers to produce vehicles that can run on methanol (wood alcohol), a fuel not widely available.

Other provisions, as expected, have little to do with the subject of global warming.  For example, contractors on some energy projects must pay employees at least the locally “prevailing wage.”  It is well known that, in practice, that means paying higher union wage scales.

Many federal departments are trying to climb aboard the economic stimulus bandwagon.  The Department of Justice wants to help out by showing that antitrust should be a “frontline issue” in the response to the problems facing the economy.  Apparently, business is not getting sued often enough.  Incredibly, one new assistant attorney general views antitrust enforcers as “key members of the government’s economic recovery team.”

When we step back and try to add up all the tax, spending, and regulatory actions and proposals of the new Obama administration, the result is clear: a cumulative squeeze on private decision-making and a more slowly growing economy in the years ahead.

In the process, private businesses will be discouraged by a host of government policies from making major new investments, especially those of a long-term nature with payoffs far in the future.  Key negative factors are the likelihood of higher taxes and greater inflation resulting from the huge budget deficits that are likely to arise in the next several decades, abetted by lax monetary policies.

The American public is likely to have a long wait until the national unemployment rate gets back down to the 7.6 percent that was reported when President Obama took office in January 2009.

One fundamental point deserves to be stressed.  In the inevitable tension in public policymaking between economic prosperity and income redistribution, for the next several years the American people can expect that income equalization will get the government’s priority over improvements in people’s living standards.  The average American, at best, will receive a more equal slice of an income pie that will be far smaller than the public expects.

Barack Obama gave volunteerism a big boost early this year, visiting service centers on Martin Luther King Day, greeting volunteers, and working alongside them. “Everybody’s got to be involved,” he said. “If we’re waiting for somebody else to do something, it never gets done. We’re going to have to take responsibility, all of us.”

These are wonderful sentiments, of course. Everyone agrees that a healthy America needs citizens who play a direct role in helping in their communities. However, when we look closely at what it takes to promote citizen involvement, we discover that politicians are straddling a divide. With one hand they wave volunteers on, urging them off their couches, out of their homes, and into community self-help projects. Yet with the other, with the lawmaking hand, they make the prospects for volunteering ever more difficult and daunting.

I was reminded of this paradox the other morning when a shocking e-mail message popped up on my screen. It was from Teresa, the president of a volunteer group we had just started to provide after-school activities for teenagers.

The subject line was, “Liability Issues and Board Function,” her way of alluding to the many legal threats and challenges that loomed over our small-town charity.

Her e-mail said: “Hello Friends of Sandpoint [Idaho] Teen Center. I am resigning from the board of Sandpoint Teen Center effective immediately.”

The message was shocking because Teresa was the heart and soul of the teen center. She had felt drawn to these youngsters with their stringy hair and too-long jeans, seeing them at loose ends after school, so ready to drift into drugs, alcohol abuse, and crime, and felt impelled to do something. Her tireless recruiting brought in board members and other volunteers, and her eager telephoning brought us our first donations. Since the center opened last month, she has worked there almost every day, greeting the youngsters, playing ping-pong with them, and leading the prayer at snack time.

Though Teresa’s message was shocking, it was not surprising. A volunteer who tries to set up a human-services organization in this country quickly discovers she is entering a jungle of government regulation. This jungle is expensive to negotiate, requiring the assistance of lawyers, tax accountants, insurance agents, and risk assessors, and requires vast amounts of paperwork. Large nonprofits have bureaucracies to stay on top of, and defend against, the demands of government officials, but idealistic newcomers have no such protection. They stand alone and unprotected in this jungle, fearful that a legal misstep could, in an extreme case, deprive them of their property or land them in jail. This was how Teresa saw it in explaining her decision to resign. “I can’t jeopardize our home,” she told me.

We got our first taste of regulation when we tried to open a bank account. Because of new regulations from Homeland Security, we were required to get an EIN (employer identification number) first. Who was going to sign the application for the EIN and offer himself as a hostage to the IRS? I finally agreed to be the Guinea pig. As it turned out, the IRS added insult to injury: Just getting the number cost me $88.

Board members started asking if we had a 501©(3)? This expensive and burdensome paperwork, which began as an IRS device to regulate the charitable tax deduction, has taken on a life of its own in the voluntary sector. Many volunteers assume you aren’t a legal voluntary group unless you have it. Others believe it is illegal to raise funds without it, an impression reinforced by donors who keep asking if the group has 501©(3) status.

We worried about lawsuits. Parents might sue us if a kid crushed his finger playing air hockey, or if he fell off his bike after he left the center, or if we authorized emergency medical treatment without formal permission. Someone who disagreed with a decision might sue individual board members. Obviously, we needed costly liability insurance, but how many different kinds of insurance did we need? Once, a volunteer suggested taking some teens down the street to rake leaves for a shut-in grandmother. No, someone else said, she didn’t think we had liability insurance for off-premises activities.

We became aware of threats from state and federal agencies. They might prosecute us for failing to adhere to requirements on nondiscrimination, or child-abuse reporting, or the Americans with Disabilities Act. We noticed that under the new Sarbanes-Oxley Act board members can face criminal prosecution for alleged lapses in financial management and financial disclosure.

The anxiety came to a head at our recent board meeting. Participants reviewed the above-mentioned challenges and brought to light some new ones. One woman feared we were subject to OSHA regulations and could be fined if our rented space was found in violation. Another thought we needed a state permit for a commercial kitchen, since we prepare nachos for the kids in our little oven. Since we were going to hire one part-time employee, that brought upon us the legal requirements of withholding and depositing payments to the IRS: Would we be able to get them all right? In this connection one board member told a frightening tale. She was a bookkeeper for a firm that went bankrupt, and the IRS came to her for missing taxes. “I had to hire a lawyer to defend myself,” she said, “and take out a second mortgage on my house to pay for it. I’m never going to go through that again.” It was a very depressing meeting, and I was not surprised that it would lead a board member to resign.

The Unseen Cost of Regulation

In theory government regulation is supposed to prevent bad things from happening. Someone falls on a broken stair, so you set up an agency to punish people with broken steps—or encourage liability lawyers to sue the pants off owners of broken steps. For those who live on the mountaintop of authority, it seems a grand system.

For those of us living in the real world below, government regulation has a nasty side effect: To act against supposed bad apples, you have to burden and intimidate millions of well-intentioned and perfectly innocent people engaged in creative activities. Everyone agrees that in an ideal society, friends should get together to help neighbors in their community, with tutoring, counseling, child care, teen activities, senior care, and so on. Yet this ideal is every day undermined by the tide of government regulation that threatens the liberty and property of local reformers. If we continue down this path, the only safe place for a Good Samaritan will be on the couch watching TV, and the job of helping neighbors will be done—to the extent that it is done at all—by impersonal bureaucracies.

Lawmakers need a broader understanding of regulation. Today, they focus on a supposed problem, like broken steps or misleading bookkeeping, and devise ever more ferocious penalties to punish those thought responsible. With their gaze fixed on malefactors, they overlook the impact of these penalties on the world’s benefactors. In the grip of this narrow perspective, lawmakers and liability lawyers are unintentionally creating a social monster, a system of controls and penalties that threatens an idealistic community volunteer with the loss of her home.

It’s a point that a new administration eager to promote volunteerism ought to consider.

It takes some sophistication to follow Henry Hazlitt’s economics lesson and trace the consequences. Under the new supply and demand conditions, if prices cannot rise beyond a certain arbitrarily set level, supplies will run short, since people have no incentive to conserve and entrepreneurs have no incentive to divert goods from where they are relatively plentiful to the stricken area where they are relatively scarce.

Similarly, most people think the minimum-wage law is a good thing because they dislike that unskilled workers are paid very low wages. What could be more humanitarian than to set a floor beneath which wages cannot fall? If they thought like economists, they would realize that a mandatory minimum wage set above the marginal productivity of unskilled labor creates unemployment or less-desirable jobs for the workers it is intended to help.

But lately an idea has been floating around that anyone should be able to see through because it has no superficial logic whatsoever. It goes like this: The government hasn’t been able to spend $500 billion fast enough to stimulate the economy, so the only thing to do is . . . give the government even more money.

Huh? How does that make sense?

The Obama administration, for now, seems to grasp the weakness of this reasoning, but the same cannot be said for some members of Congress. There is talk of a second “stimulus” package. We shouldn’t discount the possibility that the congressional backers of a new bill know it’s a ridiculous idea but that they stand to benefit from passing it anyway. That’s how incentives work in the political system.

The first “stimulus” package under Obama was no such thing. As has been noted many times, any money the government spends must be acquired from somewhere in the economy first through borrowing or taxation. While moving money around may stimulate a given activity, it comes at the price of the other activities to which that money would have been directed. And since bureaucrats, not entrepreneurs, direct the “stimulus” projects, this redirection of scarce capital is detrimental to consumer welfare. If the projects served consumers and thus were profitable, they would have been undertaken privately and more efficiently than bureaucracies could have accomplished them.

The money in the earlier bill was supposed to be used for what we were assured were “shovel-ready projects.” But the truth seems to be that precious few were shovel-ready. They won’t get started for a year or more.

Edward Lazear writes in the Wall Street Journal, “By June 26, about $56 billion [out of about $500 billion] was spent on the stimulus from the American Recovery and Reinvestment Act of 2009, passed Feb. 17. A large proportion of that actually reflects mere transfers from the federal government to state governments, so the amount that has gotten into the economy is significantly lower.”

What Were They Thinking?

Thus even if the “stimulus” plan had been sound in theory, back-loading the spending to such an extent undermined its stated purpose: immediate job creation. It makes you wonder what the bill’s architects had in mind. Did they actually believe what they were saying? If so, their actions make no sense. When the bill passed in February, the unemployment rate was 8.1 percent, Today it is 9.5 and rising. That doesn’t seem terribly stimulating. Obama might claim he saved some number of jobs, but he wouldn’t be able to prove that.

Administration spokesmen are now asking for patience, but they are the ones who created a public expectation of quick stimulus. They have only themselves to blame for the disappointment showing up in the popularity polls.

Outside advocates of stimulus, such as Paul Krugman, will say the unabated rise in unemployment only proves what they said all along: The spending package was too small. But that is not a satisfying rebuttal. First, as noted, if government agencies can’t disburse a half-trillion quickly enough to jolt the economy, logic compels us to conclude that they can’t disburse a trillion. Should they fly around in helicopters and drop the money? (That wouldn’t work — people would do unpatriotic things like save or pay off debts.)

Second, economic theory refutes the Krugmanian claim. Since government can spend only what it has first taken from someone else (by borrowing or taxation), the spending can’t create jobs on net. So even if the government-created jobs were real jobs — in the sense that they ultimately contributed to consumer well-being according to consumers’ own priorities — they were created at the cost of other productive jobs that would have been created in the absence of government intervention. Resources are scarce; government spending displaces private economic activity. There is no way around that.

If the Stimulus I was a bad idea, Stimulus II is even worse.

Don’t over estimate the power of common sense.

FEE Timely Classic
“Public Choice Theory: The Rest of the Story” by Dwight R. Lee

President Barack Obama recently expressed faux surprise that anyone would oppose his latest proposal, a government-run insurance company that will offer coverage in competition with private insurers. The president’s surprise came in the form of asking why people would claim that government cannot operate efficiently, yet simultaneously run an insurance company that would be a lower-cost producer than private firms.

While seemingly clever, President Obama’s point is irrelevant. The question is not about the “efficiency” of insurance plans, but rather the simple fact that government schemes are responsible for driving up the cost of medical care to consumers. From the huge regulatory burdens (with accompanying paperwork) on medical people to the third-party payments, government actions on all fronts have turned medical care into something akin to a Rube Goldberg cartoon.

Talk to any doctor and he or she will tell you that they spend many hours per week doing paperwork, almost all of it required by government and insurers. The government paperwork is especially pernicious because errors or disagreements on billing – even innocent ones – can lead to criminal charges. The legal aspect of medical care has turned into a minefield for the providers, and that has to impact overall costs.

The main issue, however, is quite simple, yet also profound: Medical care is a scarce good and thus is subject to the laws of economics. All too often, we hear that medical care is not like other goods and services and is set apart from economic laws. All we can say in return is, “Not so fast, my friend.”

Application of economic theories does not discriminate between the kinds of goods and services rendered. If something is scarce, the same laws apply whether we speak of brain surgery or pork bellies. Such words are disconcerting to people who believe that medical care should be a right that should be provided to everyone regardless of one’s personal wealth. Unfortunately, all government interventions – all of them –carrying out this “rights” mandate only serve to make medical care less available (and less effective) for everyone.

Think of a simple supply-and-demand example. If anything increases the cost of providing something, the supply curve shifts to the left, making the good less available and higher-priced. There is no exception to that point for anything that is scarce.

So, let us think of the ways that government makes it more difficult to provide medical care. First, and most important, government sets huge barriers in the path of people seeking to engage in medical occupations, especially through licensing and strict regulations. In other words, government purposely limits the supply of medical providers to protect the incomes of doctors.

It is the equivalent of the government’s forcing all of us to purchase a BMW or Cadillac instead of letting us choose between a high-end and lower-end vehicle. If such restrictions existed in the auto industry, we would have demands for “cost containment” in autos.

Second, as previously noted, the legal side of medical care forces doctors and nurses to spend time doing paperwork rather than providing care. Furthermore, the constant threat of criminal and civil action forces medical care providers to play defense, which further limits the supply of their services.

Last, the third-party payment system that dominates medical care further separates the consumers from their choices. If we had the same system to pay for food and automobiles, we would have “cost crises” in those markets as well.

Most people cannot fathom decoupling government control and medical care, as though cost-raising controls actually improve medical service. Yet if we wish to have innovative and affordable medical care, that is precisely what must be done.

The media not only lap it up, but they dish out more of their own—often conferring the “czar” title on officials whom even the government isn’t brash enough to label that way. While browsing the Internet, I came across an article from the January 20 Berkeley Daily Planet with a headline that caught my eye: “Bush Homeless Czar Pays a Visit.”

It wasn’t about a government official without a home. It was about the President’s homelessness czar, in town to promote “the development of 10-year plans to end chronic homelessness.” Other stories I found referred to a “timber czar,” a “cybersecurity czar,” a “health care czar,” and a “regulatory czar,” to cite but a few examples.

My problem with all of this goes beyond the notion of hiring yet another bureaucrat. It’s the use of the term “czar” itself to refer to anybody at all in what is supposed to be a free society. Jefferson, Madison, Franklin, and the others who risked their lives to fashion a constitutional republic must be turning in their graves. Just as George Washington rejected a suggestion he be named a king, so should any self-respecting, freedom-loving American citizen eschew any offer to be a “czar” over anything or anybody.

In his book Freedom in Chains: The Rise of the State and the Demise of the Citizen, James Bovard laments what this czarist fetish says about the state of American thinking: “Americans of earlier generations would be as shocked by the current adulatory use of the term ‘czar’ as contemporary Americans should be shocked of the use of ‘fuehrer’ as a compliment for a political leader.” Bovard cites an attorney who, in an 1895 case, condemned a particular tax as granting sweeping powers to the federal government “worthy of a Czar of Russia proposing to reign with undisputed and absolute power. . . .”

The origin of the word is “Caesar” from the ancient Roman autocrat Julius Caesar, who arrogated great power to himself and helped bring an end to the Roman republic. Later emperors embraced his name as their title; to be a “Caesar” was to possess almost limitless, life-and-death authority over the rest of society. In more modern times we think of a “czar” as a tyrant of pre-1917 Russia. Look it up in any thesaurus and you’ll find synonyms such as “usurper,” “despot” and “oppressor.”

Words say a lot about a culture. Americans of 1900 never referred to one of their own as a “czar” because they understood the term. Because they generally embraced liberty and limited government, they knew that it was pejorative. No respectable American of that day would have accepted the title, and no job at any level of government at that time even pretended to bestow czarist-like authority. Americans of today haven’t forgotten what the term means.

Sadly, they simply put far more faith in powerful, centralized government than did their ancestors. Their acceptance of the term “czar” is symptomatic of the same shift in thinking that has given us a government that commands a share of our lives and personal income many times what it claimed in 1900.

One hopeful sign of the prospects for liberty would be a widespread revulsion at the very thought of a fellow citizen possessing either a position or a title such as the one we’re discussing here. Let’s pray for the day when Americans tell their leaders in no uncertain terms: “Give us no more czars! Give us no pharaohs, emperors, shoguns, sheikhs, sachems, commissars, or potentates of any kind! Just give us good and limited government, and leave the rest to us!”

]]> http://www.fee.org/articles/czars/feed/ 3 http://www.fee.org/articles/tgif/obamas-impossible-healthcare-reform-promises/ http://www.fee.org/articles/tgif/obamas-impossible-healthcare-reform-promises/#comments Fri, 19 Jun 2009 13:47:24 +0000 Sheldon Richman http://fee.org/?p=7273 In his drive to “reform” health care — that is, redesign 18 percent of the U.S. economy — Barack Obama is clearly terrified that his mission will crash and burn if people think it will cost them their freedom of choice in doctors and insurance. He is surely convinced that this is what scuttled the Clinton plan in 1993 (he’s right), and he is determined not to let it happen again.

So he must persuade us that this freedom will be safe under his plan.

But can he make a truly persuasive case? No, he cannot, for reasons I will outline. Either Obama knows this and is lying to the American people, or he does not know it because he is shamefully ignorant of economics. You decide.

First, here’s what he said in his speech to the AMA this week:

We know the moment is right for health care reform. We know this is an historic opportunity we’ve never seen before and may not see again. But we also know that there are those who will try and scuttle this opportunity no matter what – who will use the same scare tactics and fear-mongering that’s worked in the past. They’ll give dire warnings about socialized medicine and government takeovers; long lines and rationed care; decisions made by bureaucrats and not doctors. We’ve heard it all before – and because these fear tactics have worked, things have kept getting worse.

So let me begin by saying this: I know that there are millions of Americans who are content with their health care coverage – they like their plan and they value their relationship with their doctor. And that means that no matter how we reform health care, we will keep this promise: If you like your doctor, you will be able to keep your doctor. Period. If you like your health care plan, you will be able to keep your health care plan. Period. No one will take it away. No matter what. [Emphasis added.]

Obama will not be able to keep his promise if he gets the “reform” he wants. He favors a “public option,” which is a euphemism for a government insurance plan. Obama says a government plan will keep private insurers “honest” through competition. But what will keep it from being a predatory competitor? After all, it will have a guaranteed source of revenue that no private insurer has: captive taxpayers. So the public option would be able to price its policies below market level and put the squeeze on the private companies.

It is strange that those folks who are always warning about predatory pricing and cutthroat competition in the free market never fret when the government provides services in “competition” with private firms. (See the “public” schools, for example.) But government is the only entity that can truly price predatorily because it can hold down explicit prices to consumers while recouping its costs implicitly through taxation or Fed-monetized debt.

Let’s not forget that Obama favors having a government bureau define the contents of the basic insurance coverage — that is, the state will dictate to insurers what services they must sell to their customers. Plus, the emerging reform plan would outlaw a premium schedule based on risk or existing illness. People who are sick or more likely to get sick could not be charged more than healthy people. (By that logic, the owner of a simple wooden house would pay the same fire-insurance premium as the owner of a brick house.)

Moreover, people would be compelled to have insurance (and then pay taxes on their employer-originated coverage). This will give the government the incentive to impose price controls — “guidelines,” no doubt –  to keep insurance “affordable” and “universal.”

If the private insurers protest that these terms make profitable operations impossible, Obama and his allies will accuse them of profiteering and proclaim that the free market has once again failed to deliver medical care.

At that point insurers may choose to leave the medical policy market. Meanwhile, when reimbursements to doctors and other providers shrink in the name of cost-cutting and red tape mounts, doctors may choose to take early retirement or find other ways to make a living. (Some doctors have stopped accepting Medicare patients.)

But when that happens, what about all those people who are “content with their health care coverage”? Despite Obama’s solemn pledge, they will not be able to keep it. What recourse will we have for the broken promise? A vote at the polls in 2010 and 2012?

Inject Competition

Obama says the public option is needed to “inject competition into the health care market so that [we can] force waste out of the system and keep the insurance companies honest.” But who is limiting insurance competition today?

Government, of course.

Interstate competition in medical insurance is illegal. There is no national market. Americans living in Texas are not free to buy coverage from a firm operating in Maine. (When John McCain proposed legalization during the presidential campaign, he was pilloried for wanting to do to medical insurance what was done to banking.)

One reason interstate competition is not allowed is that states throughout the country, to different degrees, force insurers to provide coverage for all kinds of services that most people might never buy on their own. Mandated coverage results from service providers’ lobbying state legislatures – a truly corrupt rent-seeking system. (See John Seiler’s Freeman article here.) Interstate competition could nullify the mandate system, as people bought policies from companies in states with fewer requirements. Opponents of interstate competition say this would set off a race to the bottom. What they mean is that it would permit people the freedom to tailor policies to their personal requirements.

That the government is the biggest obstacle to full competition in health insurance is also the rebuttal to another idea emerging from the “reform” factory: state exchanges, or federally subsidized insurance “marketplaces.” Imagine that! The government would set up markets. As though there is no market now, hampered as it is by idiot rules from the brains of clueless politicians.

When Obama promises to  make health care and insurance “affordable,” he means he will impose price controls, overt and covert, on providers and insurers. Promises of cost-cutting should get the same credit as past such promises: exactly none. Cost-cutting is not a bureaucracy’s strong suit.

We know where price controls lead: to shortages, decline in quality, queues, rationing, and regimentation. Welcome to healthcare reform.

Obama and John Stuart Mill

Obama’s belief that government can control the distribution of health services according to his personal preferences without effecting production of those services brings to mind John Stuart Mill’s fatal move in his famous economics treatise, Principles of Political Economy (1848 and beyond). Driving a theoretical wedge between production and distribution, Mill wrote:

The laws and conditions of the Production of wealth partake of the character of physical truths. There is nothing optional or arbitrary in them. Whatever mankind produce, must be produced in the modes, and under the conditions, imposed by the constitution of external things, and by the inherent properties of their own bodily and mental structure.

It is not so with the Distribution of wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively, can do with them as they like. They can place them at the disposal of whomsoever they please, and on whatever terms. [Emphasis added.]

Obama and Kennedy et al., like Mill before them, foolishly believe that government intervention in the distribution of medical services will have no effect on their production. “The thing once there, mankind …. can do with them as they like.” How absurd. Goods and services are never “there” once and for all.  They must be continuously produced — but the producers could decide to stop producing. Didn’t Ayn Rand write a novel about this?

Contrary to the brain trust running Washington and attempting to run the economy, distribution affects — can discourage or render impossible — production. That’s what the American people need to realize as they listen to Obama’s sugared — but fundamentally misleading — words. The people are right to be concerned.

None of this is meant to sanction the system of privilege that the medical and related professions enjoy through licensing, patents, and other interventions. On the contrary, that system must be dismantled if we are to have a free and competitive healthcare system — for that is the only way to make medical care really universal and affordable.

With the economy performing worse than hoped, revised White House figures point to deepening budget deficits, with the government borrowing almost 50 cents for every dollar it spends this year.

The deficit for the current budget year will rise by $89 billion to above $1.8 trillion — about four times the record set just last year. The unprecedented red ink flows from the deep recession, the Wall Street bailout, the cost of President Barack Obama’s economic stimulus bill, as well as a structural imbalance between what the government spends and what it takes in.

This no longer is a “problem.”  It has become a calamity, and there are no political forces in Washington willing or able to stop what seems to be a runaway train.  Furthermore, the political arrogance that is the nation’s capital prevents people from understanding the obvious: we are witnessing an episode of ruinous government spending that is going to have severe ramifications for years to come.

After the latest numbers came out, White House Budget Director Peter Orszag declared that the deficits are being driven by the recession, which this government inherited, so the numbers are not the fault of the current set of policymakers at 1600 Pennsylvania Avenue.  I am no defender of George W. Bush and his spendthrift government, but even a Bush critic like me can see that the incoming Obama government decided the speeding train was not going fast enough, so they opened the throttle wide open and tied it down.

Some perspective is needed here.  In nominal terms, the deficits are far and away greater than anything we have seen.  According to the Statistical Abstracts of the United States, if one adds up all of the budget deficits of the Bush administration, they about equal the deficits for this fiscal year alone.  Now keep in mind that many of us believed that the Bush deficits were ruinous, with its profligate spending and monetary “creation” through the Federal Reserve System –  and the boom and bust pattern of the economy proved our point.

However, it is as though the Bush policymakers were skinflints compared to what we are seeing now.  Furthermore, there are economists who claim that the present government is not spending enough.  Recent Nobel Prize-winner Paul Krugman claims that the unprecedented surge in federal spending is only a “half-measure” that won’t revive the economy.  The solution?  Even more spending!

My first reaction is simple: Spend with what?  Borrowers need lenders, and that means that someone out there has to believe that a U.S. bond is a good investment.

Much of the U.S. deficit has been funded by Asian governments such as China and Japan which accepted dollars for goods and then rolled those dollars into U.S. government debt.  However, that gravy train is slowing down rapidly, as the seller is running out of suckers.

There is one buyer, however, that seems ready and willing to buy what Uncle Sam throws its way: the Fed.  As the recent statements by the Fed have demonstrated, the central bank is increasing its purchases of both government and private securities at an increasing rate, revving up its printing press in the process.

This cannot lead to recovery; when the government throws out this much paper, there is no way we will not see a “crowding out,” which strips the very funds needed for business investment. Rather, it will lead to inflation and lots of it.  Never mind that the Obama administration has announced that this economy will enjoy a 3.5 percent increase in output by the year’s end; the only things that are going up are the inflation and unemployment rates.

One does not have to wish this administration to fail in its economic policies.  This government is doing that without any help from the opposition.

In the years after World War II, the British government went on a binge of nationalization, and after the economy became even more tenuous and less competitive, the government nationalized failing firms, an action dubbed “lemon socialism.”  Now, one would think that with this sorry example being available, U.S. policymakers might try to refrain from allowing the British Disease to slip into our body politic, but apparently arrogance is overshadowing good sense and the understanding of history.

The latest government caper is the attempt to nationalize General Motors and Chrysler, with the government taking large ownership shares in each company, along with the United Autoworkers.  Taking up the rear are the people who actually lent money to those companies and who now are being given the back of the hand.  When some Chrysler bondholders recently balked at the government’s “permitting” them to gain about 30 cents on the dollar, President Obama denounced them as “speculators” and worse. Even though Chrysler right now is in bankruptcy court, I suspect we are looking at a fixed outcome based on what the government wants.

For all of the talk of calamity if GM and Chrysler shut down for good in a Chapter 7 bankruptcy (which the government will not permit to occur, unfortunately), we have to remember that the losses being sustained by these two companies mean one thing and one thing only: their continued existence in their present state is destroying wealth.  That makes the economy worse not better.

Supporters point to the millions of people employed in the GM and Chrysler production and sales chains and then claim that if the companies went under, the job losses would be “devastating.”  That is true, but only partly true.  The job losses would be devastating to those individuals and regions connected to those companies.

However, the net effects of a shutdown of these firms would be positive, and they would be realized at various margins throughout the economy.  Contrary to Paul Krugman’s “Depression Economics” view that an economy gains when government “stimulates” the use of “idle or underutilized resources,” in truth, the Law of Scarcity does not disappear.  There is a reason as to why these resources are “underutilized,” and it has nothing to do with an alleged fall in “aggregate demand.”

Instead, it has everything to do with the fact that American consumers prefer the vehicles made by GM’s and Chrysler’s competitors.  Furthermore, the extravagant labor packages that these companies had with the UAW highlights the further irony: the two entities that had the most to do with the demise of the domestic auto industry, government and labor unions, now are taking charge of GM and Chrysler.

Obviously, the only way that these companies can survive now is through massive taxpayer subsidies, which further will destroy wealth and make our economy worse off.  I cannot imagine the government permitting GM and Chrysler’s competitors to go unmolested, so look for all sorts of contrived action against the U.S. subsidiaries of foreign companies such as government probes and union-organizing attempts.  The last thing a government firm is going to tolerate is competition, and honest competition at that.

Thus one charitably can say that this new edition of Government Motors is going to be an economic disaster.  The venture will destroy wealth and make it even harder for people who are not politically connected to make a decent living.  It certainly is not a recipe for economic recovery, but somehow, I doubt that the powers that be in Washington really care.  They are going to have their very own “lemons” as socialist play toys.  O joy.

Most commentators I have read are treating the “stimulus” as a mechanism through which the government is able to “get money into the hands of consumers” in order to cover a supposed “large hole” in consumer spending until the economy “recovers.”  Thus, according to this reasoning, Obama simply is throwing out a lifeline to people who really can use the money.

However, that is not what is happening, and the sooner we understand what the government is doing, the sooner we can speak out against it.  I am going to make a statement that will seem almost conspiratorial in nature, and I am decidedly not a conspiracy theorist.  Nonetheless, I am going to say it: there will be no recovery, and the government is going to make sure that it does not happen.

Yes, I know this seems counterintuitive.  Everyone supposedly knows that the politicians in power want a strong economy so they can get credit for it.  Sorry, people, but that is not how politicians operate.

First, no politician–no president, senator, representative, or judge–can “provide prosperity.”  At best, they can help create a playing field in which the participants in an economy can face consistent laws, protection of property rights, enforcement of contracts, and the other things that entrepreneurs and business owners need to create a prosperous economy.  In other words, the “positive” role that legislators can play is largely negative in practice; it is those things that legislators and others do not do that often help to determine whether or not a nation’s economy will be prosperous.

Second, politicians love to be seen as doing something.  Look at the press treatment given to those members of Congress who have voted against the “stimulus” and to those few governors who have said they won’t take the cash.  (The editorial page of the New York Times seems to be “Stimulus Promotion Central,” and anyone who opposes this legislation is portrayed either as evil or just plain stupid.)

Third, and most important, politicians do not gain votes by doing nothing for their constituents.  A politician who stands before voters and declares, “I have not voted to send you money, but instead voted to create an arena in which entrepreneurs and business owners can help create a stronger economy without government largess,” is not a politician who is going to win an election.

Politicians cannot help individuals who are able to find work in a recovering economy.  However, if an economy consistently has 10-15 percent unemployment and people have to ask politicians for lots of favors, especially when it comes to employment, that presents a wonderful opportunity for those in power.

Indeed, I believe that this administration plans to institutionalize double-digit unemployment and turn the United States into a European-style social-welfare system in which unemployment is high and the economy grows slowly at best, a condition that has been called “Eurosclerosis.”  To those who claim Americans will not put up with this state of affairs, I remind readers that during the New Deal, Franklin Roosevelt and his political allies won election after election despite high unemployment and slow growth.  A recent Thomas Friedman column approvingly lays the new roadmap to this brave, new economy.

From the new financial restrictions to new draconian environmental policies, the government clearly is going to stand in the way of new economic growth.  The “green jobs” path to greater employment is just a myth.  For every new “green job” created, many other sources of employment are destroyed.

Right now, the government is talking recovery.  A year from now people will be trying to survive, and it always is easier to survive when those in power are on your side.

This error also involves individuals. It holds that what is true for one individual will be true for all others.

The example has often been given of one who stands up during a football game. True, he will be able to see better, but if everyone else stands up too, the view of many individual spectators will probably worsen.

A counterfeiter who prints a million dollars will certainly benefit himself (if he doesn’t get caught) but if we all become counterfeiters and each print a million dollars, a quite different effect is rather obvious.

Many an economics textbook speaks of the farmer who is better off because he has a bumper crop but may not be better off if every farmer has one. This suggests a widespread recognition of the fallacy of composition, yet it is a fact that the error still abounds in many places.

The good economist neither sees the trees and ignores the forest nor sees the forest and ignores the trees; he is conscious of the entire “picture.”

In looking at policies coming from Washington, D.C., I employ this fallacy in two ways.  First, I apply it as written; second, I show how economists and pundits wrongfully apply this fallacy, and make false claims with it.

The latest “stimulus” package has governors, mayors, farmers, college presidents, auto and steel executives, scientists, and other interest groups lining up.  Auto executives claim that bailing out domestic producers will “save American jobs.”  The “alternative energy” crowd does one better: they claim that they will “create new jobs.”

Indeed, new government money given to these groups will benefit people who receive the dollars first.  One benefactor is Al Gore, who is a partner in an investment fund that helps bankroll these subsidized industries.  Obviously, he believes that these subsidies are “good for the country,” when, in fact, they are good only for a small group of people with a huge public relations machine.  Those who are forced to pay higher energy costs (in order to buy inferior ethanol fuel and high-priced electricity) are made poorer, and no amount of rhetoric can change that sorry fact.

However, the wrongful use of the “Fallacy of Composition” also must be addressed.  Perhaps the worst example is the “Paradox of Thrift,” coined by Keynesians, but really goes back to the Mercantilists of the 16th and 17th centuries.

The “Paradox of Thrift” states that saving money might be good for a few people, but if everyone saves, then it retards economic growth and drives the economy into recession.  (The Wall Street Journal recently had an article blaming savers for not spending “just as the economy needs their dollars the most.”  The article referenced the “Paradox of Thrift” as though it were legitimate.)

Obviously, economists and pundits who cite this faux “paradox” are ignorant of how capital formation occurs and how a boost in the savings rate will lessen the impact of a recession and help bring about a real recovery.  These economists, however, are looking at only the immediate impact of spending and saving (I will deal with “short-run” thinking in a future column), not the longer-term effect of capitalization and economic growth.

Economists tend to be divided into two groups.  The first sees the economy as a perpetual motion machine that magically grows even as people consume down the capital stock (which replenishes itself and even expands on its own, just as long as consumers continue to spend).  The second sees economic growth occurring only because people save for the future and create new capital that matches with consumer needs and desires.  It does not take a genius to recognize the “bad” economists and the “good” ones.

Not surprisingly, the “bad” economists fall over the Fallacy of Composition on both ends.  They fail to recognize it when it comes to government spending and misuse it when examining consumer behavior.

Next week: The Fallacy of “Money is Wealth.”

The Illinois way

FEE Timely Classic:
“Budgetary Immortality” by Doug Bandow

It seems the road to hell will be paved with “bipartisanship.”

FEE Timely Classic:
“Compromise, Principles, and Politics” by Gary Galles

Merry Christmas

FEE Timely Classic:
“Wartime Origins of Modern Income-Tax Withholding” by Robert Higgs

Rep. Barbara Flynn Currie, who chairs the committee considering impeachment, declared that Blagojevich created a “crisis of confidence” in state government. It is not unlike what a professor told me when former U.S. Rep. Tom Delay was indicted: He should go to jail because his actions “caused people to lose confidence in government.”

Indeed, as I see it, the real scandal lies not with Blagojevich’s taped statements, as awful as they are. Nor am I concerned that people have their “belief in government” shaken. No, the real scandal is the fact that this political hack is someone who was given life-and-death power over the lives of other people. Governors sign death warrants for execution, they make decrees that have the force of law, and generally have much control in how people live – and die.

Americans constantly run to the well of “good government,” hoping to draw up “dedicated public servants” who make decisions based upon “the common good.” Yet, the stuff that bubbles up from that well always is toxic, but that does not stop people from hoping that the next batch of political swill will have a sweeter taste.

No one runs for office on a platform of “bad government.” No one runs for office promising to enrich cronies and impoverish political enemies through the power of taxation and income distribution. Instead, political candidates promise to govern wisely and engage in behavior that will serve the “public interest.”

As we know, however, the devil is in the details. Government cannot “help” one constituency without harming another; there is no way to spread the “benefits” of government expenditures evenly. Thus, some who are taxed receive less value for their taxes than others, while others receive benefits that well exceed what they paid to the taxman.

Lest we think, however, that the essence of government is “providing services” that we cannot provide for ourselves, think again. As Fred McChesney of Northwestern University has written in his classic book Money for Nothing, government is best understood as a legal “protection racket” in which government agents extort money from people who understand that those agents can destroy or even kill them. People tend to think that such threats are limited to those involved in “organized crime,” but government is far more effective than any Mafiosi at extortion.

Take the government’s antitrust action against Microsoft a decade ago. It seems that Microsoft and most Silicon Valley high-technology firms were not sending the requisite political contributions eastward to Washington, D.C. The Washington Post even sniffed in one article that Microsoft did not even have a Washington office. How dare they not let us “wet our beaks”!

Billions of dollars later, the government was able to extract enough from Microsoft and other companies to get its message across: pay us, or we destroy you. Indeed, it was “Mission Accomplished;” Microsoft now has a new office building in Reston, Virginia, near the D.C. Beltway.

Americans were told that the rapacious monopolist Microsoft harmed consumers by making a free browser available to them (instead of consumers having to pay almost $100 for browsers made by Microsoft’s competitors). The government’s reasoning was fraudulent, a raw attempt at extortion.

The only difference between the government’s attempt to destroy Microsoft and Blagojevich’s comments was the overt crassness of the Illinois governor. No one in the Clinton Department of Justice was that tactless, but in substance, there was no difference in what the government did there and what Blagojevich did in trying to “sell” Illinois’ U.S. Senate seat.

Although Blagojevich’s alleged comments are awful, we must remember that we should not be shocked, SHOCKED to hear someone in that position speak like that. Perhaps we should be more shocked when someone in government actually does the right thing.

Another presidential election has come and gone, only this time the results are astoundingly and, yes, satisfyingly historic. In light of our racial history and leaving aside political philosophy, I am overjoyed at what Barack Obama’s election means. I cannot put it better than Will Wilkinson did at The Fly Bottle, “It means something profound that a black man was elected to the most visible, high-status position our society offers. The mere fact that Obama won truly does make our society a better place.” I also share Wilkinson’s reservations. In a truly free society, the presidency would not be the most visible high-status position our society offers. That designation would be reserved for a variety of private-sector roles. Unfortunately, however, the presidency does have that status today, and Obama’s election must be appreciated from that perspective. Relatedly, I am uneasy about, though understanding of, the public displays that followed John McCain’s concession Tuesday night. Again, Wilkinson: “[F]rankly, I hope never to see again streets thronging with people chanting the victorious leader’s name.” Amen.

President-elect Obama’s many supporters and well-wishers have great confidence in his ability to solve the economic problems that vex American society. That ability is said to lie in his cool judgment, his good intentions, and his eloquence. Let us grant that he possesses all three. Valuable as they are, they will be useless if he attempts to solve our economic problems directly by an exercise of power. That’s because there is something he does not have — something no man or woman can have: the power to repeal the laws of economics.

Until about 200 years ago hardly anyone understood that there are implacable laws of economics, or human action. This ignorance permitted rulers to believe they could impose their will more or less efficiently. If something went wrong, the fault lay in the flaws of others. Then, in the late eighteenth century, something changed.  As Ludwig von Mises wrote in Epistemological Problems of Economics: :

When men realized that the phenomena of the market conform to laws, they began to develop catallactics and the theory of exchange, which constitutes the heart of economics. After the theory of the division of labor was elaborated, Ricardo’s law of association enabled men to grasp its nature and significance, and thereby the nature and significance of the formation of society. The development of economics and rationalistic sociology from Cantillon and Hume to Bentham and Ricardo did more to transform human thinking than any other scientific theory before or since. Up to that time it had been believed that no bounds other than those drawn by the laws of nature circumscribed the path of acting man. It was not known that there is still something more that sets a limit to political power beyond which it cannot go. Now it was learned that in the social realm too there is something operative which power and force are unable to alter and to which they must adjust themselves if they hope to achieve success, in precisely the same way as they must take into account the laws of nature. This realization had enormous significance for men’s action. It led to the program and policies of liberalism and thus unleashed human powers that, under capitalism, have transformed the world.  [Emphasis added.]

Not that rulers and state-worshipers embraced economics and liberalism. But they sensed that the liberal economists had identified the natural limits of power. Finding that knowledge threatening, those enamored with power had no choice but to attack and deny economics as a scientific discipline. Yet economics survived.

Lesson Unlearned

Somewhere along the line the fundamental lesson taught by the economists was unlearned. Political “leaders” lost whatever humility liberalism had instilled in them and assumed a pre-modern hubris in which they believed that nothing but lack of will could keep them from accomplishing their goals. This hubris was described by Mises in “Social Science and Natural Science”: “[T]he belief prevailed that in the field of human action no other criterion could be used than that of good and bad. If a policy did not attain its end, its failure was ascribed to the moral insufficiency of man or to the weakness of the government. With good men and strong governments everything was considered feasible.” (Emphasis added.)

Sound familiar? Today’s political leaders, regardless of party and including, alas, Barack Obama, operate with this pre-modern mentality. We saw it throughout the presidential campaign, and heard its words when Obama said, “There is nothing we can’t do, nothing we can’t accomplish if we are unified.”

This is opposite of the classical-liberal insight, which can be summed up with this bumper-sticker slogan: Economics. It’s not just a good idea. It’s the law.

Because there are economic laws, there are limits to what “we” can do and how we can do it. (By we, of course, Obama doesn’t mean the spontaneous social order; he means the state and deliberate planning.) We cannot raise wages or create jobs or eliminate poverty or make medical care cheap and widely available — or do any of the other things politicians promise — by decree. But we can move toward those goals by freeing the market, the undesigned yet orderly process that distills the knowledge and wisdom of the people and rewards entrepreneurs for solving problems.

Government cannot do those things directly. If it tries, it will fail and make us worse off. The key to understanding this lies in the nature of human action. We live in a world of scarcity, and the list of scarce resources includes time and knowledge. At any moment demand exceeds supply. Under these conditions, we adapt means to achieve chosen ends. We face opportunity costs and make tradeoffs according to our subjective preferences. The perception of costs prevents us from achieving lesser values at the expense of greater values. Respect for other people and their property, backed by law, prevents us from shifting costs to them without their consent. The result is the market — that emergent order which serves the general welfare and encourages personal responsibility as each person pursues his or her private interests.

If government, which, recall, is force not eloquence, intervenes — to raise or lower costs, to increase or reduce rewards, to tamper with prices or interest rates — we will modify our behavior, knocking self-interest and the general welfare out of alignment. A subsidy for medical insurance will increase the demand for services and raise prices. A price ceiling will make those services less available. A floor under wages will make jobs for unskilled workers more scarce, as employers find it a losing proposition to hire them. A tax on production will mean less produced. A subsidy to production will mean too much produced relative to something else consumers want. A trade restriction will lower living standards at home and abroad.

The Road to Serfdom?

All the good will and all the unity in the world won’t change the laws that make these things happen. Government might try to overcome the “recalcitrant” market by issuing more and wider decrees and by firmly demanding compliance. But it would be for naught. We’ve seen this sort of thing fail time after time in systems no American would want to embrace. F.A. Hayek’s The Road to Serfdom demonstrates that the democratic process is not necessarily a barrier to the creeping despotism of a government intent on having its commands obeyed and its utopia carried out. I am not suggesting that this is where Obama wants to take us. But if he insists on using political means to achieve his ends, that is where logic will take him.

It’s the law.

True, government can take the more subtle route of manipulating incentives through the tax system. But this amounts to having politicians and bureaucrats substitute their preferences for ours. Moreover, taxation is force and all such programs have unintended consequences.

Intentions do not build their own bridges to results. We know this from our own day-to-day actions. It is even more true in the political world. No bridge can be built in defiance of economic logic.

The difference between accepting and rejecting this truth is the difference between humility and hubris. We shall see which describes the Obama administration. Let us hope he chooses wisely.