Anti-Poverty and the Education Monopoly

Thanks to the Amateur Economist blog for these two excellent pieces.

First, is Steven Horwitz’s column in The Freeman, A Libertarian Anti-Poverty Agenda.  In it, Horwitz disputes the claim by one of his readers that he “hates poor people” and provides three libertarian recommendations for reducing poverty by removing some of the structural barriers that keeps poverty around.  I wonder if his readers will be able to respond to those recommendations without resorting to ad hominems.

Second, is this quote from the Jennifer Grossman:

[A]ny provider that commands 90 percent of the market — whether we’re talking about software, phone service, or heating oil — is, by definition, a monopoly. Our government employs thousands of bureaucrats to track down and break up monopolies on the grounds that monopolies stifle competition and thereby produce bad products at high prices. Doesn’t it strike anyone as strange that the same government protects its own monopoly in education? And stranger still, that nearly everyone accepts this state of affairs as normal — as something that has always been and must always be? … [C]ompetition forces public schools into making long-overdue repairs. And it offers poor parents the choices they desperately desire.”
— Jennifer A. Grossman, Source: How Philanthropy Is Revolutionizing Education

I have a thing for such clear and obvious insights.  Grossman’s insight exposes an inconsistency in thinking that can cause people who hold it to give more serious consideration to their positions.

I predict that one reaction could be, I trust the government because it is held accountable to voters, but I don’t trust private enterprise.  To that I’d recommend the people evaluate the effectiveness of political voting vs. economic voting.  And, I’d offer the education system as a prime example of the relatively less effective political voting.

By the way, Horwitz’s second poverty reducing recommendation lines up with Grossman’s.

Revealed preferences and unions

Taylor Swift by David Shankbone 2010 NYC

Image by david_shankbone via Flickr

Many assertions and studies comparing union and non-union pay have been circulating since the teachers union in Wisconsin have been demonstrating against the representatives of their employers this past week.  Some say union workers are overpaid, some say they are underpaid and others hold that there are too many factors to make a fair comparison.

I think most of the logic that goes into such comparisons is bad.  Whether someone is underpaid or overpaid is up to them to determine, and it’s not something that is easily ascertainable by third parties.

We each value things differently and have different preferences and situations.  Some people like football, some like Coke and some like Taylor Swift.  But not everybody likes them.

It’s very difficult to capture those preferences in studies.  But, I think we can learn a lot by how people behave.

It occurs to me that if the union workers in Wisconsin were not overpaid in some regard — be it salary, job security, benefits or in some other non-monetary aspects of their employment trade-off — they wouldn’t care nearly as much about it as they appear to.

Another thought occurs to me.  Nearly ever time I patronize most stores the workers there thank me.  I can’t remember the last time someone from my local school district thanked me for paying my property tax, which funds their job.

Why the U.S. is not a democracy

In this previous post, I promised to write about the insights that moved me away from the fence sitting position of ‘fiscal conservative, social liberal’ toward libertarian thinking.  Walter Williams helps me start that discussion.

This week, Williams writes about why the U.S. is not a democracy, even though many people think it is or should be.

The word “democracy” appears nowhere in the two most fundamental documents of our nation — the Declaration of Independence and the U.S. Constitution. Our Constitution’s Article IV, Section 4, guarantees “to every State in this Union a Republican Form of Government.”

But why?

James Madison, in Federalist Paper No. 10, said that in a pure democracy, “there is nothing to check the inducement to sacrifice the weaker party or the obnoxious individual.”

John Adams said, “Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There was never a democracy yet that did not commit suicide.”

Alexander Hamilton said, “We are now forming a Republican form of government. Real Liberty is not found in the extremes of democracy, but in moderate governments. If we incline too much to democracy, we shall soon shoot into a monarchy, or some other form of dictatorship.

So, what’s the difference between a democracy and a Republican form of government?

John Adams captured the essence when he said, “You have rights antecedent to all earthly governments; rights that cannot be repealed or restrained by human laws; rights derived from the Great Legislator of the Universe.” That means Congress does not grant us rights; their job is to protect our natural or God-given rights.

I don’t know about you, but that’s still fuzzy to me.

To John Adams, I’d ask, how do democracies commit suicide?

I think the answer is that 51% of the people end up using government to force their will on the other 49% and that chokes off the productivity of the evolved patterns of interactions that spawned a society that could afford to form a democracy in the first place.

The simple image of why democracies fail is two wolves and a sheep voting on what’s for dinner.  I think a more accurate picture is Cinderella and her two step sisters taking a vote on whether Cinderella would get to go out for the evening.  Think of the missed opportunity for Cinderella if her step sisters had that kind of power over her.

I believe the founders wanted two things from government:

1) Protect individual liberty.

2) Limit itself from encroaching on individual liberty, to keep the wolves from using government to eat the sheep.

The U.S. has functioned more like a democracy than a limited republic for a better part of century because many folks don’t appreciate the value of #2.   I didn’t appreciate it when I was a ‘fiscal conservative, social liberal” or a conservative.

When I came to appreciate it, I started to think more like a libertarian or a classical liberal, even though I didn’t know it at the time.  It took me awhile to discover that.

I think ‘fiscal conservatives, social liberals’ have a vague notion of #1 and an even vaguer idea about #2.  Conservatives tend to be stronger on #1, but soft on #2.

I will write more about how I came to appreciate #2 in the future.

Netflix for Kindle — Coming Soon!?!

Thanks to my friend Lane Myer for sending me a link to this Wall Street Journal review of the OverDrive ebook lending service that public libraries are beginning to use.

The service still doesn’t work on the Kindle — yet (ever?).  Since my library offers this service, this has tilted my preference toward purchasing the Nook over a Kindle.

What is a job?

Creating jobs is effective political rhetoric.  Who would be against creating jobs?

But a job is different than just giving someone money.  It’s a subtle difference that few people understand.

Allen Sanderson explains it in this article, Jobs, Jobs, Jobs (via Greg Mankiw’s blog).  In this paragraph Sanderson gives the typical economic refrain:

…pay 100,000 people salaries of $50,000 a year to dig holes in the ground every morning and another 100,000 folks  $50,000 annually to fill up those holes in the afternoons. That’s also $10 billion in spending—and 200,000 new jobs created. Of course, at the end of the day we will have the same level of output as before to show for our “shovel-ready” efforts.

Most people can clearly see that the effort of digging holes and refilling them produces no benefit.

But, much of government spending does produce visible benefits, like repairing roads or building bridges.  So, people view Sanderson’s example as extreme and discount it.

What they don’t consider is whether those visible benefits from government spending was worth the cost or whether there were better alternatives for the spending.

Several years ago in my hometown someone in local government got the idea to spruce up a couple houses in a blighted neighborhood to spur revitalization.

They city spent $1.1 million to renovate two homes in a blighted neighborhood and eventually put the homes on the market for about $160,000 each and they didn’t sell for anywhere near that. That project was not even close to be worth the cost.

I’ve been thinking about how to better differentiate between an activity that produces benefits in excess of costs, like a job, and an activity that doesn’t.

Here are some thoughts:

  1. A job is something you would willingly spend your own money on to have done.
  2. If charged with the financial accountability of an organization (which means you get fired if you do a poor job of making decisions that create value for the organization), it’s something you would willingly spend the organization’s money on.
  3. A job isn’t something that you would spend money on only if you have no direct accountability to it.  Most of public spending falls into that category.

When you willingly spend your own money, you consider two criteria:

  • Will the benefit exceed the cost?  In the business world, this is known as a cost-benefit analysis.  In economics this is known as evaluating consumer surplus.
  • Are there alternatives that will bring me more bang for my buck, that is, provide more benefits than this option?  In economics this is known as opportunity cost.

Private spending is not perfect. Like most things, it is trial and error. In many cases we misjudge potential benefits and later discover that the benefits were not worth the cost. But, we then use that as a learning experience for the future.

We  stop spending money on the things where the the benefits did not exceed the cost. We get better at knowing our options and projecting benefits. These simple feedbacks drive private spending to be an effective generator of value in an economy.

Public spending does not often have to satisfy these same two criteria.  In the public spending arena many other criteria come into play, and few of those have to do with whether the spending is generates benefits in excess of the cost.

Here are some of these criteria:

  • Will this create a multiplier effect to stimulate the economy? How much of a factor is the economic multiplier effect when you spend your own money? Not much.
  • Will I [politician] be able to claim that I was hero for spending other people’s money to solve some problem in order to encourage people to vote for me?
  • Will this spending of other people’s money please a special interest group enough to garner me campaign donations and other favors (like lobbying jobs in my post elected life) from that special interest group?
  • If I vote for this spending of other people’s money that politician B supports, will politician B vote for my ideas on spending of other people’s money so I can claim to be a hero?

So, the next time a politician pushes a big spending project, ask yourself if it would be something that you would be willing to put your own money into.

Who’s accountable to the spending and what happens to them if the spending doesn’t generate enough benefit to offset the cost?  If cost-benefit isn’t governing the spending, what is?

Secret to Good Business: Part 2

From Rich Karlgaard‘s latest column in Forbes magazine:

Bill Gates once said that a great programmer is worth ten thousand times the price of a good programmer. Such extreme talent may or may not be relevant to your company. What matters to every company is talent evolution versus talent deterioration. Multiply 1.01 times a large number and watch it grow. Conversely, multiply 0.99 times a large number and watch it shrink. Now think of your employee base: Is it getting better or worse?

I think there’s more luck involved in success than just finding good talent, but I do think good talent can improve the odds.