But more people get to go

Jeff Jacoby wrote in The Boston Globe about how the government’s efforts to make college more affordable has had the unintended consequence of making it less affordable. Indeed. Have you been to college campus lately? It seems all those extra dollars flowing into education has gone to making the student’s experience more resort-like.

As I asked at the end of my previous post, can you name any part of the economy where the price level has increased faster that inflation for long periods of time that did not have major interventions from government?

(Thanks to Mark Perry at Carpe Diem for the link to Jacoby’s column).

Some of my liberal friends might say, But, that means that the government’s efforts have made it possible for more people to go to college. The cost has increased due to increased demand. That’s a good trade-off. Do you want to be the one to tell some of those folks they can’t go to college?

Of course, what these friends miss is that nobody has to be the one to tell someone they can’t go to college. Those someones make that decision on their own by weighing their options and picking the path they feel is best for them.

Instead of using aid, accumulating $100k in student loans and spending four years in college earning a liberal arts degree that prepares them for competing against high school grads for entry-level jobs, those someones might do something more productive like work their way up to management at their local retail store, or start a fence building business  that eventually employs 10 people, go to a trade school to learn a vocation like dental cleaning or something like that.

It is a spending problem

In case you are wondering, it’s not a revenue problem. It’s not a deficit problem. It’s a spending problem.

Economist Antony Davies makes a great case for that in this short video:

Near the end of the video, Davies suggests that, based on the increase in per person costs of government and health care, we should have asked health care professionals to reform government, rather than the other way around.

Funny point.

Though, I think it’s also worth pointing out that a major reason that even cost of health care has risen faster than the overall price level is government’s involvement.

Check me on this.

Can you name any part of the economy where the price level has increased faster than inflation over long periods of time that did not have major interventions from government?

(Thanks to Dan Mitchell at International Liberty for pointing me to the vid).

‘Government is overhead’ follow-up

Last August, I wrote this post about how I think we should view government as an overhead expense. Yesterday, Edward wrote the following response to that post:

A very interesting post. I agree with your premise that government is overhead. However, if you look at government expenditures relative to GDP, they are lower than the average overhead rates of successful companies. Currently this rate is 19 percent or so (gov/gdp) and for companies this number is in the high twenties. Why is it that anti-tax folks presume that the correct level for our national enterprise is even lower than the faultless private sector can achieve?

This is my response to Edward.

The Federal government is not the only overhead in the economy. It’s a piece of it. Comparing Federal government spending to all business overhead is an apples-to-oranges comparison.

For example, all government — Federal, state and local — is part of overhead. According to this graph, all government spending makes up nearly 40% of GDP, which is more than ten percentage points higher than Edward’s ‘high twenties’ benchmark.

And still, all government is only a part of the economic overhead. For example, all the overhead tied to successful companies that Edward mentions, is also economic overhead.

Also, anything we do to comply with the government is overhead. For example, the time and money you and the companies you deal with spend to keep records and prepare your taxes — at all levels — is economic overhead that does not show up in government spending.  That’s time or money that we could have spent doing something productive, like cleaning our toilets.

Edward then asked a question that I’m really glad he asked:

Why is it that anti-tax folks presume that the correct level for our national enterprise is even lower than the faultless private sector can achieve?

First, as I pointed out above, economic overhead is higher than the ‘faultless private sector’.

Second, and more important, folks of my political persuasion don’t believe the private sector is faultless, as Edward suggests. Far from it. I’d guess the failure rate of government and private sector is about the same. Why wouldn’t it be? Both are run by humans after all.  Are the humans in government less fallible than the humans in the private sector, or vice versa? No.

One reason we favor the private sector is the difference in how it and government naturally respond to failure. The private sector is better in this regard, though not perfect.

The private sector — you, Edward and I — reward organizations that provide us with stuff we value by buying that stuff and we punish the others by not buying their stuff.

When it comes to government, that success/fail feedback isn’t quite as strong, and sometimes it’s the opposite of what it should be.

For example, for years the answer to “Public schools are failing!” was “Public schools need more money!”

This sounded reasonable to a lot of folks. I bet those same folks would scoff if “Public schools” was  replaced in those two sentences with “Enron”.

We realize that giving more money to the corrupt leaders of Enron so it could try to “fix its problems” and save some jobs would have made no sense.  Those corrupt leaders would have blown that money on themselves.

The market clobbered Enron’s stock and put it out of business long before the government even figured out what was going on.

We realized that the best thing was for Enron to go out of business. The market naturally stripped the fraudsters running Enron of their power. Its failure caused some painful collateral damage to people down the totem pole, but it also taught a generation of people valuable lessons in prudence, investment diversification and ‘if it sounds too good to be true…”  And, all this happened without taking the whole economy with it. Markets naturally isolated the disturbance.

This wouldn’t be the case a few years later when government actually encouraged fraudulent practices in home lending.

I also believe that the success/feedback loop is weak in overhead functions, whether those functions are in private companies or government.

I’ve been a part of overhead of private organizations most of my career. I’ve witnessed this from the inside. Strong underlying businesses can feed crony, corrupt and political bureaucracies in the overhead departments, precisely because the success/fail feedback loop is weak.

It wasn’t a stretch for me to recognize that government also had this success/fail feedback problem.

Again, that is precisely the reason government tends to grow in good times and bad and is one reason why anti-tax folks would like to minimize government and overhead.

Politicians tell you they can solve your problems if you vote for them and allow them to spend your money (or the rich guy’s money) and too many people believe them.

Why did you buy that?

Art Carden writes that Entrepreneurs Serve Public Better Than Politicians (H/T: Speedmaster at The Pretense of Knowledge).

I agree. I agree.

While on a trip to Vegas, Carden found a profit opportunity. Two nearby Starbucks were selling coffee at different prices. The higher priced Starbucks was busier (sounds like they got their pricing right). Carden bought two cups of coffee at the cheaper (and less busy Starbucks), brought them to the line at the busier and more expensive Starbucks and sold them for a profit to people standing in line.

As Carden sums it up:

The 97 cents I earned was my reward for taking a risk on my hunch that two cups of coffee would be more valuable downstairs than upstairs.

According to Deirdre McCloskey, this is the key to the wealth of the modern world. That we live in a world in which buying low and selling high is at least tolerated encourages economic growth. The great irony of this is that merchants tend to be scorned or otherwise not trusted. But who is the real public servant: the politician deciding he will take more of your money by force so that he can accomplish his goals, or the merchant who decides he wants more of your money and offers you a hot cup of tasty coffee in return?

I have one beef with the column. To make his great point that business folks do more to serve their fellow-man than politicians, he brushed over a key point on value creation.

Most people think of business people as McCloskey put it, someone who buys low and sells high.

That’s too simple.

Why were the folks in line at the more expensive Starbucks willing to pay Carden more than he paid for the coffee?

The answer to that is why business people can “sell high”, if they’re lucky. That is the value creation process.

And the beauty of that process is that it’s sometimes hard to pinpoint the reasons we’re willing to pay what we pay for things.

Perhaps Carden’s buyers were in a hurry, he had what they wanted, so he saved them time. Maybe Carden looks like a trustworthy fellow, had a big smile on his face and his buyers got some value out of his charm. Or maybe, they saw him speak the day before, and thought that he was up to something clever, so they thought they’d play along.

If the reason they bought Carden’s coffee had anything to do with saving time, then Carden had solved what economist Friederich Hayek called the knowledge problem. Carden had knowledge of the particular circumstances of time and place. He knew of a nearby Starbucks with lower prices and shorter lines.

This is knowledge that most of the folks waiting in line at the other Starbucks did not have or did not value enough to act on.

Two people valued it and bought out Carden’s inventory.

Carden took a risk. He could have wound up with no takers, in which case he would have two grande cups of coffee to drink.

Since Carden wasn’t sure whether anyone would buy from him, he didn’t invest much.  He exhibited prudence, as I wrote about in the previous post, by limiting his risk to two cups of coffee.

Business people experiment all the time. They usually don’t know what people will value any more than you or I. They are following their hunches, observing and trying things to find something people value.

It doesn’t always work. Most business owners have experienced failures. They bought two cups of coffee and couldn’t find buyers.

The businesses we trade with every day are the few experiments that worked. For each one, there were likely dozens or maybe even hundreds that failed.

Further, once a business has established its success, we tend to take its success as a given and forget the failures and risk the business owners took to find the success. We have a tendency to question their profits rather than praise the value they bring us.

We forget that even Carden’s customers profited. Most likely, they gained time that was valuable to them.

“Losses encourage prudence”

George Mason economist and EconTalk podcast host Russ Roberts has said:

Capitalism is a profit and loss system. Profits encourage risk-taking. Losses encourage prudence.

It follows, then, that if you remove losses, you wind up with risk-taking and less prudence.

This removal of losses, and therefore prudence, is a key driver in things like the real estate and mortgage bubble that we are still trying to recover from.

The Wall Street Journal provided a perfect example in this article about a real estate development around a new downtown events arena in Kansas City, Missouri. The city government signed up as partner with a private developer. The city pledged taxes that would be generated from the area to pay off $295 million in bonds issued to help finance the $850 million construction.

Now, with the entertainment center generating about one-third of the original forecast in tax dollars, the city has to cover the bond repayment from its other funds.

Do you believe the private developer would have invested the full $850 million if the City hadn’t agreed to fund $295 million of the construction? Do you think the investors would have been a little more prudent in their investment? Maybe they would have still invested, but perhaps on a smaller scale.

(Thanks to a friend for sending the article to me)

Innovation welfare

Here and here I wrote about how competition is good for consumers because it gives them more options to choose from, even if those options are among government-provided services. If one police department, school district, fire or road department isn’t doing a good job, perhaps the one next town is better.

In this post at Carpe Diem, Mark Perry writes about how the Mayo Clinic is beginning to offer more choices in health care for Canadians. From his post:

According to this news report about Mayo’s insurance programs for Canadians, “the publicly funded health system in Canada decreases the choices available to patients, and can also result in delayed diagnosis and treatment. That’s why, within the national system, it’s good to offer choices for those who need diagnosis confirmation or even treatment for serious illness.”

Then Perry asks a great question:

Where will Americans go when/if we adopt Canadian-style medicine?

I believe that one thing that makes it possible for other countries to socialize their medical care without full implosion (though with long wait-times and less effective treatments and other negative trade-offs) is the existence of what’s left of the free market in medical care in the U.S. and other parts of the world.

The U.S. medical market helps in at least two ways.

First, it gives those country’s citizens a choice. If they can’t get treatment in a timely manner, or at all, in their country, they can come to the U.S.

Second, the free market in the U.S. still spawns a great deal of innovation in medical care that the health systems in other countries can adopt. In this sense, the free market in medicine has been supplying government health systems — not particularly known for innovation (which makes sense if you understand the incentives) — a kind of innovation welfare.

Without these two positive effects, there would be many more disaster stories from these countries that would sink their medical systems politically.

If we clamp down on the free market in the U.S. and these two positive effects go away, I will expect to see socialized medical systems deteriorate so quickly that it would start a general political trend back toward accepting more free market in medicine.

Unfortunately, in the meantime, we will have lost or delayed countless life saving innovations.

The most boring and interesting book

I finally got around to reading Hernando de Soto’s book, The Mystery of Capital, based on a recommendation from W.E. Heasley. I recommend it.

I realize the book has been out for a while and I’m very late to this party, but better late than never.

Before I read this book, I had a firm belief that law was an emergent order of an evolutionary process of humans interacting with each other, where different dynamics of interaction were constantly tested in the crucible and the most effective interactions emerged.

In other words, we stop at red lights because that practice keeps us alive, not because it’s a written law. If we were to erase the written law from the books tomorrow, we’d still stop at red lights.

But de Soto gives a good history of emerging law in the United States compared with other countries that are not as successful as the U.S.

U.S. “lawmakers” didn’t seek to overwrite the ‘law of the land’, or the law that had emerged through local and private arrangements from various landowner and gold claim organizations, for example. Lawmakers primarily sought to serve as a backstop for those local arrangements.

In not-so-successful countries, elites ignore the ‘laws of the land’ and try to overwrite them with their own idea of what’s best. But, it turns out that their untested ideas don’t work and people do their best to ignore them.

I’ve witnessed this same phenomena in business management. Company leaders often ignore bottoms-up successes and push their own ideas. Usually those ideas are based on their own untested preferences and they usually end up getting fired because they don’t work.

This bottoms up process was illustrated well with de Soto’s story from Indonesia. While there to launch his book, some Indonesian cabinet members invited him to discuss how they could find out “who owns what among the 90 percent of Indonesians who live in the extralegal [ignoring formal law of property ownership] sector.”

He told the story of his trip to Bali:

As I strolled through the rice fields, I had no idea where the property boundaries were. But the dogs knew. Every time I crossed from one farm to another, a different dog barked. Those Indonesian dogs may have been ignorant of Indonesian law, but they were positive about which assets their masters controlled.

I told the ministers that Indonesian dogs had the basic information they needed to set up a formal property system. By traveling their city streets and countryside and listening to the barking dogs, they could gradually work upward, through the vine of extralegal representations dispersed throughout their country, until they made contact with the ruling social contract. “Ah,” responded one of the ministers, “Jukum Adat (the people’s law)!”

Discovering “the people’s law” is how Western nations built their formal property systems.

I’d like to take a survey of U.S. population to see what percentage of people know that U.S. property law derives from local and private arrangements made by individuals. I bet it’s low. Most people believe law comes from judges and lawmakers, which is about like believing that language comes from English professors.

As W.E Heasley mentioned in the comments of this post, we shouldn’t confuse legislation with law. The best legislation usually derives from the people’s law. Ineffective legislation overwrites the people’s law.