The multiplier is not prosperity

“I’m doing my part to help the economy!”

I’ve heard many folks make this joke after a big purchase. We snicker. We know they really bought it for the personal benefits they expect to gain. As we’ve been discussing in the comments, they bought it because they valued it more than what they gave up.

The joke implies the multiplier effect — the idea that your purchase stimulates economic activity. You buy a car, which means income for the car maker and workers, they spend that income on suits and shoes, and so on. And, by the time it’s all said and done every dollar of your purchase ‘stimulated’ more than a dollars worth of economic activity, which is measured as GDP.

For some reason, we don’t snicker when economists and politicians make this same claim. We should.

David Henderson, who doesn’t make this claim, does a great job explaining why we should snicker in his aptly titled essay, GDP Fetishism, which I discovered after reading a recent post of his about the ‘multiplier’ of foreign aid.

Also recommended, his latest post about subjective value, which is a topic we’ve touched on here recently in the comments.

Robert Frank on EconTalk

This week’s EconTalk podcast has Robert Frank of Cornell University discussing income inequality with host Russ Roberts of George Mason University.

This seems to be a fundamental basis of Frank’s mental model (about 4:40 in):

So the best situation from an economist’s perspective is the one that leads to the largest surplus. For the non-economists in the audience, surplus is just the cumulative sum over all people of the difference between the benefits they get and the costs they bear, evaluated in their own terms. So, if we can make the economic pie bigger, the attraction of doing that, is that it’s always going to be possible for everybody to have a bigger slice than before. I don’t think that requires any difficult value judgment at all.

I added the emphasis.

I agree that surplus is the difference between benefits and costs, evaluated on our own terms. That’s the root of why our standard of living is much better than our ancestors.  We trade our surpluses in mutually beneficial manners with each other to make our lives even better.

But, I disagree with Frank’s last sentence.

As individuals, making value judgments on our own terms isn’t difficult.  We make them naturally every day.  I often to choose to pay $2 for a cup of coffee even when I can get it free elsewhere.  That might sound absurd.  But, I finish the $2 coffee because it tastes good, while  I throw out a half cup of the free coffee because it doesn’t.

What bothers me about Frank’s last sentence is that I don’t believe he’s talking about individuals making their own value judgments any longer.  I believe he’s talking about economists and politicians making value judgments for individuals based on their assessment of what creates the greater good or the largest pie.  Unlike Frank, who seems to think this is easy, I don’t think it is possible for a third party to appropriately assess how others judge value.   That’s an awful lot like the thinking that leads to destructive central planning. 

I would like to ask Frank if he was given the power to enact his policies to maximize economic surplus, how would he know if he happened  to be wrong?  If he were wrong, how would that be corrected?

Excellent Post and Comments at Cafe Hayek

Russ Roberts made reference to David Rose’s good work in his post Justice and the Rule of Law at Cafe Hayek.  The comments section was good too.  Key paragraph from Rose’s work:

But a consequentialist judge would look beyond the law and consider the insurance mandate’s impact on society. Using this criterion, the consequentialist judge might see the mandate as a “benefit to public health” and a “compelling state interest.” Such thinking would lead to a loose interpretation of the Commerce Clause and an affirmation of an unprecedented loss of personal liberty in America.

Commenter MichaelSmith writes:

“Consequentialist” — at least as it is being used in this context — essentially means “collectivist”. It is an effort to obliterate the concept of individual rights in the context of evaluating the Constitution by substituting, instead, the thoroughly collectivist notion that “the public good” — or some similar allegedly superior “right” of the collective — trumps and cancels individual rights.

Tick, tick, tick, tick

Ricky Gervais, creator of the television show The Office, and Andy Rooney both lamented about how much money they have on this evening’s 60 Minutes.  Ricky said that he doesn’t work harder than a lot of other folks, but earns many multiples of their income.  He said that a large part of his success was due to luck.

I agree.  Nassim Taleb, author of the Black Swan and Fooled by Randomness, educated me on how much luck plays in the success of successful people.  As Taleb says, we always hear about the successful people but never about the just as talented people who aren’t as successful because they just haven’t had their lucky break.  Sometimes it’s as simple as meeting the right person at a party.

But, I will give Ricky something, he does have talent.  He makes me laugh.  I enjoy his humor, acting and writing.  Not to say that others aren’t as deserving, but any dollars Ricky has of mine in his pocket were well earned.

Rooney seemed bothered by having more than his share, but comforted by the fact that he doesn’t have as much as others.  He referenced the Forbes 400 list of the richest 400 people as proof.

What bothered me: C’mon guys.  Rather than feel down about being wealthy, celebrate it.  Encourage others.  Tell us how awesome it is that we live in a world where you can follow your dreams, work hard and be rewarded.  Acknowledge, as Ricky did, that there is some luck to it, but one thing is for certain – they wouldn’t have been successful if they hadn’t tried.

And, if you don’t have a dream but can still live a decent, comfortable life as a nurse, engineer, electrician or some other chosen profession, that’s awesome too.  Compared to how people lived a century ago or how people live in other parts of the world (some within a day’s drive for most of us) – we are all rock stars.  That something that we should feel good about it.

We should be asking ourselves why that is.  What are the root causes that allow each of us live better than royalty in the past in exchange for an honest day’s work?  We should want more of that.

They showed an 80s video of Ricky taking a stab at the music business.  Apparently it didn’t work out.  He wasn’t bothered by it.  He seemed to recognize that all things don’t work out, but trying matters.

General Welfare

More great thoughts from Walter Williams, Exploiting Public Ignorance.

He points out that the Constitution does not empower Congress to manage the economy.

Most attempts to persuade otherwise rests on the misinterpretation of what is commonly referred to as the general welfare clause in Article I, Section 8 which states, “The Congress shall have Power To lay and collect Taxes, Duties, Impost, Excises to pay the Debts and provide for the common Defense and general Welfare of the United States.”

Not understood by those who misinterpret this section is that the Constitution specifically lists the powers in the rest of Section 8, which is entitled, appropriately enough, Powers of Congress.

Rather than letting those who misinterpret this section frame the debate in their terms, I recommend keeping a copy of Article I, Section 8 handy and referencing it when discussing whether Government should do this or that and asking them to specify and explain which of the listed powers of Congress enables Congress to take that action.

Here is Article I, Section 8 in it’s entirety (thanks to usconstitution.net):

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

To establish Post Offices and Post Roads;

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

To constitute Tribunals inferior to the supreme Court;

To define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations;

To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;

To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

To provide and maintain a Navy;

To make Rules for the Government and Regulation of the land and naval Forces;

To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;

To provide for organizing, arming, and disciplining the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;

To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings; And

To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

Getting By in This Economy

The bad economy was the common angle on this evening’s local TV news.  Charities need more donations because they’re getting less donations in the bad economy.  More people are turning to charities because of the bad economy.  Restaurants were busier this Easter because of the bad economy (“a rare and welcome break from the kitchen”). 

A conversation I had yesterday sparked an idea.  I’d love to see stories about people rising to the challenge of this economy by making responsible choices so they’ll come out of the economy stronger, more self-reliant and in a better position to help those who need it.

The conversation that sparked this idea was with a former neighbor who has owned and operated a business from her home since I’ve known her.  Over the years she’s cleaned toilets, ran estate sales, provided coaching and administrative services to other businesses and offered notary services among other things.  She lives within her means.  When times were better, she wasn’t tempted to take out a bigger mortgage.  She reminded me that it always pays to be industrious and look for ways to make yourself valuable to others and not to wait around for others to solve your problems.

I’ll make this a recurring thread here.  Please share your stories.  This is how we get out of this mess.

Why we do what we do

I lifted this from an econblog I frequent at Marginal Revolution.  It’s a nice piece of work from Adam Smith and I wanted to collect it to remind  me  why capitalism works so well to improve the standard of living for the masses, far better than most people realize.  This is from Smith’s Wealth of Nations, Book 1, Chapter 2. 

But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely.

Though I’m not sure what to make of the last two sentences.  I don’t believe people give money to beggars out of benevolence.  I think givers get something from giving that appeals to their own self-love.  Perhaps a good feeling they helped someone in need or an ease to the discomfort they get from the sad stare of the unfortuanate person on the receiving end. 

Addendum:  I actually lifted this from Cafe Hayek, not Marginal Revolution.

Corrosive nature of making secondary impulses top priority

And another (from America Alone) by Mark Steyn:

To understand why the West seems so weak in the face of a laughably primitive enemy it’s necessary to examine the wholesale transformation undergone by almost every advanced nation since World War Two.  Today, in your typical election campaign, the political platforms of at least one party in the United States and pretty much every party in the rest of the West are exclusively about those secondary impulses: government healthcare (which America is slouching toward, incrementally but remorselessly), government day care (which was supposedly the most important issue in the 2006 Canadian election), government paternity leave (which Britain has introduced).  We’ve elevated the secondary impulses over the primary ones: national defense, self-reliance, family, and, most basic of all, reproductive activity. 

 A government big enough to give you everything you want is big enough to take away everything you have, starting with your sense of self-reliance.

Military Welfare

Here’s another gem from Mark Steyn’s book America Alone:

The United States has the most powerful armed forces on the planet.  The fact that Washington’s responsible for 40 percent of the planet’s military spending pales in comparison to the really critical statistic: it’s responsible for almost 80 percent of military research-and-development spending, which means the capability gap between it and everyone else widens every day.

As for America’s “friends,” there’s another paradox of the non-imperial hyperpower: the United States garrisons…its wealthiest allies, thereby freeing them to spend their tax revenues on luxuriant welfare programs rather than on tanks and aircraft carriers…  Like any other welfare, defense welfare is a hard habit to break and damaging to the recipient.  The peculiarly obnoxious character of modern Europe is a logical consequence of America’s willingness to absolve it of responsibility for its own security.