A couple thoughts from Thomas Sowell

From Thomas Sowell’s latest Random Thoughts:

Everybody is talking about how we are going to pay for the huge national debt, but nobody seems to be talking about the runaway spending which created that record-breaking debt. In other words, the big spenders get political benefits from handing out goodies, while those who resist giving them more money to spend will be blamed for sending the country off the “fiscal cliff.”

I, too, am amazed at how spending gets a pass, even from folks like Warren Buffett who should know better.

Would Mr. Buffett give such a pass to a manager of one of his businesses who habitually spent 20% to 30% more than he took in and planned to do so as long as possible? In this case, would Mr. Buffett be so eager in volunteering his own income to continue to support such a manager so that manager could carry out his indefinite plan of spending beyond his means?

Here’s another good Thomas Sowell thought:

The more I study the history of intellectuals, the more they seem like a wrecking crew, dismantling civilization bit by bit — replacing what works with what sounds good.

I’ve seen the same with managers of successful businesses. New managers often ignore the actual success of the business they’ve been entrusted to run — what works — and change that business with their own ideas — what sounds good.

The typical outcome of that can be seen with JC Penney of the past year, where the new manager of JC Penney has made major changes to the business that sounded good, but have reduced the stock price by more than 50% against the S&P 500.

Intellectuals often have the same effect on society. For example, they may wish to ‘wage war on poverty’, but they ignore the best anti-poverty mechanism ever — innovationism (what works) — and instead seek to replace it with systems that sound good, but actually encourage poverty.

I could be wrong

Don Boudreaux, George Mason University economist, gets annoyed when non-economists make economic pronouncements.  Boudreaux writes in his Pittsburgh Tribune column:

Economics — unlike chemistry, electrical engineering and almost any other subject matter you can name — is a discipline that people routinely opine on even if they have zero formal exposure to it. No taxi driver or movie star offers, for example, his opinion on the molecular structure of radium or the process by which the magnetron led to the development of microwave ovens. On such matters, that person defers to trained chemists and engineers.

But that same cabbie or movie star is often eager to give his opinion on matters such as the causes and consequences of expanded international trade, the effect of minimum-wage legislation and the appropriateness or inappropriateness of the salaries of professional sports stars.

I’m embarrassed to confess that I often get annoyed at non-economists making pronouncements on economics.

Later in the column he softens his credentialism a bit:

Please don’t mistake me as saying that someone must have a degree in economics to offer worthwhile opinions on economics. I don’t believe for a second that that task requires formal training in economics.

What is necessary is at least some exposure to serious, formal economics — for example, taking a good course in principles of economics or reading at least two or three of the many good books on the market today that aim to introduce non-economists to the economic way of thinking. (Superb examples of such books include my colleague Russell Roberts’ “The Invisible Heart” and James Gwartney’s, Richard Stroup’s and Dwight Lee’s “Common Sense Economics.”)

I happen to think that Boudreaux is wrong about folks not opining on chemistry or electrical engineering.  I don’t think he pays as close attention to those fields.

Folks may not opine on the molecular structure of radium, but as a former electrical engineer, none of my friends or family who make pronouncements about the potential of solar or wind energy or electric vehicles ever ask for my opinion on the matter.

I also see plenty of non-chemists make pronouncements on the effects of chemicals and substances in our air, ground and water.

I also think Boudreaux does an injustice by singling out ‘non-economists’.

I get annoyed at anybody who makes pronouncements on any subject without considering that they might be wrong.  Economics is a wide field with plenty of different specialties and  economists can stretch their resumes and make dumb economic pronouncements on subjects they know little about too.

In my groups of peeps I try to gently enforce an informal rule.  If someone makes a pronouncement, I may ask them to explain to me how they arrived at their position.  Then I listen. I also request that they listen if I think they missed something in their thought process.

If they are unwilling to participate, I kindly request that they refrain from making such pronouncements unless they are willing to discuss.  It seems to work.

Now, everybody, let’s practice. Take a deep breath. Count to 3 and repeat after me.  1…2…3: I could be wrong.

It really doesn’t hurt that much to say it. Once you feel comfortable saying it, you open yourself to learning, teaching and seeing the world differently. But, of course, I could be wrong.

I use to have a tough time saying this.  Many of my family and friends have a tough time saying it. I still struggle with it at times.  But, I’m better now, and when I find it tough to say, I usually get over it quickly.

When you can say it, it’s amazing how disarming it can be.

Government is an expense

In this post, I wrote about how government is overhead.

If you believe this view of government, then you shouldn’t use GDP (Gross Domestic Product) as an indicator of the health of our economy.

Gross Domestic Product is calculated by adding consumer, investment and government spending.  If consumer and investment spending decline, as usually happens in a recession (and usually for good reasons), people believe that boosting government spending is a good thing because it helps offset the declines in the other components of GDP.

What’s wrong with that?

GDP tells us how much economic activity there is.  It doesn’t say if that activity is healthy or not.  But we assume it does.  We assume GDP is like to our income.  We assume (and I think we are taught) that it’s the “income” of the economy, so more of it is good and less is bad.

But it’s not really income of the economy.  It’s the total economic activity of the economy.

Let’s say you made $50,000 in income, spent $40,000 and invested $10,000.  Your GDP, or total economic activity, was the sum of the three or $100,000.

$5,000 of your income came from a part-time job that you decide to quit.  Your income drops to $45,000 and your total economic activity drops to $95,000.

Confusing your total economic activity with your income, you decide to borrow $5,000 and spend it to keep your economic activity at $100,000.

Many people will instantly see the problem with using economic activity in this fashion and advise against borrowing the money.  They would also likely point out that your income level and how much you have left to invest after spending are better measures of your economic health.

But if you cloak such words as income, spending and investment with other words like GDP, consumer, investment and government spending, we lose our senses and start to believe it’s okay to borrow $5,000 to keep GDP at $100,000.

If we recognize that consumer and investment spending is the better estimate of the economy’s income and view government spending as an expense, we will make better decisions.  For example, when economy’s “income” declines, we will want to reduce our expense, rather than increase it.

Not quite convinced?  Here’s one more way to look at it.

Again, the three components of GDP are consumer, investment and government spending.  Where does each of these come from?

Consumer and investment spending are the result of value created in society.  Chipotle makes a burrito, I buy it.  We both come out ahead (or we wouldn’t have traded).

Government spending also comes from this value creation process.  Your expenses are enabled by the value you create at your job or with your business.  I do something for my employer, they pay me.  We both come out ahead.   I spend some of that income on a Chipotle burrito.

As an expense, government spending comes from our income.  Without income from our productive pursuits, we would not have government.  As our productive pursuits have become ever more productive over the centuries, we’ve been able to afford bigger governments.  Increase government spending and that leaves less income to spend on other things.

Since government spending comes from our income, it makes no sense to increase it in response to a decline in income.  Rather, we should reduce it and look for ways to increase our income.

And, the secret to increasing our income is by encouraging, rather than discouraging, market-based innovative pursuits, just as it has been since humans have been evolving.

Notes from the road

With the budget talks this week, someone asked me what that’s all about. Here’s how I summed it up.

The side that wants to raise the debt limit is saying that they want to spend more of our money and avoid making tough choices about government spending.

That side also told us a couple years back that if they spent more of ours and our children’s money the economy would improve and we’d get a payback on that spending. By the way, their current actions of wanting to get more of our money is evidence their plan didn’t work.

The other side at least wants to start entertaining tough choices on spending and they’re not that interested in spending more of our money.

Another Effective Visual

A typical forearm crutch

Image via Wikipedia

A Harry Browne quote from JohnK, commenting on this post at Cafe Hayek:

Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, “See, if it weren’t for the government, you wouldn’t be able to walk.”

–Harry Browne

Recently, a big company played the economic incentive game with my state’s legislators.  The legislators come out looking like the heroes by passing tax breaks for the business to “keep jobs here.”

Taxes are breaking the legs.  Passing tax breaks is giving out the crutches.  Most people see the later and ignore the former.

The thing I find odd about the scenario of passing tax breaks to keep jobs is how it is sold.  “We’ll keep more jobs here, which means better economic activity and more taxes in the long-run.”

If that’s true, why wouldn’t we give the same tax breaks to all?