The 0.000179%…

…is the federal government.  Or, the 535 members of Congress + 1 President.

If my calculations are correct, those few currently “control” about the same amount of income as the 3 million, or so, in the much ballyhooed Top 1%.  Thanks to commenter, Xerographica, for pointing that out.

I wonder why those who fret about 3 million people earning that much money, by and large by producing value, don’t seem at all bothered by the 536 controlling just as much, through taxing and spending.

Because we vote for our elected representatives? Because they’re not spending the money directly on themselves?

These are reasons we should care even more about the 0.000179%, not less.

I believe many people will intuitively defend Congress having so much spending power by saying, but they are held accountable by our votes, we get to choose them.

How has that worked out for us?   Not well.  Public choice economics tells us why our intuition about elections is wrong.  Thomas Sowell explained it well in his book, Applied Economics.   I wrote about it in my post, How to Get People to Respond to Other People’s Desires.   This is Sowell’s key paragraph:

Politics and the markets are both ways of getting people to respond to other people’s desires.  Consumers deciding which goods to spend their money on have often been analogized to voters deciding which candidates to elect to public office.  However the two processes are profoundly different.  Not only do individuals invest very different amounts of time and thought in making economic vs. political decisions, those are inherently different in themselves.  Voters decide whether to vote for one candidate or another but they decide how much of what kinds of food, clothing, shelter, etc. to purchase.  In short, political decisions tend to be categorical, while economic decisions tend to be incremental.

I can also imagine some people defending the immense spending power that has been concentrated into the Federal government vs. the Top 1% by saying, well, they’re not spending the money on themselves.

Milton Friedman explained why this should make us more concerned in his Four Ways to Spend Money.  Government spending falls under Type IV spending — spending other people’s money on other people.  Friedman explained that with Type IV spending you have little incentive to spend it wisely since you don’t pay the consequences if you’re wrong or receive the benefits if you’re right.

Though, sometimes politicians do get benefits.  I get the pleasure of driving over a bridge each weekday named after a still living Senator from my state, for no other reason than he played politics with the rest of the 534 folks in Washington to get enough of them to agree to spend our money on that bridge.

Grandpa’s Lament

Markets fail.  Use government.

This is the underlying belief held by those who think it’s a good idea to expand the role of government to fix problems.

Arnold Kling gets credit for this simple counter:

Markets fail.  Use markets.

Kling calls this Masonomics, after the classical/libertarian economics department of George Mason University.  As Kling explains:

Masonomics worries much more about government failure than market failure. Governments do not face competitive pressure. They are immune from the “creative destruction” of entrepreneurial innovation. In the market, ineffective firms go out of business. In government, ineffective programs develop powerful constituent groups with a stake in their perpetuation.

In the Wall Street Journal this week, David Malpass wrote about why we should pay some heed to Masonomics as grasshopper governments are looking for ants to bail them out, so they can keep acting like grasshoppers:

Across Europe and the United States, the fiscal crisis is setting up an epic battle among government services, pensioners, government employees, creditors and taxpayers. There is simply not enough money coming in to pay all the promises politicians have made. The shortfalls and fights are challenging our democracies and shifting wealth from the private sector to ever bigger government.

The hope has been that Europe’s debt crisis would force government downsizing in time to meet cash flow requirements. Newfound fiscal discipline would provide a silver lining to the debt crisis. But that’s not working out.

Germany’s insistence on centralized fiscal discipline for the euro zone will lead to a massive expansion of bureaucracies in Brussels, Frankfurt and Berlin. They’ll include temporary and permanent bailout funds, dangerously intrusive powers for the International Monetary Fund and the European Central Bank, endless summits, new taxes on property, and recessions.

With Europe’s government structures assured of getting even bigger, the U.K. reacted immediately by opting out. U.S. lawmakers are already objecting to the European plan to expand the IMF. As in Greece, IMF programs are antigrowth, imposing austerity on the private economy, not the government. Greece has raised value-added and property taxes, then projected revenue increases that never materialize in order to keep payments flowing to creditors and the government’s entourage.

Governments on both sides of the Atlantic are trying to use the crisis to grow rather than shrink. News of Europe’s fiscal incompetence abounds, but Washington had no budget at all in 2010 or 2011 and the federal deficit grew at record pace. President Obama sailed through 2011 without any significant spending cuts or government downsizing.

It’s a shame that the U.S. government has been turned into a grasshopper government.  My Grandpa used to express his concern for the future:

If these kids are going to be our next leaders, we’re in trouble.

Yep.

What is the Eurozone crisis?

You have a few grasshoppers looking for a lot of ants.

When those grasshoppers and their bureaucrats throw in words like debt, sovereignty, Euro, ECB, crisis, default, system collapse and so forth they hope to confuse and scare some ants, or their bureaucratic queens, into giving up some of their winter food stores.

Invariably some of these ants start thinking that if the grasshoppers stop singing and start working on building their own food stores for the winter, that the the ants may somehow be putting their own food stores at risk.

Good Reading

P.J. O’Rourke asks, If the 1% had less, would the 99% be better off?  I think the answer is no.  At the end, O’Rourke writes:

Yes, it’s upsetting that some people have so much while other people have so little. It isn’t fair. But I accept this unfairness. Indeed, I treasure it. That’s because I have a 13-year-old daughter And that’s all I hear, “That’s not fair,” she says. “That’s not fair! That’s not fair!” And one day I snapped, and I said, “Honey, you’re cute, that’s not fair. Your family is pretty well off, that’s not fair. You were born in America, that’s not fair. Darling, you had better get down on your knees and pray that things don’t start getting fair for you.”

Thomas Sowell explains why gridlock is good:

The media and the intelligentsia seem obsessed with the idea that government intervention is necessary to get the economy out of the doldrums. This is certainly the prevailing dogma but it is contradicted by history. Yet who reads history any more?

If you look back through history and compare what happens when the federal government intervenes during a downturn in the economy with what happens when the government leaves the market free to work its own way back, doing nothing has by far the better track record.

First of all, this country existed for a century and a half without the federal government intervening to save the economy. No downturn in all that time was as severe or as long-lasting as the downturn that persisted throughout the decade of the 1930s, when both the Hoover administration and the Roosevelt administration intervened on an unprecedented scale.

By the way…

Here’s one of the best by-the-way’s I read this week.  It’s from a Wall Street Journal interview with Texas Senator, John Cornyn:

Paul Ryan in the House proposed a constructive solution to . . . our fiscal problems. And rather than engage and propose something constructive himself . . . [the president] decided to go into the class-warfare mode, where, as you know, you can’t raise taxes enough to solve the problem.”

“And by the way,” he adds, “it’s not raise taxes so we can pay down the debt, it’s raise taxes so we can keep on keeping on—doing what we’re doing, which is spending a whole lot more money, making a whole lot more promises than we can actually keep from a financial standpoint.”

That’s an extremely important by the way.

This is something that the people who advocate raising taxes to ‘solve our problems’ don’t seem to get.  It won’t solve our problems. Not even close.

Is the value proposition back at Walmart?

Yesterday I was looking for two relatively common things to buy for Christmas presents.

Target:  Strike 1

Best Buy:  Strike 2

Walmart:  Homerun.  They had plenty of both in stock.

I may have to rethink the reasons why I went to Target and Best Buy first.  Having things that people want to buy in stock is a key value proposition for a retailer.

Many believe that Walmart’s key to success was low prices.  That was part of it.

But, prior to the 00’s, they had a more complex value proposition than that.  They also happened to have what people wanted in stock more of the time than their competitors (good supply chain management), they had good customer service (good people management) and a no-questions-asked return policy.

Somewhere in the early 00’s, their focus seemed to go to low prices alone.

Customer service declined.  Staff became grumpy and phantom.  One reason I didn’t go to Walmart first is the memories from the early 00’s of going there to buy a couple things and having to wait in 30 minute long lines to checkout because they managed cashier wage expense tightly to keep prices down.

This decline in Walmart’s value proposition opened the door for competitors like Target and Kohl’s and gave a lifeline to Kmart.

Not only did Walmart have plenty of what I needed yesterday, but when I went to check out there was a helpful cashier, without a line, smiling and waiting for me.

Good questions

Speedmaster, at the Pretense of Knowledge, asks a couple of good questions:

1. If companies/corporations can simply get rich by being greedy, “gouging”, and otherwise scr*wing customers. Why does any company/corporation ever go out of business?

2. If minimum-wage laws are necessary to prevent employers from paying less than that, why does anyone ever earn more than the legislated minimum-wage?

We have high tolerance for disatrous gambles

In his column this week, Walter Williams discusses a Ron Paul/Wolf Blitzer debate moment and NY Times columnist Paul Krugman’s reaction to it.

He [Krugman] was referring to a GOP presidential debate in which Rep. Ron Paul was asked what should be done if a 30-year-old man who chose not to purchase health insurance found himself in need of six months of intensive care. Paul correctly, but politically incorrectly, replied, “That’s what freedom is all about — taking your own risks.” CNN moderator Wolf Blitzer pressed his question further, asking whether “society should just let him die.” The crowd erupted with cheers and shouts of “Yeah!”, which led Krugman to conclude that “American politics is fundamentally about different moral visions.”

This is a good example of why I don’t care to watch election debates.  This topic deserves more in depth exploration, but the debate format only allows for sound bite responses.

I agree with Williams and Ron Paul.  But, I doubt those answers will do much for people who disagree with us. I’m not sure if my responses will either, but here are some other things to consider.

First, I’d like Wolf to clarify what he means by “society.”  Members of society are free to do what they like for this hypothetical 30-year-old.  Who’s stopping them?  Why do they need to be forced through government?

Medical practitioners could donate their time for his benefit.  Individuals can choose to donate their money to cover his costs.  People can form organizations that raise funds to help folks like him.

But, I think what Wolf really means by “society” is “government”.

It’s a pet peeve of mine when folks use “society” in place of “government”.  The underlying assumption is that there are only two options — either the 30-year-old buys insurance or the government comes to the rescue.  When you say “society” and really mean “government”, just say “government.”

Second, I’d ask why the 30-year-old decided to not buy insurance?  This is rarely discussed, but the answer is important.

Certainly, we could just say the 30-year-old made a bad gamble, but that doesn’t give the root cause.  It’s not only a bad gamble, it’s a disastrous gamble. Why he would make such a disastrous gamble?   Running red lights is a disastrous gamble also and very few people intentionally make this gamble.  Why not?

What if he made his health insurance gamble because he knew government would back him up?  That’s called a moral hazard and we find ourselves in a bad position when what is believed to be compassionate government policy actually causes more people to make disastrous gambles.  That also drives up the cost of insurance, medical care and government for everyone, as they are left paying for those disastrous gambles (which is exactly one of the key underlying problems driving medical costs in the U.S.).

Third, I’d ask for more information about this 30-year-old.  What’s his income?  What kind of car does he drive?  What phone plan does he have?  Where does he live?  How much did his TV cost?  Which TV service does he have?  How much would a catastrophic insurance policy cost him?  Enter your zip code on this website to find out.  In my zip code, a $5,000 deductible policy for a 30-year-old single male with Blue Cross Blue Shield is quoted at $53 per month.

I wonder, if “society” would have less compassion for him if it found out that he could afford the $50 / month insurance insurance policy, but chose not to buy it so he could have the best data plan for his smartphone.

Apparently, “society” didn’t think much of this woman’s efforts to raise money for her cancer treatments with yard sales, since the local government shut her down.  But, it appears that individuals in society have privately and voluntarily taken it upon themselves to help her out.  Good for them.

Third, I might ask why “society” should value the 30-year-old’s life more than he valued it himself, as demonstrated by his own unwillingness to insure himself?

I can’t imagine “society” having much sympathy for a driver who died in a car accident because he recklessly chose to run red lights.

This is just another example of where we let poor logic lead us to make bad decisions.

Poor logic: That guy made a disastrous gamble, let’s help him.

Better logic:  Let’s encourage that guy to not make disastrous gambles and let’s, through our private actions, help the truly needy.

So, I can well imagine someone like Blitzer saying, “so what do we do when we have a 30-year-old male dying who didn’t buy insurance?”

First, “we” do like the people did for the lady having yard sales.  We take private actions to help him, because we are good people.

Then, if he recovers, we take him by the ear and let him know that he should be ashamed of himself for making such poor choices that others had to come to his aid and take away resources for the truly needy.

We let him know that he will be expected to make responsible choices, because next time there are no guarantees of help.  He played us for fools once.

Maybe he goes on a speaking tour or gets interviewed by the local news and sends the message to other able-bodied and able-minded folks to not take disastrous gambles because it’s selfish and not worth it.

And, maybe one day he will come across someone who took a disastrous gamble and lost and will do the same for her that others did for him.

Maybe, in the process, he picks up some dignity and reinforces it others.

Unintended Consequences Realized?

In this post, I predicted that one unintended consequence of shrinking the fry size in a Happy Meal and including fruit — for the sake of health — would be higher sales at McDonald’s as folks would choose to order extra fries to make up for the reduced size.

McDonald’s just reported a 7.4% surge in sale in November.

Of course, its press release makes no mention of the Happy Meal change as a driver of the sales.  They claimed that the increase was caused by higher breakfast demand, the Peppermint Mocha and a McNugget promotion.

Could be.

All I know is that having contributed to press releases in the past, I know that reasons given for performance changes can be arbitrary and sometimes they can be hard even for the company analysts to decipher.