More examples of signals rather than causes

Being a homeowner makes one responsible.  More likely: Responsible people become homeowners.

Going to preschool improves ones chances of success. More likely: Having parents that do a lot of things, including sending kids to preschool, improves ones chances of success.

A college degree increases your earnings. More likely: Ambitious folks find ways to make more money. I’ve heard of studies that look at non-college graduates that have similar ambition and work ethic as college graduates that show that they have about the same earnings as college graduates.

Countries with government health care have better health, as measured by life expectancy and infant mortality, than the U.S. More likely: Other factors like health habits, diet choices, demographics, lifestyle choices and differences in the way these health stats are tracked from country to country have bigger impact than whether the health care system is provided by government or not.

Can you think of any?

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How Social Security can continue to be paid out without raising the debt limit

Here’s the New York Times reporting on President Obama’s remarks today:

“Treasury would be left to fund the government solely with the cash we have on hand on any given day,” he said, forcing it to choose among creditors, federal contractors, veterans,Social Security and Medicare beneficiaries and the many other claimants to federal dollars.

An enterprising reporter or Republican politician might do well to understand and point out what David Henderson has written on this topic here, where Henderson points to the Huffington Post’s debunking of the Social Security claim:

The Social Security Administration owns bonds that the U.S. Treasury has issued. To make up for a shortfall each month, the SSA could sell some of these bonds to the Treasury. But where would the Treasury get the money to pay for these bonds? By issuing bonds to the public. How could the Treasury do that if the debt ceiling is not raised? The debt ceiling includes the SSA bonds. So for every $1 billion the Treasury pays when the SSA redeems bonds, the Treasury could issue $1 billion in new bonds without affecting the official debt at all.

People do not know what capitalism is

Even though the video has made its rounds on other blogs, I had to post it here because I think it’s really good.  I credit Speedmaster at The Pretense of Knowledge for directing me to it.

It’s called Top 3 Common Myths of Capitalism from Jeff Miron of Harvard.

Myth 1: Being pro-capitalism is the same as being pro-business.

Miron says:

The point of capitalism is to make sure that businesses have to be compete vigorously against each other.  That benefits consumers.

It’s not good for the businesses, per se, because they have to work really hard.  Many businesses understand this and they hate capitalism.  They’re constantly trying to get government erect various rules, restrictions, regulations that help them, but they are not in the interest of the consumers [though they will say otherwise].

I believe one cause of this myth is that many people don’t fundamentally know what capitalism is.

Just this morning I heard radio DJs criticizing capitalism.  Yet, they were really criticizing disingenuous commercialization.  On that I agree with them.  That bugs me too.  Other things bug me.  Whiny millionaire football players, cheesy car salesmen and endless customer service touch tone menus are not my faves.  But these aren’t capitalism either.

These have emerged from capitalism.  So have many other things.  Things that I like and love and have made my life better than my ancestors and even better than my younger days.  On net, we all come out far ahead.

And, I know that I can turn the channel when it shows whiny football players, I can find a professional car salesmen and I’ve noticed those phone menus getting better.

I also noticed that those DJs didn’t criticize their advertisers.

Another cause of Myth 1 is that few people differentiate between profits earned by capitalism, through competition, and those earned by rent-seeking or politics.

We need to get better at asking if the profit came from providing valuable products that people voluntarily buy or rent-seeking or politics?

For example, sugar tariffs increase the price consumers pay for sugar and results in a higher profit for domestic sugar companies.  Those higher profits are passed to domestic sugar companies directly from consumers.  Those sugar companies should thank their friends in government.  They do.

Without the tariff, sugar and things made of sugar, would cost less and we would spend our savings on something else that could make our lives even better and create more jobs.  That’s rent-seeking.  It’s anti-capitalist and anti-consumer.  But is viewed by most folks as capitalism itself.

Myth 2:  Capitalism results in an unfair distribution of income.

Miron explains that capitalism rewards people based on what they contribute and produce and admits that a downside to capitalism…

…is that some people have very little skill.  They are not able to earn very much, left on their own.  Some reasonable people support anti-poverty spending, but that’s completely different than interfering with capitalism–regulating prices, limiting quantities, etc — those make the economy less productive, give us a smaller pie and makes it harder for us to operate programs that help those who are less fortunate.

I’d add that the anti-poverty spending does not have to be (nor is it an enumerated power) conducted by the Federal government.

Myth 3:  Capitalism was responsible for the recent financial crisis and recession.

Miron explains that we didn’t have unbridled capitalism in housing prior to the meltdown.

We had enormous government interventions — subsidized risk, encouraged over investment in housing.  If one is going to draw a conclusion, it seems to suggest much more clearly that interfering with capitalism generates financial crises…

…because what happened was a result of the market distortions created by government interference.

This goes back to causes of Myth 1, primarily that people do not know what capitalism is.  People see private, for-profit companies operating in the housing and mortgage industry and stop there assuming that’s capitalism.

They don’t understand that those private companies — and private individuals — were responding to incentives distorted by government.

Consider Speedmaster’s example.  If we believe owning a Porsche cause folks to become well-off (which it doesn’t), then government will do things (distort incentives) to make it easier for people to buy Porshes.

Government can tell banks to not worry about lending on Porsches, because if anything happens, the government will help out.  Government sends subsidies to Porsche to encourage them to produce more cars (though they don’t have the capacity to keep up with demand caused by the incentives distorted by government).

Porsche prices rise from the increasing demand.  People buy more because it seems like, even if you can’t afford one, you can sell it two or three months later for a profit.  Why buy just one?  Buy two, maybe three.

It’s not hard to imagine what happens next.  First, few will have achieved success by simply becoming a Porsche owners.  The original thinking was flawed.

Second, prices rise well beyond normal, capitalism-driven, prices for awhile as everybody gets one or two.

Then they look around and wonder, who’s going to buy my Porsche?  Everyone seems to have one of their own now (which also makes it uncool).  They realize they can’t afford to keep it (plus it’s suddenly uncool), so they panic and rush to sell it before anyone else realizes what’s going on.  Supply skyrockets relative to demand.  Prices collapse.  Everyone says this was capitalism’s last hurrah and governments pays off loans with taxpayers money and becomes the proud owner of millions of Porsches.

I was the 301st person to watch this on Youtube

Here’s the second round of the Keynes vs. Hayek.  Enjoy.  I donated $50 to this project.

And here’s Round 1 in case you missed it.

Thanks to Russ Roberts and John Papola for their excellent efforts, great lyrics and high production value!  There’s a lot of depth to both videos in the lyrics, in the folks who are mentioned and the folks who pop up in the video.  These are excellent learning tools.

The economic way of thinking

Here’s an excellent column, On Truth’s Side, by George Mason University economics professor Don Boudreaux.  I’ve copied the column in it’s entirety under the fold to save for the future.  This is a keeper.

Continue reading

Nice Video on Wealth Creation

Bill Whittle asks for 10 minutes of your time in the following video to explain how conservatives view wealth and where it comes from:

I like the central premise that liberals tend to view wealth as a fixed pie to be split among people, while conservatives tend to view it as something that derives from win-win trades.

To illustrate, I liked the graphics he showed of LA in the 1800’s and today.  Bill asks how it LA changed so much if wealth was a fixed amount?

My favorite part of the video starts at 4:16 where Whittle does an excellent job of explaining how he created a little bit of value as an office temp making $7.50 per hour for an insurance company by cross-checking a list of customers with a list of checks sent.

I made that insurance company just a little bit wealthier.  By confirming those check mailings, I was reducing loss of customers due to frustration and error.  I was reducing the amount of time that higher level, more valuable employees would need to spend undoing the damage caused by unsent checks and all the rest.

A cross-checked and confirmed list was more valuable than one that wasn’t.

To me, this example is easier to identify with than the examples often given by econ professors, and given by Whittle later in the video about trade between primitive tribes.

I know few people who can adequately explain the value they produce in their job for their employers or the value they find in the stuff they purchase on a daily basis.

I also enjoyed the final few seconds of the video.  “I would be much more impressed with your moral outrage…”  Great line.

What value do you produce for your employer or your customers?  Why are you worth more than what they pay you?

Turnabout is Fair Play

Don Boudreaux of Cafe Hayek makes an excellent point in his letter to the Wall Street Journal and post titled, Regulate THIS!.

You’re correct that the Credit Card Accountability, Responsibility and Disclosure Act of 2009 will discourage lenders from extending credit to households most in need of it by arbitrarily reducing the penalties that lenders may assess against dead-beat and delinquent debtors  (“The Politics of Plastic,” August 24).  Our Leaders, though, cling to their peculiar faith that regulations never create incentives for people to do what Our Leaders would prefer people not to do.

Let’s put this faith to a real test: Ask Congress and the White House to regulate more strictly the penalties assessed by the IRS against dead-beat and delinquent taxpayers – for example, let’s reduce fees and interest charges for late payment of taxes, and eliminate jail time as a punishment for tax evasion.  If Our Leaders’ faith is sound, there will be no increase in tax evasion and delinquencies.  Revenue collected by the IRS will be unaffected.  The IRS’s stiff penalties will be seen to have been unjustified because (if Our Leaders’ faith is true) these penalties do nothing to encourage timely and full payment of taxes.

Sincerely,
Donald J. Boudreaux