Life would be better if more people understood this

Here’s a great post from Don Boudreaux at Cafe Hayek on the nature of wealth and politics.

In it, he criticizes the all too typical, and wrong, view that wealth is a fixed pie and why the concern that the wealthy use their wealth for political influence is a good marker for someone who seems oblivious to root cause thinking.

Here’s a snippet on the second point:

…Mr. Reich fails to connect the dots by complaining that the rich spend more and more of their wealth in the political arena.  What else to expect when that arena becomes ever more central to Americans’ daily lives and, simultaneously, becomes ever more crowded with redistribution-mongers (such as Mr. Reich) whose squeals to soak the rich grow louder and harsher?

Folks like Mr. Reich think that the solution to their perceived problem of politically powerful wealthy is a more powerful government. But, a more powerful government just raises the stakes for the wealthy to use that power to their advantage.

In other words, without a powerful government, the wealthy could not be politically powerful. The problem is not the wealthy gaining political influence. The problem is that with a powerful government there will always be unsavory characters seeking to gain that power for their own good.

Think about the plot line of every movie that has an object with immense powers. There’s always a fight between multiple groups, good and bad, to get the object so they can use its power to their advantage.

The problem in Reich’s thinking is that he cannot fathom a limited power government. He wants a powerful government, but he just wants to somehow (through even more power for the government) restrict the holders of its powers to people who think like him.

He doesn’t realize that’s a self-fulfilling prophecy. The more power we bestow on the government, the more likely there will be unsavory people seeking to control that power.

Good links

A short, but insightful graduation speech.

A longer and insightful discussion of wealth and how different views of where it comes from can affect the words we use.

From the first:

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

From the second:

Europeans and Americans “claimed” a higher portion of global output only because they produced a higher portion of global output!  What these Europeans and Americans “claimed” simply would not have existed had they not produced it.

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Party Planning vs. Raising Kids

Lant Pritchett uses a starfish/spider analogy to illustrate differences between bottom-up/top-down systems.

Steve Landsburg explained that people mistake central planning as being something like planning a birthday party. Based on this vision, they think it can work well. You just need good planners. Landsburg says that folks who make such mistakes simply can’t imagine the complexities involved when hundreds of millions of people are added to the mix, so even good planners won’t do well.

Russ Roberts recently distinguished between engineering and economics problems in a post on Cafe Hayek, building off the following Soviet joke:

Yuri Gagarin’s daughter answers the phone.  ‘No, mummy and daddy are out,’ she says.  ‘Daddy’s orbiting the earth, and he’ll be back tonight at 7 o’clock.  But mummy’s gone shopping for groceries, so who knows when she’ll be home.’

Of course, her Mom may be an avid shopper. But, the joke was meant to convey that centrally planning something as mundane as producing products that people want, at reasonable prices and making them available in nearby stores is a much more vexing problem than sending man into orbit. Prices do a better job of coordinating that effort.

I made a similar point in a follow-up to the Landsburg post, because I’ve heard too many people use the “If we can send a man to the moon, then we can do anything” fallacy.

Though, I didn’t distinguish it then as an engineering problem. That is an important observation. It’s also a good question to keep in mind when people start using the man on the moon fallacy, are we solving an engineering or economics problem?

But, I still think some folks may have a difficult time understanding exactly how an economics problem differs from an engineering problem. For many, both fall into one category: complicated. So, if we can solve one complicated problem, why not another?

I think it might help to go back to Landsburg’s party planning analogy. An engineering problem is like planning your kid’s birthday party. It’s straightforward (place, invites, plates, cake, fun, done) and it’s a relatively short time commitment. The short time commitment is important. Any longer and it might be harder to get grandparents to help clean up or for guests to come.

An economics problem is more (though still not quite) like raising kids. That’s much more complex than planning a two-hour party. It doesn’t end. It’s not easy.

Just when you think you figure it out, it changes. Why? Because kids are human and they go through phase. They have preferences. They respond to rewards and punishments — differently to different ones. They make decisions. They like what they like. They change. They will fight you. They won’t always do what you tell them. You need to let them make mistakes and learn for themselves, even though it is painful to do so.

Now, I say it’s not quite like an economics problem because people can do a good job of raising kids. Though, there aren’t many truth-telling parents who will say that it’s easy.

So, an economics problem is much more like being tasked with raising all of the kids in your town, or maybe your state, or more.

Multiply the frustrations, the reactions, the support, attention and love required by a thousand or a million kids.

We’re all smart enough to know that’s impossible. We would never sign up for it because we know we’d do those kids a major disservice. Hmmm…..

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Good links

From Sheldon Richman’s, So What if Freedom Isn’t Free?  (Thanks to Mark Perry, Carpe Diem)

Freedom may not be free, but lots of things aren’t free. Food isn’t free, but farmers aren’t drafted. They farm voluntarily. It is true that we are taxed to support certain (but not all) farmers, but not because we wouldn’t have food if farmers weren’t subsidized — even if the farm lobby and its congressional agents have convinced most people that is the case. The fact is, we could have ample supplies of food — not free but at low cost — in a completely voluntary marketplace.

The next time someone says, “Freedom isn’t free,” you might simply respond, “What’s your point?”

Shameless” society update from Jeff Jacoby, Is this any way to help the poor? (Thanks to Don Boudreaux, Cafe Hayek)

It wasn’t so long ago that such a degree of dependency would have been inconceivable. In 2001, according to federal data, 17.3 million people were receiving food aid. In little more than a decade, the food stamp rolls have almost tripled.

That didn’t happen by accident. Under the last two presidents, increasing food stamp enrollment became an explicit government goal. George W. Bush sharply expanded eligibility, rebranding food stamps as “nutritional assistance” instead of welfare. States were encouraged to sign up more recipients — a ball the Obama administration took and ran with. The Agriculture Department promotes food stamps through radio ads and “public service” announcements; billboard-style ads appear on city buses. To attract even more participants, the department advises local welfare agencies to “host social events where people mix and mingle” — show them a good time, and try to get them on welfare.

I forget who asked this question, but it’s a good one. If government welfare works shouldn’t we see less of it over time, not more?

Neither do I

Don Boudreaux, of Cafe Hayek, explains why he doesn’t care about income inequality. I agree. At the end his post, Boudreaux adds a great comment from Steve Horwitz.

I also agree with a couple of comments to the post that say that concern for income inequality isn’t necessarily “envy elevated to public policy,” as Boudreaux claims at one point.

While I think envy plays a role for some of those concerned with the income-inequality-shiny-object, I think others are motivated by what they view as unfair processes for achieving wealth, which is also a concern of Boudreaux’s.

It’s just that Boudreaux and these folks have different views on what constitute unfair processes. Which, I believe, should take the discussion to the next stage: What are those unfair processes and why are they unfair?

Boudreaux and libertarians generally see wealth acquired through market activities as fair and wealth acquired by scratching the back of a politician as unfair.  But, others tend to see it the other way around.

But, those who see it the other way around don’t explain the processes they deem as unfair. They assume income inequality is proof that the processes were unfair.

Here’s something else I’ve noticed. Ask them about the wealth Steve Jobs earned before his death or that of their favorite movie stars and you’ll hear why these particular wealthy people deserve it. It’s because they produced something these folks personally value.

Ask them about the wealth of an oil or pharmaceutical company CEO and you’ll get a sneer.

Their idea of “unfair processes” generally is their own arbitrary assessment of whether the person deserves the wealth or not.


The curious task of economics…

Russ Roberts, host of EconTalk podcast, often reminds his listeners and his Cafe Hayek blog readers that F.A. Hayek said:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

I think Edward Glaeser did a good job of fulfilling this task in last week’s EconTalk podcast when it comes to nice-sounding government policies that may have unintended consequences of hurting cities.

Here’s one consequence I hadn’t thought of regarding government policies meant to encourage more home ownership:

Having a very pro-home ownership policy also means you have an anti-urban policy, because typically single family houses are owner-occupied whereas multi-family dwellings are rented; on average more than 85% of multi-family dwellings with 5 or more units are rented, exactly the same percentage of households for single-family occupancy being owner-occupied. So if you are going to have federal policy which both directly, through let’s say the home ownership interest deduction, or indirectly, through Fannie Mae and Freddie Mac are going to subsidize owning, you are going to be stacking the deck against high rise houses.

Glaeser also comments on how school districts hurt cities (my parents moved to a suburb when I was a child primarily to get their kids into a better school district):

Now the last thing that artificially stacks the deck against cities is just the way our local education systems work. So, by your telling me your kids like to go tromping around in grass, that’s great; my kids do that. I have no problem with parents making those choices. However, I grew up in the streets of Manhattan and that can also work perfectly well. The problem is that we’ve created such a strong schooling incentive for people to move out of those cities that have weak school systems. I think anything that we can do that tries to somewhat reduces those spacial, those schooling-related, which are fundamentally government-created incentives to suburbanize, that’s probably a good thing.

As I heard Glaeser say this, I was reminded of how Arnold Kling decomposed freedom into having the power of voice and exit. People with bad ideas to use public schools as a means to achieve their desirable social goals took over many public school districts and drowned out the power of voice for many. They didn’t worry about it because public schools were free and they figured that folks would continue to send their kids there. What were they going to do, move?

Yes, that’s exactly what happened. They exercised their power of exit.

The neighborhood I grew up in was a nice, middle class neighborhood. It had been for 40 years from when it was first built. Sadly, it turned into a pit soon after we left. And not because that was the natural order of things. The public education system was failing to educate and that chased people away.

More people wanted out than wanted in. ‘Supply and demand’ says that means home prices will go down. When prices fell, folks who couldn’t afford much because they hadn’t made good life choices, or simply didn’t care, moved in. I remember my grandparents finally moving from the home that I believe they bought new when they discovered their next door neighbors were crack addicts willing to do just about anything for their next score.

There are neighborhoods of similar age and design in different parts of the metro area that are subject to different public school systems and they are still thriving.

It’s amazing to me that the very people who love cities so much, the so-called intellectual elites, have done so much damage to them. But, it’s the perfect example of Hayek’s fatal conceit and the curious task of economics.

Russ Roberts on the minimum wage

Russ Roberts had some good recent posts about the minimum wage on Cafe Hayek. The paragraphs below are from his post about his follow-up thoughts to a debate he participated in to abolish the minimum wage:

Everyone, on the left and the right, agree that employers are eager to save costs and will substitute machines for workers or outsource production if those changes are profitable. Why will artificially higher wages created by minimum wage legislation not lead to similar substitutions?

No joke. But, of course, proponents of minimum wage will cite ’empirical evidence’ that shows that raising the minimum wage has no effect on jobs or employment. And, of course, they never consider that these studies may not tell the whole story or have limitations.

They also seem to forget basic econ where we are taught that if a price floor is well below the going-market rate, it won’t have much affect on supply. In other words, if the minimum wage is well below the going market labor rate, then it won’t have much effect on jobs. For example, if I set a minimum wage at $0.50/hour, most people would intuitively know that’s so low, it doesn’t  effect anyone — employees or employers.

So, while minimum wage studies are often heralded as empirical support for raising the minimum wage, they are much more likely to be empirical support for that basic econ understanding of a price floor.

Next (emphasis mine):

The weird part of the debate over the magnitude of the employment effects, is that when someone uses the reductio ad absurdum of a minimum wage increase to say $50 or $100 an hour, everyone understands that won’t work because it would destroy the labor market. So where do those disemployment effects kick in? If the minimum wage is small enough so that it doesn’t cause job losses, then it can’t be having much of an effect boosting wages.

Yes. Where do the disemployment effects kick in? Great question and I never hear anybody ask it or answer. It’s similar to the ‘rich must pay their fair share’ tax debate where the answer is always ‘more’.

It occurred to me after reading this paragraph that the same people who cite empirical evidence that changes in the minimum wage don’t affect jobs (that price floors below the going market rate don’t change supply), don’t seem interested in asking about empirical evidence that raising the minimum wage actually increases wages.

I suppose they assume that if it doesn’t change the number of a jobs and a few people are marking more now, then wages must go up.  But, that assumes a lot. For example, it assumes other things don’t change — like the number of hours worked and the value of fringe benefits like employee discounts — to name a couple.