Shrinking middle class prop

Two non-pathetic economists, Don Boudreaux and Mark Perry (one has bought me beer), write in the Wall Street Journal today that the shrinking middle class is a nothing more than a political prop.

You should read their criticisms of cost and wage measurements. But, here are a few points that are more compelling to the average joe. First, the basics have never cost us less:

According to the Bureau of Economic Analysis, spending by households on many of modern life’s “basics”—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today.

Second, gadgets of prosperity are available to all:

Today, the quantities and qualities of what ordinary Americans consume are closer to that of rich Americans than they were in decades past. Consider the electronic products that every middle-class teenager can now afford—iPhones, iPads, iPods and laptop computers. They aren’t much inferior to the electronic gadgets now used by the top 1% of American income earners, and often they are exactly the same.

Finally, a true measure. Would you trade what you earn and have today with someone from the 1950s or 70s?

Even though the inflation-adjusted hourly wage hasn’t changed much in 50 years, it is unlikely that an average American would trade his wages and benefits in 2013—along with access to the most affordable food, appliances, clothing and cars in history, plus today’s cornucopia of modern electronic goods—for the same real wages but with much lower fringe benefits in the 1950s or 1970s, along with those era’s higher prices, more limited selection, and inferior products.

I can’t believe anyone buys the shrinking middle class barb. For those of us that have been around for more than a couple of decades, we don’t need economists to point out that the suburban blossom of mcmansions and the roads becoming clogged 4×4 family passenger trucks occurred during this period where the middle class supposedly shrunk.



In a post about styrofoam, Don Boudreaux points out Diedre McCloskey’s better name for capitalism, innovationism. I couldn’t agree more. The word capitalism sterilizes what’s really happening. Innovationism captures it much better.

Free Market Masterpiece

I agree with Don Boudreaux, of Cafe Hayek, that John Cochrane’s health care essay is a must read.

I first titled the post, “Health Care Masterpiece,” but then changed it to “Free Market Masterpiece”. In his essay, Cochrane does a masterful job of contrasting free market success stories to our government-restrained market for health care.

Here are a few snippets.

I bet you didn’t know:

About 70% of hospitals and 85% of health‐care employment is in non‐profits,whose legal and regulatory treatment protects much inefficiency from competition.

Maybe for‐profit companies pay too much attention to stock prices. But non‐profits can go on inefficiently forever, with no stockholders to complain.  The whole point of a non‐profit is to pursue goals other than economic efficiency.

Here he summarizes the competing goals of various government actions in health care:

…here we have the government forcing small size in order to boost competition with one hand, stopping entry to protect hospitals from competition with another, trying to force larger “networks” through “Affordable Care Organizations” to obtain the needed economies of scale with the third, but laws preserving doctor independence with the fourth.


On reflection, it’s amazing that computerizing medical records was part of the ACA and stimulus bills. Why in the world do we need a subsidy for this? My bank computerized records 20 years ago.

Why, when you go to the doctor, do you answer the same 20 questions over and over again, and what the heck are they doing trusting your memory to know what your medical history and list of medications are?

He answers that question (read it to find his answer) and OMG:

No, we did not get cheap and amazing cell phones by government ramping up the pressure on the 1960s AT&T. Southwest Airlines did not come about from effectiveness panels or an advisory board telling United and American (or TWA and Pan AM) how to reorganize operations. The mass of auto regulation did nothing to lower costs or induce efficient production by the big three.

When has this  ever worked?  The post office? Amtrak? The department of motor vehicles? Road construction? Military procurement? The TSA? Regulated utilities? European state‐run industries? The last 20 or so medical “cost control” ideas? The best example and worst performer of all,..wait for it…public schools?

I will post more quotes later. But, I also agree with Boudreaux that you should take the time to read the whole thing.

Two fine points

A few weeks ago, I wrote about a fine point made by Thomas Sowell regarding Obama’s “You didn’t build that” comment and, in general, the idea the we always owe something to “society” or “government” because government provides a plethora of infrastructure.

Sowell wrote:

Did the taxpayers, including business taxpayers, not pay for that road when it was built? Why should they have to pay for it twice?

Don Boudreaux adds to Sowell’s fine point in his column this week in the Pittsburgh Tribune-Review (bold mine).

Sure, Wal-Mart uses government-built highways to speed its inventories to its stores. But the fact that Wal-Mart would be unable to operate without the highway system doesn’t make those highways a uniquely special input to which Wal-Mart owes all, or even much, of its success.

Wal-Mart would be equally unable to operate without farmers to grow food to feed its truck drivers — or without textile producers to supply clothes for those drivers — or without oil companies to fuel its fleet of trucks.

Would Obama therefore conclude that Wal-Mart owes some special, open-ended obligation to oil companies? Would he insist that, if oil companies now squander their revenues, Wal-Mart and other retailers are morally compelled to chip in to help oil companies get back into the black?

Does Wal-Mart owe a special, open-ended obligation to oil companies?

If an oil company exec gave a speech suggesting that the oil his company provides is so valuable that they should be able to come along after someone has bought and used oil to make a profit and charge them again, that exec would be laughed off stage. Most people have a sense that oil has a price and once price has been paid, there’s no further obligation to the oil company.

So, why wasn’t Obama laughed off stage? Why have I only heard two economists point out that the folks using the services provided by government have already paid for the use of those services?

Boudreaux goes on to make another fine point, often overlooked or treated with much skepticism by folks who don’t give this a lot of thought:

Among the kinds of infrastructure that have, in fact, been supplied successfully by private businesses are city streets, highways, sewage systems, formal education, policing, money and commercial law. Government provision of such infrastructure, therefore, cannot be read as evidence that government’s role on this front is necessary.

If government failed to build highways to connect, say, Atlanta to Pittsburgh, private firms almost certainly would. (It’s easy to collect tolls from drivers who use highways.) And likewise for nearly any other pair of cities in America. So in what way is any actual, government-built highway necessary for any private entrepreneur’s economic success? None — if (as is likely) private enterprise would have done what government instead did by crowding out private efforts.


I agree with Randall Holcombe on the JP Morgan loss (HT: Don Boudreaux of Cafe Hayek). He had me at:

The correct argument, which Krugman acknowledges, is that the loss was entirely borne by JPM and their shareholders. They took the risk; they took the loss. That’s how markets are supposed to work.

He goes on…

…to add that unless people take risks, economic progress will come to a halt. So the fact that people are willing to take risks is good for the economy, and the fact that in this case the bad outcome for the risk takers involved only their loss sends a signal to others to weigh carefully the risk against the return. The bottom line is that risk-taking is beneficial to the economy, and the incentives are correct in cases like this when losses are borne entirely by those who took on the risk.

As Milton Friedman said, capitalism is a system of profit and loss. Profits encourage risk-taking (and that’s risk-taking to find things that improve our lives, by the way). Losses encourage prudence.

A private company losing money because of a boneheaded decision that is entirely borne by the shareholders of that company should not be an example for more regulation. That is foolish because it will only lead to less prudence.

Two Open Letters

First, from Laurence Reed to people who think we need more government to solve problems: Say when (H/T: Speedmaster). Here’s the opening paragraph:

At the start of the 1900s, government at all levels in America claimed about 5 percent of personal income. A hundred years later, it takes more than 40 percent—up by a factor of eight. So my first questions to you are these: Why is this not enough? How much do you want? Fifty percent? Seventy percent? Do you want all of it? To what extent do you believe a person is entitled to what he (or she) has earned? I want specifics.

I like to think of government as a partner in the prosperity of its citizens. The more prosperous the citizens, the better this partner does. If you had a similar partnership with someone and you kept demanding more from him as if you were entitled to the produce of his talents, at what point to you think he would say enough is enough?

Second, from Don Boudreaux to the would-be lords of our manor:

Dear Sen. Casey and Sen. Schumer:

Irked that Facebook co-founder Eduardo Saverin has renounced his U.S. citizenship, you propose, with your “Ex-Patriot Act,” to punitively tax and to permanently bar from ever again entering America men and women who, to reduce their tax liabilities, renounce their citizenship in the U.S.

The very fact that sitting U.S. senators issue such a proposal – the sick reality that representatives of an allegedly free people act as if individuals are serfs bound to a master – the noxious yet proudly paraded assumption by American government officials that a peaceful man’s or woman’s freedom of movement can properly be restricted by a government jealous that it misses the opportunity to seize a huge chunk of that man’s or woman’s earnings – does nothing other than to confirm the wisdom and justice of Mr. Saverin’s decision.

The forgotten viewpoint

Mark Perry, at Carpe Diem, reminds us of some good advice from French economist, Frederic Bastiat:

Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.

Let’s apply this advice to some common situations.

Minimum wage.  Here’s a good story about how consumers pay for higher minimum wages (HT: Don Boudreaux, Cafe Hayek). The costs to the consumer includes higher prices and fewer options. Some of the cost is also born by low-skilled workers who will have fewer employment opportunities.

Credit card regulations: Don Boudreaux does a nice job in his Pittsburgh Tribune column, Help That Hurts, of looking at the credit card regulations from the viewpoint of consumers.  Here’s an excerpt:

Congress, the White House and most of the news media describe CARD [Credit Card Accountability, Responsibility and Disclosure Act of 2009] as “pro-consumer.” At first glance this description seems accurate. After all, don’t consumers benefit when the fees and interest rates they must pay are reduced?

Although the answer to this question is “yes,” this isn’t the correct question.

The correct question is, “Don’t consumers prefer to have the option of paying higher fees and interest rates if the alternative is having no access to credit at all?”

Not everyone is financially careful or responsible. Traditionally, credit-card issuers dealt with this fact not by refusing to lend to consumers with poor credit scores but, instead, by using an ingenious approach that helps both those consumers with poor credit scores as well as the banks that lend to them. That approach is to charge delinquent customers significant fees for late payments and to raise interest rates on delinquent balances.

Here are a couple more things where the consumer viewpoint is usually ignored:

  • Foreign trade – Who would be hurt by restricting access to foreign goods? Consumers.
  • Labor unions – Who funds the generous wages and benefit packages of unions? Consumers.

I’ve added a new category to my blog, Consumer Viewpoint, to remind me to continue to apply Bastiat’s advice as I encounter various situations.