Keynesian stimulus in one sentence

Milton Friedman, Nobel Prize in economics and ...

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We’re not sure why you’re not spending your money, but we don’t like it, so we’re going to spend it for you.

No?  What am I missing?

Unfortunately, when this happens it moves spending from Types 1 through 3 spending, per Milton Friedman, to Type 4 spending.

In Type 1, you spend your money on yourself.  That’s the most carefully spent money.

Type 2 is you spending your money on someone else (e.g. gifts you give).  Type 3 is you spending someone else’s money on you (e.g. you on business travel).  Type 2 and 3 spending isn’t quite as carefully spent as Type 1, but they’re still much better than Type 4.

Type 4 is spending someone elses’ money on someone else (e.g. government spending).  The result of Type 4 spending creates value in the same way receiving a gift of 100 cans of green beans for your pantry creates value, even though you don’t much care for green beans. To be clear it doesn’t.  That destroys value — even if you donate them to a charity (but I won’t get into that now because I might be wrong about that).

And that’s why stimulus doesn’t stimulate.  It ignores why people aren’t spending money (because they’re being careful for some reason) and overrides that with spending that’s not likely to create net value because it’s not carefully spent.

UPDATE: Be sure to read W.E. Heasley’s excellent elaboration on this post at his blog, The Last Embassy, where he also coins Type 5 spending.

Everything’s Amazing

Here’s an excellent TED video, which is a new take on a classic: How to Build a Toaster.  (Credit: Don Bourdreaux of Cafe Hayek)

Plot:  How to build a toaster from scratch if a modern person found himself on a planet inhabited by primitives.

Subplot:  The benefits of trade and specialization.

Some of the comments on the TED site ding Thwaites for taking for granted the other tools he used while making his toaster.  I also find it suspicious to assume that a 240 volt electric source would be readily available on a primitive planet or that he would have much to toast.

But the video is still eye-opening for its subplot exposes how much we take for granted the special, distributed, evolved and advanced knowledge and coordinated effort that goes into making something as seemingly simple and unremarkable as a cheap toaster and making it available at a local store to pick up at our convenience.

Here’s the first remake of the classic in the video world:

And here’s the original classic: I, Pencil by Leonard Reed

Unholy Coalition

At the 2:40 mark of this video, Milton Friedman says this about government programs:

There are always…two groups of sponsors.  There are the well-meaning sponsors and there are the special interests who use the well-meaning sponsors as front men.  Who, almost always, when you have bad programs, have an unholy coalition with the do-gooders on the one hand and the special interests on the other.

The do-gooders focus on the intentions of government programs and either do not pay attention to results or are quick to explain away bad results as a problem that can be fixed if we just spend more money or find the right people.  It never seems to occur to these people that perhaps the incentives are poor and the system is broken.  Maybe we should change those incentives before doing anything else.

The special interests are the folks who get a paycheck from public education — or benefit in other ways (like tenure with bad results)– be they teachers, administrators, consultants, business owners who have the custodial contracts — just about anyone feeding off the public school district funding.

As commenter Lane Meyer pointed out when he replied to this post, the special interests who benefit from economic rents created by the public school system have incentives to keep getting those rents, which provide political barriers to changing the system for the better.

We expect those in the private sector to practice full disclosure.  If a business commentator mentions a stock he owns, we expect him to mention that so we can take his comments with a grain of salt.  I find it amazing that we don’t have the same expectations in the public sector.

When the do-gooders and the special interests combine into their unholy coalitions” we get a political force that’s tough to beat.  And we may get a lot of creative, consultant-inspired rhetoric to the question, why should any student have to settle for a neighborhood school that’s awful?


Responsibility to the Poor

Here’s a nice video of Milton Friedman explaining where the true responsibility lies.  Not the government.  People.

The student asserts that it might be the responsibility of the government to help out the poor.  Right about 50 seconds in Friedman responds:

First of all, the government doesn’t have any responsibility.  People have responsibility.  This building doesn’t have responsibility.  You and I have responsibility.  People have responsibility.

Make no mistake about it.

Great Stossel Show

If you’re like me and don’t have the Fox Business News channel in your line-up, you’re missing good television.  Luckily, there’s this thing called Youtube where you can also view his show.  His latest show was on Milton and Rose Friedman’s book and video series, Free to Choose. The book came out in 1980.

Here’s the first segment of the show.

You can watch it and the rest of the segments by clicking here.  The Friedmans’ book is also an excellent read.  I read it last year as a check out from my library (I love my library).

I have a few thoughts on the show.

First, Stossel runs video footage of Friedman accepting his Nobel Prize where it appears there is one loud heckler.  It amazes me that the message of freedom can stir such a strong anti-response from people.  This reminds me of graffiti I saw scrawled on an old sheet metal building near by home decades ago that read, “Die Kapitalists Pigs.”  I was too young to know much about politics.  Though it did strike me as odd that my elementary school teachers only ever spoke of one candidate for President in ’76 – Jimmy Carter.  But, I often wondered when I saw that graffiti what was at the root of such message.

Second, the young lady in the 5th segment does a superb job at going toe-to-toe with the Friedman opponent, Ben Barber.

Third, Stossel and his guests do an excellent job at responding to the opponents points.  The one critique I have, though, is that he Continue reading

Milton Friedman – Open Mind

Here’s an excellent, and topical, interview with Milton Friedman.

Around the 7 minute mark, Friedman says:

I have often in talking to audiences, especially liberal audiences, offered them a challenge.  I challenge you to name me a single social measure which has accomplished its intended objectives rather than opposite, which has not done more harm than good.

Around the 22 minute mark, the host Richard Heffner says,  “…you just said that mankind is selfish and greedy and that has always been the battle cry of those who said, ‘therefore, we must impose controls upon them.'”

Friedman: Therefore, we have to put power in the hands of other greedy and selfish men.

Heffner: That’s the philosophic basis of the argument that the government must step in.

Freidman: It’s a false argument.  It assumes somehow that government is a way in which you put unselfish and ungreedy men in charge of selfish and greedy men.  Government is an institution whereby the people who have the greatest drive to get power over the fellow man get in a position of controlling them.  Look at the record of government.

That’s what government supporters never seem to recognize.  That was one of the points of this post, Anyone Mad At The Government? People in government are no different than the CEOs of the corporations that everybody gets so mad at (while voluntarily buying and benefiting from the products their companies produce).

We demonize CEOs and want to fire them when they screw up – which I have no problem with – but we also want to give government more power when it screws up.  That make no sense to me.  Some might say, “but you can always elect a different person in government.”  Which takes me back to Friedman’s last comment, “Look at the record of government.

Rising Cost of Health Care

In 1978, Milton Friedman addressed the rising cost of health care:

About 2:36 in Friedman says something in a way that I have not heard before and I think it’s worth considering.

The cost of hospital care has been going up for exactly the same reason that the amount of monies being spent on automobiles  went up during the nineteens, twenties and thirties – because in the main, the public at large has wanted to buy more medical care and the market has been responding to their demands.

The main reason for the rise in costs has been because there has been pressure to expand services and provide a different variety.

Now maybe…maybe customers have been silly.  Maybe they’ve been foolish in wasting their money…but I think one of the freedoms we ought to preserve in this country is the freedom for people to be foolish with their own money.

I found that interesting.  Medical care has been evolving and innovating rapidly and continues to do so to respond to voluntary demand.

In 1900, very little was spent as a percent of GDP on automobiles.  By 1940, the percent of GDP spent on automobiles was much higher, not because automobiles was a mismanaged industry for the privileged.  In fact, it had evolved away from that.

The reason spending on automobiles was much higher by 1940 was because the automobile industry had evolved to meet demand from consumers and created a product that people found valuable enough to buy and made it affordable for many more people to buy it.

While medicine has been practiced for a long time, modern medicine is a relatively new field and it stands to reason that we are going to spend more and more on it, if that’s what we decide to do.

Many studies compare how much the U.S. spends on medical care with other countries with socialized medical care and conclude that we spend much more and get about the same results.

Yet, there are two problems with that.  First, defining comparative results is difficult.  By the measures used by many of the studies, medical results in the U.S. are middle of the pack.

Yet, by truer measures the U.S. shines.  Those truer measures are where people go when they have a choice and the effectiveness of specific medical treatments and procedures.

The second problem with these comparisons is that it doesn’t consider that, in many respects, we still have the freedom to choose how much we want to spend on health care.

In the countries with socialized medicine that freedom has been removed from citizens.

We could deem bread a basic right for everyone and fund bread through taxes and create a central bureaucracy for the distribution of bread.

If we did this, we could probably show that our country, relative to other nations that have free bread markets spend less as a percent of GDP on bread with the same, if not better results, depending on how we chose to define results.  Maybe we could define results as the number of days people eat bread.

But, is it really that bad that we spend a great deal on bread?  We choose to do that.  And the free market has evolved many innovations that work to our advantage.  We have a wide array of bread to choose from.  White, wheat, honey wheat, cracked wheat, light bread, bagels, muffins, etc. etc.

But, the innovation doesn’t stop just at the choice we have available.  We also almost always have all this bread to choose from at just about any time at a wide variety of places – grocery stores, retailers like Wal-Mart and Target, convenience stores and bakeries.