What happened?

While reading the following portion of this morning’s Wall Street Journal’s Weekend Interview, with New Jersey Governor Chris Christie, a metaphor occurred to me.

“What happened before in state government was that they would just spend, and then in April they would come to the governor’s office and say, ‘Oh, oops. Sorry, we need another 30 million. We need another 50 million.’ And there would be a huge number of supplemental spending bills that would get passed on June 30th along with the budget for the next fiscal year,” often with tax hikes to pay for them, says Mr. Christie. “And I said to my folks, ‘If you don’t manage to budget, you’re going to get fired.'”

Here’s the metaphor:  It’s suicide when a parasite begins think of itself as the host, as it will proceed to consume the host and then wonder what happened as it dies.

Here government is the parasite and the private market is the host.

I do not intend to use the word parasite in its pejorative.  I intend to use its biological meaning.  There are many cases of parasite organisms that provide benefits to the host and I do believe that government can provide benefits to its host.

Government is a parasite that feeds from the private market.   While it does provide benefits, like defense and a backing to the rule of law, it would not exist if it were not for a valuable resource from which it could draw its life force.

In some cases, that resource may be natural.  Middle Eastern governments are sustained by the proceeds of oil.  Warlord governments in Africa form around resources such as diamonds.  The crony kleptocracy of Russia persists on the bounty of Russia’s natural resources.

And our representative democratic government persists on the wealth generated in the private market.

But, few people see that.  They reflexively see each new perceived problem as a job for government to solve, without considering private alternatives, and then when the government runs out of money, they simply say, raise taxes.

Governor Christie describes this mindset in New Jersey.  “Ooops.  Sorry, we need another 30 million.”

This mindset leads the parasite to incrementally consume the host and then wonder why it’s dying.  Where did the jobs go?  Where are the new jobs!? Why are tax revenues declining?  Raise taxes on the rich!

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“…government does not create jobs”

I would prefer it if more politicians sounded like Herman Cain.  Here is a great paragraph that he wrote in today’s Wall Street Journal:

As a longtime leader in the business community, I know firsthand that government does not create jobs. It can only create the conditions in which businesses operate. These conditions can spur growth, or they can suppress it. The conditions imposed by the current administration have suppressed growth.

I’ve heard Cain derided by both left and right as a simple “pizza maker”.   Yet, I’ve heard very few politicians who understood this truth.

Bill Gates is wrong on education

In the Wall Street Journal Opinion Weekend, Jason Riley asks Bill Gates, Was the $5 billion Worth It?

Bill Gates, through his charitable foundation, has sought ways to improve education for 10 years and has failed to produce results.

In this paragraph, Gates seems to rely on some data to back his position:

“We have heavy union states and heavy right-to-work states, and the educational achievement of K-12 students is not at all predicted by how strong the union rules are,” he says. “If I saw that [right-to-work states like] Texas and Florida were running a great K-12 system, but [heavy union states like] New York and Massachusetts have really messed this up, then I could draw a correlation and say it’s either got to be the union—or the weather.”

Immediately following, however, is this paragraph:

Mr. Gates’s foundation strongly supports a uniform core curriculum [i.e. one-size-fits-all] for schools. “It’s ludicrous to think that multiplication in Alabama and multiplication in New York are really different,” he says. He also sees common standards as a money-saver at a time when many states are facing budget shortfalls. “In terms of mathematics textbooks, why can’t you have the scale of a national market? Right now, we have a Texas textbook that’s different from a California textbook that’s different from a Massachusetts textbook. That’s very expensive.”

And later:

Nor does he see the need for competition among state standards. “This is like having a common electrical system. It just makes sense to me.”

So, with unions he relies on data to see if they have any effect on quality.  Yet he seems to want to whack out competition and innovation of curriculum without evidence to support that this would actually drive improvement in education quality.  It just makes sense to him.

I’ve seen quite a few decisions made by folks that just made sense.  They learned shortly thereafter why it didn’t make sense.

I was disappointed the article didn’t mention Gates’ involvement with the Khan Academy.  Ultimately, as with any other market that has evolved over the past few centuries to deliver amazing products, bottoms-up innovation and competition is what drove it.  Khan Academy is disruptive.

Top-down innovation rarely works and often causes massive failures.

The article made it appear like Gates kind of knows this, but he’s too timid to upset the existing rent-seeking constituencies in the education establishment.

Incentives matter

I recommend reading Alan Reynolds’ piece in Wall Street Journal Opinion today, Why 70% Tax Rates Won’t Work.

The table below from the article says it all.

With some wide range of experiences on where the tax rates have been set, there really wasn’t much difference in the tax revenues generated as a percent of GDP.  The high-end outlier was, counter-intuitive for most, on the lower end of the tax rate experience.

Alan Reynolds sums it up:

Still, pundits cling to the myth that lower tax rates mean lower revenues. “You do probably get a modest boost to GDP from tax cuts,” concedes the Atlantic’s Megan McCardle. “But you also get falling tax revenue. It can’t be said too often—and there you are, I’ve said it again.”

Yet the chart nearby clearly shows that reductions in U.S. marginal tax rates did not cause “falling tax revenue.” It is not necessary to argue that tax rate reduction paid for itself by increasing economic growth. Lowering top marginal tax rates in stages from 91% to 28% paid for itself regardless of what happened to GDP.

Do pundits ignore this evidence?  Do they think there’s something wrong with it?

Step in the right direction

This is good news, if true. From the Wall Street Journal Opinion today:

In a report published Thursday, the FCC sketched gloomy prospects for local media outlets but stopped short of pitching the federal bailout many had expected.

“Government is not the main player in this drama,” the report says. While it may be able to eliminate some obstacles to local reporting, most of the answers “will be found by entrepreneurs, reporters, and creative citizens, not legislators or agencies. Government cannot ‘save journalism.'” In a rare display of bureaucratic modesty, the report even notes that technology is changing so fast that “heavy-handed regulatory intervention dictating media company behavior could backfire, distorting markets in unhelpful ways.”

This is remarkable restraint from this Administration, but all the more so because it fails to join what has become a liberal campaign to create more government-supported media. Common wisdom among academic types has been that the blogosphere can’t replace what’s being lost at hometown papers, so government should provide seed money for local reporting. In 2009, former Washington Post Executive Editor Leonard Downie and Columbia professor Michael Schudson proposed, under the auspices of the Columbia University school of journalism, an FCC-bankrolled Fund for Local News.

Make it, take it

In the Wall Street Journal Opinion section today, Stephen Moore writes a slightly different take on rent-seekers or freeloaders in his piece called, We’ve Become a Nation of Takers, Not Makers.

His statistics are eye opening.

If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

And, it’s not just manufacturing.  Moore takes a closer look at states known for other things:

Iowa and Nebraska are farm states, for example. But in those states, there are at least five times more government workers than farmers. West Virginia is the mining capital of the world, yet it has at least three times more government workers than miners. New York is the financial capital of the world—at least for now. That sector employs roughly 670,000 New Yorkers. That’s less than half of the state’s 1.48 million government employees.

Moore goes onto to discuss something near and dear to my heart — managing inputs rather than outputs, which leads to declines in productivity:

After setting the table to show that productivity (i.e. output per employee) has increased dramatically over the last several decades in the private sector, Moore writes:

Where are the productivity gains in government? Consider a core function of state and local governments: schools. Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student, according to a study by researchers at the University of Washington. That is what economists call negative productivity.

But education is an industry where we measure performance backwards: We gauge school performance not by outputs, but by inputs. If quality falls, we say we didn’t pay teachers enough or we need smaller class sizes or newer schools. If education had undergone the same productivity revolution that manufacturing has, we would have half as many educators, smaller school budgets, and higher graduation rates and test scores.

And we may yet see that with innovations like Khan Academy.