Category Archives: Economics

Top Ten Bad Assumptions: 9 – People making more cause other people to make less.

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Alternate Assumption: People making more cause other people to also make more.

Income inequality is one of the hottest political issues in America today.  People don’t think it is fair that some people make substantially more money than other people.  Proposed solutions include increasing taxes on the wealthy, raising the minimum wage, and limiting the pay of CEO’s.  The key assumption in this whole debate is that the total amount of wealth is a fixed pie.  People who take a bigger slice of pie force others to take a smaller slice.

It is a basic principle of economics that wealth is not a fixed pie.  It grows and contracts. The key to growing wealth is voluntary transactions.  For example, you buy a cup of coffee.  You are buying the coffee because to you the coffee is worth more than the money that you are paying for it.  The coffee shop owner sells you the coffee because to him or her, the money you pay is worth more than the coffee.  You both feel you are better off by making this transaction.  If not, you wouldn’t make the transaction.  This transaction has made both you and the coffee shop owner better off than if you hadn’t made the transaction.  In essence, you are both a little bit wealthier.

The key here is that the transaction is voluntary.  If the transaction is not voluntary, wealth is not increased.  If someone steals your money, wealth is not created.  When government taxes you, wealth is not created.  It is only when the transaction is voluntary, when both parties to the transaction think they are better off, that we create wealth.

Steve Jobs was exceptionally good at creating wealth.  When he returned to Apple as CEO, Apple was on the verge of bankruptcy.  Now Apple has the highest market value of any company in America according to the latest rankings by Fortune magazine.  Steve Jobs earned billions as a result.  He was not the only one who benefited, however.  Millions more benefited from his success.  pPeople who invested in Apple, work for Apple, work for companies who sell to Apple, work for companies who develop software for Apple, or who simply enjoy using iPhones and iPads are all better off.   Would all of these people have better lives if we stopped Steve Jobs from creating wealth because he made too much money?

In the feudal societies of the middle ages, most transactions were not voluntary.  Nobles forced serfs to work for them and taxed from them just about everything they had.  Kingdoms grew wealthy not from innovating and creating but from plundering weaker kingdoms.  In these feudal societies, the assumption that one person growing wealthier causes others to become poorer was valid.  It is also why society did not progress for over a thousand years.  This assumption is also true in a modern autocratic society where dictators plunder from the rest of the population.

It is not true, however, in societies where most transactions are voluntary, where there is economic freedom.  The Heritage foundation ranks each country by economic freedom. Look at their rankings:  2015 Index of Economic Freedom.  Note that the most economically free countries are also the wealthiest countries.  The least free countries are the poorest countries.

Bernie Sanders, the Vermont senator who is currently running for president, is calling for a top tax rate of 90%?  Why should an investor put money into a risky new company that might become the next Apple if when the company fails, the investor loses everything, but if the company succeeds, the investor only gets to keep 10% of the gain.  The investor doesn’t make this investment and just puts the money in the bank for a safe low interest. As a result, society loses the next Apple.

The belief that people making more cause other people to make less is a very popular, very dangerous, very bad assumption.

“President Obama is too Intelligent for Republicans to Understand”: Revisiting Bad Assumption 1

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I have a friend who is a delightful person and highly intelligent.  That being said, she constantly bombards Facebook with far left wing links.  I often look at these.  As I have said before, if you can’t argue the other side of an issue, you don’t know enough to argue your own opinion.  Frequently I see the bad assumptions I talk so much about permeating these articles.  The other day I saw one such article that stood out by the audacity of its title:

The Simple Truth: President Obama is Too Intelligent for Republicans to Understand.

I highly suggest you click on this link for a moment and read this article.  I also suggest you revisit my previous blog post:

Top Ten Bad Assumptions: 1 – If we disagree, you are either mean or stupid.

I would now like to analyze this article.  The author, Allen Clifton, provides three examples which “prove” how much smarter Obama is than the Republicans.  I would like to take a close look at each of these examples.  I would then like to talk a little about how intelligent Obama really is.

Obamacare

Obamacare is Clifton’s first example of the “big picture thinking” that Republicans are too stupid to grasp because “Republicans seem unable to understand anything beyond the spoon-fed bumper sticker talking points they’re given by the GOP and the conservative media.”  Clifton states that in the long term medical rates will go down because increased preventative care will cause a reduction in more expensive treatment down the road.  Let’s assume that Clifton’s premise is true that increasing preventative care is a force that will drive down healthcare costs.  The “big picture” piece that Clifton is missing is that there are many, many forces at work in the market.  Some of the forces push costs down and some push costs up.  For example, Obamacare reimburses doctors at a significantly reduced rates compared to private insurance.  As a result, many doctors are refusing to accept patients with Obamacare.  At the same time, Obamacare enrollment is increasing.  With supply going down and demand going up, this inevitably is a force to either push costs up, or if costs may not go up because of regulations, it will cause a shortage in medical care.  Here is an article from USA Today titled “Some doctors wary of taking insurance exchange patients” explaining the situation.

I am not expert enough to say whether the forces pushing costs up or those pushing costs down will prevail.  This certainly is a subject for reasonable debate.  Clifton, however, looks at one small piece of the overall “big picture” and makes a definitive statement while ignoring the rest of the picture.  At the same time he derides Republicans for being too stupid to look at the big picture.  Ironic, isn’t it?

The Minimum Wage

Clifton’s second example of Republican stupidity is the minimum wage.  He notes that Republicans call it a job killer and refute this with this powerful argument:   “It’s not.”  I’d like to refer here to Dr. Thomas Sowell about the minimum wage:

Minimum Wage Madness:  Part 1

Minimum Wage Madness: Part 2

Minimum Wage Exploitation (if you prefer audio)

Dr. Sowell is basically stating that a minimum wage job is the bottom rung on a career ladder.  A person with no skills works for a low wage.  In the process, the person gains skills that allow him or her to earn a higher wage.  A company will only hire a worker, at minimum wage or any other wage, if the company expects that the value received from the person exceeds what it costs to employ that person.  As the cost rises, fewer people will be hired.  This is basic economics.  When we raise the minimum wage, we are cutting off the bottom rung of the ladder.  As a result, some people will never, ever climb that ladder.

This does not mean we should not raise the minimum wage.  In any policy, there are winners and losers.  There are trade-offs.  If we raise the minimum wage, the clear winners are people who now have a job at the new higher wage.  It is very easy to see that they are better off, and they know it.  There are losers too, but they aren’t so clear and the losers may never know they are losers.  The primary losers are people who never get hired who would have gotten hired if the minimum wage had not risen.  If the employers have to raise prices to pay for the higher wages, the consumers who pay the higher prices are also losers.  The companies who have to pay hire wages without getting more for their wages are also losers, although I am sure that this would be unimportant to Clifton.

Clifton also claims that the workers will make more money, spend the money, and this will help the economy making everybody a winner.  This would be true if the higher salary was due to increased productivity, to the worker earning more because the worker is worth more.   When productivity increases, the pie gets bigger. If, however, this is just an arbitrary raise without any productivity increases, the pie isn’t getting better.  It is just being cut differently.  This means that every extra dollar that the higher minimum wage worker spends, somebody else is spending a dollar less.  There is no spending boost in the economy.

The key point here isn’t to say that the minimum wage shouldn’t be raised.  The key point is to say that it is complicated, that there are trade-offs that should be weighed.   Clifton is denying the complexities of the issue and proposing a simple answer.  Remember that Clifton’s whole point was to say how stupid the Republicans were and how Republicans didn’t understand the issue.

 ISIS

Clifton states, “When it comes to ISIS,Republicans just want to send in troops and ‘crush the terrorists’.”   Note that Clifton put “crush the terrorists” in quotes.  I am not sure who he is quoting.  I have not heard a single reputable Republican advocating sending American ground troops to fight ISIS.  Clifton is raising a straw man argument.  He is saying his opponents are for a position and then ridiculing the position, when his opponents don’t have that position.  Clifton states:

When it comes right down to it, I really do believe a huge part about why so many of the non-racist Republicans are against President Obama is because many of them are simply unable to grasp his “big picture” thinking that drives a lot of his policies. That requires intelligence and far too many conservative would rather just be told what to think by Fox News. They want their policies to be so simplified and catchy that they fit on bumper stickers.

He is clearly stating that Obama has a “big picture” policy, that Obama’s understanding is so much better than the Republicans’.   Is he referring to the same Obama who over a year ago scoffed at ISIS as a threat calling it the “JV team.”  Here is a link to a Politifact article which shows Obama’s statement and stating that his later denial of referring specifically to ISIS is false.  Obama also removed all troops from Iraq, overriding his top advisors who wanted him to leave behind a residual force.   This Time article “Leon Panetta: How the White House Misplayed Iraqi Troop Talks” references former Obama CIA leader and Secretary of Defense Leon Panetta on this subject.  On the way to taking over major Iraqi cities, such as Mosul, ISIS had to cross a wide open desert which would have made them sitting ducks to an air attack if we had kept a residual force.

Why therefore should anyone believe that Obama has this “big picture” view of ISIS  that the Republicans are just too dumb to understand?

Obama:  The Super Genius

In addition to saying that all Republicans are idiots, Clifton is stating that Obama is such a genius that his detractors, idiots such as Dr. Thomas Sowell, can’t keep up with his intellect.  I ask where is the evidence that Obama is such a genius?  I am not saying Obama is stupid.  After all, he graduated from Harvard Law School.  What about Obama though should make us think he is that much more intelligent than his opponents?  Obama still has not authorized the release of his grades in college.  Does anybody really think that if his grades were exemplary, he wouldn’t release them?

I will tell you what shocked me more than anything else when it comes to realizing Obama’s understanding of policy.  In 2011, in an interview with NBC’s Ann Curry, Obama blamed unemployment on advances in technology:

There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate.

By Obama’s logic, we never should have invented the plow.  For example, lets say we have an agrarian society where it takes everyone’s efforts to grow enough food to feed the society.  Then somebody invents the plow.  Now only half of the people are needed to do the farming.  We can say that the plow made half of the society unemployed.  Now, however, the labor that has been freed from farming can do other things.  People can be blacksmiths, shoemakers, merchants and artists.  Overall, the society is wealthier than it was before.

The concept here is that technology increases productivity.  Productivity is the total value of goods and services produced divided by the costs of providing these goods and services.  Productivity from labor can be thought of as the total value of goods and services produced per working hour.  A person’s productivity represents the most somebody is willing to pay that person.  When we increase productivity, we can pay the person more.  New technology may cause some people to lose jobs in the short-term.  The proverbial buggy whip employees were put out of work by the invention of the automobile, but overall society was better off.

This is something that they teach in Economics 101.  It is simple, basic economics.  When Obama blamed unemployment on ATM machines and other technology, he showed he did not understand the basic facts about economics.  This is the man who is in charge of the economic policy of the United States.  This is the super genius whose knowledge leaves everybody else in the dust.

I don’t think so.

Bad Assumption 1 Revisited – If we disagree you are either mean or stupid.

I don’t know Allen Clifton. I think he is probably a fairly intelligent person.  Like my friend who posted this article on Facebook, he is also probably a nice person.  I think he is also totally blinded by bad assumption 1.  By demeaning his opponents, by saying they are all stupid, this means he doesn’t need to seriously look at their arguments.  This also means, he doesn’t need to examine his own arguments, his own views.  As I have said previously, just about every issue has two sides.  If you can’t argue the other side assuming that your opponent is a well-meaning, intelligent person, that means you don’t really understand the issue.  I think we are all much better off if we can jettison this bad assumption.

Top Ten Bad Assumptions: 7 – Judge a policy based on its benefits.

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Alternate Assumption:  Judge a policy based on its benefits and its costs.

This is probably the bad assumption that we see the most.  Policy A helps people.  Therefore Policy A must be good.  If anyone opposes Policy A, that must mean that they don’t want to help people.  This bad assumption usually involves government spending, but it doesn’t have to.  It also applies to both sides of the political spectrum.  A “Jobs bill” might hurt the environment or a “Clean Air” bill might cost jobs.

Generally, any policy has both costs and benefits.  The costs frequently involve spending money, but there can be other costs as well.  For example, raising the minimum wage might reduce the number of minimum wage jobs.  One can debate whether the benefit justifies the cost, but too frequently there is no debate as people only look at the benefit.

The debate on global warming provides a good illustration for this.  Recently Bill O’Reilly said something to the effect  that even if global warming claims are exaggerated, it can’t hurt removing pollutants from the air.  It certainly can hurt.  We each can drastically reduce our carbon footprint.  All we need to do is to stop driving and stop using electricity produced by coal-fired power plants.  Is it worth is?  If the threat is dire enough, yes it is.  If the threat is remote and speculative, then it probably isn’t.  We need to compare the benefits of reducing the carbon emissions to the cost of doing so.  Is it worth giving up driving?  Is it worth losing the millions of jobs we would surely lose if there was no more driving?  You decide.

Right now the national debt is approximately $17 trillion.  Of this, $7 trillion has been accumulated in the last six years under Obama.  This should alarm both conservatives and liberals.  Let’s say you are a devout  liberal and you believe that government has the obligation to help the needy.  There is a new proposal to spend $50 billion on anti-poverty programs.  The question you typically ask is does this program provide real help to people who need help.  Let’s assume the answer is yes.  As a result, you support this bill.

I suggest that you are asking the wrong question.  The question you should ask is does this program provide enough help to justify borrowing the money from China that one day our children and grandchildren will have to repay.  Moreover, since you believe that government should help the needy, does it provide enough help to the needy today to justify the fact that there won’t be any money available for government to help the needy in future generations?

We can’t just look at the benefits.  We need to look at the benefits and the costs.

Misrepresenting Ayn Rand

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I am taking a break from my top ten list of bad assumptions to respond to an article posted to Facebook about Rand.  This friend, whom I happen to think is a wonderful person, posted a link to an article saying how Ayn Rand devotees are greedy and selfish and are making America a bad country.  Here is the link:

http://www.rawstory.com/rs/2014/12/clinical-psychologist-explains-how-ayn-rand-helped-turn-the-us-into-a-selfish-and-greedy-nation/#.VI79xO_vcBo.facebook

This article starts with the following quote:

Ayn Rand’s “philosophy” is nearly perfect in its immorality, which makes the size of her audience all the more ominous and symptomatic as we enter a curious new phase in our society….To justify and extol human greed and egotism is to my mind not only immoral, but evil.— Gore Vidal, 1961

The author of this article, Bruce Levine, makes in essence two main arguments:

  • Ayn Rand herself was a horrible person.
  • Ayn Rand’s philosophy is that you shouldn’t care about anybody but yourself.  This philosophy causes people to be ruthless and manipulative and is evil.

First, let me address the attack on Ayn Rand as a person.  As a start, the events described in this article are, to my memory, consistent with the biography “Ayn Rand and The World She Made” by Anne Heller.    I can’t state how fairly this biography portrays Ayn Rand.  It shows both the good and not so good of Rand.  In his article Levine emphasizes two of the less flattering aspects of Rand’s life.

Before discussing the actual attacks on Rand’s personal life, I would like to point out this is an “ad hominem” attack, an  the attack on character rather than an attack on the idea.  This is a common fallacy.  For example, if I a scientist proves that smoking causes cancer, but still smokes, one might attack his research on the grounds that he a smoker and that if he believed his own research, he wouldn’t smoke.  His smoking may be evidence that he is personally flawed, but it has no relevance on the validity of his research.  Likewise, pointing out Ayn Rand’s flaws has no relevance to her philosophy and arguments.  It only can prove that she is not the Messiah.  Still, people do look to the philosopher when judging the philosophy, so I would like to address these two key aspects.

Levine dwells upon Rand’s extra-marital sexual relationship with her disciple Nathaniel Brandon, for which Rand gained the consent of both of their spouses.  In Atlas Shrugged, Rand’s heroine Dagne Taggert had an affair with one of her heroes, Hank Reardon, so it would not be fair to claim that monogamy was central to Rand’s philosophy or that Rand was being hypocritical in this regard.  Rand did stress honesty.   She believed she was honest in her relationship.  She got angry when she felt she was betrayed and that her lover Brandon was not honest with her.  One may approve or disapprove of her actions here, but she was not inconsistent with her stated philosophy.

The second issue is one that I found more troubling when I read the biography.  Rand stressed using logic based upon objective facts.   She often stated that people need to think for themselves and not blindly follow others.  Yet when somebody in her circle developed conclusions that significantly differed from hers, she would treat this person as a heretic and cut the person out of the circle.  I personally do find this disturbing.  I also think it is entirely irrelevant to her whether her ideas are good or bad.

So now let’s go to the attack against her idea, primarily the attack that she promotes selfishness and not caring about others.  Levine offers us the following quote:

My ex-husband wasn’t a bad guy until he started reading Ayn Rand. Then he became a completely selfish jerk who destroyed our family, and our children no longer even talk to him.

I believe that this is a good example of what I have long felt is a glaring misrepresentation of Ayn Rand’s philosophy.  Much of the blame for this misinterpretation falls on Rand herself.  Rand did not respect conventional thinking.  She loved to taunt those she disagreed with.  She wrote a book called “The Virtue of Selfishness”.   I’m sure she chose this title to be provocative.   Rand, however, uses the word selfishness differently than most people use the word selfishness.  I think she did her philosophy a disservice in her choice of this word.  What does she mean by it then?

In Atlas Shrugged, John Galt is Ayn Rand’s primary hero.  Rand described him as the perfect man.  I think Ayn Rand’s philosophy can best be summarized by John Galt’s oath.

I swear, by my life and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine.

Galt’s oath is fairly straightforward.  He is proclaiming that everybody has the right to live for him or herself and not for the purposes of others.  The primary misinterpretation of Ayn Rand is that people focus on the first part of the oath and not the second.  They say that Rand advocates exploiting others.  If you look at this simple statement, nothing could be further from the truth.  Rand is explicitly stating that we have no right to ask other people to subjugate their own desires and happiness to our own.

Moreover, Ayn Rand’s heroes keep their word no matter what.  Rand decries how people make excuses to explain why they can’t keep their word with lines like “It was beyond my control.  I couldn’t help it.  It’s not my fault.”  Rand’s heroes do not believe people should be able to force them into obligation against their will, but when they voluntarily make an obligation they must fulfill it no matter how difficult this may be.  For example, in Atlas Shrugged Dagne Taggert promised that a key customer that rail line would be completed on time.  When it looked like her railroad company would not be able to make this deadline due to the unavailability of a key part, the railroad bought a manufacturer for the sole reason of having it produce the part on time.

So when Levine cites the wife whose husband became a Rand-reading selfish jerk, this husband certainly was not following the philosophies of Ayn Rand.  When one has a family, one has voluntarily made an obligation. and one always fulfills a freely-chosen obligation.

Also, a common misinterpretation of Ayn Rand is the statement that Rand believes we should never help others.  Rand frequently stated that she has nothing against people helping others.  She just didn’t believe that people should be able to force others to help them.  Ayn Rand’s characters make huge sacrifices for those they care about, including undergoing torture and risking death.  They choose to make these sacrifices because the people they make them for are important to them.

As I stated earlier, I believe one main reason that Ayn Rand is so misinterpreted is that her definition of selfishness, which she thinks is good, differs from the standard definition of selfishness, which most people think is bad.  I would state that the standard definition of selfishness is thinking of oneself first without respect for the rights of others.  I would say that Ayn Rand’s definition of selfishness is thinking of oneself first with full respect for the rights of others.

Levine also made this statement in his article:

While Rand often disparaged Soviet totalitarian collectivism, she had little to say about corporate totalitarian collectivism, as she conveniently neglected the reality that giant U.S. corporations, like the Soviet Union, do not exactly celebrate individualism, freedom, or courage.

Quite frankly, I don’t see how anybody who actually read Atlas Shrugged could make that statement.  Ayn Rand despised crony capitalism where corporations conspire with government to gain an unfair advantage.  One of the main villains in Atlas Shrugged, James Taggert, is a crony capitalist and Rand attacks this practice throughout the book.

The purpose of this post is not for me at this time to explain or defend Ayn Rand’s philosophy.  It just got my goat that this article called her philosophy “evil” and then justified this rather damning accusation by attacking her character and by totally misrepresenting her philosophy.  Ayn Rand believed in logic.  Rand built her philosophy by starting at very low levels and painstakingly building logical arguments.  I have seen many attacks on Ayn Rand.  I have yet to see an attack that focuses on refuting her actual logic.  I would very much welcome it if anybody sees this who can post a comment pointing me to a good, fair refutation of Rand’s logic.

Ayn Rand was a staunch supporter of capitalism and an enemy of communism and socialism.   Capitalism epitomizes the belief that a person can pursue their own dreams.   Communism epitomizes the belief that a people should forsake their own dreams for the betterment of the greater good. In the last twenty five years both China and India have turned from socialism to capitalism and as a result have lifted hundreds of millions of people out of poverty and into the middle class.  In the name of Communism, China, the Soviet Union, Vietnam, Cambodia, and other countries murdered tens of millions of their own people.  Yet Levine and others call Ayn Rand’s philosophy evil.  How interesting.

Top Ten Bad Assumptions: 4 – Government helps people. Business exploits people.

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Alternate Assumption:  People are helpful when they have an incentive to be helpful.

We hear this all the time.  Government is compassionate and caring.  Business is heartless and cruel.  This assumption was a cornerstone of the argument for nationalizing healthcare.  Health insurance companies have a reputation, deserved or not, for denying benefits.  I have seen countless stories in the newspaper about a very ill person whose insurance company denies a needed operation or medication.  If only government ran healthcare, it would be much more compassionate.

Before we even look at government, let’s look at a different type of insurance.  My city of St. Louis was hit by a major hailstorm a few years ago and my roof was damaged.  Within two days my insurance company had an adjuster at our house.  The adjuster was based out of Dallas.  After the hailstorm, the insurance company flew in adjusters from all over the country to quickly handle the huge influx of claims.  The insurance company could not have been nicer to work with and they quickly paid the claim.  I heard similar stories from friends and neighbors who had different insurance companies.

Should we assume from this that people who work for property insurance companies are nicer than people who work for health insurance companies, or is there another factor here?  Property insurance is an extremely competitive business.  There are many different companies.  Everybody chooses his or her own insurance.  The insurance company’s reputation for being easy to work with and prompt in paying claims is a key factor in the sale.  If a property insurance company gets a bad reputation, their sales plummet.  The property insurance companies have a very strong incentive to be fast and fair in paying claims.

Contrast this with health insurance.  Due to regulations, there are very few health insurance companies to choose from in a state.  Moreover, most people don’t choose their own health insurance.  Their employer chooses the health insurance.  You can’t change your health insurance without changing your job.  The employer wants a benefits package that on paper is at least comparable to health insurance offered by other employers.  If the benefits package appears inadequate, the user might lose values employees or might have to pay additional salary to compensate.  For a given benefits package, the employer is then looking for the insurer who can provide it for the cheapest cost.

Nowhere in this sales equation is there a factor for how promptly, fairly, and courteously the insurance company handles claims.  If a health insurance company is especially generous in handling claims, it may raise their cost basis which would make them less competitive and therefore hurt their business.  Property insurance companies have the incentive to be helpful and health insurance companies have the incentive to not be helpful.

The Veteran’s Administration is a current example of where government runs healthcare.  It is known for providing poor healthcare.  In a recent scandal, veterans died as they were on a months long waiting list for care.

My belief is that neither government nor business is inherently good or bad.  All organizations are composed of people, both good and bad.  Most of us are good when it comes with family and friends we care about.  When we deal with strangers, while there are a few Mother Theresa’s in the world, but most of us try to be polite. On occasion we are more than polite, but on an every day basis, we don’t go out of our way to help people if there is no advantage to us in helping them.  While we may wish that everybody was a whole lot nicer, this is the way that people are, and we are not going to change human nature.

So, for example, if we want to make health insurance more responsive, would it be better to make the health insurance industry more competitive and more like the property insurance industry, or would it be better to make it less competitive and more like the Veteran’s Administration?

If government was inherently more helpful, then everybody would have loved living in the Communist countries where government did everything.  The Berlin wall would have been built to keep the West Berliners from heading east.

Businesses have people.  Governments have people.  With people you get more of what you reward and less of what you punish.  This applies to helpfulness.  It applies to everything.

Top Ten Bad Assumptions: 3 – America should not favor Americans.

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Alternate Assumption:  America should favor American citizens.

I had been planning to discuss this assumption later in the process but this assumption so underpins Obama’s recent executive action on immigration and the entire immigration debate I have moved it up a bit.

First it is important to note that this is strictly a values assumption.  There are no facts to argue here.

The basic assumption is that we are citizens of the world.  Americans are not inherently better than other people in the world.  If our policies favor Americans over other people, we are implying that Americans are more worthy than anybody else.  The moral approach is to treat everybody equally.  Immigration restrictions are immoral because they state that existing Americans have more of a right to be in America than other people in the world.  Moreover, unless you are a native American, you are an immigrant or a descendant of immigrants so it is hypocritical for you to try to restrict immigration.

As Barack Obama said just a few days ago on November 24, 2014 in his immigration speech in Chicago:

If you look at the history of immigration in this country, each successive wave, there have been periods where the folks who were already here suddenly say, well, I don’t want those folks.  Even though the only people who have the right to say that are some Native Americans.

It is clear that the belief that America should not favor Americans is a core value behind President Obama’s immigration approach.    The purpose of this post is not to debate immigration.  I want to look at the core value itself.

This assumption has a further assumption below it.  It states that whenever someone favors one person over another, that person is stating that the more favored person is somehow superior to the less favored person.  I believe that this is a false assumption.  When a parent cares for his or her child, the parent is not saying that this child is more worthy than all other children.  The parent cares for the child because of an emotional attachment and because the parent has assumed a fiduciary duty to act in the interests of the child.

Now let’s move up from the individual to local levels of government.  At the governmental level, we no longer have the emotional attachment, but the fiduciary duty still holds.  A fire department, for example, has the fiduciary duty to protect the homes and businesses within the district from fire.  It does not have the same fiduciary duty to protect the homes in neighboring districts.  This doesn’t mean that if a neighboring district has a fire and there is not currently a fire in the district, that the local fire department shouldn’t assist the neighboring fire department.  If there are simultaneous fires in both districts, however, the local fire department needs to take care of its own residents first.

At the state level, the Missouri government has a duty to protect the citizens of Missouri.  The Illinois government has a duty to protect the citizens of Illinois.  In doing this, neither state is saying that the citizens of its state are better or more worthy people than citizens of the other state.

It is the same at the federal level.  The United States government has a duty to the citizens of the United States.  The Mexican government has a duty to the citizens of Mexico, and the Nigerian government has a duty to the citizens of Nigeria.  This is not racism or any other form of discrimination.  It is a government fulfilling the duty that the government was created for.

Therefore America should favor Americans.  This does not mean that America has the right to attack other countries or expect countries to favor Americans over its own citizens.  America has not only the right but the moral obligation to put the interests of its own citizens first while respecting the obligation of every other country to put its citizens first as well.  Greece should favor Greeks.  Mexico should favor Mexicans.  America should favor Americans.

Top Ten Bad Assumptions: 2 – The intended effect is the only effect.

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Alternate Assumption:  The impact of unintended effects is frequently greater than the impact of the intended effect.

Let’s say we run a store.  For simplicity’s sake, let’s say we have ten customers who each spend $1,000 per month for total sales of $10,000 per month.  We set a goal of increasing sales by 10%.  To do this, we raise prices by 10%.  We expect that we will now have $11,000 in sales each month.

After we increase our prices nine out of the ten customers decides to shop with us as always, but one customer balks at our price increase and chooses to shop at a different store.  Now nine customers spend $1,100 per month for total sales of $9,900/month.  Instead of increasing our sales, we have decreased them.

The unintended effect exceeded the intended effect.  Most people intuitively understand that you can’t just raise prices without losing customers.  Typically, however, the unintended effects aren’t immediately obvious.

New York City had a problem.  Rents were rising and elderly people could no longer afford to stay in their apartments. People were moved by the plight of elderly people being forced to leave their homes, and so they instituted rent control which limited how much landlords could increase rent on their tenants.  This solved the problem of high rent increases forcing out the elderly, but what were the unintended effects?  These included:

  • There was a major housing shortage in New York City causing rents for new residents to skyrocket.
  • As people age and their children move out, they need less room.  Typically people would move to a smaller apartment to save money.  After rent control, renting a new smaller apartment costed more than staying in the rent controlled apartment, so people stayed in apartments that were bigger than they needed.  The unavailability of the large apartments forced young families into higher priced, smaller apartments.
  • Landlords would often not perform proper maintenance on their apartments.  The normal incentive is to keep your existing tenants happy as it is more costly to find a new tenant than to keep collecting checks from the old tenant.  Under rent control, however, if the old tenant moved out the landlord could rent the apartment for much more to a new tenant so landlords were rewarded for performing shoddy maintenance,

Rent control had an intended effect that was good but it also had unintended effects that were bad.  With some thought, the negative affects were fairly predictable.  One just needs to look at what behaviors are being rewarded and what behaviors are being punished.  You will get more of what you reward and less of what you punish.  The people who pushed rent control didn’t do that, however.  They wanted to stop elderly people from being evicted.  If you opposed rent control, that meant you wanted elderly people to be evicted.

Right now there is a current push to substantially increase the minimum wage.  There are proposals before Congress to raise the federal minimum wage from $8.25 to $10.10.  Fast food workers have been protesting demanding a $15 minimum wage. The argument is that if people work full-time, they should be able to earn a “living wage”, enough to pay rent and food and other basic necessary expenses.  This certainly appears to be a reasonable argument.  If the minimum wage increases, it will certainly achieve the intended effect where people who work for the minimum wage will get paid more.

What, however, are the unintended effects of increasing minimum wage?  Employers now have an increased cost and they need to do something about it.  What are their choices?

  • They can absorb all of the costs and reduce profits.  Some employers can and would do this.  This is certainly what many who are pushing for the minimum wage increase are expecting.  In some cases the profits aren’t large enough to cover this cost and the employer would be forced out of business.  Also, if the profitability of a business decreases, it decreases the incentive for people to open new businesses and stops new jobs from being created.  We will never know how many businesses aren’t even started because they are no longer perceived to be profitable.
  • They can pass on the increased costs to consumers.  This will cause everybody’s prices to rise.  This is not a good thing.  Some consumers will reject the price increases and shop elsewhere causing a loss of sales, profits, and eventually jobs.
  • They can hire less people, reducing jobs.  There might be one less person behind the counter and you will wait a little longer for your fast food.
  • They can replace people with machines.  The burger flipping machine might seem to expensive at an $8.25 minimum wage but attractive at a $10.10 minimum wage.

As a result, raising the minimum wage would cause a drop in minimum wage jobs.  One can debate over how large that would be, but there would definitely be a drop.  Also, many people who make minimum wage are teenagers who live at home.  These teenagers do not need a living wage.  They want to help their families or earn extra pocket money.  Most importantly, the minimum wage job is the first rung on the ladder of a career.  The minimum wage job for most is where you get initial experience, prove yourself, and work your way to a higher paying job.  If the minimum wage job isn’t there, the teenager never gets to step on that first rung of the ladder and may never go any higher.

One could conceivably account for that by passing a higher minimum wage for adults than for teenagers.  In this case, you are now favoring the hiring of teenagers over adults, so you are hurting the adults who need the job to survive and helping teenagers gain extra pocket money.

In short, we have a trade off.  The intended effect is that minimum wage workers make more money.  The unintended effect is that some businesses go out of business, other businesses never open, inflation rises, unemployment rises, and some young people never get their career started.

I personally think that the unintended negative effect is greater than the intended positive effect,  This is debatable.  The big problem though is that there is often no debate.  This is because of Bad Assumption #2:  The intended effect is the only affect.  If you oppose the minimum wage increase, you don’t want people to earn a living wage.   You must be mean.  (See Bad Assumption #1.)

While I focused here on my examples of rent control and the minimum wage, this bad assumption is pernicious and can be seen in an endless number of policies that on the surface do good but below the surface do a lot of harm.  It is easy to make this awful assumption.  We need to recognize it and fight against it.

Helping People Who Cannot Help Themselves: What is Government’s Role?

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In the previous segment, I talked about the role of government.  Helping people who cannot help themselves, is typically considered a key role of government.  First, let me state that I think helping people who truly need help is generally a good thing.  Most people are good people and we want to help the needy.  We all know people, good people, who depend on government assistance.  Without this assistance, they might not have the basic necessities of life.  On the surface, it seems that only a cruel, selfish person would question if government should be providing this assistance.

We all see the positive benefits of government aid.  What, however, are the negative effects?

The key phrase to keep in mind in analyzing this, or basically any, issue is “You Get What You Reward”.  (See my previous post https://ralphkoppel.com/2014/03/05/you-get-what-you-reward/).  Whenever we say we will help people who are helpless, we are rewarding helplessness.  As a consequence, we get more helplessness.  For purposes of discussion, lets not talk about people who may or may not be able to help themselves such as an unemployed worker who might or might not be able to get a job.  Let’s talk about a very young child whose parents c,annot or will not provide basic necessities such as food and shelter.

If the government takes care of the child of a neglectful parent, the problem isn’t that we are rewarding the child.  The problem is that we are rewarding the neglectful parent.  For example, we have two single mothers with very limited money.  Mother A uses her money for food and clothing for Child A.  Mother B uses her money to party and have fun.  Without intervention, Child B will starve.  If the government takes over and feeds Child B, then both Child A and Child B are fed.  Mother A though has no fun and Mother B has fun.  We are rewarding Mother B’s neglectful behavior.

When we look at an entire population, people don’t easily divide into two groups.  Rather, we have a spectrum.  In this case, at one end of the spectrum are mothers who will take care of their child on their own, no matter what, and would not accept any aid.  At the other end are mothers who won’t care for their child, no matter what, and will party and have fun without regard to the child.  Most mothers fall somewhere in between.  The more aid government provides, the more likely the mother is to have fun and leave the care of the child to the government.

The same analysis can be used with any kind of government aid.  Whenever we provide more aid, due to the inherent rewards, we get more people who need the aid.  In short, society has in essence three options when it comes to people who can’t help themselves.

  • Society can provide no aid and let the truly helpless people starve.
  • Government can provide aid to helpless people and as a result, we will get more helpless people.
  • Charities, friends, and family can provide aid to helpless people.  This might seem to be the best solution, but what then if private individuals can’t provide enough aid?

In short, there isn’t a good option here.  So is it the proper role of government to help people who can’t help themselves?  I’m still torn on this one.  I know that government aid in the long run often does more harm than good.  On the other side, I am sickened when truly helpless people can’t get the basic necessities.  There really isn’t a good answer.  In the real world, however, none of the above isn’t one of the options we have to choose from.

I would say that whenever possible we should look to friends, families, and charities to provide aid.  This should be the first choice.  As a last step, I do think government does need to have a role in helping people who can’t help themselves.  Any government policies need to be fully aware of the negative consequences of government aid and should be designed to at least attempt to mitigate these consequences.

Is this a good approach?  No, it isn’t.  I do think though it is the least bad of all of the bad approaches available.

Global Warming: A Step by Step Look At the Key Arguments – Part 5: Is it the proper role of the United States government to enact regulations on private companies and individuals to protect the environment?

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In the last three sections I discussed whether global warming/climate change is a real problem.  I believe I have made a good case to say that it isn’t a problem.  For the rest of this discussion, however, we will assume that I am totally wrong and that man-made carbon dioxide emissions pose a serious environmental problem.  The next question then is what should be done to solve this problem?

As individuals, we each have our own choice to make.  We can elect to “go green”, to drive a Prius, or do as much or as little as we want in our private lives to reduce carbon emissions.  The debate here, as a citizen of the United States, is what role the United States government should have in this effort.

Before we discuss what the United States government can do, we should discuss if it the role of the United States government to do anything.  Just because there is a problem, it doesn’t therefore follow that it is the role of the United States government to solve the problem.  I believe strongly in limited government and capitalism.  I will discuss much more on my view of the role of government in future blogs.  One might conclude then that I believe that this is not the role of the United States government to do anything.  In this instance, though, I side with the liberals.  If this is a real problem, the United States does have a role in its solution.

Economics has the concept of externalities.  An externality is a cost born by someone who does not get the benefit.  For example, a factory makes money from a heavily polluting plant.  The people who live around the plant don’t get the benefit, the money, from the plant.  They do though pay a cost when they breathe polluted air.  Their health suffers, their enjoyment of life suffers, and very possibly their property values also suffer.  

I believe that government has the responsibility to try to reduce externalities.  This does not mean that government has to eliminate them.  It may not be possible to reduce the pollution from this factory to zero, or even if it is scientifically possible, the costs might be so prohibitive that it would force the factory out of business.  The key word here is reasonable.  The government has the responsibility to ask reasonably so external costs are not burdensome to others and that the cost of ameliorating the externality is not unreasonably burdensome to the business.

For example, in the instance of our polluting company, the company can spend $10,000 for filters that will remove 98% of the pollutants or it can spend $1,000,000 for filters that would remove 99% of the filters.  Unless one can clearly show that the ill effects of the 1% difference are substantial, it would be reasonable for government to regulate that the company must remove 98% of the pollutants.

What should the government do if there is no reasonable compromise solution?  For example, what if the pollutant is so toxic that even the smallest amount causes a severe health risk?  In this case the government should not allow any pollution, even if it does put the factory out of business.  Philosophically, I would say that eliminating the pollution is a cost of doing business.  If you can’t pay this cost, you shouldn’t be in business.  This is no different than paying the cost for labor or the cost for supplies.  

Society prospers when total benefits exceed total costs.  A beauty of capitalism is that it aligns this benefit to society with the benefit to the business.  The needs of society and the needs of business are in line as long as externalities are minimized so those getting the benefit pay the cost.

If carbon dioxide truly is a pollutant causing severe environmental harm, it is therefore the proper role of government to regulate it.  

In the next section, I will explore the options government has and what the effects of these options would be both to the economy and to affecting global warming/climate change.

All Global Warming Posts
Global Warming: A Step by Step Look At the Key Arguments – Part 1

Global Warming: A Step by Step Look At the Key Arguments – Part 2: Are global temperatures rising?

Global Warming: A Step by Step Look At the Key Arguments – Part 3: Do carbon emissions from humans cause global temperatures to rise?

Global Warming: A Step by Step Look At the Key Arguments – Part 4: Will global warming will cause catastrophic environmental consequences?

Global Warming: A Step by Step Look At the Key Arguments – Part 5: Is it the proper role of the United States government to enact regulations on private companies and individuals to protect the environment?

Global Warming: A Step by Step Look At the Key Arguments – Part 6: Can the actions of the United States government effectively prevent these consequences?

Global Warming: A Step by Step Look At the Key Arguments – Part 7: Is the evidence supporting global warming so overwhelming that we should no longer debate or delay?
Sources:

http://en.wikipedia.org/wiki/Externality

 

Basic Economics Part 7 – Why do so many people prefer socialism?

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This is the final part in a series on basic economics inspired by the works of Thomas Sowell.

The prior segment in this series clearly shows that a capitalistic, free economy greatly outproduces a centralized, less free economy.  Why then do so many prefer socialism?

Many people actually believe that socialism produces better economic results than capitalism.  I believe I have shown that this is totally mistaken and that the evidence overwhelmingly shows that capitalism outproduces socialism.  I would welcome anybody who can refute my previous arguments here to respond.

Even those who agree that more capitalism leads to greater overall wealth still favor government control of economies to a varying degree, from heavy government regulation to socialism to communism.  These are reasons they give:

  • Capitalism can be corrupt.  People point to “crony capitalism” where government supports favored companies, frequently those who give the biggest campaign contributions.
  • Unfettered capitalism and out of control greed lead to major crises such as the great depression and the financial collapse of 2008.
  • Without regulation, capitalists will exploit the environment, their workers, and their customers to increase profits.
  • Capitalism is inherently immoral.  Everybody should work for the greater good instead of for themselves.
  • Profits represent waste.  Goods and services could be provided more cheaply if there weren’t profits.
  • Wealth isn’t everything.  People are happier under socialism.

I believe that some of these statement contain some truth while others I vehemently disagree with.  I will return to discuss each of these topics in future segments.

Except, I would like to discuss the last issue right now.  I think it is the most important argument, because I think it is the only argument where they are right.  Many people are happier under socialism.

According to the Heritage Foundation’s 2014 Index of Economic Freedom, Chile is ranked one of the most free countries in the world, and is the most free in Latin America with a per capita income of $18,419 .  Honduras in contrast is one of the least free with a per capita income of $4,610.  The bottom 20% in Chile has an average income roughly twice the average income in Honduras.  Despite this, in happiness surveys, Honduras rates as a much happier country than Chile.

If you are poor and everyone else around you is poor, you  tend to be happier than someone who is much better off but who is surrounded by even wealthier neighbors.

In remarks before the World Affairs Coucil of Greater Dallas in 2003 Alan Greenspan talked about “the creative destruction” of capitalism where the standard of living rises as new technologies and methods replace old.   This leads to both progress and stress.  He stated, “I do not doubt that the vast majority of us would prefer to work in a less stressful, less competitive environment”.

Basically, under capitalism there are winners and losers.  This is an essential element of capitalism.  Socialism tries to have no losers.  It is much more stressful to have to compete first to survive and then to better yourself.  There is an attraction to having everything handed to you, even if you don’t get as much.

Picture a classroom with no grades.  Nobody passes or fails.  If you show up, you get promoted.  There are no tests.  In this environment there are some who would likely be at the top of the class who would hate this.  The majority would probably prefer this stress-free environment.  Overall happiness would be higher than in a classroom where students compete for grades.  Does anybody think though that the students would learn more in a class without grades?

Economics is a field where we make choices.  Do we prefer an economy that grows and progresses but produces stress?  Do we prefer an economy that keeps most people mired in poverty but produces less stress?

If you found these segments interesting, I recommend that you read “Basic Economics” by Thomas Sowell.   You will find some of what I said embodied in his work while some are my own extensions based upon the Sowell’s concepts.

Sources:

http://www.heritage.org/index/ranking

http://books.google.com/books?id=s-YPDQIlJAYC&pg=PA181&lpg=PA181&dq=chile+vs+honduras+happiness&source=bl&ots=Yyw1i2TRBg&sig=Supf4_aN6mBj_bZ8PZ8lTf_0ma0&hl=en&sa=X&ei=NttvU87VItSmyASy34KwDA&ved=0CCYQ6AEwAA#v=onepage&q=chile%20vs%20honduras%20happiness&f=false

http://www.telegraph.co.uk/news/8198810/Money-really-doesnt-buy-happiness-in-the-long-term-at-least.html

http://www.federalreserve.gov/BoardDocs/Speeches/2003/20031211/default.htm