Archive for the 'Current Events' Category

ACT now!!

jamiewhyteIf you like The Big Questions, you really ought to know my brash and brilliant friend Jamie Whyte. After a brief but dazzling career as a philosopher at Cambridge university (he once won the prestigious Analysis prize for the best article by a philosopher under 30), Jamie distinguished himself as a management consultant, a foreign currency trader, and, via his frequent writing, an incisive and steadfast defender of rational thought and individual freedom. His little book on Crimes Against Logic delivers brilliantly on its promise to “expose the bogus arguments of politicians, priests, journalists and other serial offenders”, and his recent collection Free Thoughts (which, true to its title, you can read for free) is essential fare for anyone who cares about clarity of thought — or, because Jamie is as funny as he is brilliant, anyone who’s just looking for a good chuckle.

Now, in his most startling career twist yet, Jamie has become the leader of a political party in his native New Zealand — the ACT party, named for its forerunner, the Association of Consumers and Taxpayers. ACT stands unabashedly for individual liberty, the rule of law and the enforcement of well-defined property rights. It campaigns against corporate welfare. It’s even pro-immigration. And thanks to New Zealand’s system of proportional representation, it actually gets representatives into parliament.

After several years of turmoil, the party turned to Jamie’s leadership in February of this year. With the boundless energy that inspires awe in everyone he meets, Jamie is re-building the party and promoting a principled free-market agenda in the run-up to the September 20 general election.

actThe downside of being a principled politician — and the reason they’re almost vanishingly rare — is that it’s hard to raise funds when you won’t cater to special interests. ACT opposes both corporate welfare and legal favoritism for union members, which cuts out most of the usual big donors. Here’s where you can help, and I hope you will.

Never before (and, I expect, never again) have I encouraged my readers to support any political party with their votes, let alone their dollars. That’s because I’ve spent my adult life being seduced and abandoned by politicians who talked a good game and then caved in to expediency when the chips were down. But Jamie — and therefore ACT — is different. I know him as a friend, and I know that principles are his passion.

You can help make ACT’s vision a reality by visiting the donation page and giving generously. Remember that a New Zealand dollar is worth about 88 cents U.S., so if you’re an American, a “$100 donation” is actually $88.

A little more background on New Zealand:

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Nanosteps

In a nanostep for freedom, the Supreme Court this morning protected a small number of Americans from being forced by Congress to buy contraception insurance that they do not want. In a somewhat larger step backward, that small number of Americans were not chosen randomly, but instead were selected according to the religious beliefs of their employers. Whether this bodes well for future progress remains to be considered.

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The Free Marketeers

Yesterday’s brief post raised an eyebrow over a congressional candidate who manages simultaneously to call himself a “free-market economist” and to support strict controls on immigration. Here are a few more words for those who don’t quite see the problem.

First, I can imagine two possible meanings for the adjective “free-market”. Either it means you place a high value on freedom as an end in itself or it means you believe that freedom is, in general, a highly effective means to other ends you care about, like prosperity or security. I happen to be a free marketeer in both senses, though I can easily imagine being a free marketeer in either sense alone.

I see my preference for freedom as an end in itself as being similar to my preference for well done meat — you either share that preference or you don’t, and if you don’t, we’ll just have to agree to disagree — there’s no right or wrong here. One exception: If your preferences strike me as inconsistent — if, that is, you seem to make a lot of choices that indicate a strong preference for freedom while denying that freedom is terribly important to you — then I’m apt to point to that inconsistency and suggest that you might want to think a little harder about what your true preferences really are. That was the thrust of what I once tried to do in a book called Fair Play, where I suggested that the choices we make as parents often reveal values contrary to those we express in the voting booth — and that by reflecting on those choices, we might become more thoughtful voters.

On the other hand, if you doubt that freedom is an effective means toward prosperity, then I’m pretty sure you’re just wrong, and that if you thought about it harder you’d change your mind. A lot of my other writing has tried to explain how to think about it harder, and to demonstrate that this is a subject where hard thinking can be fun.

Now I’m not sure in which sense our congressional candidate considers himself a free marketeer, but surely if you’re a free marketeer in either sense, you’ll tend to endorse statements like these:

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Veterans Affairs

Suppose you’ve just joined the army and expect to serve for, oh, say, four years before returning to civilian life.

Which would you rather have when you get out: a lifetime-guaranteed annual check for $7500 (adjusted each year for inflation) or a package of VA benefits?

To help you decide: The VA benefits include payments of anywhere from about $100 a month to almost $3000 a month in the unlikely event that you are partially or fully disabled, a pension on the order of $15,000 a year in the more unlikely event that you are both disabled and poverty-stricken (rising to more like $20,000 a year if you need regular aid and attendance), educational benefits under the GI bill, and health care of whatever quality the government chooses to provide.

Me, I’d take the guaranteed $7500-a-year in a heartbeat. If that’s the typical response, then it’s hard to see why we have a Veteran’s Administration in the first place, seeing as how the VA’s annual budget would just about cover those payments.

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The Rising Tide

So the Obama administration has released a climate forecast, according to which Miami could be under water by the end of the century. Apparently we’re supposed to be very concerned about that.

To put this in perspective, we’ve currently got about 140,000,000 square miles of ocean on this planet — about 71.066% of the earth’s surface. Add Miami’s 35 square miles and that goes up to 71.066007%. You could add all of South Florida and barely notice the difference.

Here’s what Jeff Goodell of Rolling Stone says about that:

Of course, South Florida is not the only place that will be devastated by sea-level rise. London, Boston, New York and Shanghai are all vulnerable, as are low-lying underdeveloped nations like Bangladesh. But South Florida is uniquely screwed, in part because about 75 percent of the 5.5 million people in South Florida live along the coast.

What Mr. Goodell appears to overlook is that of the 5.5 million people now living in South Florida, approximately zero will be alive a hundred years from now, and those that are will presumably have had the sense to move inland well before the water reaches their breastbones.

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High Frequency Rentseeking

Spread Networks recently spent $300 million to build a fiberoptic cable that will let Wall Street traders shave .003 seconds off their execution times.

What’s the social value of that cable? If you can shave .003 seconds off the time it takes to execute a trade, how much good have you done the world?

Clearly, the full value of the cable resides in its ability to get things done faster. So start with a vast overestimate: Suppose the entire economy is on hold waiting for that trade to be completed. Then, thanks to the cable, we can all get on with our lives .003 seconds sooner and produce an extra .003 seconds worth of output.

In a $15-trillion-a-year economy, that comes to about $1500.

If we assume, more realistically, that just 1/1000 of the economy is hanging fire waiting for this one trade, the social contribution of a .003-second speedup is roughly $1.50. I’m confident it’s even more realistic to replace that 1/1000 with 1/1,000,000 . That gets us down to about an eighth of a cent.

But chances are you’d be willing to pay a hell of a lot more than an eighth of a cent for that extra speed, which is why Spread Networks is willing to pour $300 million into this thing, and why, quite generally, we should expect there to be more invested in such projects than they return in social value.

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Krugman Versus Keynes

Remember Paul Krugman? You know, the guy who thinks we’re so deep in a liquidity trap that pretty much all spending is good spending, even if it’s socially wasteful?

Well, here’s something odd. That very same Paul Krugman is outraged to the core by expenditures on fiberoptic cables to support high frequency trading — expenditures that I happen to agree represent a giant social waste.

“We’re giving huge sums to the financial industry for little or nothing in return”, gripes the very same Krugman who thought it was a swell idea to stimulate the economy through hundreds of billions in government spending, whether or not we got anything in return.

It’s true that Keynesian economists have reasons to believe that wasteful spending is sometimes good. But honest Keynesian economists tend to acknowledge that those reasons apply equally well to both private and public spending.

Krugman’s view, apparently, is that, at least in the current climate, wasteful spending is good as long as you’re spending taxpayer’s money, but bad if you’re spending your own money. That’s not Keynesianism. It’s just crankiness.

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The Arithmetic of Wage Gaps

Mark Perry and Andrew Biggs argue in the Wall Street Journal that

These gender-disparity claims [the claims that women are paid 23% less than men for the same work] are also economically illogical. If women were paid 77 cents on the dollar, a profit-oriented firm could dramatically cut labor costs by replacing male employees with females. Progressives assume that businesses nickel-and-dime suppliers, customers, consultants, anyone with whom they come into contact — yet ignore a great opportunity to reduce wages by 23% [by hiring women instead of men].

Well, first of all, even if we take the gender disparity claims at face value, this doesn’t add up to an opportunity to reduce wages by 23%. Only about half the work force is female, so the average firm, if it replaced all of its men with women earning 23% less, would reduce its wage bill by only about 11.5%.

Beyond that, the Perry/Biggs argument appears to founder on the observation that lazy and incompetent managers do in fact manage to ignore profit opportunities all the time. Why, then, is it so hard to imagine that they’re ignoring this one?

Fortunately, I’m here to fill the gap —- by figuring out just how big a profit opportunity we’re talking about.

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Re Arizona

I realize I’m late to the party, but here are a few thoughts on Arizona Senate Bill 1062:

1) A law allowing people to pick and choose whom they want to transact with would be a very good law. Not as good as eliminating the other laws that make this law necessary, but still a big improvement over the status quo.

2) Senate bill 1062, however, was not that law. Instead it was a law allowing people to pick and choose who they want to transact with provided they have (or claim to have) a religious basis for their preference.

3) This raises the question of how we should feel about good laws that exempt only the politically favored from onerous requirements of other laws. How should we feel, for example, about a law that allows only white people, or only black people, or only Muslims, or only art history majors to practice cosmetology without a license — while continuing the status quo for everyone else?

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Block Heads

walterblockThe righteously irrepressible Walter Block has made it his mission to defend the undefendable, but there are limits. Chattel slavery, for example, will get no defense from Walter, and he recently explained why: The central problem with slavery is that you can’t walk away from it. If it were voluntary, it wouldn’t be so bad. In Walter’s words:

The slaves could not quit. They were forced to ‘associate’ with their masters when they would have vastly preferred not to do so. Otherwise, slavery wasn’t so bad. You could pick cotton, sing songs, be fed nice gruel, etc. The only real problem was that this relationship was compulsory.

A group of Walter’s colleagues at Loyola university (who, for brevity, I will henceforth refer to as “the gang of angry yahoos”) appears to concur:

Traders in human flesh kidnapped men, women and children from the interior of the African continent and marched them in stocks to the coast. Snatched from their families, these individuals awaited an unknown but decidedly terrible future. Often for as long as three months enslaved people sailed west, shackled and mired in the feces, urine, blood and vomit of the other wretched souls on the boat….The violation of human dignity, the radical exploitation of people’s labor, the brutal violence that slaveholders utilized to maintain power, the disenfranchisement of American citizens, the destruction of familial bonds, the pervasive sexual assault and the systematic attempts to dehumanize an entire race all mark slavery as an intellectually, economically, politically and socially condemnable institution no matter how, where, or when it is practiced.

So everybody’s on the same side, here, right? Surely nobody believes the slaves were voluntarily snatched from their families, shackled and mired in waste, sexually assaulted and all the rest. All the bad stuff was involuntary and — this being the whole point — was possible only because it was involuntary. That’s a concept with broad applicability. One could, for example, say the same about Auschwitz. Nobody would have much minded the torture and the gas chambers if there had been an opt-out provision. And this is a useful observation, if one is attempting to argue that involuntary associations are the root of much evil.

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The View From Olympus

Correct me if I’m wrong here:

1) In Russia, there is a law against so-called “gay propaganda”. Reasonable people (including me) consider this a regrettable curtailment of liberty. Some of those reasonable people also believe that it contributes to a culture in which violent acts against gay people are condoned or encouraged. This, if true, is sickening.

2) In Russia, there is also a law requiring most male citizens to serve at least a year in the military. Reasonable people (including me) consider this a regrettable curtailment of liberty. It is widely reported that conscripts are routinely subject to violent hazing that has been characterized as rising to the level of torture. News reports suggest that hundreds of conscripts die every year as a result of this hazing. This, if true, is sickening.

3) Conscription affects far more people than the anti-propaganda laws. In most cases, it also affects them far more severely. (If you doubt this, try asking your friends which they’d prefer: avoiding public discussions of homosexuality or serving a year in the Russian military.) Conscription is therefore, on both counts, the (far) greater outrage.

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State of the Union

I’m leaving this one up to my readers. What was the most egregious moment?

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Vocabulary Lesson

So…Democrats want to increase federal spending. Republicans supposedly want to decrease federal spending. The “compromise” is to increase federal spending by $45 billion.

I do not think the word “compromise” means what these people seem to think it means.

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Blast from the Past

With minimum wages in the news, one of my old posts on the subject has been getting a lot of hits lately. Unfortunately that post is quite long and the key points come near the end — past the point where I suspect a lot of people might stop reading. So here I’m excerpting what I consider the main ideas:

1. If we’re going to transfer income to low-wage workers, it’s both fundamentally unfair and politically unwise to put the entire burden of that transfer on a relatively small segment of the population (namely the owners and customers of businesses that employ a lot of low-wage workers). The right thing, given that we’re going to make this transfer, is to fund it as broadly as possible — say through an increase in the Earned Income Tax Credit, which comes out of general tax revenues.

2. I used the phrase “fundamentally unfair and politically unwise”. I’ll expand on both points, starting with fairness. When we collectively want a whole lot of 18-year olds to form an army, do we put the entire burden of that desire on people who happen to be 18 years old, by conscripting them at zero wage? Or do we think it’s fairer for those of us who enjoy the protections of that army to bear the cost through the tax system? When we collectively want to convert farmland to parkland, do we put the entire burden of that desire on people who happen to own farms, by taking their land without compensation? Or do we think it’s fairer for potential park-goers to pay for that land through the tax system? When we collectively want to raise the wages of unskilled workers, should we put the entire burden of that desire on those who happen to employ unskilled workers? Or is it fairer for those who have collectively made this decision to share the burden?

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Minimum Insight

Paul Krugman argues that:

  1. Hiking the minimum wage has little or no adverse effect on employment
  2. and therefore

  3. A minimum-wage increase would help low-paid workers, with few adverse side effects

.

In other words, Krugman, not for the first time, is peddling the sort of claptrap that few of us would accept from a college freshman.

The first point — that hiking the minimum wage has little effect on employment — is an empirical one. Not all smart observers agree with Krugman’s reading of the data, but many do — so for the sake of argument, let’s assume he’s right about that.

The question now is: How the hell do you get from point 1 to point 2? Answer: Only by forgetting the most basic principle of economics, which is that things have to add up. If the minimum wage has no effect on employment, then it’s basically a pure transfer of resources. Which means that the costs and the benefits are equal. The only way there can be “few adverse side effects” —- i.e. few costs — is if there are few benefits. Our job as economists is to make sure people understand such things.

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A Little Knowledge is A Dangerous Thing

Sent by a reader:


(Click to enlarge.)

Some questions for the economics students:

  • Which vertical line segment illustrates the carbon tax revenue?
  • Which vertical line segment illustrates the compensation paid by the government?
  • Where does the difference come from?
  • What difference would it make if you changed the axis labels from “Polluting Products” and “Non-Polluting Products” to “Watermelon” and “All Things That Are Not Watermelon”?

Answers below.

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False Imprisonment

The frequently insightful and usually accurate Megan McArdle gets this part quite completely wrong in her latest Bloomberg column about ObamaCare:

Democratic politicians and insurers are locked in a prisoner’s dilemma. In this classic game-theory case, you and a professional associate are both arrested for theft. If neither of you talks, then you’ll probably get off. But if just one of you talks, then the person who talks will get a reduced sentence, while the other person has the book thrown at them. If you both talk, then both of you go to jail for a long time. The equilibrium is for both of you to talk, just in case the other guy does .

I sincerely hope that anyone who’s ever taken my Principles of Economics course — or for that matter, any Principles of Economics course — can explain to McArdle how wrong this is, and why.

Exercise for the reader: To what extent, if at all, does this howler undermine the larger point of McArdle’s column?

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Obama Did Not Lie

Say you’re planning a vacation trip to visit the castles of England. You’re thinking maybe you’ll see a castle a day, with lots of time for leisurely drives and exploration in between. Your spouse, meanwhile, has drawn up a rigid schedule that will get you to twenty sites in seven days. In the course of trying, gently, to point out how impractical this is, you ask: “But how can we possibly make it from Harlech to Alnwick in under two hours?”. Your spouse, fed up with this discussion, replies: “We’ll take a rocket ship, okay?”

Actually, of course, your spouse knows perfectly well that you won’t be taking a rocket ship. So: Have you just been lied to? It seems to me that you clearly haven’t been. A lie requires an intent to deceive. You have, perhaps, been treated with contempt, and that can be just as unpleasant as a lie. But it’s not a lie. In order to lie, you’ve got to have some chance of being believed.

When President Obama said that he could provide health care to millions without taking any health care away from people who have already got it, he had no chance of being believed. The statement was absurd on its face. This is a law of arithmetic: If you invite a bunch of friends to share your lunch, there’s going to be less lunch for you. Everybody understands that.

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What Went Wrong

Okay. I’ve never worked as a tech geek, so I’m speculating from ignorance here. Some of you can probably speak with more authority. Perhaps we’ll hear from the reliably acerbic and insightful Doctor Memory, who knows whereof he speaks on this subject (and several others). But to my uneducated eye, it appears that Arnold Kling has got this pretty much dead-on right: The Obamacare mess “is not a technical screw-up, and it will not be fixed by technical people. It is an organizational screw-up.”

What you had here, among other things (and almost of this is paraphrasing Kling) is:

  • A bunch of people who had never worked in the insurance business appointing themselves executive officers of the world’s largest insurance brokerage.
  • Nobody at the top with the authority to trim features as needed to keep the project manageable.
  • No mechanism for the technical staff to challenge the managers, because all of the management decisions were essentially set in stone before the technical staff — i.e. the outside contractors — came on board.
  • No clear lines of authority and acceptability.

Private enterprises frequently fail, often for one or more of these reasons. But sometimes they succeed, and that’s largely because sometimes they get this stuff right. The government, by contrast, has no mechanism for getting it right. The people at the top are not industry experts, the features are largely determined by the legislative process, which takes place with absolutely no feedback from the tech geeks who are going to have to implement it, the political system pretty much forces you to put the technical part of the project out for bid and to parcel it out among multiple contractors, eliminating any possibility of ongoing negotiation between the managers and the techies, and on top of all that, nobody’s livelihood is on the line.

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Lying Low

Faithful readers of this blog might remember the despicable antics of Senator Sheldon Whitehouse, who, in a televised hearing last June, spent eight excruciating minutes impugning the honesty of a young economist named Salim Furth — because Furth had presented actual data that contradicted a bunch of numbers Whitehouse had made up out of whole cloth. For those who need a refreseher, the entire sordid story — including Paul Krugman’s reprehensible piling-on to Whitehouse’s McCarthyite smear — is here with a follow-up here.

Well, it turns out that Senator Whitehouse is no more interested in understanding the numbers today than he was last June. Last week, the Heritage Foundation held a symposium on the effects of austerity and what the data actually show — the precise data that Whitehouse disputed. In addition to Furth, who has continued his meticulous research on the subject the speakers included illustrious scholars such as Harvard Professor Alberto Alesina. Heritage sent personal invitations to Senator Whitehouse’s staff and to the various journalists who screwed up this story by reporting Whitehouse’s made-up numbers as accurate and his smears as justified.

The result? None of them showed. Apparently Senator Whitehouse’s passionate interest in the austerity numbers tends to cool off when he can’t hog the spotlight, or might risk learning something.

Meanwhile, if you care more about this subject than Senator Whitehouse does, you might want to look at Furth’s most recent report on the subject, or at the data set he’s posted online, or at his most recent blog post calling Paul Krugman to account for misinterpreting some of these numbers.

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Six Observations

Do correct me if I’ve got any of the history wrong here:

1. It seems pretty likely that a big part of the reason why Amazon’s website works so well and Obamacare’s website works so poorly is that Obamacare, unlike Amazon, is not subject to the discipline of the market (and therefore, for example, employs coders with no equity in the enterprise).

2. A whole lot of people predicted that the Obamacare bureaucracy would not work well because it would not be subject to the discipline of the market. I’m not sure anyone pointed to the webpage as a particular point of vulnerability, but plenty of people made the general observation that large government bureaucracies don’t work well and that this was a reason to be skeptical of Obamacare.

3. Paul Krugman pooh-poohed those concerns.

4. Paul Krugman reminds us approximately 914 times per month that only a very bad person would fail to acknowledge accurate predictions of his adversaries. (It’s true that in approximately 914 of those 914 cases, the vindicated adversary is Paul Krugman. But he has indicated support for the general principle.)

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They Got It Right

I have no time to blog at length, but Fama, Hansen and Shiller are brilliant choices.

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The Compassionate Science

I’ve said this before and will say it again: Part of the reason I love economics is that economics is the compassionate science. It’s the discipline that requires us to think hard and to care about how policies affect everyone, not just the people who happen to be standing in front of us.

The response to the government shutdown has been as good an example of this as any. Nothing but a garguntuan failure of empathy can explain the chorus of voices insisting that the shutdown is a bad thing because government employees might lose their paychecks. It takes a mighty powerful set of moral blinders to care so much about the recipients of those checks and so little about the taxpayers who fund them.

It gets even uglier when that same chorus of voices responds “But the government employees are poor and the taxpayers are rich!”. Put aside the question of whether that’s true. If your goal is to transfer money to the poor, and if the poorest people you can think of are government employees, then the well of your compassion is truly dry.

Argue if you must for transferring income from the rich to the poor. But to turn that into an argument for transferring income from the taxpayers to the employees of the government, there are a couple of billion poor people you’ve got to willfully ignore.

When I blogged about this issue earlier this week, we had one commenter — a personal friend, actually, and someone I’ve been surprised and delighted to see showing up in our comments section from time to time — who broke my heart by pointing to the pain of Capitol Hill coffee shop owners who are losing business, apparently oblivious to the fact that taxpayers also visit coffee shops, and that for every dime not being spent by a DC bureaucrat, there’s an extra dime available to be spent by a Nebraska farmer or a New York cab driver. Our commenter apparently remembered to care about the guys selling coffee in DC but forgot to care about the guys selling coffee in Nebraska.

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The Sky Won’t Fall if the Ceiling Holds

Paul Krugman proffers a trademark sneer to the “default deniers” who are “asserting that the government can prioritize, so as to avoid a default on interest payments”. Not so, says Krugman, who insists that

The crucial point here is that even if they’re right about interest payments — which is unclear — the government will (a) still go into default on obligations to vendors, Social Security recipients, and so on (b) be forced into spending cuts so large as to guarantee a recession if the standoff lasts any length of time.

Well, first of all, as I wrote the last time the debt ceiling got raised, it’s easy to cover all of the interest on the national debt via spending cuts. At least to a rough approximation, you could do it by eliminating the Departments of Commerce, Agriculture and Labor, none of which should ever have existed in the first place.

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The Sin of Wages

How dire is a government shutdown? Respectable people have made respectable arguments on all sides of that issue. But there’s nothing respectable about the chorus of voices pointing to the pain of furloughed government employees — and pretending this is a reason to end the shutdown, whereas it’s clearly a reason to prolong it.

The more painful the furlough, the more overpaid the worker must have been in the first place. People who are paid fair market wages don’t get nearly so upset about losing their jobs — or losing a few weeks of work — as do people who are paid more than their skills reasonably command. Of course there’s always pain associated with an unexpected disruption in your work schedule, even if when your wages are entirely reasonable. But cries of extreme pain amount to admissions that these workers have been ripping the public off for years.

Even without that observation, the pain of interrupted wages cannot by itself be a reason to restart the government, because it is exactly offset by the relief of those who pay those wages.

To make an honest argument in favor of a government operation, you’ve somehow got to point to the social benefits of that operation. In some cases that might be easy. In other cases, it’s hard but possible. But those who shirk the task completely, by focusing not on lost productivity but on lost wages, are just making themselves ludicrous.

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Correcting an Oversight

Listening to talk radio on the way into work this morning (I know, I know, there are better things to listen to, but since Sirius/XM has pretty much made the Broadway channel unlistenable —- something I’ve been meaning to blog about — I’ve been floundering around lately), I heard a gentleman complain that the government shutdown is hurting his business — because nobody’s available to issue the export licenses that he needs to ship goods abroad.

Oddly, it seems not to have occurred to this gentleman that his problem emanates not from the parts of the government that are shut down, but from the parts that aren’t. If the government were really shut down, there’d be nobody to enforce the export-license requirement in the first place.

(And just to anticipate the worst possible misreadings — yes, I am aware that in the absence of any government at all, this gentleman’s business, with its reliance on contracts and property rights, might not exist in the first place. That doesn’t change the fact that his immediate problems are being caused by too much government, not too little.)

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Dispatches From the Front

My government’s been shut down almost 12 hours now. So far, I’m doing okay without them.

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RIP, Ronald Coase

ronald-coase1
Ronald Coase has died at the age of 102. I am therefore reposting, with minor changes, the appreciation I wrote a few years ago for his 99th birthday.

In the theory of externalities—that is, costs imposed involuntarily on others—there have been exactly two great ideas. The first, forever associated with the name of Arthur Cecil Pigou (writing about 1920) is that things tend to go badly when people can escape the costs of their own behavior. Factories pollute too much because someone other than the factory owner has to breathe the polluted air. Nineteenth century trains threw off sparks that tended to ignite the crops on neighboring farms, and the railroads ran too many of those trains because the crops belonged to someone else. Farmers keep too many unfenced rabbits when they don’t care about the lettuce farmer next door.

Pigou’s solution—and it’s often a good one—is to make sure that people do feel the costs of their actions, via taxes, fines, or liability rules that allow the victims to sue for damages. Do a dollar’s worth of damage, and you’re charged a dollar.

Pigou endorsed this policy not because it seems fair, though it does seem fair to many, but because it yields, under what he believed to be very general conditions, the optimal amounts of damage. We don’t want too much pollution, but we don’t want too little, either, given that pollution is a necessary by-product of a lot of stuff we enjoy. Pigou offered a proof—now standard fare in all the textbooks—that his policies lead to the perfect compromises, in a sense that can be made precise.

The second great idea about externalities sprang full-blown from the mind of a law professor and subsequent Nobel prize winner named Ronald Coase, who stunned the profession in 1960 by pointing out that Pigou’s argument runs both ways. If you breathe the pollution from my factory, I’m imposing a cost on you—but at the same time, you’re imposing a cost on me. After all, if you lived somewhere else, you wouldn’t be complaining about the smoke and I wouldn’t be getting punished for it.

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Sun Burned

This is a picture of Jeffrey Punton, from my hometown of Rochester, New York, standing in front of the solar panels that he installed at a cost of about $42,500. He figures that over the long term, they’ll save him maybe $8000 to $10,000 in power bills. But he’ll only lose a few thousand dollars on the deal, thanks to about $30,000 in government subsidies — in other words, thanks to those of you who pay taxes. He keeps the panels up as a conversation-starter so he can educate people about how little sense these subsidies make.

The story is here.

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Double Standards


Remember last January, when the President said he wouldn’t negotiate with hostage-takers—like the Republican representatives who demanded spending cuts in exchange for raising the debt ceiling? His argument, as I understood it, was that:

  1. A failure to raise the debt ceiling would be unambiguously bad policy.
  2. It is irresponsible to threaten to implement a bad policy just to gain concessions on the spending front.

It’s an argument I expect we’ll hear again, next time the debt ceiling comes up.

And what’s the President up to in the meantime? He’s demanding a new round of spending increases in exchange for corporate tax reform. Now, since pretty much every sentient being in the Universe agrees that we’re long overdue for corporate tax reform (and in particular for lower rates), I think it’s fair to characterize the President’s position as a threat to retain a bad corporate tax policy just to gain concessions on the spending front.

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