Santiago, Chile, is a city of more than 5 million people, with one of the highest standards of living in Latin America. In the latest episode of EconTalk, host Russ Roberts of George Mason University talks to Mike Munger of Duke about the city’s mass transportation system. In the middle part of the last decade, Santiago featured a flourishing system of private buses, with more than 3,000 companies offering quick and inexpensive transportation all over the city and mostly managing to turn a profit. The system was not without its flaws, however. The buses emitted a great deal of pollution, and overzealous bus drivers often caused accidents or hit pedestrians in efforts to pick up passengers before their competition.

Such problems led the government to scrap the private system in favor of a public one in 2007, and Munger explains how this led to far worse outcomes on pretty much every measure. The average commute for a mass transit rider immediately skyrocketed from 40 minutes to an hour and 40 minutes. This encouraged more people to drive or use small taxi services, feeding a vicious cycle. Furthermore, because bus drivers are paid based on how often they are on time, they have no incentive to stop for passengers at bus stops if they are running late. The extremely lengthy lines for buses routinely lead to pushing and shoving to board and fights often break out. Although the public system was specifically designed to solve safety problems in the private system, the number of wrecks actually increased because the city purchased extra long bendy buses, which require two lanes to turn, so cars frequently crash into them. Finally, the system as a whole went from running a profit of $60 million to requiring a government subsidy of $600 million — more than $100 for every resident of Santiago.

Munger argues that the problems with the private buses could have been solved relatively easily without resorting to socializing the system. A very minimal licensing requirement could ensure that the buses do not emit excess levels of pollutants, and the enforcement of property rights in private bus stops has been shown to prevent buses from driving recklessly to swipe passengers out from under the competition. Although Saint Louis and Kansas City do not have the same level of demand for bus services as Santiago, the city has shown that government ownership is not necessary for a decent mass transportation system.

Many problems in public policy are government-created, and the best solution is not more government. Unfortunately and predictably, solutions involving more government will be supported by groups that are short-sighted and will benefit directly from them.

As the latest illustration of this, biodiesel producers in Missouri are calling for extending the $1-per-gallon biodiesel blender’s federal tax credit. In its Friday issue, the St. Louis Business Journal published two articles that profile a struggling biodiesel plant as it waits for extended handouts from the government.

Meanwhile, there exists a lack of demand for biodiesel in the market, and the government has responded by setting a mandate to create an artificial level of demand. From one article:

Environmental mandates that require oil companies to blend petroleum-based diesel with minimum levels of biodiesel [...] have increased demand, and therefore prices, for biodiesel and helped offset the loss of the expired tax credit.

The problem with mandates and production subsidies like those for biodiesel is that the government is encouraging energy producers to invest in an infrastructure that is neither efficient nor cost effective. Residents of Missouri and other states could achieve higher levels of utility if government stayed out of the market and allowed the profit-and-loss system to allocate resources. As another positive consequence of eliminating handouts to biodiesel producers, fewer resources would be distracted from the development of other alternative energies that are perhaps more viable.

There has been some great talk in the blogosphere about occupational licensing over the past week. Matthew Yglesias began the discussion, and Conor Friedersdorf, guest hosting at Andrew Sullivan’s Daily Dish, has joined in. I may be a few days late to the discussion, but I can ascribe that to two words: State Fair.

While some of the larger national think tanks regularly take on this issue, we here at the Show-Me Institute cover occupational licensing more than most other state-based groups. It is great to see people engaged in the conversation, and I hope they enjoy getting punched in the face as much as I enjoy throwing the punches.

There really isn’t a more accurate example of democratic failure than occupational licensing. It is public choice economics at its most concise. A small group of people stand to gain financially from a very narrow policy action, and passionately advocate for it. A large group of people stand to be harmed very marginally from that same issue and so don’t care about it enough to spend time and effort becoming informed and fighting back. Politicians measure the gains for them to be made from satisfying the small group (campaign contributions, union support, etc.) versus the fallout from harming the larger group (there’s generally no fallout), and — voilà! — an entire industry becomes regulated with a few votes and the stroke of a pen, while the only person who shows up to complain about it is some jerk like me. You grandfather in the existing practitioners (or exclude only a small portion of them), and put the screws to future practitioners and the general public, neither of whom realizes at the time that anything is going on.

The purpose of licensing is always the economic gain of those practicing the occupation to be licensed (the regulatory push never comes from the outside — always the inside), but advocates are usually smart enough not to say that. Instead, the arguments actually advanced in favor of licensing are twofold: safety and search costs. The safety argument might be legitimate for a few professions (i.e., drug testing for school bus drivers) but very quickly devolves into a love of the nanny state — unless you really believe that the threat of a bad haircut actually involves your “safety.”

The search costs argument was always wildly overstated. It assumes that we need the state to license heart surgeons, for instance, so you don’t have to check references on your own while you are having a heart attack. (This is sort of a bad example, given that I think doctors and nurses may be one field in which the benefits of licensing outweigh the costs, but stick with me.) This general argument fails in that the employer is unlikely to have hired an unqualified person in the first place (the hospital probably confirmed that the doctor graduated from medical school), and how often do people really hire someone cold? You get references for plumbers, electricians, pediatricians, etc., from family, neighbors, or friends who have used those people before, and who are willing to recommend them. License or no license, reputation and referrals are what keep people in business, or drive them out of it.

The scam artists who successfully operate in the underground economy and show up at your house to do the roofing right after the straight-line wind blows the shingles off won’t be stopped by licensing laws. Even if I thought licensing laws protected consumers by limiting scams, I still don’t favor giving the government more power over our economic lives and taking the responsibility away from individuals to make better choices by checking references, calling the Better Business Bureau, etc. Others might disagree, but the evidence that licensing improves quality and protects the public is lacking.

I could go on, but this post is long enough. It is great to see people participating in this debate. Now, as they told me during my very brief boxing career, keep your hands up. …

Are people inherently born with the right to an important and well-paying job? How about a decent house? The author of a recent article in the St. Louis Beacon certainly thinks so. He advocates a larger government role in job creation and cites Franklin D. Roosevelt’s “Second Bill of Rights,” or a similar economic bill of rights, as the prism through which the entire economy should be viewed.

FDR’s Second Bill of Rights includes:

The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;

The right to earn enough to provide adequate food and clothing and recreation;

The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;

The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;

The right of every family to a decent home;

The right to adequate medical care and the opportunity to achieve and enjoy good health;

The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;

The right to a good education.

The framers of the Constitution saw the need for a Bill of Rights as a means of protecting the people from an overbearing and oppressive government. They drafted a bill of negative liberties, or protections that define what the government cannot do. They gave no guarantee of housing, food, or employment because they saw the dangers that the notion of positive rights pose as a potential threat to liberty — the idea that, just by being born, people are entitled for others to provide them a comfortable life.

Because the government does not produce any wealth, even the most basic obligation to one individual must be paid for by taking from another. In order to guarantee one person a profitable job, a decent home, or adequate food, wealth must first be taken from those who have rightfully earned it, infringing on their liberty to do as they wish with their own money.

Unfortunate individuals who receive assistance do not receive those benefits because it is their inalienable right, but because it is irresponsible to let them starve or freeze in the streets. No one is entitled to anything that is not their own, no matter how basic of a necessity; however, it is the responsible duty of able individuals to help those in need through their charitable impulses.

Although the end result may be the same, in terms of the needy receiving necessary aid, there is a stark distinction between an unalienable right to something and the responsibility of an able man to care for their fellow man. The difference can be summed up in one word: liberty. The liberty of every individual to do as he pleases with his own money and resources. Although it is repulsive — and, at the very least, irresponsible — for an able individual to let those less fortunate starve, I have no right to infringe upon their liberty to do as they please with their own money.

This is by no means an argument against all government assistance. Obviously, the government cannot allow its citizens to starve or children to live on the streets, homeless. Rather, my objection is with the larger issue of entitlements justified through a notion of positive rights. When fully implemented positive rights lead to socialism, a concept that has been tried and found ineffective at growing economies, raising standards of living, or even helping the very poor. To paraphrase Margaret Thatcher, “The trouble with Socialism is that eventually you run out of other people’s money.”

According to the Saint Louis Business Journal, the Illinois state government pledged a $2.3 million business investment package to help Boeing open a manufacturing plant at MidAmerica Airport in Mascoutah, Ill.

Additionally, the article reports that “Boeing is Missouri’s largest manufacturer.”

I worry that this fact will mean that the Missouri state government will offer retaliatory tax incentives to Boeing in order “to keep these jobs in Missouri.” Economic development is not a zero sum game, and states should hesitate to view each others’ economic growth with antagonism. Both Missouri and Illinois will be better off if they specialized and engaged in mutually-beneficial trade instead of spending taxpayer money to compete over the same activities. Government intervention in interstate trade hurts business and discourages economic growth, defeating its ostensible intended purposes.

I also want to point out that Illinois is spending $2.3 million for 75 jobs, which is an expenditure of nearly $31,000 per job. This means that the project is already in the hole by this amount, plus deadweight loss.

Furthermore, Boeing and the state government may say that these 75 jobs are new. However, even if they are created as a consequence of the subsidy, they are not really new. This is because they represent the jobs that were destroyed by the $2.3 million that was taken from the taxpayers of Illinois.

Last Friday, I travelled to the 108th Missouri State Fair in Sedalia, for my shift at the Show-Me Institute’s booth, fully prepared to engage in conversation with Missourians about how state and local governments create barriers to the free exchange of goods and services. I expected to field some tricky questions about whether the Show-Me Institute has partisan affiliations — we have none — or about pending, unaffiliated ballot initiatives, but I did not meet a single Missourian who wanted to know about either of these matters. Instead, I got tripped up by a seven-year-old’s query, “What is the smallest town in the state?”

Had the child asked which of Missouri’s 115 counties has the highest rate of tax abatement as a percentage of total real property assessed valuation, I could have provided an answer. Had he inquired about the intricacies of state supplemental tax increment financing, I would have jumped at the chance to describe its function and effects. I certainly would have had something to say about state spending for historic preservation or the myths of downtown “revitalization” in St. Louis. But I did not know the answer to the question, “What is the smallest town in the state?”

I promised my questioner that I would get back to him after consulting the Census, so, without further ado, here is the answer to the trickiest question from Sedalia:

Goss Town, population one, in Monroe County, population 9,311, is the smallest town in the state.

If you have a question for the Show-Me Institute, please feel free to stop by our booth in Sedalia for the remainder of the fair, or place a comment on the blog.

I just want to remind everyone that today, at 6:00 p.m., the Show-Me Institute will be hosting a panel discussion with Liberty on Tour and the American Civil Liberties Union (ACLU), about recording the police. Recently, individuals in Maryland, Illinois, and Massachusetts have been arrested for filming either their or others’ arrests. In Maryland, police raided a motorcyclist’s home after he had posted video footage of a traffic stop on YouTube. Anthony Graber, the motorcyclist, faces up to 16 years if convicted of violating Maryland’s wiretap laws. The Illinois legislature has explicitly made it illegal to record an on-duty police officer without his or her permission. A man arrested for filming an arrest in Boston has recently filed suit against the city.

This panel discussion is our attempt to explore the issues of liberty at stake, as well as provide the opportunity for anyone who is interested to meet the panelists and to ask questions.

The discussion will begin at 6:00 p.m. TODAY at the Show-Me Institute’s office at 4512 W. Pine Blvd in the Central West End of Saint Louis.

The event is free, and snacks will be provided. However, because Liberty on Tour is traveling across the country, we suggest a $5 to $10 donation to help pay for the group’s travel costs.

Our star-studded panel includes:

• Adam Mueller and Pete Eyre of Liberty on Tour, a project to tour 13 cities in 13 weeks to talk about the principles of voluntaryism. Adam is also a founder of Cop Block, an organization devoted to watchdogging police officers who break the law. Pete Eyre currently works for the Future of Freedom Foundation, which advocates for individual liberty, free markets, private property rights, and limited government. Both Adam and Pete were part of the Motorhome Diaries project.
• Redditt Hudson, of the ACLU of Eastern Missouri. Redditt is a former Saint Louis police officer, and part of his work at the ACLU is to lead workshops that educate people about their rights under the law, including practical advice about how to interact with the police.
• John Payne, a research assistant at the Show-Me Institute, will be moderating the discussion. John has argued for greater transparency and recording of SWAT raids in Missouri, and follows issues of civil asset forfeiture closely.

If you have the time, please drop by, and don’t hesitate to bring questions! The panelists will speak briefly about their perspectives on recording the police, and then we will open up the discussion for questions from the general public. After about an hour of discussion, we will move the group to Sasha’s on Shaw for dinner and drinks.

If you can’t make it, you can send questions you’d like asked to info@showmeinstitute.org, tweet them to @showmeinstitute, or post questions on the event’s Facebook wall. Finally, we will film the discussion and post it online for those who cannot attend.

As the end of the year draws nearer, the expiration of tax cuts passed in 2001 and 2003 also begins to creep over the horizon. As this happens, our federal government continues to spend what seems to be an infinite line of credit. Recent financial and health care reforms bring with them cost estimates that undoubtedly understate true costs. The same can be said about unemployment extensions.

The egregious amount of deficit spending is leaving taxpayers with a sizable bill. The federal government would like the “rich” (those that make more than $200,000 in pre-tax income) to pay a higher proportion of that bill, making them the lucky recipients of a tax rate increase. The politics of the tax cuts have already begun. It seems like an impossible task for Washington to divorce the economics from the politics. At this point in history I’m betting that that those individuals and families in the highest tax brackets will certainly see a tax increase come January.

The president recently said, “There will be no more taxpayer-funded bailouts. Period.” But, as Dan Henninger of the Wall Street Journal points out, “Raising taxes to cut the deficit is a bailout for the spenders.”

I’m beginning to think that an effective training regimen for politicians would include an undergraduate degree in linguistics.

Maybe I am missing something. Maybe classical microeconomics has become outdated and doesn’t adequately reflect decisions in the real world anymore. Maybe the nuance of their arguments is too much for me. Or maybe they’re wrong.

Economists have been developing mathematical equations since the days of Adam Smith, attempting to ascribe reality to a system of variables that can be changed and tweaked to more accurately reflect what economists empirically see. The problem with these equations is that they are not reality. That being the case, it is best to avoid needless complication.

Someone best illustrated this to me using the game of billiards as an analogy. Hitting the cue ball into the eight ball in an effort to send the eight ball into a corner-pocket requires skill and accuracy. Ricocheting the cue ball off the rail into the three ball which then will kiss the nine ball on its way into the two ball which will subsequently fall into the pocket is an entirely different problem. The more complex the system gets, the more accuracy is required, and initial mistakes are magnified further down the line.

Intertemporal decision making can be a complex problem to study, but most of the world makes such decisions intuitively — we are all practicing economists. The amount available for future consumption is future income plus savings plus the amount of interest earned on savings. If savings are negative, the person is borrowing and must pay back the amount borrowed plus the interest in the second period. This has the effect of reducing future consumption.

Future Consumption: P₂C₂ = M₂ – M₂t + S + iS

This means that today’s purchases change tomorrow’s parameters.

Current Consumption: P₁C₁ = M₁ – M₁t – S

Reality is an integration of these two equations. We do it constantly, and instantaneously most of the time. Income (M₁ & M₂) is a function of spent spent in leisure and work, and wages. People often decide how much they will work based on how much they plan to consume and how long it will take them to achieve the desired amount of income for that consumption (this also allows income to implicitly represent labor decisions in these micro equations).

Enter government, with a budget constraint that looks very similar. What is different is that the government doesn’t have to make labor decisions; it makes taxing decisions, and consumes through expenditures.

Government Expenditures: p₁E₁ = M_G + S

Government Revenue: M_G = M₁t (this form represents an income tax)

Taking from the income produced by others is the government’s only real source of revenue. This has two very obvious implications: 1) Taxation has an obvious impact on private consumption decisions, because it subtracts from real income (this also affects savings and consumption patterns, both now and later); and, 2) tax rates and government expenditure choices signal to the public the likely outcome of future taxation and expenditure decisions. This model of the aggregate economy suggests that eliminating the tax cuts will have deleterious effects on output and employment.

For some reason, Keynesian economists believe they have the power to affect the M₁ variable in this equation on a massive scale. The government is just adding pool balls to the equation. When the government decides to increase expenditures, it also has to increase revenue, by increasing the tax rate (t) now or in the future (after borrowing). This will have a negative effect on personal income, which translates to a decrease in personal consumption. The government has also decided to implement a progressive income tax structure. This means that, as M₁ increases, so does t. Because people tend to make decisions based on marginal welfare at their original consumption pattern, the last unit of consumption is roughly equal to the leisure that a person gives up to work that extra little bit so they can afford that last bit of consumption. With a progressive income tax, or an increase in the tax rate on any person, production is decreased at a marginal rate. When this happens to 300 million people at the same time, we begin to see problems.

The opponents of tax cuts often ask: What is the difference between swelling the public sector and cutting taxes, in terms of the federal government’s deficit? The answer is that they have different compensation structures and lead to different production decisions. Public money doesn’t force firms (whether they are public firms, or private firms contracted by the government) to make marginal decisions that maximize efficiency. Unfortunately, this means that public money is attached to inefficiency margins for anyone accepting it. Raising taxes therefore has a double whammy effect: Private production slows based on marginal decisions, and when it is converted to public money, it integrates inefficiency into each dollar.

Does this sound like a good prescription for an ailing economy?

The St. Louis Business Journal wrote a delightful editorial about the state and federal subsidization of broadband access for rural areas. The article quoted our research analyst, Christine Harbin (you have to be a paid subscriber to read her comment on the Business Journal site):

Some will argue the money could be better spent on education, health care, you name it. Indeed, there are many needs but these federal funds were designated for broadband. The state’s in-kind contribution does not impact the dire budgetary situation or projected $600 million shortfall.

Only the Show-Me Institute, the ultraconservative think tank, finds a reason to object. Research analyst Christine Harbin commented: “If an individual desires faster Internet service, he or she can either pay the market rate for the service or relocate to a larger town in order to access a broadband connection that’s less expensive.”

Of course, we received Ms. Harbin’s remarks via a high-speed Internet connection, and we certainly would not have wanted to miss sharing them with you.

The Business Journal could not have illustrated Christine’s point more succinctly. She, and the Business Journal, have both chosen to locate in the city of St. Louis. This decision entails extra costs, like the earnings tax and a higher cost of living, but it also has some cost-saving benefits, like less-expensive broadband access.

It is more expensive to provide Internet access to rural areas. This does not mean that rural areas should not have Internet access, only that they should shoulder the steeper costs of this service if they want to use it. When Internet access is subsidized, it distorts the market because the lower price leads people to consume more without seeing the true cost. If someone opts for the lower general cost of living in a rural town, she should accept that urban amenities may not be available at as low of a price as they are in more populated urban areas. In the same way that rural areas may be loathe to subsidize an urban area’s mass transit, it is reasonable for urban areas to be loathe to subsidize a rural area’s broadband Internet.

People should be allowed to live where they choose, but that doesn’t mean that everyone else should subsidize them.

While representing the Show-Me Institute at the Missouri State Fair, I took some time to wander around the Missouri Department of Transportation’s Highway Gardens. En route, I unexpectedly encountered Barrel Bob, an anthropomorphic structure of orange construction barrels that is used to incite drivers to reduce their speed in construction zones.

I like Barrel Bob. I am amused to learn that Barrel Bob has been assassinated and kidnapped, and that he has a girlfriend named Barrel Betty. I would not be surprised if Barrel Bob were more effective than distribution of pamphlets or public service announcements at promoting highway safety.

However, I have questions relating to the Highway Gardens. Why does the Department of Transportation own and operate them year-round? Is this an effective method of promoting highway safety with taxpayer funds? Could the money used to maintain the Highway Gardens be put to better alternative uses, such as fixing roads in Missouri?

The Columbia Missourian ran a story earlier this week about allegations of police abuse at a convenience store last fall:

Ricky Gurley has opened up his firm’s private investigative files on a Sept. 28, 2009, incident in which police said area car salesman David Riley, 31, tried to rob an undercover police officer at a gas station and then resisted arrest.

The case concluded Aug. 9 in the 13th Circuit Court of Boone County when Riley took a plea deal of two years in prison for a felony charge of resisting arrest. [...]

According to video recordings and witness statements, Riley, along with local woman Desiree Kemp went to buy beer at the Ultra Mart at 2102 Paris Road. Riley and Kemp were leaving the store when Columbia Police Department Officer Chris Hessenflow started watching Riley. Hessenflow was working undercover with a teenager to see if the gas station was selling alcohol to minors.

Video surveillance from the convenience store, provided by Gurley, shows Riley standing at the passenger door of his car as Hessenflow walks toward the entrance of the store. When Riley noticed Hessenflow looking at him, police said Riley cussed at the officer and demanded his wallet — a claim Gurley said is ridiculous.

“How do you rob a guy from 15 feet away?” Gurley said. “What do you say: ‘Throw me your wallet’?”

The store’s surveillance video shows Hessenflow drawing his gun on Riley. Then, Riley gets on his knees with his hands behind his back, facing away from Hessenflow.

Although the video is partly obscured, Hessenflow can be seen kicking Riley to the ground. That, Gurley said, led an angered Riley to resist arrest when more officers arrived on the scene. Gurley also said Riley was not handcuffed soon enough; handcuffs could have prevented at least some of Riley’s resistance to officers, as well as some of his injuries.

The justice of the arresting officer’s actions hinges on three questions, in my mind. Did Riley demand the officer’s wallet? Did the officer identify himself as a police officer when he pulled his gun? Did the officer use excessive force to restrain Riley?

I strongly recommend that you watch the video for yourself and read Gurley’s two blog posts on the topic, so you can make an informed judgment of evidence on your own, but, to me, the hardest question to answer is the first one. Both Riley and Kemp maintain that Riley said something antagonistic — not a demand for the officer’s wallet, although the officer could have misheard him. As to the second question, however, three witnesses claim that the officer did not identify himself as a member of the police force: Riley, Kemp, and Kendrick Hardrick, who is wearing a bright blue jacket in the surveillance video. Finally, as far as I’m concerned, kicking a man in the torso when he is already on the ground qualifies as excessive force in almost all circumstances. Unless the officer can show evidence that Riley was an imminent threat at that point, he acted inappropriately.

There is probably more evidence from this story yet to surface, and it deserves further investigation.

I am writing from the Missouri State Fair on my second and final day of representing the Show-Me Institute here. I have been impressed by the number of people who claim to agree with our message of less government, but judging by the prevalence of “Fire Pelosi” stickers, I worry that some of this backlash against government spending is based on nothing more than partisanship. However, most of the people who obviously dislike big government — no matter what party affiliation it wears — are vocally pessimistic about our ability to change the government for the better. Although restraining government may look hopeless at times, I believe pro-liberty sentiment is more widespread than we often suspect.