February 22, 2013

February Book Club Recap — The Road to Serfdom

The Road to Serf City by Mary Chism
Drawing done for the February book club meeting by former SMI intern Mary Chism

Last night was obviously Snowmaggedon, and I hope everyone is staying safe out there as some of the roads are still nasty. The previous night, Wednesday, we hosted the second Show-Me Institute Saint Louis Book Club meeting of the year. We discussed the classic The Road to Serfdom, by Friedrich Hayek. The central theme of the book is that fascism is a natural outgrowth of socialist central planning. Hayek’s desperate wish was to warn the western nations, especially England and the U.S., not to pursue the path of central planning. Hayek believed that a descent into fascism was more likely than it seemed to his audience: the citizens of non-fascist western nations in 1944.

But all that just makes the book sound like a dated warning against something no one really advocates anymore, right? Well, the book has staying power because of two timeless features which are perhaps separate sides of the same coin: Hayek explains why the price system not only works, but is the best system possible for maximizing individual welfare while also making a strong case for individual liberty and limited government, which Hayek calls (using the connotation of his time), liberalism.

It was a wonderful meeting and a rousing discussion. Book club meetings start at 7 p.m. and usually wrap up about 8:30 or 9 p.m. But Wednesday’s meeting did not end until shortly after 9:30 p.m. — we all had so much to discuss. Here are some of the topics and ideas we discussed:

  • Whether a person’s concept of what is possible constrains their action.
  • The important distinction between freedom and power: what it is and why it is important that they not be confused.
  • This wonderful quote from Adam Smith (introduced roughly by Hayek): “[the regimentation of economic life puts governments in a position where] to support themselves they are obliged to be oppressive and tyrannical.”
  • Where Hayek drew the line on the proper role of government and how that might undermine his overall message of liberty.
  • Whether market competition is inherently violent (hint: it is not).
  • Whether a legal system is necessary for competition, and David Friedman’s “the discipline of constant dealings.”
  • The contradiction and ugliness of “competitive socialism.”
  • An extended interlude about “Little House on the Prairie.”

The reading for next month is The Machinery of Freedom, by David Friedman, another classic. Friedman is an economics and law professor with a Ph.D. in physics, and the son of free-market titan Milton Friedman. From the Amazon description: “This book argues the case for a society organized by private property, individual rights, and voluntary co-operation, with little or no government.” I am looking forward to some excellent discussion on this one at our March meeting, so please join us if you can (date of meeting to be announced, check here).

January 10, 2013

January Book Club Recap — The Cambist and Lord Iron

Last night, the Show-Me Institute hosted our first book club meeting of the new year. The reading we discussed was a short story by Daniel Abraham called “The Cambist and Lord Iron: A Fairy Tale of Economics.” The story is available free online and conveys some important economics lessons that are not often covered in fiction, such as the idea that valuation is determined by exchange, and that trade creates wealth. It is a short and fun read, and because of our recent changes in book club, I wanted to pick something that had both of those qualities for our first meeting.

Our discussion started with introductions around the table. Among our 10 attendees, some have been attending book club regularly for years, some have come in the past and had not attended in a while, and one person had never attended. Former Show-Me Institute intern Mary Chism gave a synopsis of the story for the few people who had not read it. Next, I gave a brief summary of the history of intellectuals’ views on the concept of value, from Aristotle’s “value for use”/”value for exchange” dichotomy, to the Labor Theory of Value, to the modern marginalist conception of value, attributable to Alfred Marshall.

We then started addressing the discussion questions I had prepared in advance (with Mary’s help). Leading from those questions, here are some of the topics we discussed:

  • Whether anything can be exchanged for anything else
  • The how and why of international currency exchange
  • Government policy relating to the supply of money and exchange rates
  • Whether sweatshop laborers, especially children, are making a free choice to work where they do
  • The opportunity cost of reckless behavior
  • Risk aversion and diminishing marginal utility of income
  • A question from one attendee: “When a participant in a market has more resources, how does that affect that party’s ability to make beneficial exchanges?”

Some topics were discussed on an introductory level and others on a very high level. Many questions were asked and much knowledge shared. In addition to the lively discussion of economics and such, we talked about what our next reading selection should be and when we should meet again. The respective decisions were Hayek’s “The Road to Serfdom” and Wed., Feb. 20. If you are interested in the book or related topics, stop by our office at 7 p.m. on that evening for pizza, soda, and interesting discussion. See ya there!

June 1, 2012

Will Missouri Taxpayers Have To Bail Out Public Pensions?

A recent New York Times article discusses something we have talked about on Show-Me Daily: the unrealistically rosy forecasts of public pension funds. If words like “forecast” and “public pension” make your eyes glaze over, hold on for the kicker — if you are a Missouri taxpayer, this is something that will likely cost you money soon, or result in your city or state going bankrupt. From the article (emphasis added):

In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds.

And:

Ailing pension systems have been among the factors that have recently driven struggling cities into Chapter 9 bankruptcy. Such bankruptcies are rare, but economists warn that more are likely in the coming years.

These problems are not confined to New York City. As the New York Times article says, this is a near-term problem for “public retirement systems from Alaska to Maine.” This expensive problem is manifesting in Missouri, and in particular in Saint Louis with the recent discussion of firefighter pensions.

Public employee pensions tend to use an outdated benefits structure that relies on growth assumptions that are unrealistic in the current climate. Public employee retirees are receiving pension benefits that assume growth rates that just do not match reality. This means that current employees are paying into a system that, in its current state, cannot afford to pay them when they retire. Something has to give. Either their benefits will be reduced, the current employees will be asked (or required) to contribute more — taking a salary cut to support their retired peers — or the taxpayers will be tapped year after year to plug the holes in the broken pension system.

Lowering the forecasted growth rate from 8 percent to 7 percent per year is not enough to improve this serious problem. And the longer Missouri policymakers wait to make politically unpopular decisions that will improve the long-term picture, the worse the finances become. Let’s not be like Greece and curry favor with unrealistic future promises to pay. Instead, let’s lead the way on substantial public pension reform at the state and local level by switching all public employees to defined contribution 401(k) retirement plans.

February 8, 2012

Standstill Part Two?

Show-Me Institute Policy Analyst Audrey Spalding is in Jefferson City today to give testimony about land banks.

The state legislature is currently considering legislation that would create a land bank in Kansas City with much the same power and authority as the Saint Louis land bank, the Land Reutilization Authority (LRA). Audrey’s policy study on the LRA, “Standstill: Is Saint Louis Hindering Development by Waiting for Large-Scale Miracles?” (published last April) provides important insight into the potential pitfalls of a land bank with expansive authority to acquire and hold property.

The lessons of the LRA are well worth considering for any proposed land bank. Lofty public policy dreams often run afoul of the law of unintended consequences, and the long history of the LRA may serve better as a cautionary tale than an achievement to be repeated.

January 17, 2012

Are Missouri Public Schools Failing to Make the Grade?

If you have not done so lately, check out the latest videos on our video page.

A couple recent videos:

Both videos are embedded below.


October 21, 2011

We’re Not All That Different

Occupy Saint Louis is in full effect, and my co-worker Patrick Ishmael and I dropped by last Friday for the group’s afternoon march. I can only claim superficial exposure to the pulse of this particular group at that particular time, because I was in the crowd but not of it, and I didn’t take the time to talk to anyone while I was there. Most of the signs I saw and chants I heard involved “jobs,” though there was also a call-and-response that got a lot of play: Call: “Whose streets?” Response: “Our streets!” I’m not really sure what that one meant.

I have been reading quite a bit about the protests going on in New York City, in the rest of the country (my cousin participated in Occupy Omaha, he’s the one in the suit near the center) and even around the world. The protests and the protesters are not totally united in their goals or their beliefs, but there are certain common threads that bind the movement and represent a shared objective. One of the most common complaints you’ll hear is anything along the lines of “get Wall Street out of Washington.” This is an expression of the idea that business and government should not have such cozy relationships. The word for this concept in popular usage is “corporatism,” and although the protesters may not realize that a free-market think tank represents an ally in their fight, we have published countless studies and commentaries asserting that government should not be in the business of picking winners and losers in the marketplace.

We oppose tax credits such as the Aerotropolis subsidy package, film tax credits, and other publicly-funded business incentives. Indeed, so strong is our stance against corporate welfare that it’s one of our six main policy areas.

The Occupy protests and the people calling themselves the 99% are fired up and out on the streets for a reason. H.L. Mencken said “Every decent man is ashamed of the government he lives under,” but when left and right are aligned in opposition to pervasive policy that hurts all but a very few well-connected people, and when thousands take to the streets to voice their disillusion, there’s a glimmer of hope for real change to the status quo.

September 19, 2011

The Boston Tea Party and . . . Targeted Tax Credits?

I don’t think any American schoolchild escaped this lesson from civics class: On the night of December 16, 1773, in response to Parliament imposing new taxes on tea, a group of colonists from Boston boarded a number of ships in the harbor and threw the newly-taxed tea overboard in protest against “taxation without representation.” This is a great lesson for children to learn, after all — as Daniel Webster and John Marshall agreedthe power to tax involves the power to destroy. It’s also an easy lesson with which to sympathize. If taxes make things we buy more expensive, we lose out. According to Wikipedia:

The protest movement that culminated with the Boston Tea Party was not a dispute about high taxes. The price of legally imported tea was actually reduced by the Tea Act of 1773.

Wait, what?

Let’s go back a bit. For years, the British East India Company enjoyed a monopoly — granted by the British crown — on importing tea to Britain. Because the American colonies were under British rule, this also meant that all their tea had to come from the East India Company — first imported to London, then shipped to America by a third party. At the time, Britain had high import tariffs, which raised the price of all East India Company tea. Colonists could buy Dutch tea smuggled into the colonies  much more cheaply because it never touched a port with high tariffs. In 1773, Parliament passed the Tea Act, which allowed the East India Company to import tea to the colonies duty-free. Suddenly, all the people who imported tea to the colonies, legally and illegally, were priced out of the market by a competitor that received special government favors. Some of the people on the boats in Boston Harbor the night of December 16 were concerned about overreaching government authority and a pattern of abuse, but lots of them were smugglers or legal shippers who were rebelling against the loss of their livelihood to a government policy that favored one business at the expense of others.

Here’s another quote from Wikipedia:

In 1772, legally imported Bohea, the most common variety of tea, sold for about 3 shillings (3s) per pound.[33] After the Tea Act, colonial consignees would be able to sell it for 2 shillings per pound (2s), just under the smugglers’ price of 2 shillings and 1 penny (2s 1d).[34]

So the colonists got their tea cheaper than before. Where’s the problem? Well, in addition to the problem of taxation without representation, competing businessmen lost out under the new tariff regime. There were other losers as well — namely every British citizen who paid higher taxes because the East India Company had this duty-free dispensation.

My co-workers at the Show-Me Institute have talked about targeted tax credits before. Targeted tax credits are just one way that governments pick winners and losers in the marketplace. When this happens, the logic of the market is overturned and almost everyone suffers — except those the government selects to receive its largess. It’s easy to point to these people and conclude that the tax credit was a success, but maybe that’s because the injured parties so seldom throw a historic party to make their plight known to the world.

April 19, 2011

Bruce Caldwell — the Hayek Expert — to Speak in Saint Louis

Coming up this Thursday, there will be two chances for liberty-minded or simply curious folks in Saint Louis to hear speeches from the world’s foremost expert on Friedrich August von Hayek, the Austrian economist, Nobel laureate, and champion of free markets:

  • The afternoon of April 21, from 2:00 to 3:30 p.m. at the University of Missouri–St. Louis, in the James S. McDonnell Conference Room (331 SSB) (building 11 on this map). This lecture is free.
  • The evening of April 21, at the Discussion Club. This lecture includes a dinner beginning at 7:00 p.m., which costs $37.00 for those who are not already Discussion Club members. For those who wish to attend the lecture only, beginning at 8:00 p.m., it costs only $5.00. The Discussion Club has provided more information about the speaker, as well as general club information.

I’m excited about these events. I watched this video a few days ago, and discovered that, as speakers go, Caldwell is a delight. I never wasted an opportunity in school to write about Hayek, so I can’t wait to see this speaker live.

March 17, 2011

Cranky Yellow Quaffs Bitter Bureaucracy

Ever seen the movie Brazil? When the main character wants his A/C fixed, the opaque and monolithic government forces him to jump through one bureaucratic hoop after another, and he’s not sure that his simple problem will ever get fixed. Then a vigilante HVAC repairman named Harry Tuttle swoops in and fixes the problem in a few seconds.

I thought of this movie when I read a blog post that tells the very personal story of an inspiring small business owner. Without government grants, tax credits, or artificial incentives of any kind, David “Cranky Dave” Wolk saved his money and built up, ex nihilo, his own business — a gathering place and venue for artists and their creations. Like the vigilante HVAC man, Cranky Dave filled a niche for artists and the community and apparently did at least well enough to keep the doors open. Now things are getting difficult for him as Saint Louis city chases after his unpaid earnings tax bill (when he says he had no earnings) and simultaneously cites him for not having a separate trash bin for his business (he says he was using the one for his residence, which is in the same building and that he upcycles much of the trash produced by his business, incorporating it into art and craft projects).

As if this one-two punch of local government interventions on his business weren’t enough, the Riverfront Times reports that he is also being pursued for back taxes at the state level. Cranky Dave wants to make things right with the law, but he didn’t even know that the things he’s being cited for were problems. Will Cranky Dave be devoured by government paperwork like Harry Tuttle literally was at the end of Brazil? Is there room for honest, hardworking small businessmen in the city of Saint Louis?

Of course, Cranky Dave’s blog tells his side of the story, and perhaps the people he’s dealing with at city hall would tell another. The RFT found in their inquiries nothing remarkably different from the picture that Cranky Dave painted. Be sure to check out their blog post for more details.

What makes a business work? What grows an economy? These are not easy questions, although lawmakers and thoughtful people have struggled for easy answers almost as far back as historical records go. One thing that most can agree on is that healthy businesses grow the economy and serve the community. Most can also agree that it takes dedication and drive on the part of an entrepreneur to make their business reach and stay in the black.

Cranky Dave’s struggle is only one example, but it’s representative of an important principle. Bold, entrepreneurial individuals and hardworking community folks are what put products in the hands of customers and serve the people around them. The more that lawmakers do to get in the way, even with simple-sounding things like “you need a separate, commercial trash bin,” the more strain it places on fragile new businesses. To encourage local community and business growth, this is one time that a hands-off government attitude would clearly benefit not only Cranky Dave or the folks who are helping to keep Cranky Yellow alive, but anyone else with a dream and the will to make it happen. We’re pretty far from the world depicted in the film Brazil, but it still wouldn’t hurt to make things easier on the very people who are trying to make a difference.

December 17, 2010

“We Need You to Work on Saturday, So We Cut Your Pay”

In one of Christine Harbin’s recent posts here at Show-Me Daily, she made the point that having higher sales taxes or excise taxes is a boon for stores just across the state line. A commenter by the name of Dempster Holland cited this to justify using the income tax, rather than sales tax, as a revenue mechanism, because that way the state won’t lose tax revenues from people who cross the border.

I countered with the idea that when analyzing the effect of taxes at the margin, we must consider that, although sales taxes push consumption into other states, income taxes reduce production. It is also true that income taxes will push some production into other states, but for people near the border it’s easier to keep your job and change the state in which you shop. Holland responded to this with a highly unexpected comment: “I [believe] that higher income taxes cause people to work more in order to secure more take-home pay. This would increase production.” He went on to say, in a later comment:

On the income tax question, think through the following thought experiment. You are earning a certain income, with certain tax deductions and therefore a certain take home pay. From that take home pay, you have developed a certain spending pattern. Now your taxes go up. You can either reduce your standard of living, borrow money or earn more income. One thing you would prefer is to earn more income, and that means more work and therefore more productivity in society.
At some point. of course, the extra work won’t be worth it–but I would bet that is when you hit 80 per cent or so. In any event, not many people would work less, even the well off who are basically type A people to begin with

The idea that people will work more when their take-home pay is reduced is obvious at face value, but begs for analysis, because it falls apart on deeper examination.

The work that anyone does — the thinking, lifting, moving, and showing up — are the price that you pay in exchange for something you want: your paycheck. Workers then use their paychecks to get things they want or things they need, always aware of their limited resources: time and money. To suppose that someone will work longer hours when their wage is reduced is analogous to saying that people will buy the same number of potatoes when the price of potatoes rises. It will be true for some, and not true for others. Very important in this analysis is the idea that leisure time has value. When you work, you get value from the wages your receive; when you are not working, your time is your own to spend in a way that allows you to get the most enjoyment out of it that you can.*

If somebody has the option of working 41 hours instead of 40, and they earn $10 per hour, they must consider that extra $10 worth giving up their time to work that 41st hour, rather than going home to do chores, say, or spend time with friends or family. If the employer is willing to pay that amount for that much work, it reflects that the employer is getting at least that much value out of the worker’s efforts, and the worker can thus make the decision to work or not to work. At the margin, things are efficient in this scenario. Workers work until their leisure-time value exceeds their work-time value, and no more.

Now let us introduce an income tax. If suddenly each worker’s take-home pay is reduced by 5 percent, should we assume that everyone will work more to make up the difference? If you have the choice between working an extra half day at work every week, in order to make up the lost money, or reducing consumption instead — for instance, by staying home instead of going out one weekend per month — many people will choose to spend less rather than work more. In fact, the reduction in pay will likely make many people work less than they did before, because the relative value of their free time has increased in comparison to their new, lower net wages.

It would be wonderful from a benevolent planner’s perspective if every income tax increase led to a commensurate increase in productivity, but this is not the case — and, indeed, it would be lamentable if it were. We are fortunate that we live instead in a world where people can work fewer hours for more money as time goes on. The contention that people will work more hours if their pay is cut is, in economic terms, an argument that the supply of labor is inelastic — that is, that a decrease in the price for labor will result in very little decrease in the quantity of labor supplied. Different types of labor have different elasticities, and different people at different times have different levels of willingness to sell their labor at different prices.

One last point: Holland brought up the idea of taxing wages instead of sales in response to the idea, often repeated by our scholars, that Missouri would experience faster economic growth if it were to replace its state income tax with a broad-based, revenue-neutral sales tax. For the reasons I have just said, income taxes are problematic, but there’s one other reason that Missouri should prefer sales as a source of revenue: volatility. Any responsible state budget must account for the volatility of revenue streams. If your revenue in a given year is half of what it was in the previous year, budgeting becomes very difficult. The relative stability of sales taxes, compared to income taxes, is one of the best reasons to prefer them for state revenue.

* A slightly more technical point about the value of leisure time: Everybody can spend their time in two broad ways — working or taking leisure. We assume that people derive some utility from their leisure and some utility from the money that they receive for working. If their pay is cut, the relative value of their leisure hours goes up, subject to diminishing returns. Therefore, for many people, we can expect that they will work less when their pay is reduced.

November 23, 2010

At Long Last: The Payne-Stokes Debate Is Online

On Sept. 30 of this year, at Dressel’s Pub in the Central West End, a small crowd gathered to watch David Stokes and John Payne debate the topic “Are Libertarians and Conservatives Natural Allies?” Now this wonderful debate and its ensuing audience Q&A are available for viewing on our website, or right here:

Enjoy!

September 9, 2010

Wasting Green on Going Green

If you care about going green, you should care about internalizing the costs of pollution.

If you care about sustainability, you should care about property rights.

Why do I bring this up? According to an article over at the Post-Dispatch, Jefferson City has been chosen as one of five state capitals to receive extensive attention from the Environmental Protection Agency (EPA), in the form of plans intending to make the city greener and more sustainable. The project is called “Greening America’s Capitals,” and calls for “a team of designers to produce illustrations on how targeted neighborhoods in chosen capitals can be improved,” with funding provided by taxpayers nationwide the EPA. The Show-Me Institute’s book club is currently reading a lot about public choice economics, and I could write an entire post about the dispersed costs and concentrated benefits of this particular scheme. Instead, I’ll focus on how everything that is proposed by this federal agency would be better handled by a reduction in hands-on government management.

First, the obvious (at least to me): Strong property rights lead to good stewardship. When the costs of harming things falls on those doing the harm, they tend to try to reduce the harm as much as possible. Namely, when something belongs to you alone, you tend to treat it with more care than if it belongs to someone else. Moreover, when the benefits of improving something accrue to those doing the improvement, more improvements happen. Namely, you’re more likely to work to improve your own things than someone else’s things. There are plenty of historical examples, including the dramatic improvement in crop yield and work participation among the early European settlers in America after switching from a communal system to one based on private property.

When I hear “sustainable” and “going green” I think “good environmental stewardship.” There are two components to this, the first of which is taking care to maintain or improve your own property. The second part involves externalities. For the unfamiliar, externalities are any cost or benefit that falls on someone not directly or willingly involved in an exchange. Maintaining a classic car provides a positive externality to those who enjoy seeing one driven around town but who don’t pay for its upkeep. Pollution is the classic example of a negative externality: harming people who had no say in the pollution’s production. This is a problem with no obvious solution, but (as public choice has clearly shown) a lot of bad possible solutions from the government. Ronald Coase is a Nobel Prize–winning economist who demonstrated that the problem of externalities is really a problem of transaction costs (such as the cost of information). Show me a government solution to an externality problem that doesn’t involve internalizing costs and I’ll show you the law of unintended consequences in action.

Greening America’s Capitals will not help the state of Missouri. It’s a fundamental waste that distracts from the real problems of insufficiently robust property rights and, especially, transaction costs. But these difficult technical problems will never be as broadly appealing as a visible, heart-in-the-right-place EPA program. This is not a new problem in politics.

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