Ritenour on Rockwell

My piece "Government Stimulus: Out of Sight, Out of Mind" was published on LewRockwell.com yesterday. It makes the basic point that government stimulus does not create anything, but merely reallocate resources away from their most valued use. Consequently, fiscal stimulus is a problem, not a solution.

Recommended Reading

David Whitlock, President of Oklahoma Baptist University, has put my book on his recommended reading list, along with an article on the Tea Party in which he references my work during an interview.


Whitlock is a scholar in his own right and has edited or authored four books including an innovative introduction to business, Opportunity. It is written as a novel and introduces the reader to the various business disciplines from a Christian perspective.

Energy in a Free Market

To say that energy is extremely important for our society is a truism. It is so important that, whenever there is anything from a hiccup to a coughing fit (such as the BP oil spill) in energy production or consumption, it reveals how many people presume that the energy market is rife with "market failure" and many feel anxious and call on the state to "do something." That is a plea the state is always eager to placate. It seems that very few realize how regulated and, hence, unfree the energy market actually is. In fact, the energy is so regulated it is likely we don't even know what a free market in energy would look like. 

Robert Bradley Jr., CEO and founder of the Institute for Energy Research, has done research on the energy market since 1980. His book, co-authored with Richard Fulmer, Energy: The Master Resource, is a very useful primer on energy economics. Bradley speculates on what a free market in energy might look like in his piece, "A Free Market Energy Vision."

Bradley identifies four sustainability issues around which energy market debates revolve:

1. Future supply growth of carbon-based energy in light of "the fixity/depletion view of minerals."
2. Air and water pollution from carbon-based energy production.
3. Energy security, particularly oil imports to the U.S. from the Middle East.
4. Global warming due to the use of carbon-based fuels.

Bradley then makes his case for a free market in energy, summarizes it in four points:

1. Human ingenuity in market settings has and will continue to overcome nature's limits.
2. Statistics of air and water quality in the U.S. show dramatic environmental improvement.
3. Energy security in the electricity market is assured by abundant coal supplies and almost all U.S. gas imports are from Canada.
4. Global warming is still an open scientific question and the reality is at the present time carbon-based energy is necessary for economic growth.

Because the future is uncertain, no one knows exactly what a free market in energy will look like. We don't know how energy demand will change and we don't know how entrepreneurial ingenuity will respond to demand. Still, Bradley suggests important reasons why we shouldn't be afraid of a free energy market after all. We know it will not be perfect. No human institution ever is. However, we have reason to believe that a free energy market will provide the most energy for the longest time in the most efficient manner possible.

We also know that private entrepreneurial provision of energy will be much more efficient than it is now in our severely hampered energy market. In a free market private entrepreneurs are able to use market prices for both energy and the factors used to produce that energy in calculating profit or loss.  This serves as the best guide for wisely using scarce resources. If producing a certain type of energy in a certain way is profitable, it will be done. If it is not, entrepreneurs will not sink scarce land, labor, and capital goods producing energy that is not worth the cost. Additionally, in a free market entrepreneurs are able to keep their profits and must eat their losses, so they have every incentive to make only profitable energy investments.

Things are exactly the opposite when the state intervenes. Price controls, subsidies, and taxes distort the price system, so energy producers are led to misallocate resources from the perspective of people in society. They also do not have the same incentive to reap profits and avoid losses, because their income is not tied to their success.  Therefore, we have every reason to expect that the more state intervention in the energy market, the less efficient and more wasteful it will be. This is why Bradley argues that the real sustainability problem is statism, not "market failure."

Herbener on Value, Utility, and Price

As mentioned earlier, Mises University is going on this week at the Ludwig von Mises Institute in Auburn, Alabama. I know of no better one-week introduction to economics from the Austrian causal-realist perspective. This year's lecture, "Value, Utility, and Price," was given by my department chair, Jeffrey Herbener. You'll find no better introduction to the topic than this:

Herbener lays the foundation of price theory by explaining the nature of value as it relates to our preferences and choice, as well as economic appraisement in the pricing process. Along the way he also distinguishes the causal-realist approach from other alternative frameworks, such as classical and neoclassical economics.

For those looking for a good overview, Herbener has written this brief primer on Austrian, causal-realist economics. It was published as a White Paper for the Center for Vision and Values.

Very few people are able to explain economic theory with the clarity and logical order of Herbener. One of the great blessings of being on faculty at Grove City College is learning from this economist.

It Would Be Funny, If Not So Gruesome

I recently posted on the employment situation in Cuba as it relates to the problem of economic calculation in a socialist economy. Anyone wanting more knowledge about how socialistic economic theory actually plays out on the street is in for a treat. Here is an audio recording of a very revealing lecture called "Capitalism, Cuba, and Castro: A Report from Recent Travels by former Soviet Economist and current Carthage College professor Yuri Maltsev." Maltsev, an entertaining speaker, delivered this lecture at the Austrian Scholars Conference in 2004. I was in the audience and remember it as one of my favorites. As he says about the workings of the socialist Cuban state, "It would be funny if it was not so gruesome." In this lecture Maltsev reveals the following:

1. The true nature of the Cuban economy.
2. The level of quality in the Cuban health care system.
3. Why infant mortality is so low in Cuba.
4. Why informal economic activity is necessary for Cuban society to survive.

Listen to the lecture here.

How Politicians Bring Down Deficits: Geithner vs. Romer and Perhaps Romer vs. Romer

It's not by reducing government spending--the one thing that would actually help the economy. Instead, Tim Geithner, Secetary of the Treasury, says we should raise taxes by letting the Bush tax cuts die for two reasons:

1. It will not push us into a new recession.
2. It will show a commitment to cutting the deficit.

It's not clear to me that we are entirely out of the "old recession" yet. Even if we are, however, Geithner's second reason belies ignorance of the truly significant factor affecting economic prosperity. An astronomical government debt is not the main evil, per se. It is what it represents, a massive increase in spending above what is taken in as tax revenue.

There are two ways to reduce the government deficit, one is helpful to the economy and the other is not. If the government raises taxes, the government deficit may indeed be reduced, but this does not remove the drag on the economy. It merely shifts the funding of the state apparatus away from borrowing and toward taxation. Both taxation and government borrowing, however, draw resources out the private economy and result in capital consumption. Capital consumption is a recipe for economic contraction. With less capital profitably invested, labor productivity falls, putting downward pressure on wages and incomes, lowering our standard of living.

Randall Holcombe notes that an empirical study co-authored by Christina Romer, head of President Obama's Council of Economic Advisors, verifies the contractionary nature of taxation. Her paper, "The Macroeconomic Effects of Taxation," was published in the June 2010 American Economic Review and concludes that "tax increases are highly contractionary." A pre-publication working-paper version can be found here.

One interesting finding by Romer and Romer is "that tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other exogenous tax increases." This makes sense, because of the reasons mentioned above. Raising taxes to decrease a budget deficit is merely shifting sources of funding. Capital consumption that is already occurring due to government borrowing will merely continue due to taxation, so the negative effects of taxation in this case will not appear to be as drastic a change. Note, however, that the effect is still negative. Thus economic history contradicts Geitner's hope that increasing taxes will not be a drag on the economy. It will also be interesting to see, as Holcombe asks, will Romer the political appointee listen to Romer the economist?

If Geithner and company want to point us in the direction of prosperity by way of reducing the deficit, their only option is to reduce government spending. Reducing spending will allow for less government borrowing and lower taxes. Both will keep more capital in the hands of capitalists and entrepreneurs who will invest it in productive activity instead of government consumption. Focusing on the deficit per se distracts us from government spending, the real enemy of prosperity.

Ortel: It's Impossible to be Optimistic About the Future

In this Tech Ticker interview by Aaron Trask, Charles Ortel, managing director at Newport Value Partners lists two reasons for his pessimism:

1. We're raising the cost of employment.
2. We're encouraging companies to shift jobs offshore. 

This is exactly the opposite of what should be done to recover from the Great Recession. Ortel rightly points to private sector employment as a good indicator of the state of our economy. He cites growth in government, higher taxes, increased regulation and virtually every major legislation passed by the Obama Administration as contributing to the problems in private sector employment.

Note: This blog should not be taken as Democrat/Obama bash-fest. It is just a fact of life that presently Democrats are in power and they are the ones currently ratcheting up government intervention.

Nevertheless, the Bush Administration has a lot to answer for as well. The tremendous increase in the rate of growth in government spending began during the Bush Administration, not when Obama took office. The further centralization of education was the result of Bush's No Child Left Behind program. The first TARP bailout bill was a Bush initiative as well. Bush pushed for large increases in foreign aid spending. Before Obama, Bush was the great interventionist-in-chief.

As the Psalmist says "Put not your trust in princes, in a son of man, in whom there is no salvation" (Ps. 146:3).

Learn Economics in the Comfort of Your Own Home

There is so much to do in the brief time we are given on this earth. I know of more than one student who has come to economics too late in their college career and, while developing a great love for the discipline after a class or two, are too far along semester-wise and don't have time to major in the subject in the time they have left at college.  Very few laboring in the occupation they have chosen after graduation have the opportunity to drop everything for four years and pursue formal training in economics. This is a shame, because economics is an important discipline in which we can glimpse the beauty of God's providence in the created order.

The good news is that it is possible to receive a top-shelf introduction to sound economics from the comfort of your own home. Mises University is taking place this week in Auburn, Alabama. The faculty are the cream of the economic crop and include Joe Salerno, Guido Hulsmann, Jeffrey Herbener, Robert Murphy, Peter Klein, Mark Thornton, Thomas Woods, Roger Garrison, Roderick Long, David Gordon, Walter Block, Thomas DiLorenzo, Timothy Terrell, and Gary North. Attending it are students from scores of colleges and university. If you are not there, do not despair. You can watch every lecture live and in color on the Ludwig von Mises Institute's USTREAM channel by clicking here.

Workers' Paradise?

Today marks the 57th anniversary of the Communist revolution in Cuba. All these years later and things don't seem to be going as well as promised. Doug French has alerted us to massive layoffs coming in the Republic of Cuba. He writes:

Cuba is facing a severe budget deficit and may have to trim its “bloated work force,” according to the Associated Press, even though the official unemployment rate is only 1.7 percent. That has some on the island socialist utopia upset because as the AP’s Anne-Marie Garcia reports, “guaranteed employment was a building block of the 1959 revolution that swept Fidel Castro to power.” A half century later, Castro’s brother Raul is hinting that one in five Cuban workers aren’t needed. In fact, he says some of his analysts, “calculate that the excess of jobs has surpassed 1 million.”

French goes on to point out that in reality Cuban officials can't even know the right numbers of workers to let go, because of the socialist calculation problem, citing Mises' classic article on the subject.

The problem occurs because in a socialist system all factors of production are owned by the state. Consequently, there is no real exchange of such factors and hence no real market prices that can be used to calculate profit and loss. In such a system, any accounting figures are mere guess work. Without meaningful profit and loss calculations, the so-called planned economy is no economy at all. It is planned chaos.That is why socialism is always disastrous. Pure socialism never works for any length of time and the more socialistic a market economy becomes, the less efficient it is.

One of my favorite articles to have students read about the socio-economic path of socialist Cuba is "Why Havana Had to Die," by Theodore Dalrymple. It is eight years old, but truth is never dated.

Christianity and the Free Society

I encourage anyone wondering whether Christianity and the free society are compatible to read a very important contribution to 20th Century American history by Lee Haddigan. In his paper "The Importance of Christian Thought for the American Libertarian Movement: Christian Libertarianism, 1950–71," Haddigan recounts the importance of the Christian convictions of important pastors and laymen such as the Rev. Carl McIntyre and industrialist J. Howard Pew on the broader libertarian movement during the third quarter of the 20th Century. Indeed, one of the great virtues of the piece is that it shows how the link between Christian doctrine and the free society played itself out in the minds and actions of many Christians during this period.

Another great service done for us by Haddigan is his mining of some very hard to find and forgotten literature such as Christian Economics, a bi-weekly periodical featuring economic commentary from the likes of Ludwig von Mises and Hans Sennholz. Each issue was sent out to as many as 200,000 pastors at its peak of circulation and helped shape the thinking of that generation.

The article's rather lengthy abstract reads:

Murray N. Rothbard argued that there are many philosophic and non-philosophic arguments that provide a satisfactory basis for individual liberty. Rarely, however, did he discuss the claims of Christianity to be a suitable foundation for individual freedom. By looking at the Christian libertarians of the Old Right, between 1950 and 1971, the article contends that religious values were the most important reason for libertarians pursuing a society composed of free individuals during that period. By examining the journals Faith and Freedom, Christian Economics, and the Freeman, and the positive views of Rev. Carl McIntire, the author explains the philosophy of Christian libertarianism. It is the belief that individual freedom is only the highest political end; the necessary means for God’s Creation to develop unhindered their conscience and the full ‘sacredness of their personality.’ Christian libertarians maintain that individuals cannot be coerced by government to lead a virtuous life. They must instead be persuaded, by a true understanding of the life of Jesus especially, to choose to follow the moral life sanctioned by the Bible. The desire to follow the Golden Rule voluntarily, Christian libertarians explain, is the God-given template that allows a society of individuals to live in freedom. It was this Christian ethic, Christian libertarians insist, couched in terms of the Natural Law, that inspired the founding fathers to establish a system of government where the individual is free to enjoy their ‘life, liberty, and the pursuit of happiness.’ The article concludes by discussing Frank S. Meyer’s ‘fusionist’ attempt to find a uniting theme for traditionalists and libertarians, and suggests that it was the Christian libertarian philosophy in all but name. It also suggests that if America has any valid claim to be ‘Exceptional,’ then it is based on the nation’s traditional defence of individual freedom as a God-given grant.

Haddigan's piece also demonstrates a point raised by Joseph T. Salerno in his history of the revival of Austrian economics during the second half of the 20th Century. Salerno stresses the importance of not only ideas, but also the necessary capital invested in institutions that propagate such ideas.

Of Gravy and Doughnuts

The government gravy still keeps flowing. On the same day that the Obama Adminstration forecast a record high annual budget deficit of $1.4 trillion (that's trillion! with a tr in front, not a b as in billion), President Obama called for the establishment of a $30 billion small business lending fund. The stated goal of the program "is to make sure the people who are looking for a job, can find it." The idea is that the government would invest $30 billion dollars in community banks who would then find it easier to loan to small businesses. It seems that the official line is that there is no economic problem that can't be solved by throwing billions of dollars at it.

It's understandable why the Administration might be advancing this particular policy. It is pretty clear from the data that the Great Recession was accompanied by commercial lending falling off a precipice.

Don't forget, however, that if commercial lending collapsed dramatically (although note that it is still greater than in mid-2006, not all that long ago), there is a reason for it. One thing holding lending back is the current regime uncertainty I've discussed before, fostered in part by the very budget deficits and government debt to which this program contributes. Another is the fact that massive malinvestment during the 2000s resulted in large scale capital consumption and financial institutions are still working on rebuilding their capital.

No matter how much we'd like it to be otherwise, capital cannot be created out of thin air. Capital goods don't come into being by clicking our ruby slippers together and chanting "There's no place like D.C. There's no place like D.C." No, capital must be accumulated through the allocation of real savings. Government loans and subsidies to small businesses merely give them the ability to bid the ownership of such goods away from their most highly valued use. It does not add to the capital stock, it merely redistributes the existing capital stock. We should never assume that investments made possible only due to government subsidies will wisely use the capital invested.

A case in point is the story of how the lives of inhabitants of a small Iowa town were forever made more dismal due to our friends at the Small Business Administration who were there to help. Many years ago this town had a lively doughnut shop that was one of the townspeople's favorite meeting places and served the best glazed fried cinnamon rolls on the planet. The firm maintained a profit because in addition to the retail shop it also daily serviced a very large account at the town's largest employer.

One day a businessman who owned a doughnut shop somewhere else received an SBA grant to also operate a wholesale doughnut bakery in town. Because of the grant, he was able to underbid the established firm for the account at the large employer.  He won the bid and the other doughnut maker had to close up shop. A couple of years later the SBA grant to the second doughnut maker ran out and he was not able to profitably operate either. He had to shut down and the little town in Iowa was left with only holes where the doughnuts used to be. The moral of this true story is that whenever government intervenes with commercial subsidies, resources are misallocated from the point of view of society. Scarce land, labor, and capital goods were used less efficiently than they would have been without the intervention, and the community was left worse than before the government stepped in to support commercial activity.

There Is Only One Boss

The phrase "the customer is always right," should never be taken in an absolute metaphysical sense. I've worked in retail and I can tell you there are plenty of times when the customer is wrong. The phrase does capture, however, an important economic principle: consumer sovereignty. Rightly understood, consumer sovereignty means that if entrepreneurs want to earn a profit, they must serve customers better then their competitors. To the extent that they do not, their profits will be lower that possible. As I've mentioned before, entrepreneurs serve customers.

That is one of the main points Ludwig von Mises makes in his lecture "Capitalism" in his book Economic Policy: Thoughts for Tomorrow and Today, a series of lectures he presented to businessmen, professors and teachers, and students in Argentina in 1959. The opening paragraph of his lecture reads:

Descriptive terms which people use are often quite misleading. In talking about modern captains of industry and leaders of big business, for instance, they call a man a "chocolate king" or a "cotton king" or an "automobile king." Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all, he serves. He does not reign over conquered territory, independent of the market, independent of his customers. The chocolate king—or the steel king or the automobile king or any other king of modern industry—depends on the industry he operates and on the customers he serves. This "king" must stay in the good graces of his subjects, the consumers; he loses his "kingdom" as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.

There is a BIG difference between actual political rulers and the "kings" of industry. One set can compel obedience and the other must earn voluntary cooperation.

One of the reasons Wal-Mart became the successful company it has is that early on, Sam Walton, the company's founder also recognized the same principle. Wednesday's "Tip of the Day" at Business Insider is a quote from Walton that again dispels the myth of the free market plutocrat commanding his minions to buy from him. Walton said,

The folks on the front line - the ones who actually talk to the customer - are the ones who really know what's going on out there. There is only one boss. The customer. And he can fire everybody in the company from the chairman on down simply by spending his money somewhere else.

Note, however, that consumer sovereignty is a practical sovereignty, not an ethical sovereignty. From a cosmic point of view, God is our Sovereign and Lord of all creation. It is He who made us and to whom we owe all allegiance. There is only one Almighty. He will hold us all to account for how well we exercised stewardship and dominion while on earth.

Additionally, Christian ethics require we recognize private property in our relations with others, thus allowing entrepreneurs to do with their property as they see fit. If they choose to reap lower profits than possible because they want to keep certain people employed at a certain wage in the midst of a downturn, that is their right and the principle of consumer sovereignty does not allow us to compel them to lay off workers in the name of the consumers.

Bernanke Ready to Stop Inflating?

Sadly no, although that is what I first thought when I read the headline, "Bernanke says Fed to act if recovery falters." If the Fed really wants to act to support whatever fledgling recovery there is, the act it should take is to stop keeping interest rates artificially low. That act alone would do much to facilitate the capital restructuring necessary for a real recovery of prosperity. In fact it is clear that what Bernanke has in mind is additional monetary injections into the banking system and financial markets.

 Investment adviser, commentator, and senate candidate, Peter Schiff also says that the Fed and the Government (or do I repeat myself) must do exactly the opposite of what they are doing. Here is yesterday's interview that appeared on Tech Ticker:

Schiff rightly notes that "They're trying to sober up a drunk by giving him more alcohol - it won't work." The path to real recovery, he notes, is through increased saving and returning to living within our means.

The promotion of debt and regularly buying what we can't afford that occurs in an inflationary environment implies that there are indeed more than mere material consequences to monetary inflation. As Guido Hulsmann reminds us, there are spiritual consequences as well. In chapter 13 of his book Ethics of Money Production, he writes:

The spiritual dimension of these inflation-induced habits seems to be obvious. Money and financial questions come to play an exaggerated role in the life of man. Inflation makes society materialistic. More and more people strive for money income at the expense of personal happiness. Inflation-induced geographical mobility artificially weakens family bonds and patriotic loyalty. Many of those who tend to be greedy, envious, and niggardly anyway fall prey to sin. Even those who are not so inclined by their natures will be exposed to temptations they would not otherwise have felt. And because the vagaries of the financial markets also provide a ready excuse for an excessively parsimonious use of one’s money, donations for charitable institutions will decline.

Entrepreneurs Serve Customers

One way firms try to cover rising production costs without noticeably raising prices, is to charge the same amount of money for smaller goods. The peanut butter and ice cream industries moved in this direction in 2008.

The airline industry also began charging fees for things that used to be included in the price of the ticket, such as in-flight meals and checked luggage. Although this has begun to cost them some good will, it makes a certain amount of economic sense, because now those of us who don't check luggage are no longer subsidizing the travel of those who do. (By the way, Doug Dyment of OneBag reminds us that there are two kinds of luggage: carry-on and lost.) Consumers have begun to grow weary of baggage fees, however, and UPS has identified this as a potential profit opportunity.

They figure, and I guess rightly, that if people are willing to shell out a large sum of money to the airlines to check their luggage, some might be willing to pay UPS from $30 to $80 less to ship it instead, even if it takes just a little longer for their bags to reach their destination.

One of the beauties of the free market is the rapidity with which entrepreneurs act in an attempt to serve customers. This is another example piercing one of the most persistent myths about that free society: that it is based on greed, necessarily breeding greedy capitalist pigs who make life worse for everyone else while they squeal all the way to the bank.

That UPS is hoping to make a profit, does not keep it from serving other people. In fact, the only way for entrepreneurs to make a profit in a free market is to serve people better than their competitors. The profit motive makes them want to do so all the more.

What Does Excess Supply Look Like?

Home construction in June was the lowest it has been since October, and Homebuilders confidence in the housing market has reached its lowest level in a year. The government has tried for two years to prop up the prices of houses and what does it have to show for it? The persistence of what we in the economics profession call excess supply.

Those hoping for a turnaround in the housing market may be waiting for a long time. A report written by Dhaval Joshi and excerpted by Barry Ritholtz documents why the housing market is still in its depressed shape and why it may take a long time for it to recover.

• 24% of all home mortgages are underwater, meaning owners owe more than their house is worth.
• Between 2002 and 2006, contractors built 12 million new homes while the number of households went up by just 7 million
 

The bottom line is that there are still way more houses for sale than there are buyers at current prices. Credit expansion by the Federal Reserve and other interventionist measures promoting home ownership last decade created a housing bubble that still has air in it. With an excess supply of such magnitude, there is no place for market prices to go but down. Prices must fall for the market to clear and the housing slump to finally be abated. Any efforts of the Federal Reserve or the Obama Administration to forestall the market clearing process, may appear to work temporarily, but merely prolong the agony and delay the adjustments required for our economy to get back to a more sure footing.

Joe Entrepreneur's Response to Regime Uncertainty

Robert Higgs, one of the great political economists and economic historians of our day, has made popular the term "regime uncertainty" for the business environment created by activist government. When politicians respond to perceived crises with one intervention after another, entrepreneurs find it much harder to perceive opportunities and plan profitable investment projects, because they don't know when and how the state is going to strike next. Higgs used this concept to convincingly explain why the Great Depression lasted as long as it did.

There has also been much discussion recently about how our present Congress and the President are creating regime uncertainty again, which is hampering the adjustment process during our Great Recession. In his weekly column, Lee Wishing, provides evidence for this by relating the business advice of a very successful entrepreneur he knows. Summing up the effects of the bureaucratic administrative state we live in, he writes:

Man is a rational actor who reflects the image of God. Our federal government, however, is frustrating man’s natural desire to make sound economic plans.

In his piece he links to my book and passed along these kind comments:

Thanks Shawn! Your outstanding book “Foundations of Economics: A Christian View” opened my eyes to an incredibly important economic and moral concept: man reflects the image of God as a rational economic planner. It’s even clearer to me, in a profound way, that government meddling runs contrary to the God’s created order. Thanks for removing the scales from my eyes!

The Story of Foundations of Economics

This blog is largely meant to compliment my book Foundations of Economics by showing how sound economics and Christian ethics can be brought to bear, when appropriate, on economic theory and policy. For anyone interested in how my book came to be and what's it all about, I encourage you to read "The Story of Foundations of Economics" Jeff Tucker asked me to write for Mises.org. It appeared in April.

Unemployment Compensation Stimulates Unemployment

In his weekly radio address, President Obama, urged Congress to increase aid to the unemployed and small business. His rationale is right out of the Keynesian playbook of stimulating A. D. (that is Aggregate Demand, not in the Year of our Lord). Obama said:

The fact is, most economists agree that extending unemployment insurance is one of the single most cost-effective ways to help jumpstart the economy. It puts money into the pockets of folks who not only need it most, but who also are most likely to spend it quickly. That boosts local economies. And that means jobs.

"Most economists" does not include me. In fact, it turns out that it may not even include Larry Summers, one of President Obama's chief economic advisers. Summers co-authored a paper in 1995 explaining that increasing the duration of unemployment benefits merely increased the duration of unemployment.

The chart above from a piece by Keith Hennessey shows that workers get real serious about finding and accepting work right before unemployment benefits run out. The longer we extend the benefits, the longer we remove the incentive to find and accept work. One fundamental principle of economics is that you get more of whatever you subsidize. As is often the case, you get what you pay for. If you subsidize unemployment, you get more unemployment.

This is because it takes away one of the primary incentives for finding work. Paul's admonition was "If anyone is not willing to work, let him not eat" (2 Thes. 3:10). Now certainly not everyone in this current economic environment is unemployed because they are entirely unwilling to work. Massive malinvestment during the boom of the mid-2000s has led to the Great Recession, which requires a tremendous amount of capital restructuring and labor reallocation. Nevertheless, by extending unemployment benefits, we enable people to remain less eager to accept productive work that does appear. As it says in Proverbs 16:26

A worker's appetite works for him;
his mouth urges him on.

Extending unemployment benefits prevents the worker's appetite from encouraging him to obtain gainful employment, and it is productive employment that will truly stimulate the economy, placing us on the road to real recovery.

Shughart Agrees

William Shughart agrees with my assessment that Obama's "Recovery and Investment Act" stimulates neither.

Responding to the claim of Christian Romer, chairwoman of Obama's Council of Economic Advisers, that three dollar’s worth of personal income was generated by every federal dollar disbursed by the stimulus plan Shughart explains:

[W]hat are the principal sources of the public sector’s ready money? Washington has just three ways available to it for financing spending programs: taxing, borrowing or resorting to the Treasury’s printing press, all of which suck scarce resources from the private sector. Because wealth thereby is transferred from private to public use, expansions in the number of jobs “created” in “green” industries and other politically favored sectors of the economy must be less than the number of jobs destroyed in the private businesses that are forced to finance governmental economic “stimulus” packages but receive nothing in return.

Exactly!

U.S. Economy Is a Complete Disaster

So says Howard Davidowitz, chairman of Davidowitz and Associates, which specializes in providing consulting and investment banking services to the retail industry. If you are afraid you've been too pessimistic about the current state of the economy, he will assure you that you are not pessimistic enough. He always makes for a lively discussion while at the same time providing interesting relevant facts.

In this interview from July 1 on TechTicker (which I always find thought provoking and often entertaining), Davidowitz points out that the housing and jobs markets are still in shambles and President's current spending commitments and future health care spending points to a long struggle.

Prosperity is the result of accumulated capital wisely invested in a free market division of labor. Government subsidization of mortgages, socialization of automobile and health care industries, draconian regulation of financial markets, increased government spending, massive government borrowing, artificially low interest rates, and increases in taxes are not the way to get us back on track. All of these policies hamper the market process by directing scarce factors of production away from their comparative advantage, resulting in capital consumption. A shrinking capital stock results in less productivity, lower real incomes, and will keep prosperity further around the corner.

The solution is to do almost the exact opposite, no matter how painful. Government spending should be slashed along with taxes and regulation of the economy. The Fed should cease inflating. Better yet, we should end the Fed altogether.

Fighting Poverty with Capitalism

PBS NewsHour (of all places) featured this hopeful item on Martin Fisher, a designer who went to Africa a socialist wanting to help poor African's escape poverty and, after six years of disappointment, became, as he put it, "a small-'c' capitalist" selling water pumps to farmers.


The money quote comes from Mark Bell who teaches international agricultural development at the University of California at Davis. Contrasting two ways of attempting to fight poverty in rural Africa he says:

If you go in and say, here's a freebie, then people are going to say, sure. Give it to me. And when you leave, you know, who knows what happens to it. But if a farmer is given the opportunity to assess and then makes the decision to buy, I think that's the real proof that this is something that is beneficial to him.

This is the main lesson yet to be learned by many foreign aid activists. The last sentence gets at the heart of demonstrated preference. When a person trades away property to receive something else, he demonstrates that the maker of the good (in this case water pumps that are practically useful and inexpensive enough to afford) has actually done something productive.

Out of Sight, Out of Mind

Yesterday the President's Council of Economic Advisers released its quarterly report on the effects of Obama's stimulus plan, praising it for either saving or creating 3.6 million jobs. The highlights of the report include these claims:

• The administration said 3.6 million jobs were saved or created through the second quarter of 2010, beating President Barack Obama's stated goal by six months.

• $100 billion of the $787 billion stimulus has been leveraged by private funds, expanding the amount invested into the economy.

• Outlays on public-investment projects like highway reconstruction increased by more than 50 percent between the first and second quarters. By June's end about two-thirds of the $319 billion in public investment funds in the stimulus had specific projects attached to them.

What should we make of such claims? We would all do well to remember that shopkeepers are not better off after having their windows broken. What is missing from the report is any recognition that economic goods, including factors of production, are scarce even during a recession. There is no recognition that the funds spent by the state must be taken from someone.

As I have explained before, government spending can be funded by only three sources: taxes, borrowing, and inflation. Each has negative economic consequences that mitigate any positive benefits reaped by those who get the government money. At best such Keynesian fiscal policy merely robs Peter to pay Paul. In fact, due to the stimulus plan, scarce economic goods are being bid away from their most productive use, so the effects of such government spending is even worse than unhelpful; it is destructive.

We have no reason to believe, consequently, that there has been any net economic benefit from the stimulus plan. Certainly many people did take jobs funded by government money. The economic resources used by the recipients of the stimulus money, however, were merely bid away from their most highly valued alternative uses. Government spending does not create more factors of production out of thin air, it merely allows the recipients of subsidies to have an advantage in the market for factors of production. This actually hinders the adjustment process that needs to take place for our economy to get back to a more sound footing.

Let us not forget that work is beneficial only if actually productive, that is only if it is useful in making something people actually want. Certainly government bureaucrats tossing money hither and yon will stimulate some activity, but if people do a job that is only possible because the state took the money from someone else, this is not productive. This is merely wealth redistribution. What the economy needs are real jobs, and what the government is heralding is the creation of fake jobs.

To the extent that there has been any recovery and any jobs saved or created at all, it is most likely due to an increased saving rate.

Only real savings leads to capital accumulation, which is what can put us back on the path toward prosperity.

Instructor's Manual and Study Guide Now Available

The Instructor's Manual and student Study Guide that accompany my book Foundations of Economics are now available electronically in pdf format. They are co-authored by myself and Ronda Credille. I'll be happy to send one to interested parties who e-mail me at srritenour@gcc.edu.