Tuesday, August 31, 2010

Not ALL Economists Agree

A headline from yesterday's USA Today boasts that "Economists Agree: Stimulus Created Nearly 3 Million Jobs (HT: Jeff Tucker). Citing economists such as Mark Zandi, chief economist at Moody's Analytics, Alan Blinder, and Christian Romer, the story's main point is that "the consensus among economists is that the stimulus worked in staving off a rerun of the 1930s."  It also notes that "conomists at Goldman Sachs, IHS Global Insight, JPMorgan Chase and Macroeconomic Advisers. . .say the stimulus boosted gross domestic product by 2.1% to 2.7%."

Well all economists do not agree. I don't, but no one asked me. Here again we have evidence of the bad economic consequences of confusing GDP with our economy. As I've said before
Was the increase in GDP during 2009 and early 2010 really indicative of economic progress? If so, why was it dependent on government subsidies? Perhaps the increase in GDP is merely indicative of an increase in government spending.
It is not hard for the government to "create jobs." All it needs to do is spend a lot of money to hire them as bureaucrats of give someone else a lot of money with the understanding that they will hire them. As I've noted before, however, this begs two very important questions:
  1. How do we know the jobs are productive or ultimately a waste of scarce factors of production and time?
  2. What about the jobs lost because of capital consumed as a result of the stimulus?
These questions are rarely asked by such studies, because, while it is easy to count government created jobs, it is much more difficult to account for jobs lost or not created because of capital consumption. It is hard to count them because many of them never existed and other lost jobs are easily written off merely as casualties of the recession.

Expansionist monetary and fiscal policy do not contribute to prosperity, because neither creates the saving and investment in capital accumulation necessary for real economic expansion. Neither do they aid entrepreneurial activity or foster the development of the market division of labor. By thwarting these engines of prosperity, interventionist macroeconomic policy hampers real recovery and at best, provides us with prettier GDP numbers even while a plethora of people remained unemployed.

Monday, August 30, 2010

The Why of Economics

My colleague Joshua F. Drake has just written an important primer Recovering Music Education as a Christian Liberal Art. I commend his book to anyone who is at all concerned about our musical culture. In it he seeks to explain why it is right and proper to study music (not to practice music performance mind you, but to study music itself). One of the key virtues of studying music as a Christian liberal art is that in this context, we learn not just the what--music--but also the why. Why it is important and a worthy use of our threescore and ten to study music. Drake stresses that music is part of God's general revelation, so that by studying music we can see more of His glory.

One of the reasons I wrote Foundations of Economics is to provide answers to similar questions as they relate to economics. I teach a course of the same name that fulfills the social science general education requirement at Grove City College. While many students take the class merely to fulfill a graduation requirement, many also take it to learn something important about economics.

I begin the class by attempting to communicate why it is worth anyone's while to study economics. College classes do not come cheap these days, so it is nice for students to understand they are getting their money's worth.

As I see it there are two primary reasons for the study of economics. In the first place, God manifests His glory by his works in the created order, so economic laws and how people interact constrained by these laws manifest God's glory. Romans 1:19-20 reads
For what can be known about God is plain to them, because God has shown it to them. For his invisible attributes, namely, his eternal power and divine nature, have been clearly perceived, ever since the creation of the world, in the things that have been made. So they are without excuse.
The Bible tells us that God reveals Himself to us not only in Scripture, but also in the created order, what theologians call general revelation. We can learn more of God's eternal power and divine nature by contemplating the economic laws that God has established.

Additionally, the cultural mandate given in Genesis 1 and 2 requires economic development. God tells us to be fruitful and multiply, fill and rule the earth, and to work and keep creation. Doing so requires economic progress that allows us to sustain a growing population while we build things and cultivate the potentialities God has put into the created order. In a sense, consequently, economics is practically helpful in our fulfilling the material aspect of the cultural mandate.

Whether they know it or not, economists, public intellectuals, rulers, and voters who advocate various economic policies are all pushing for various means to achieve the cultural mandate. Economic theory and history both teach us that different economic policies can have very different outcomes. Therefore, we must make wise policy decisions if we do not want to contribute to poverty, death, and the decline of civilization. That begs the question, which economic policies are wise and how do we know?

As I tell my class, just as the stability of the house depends not  on the roof, but on its foundation, our analysis of economic policy requires us to make sure our intellectual foundations are secure. Whether we are correct in assessing economic policy ultimately depends on the soundness of our economic theory, which depends on our view of man, which in turn depends on our understanding of ultimate things (i.e. our philosophy and theology). The foundations of our economics, consequently, are very important. 

Those interested in how I approach the foundations of economics in class can take a look at the course syllabus. In use my own book as the main required text along with Herbert Schlossberg's Idols for Destruction. I also include supplemental readings from the likes of Ludwig von Mises, Murray Rothbard, Carl Menger, E. Calvin Beisner, Francis Wayland, Adam Smith, Alfred Marshall, Paul Ehrlich, and Karl Marx.

Sunday, August 29, 2010

A Positive Approach to Stewardship

Two weeks ago I wrote about how ethics necessarily inform the policy debate of sustainable development. Christians contributing to this debate often rightly emphasize the concept of stewardship. The Scriptures indicate that the earth and all that is in it are the Lord's because He made it. If it is all His, then the property we possess is not ultimately ours in an absolute sense. We serve as His caretakers or stewards.

Unfortunately a right emphasis on stewardship too easily gets transformed into justifications for the welfare state or environmental extremism. After all if we do not really own the property we think we do, then it is okay for the state to take some of it away from us for the sakes of the poor or the environment.

I've written before about why we need to ensure that our evaluations of economic policy include the Christian ethic of property. A group that tries to do this in a positive way by looking at both special revelation in Scripture and general revelation in natural science and economics is the Cornwall Alliance. It has published a Stewardship Agenda that seeks to "answer the practical question of what public policy principles religious leaders and policymakers should support in their desire to achieve Biblically balanced stewardship." The document includes a chapter on poverty and development (of which I was a contributing editor) and a chapter on energy and climate change. Because I was only a contributing editor, the views in the document are not entirely mine. I think that, while rightly recognizing the dismal record of foreign aid to less developed countries, it still concedes too much to aid's efficacy if directed to countries with "just governance."

The Stewardship Agenda is not the last word on the topic. Nevertheless, even with the above caveat, I still think it a good and significant step in the right direction toward a better understanding of a Christian view of stewardship.

Saturday, August 28, 2010


A little over a week ago I mentioned some of the reasons we need not fear a deflationary spiral, drawing upon several works in recent popular economic commentary. The pieces I linked to were written to combat an all too popular fear of deflation. This fear is particularly dangerous, because it often feeds the inflation monster.

As Lucy van Pelt says to Charlie Brown in A Charlie Brown Christmas "The mere fact that you realize you need help indicates that you are not too far gone. I think we better pinpoint your fears. If we can find out what you're afraid of, we can label it." A few years ago a former professor of mine, Mark Thornton, did just that. In an article in The Quarterly Journal of Austrian Economics, Thornton appropriately labels the fear of deflation, apoplithorismosphobia, drawing on the Greek word for deflation. provides a scholarly (and humorous) diagnosis of this malady.

Thornton begins by briefly describing a taxonomy of the different types of deflation developed by Joseph T. Salerno. He points out that deflation generally helps the economy adjust following both economic growth and malinvestment.

He separates economists into three groups. He explains that the first two, keynesians and monetarists, both generally suffer from apoplithorismosphobia to some extent. Keynesians do so because they see deflation as contributing to a collapse in aggregate demand which they think causes recession. Monetarists fear deflation, because they think prosperity requires a relatively stable price level.

The third group is made up of causal-realist economists who go back at least until Richard Cantillon. This group does not advocate any particular quantity of money or rate of monetary inflation as optimal.

Thornton then goes on to diagnose a case of acute apoplithorismosphobia, that of economist and New York Times columnist, Paul Krugman. He notes how much monetary policy mileage Krugman gets out of a tongue-in-cheek article on a baby-sitting co-op.

Thornton concludes with a 12-step program to vanquish apoplithorismosphobia. The steps are as follows:

  1. Revisit and relearn the basic principles of economic analysis, such as supply and demand.
  2. Remember that the cause of misallocations and unemployment is government interventions, such as price controls, inflation, and regulations.
  3. Re-examine the effects of monetary policy, other than on the price level.
  4. Stop thinking about the price level.
  5. Pay less attention to statistics in general.
  6. Forget modern macro9 altogether.
  7. Note that macroeconomic problems are usually preceeded by large increases of the money supply (i.e., inflation).
  8. Remember that the Great Depression occurred after central banks were established, not before.
  9. Remember the Fed’s “mistakes” took place well after the Great Depression began.
  10. Recall that Herbert Hoover and FDR (and modern Japan) pursued activist policy regimes to keep wages and prices high.
  11. Remember that monetary and fiscal policy do not cure recessions or prevent deflation; they only exacerbate the problems and delay recovery.
  12. Remember that some of the best periods of economic improvement in human history have occurred during deflations.
The entire piece is worth reading. It is relatively brief, very readable, and quite revealing about the fear of deflation and how to combat it.

Friday, August 27, 2010

Making the Economy Worse Through Mortgage Subsidies

Henry Blodget has an excellent bit of commentary on the real consequences of Fannie Mae and Freddie Mac. Noting that they ostensibly were created to make houses more affordable to buy, the actual consequences of their intervention in the housing finance market is to keep houses more expensive. He begins:
As we noted yesterday, the raison d'etre of housing subsidizers Fannie Mae and Freddie Mac has changed radically in the past three years.
Specifically, the purpose of these two agencies has gone from "making housing affordable" to "keeping houses expensive."
How so?
The government is panicked about what will happen to the economy (and voters) if house prices decline further. By subsidizing mortgages through Fannie and Freddie, therefore, the government is now doing everything it can keep house prices as high as it can.
When government sponsored enterprises subsidize home mortgages, it does make it easier for banks to create mortgages and loan money to would-be home owners at lower interest rates. What appears to make buying a house more affordable, however, has consequences that do just the opposite. Because it is easier to borrow money, more people demand more houses resulting in higher prices. In the name of house affordability, Fannie and Freddie actually raise house prices. It is particularly sad, however, that instead of this being an unfortunate unintended consequence of government benevolence, higher house prices is exactly what the government wants, because of so many Wall Street balance sheets heavy in mortgage bonds. 

Higher house prices is exactly what we do not need right now. What I find most impressive in Blodget's piece is an almost Misesian view of what needs to happen to get us out of the Great Recession. 
[A]s long as Fannie and Freddie delay the inevitable return of house prices to fair value, they will also delay the clearing and healing process that this country must go through if it is to get back on solid economic footing again.
Blodget seems to understand that such intervention in housing finance serves only to hamper the necessary capital reallocation process required for real recovery.

Thursday, August 26, 2010

There's the Signpost Up Ahead

Here is a guy who get's it right about Fannie and Freddie:

In this interview on Tech Ticker, John Tamny, editor of Real Clear Markets, notes that Fannie Mae and Freddie Mac are both unconstitutional and economically destructive, noting how both led to massive capital malinvestment. He specifically rebuts Bill Gross' call to nationalize housing finance.

Wednesday, August 25, 2010

Confusing GDP with the Economy

Last tuesday I explained several of the problems with GDP and why we do not want to confuse it with our economy. As if on cue, Wednesday's Chart of the Day from Business Insider shows how easily GDP can distract people who should know better.

The graph is from a GDP report prepared by Goldman Sachs that purports to show the effects of the year-old fiscal stimulus measure on economic growth. The stimulus supposedly boosted economic growth through 2009 and early 2010, but as it slinks away, the economy shrivels into decline. One moral taken away by Greg White who wrote the accompanying article is that we might have been able to prolong growth if we kept in place more stimulus.

This begs a very important question. Was the increase in GDP during 2009 and early 2010 really indicative of economic progress? If so, why was it dependent on government subsidies? Perhaps the increase in GDP is merely indicative of an increase in government spending. Could it be, rather, that what the right half of the graph indicates is the economic vanity of fiscal stimulus?

Tuesday, August 24, 2010

A Funny Thing Happened on the Way to the Fiscal Crisis

Because of the Great Recession many towns and cities are facing rather bleak financial circumstances. Researchers at the Center on Budget and Policy Priorities estimate that states could face budget deficits totaling $260 billion for fiscal years 2011 and 2012 combined. Many municipalities are similarly up against it financially.

Now there are howls warning of massive job losses and service stoppages and pleas for subsidies from the national government to help fix these problems. President Obama recently signed into law $26 billion in aid to states ostensibly to save "hundreds of thousands of jobs."

Have you ever noticed, however, that whenever there is a municipal fiscal crisis, the first things to go are the services that allegedly justify the very existence of government? The most popular argument for the state amongst economists is that it is necessary to produce public goods. Greg Mankiw provides a rather standard explanation  of a public good as one in which there is jointness in consumption and producers are unable to exclude users. Theoretically this creates a free-rider problem so that people are able to use the good without paying for it. Because the producer cannot cover the costs of production for these people, a less than efficient quantity of such goods are produced in the free market. Therefore the state must step in and provide such services. Examples of such alleged public goods include things like national defense and local police service, education, fire protection, road production and maintenance, and light houses.

Hans-Hermann Hoppe, however, has provided an excellent critique of the public goods theory of the state. He shows theoretically and historically that such "public goods," even if they exist as defined, can in fact be satisfactorily produced by private entrepreneurs in a free society.

Micheal Snyder has prepared a slide show featuring "18 Signs of Decay in a Cash-Starved America." His presentation is noteworthy for the types of cutbacks taking place. Government school budgets are being slashed to the point where in one school district students are asked to bring their own soap and toilet paper. Cities are reducing road and bridge maintenance and shutting off street lights. Municipally owned electric companies are cutting back to the point of generating brown outs. In some towns police have stopped responding to minor crimes. Sheriff and police forces are being reduced.

Now one would think if the reason for the existence of the state is to provide such public goods, when budgetary push comes to fiscal shove these items would be the last things to go not the first. Perhaps we are being shown that what people think are the state's main priorities are not its main priorities after all.

Randall G. Holcombe, economist at Florida State University, has a good article arguing that this is indeed the case. He concludes by saying "The theory of public goods does not do a very good job of explaining what the government actually does, or should do, but can be better understood as a tool that the government employs for its own benefit."

Notice also, as Kid Dynamite points out, no one is forcing municipal governments to cut back. If their citizens really wanted those services, the cities could raise taxes to pay for them. If the citizenry are not willing to pay for them, perhaps they do not really want them that bad.

Monday, August 23, 2010

Too Many Wind Turbines?

One of the blessings of the free market is that market prices provide economic decision makers a way to calculate profit and loss. This economic calculation guides them in using scarce factors of production to make those goods most highly valued by members of society. The beauty is that the same prices that allow entrepreneurs to establish which investments are profitable and which are losers also provide an incentive to act on that guidance. In a free market an entrepreneur who satisfies customers better than anyone else reaps large profits. Those who waste resources making things customers do not want reap losses. The market price system, in other words, serves as a benevolent constraining influence on the entire structure of production, providing social order instead of chaos.

When the state intervenes in the economy, however, this necessarily hampers the market and distorts the price structure, providing false signals while muddying the economic calculatory water. A good case in point is the desire of governments to promote cleaner alternative energy sources. A news story from the British paper, The Guardian, reports that over half of Great Britain's wind farms have been erected where there is not enough wind.

The culprit, the story says, is government subsidies for businesses to build wind farms. The subsidies "designed to help Britain meet green energy targets are encouraging firms to site their developments badly." The average wind turbine in the U.K. operates at a measly 21% efficiency level, while some are as bad as 4.9% efficient.
Britain already has 264 wind farms with a total of 2,906 turbines. 7,000 more turbines are planned to be built over the next 12 years to meet European emission targets. Instead of helping the environment, however, the state is encouraging businesses to clutter the U.K. with too many wind farms in areas that are utterly unproductive.

This is the sort of thing that would not perpetuated in a free society. Entrepreneurs guided by profit and loss calculation would build wind farms where and to what extent they were profitable. If they did not reap a profit, they would not be built and scarce resources that would be wasted building the wind farms would be available for more highly valued uses.

Sunday, August 22, 2010

Idols of Housing

One of the great books on American culture written in the 1980s (and still timely today), is Herbert Schlossberg's Idols for Destruction. Schlossberg describes and critiques various forms of contemporary idolatry in American culture from a Christian perspective. Included are chapters about idols of humanity and idols of mammon.

As Schlossberg defines it
Idolatry in its larger meaning is properly understood as any substitution of what is created for the creator. People may worship nature, money, mankind, power, history, or social and political systems instead of the God who created them all. 
In this context idolatry is the setting up of some person, place, or thing, above Jehovah God, the only being worthy of worship and obedience. Schlossberg notes, for example, that those who would make an idol out of humanity "are hostile to any notion of law that is external to the legislative organs under human control and this means that morality cannot be predicated on universal codes." Those who would make an idol out of mammon elevates obtaining material possessions, such as a house, as the end of life.

Evidence of such thinking came out of a recent Treasury Department summit about what to do with Fannie Mae and Freddie Mac, those mortgage buying leviathans. Bill Gross, for example called for the complete nationalization of housing finance in the United States. Gross said
To suggest that there’s a large place for private financing in the future of housing finance is unrealistic. . .Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.
Well then. So let it be written, so let it be done. Think financing housing is not a matter for the state? Your unrealistic. Worried about constitutionality? So anachronistic. Think that full nationalization of the housing industry might be less than economically wise? Who can say before the fact what the economic outcome will be? Concerned that such a matter violates the ethic of private property? We do not discuss such things in polite company.

For his part, Treasury Secretary Timothy Geithner sounded like the conservative. He said that the Obama Administration "will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support.” Alas, it appears that Geithner is asking for something contradictory. I don't see how a government sponsored entity can participate as a supplier in a market and 1) not take market share from private companies and 2) not enjoy the perception of government support. The logical policy to take from Geithner's stated perspective is to eliminate government involvement in mortgage finance altogether, but I am confident that he does not want that.

On the other hand, Mike Heid, co-president of Wells Fargo Home Mortgage, said that a government guarantee against catastrophic loss would help draw private capital into the housing finance market. Well I bet it would. As Heid correctly noted, however, the challenge would be "how to marry this government guarantee with the maximum use of private capital in a way that minimizes the risk to the taxpayer, encourages competition, and ensures no one institution is too big to fail."

In other words, how do we accomplish contradictory ends? How do we intervene to provide government guarantees in such a way that private capitalists will act accordingly while at the same time not act accordingly? If we promise them guarantees against catastrophic loss that will draw them into this market, but that same promise will also give them the incentive to take on much more risk that necessarily falls on the taxpayer, not themselves.

In his book Meltdown Tom Woods has already done a masterful job explaining how Fannie and Freddie played a large role in creating the housing bubble that helped usher in the Great Recession. Because of such government sponsorship and the perception that they were indeed too big to fail, they drew much more capital into the housing market than there would have been otherwise. This is just fine for those whose chief end is to glorify home ownership and to enjoy four bedrooms and two-and-a-half baths forever. Those who understand economic law, however, recognize that such intervention has had and will always have serious negative consequences.

Gross and company demonstrate the flight from reality, what Schlossberg refers to as pathology, of the idolatrous. Notice the implicit ethical criteria--whatever brings back the housing market trumps everything including economic law, civil law, and moral law. There was nary a suggestion that trying to reap all of the benefits of the market through government intervention cannot succeed because of economic law. There certainly was no discussion about how such policies would obliterate private property in housing finance with obvious ethical consequences. When we place anything above the law of God, however, we engage in practical idolatry and are playing with some serious fire.

Saturday, August 21, 2010

What Has Intervention Wrought?

Two years ago economist Guido Hülsmann presented the lecture "How to Get Out of the Economic Crisis" at Grove City College. One of the points he made about the government's response to the recession of 2008 was that interventionist policies such as massively increasing bank reserves and fiscal stimulus hindered capital reallocation that is necessary for any true recovery. He suspected that such policies already put in place was delaying recovery by eighteen months to two years. I encourage you to watch Hülsmann's lecture here.

Hülsmann's remarks come to mind today as I survey various headlines related to our economy.

Jobless claims rose again last week to their highest level since last November.

Mid-Atlantic factory activity contracted in August for the first time since July of last year. The Philadelphia Fed's business activity index fell from a positive 5.0 in July to a negative 7.7 in August.

The Congressional Budget Office is forecasting chronic high unemployment and slow growth in manufacturing.

Such macro indicators are, not surprisingly, confirmed on the micro level as well. Staples reported weaker than expected earnings for last quarter.Meanwhile Sears reported a larger than expected quarterly loss. Home sales in California fell 22% last month. Record numbers of people made hardship withdrawals from their retirement accounts last quarter.

All of the above illustrates the importance of capital theory. The crisis that became apparent in late 2007 was the result of massive capital malinvestment. Any recovery requires reallocation of capital toward its most valuable and, hence, profitable uses. Unprofitable investments must be liquidated. Because of the efforts of the government via fiscal stimulus and Federal Reserve quantitative easing, the readjustment process has been hampered and recovery delayed.

Friday, August 20, 2010

Who's Afraid of the Big Bad Deflation?

Not good economists. Deflation is the current fright-word used by economists and politicians alike to justify more inflation in the form of monetary reserve expansion by the Federal Reserve. A good example of this recently came from John H. Makin at the American Enterprise Institute. A less academic manifestation of the phobia-du jour can be found in U.S. News and World Report. In his succinct case for fear of deflation, Paul Krugman claims that inflation is bad because
  1. "[W]hen people expect falling prices, they become less willing to spend, and in particular less willing to borrow."
  2. "[F]alling prices worsen the position of debtors, by increasing the real burden of their debts."
  3. "[W]ages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines."
Is all of this, however, truly reason to be fearful? Sound economic theory tells us the answer is no, not very much. The fear of deflation is primarily the result of trying to do economics from the perspective of the businessman. If the price at which a firm can sell its goods decreases due to decreased demand, this will reduce its revenues and, if it such a drop is unanticipated, the firm will reap losses or at least smaller profits. However, if there is general price deflation, then wages, land rents, and the prices of capital goods will fall along with those of products. Production costs will fall along with revenues, so firms will not necessarily be in long-term financial distress.

These points and others are brought out by the following recommended reading. Financial analyst Frank Shostak answers the question, "Is Deflation Really Bad for the Economy?" concluding that a fall in the money stock following previous artificial money creation actual assists the wealth-creating process by hastening the demise of unproductive malinvestment.

William L. Anderson explains Murray Rothbard's analysis of "the Deflation Bogey,"  pointing out how deflation affects both prices of factors of production as well as prices of final products. He also identifies reasons why deflation is positively beneficial after an inflationary boom.

Douglas French, President of the Ludwig von Mises Institute, presents a defense of deflation, explaining why so many economists get the deflation issue wrong while those following in the Misesian tradition get it write. Quoting economist Guido Hulsmann, French explains
Lower prices increase demand; they do not reduce or delay it. That's why more and more people own flat-screen TVs, cellular telephones, and laptop computers: the prices of these goods have fallen, and people with lower incomes can afford them. And there are more low-income people than high-income people.

Lower prices don't mean lower profits; nor do they mean that employees will be laid off. More demand for a good or service means more employees needed to produce those goods and services. "There is no reason why inflation should ever reduce rather than increase unemployment," Hülsmann writes.

Do not fall into the trap of thinking there is only one opinion on deflation--that it is the unpardonable economic sin. As the literature referenced above reveals, there exists a better framework within which to analyze deflation and that analysis indicates we need not succumb to deflation phobia.

Thursday, August 19, 2010

Socialized Medicine, Fish and Chips Edition

It is not uncommon for proponents of socialized medicine to point to centralized government health care systems in other countries. Theodore Dalrymple, retired doctor and psychiatrist from England, reveals that not all is well with Britain's National Health Service. In a piece from this March, he cites a news item from the Guardian that should give us pause:
[W]hile spending on Britain’s National Health Service had increased by 60 percent under the Labour government, its output had decreased by 4 percent. No doubt the spending of a Soviet-style organization like the NHS is more easily measurable than its output, but the former minister’s remark certainly accords with the experiences of many citizens, who see no dramatic improvement in the service as a result of such vastly increased outlays. On the contrary, while the service has taken on 400,000 new staff members—that is to say, one-fifth of all new jobs created in Britain during the period—continuity of medical care has been all but extinguished. Nobody now expects to see the same doctor on successive occasions, in the hospital or anywhere else.
Note that spending went up while output fell. Cost per-patient necessarily increased. Certainly one can find people who have had positive experiences with the NHS. However, economic theory provides us with good reasons to believe that the more centralized the health care industry becomes, the more it will generate higher costs and disappointed patients. This is not what was promised when health care reform was passed.

Wednesday, August 18, 2010

A Picture May Be Worth a Thousand Words, but a Dollar is Worth Less and Less

Monday's Chart of the Day from Business Insider communicates a remarkable amount of 20th Century American monetary history in one graph. It quite ably shows three major monetary turning points last century, all of which encouraged increases in the rate of money creation and resulted in large increases in prices.

Notice first, however, that from the end of the Civil War in 1865 through about 1910 prices gradually fell, meaning that we experienced deflation (the horror...the horror!) during one of the most prosperous times in the history of our country. It is simply not true that deflation necessarily hurls us into a financial black hole sucking us further and further down a depressionary death-spiral.

Alas, deflation was the last thing we needed to worry about during the 20th Century. The first crucial turning point toward inflation illustrated by the graph was the creation of the Federal Reserve in 1913. Initially sold as a way to assist the commercial banking system to provide an "elastic" currency to mitigate financial crisis, the Fed merely made it easier to inflate the money supply, which banks did quite willingly. This led to an inflationary boom during the 1920s that culminated in a serious bust in 1929 that turned into the Great Depression.

The next turning point came after World War II with the establishment of the Bretton Woods system. The chart bears out the truth of the title of Henry Hazlitt's book, From Bretton Woods to World Inflation. Far from stabilizing the world's monetary system, Bretton Woods put us back on the inflation trail, leading to the final turning point. 

That would be Nixon taking the United States off of the international gold standard. Nixon felt compelled to do that because of the severe drain of our gold reserves do to the massive inflation of dollars during the Bretton Woods era. With no more international gold anchor, the Federal Reserve was free to inflate and inflate it did. You can see what has happened to prices and the value of the dollar since then.  It is estimated that consumer prices have increased by at least 538 percent since 1960.

The story told by monetary history is that fractional reserve banking made easier by a central bank opens the door to massive monetary inflation which causes higher prices and a decreased purchasing power of money. It also opens to door to the boom/bust business cycle. There is nothing like bringing stability to our monetary system, and this is nothing like bringing stability to our monetary system.

Tuesday, August 17, 2010

The Trouble with GDP

In a recent interview, international investor, author, and Schlarbaum Prize winner, Jim Rogers, said he does not use Gross Domestic Product (GDP) in his investment analysis for four reasons:

  1. The numbers are backward looking;
  2. The numbers are always revised;
  3. Every government has different methodologies; and,
  4. Most governments have no clue, so they just make up the numbers. 
For many macroeconomists, GDP is their statistical bread and butter, GDP is a product of state intervention in the economy used to measure economic output. Keynesian attempts to manage the economy necessitated having something to target, so the government employed economists to develop national income accounting, of which GDP is a part. It is a convenient statistic because it seems that we can represent the state of the economy by using only one number.

However, as I explain in chapter 11 of my book, there are many practical and theoretical problems with GDP that should lead not just investors like Jim Rogers, but also professional economists, journalists, and policy makers to put away their GDP fetish. In the first place, too often people fall into the trap of believing that GDP measures human welfare. It does not, it merely sums up expenditures on all domestically produced final products for a specific period of time. That is why a hail storm that ruins your roof will lead to an increase in GDP. Getting a divorce or contracting a major disease will also work to increase GDP because these things require monetary expenditures. However, I don't see a ruined roof, major illness, or wrecked marriage as boons to human welfare. On the other hand, much work that does contribute to human welfare, such as productive work by a homemaker, is not included.

A problem hinted at by Rogers is that GDP numbers are often calculated using inaccurate data. There is a reason why GDP figures always need revising. Simon Kuznets, the economist who won a Nobel prize in economics for his work on national income statistics, estimated that GDP figures had a 10% margin for error. Another expert on GDP calculation, Oskar Morgenstern estimated the margin for error at 20%. This is so large that it is possible for GDP to be telling us the exact opposite of what is really happening in the economy. The problem gets even worse if we are trying to make international comparisons, because, as Rogers points out, each country has a different methodology and uses data of different quality. David Osterfeld has an excellent summary of these problems with GDP on pages 9-14 of his book, Prosperity Versus Planning: How Government Stifles Economic Growth.

Another major problem is that GDP is only partly gross. It leaves out investment expenditure on intermediate non-durable capital goods. This leaves out a large part of economic activity and leaves the impression that what drives the economy is consumption spending.

Finally, but not exhaustively, GDP includes large amounts of government spending. This is spending that does not reflect the subjective values of members of society. It is spending that is not funded by the voluntary purchases by the earners of the money spent, but by taxes forcibly taken from other people. In order to spend money, the government does not produce anything, but takes wealth out of the economy by either taxation, borrowing, or inflation. Government spending is much more consumptive than productive. Consequently, when GDP is increasing due to increases in government spending, this actually indicates more government consumption and less private production. It is a sign that the economy is getting worse, not better.

If economists must use GDP statistics, they should not kid themselves that the numbers present a scientific measurement of economic well-being. We should beware of equating GDP with the economy and increased GDP with prosperity.

Monday, August 16, 2010

James Fenimore Cooper and Property

One of my favorite authors is James Fenimore Cooper. Let me state out the outset that, yes, I have read Mark Twain's screed attacking him. In my ongoing informal poll of English departments, it sadly seems that no one has read Cooper, but everyone has read Twain's uncharitable dismissal. A review in The New Criterion of a recent biography of Cooper, for instance, can't resist by starting with Twain instead of Cooper. Twain certainly is very skillful at poking fun at people. However, I prefer Yvor Winters' take on Cooper in his underrated essay, "Fenimore Cooper or The Ruins of Time," included in his book, In Defense of Reason.

It is true that the openings of Cooper's novels often proceed at, shall we say, a leisurely pace. However, I think it is best to embrace his style by approaching his books as if he was an invited dinner guest and, after the meal is finished, we've all retired to the living room and he begins to tell us a story from his particular point of view.

I like Cooper's work in general because it gives us a glimpse of the world-view and ideologies current in the early years of our republic, when we still had a republic. It also reveals the thorough influence of Christianity on our culture. One cannot hope to understand Cooper's characters and their actions if he has little understanding of Christianity. Cooper clearly assumes a general understanding, not only of the Scriptures and basic Christian doctrine, but also a basic understanding of various denominational and theological differences.

Cooper is also to be valued because he causes us to contemplate the virtues and costs of civilization and, although his fiction is certainly in the romance genre, his descriptive and historical realism is too often underrated. Certainly his characters inhabit the real world of good and evil.

I recently completed the cycle of books known collectively as the Leatherstocking Tales by reading The Prairie. It is a tremendous work dealing (somewhat ambiguously) with the juxtaposition between nature and civilization and between justice and the law of the wilderness. It quickly became my favorite of the cycle, being the most profound of the five and certainly is the most quick to draw the reader in. Those who criticize it for being boring simply do not know what they are talking about.

It is possible, however, that some of my appreciation for the work is due to my already being familiar with the life of Leatherstocking, Natty Bumpo, from earlier reading. If one has never read any of the series, I would not suggest beginning with The Prairie. The thoughts and behavior of Bumpo make the most sense if you have already become acquainted with him throughout his life in the other four tales.

Nevertheless, The Prairie contains some of Cooper's best prose of the series. That assumes, of course, readers are able to read compound sentences and possess a vocabulary above that of a seventh grader. I have read Cooper's writing criticized as wordy, stilted, and ponderous. Well, I for one do not mind pondering language. And it might do us good to expose ourselves to a bit of formality in our hyper-informal age. Perhaps these criticisms say less about what is wrong with Cooper's writing and more about what is lacking in us as readers of his writing.

Anyone wishing to better understand the heritage of America should read the entire series. Some critics allege Cooper to be historically inaccurate regarding Native Americans and misogynistic toward women.  These criticisms, however, merely castigate him for being insufficiently contemporary. As Yvor Winters wrote, "For the American who desires a polite education in his own literature, the five novels of the Leatherstocking series are indispensable." He's right. 

The Prairie relies heavily on the best geographic and sociological information available to Cooper. The book is set in that part of the Midwestern plains now known as Nebraska. I was born and raised there and I can vouch for the accuracy of Cooper's description of the pre-settlement prairie. Zebulon Pike did not refer to Nebraska as "the Great American Dessert" for nothing.

To those interested in learning more about The Prairie, I commend to them William H. Goetzmann's essay, "James Fenimore Cooper: The Prairie" that appeared in Landmarks of American Writing. He provides great insight on Bumpo's character and its relevance to Cooper's vision when he writes:
More important than his powers, however, are his values for they denote what he represents in Cooper's myth of America's beginnings. The twin keys to Leatherstocking's values are freedom and a reverence for nature. Having been arrested by Judge Temple for making free use of nature's bounty when he killed a deer, Natty rejects "the law of the clearings" for the most part, favoring instead the freedom of nature's laws -- even as applied to the Indians who make "free" with the settlers' horses because, being natural beings, they have little feeling for or need of private property. Leatherstocking does not, however, violate nature or nature's laws, and, embodying Cooper's basic ambivalence in this matter, he does not entirely scorn civilization's laws. Speaking to Ellen Wade, he declares, "The Law -- tis bad to have it, but I sometimes think it is worse to be entirely without it. Age and weakness have brought me to feel such weakness at times. Yes-yes, the law is needed when such as have not the gifts of strength and wisdom are to be taken care of." Here Cooper gets at the heart of his theme, and for that matter the theme of most "westerns" down to the present day. This is the role of law and order which is synonymous with the best aspects of civilization in that it provides justice and protection for the weak against the vicious, {82} the violent, and the rapacious -- in short the spoiler who is in Cooper's terms the unnatural man. The good law is, by implication, Jeffersonian law which is in harmony with nature, indeed derives from it, but which nevertheless allows a man to be as free as possible without injury to his fellow creatures. It depends fundamentally upon tolerance and mutual respect.

While the issue of private property is dealt with more explicitly in Cooper's Littlepage novels, one issue that struck me as I pondered The Prairie was the relationship between property and civilization. As alluded to by Goetzmann, Natty Bumpo, known is this work as "the Trapper," kept moving west because he did not like the idea of private property hemming him in from walking about and hunting game wherever he wanted. It seems that this sort of freedom is a virtue that attracted Cooper. On the other hand, Cooper always keeps this virtue in tension with that of civilization that is organically linked with the establishment and defense of private property.

Natty Bumpo and the Native American characters described by Cooper were lax about private property not merely because they lacked moral fiber, but because land was relatively abundant and there was no necessity to economize on land because there was so much of it compared to people there to use it. Cooper's description of the early American frontier lends credence to Hans Hermann-Hoppe's theory of the development of property as an institution necessary to avoid potential conflict over economic goods.

In the second chapter of his book, A Theory of Socialism and Capitalism, Hoppe explains the practical benefits of private property and its necessary for social peace and cooperation wherever goods are scarce:
To develop the concept of property, it is necessary for goods to be scarce, so that conflicts over the use of these goods can possibly arise. It is the function of property rights to avoid such possible clashes over the use of scarce resources by assigning rights of exclusive ownership. Property is thus a normative concept: a concept designed to make a conflict-free interaction possible by stipulating  mutually binding rules of conduct (norms) regarding scarce resources. It does not need much  comment to see that there is indeed scarcity of goods, of all sorts of goods, everywhere, and the need for property rights is thus evident. As a matter of fact, even if we were to assume that we lived in the Garden of Eden, where there was a superabundance of everything needed not only to sustain one’s life but to indulge in every possible comfort by simply stretching out one’s hand, the concept of property would necessarily have to evolve. For even under these “ideal” circumstances, every  person’s physical body would still be a scarce resource and thus the need for the establishment of property rules, i.e., rules regarding people’s bodies, would exist.
Property rights were relatively less important on the open prairie upon which there are very few inhabitants. As populations grow and society develops, private property is absolutely necessary to prevent a barbaric and violent struggle for survival. Private property and civilization do indeed progress together.

Sunday, August 15, 2010

Sustainability and the Cultural Mandate

Anyone unsure that economic policy necessarily includes an ethical component need only to look at the issue of sustainable economic development.  The debate over sustainability is at least waist deep in ethics as evidenced by the lengthy essay "For Goodness Sake" by Ashley Thorne at the National Association of Scholars. Thorne reviews in detail the ethical imperatives heaped upon sustainable development that separate the virtuous, low-carbon footprint sheep from the villainous polluting goats. She documents the spectrum of ethical unction on this issue, culminating with comments manifesting extreme environmentalism. Thorne's final example quotes the text of a website designed to comfort women who have had abortions:
[B]ecause I chose to end my accidental pregnancies, there are two fewer human beings on the earth impacting the habitat of butterflies and other creatures.
This is a logical conclusion for one who fails to see human beings a creatures made in the image of God.

Of course Christians must bring thoughts about creation and man's place in it captive to Christ. We do this by meditating upon His general and special revelation. We find in Genesis 1 that the very first command given to man is what has been variously called the creation mandate, cultural mandate, or the dominion mandate. Even before sin and the fall of man, God told our first parents to “Be fruitful and multiply and fill the earth and subdue it and have dominion over the fish of the sea and over the birds of the heavens and over every living thing that moves on the earth” (Gen. 1:28). In Genesis 2 we find that the cultural mandate includes working and keeping the created order. Thus, as David Hegeman in Plowing in Hope explains,  the cultural mandate requires filling, working, keeping, and ruling creation.

We are called to do this, however, in our present, fallen and finite world faced with scarcity. Since our banishment from the Garden of Eden, man has faced a central cultural dilemma: how do we fulfill God’s creation mandate in a world of aggravated scarcity without either starving to death or killing one another. One of the primary goals of my book Foundations of Economics is to show how economics helps us to answer this question.

In the first place, multiplying the population and subduing and exercising dominion over the earth requires economic progress. It obviously requires survival and each person developing their potential and it requires the development of the potential of the natural order.

Fulfilling God’s dominion mandate, however, also requires wise balance. It is possible that we rashly try to draw too much from creation too quickly, make changes too abruptly, or do so without replenishing the earth. We can, however, err on the other extreme by taking our cue from the environmentalist movement and  and act as if nature is a museum and we are its curator. Exercising dominion and developing civilization requires making concrete and lasting change to the created order. At the same time we are not to be spoilers of creation.

Economic theory tells us there are three sources necessary for economic progress: the division of labor, capital accumulation, and entrepreneurship. The division of labor opens the door to increased productivity by allowing people to specialize at lines of production where they are most efficient. The use of capital goods contributes to economic progress by increasing the productivity of the user. In order for economic progress to continue over time, however, it is important not to waste capital that has already been accumulated, which is why entrepreneurship is the third major contributor to economic development.

It turns out that all three of these sources of economic development require private property. Without private property there can be no voluntary exchange nor division of labor, capitalists will be discouraged from saving and investment, and entrepreneurs will lack the incentive to engage in profitable production and they will be unable to calculate economic profit and loss because there would be no market prices to use in such a calculation.

Additionally, the institution of private property also helps prevent the destruction of the creation as it is developed. The strict liability that is a feature of private property constrains would be polluters, for example, because they will be held accountable if they aggress against the property of their neighbor through things like smoke emissions or chemical dumping.

In fact it is in societies with little or no private property that we find little prosperity but much waste of resources. Economic development that is truly sustainable can only occur in societies that adhere to the Christian ethic of private property. Once again we find the Christian ethic of property supporting general revelation manifest in economic law.

Saturday, August 14, 2010

Moral Hazard and Football Concussions

Moral hazard exists when certain acts or policies produce incentives that promote the very outcomes the acts or polices seek to mitigate. A classic example is how automobile seat belts, because they give drivers a sense of protection, make them more willing to drive faster, which increases the risk of accident.

A particularly economic destructive source of moral hazard in the protective belt designed to keep our banking system safe. Central banks standing by as lenders of last resort and deposit insurance actually encourage reckless banking behavior because they greatly reduce the risk of insolvency. Banks are thereby encouraged to undertake even more risky lending practices. If they make a profit, banks reap it all, but they do not bear all of their losses. Such privatization of profit and socialization of risk is one of the key factors contributing to our recent financial crisis.

Preseason professional football is upon us, so it is appropriate to point out how moral hazard is playing itself out on the football field. Not quite a year ago, Peter Klein alerted us to a Wall Street Journal article in which the author argues that hard-shell football helmets may have reduced the potential for death on the field, but also, because of creating a sense of safety, promoted more violent head collisions, resulting in more concussions.

The unintended consequences of advances in football headgear has been affirmed recently by Pittsburgh sports writer and author Jon Steigerwald in a post on his blog Just Watch the Game. He recounts a conversation he had a few days ago with newly inducted Hall of Famer Dick LeBeau. Presently defensive coordinator for the Pittsburgh Steelers, LeBeau and had a successful career as defensive cornerback with the Detroit Lions several decades ago. He told Steigerwald that the reason players in the 1960s tackled leading with their shoulders instead of their heads is that they only had at most two bars on their face mask.

The moral of the story is be careful what and how you protect. God has established economic laws that regulate the behavior of people in the market place. When we engage in policies to institutionally protect people from the negative consequences of unwise behavior, we attempt to thwart that law and, more often than not, we we end up merely feeding that foolish behavior. We should not be surprised that the outcome is much worse than expected.

Friday, August 13, 2010

Another Reason Unemployment Remains So High

It costs a lot to hire someone. Michael P. Fleischer, president of Bogan Communcations in New Jersey, revealed the nitty gritty on labor costs in an op-ed in Monday's Wall Street Journal. He describes the full labor cost of hiring a good employee whose been with his company for many years.
Meet Sally (not her real name; details changed to preserve privacy). Sally is a terrific employee, and she happens to be the median person in terms of base pay among the 83 people at my little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings. She's been with us for over 15 years. She's a high school graduate with some specialized training. She makes $59,000 a year—on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.
After documenting the money the government takes from her, Fleischer spells out the details of how much it costs him to hire her:

Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay. Health insurance is a big, added cost: While Sally pays nearly $2,400 for coverage, my company pays the rest—$9,561 for employee/spouse medical and dental. We also provide company-paid life and other insurance premiums amounting to $153. Altogether, company-paid benefits add $9,714 to the cost of employing Sally.

Then the federal and state governments want a little something extra. They take $56 for federal unemployment coverage, $149 for disability insurance, $300 for workers' comp and $505 for state unemployment insurance. Finally, the feds make me pay $856 for Sally's Medicare and $3,661 for her Social Security.

When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally's job each year.

It is no wonder recessions are drawn out when the state makes it so difficult to reallocate labor. Some people have observed that much of Fleischer's expense is health care costs which are optional. They will not be for long due to the recently passed health care law. These expenses coupled with the general regime uncertainty go a long way toward explaining why companies are not hiring.

Thursday, August 12, 2010

The Bad Economics of Arts Impact Studies

John Kay has a very good column in the Financial Times explaining the problem with studies designed to show the positive economic impact of the arts. These studies essentially count up all of the money spent by arts organizations on labor, rent, advertising, etc. and expenditures by patrons on complementary goods such as food and drink. Then they use that number to show how much economic activity occurs because of the arts and also how much tax revenue is generated for the state by this activity.

Kay does us an excellent service by showing that the same approach could be taken to demonstrate the positive economic benefit from disease. Kay begins:
Many people underestimate the contribution disease makes to the economy. In Britain, more than a million people are employed to diagnose and treat disease and care for the ill. Thousands of people build hospitals and surgeries, and many small and medium-size enterprises manufacture hospital supplies. Illness contributes about 10 per cent of the UK’s economy: the government does not do enough to promote disease.
Such reasoning is identical to that of studies sitting on my desk that purport to measure the economic contribution of sport, tourism and the arts. These studies point to the number of jobs created, and the ancillary activities needed to make the activities possible. They add up the incomes that result. Reporting the total with pride, the sponsors hope to persuade us not just that sport, tourism and the arts make life better, but that they contribute to something called “the economy”.
Kay highlights the fact that what these studies count is not the net or even gross benefit of the arts. They merely calculate the cost. For the arts to be of obvious economic benefit, they must generate revenue greater than that cost. Kay also rightly implies that professional economists should know better.

One limitation of Kay's piece is that he tries to incorporate the notion of "cultural value" in assessing the worth of the arts. While I am prepared to say that we can conceptualize about the value some art has for a society's culture, there is no way (as Kay acknowledges) we can measure that or even account for it in economic calculation beyond what people are willing to pay for it. If, however, we account for it in that way, then there is no need to treat it as a separate category of value.

Several years ago I wrote about the trouble with arts impact studies in the United States. One of the worst things about these studies is their attempt to justify increased government funding based on spurious calculations. Ridiculous claims are made saying that for every dollar the government spends on the arts, it gets up to eight in return. This completely ignores that the vast majority of artistic activity would be done anyway without government aid. It also entirely leaves out the cost of foregone activity due to the taxes funding the arts subsidies.

Advocates of government arts funding offer several different arguments in support of arts subsidies. One that should be yanked off of the stage is that government arts subsidies are a boon to the economy and tax revenues alike. Do not get fooled by the siren song of the economic impact of the arts study.

Wednesday, August 11, 2010

No More Bailouts. . . . .Unless You're from the Government and You're Here to Help

When he signed the recently passed financial regulation into law, President Obama declared, "No more bailouts, period." Well it turns out he didn't mean bailouts for government sponsored enterprises, Fannie Mae and Freddie Mac. This report from Wall Street Journal Video has the details:

These behemoth beneficiaries of state privilege were excluded from the giant financial regulatory law just passed and it turns out they were excluded from the no more bailouts promise as well. Together they are asking and will surely get another $3.3 billion from the government.

Tuesday, August 10, 2010

Why Would Someone Unemployed Turn Down a Job?

I have previously briefly outlined the economic theory explaining why providing unemployment benefits produces more unemployment. Recent news also bear this out. A Wall Street Journal article documenting how some firms are actually finding it hard to hire workers even in this recession indicated this is largely due to unemployment insurance making potential workers much more choosy:
Some workers agree that unemployment benefits make them less likely to take whatever job comes along, particularly when those jobs don't pay much. Michael Hatchell, a 52-year-old mechanic in Lumberton, N.C., says he turned down more than a dozen offers during the 59 weeks he was unemployed, because they didn't pay more than the $450 a week he was collecting in benefits. One auto-parts store, he says, offered him $7.75 an hour, which amounts to only $310 a week for 40 hours.

"I was not going to put myself in a situation where I was making that small of a wage," says Mr. Hatchell. He has since found a better-paying job at a different auto-parts dealer.
Once again we see a fundamental economic principle at work: We get more of whatever we subsidize. Subsidize unemployment and we get more unemployment.

Monday, August 9, 2010

Labor Numbers and Mondays Always Get Me Down

During the Great Recession anyway. Last Friday, the U.S. Department of Labor said that non-farm payrolls lost 130,000 jobs due to more workers cut by the Census Bureau as it winds down this year's census. They also revised up the number of jobs lost in June from an initially calculated loss of 125,000 to an actual job loss of 225,000. That is, then 355,000 jobs lost over a two-month period. Nothing gives the lie to premise that we can governmentally employ our way to prosperity than these numbers. As soon as the government gravy train runs out, and it must eventually, things shift back to reality. The only good news is that private payrolls increased by 71,000, which is still too small to signal an actual recovery. Meanwhile the real unemployment rate (which includes unemployed who have given up looking for work and part-timers looking for full time employment) remained unchanged at 16.5%.

This chart and report from Calculated Risk reveals that the employment situation during our current Great Recession is worse than that in any other recession since World War II. Notice the recent shift to a downward trajectory again.

Of course all of this news has led to talk of the FED inflating monetary reserves even more and calls from Keynesian economists like Joseph Stiglitz  for even more fiscal stimulus. As I explain in chapter 14 of my book, such policies will not cure recession because government spending and artificial credit expansion merely result in the misallocation and consumption of capital. As the Beatles once said, "Money can't buy you love." It can't buy prosperity either.

Sunday, August 8, 2010

Economic Policy and Christian Ethics

There never seems to be a shortage in calls for government intervention in the economy to solve one sort of problem or another. Increasingly, such proposals are being floated by Christians who identify people facing undesirable circumstances and then claim that Christian ethics demand statist economic policy as a solution. Such advocates view increased regulation of the financial industry, mandatory sick and family leave, mandatory safe, affordable, and enriching child care, and living wage legislation as Christian responses to what they see as undesirable outcomes in our hampered market economy. Some lobby for state regulation of the use of goods possibly affecting the environment in the name of creation care.

In evaluating various policy proposals, we would do well to remember Murray Rothbard’s insight that  all economic policy has an ethical component. Once we move beyond examining the purely economic consequences of the minimum wage, for example, and then advocate raising, lowering, or abolishing it, we must incorporate some ethical standard, because we are now entering dimension of the should or should not.

Therefore, as I point out in chapter 13 of my book, if we want to fully analyze any economic policy, we must answer two questions, not just one. First, is the policy economically sound? That is, does the policy do what it is ostensibly supposed to do? Second, is it ethically sound? Is it morally acceptable, or does it violate our accepted ethical criteria? Any economic policy about which we cannot answer both questions in the affirmative, must be deemed unacceptable.

Those Christians who advocate interventionism fail to remember that from a Christian perspective, the ends never justify the means. If we want to acceptably do God's work, we not only must seek to obtain ends ordained by God, but we must use means ordained by Him as well. If we see poverty as a social evil, for instance, and desire to reduce the number of people living in poverty, we could accomplish this simply by executing all poor people. That would, after all, reduce the number of people living in poverty. It would also be evil. This example may make my case by noting the absurdum of the ol' reductio, but you get the point. We cannot embrace wicked means to achieve morally desirable ends.

Because all economic policy affects what people can do with property, a Christian view of economic policy demands that we evaluate policy within the Christian ethic of private property.  As noted by various Christian thinkers from Tertullian, to Aquinas, Calvin, Charles Hodge, and Francis Wayland. both general and special revelation teach that people possess a divine right to private property. In Scripture we find commandments against theft (Exod. 20:15, Deut. 5:11, Luke 18:20), fraud (Lev. 19:35-36, Prov. 11:1), and moving property barriers (Prov. 23:10-11). The account of Ananias and Sapphira in Acts 5 indicates that the right to property includes the freedom to dispose of one's property as one sees fit, without compulsion from other people.

Of course this right to property is relative to claims made by other people. God is the ultimate owner of all there is and hence we are all responsible to Him for how we use the property he has bestowed upon us and we will be held accountable to Him on the last day for how well we executed our duty as stewards. Nevertheless, with regards to our social interaction with other humans, God has ordained that each of us should be secure in our property.

The implications for economic policy point us toward a free market. If each person is secure in his property, this prohibits theft by individuals. It also, importantly prohibits theft by rulers. God did not say, after all, "Thou shalt not steal, unless a majority in Congress and the President say so. And if the right to property includes that of disposing of one's property as he desires, provided he does not violate anyone else's right to do the same, this implies that state interference in voluntary exchange is wrong as well. Therefore, as Christians we are not free to advocate for increased regulation of business, minimum wages, monetary inflation, fiscal stimulus, confiscatory taxation, or subsidies as means to achieve our desired ends.

It also means we have our work cut out for us. When we identify social ills to which Scripture calls us to minister, we need to do the hard work of finding ethical means for doing so. Violating property rights with good intentions will not cut the ethical mustard.

Saturday, August 7, 2010

Is the Health of the Economy Dependent on Consumption?

Too many economic journalists think so. This week's Exhibit A comes from Martin Crutsinger, economics writer for the Associated Press. He claims that whether we have sustained economic recovery depends on people increasing their consumption spending. Crutsinger writes
For the economic recovery to gain strength -- and the unemployment rate to come down in any meaningful way -- consumers will need to become less frugal.
Later in the piece he notes that even when people are spending on consumer goods, they are not buying them with credit.
Even the way people are paying for things shows a change in attitude about money. Consumers shied away from accumulating new debt during the second quarter, according to the latest reports from MasterCard Inc., and Visa Inc.
Overall card use rose 14 percent. But the growth came almost entirely from debit cards, which rose to $465 billion, from $408 billion a year ago. Credit card use edged up less than a percent to $345 billion from $342 billion last year.
The upshot of this view of the economy is that prosperity rises and falls with consumption. If people spend more money on consumer goods, retailers reap profits, hire more workers, and incomes expand. If people reduce consumption and increase savings, however, retailers feel the pinch, lay off workers and incomes fall. It is an easily understood tale, but it only captures part of the effects of changes in consumption and spending.

The fact of the matter is that one of the primary reasons the economy is in such a mess is that, with the help of the Federal Reserve and the commercial banking system, people were encouraged to take on too much debt in the form of things like home mortgages and consumer credit. Too much consumer spending financed with credit is part of the problem. It will not be the solution for recovery.

Economic prosperity occurs when people are able to obtain more and better goods they desire at lower prices. This is made possible by production, not consumption. We produce in order to consume, not consume in order to produce.

It is impossible to consume food, clothing, shelter, automobiles, or recordings of the Dvorak Serenade for Strings in E, Op.22 if they are not first produced. Production requires the use of land, labor, and capital goods. The more capital goods there are the more productive the land and labor will be. Capital goods, however, must also first be produced. That means that, in order to benefit from the use of capital goods, resources must be directed away from consumption and the production of consumer goods and invested in the production of capital goods that can then be used to produce even more consumer goods. The restriction of consumption is what economists call saving. Therefore, saving is not a hamper to the recovery.

Nay, saving is required for recovery. A tremendous amount of capital was squandered during the economic boom of the mid-2000s. This malinvestment came to light during the recession and can't be fixed by increases in consumption. Given the increases in government intervention in the automobile, financial, and health care industries over the past two years, one of the only bright spots is that people appear to be increasing saving. This is not something of which to be fearful, but to hope continues.

Friday, August 6, 2010

Learn from History Indeed

Repeatedly supporters of the Obama Administration's health care reform have refered to the debate over medicare decades ago to show us that we have nothing to fear in our brave new world. In a bit of commentary in The Guardian, Sahil Kapur does so as he attempts to explain "How the US learned to love healthcare reform." He appeals to recent poll numbers that show an increase in the number of people who approve the plan compared to two months ago. He then seeks for reasons for this improved image.

In his explanation he uses the passage of Medicare as an historical analogy. Kapur cites conservative fears that passage of Medicare would result in creeping socialism and then notes that everything turned out okay, because Medicare is overwhelmingly popular. There is much to be learned from the history of 20th Century U.S. health care policy, but the lessons to take away are not what Kapur thinks they are.

The idea that health care is a mess only government can solve would be laughable if not so dangerous. It is true that the health care problem is not working itself out in the marketplace, but the reason is that we have a highly interventionist market for health care. Past government intervention to mitigate the problem of rising health care costs has resulted in a system in which the U.S. Government is already the number one purchaser of health care, and that is precisely the problem.

The history of health care in the U.S. is a quintessential case of progressive interventionism, most brilliantly explained by economist Ludwig von Mises. In his classic article "Middle-of-the-Road Policy Leads to Socialism," Mises explains that, whenever the state intervenes in the economy, negative consequences occur that are then used as a motive for even more intervention. What begins as an intrusion in a single market can grow until it incorporates an entire industry or even economy.

This is the story of health care in the United States over the 20th Century. As Vijay Boyapati notes in an excellent brief overview of the economics of health care reform, our current system didn't develop organically, as it were, from health care providers or employers responding to demand from consumers. It was the result of government intervention in labor markets. After World War II began, the U.S. government mandated wage and price controls. Employers who wanted to compete for the best employees, but were barred from offering them higher wages, began to provide their workers with health insurance. In 1943 a modification to the tax law was passed that made insurance provided by employers tax free. That set in motion our long march toward the present

As Mises' theory indicates, intervention begat intervention. Health care costs began to increase due to demand increasing faster than supply until there were calls to insure that retired elderly citizens could pay for treatment. In 1965 the government made things worse by expanding this system to everyone over 65 years of age with the creation of Medicare.This other government health care programs greatly increased the demand for health care services (the entire third party payer system we have does this) and government licensing and regulation reduces the supply. In an interventionist market like this, health care costs must go up. Government intervention in the market for medical services is primarily responsible for our situation. Even more intervention in our present direction will only make things worse.

It also turns out that claims that socialized medicine in the form of Medicare would lead to large constraints on our freedom were not far off at all. With the passage of Obamacare it is illegal for a person to simply not buy health care. If a person decides he would rather save his money or spend it in some other way, he will be fined. The state is now forcing us all to give money to a health insurance company or to pay the state. This is legalized theft. The government has become like old man Potter in It's a Wonderful Life. As George Bailey rebuked, "You're talking about something you can't get your fingers on, and it's galling you."

The lesson to be learned from history is that government intervention in health care is the problem not the solution. What the patient needs is not more interventionist poison. It needs the cure of a free market, where consumers will be more price attentive and health care providers will be more eager to provide higher quality care at lower costs.

My Blog Is in the Western Tradition

Both as commonly understood and in reference to the blog of the same name. The man behind the blog is Jason Jewell. He is Associate Professor and head of the Department of Humanities at Faulkner University and Associate Editor of the Journal of Faith and the Academy. He is also a friend of mine. I've found his blog Western Tradition well worth reading. It is an honor to included on its blogroll. He explains his mission as follows:
This blog is dedicated to promoting an appreciation of the classical and Christian heritage of Western civilization. I believe that the Western tradition has compelling answers to the religious, cultural, social, economic, and political problems we face today. 
Jason is very bright, well-read, thoughtful gentleman, and joy with whom to share a pancake breakfast. I encourage you to regularly read Western Tradition.

Thursday, August 5, 2010

Some of What Is Seen Isn't So Hot Either

My op-ed, Stimulus: Out of Sight, Out of Mind, pointed to the fact, made popular by Frederic Bastiat and Henry Hazlitt, that identifying beneficiaries of fiscal stimulus projects such as the "American Recovery and Reinvestment Act" is relatively easy, but seeing the harm due to taxation and lost private investment is much more difficult.

A new study issued by Senators Tom Coburn and John McCain identify a plethora of projects funded by stimulus money in which the costs can be observed. What is seen is not pretty. As I said in my commentary, because such stimulus policy directs scarce economic goods away from their most productive uses, fiscal stimulus is worse than useless, it is destructive.

The study from Coburn and McCain identifies 100 projects where the costs clearly outweighed any benefit and net jobs were lost. You can read a good summary of the study here at Business Insider. Economically destructive projects funded by the stimulus plan included:
  1. $554,763  used by the U.S. Forest Service to replace windows in an Amboy, Washington visitor center that closed in 2007.
  2. $62 million poured into the disastrous North Shore Connector to professional sports stadiums and a casino in Pittsburgh, Pennsylvania.
  3. $1.9 million received  by the California Academy of Sciences  to send researchers to the Southwest Indian Ocean Islands and east Africa, to capture, photograph, and analyze thousands of exotic ants. 
  4. FEMA stalling two Texas fire stations for more than a year due to increased costs and red tape because it received $7.3 million.
  5. $89,298 spent by Boynton, Oklahoma to replace new sidewalks with even newer sidewalks that lead to a ditch.
I should note that it is more than a little disturbing to see McCain coming out for fiscal soundness only now. We should not forget that in 2008 he voted in favor of the Keynesian inspired tax rebates as well as the Financial Bailout. Although he is known generally as a conservative, he has a knack for voting interventionist when it really matters.

Wednesday, August 4, 2010

Economic Policy Turning Points

At one of those great free market institutions known as the yard sale, I was speaking to a mother who teaches her son history. They had recently been going through the Great Depression and noticed a number of similarities between Roosevelt's economic policy in the 1930s and our present economic policies, noting that FDR's regime was an important starting point for much of the welfare state. It occurred to me that, while Roosevelt certainly did his share of the heavy lifting, the descent from liberty began even earlier.

One can see the beginnings of the mercantilist corporate state in the minds of people like Alexander Hamilton and then Henry Clay's so-called "American System." Regardless of one's opinion regarding the causes of the Civil War (slavery, tariffs, or simply states rights vs. the Union), the legacy of that conflict was a major tipping of the balance of power to the centralized national state.

The Progressive era added the ideology of social engineering and achieving the great society through a benevolent bureaucracy overseen by wise technocrats. It was during Woodrow Wilson's presidency that certain key parts of the economic statist apparatus--the Federal Reserve and the Income Tax--were put in place.

FDR erected even more of the institutional structure of interventionism by implementing social security and the framework for the welfare state. Lyndon Johnson greatly escalated the welfare state with his Great Society programs. And then we left the international gold standard in 1971 under Nixon and we've had serious inflationary credit expansion ever since. Now the interventionist state is accepted by all branches of the national government--the President, Congress, and the Supreme Court.

In such a legal environment, what is our best course of action? The very bright historian Thomas E. Woods, Jr. has an idea that stretches back to Thomas Jefferson and 1798 and is worth serious consideration. Nullification: How to Resist Federal Tyranny in the 21st Century is Woods' tenth book and in it he makes the provocative claim that "states can and must prevent the enforcement of unconstitutional federal laws within their borders." I have not read Nullification yet, but I do know that everything Tom Woods writes is worth reading.  Here's an interesting and, dare I say, educational interview of Woods by the Mises Institute's ever-dapper Jeff Tucker.