The Liberal Order

Government As Perpetrator

The sole primary purpose of market capitalism is to align the interests of individuals (their selves) with that of society (others). As paradoxical as it may seem, in a market capitalist economy with effective institutions (primarily property rights and contract enforcement), the only way I can make me better off is to make you better off. I do this by using scarce resources over which I have sole control in a manner that provides others more value per dollar than is possible using these same resources in any other manner. 

Prices and profits guide individuals to make better decisions about how best to allocate scarce resources. I will use such information to determine how best to allocate my time and other scarce resources at my disposal. And as long as I or my assignees bear the costs and benefits of my (our) decisions, I (we) will carry out those decisions as directed by existing relative prices and profit opportunities. Should I fail to provide others more value per dollar than what someone else offers, I may find myself out of business. This makes me vigilant when deciding how to spend my time or how best to employ the resources at my disposal.

Market capitalism is not perfect, nor can it ever be given the knowledge and information problems we encounter. Consequently, there may indeed be a limited need for government to intervene, taking on a role more expansive than the protector of property rights and enforcer of contracts to which it is normally assigned. We all differ on our preferences or beliefs about the extent of this expansionary role, but things like provider of national defense, funder of education for the masses, a social safety net, and provider of roadways are common examples of such an expanded role.

So we have two imperfect institutions, markets and government, and must therefore find that mix of these two imperfect institutions that provide us the least imperfect outcome. Remember, though, the incentives of individuals acting within either institution, private or public markets, are the same - self-interested utility maximizing behavior. What differs is how the rewards are earned by individuals acting within the different institutions. For right or wrong, market participants use persuasion and inclusion to elicit cooperation; politicians and bureaucrats use force and exclusion to elicit cooperation. Think of Fed Ex versus the U.S. Post Office. Social security versus a retirement community. Government schools versus private schools.  

Firms that produce more value per dollar of input earn greater profits. Those who waste resources go out of business. This is exactly what we as a society want to happen. People who make good choices and serve their fellow man well are rewarded with claims on what others produce, while those who fail to serve their fellow man as well earn less, and in the case if a firm are likely to go out of business. Profits and losses are what discipline market participants, leading them to make better choices and to better promote the interests of others. It is what has led to the great prosperity of the West over the past two to three hundred years. 

To the contrary, outside of its limited role, government run by self-interested politicians is directed to save and prop up those who make poor choices and who should instead consequently suffer the resulting consequences. The defense typically is that market capitalism is a zero sum game, with those who chose well "winning" at the expense of those who make poor choices, the "losers." Consequently, proposals like taxing the rich to give to the deserving poor are put forth to rectify some nefarious wrongdoing. Given this mischaracterization of both the process and the incentives of market capitalism, it is easy to defend this bailing out of people who made poor choices. "Hardworking people whose only fault was to play by the rules." Nowhere is it described as for what all this hard work was expended.   "Were it not for this recession (a market failure) or this unfortunate turn of events over which this company had no control, it would be prospering." GM is the current example de jour, as are derelict homebuyers and flippers.

The list is long: welfare, corporate subsidies, farm subsidies, tariffs and quotas, social security, subsidized education or healthcare, earned income tax credit, loan guarantees, and every single bailout we've seen the past eight months. This is not to say all of these are necessarily bad or even unwarranted, but to reinforce that most government spending today is largely intended to insulate people from their past bad choices. 

Market capitalism cannot survive in this environment. If those who make poor choices know they will not suffer the consequence of their poor choices, the discipline of the market fails and we end up with what we are rapidly descending to now, which is fascism, or worse yet, socialism. Politicians and bureaucrats will then decide on who will win and who will lose, and it will definitely be a negative sum game, not even a zero sum game. History is abundant with such evidence.

Whenever it's stated that we've tried market capitalism and it didn't work, it must be asked, if this is so, have people been properly rewarded for their good choices and made to suffer for their poor choices? Were those who regarded education a nuisance and therefore something to reject allowed to struggle with their poor choice to not become educated, or have they routinely been bailed out? Are people who failed to save forced to live by this poor choice, or does the government step in to insulate them by further subsidizing their irresponsible lifestyle? If a firm routinely wastes scarce resources by producing stuff that is not desired by many allowed to fail, or is it afforded government loans that no private entity would ever consider or protection from more viable competitors? The list is near endless.

Market capitalism works, we've just never had the political will nor the intelligence (yeah, I know that this is a redundant phrase) to permit it to work as it should.

Update: I am not implying here that government acts only to prop up people who have made poor choices. But politicians advantage themselves by convincing people they have been victimized by others, and then pledge to rectify that wrongdoing if elected. Consumers are victimized by greedy gas companies when prices rise. Taxpayers are victimized by AIG employees who pledged their allegiance to the company in return for bonus payments. Union members are victimized by importers and their foreign producers. There is much to be gained politically through this agenda.

Unfortunately, what results is that instead of serving its purpose of protecting potential real victims from perpetrators, the government takes on the role of stationary bandit, thus becoming the victimizer itself. It takes from those who, while acting within the constraints of law, served more people to greater advantage in order to give to those who served society's interests least. Markets cannot function well under such circumstances.

GM CEO Wagoner Forced to Step Down

Competition causes markets to function relatively well. If you fail to serve your fellow human being better than what others are offering, you will not be in business long. The discipline of market forces ensures pretty well that society's interests are maximized.

Government, on the other hand, does not face the same discipline and we can therefore expect that the interests served are not typically widespread. This is evidenced in the fact that Congress's approval rating hovers in the low twenties, though its incumbency rate is in the 90s. 

Given this, we should all be shrieking at this. The Boy Blunder Geithner and his team of amateur auto execs are now deciding on who will steer private companies? My guess is any concession by the union will be tiered so that current members face little to no reductions in their wages or benefits.

This Post Is Worth Repeating

Given Geithner's comments today,

So what's the most important thing [U.S. Treasury Secretary Timothy Geithner]  has learned in trying to fix the economy?
He says it isn't the risk that the government does too much. Instead, Geithner says it's the risk that the government does too little to try to help solve the financial problems.

It's worth repeating the quote from this post.

The arguments of Polanyi and his latter-day disciples are completely untenable. First of all, their reading of history is an almost perfect inversion of the truth. The tragedies of the 20th century stemmed not from an over-reliance on markets, but from a pervasive loss of faith in them. It was the mistaken belief in the promise of central planning that led to ruinous economic policies around the world; it was that same mistaken belief that lent legitimacy to the hideous tyrannies of totalitarian communism and fascism. 
As to the supposed ascendancy of "market fundamentalism" in the present, where are the governments today that toe a strict laissez-faire line? Where even are the opposition parties of any size that do so? Scour the planet and you will be hard pressed to find a single political movement of significance anywhere that advocates anything remotely resembling minimal-state libertarianism. 
Certainly the world has moved in leaps and bounds toward more market-oriented policies in recent years, but look who has led the charge - in China, Deng Xiaoping, a committed Communist; in India, P.V. Narasimha Rao, a product of the Congress Party that instituted Soviet-style central planning there; in Argentina, Carlos Menem, a Peronist; in Peru, Alberto Fujimori, an ideological cipher. Yes, there have been reformers who made their case in ideological terms (Ronald Reagan, Margaret Thatcher, Vaclav Klaus) but they have been exceptional. by and large, the worldwide re-discovery of markets has been guided by pragmatism, a rejection of the failed dogma of centralized control in favor of something, anything, that works. This is a time of idol smashing, not of setting up new gods.

Is Janet Yellen Expressing Concern About Looming Inflation

Former Federal Reserve economist Gerald O'Driscoll thinks so.

Yellen’s call for the power to issue Fed debt signals a number of things. First, the Fed, contrary to recent happy talk from other officials, is worried about inflation. Second, its critics are correct that the Fed has painted itself into a corner by taking illiquid assets onto its balance sheet. Third, the Fed wants to hold those dubious assets to maturity (hence Yellen’s point about not “shrinking the total size of our balance sheet”).

My previous post on Bernanke's "Oh crap!" moment.

Thump, Thump, Thump

As the drum keeps beating the argument that laissez-faire capitalism has failed, thus causing the current financial meltdown, there are plenty of criticisms arguing against the drone of these drumbeats. But their arguments are nothing new. Here is Brink Lindsey in Against the Dead Hand: The Uncertain Struggle for Global Capitalism (page 7):

The arguments of Polanyi and his latter-day disciples are completely untenable. First of all, their reading of history is an almost perfect inversion of the truth. The tragedies of the 20th century stemmed not from an over-reliance on markets, but from a pervasive loss of faith in them. It was the mistaken belief in the promise of central planning that led to ruinous economic policies around the world; it was that same mistaken belief that lent legitimacy to the hideous tyrannies of totalitarian communism and fascism. 
As to the supposed ascendancy of "market fundamentalism" in the present, where are the governments today that toe a strict laissez-faire line? Where even are the opposition parties of any size that do so? Scour the planet and you will be hard pressed to find a single political movement of significance anywhere that advocates anything remotely resembling minimal-state libertarianism. 
Certainly the world has moved in leaps and bounds toward more market-oriented policies in recent years, but look who has led the charge - in China, Deng Xiaoping, a committed Communist; in India, P.V. Narasimha Rao, a product of the Congress Party that instituted Soviet-style central planning there; in Argentina, Carlos Menem, a Peronist; in Peru, Alberto Fujimori, an ideological cipher. Yes, there have been reformers who made their case in ideological terms (Ronald Reagan, Margaret Thatcher, Vaclav Klaus) but they have been exceptional. by and large, the worldwide re-discovery of markets has been guided by pragmatism, a rejection of the failed dogma of centralized control in favor of something, anything, that works. This is a time of idol smashing, not of setting up new gods.

Here is Pete Boettke sounding the alarm of creeping totalitarianism. It's a very thoughtful piece and I believe his argument is more correct than incorrect.

Arnold Kling dispels the argument that repeatedly regulating financial markets can even remotely produce "optimal" outcomes.

A Devalued Prime Minister of a Devalued Government

Wow! 

HT - Dan Maynard

Take that, Congress!

 FedEx Corp is threatening to cancel the purchase of billions of dollars worth of new Boeing Co cargo planes if Congress passes a law that would make it easier for unions to organize at the package-delivery company, the Wall Street Journal said.

You gotta love Fred Smith. Let's hope he can stick to it.

Dear Haley

Haley Phillips wrote the following letter to the Raleigh News & Observer. I hate letters like this because if it is a child who wrote this, it's abusive to display the child's ignorance. And if not, it's probably a teacher using a fictitious child's persona for rent-seeking purposes.

I am in the eighth grade at Wakefield Middle School in Raleigh. I was recently picking up a few groceries at a local Food Lion, and I saw my favorite teacher stocking shelves. This made me very sad and brought teacher salaries to my attention. What does that say about how we pay our teachers if they have to be stock boys just to make a living?
During these tough economic times, please remember where the future of this country lies. Without strong teachers, the youth of today will not be prepared to take on the challenges of future leadership. Now is not the time to cut teacher pay and positions; now is the time to invest in our future.
Haley Phillips, Raleigh

Here's my response.

Dear Haley,
             I understand your concern with seeing your favorite teacher stocking shelves at Food Lion. It does seem however, that had he better employment opportunities he would have exercised at least one of them. But given the state of teachers colleges in this country and the product they are putting out, your teacher was probably on the high end of the labor pool for teachers overall in our government schools. In other words, your favorite teacher works at Food Lion, but that probably beats cleaning your school’s lavatories (lavatories is another word for toilets, Haley) at night to earn extra money. Just ask your social studies teacher. And for God’s sake Haley, please don’t make me discuss how your English teacher earns extra coin. You might ask your favorite teacher if he’s so smart, why he’s not working at some other higher paying job. 
Now, your teacher certainly does not earn much money in his teaching job. And it certainly sounds reasonable for a third grader to believe that paying him more is fair and might attract better people to the teaching profession. (I say third grader because even though Haley is in eighth grade, it’s difficult to tell the difference between a third grader, an eighth grader and a high school senior at government schools based just on their logic and writing abilities.) But let’s suppose you wanted to pay someone to mow your lawn every week so you don’t have to. You post an ad on Craigslist and offer $10 for someone to mow your lawn each week. To your amazement fifty people show up at your door willing to accept your offer.
             You must now decide whom to hire. As you well know, mowing the lawn is really not that difficult, at least doing a basic job of it. But what makes hiring one person better than hiring another? It’s the specific knowledge and skills a more qualified candidate possesses. He knows the difference between fescue and bluegrass and which mowing technique works best for each; he knows how to mow with the grain rather than against it and the perfect height at which to mow your lawn; and he even knows about fertilizers and other turf management issues. In other words, he has common sense, knowledge, and most importantly, he knows how to think critically about issues important to him. Most everyone else simply knows how to start a mower and push it across the grass. Job done!
            You would like to hire a more qualified mower because you profess to care about quality. But dad nixes your idea of offering more money to attract more qualified mowers because he doesn’t trust that you’ll be objective in doing so. He thinks you might offer your loser boyfriend the twenty dollars, notwithstanding his inability to walk straight, much less show up for a job. Your dad is also afraid that the lower pay might make people with lower skills feel bad about themselves. So, you’re stuck paying the ten dollars.
             Well guess what? At ten dollars all the better-qualified people take other jobs that pay better than mowing and you’re stuck with a pool of poorly trained mowers. Anyone you hire will essentially be a random grab from a pile of low skilled workers.
             Now, teachers aren’t quite like lawn mowers (Or is it “mowerers,” Haley? It doesn't matter. It's whatever sounds right to you.), but the comparison is not far off. In fact, many of your teachers probably mow lawns in the summertime when they are not teaching. There are certainly very good people who become teachers, but most of them leave soon after discovering that in our government schools little teaching actually takes place. They find within the first few weeks that most of their time is spent babysitting the dysfunctional kids and teaching the "hump" kids how to take a test. You see, Haley, the more students who pass the test the greater the increase in your teacher’s meager salary. Therefore, his time isn’t spent teaching bright shining stars like you who know how to write short two-paragraph letters to the editor of your local newspaper. You're going to pass the test anyway. No, it’s spent training the semi-comatose kids who are on the edge of failing how to fill in bubbles in preparation for end-of-the-year tests. Consequently, by the end of their first year teaching most of the good teachers leave for more fulfilling careers and better pay while the rest stick to teaching, mostly because their next best alternative employment opportunity is working the concession stand at the local movie theater or stocking shelves at Food Lion. 
             Lastly, Haley, if your teachers had been doing a good job they would have taught you a little economics. You see, Haley, your teacher earns little money because there are so many people who meet the mediocre requirements needed to become a teacher in our government school system. And there certainly are millions of people who would enjoy having their summers off. This means that the marginal value to society of one more teacher with these same skills and preferences is very low. Consequently, they earn relatively little money. If teachers’ salaries were increased there would be a flood of new applicants who meet the mediocre standards necessary to get a job teaching in government schools. These additional people now find teaching at the higher salary more lucrative than their next best employment opportunity.
            If you really desire to see teachers earn more money, Haley (And who doesn’t?), write your local school board and discuss the importance of merit pay and differential salaries for teachers with degrees in more difficult disciplines like math and science. Teachers would then have an incentive to actually teach, and better and more qualified people would be attracted to the profession. But that's what your teacher and the union that represents him don't want - competition. 

Did you know, Haley, that your math teacher probably took only one remedial math course in college? But since the teachers’ union that (ostensibly) represents her and her mediocre talents won’t allow differential pay for better qualified teachers and those with degrees in math, science, economics, etc., people with degrees in these fields don’t go into education. And guess what? You’re now stuck with ol’ Mrs. Crabapple with a degree in special ed. trying to teach you physics and math. No wonder you’re inept in those subjects.  

Obama's Auto Task Force Is Looking for Workers

The hubris in all of this is outrageous. 

Wanted: Financial experts for what might be a year-long assignment in Washington, helping restructure the auto industry. Long hours. Government wages. Must not have worked for an auto company in the past 12 months.
That, in a nutshell, is the message from the Obama administration's Task Force on the Auto Industry, which is urgently trying to increase the size of its shoestring staff, as it scrutinizes the books of General Motors Corp. and Chrysler LLC, as part of its broad review of the entire auto industry.

Surprise, surprise, Michigan's lawmakers are not happy. 

Some Michigan members of Congress, including U.S. Sen. Carl Levin, D-Detroit, have grumbled that the Obama task force doesn't have anyone with auto experience -- though they praised the selection of Ron Bloom, special assistant to the president of the United Steelworkers. Bloom previously worked, albeit briefly, as an informal adviser to the UAW in 2005, reviewing GM's finances.

I guess they're afraid the auto industry and its affiliate unions might have to divest themselves of the fruits from sixty years of rent seeking.

I'm upset that there are no economists on the task force, especially economists who understand the efficient allocation of scarce resources and how this is a prime example of making society worse off for the benefit of a few politically connected entities. If you want an economic solution, allow markets to function. If you want a political solution, have the political class intervene. 

 

As the Dominos Keep Falling

More casualties on the way in the rapidly changing newspaper industry.

On Monday, the Ann Arbor (Michigan) News announced that it will publish its last edition in July. Taking its place will be a Web site called AnnArbor.com.
Three other Michigan newspapers announced Monday they are reducing their publications to three days a week. The Flint Journal, The Saginaw News and The Bay City Times will publish print editions on Thursdays, Fridays and Sundays, according to the mlive.com Web site, as research shows those are the highest readership days for newspapers.
And the Charlotte Observer announced Monday it will cut its staff by 14.6 percent and reduce the pay of most of the employees it keeps.
The situation now looks grim for The Tucson Citizen. In the past 25 years, circulation at Arizona's oldest newspaper has dwindled from 65,000 to 17,000. The Gannett Co. paper could fold if a buyer can't be found.
At least 120 newspapers in the U.S. have shut down since January 2008, according to Paper Cuts, a Web site tracking the newspaper industry. More than 21,000 jobs at 67 newspapers have vaporized in that time, according to the site.
More bad news could be coming this week as newspapers struggle to meet challenges posed by changing reader habits, a shifting advertising market, an anemic economy, and the newspaper industry's own early strategic errors.

And who's next?

Despite arguments like Boice's, newspapers are losing their relevance in the lives of a majority of Americans, particularly younger readers.
Many industry analysts agree many more papers will soon become extinct. Most two-newspaper towns will likely disappear, perhaps by the end of 2009, some experts say.
Among the next newspapers to go, experts say, are major metropolitan dailies relying on an expensive business model that requires costly newsprint consumption and gas-guzzling deliveries.
The quirky San Francisco Chronicle is reported to be circling the drain. If it were to close, San Francisco would be the first big U.S. city without a major daily paper.
The Atlanta Journal-Constitution and the Boston Globe are bleeding about $1 million a week, according to a media report issued by the Pew Center for Excellence in Journalism. Experts say more big-city papers are expected to follow the example of Gannett's Detroit Free Press, which started cutting back on print edition delivery in December.

Lastly:

But easily accessible, high-speed Internet connections and smart phones have dramatically shifted the way people get their news. Ironically, news is still in strong demand. It's abundant, accessible and usually free on the Web.

And that portends the future of newspapers. At one time every city and town in the world was surrounded by farmers who provided food to local residents. Farmers markets in most every city are remnants of this past. Transportation changed that, however, allowing a greater concentration of farming and greater economies of scale. The same will be true of newspapers.

A few major newspapers will provide major news stories to the world. Consequently, there will be a decline in the overall number of reporters hired, resulting in a highly concentrated market for those who have proven themselves best in their specific field. The outcome will be a winner-take-all market for those few reporters.