The Liberal Order

Bastiat's "Broken Window" Fallacy Tested

Don Boudreaux links to this video explaining the fallacy of the "broken window," first elucidated by Bastiat. The gist of the story is that there is a silver lining to natural and man-made disasters in that as a result of the disaster there is an increase in economic activity. Following the destruction of the Twin Towers for example, people were put to work cleaning up the site, designing and building a visitor's center, etc., requiring all sorts of materials and other productive assets to be employed as a direct consequence of this disaster.

There is, however, a simple test of peoples' perceptions of the great benefits accruing from the destruction caused by natural and man-made disasters. In August of 2005, Hurricane Katrina ripped through (and up) New Orleans and other parts of the Gulf Coast, killing nearly 1,500 people and causing an estimated $125 billion in property damage.

A mere three weeks later, another category 5 hurricane was traversing the Gulf, barreling down on the coast of Texas. Hurricane Rita was predicted to make landfall just north of Galveston, Texas. How many people living in the projected path of Hurricane Rita were elated by the news of this imminent threat, pumping their fists in the air and yelling, "Hot damn, economic growth is headed our way!"? My guess is none.

Another Example of Superior Privately Provided Networking Technology

While traveling in Italy in 2001, I was struck by how many people there had cell phones - it seemed like everyone had one. In fact, they were far more prevalent then in Italy than they were in the U.S., which was counter to what I expected. In response to my question of why cell phones were so ubiquitous, especially relative to the U.S., an Italian acquaintance informed me that the state-run telephone company in Italy was so corrupt and inept that privately provided cell phone service was far more reliable and it cost less, therefore everyone had one.

Bill Easterly shows graphically the widespread use of cell phones around the world since 2001.

HT: Pete Boettke.

Scarcity Also Applies to Government Budgets

Alan Reynolds explains why raising taxes on the wealthiest Americans will do nothing to offset the increased expenditures of the recently enacted health care initiative.

In short, the belief that higher tax rates on the rich could eventually raise significant sums over the next decade is a dangerous delusion, because it means the already horrific estimates of long-term deficits are seriously understated. The cost of new health-insurance subsidies and Medicaid enrollees are projected to grow by at least 7% a year, which means the cost doubles every decade—to $432 billion a year by 2029, $864 billion by 2039, and more than $1.72 trillion by 2049. If anyone thinks taxing the rich will cover any significant portion of such expenses, think again.

The federal government has embarked on an unprecedented spending spree, granting new entitlements in the guise of refundable tax credits while drawing false comfort from phantom revenue projections that will never materialize.

No way! You mean that self-interest does not just apply to greedy capitalists?

The most naive sentence I've read (so far) today:

Just think of it: people actually using a noble governmental program, one that is constantly strained for resources, to line their own pockets.

What a delight it must be for this editor of the News & Observer to marvel each and every day when he discovers that birds fly and water flows downhill and self-interest permeates every aspect of our lives. 

UPDATE: What a further disappointment this must have been for the editor referenced above.

Social Networking

Twenty years ago, the saying went something like, "If you don't have a web site, you're not in business." Today it's more like, "If you're not networking through social media, you're not in business."

And all of that explains why an Arlington County company named New Media Strategies reached out last year to a popular Brooklyn blogger named Aly Walansky. Founded 11 years ago by former political pollster Pete Snyder, NMS was one of the earliest digital PR firms to focus on word of mouth. NMS employees, most in their late 20s or early 30s, sit wired and caffeinated in a newsroom-like setting, tapping away at computers with double monitors to contact bloggers and Tweeters so they can offer everything from behind-the-scenes access to clients to free stuff. NMS represents, among other corporate giants, Chrysler, NBC, Intel, Sony Pictures and Domino's.

Last year, Domino's launched a new recipe for its pizza. To help the company, NMS identified hundreds of bloggers who influence what people eat and offered many of them coupons so they could try the new pizza for free. Snyder says there was no quid pro quo: Bloggers could say whatever they wanted about the product. Walansky, who often reviews food and beauty products, liked the new recipe -- as did almost every blogger the company contacted. NMS also offered Walansky a Domino's gift card so she could run a giveaway contest on her blog.

"To all my pizza lovers out there: Domino's has a new pizza recipe, and it's delicious!" Walansky wrote on her blog. "Everything has been upgraded -- the dough, the sauce, even the cheese, and we are grateful." Walansky's endorsement and contest got nearly 200 readers to add their own comments.

Will Replacing the Middleman With Government Reduce Costs?

That's ostensibly the thinking as it pertains to the recently passed changes in student lending. By lending directly to college students, the government purports to save money by eliminating the profiteering banker middleman.

If that's the case, why not apply it to food, defense contractors, and even health care. All right, that last one is likely to occur sooner than I think.

But it's this sentence that bothers me.

"Why are we paying people to lend the government's money and then the government guarantees the loan and the government takes back the loan?" asked Rep. George Miller, D-Calif., the chairman of the education and labor committee.

Mr. Miller, that's not the "government's money," that's partly my money and partly that of 308 million other people. But I guess after so many years of viewing all property in this country as the personal slush fund of politicians, it gets a little confusing.

A Nice Interview With Gary Becker

From today's Wall Street Journal, it's worth the read.

Capitalism has produced the highest standard of living in history, and yet markets are hard to appreciate? Mr. Becker explains: "People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."

This goes along with what I said yesterday: markets don't promise anything, but deliver almost everything.

UPDATE: I should also add to Becker's comment above, so much misinformation and denigration of markets is taught in both private and public schools, at all grade levels, much of it anti-capitalist, and indeed pro-government (historical eras are usually defined by political events rather than the vast improvements in the human condition brought about by new technologies, etc.), skewing young minds to be skeptical of individual motives of market participants, but mindless believers in the good faith of political leaders. Even the least egregious history books used at these grade levels promote the motives of politicians and bureaucrats as benevolent, and the motives of entrepreneurs as indifferent at best, and malevolent at worst. 

GM Is A Sucky Company

In the very very early days of the internet, Carla Virga used it to broadcast to the world her strong displeasure with the poor quality services of Terminix and the inept response to her complaints by this company and its parent company Servicemaster.

Others have followed, and some are finding that the companies with whom they've experienced poor service are now responding to their web criticisms in order to protect their reputations.

GM is now in the game, actively searching for critical comments on the web by its aggrieved customers.

GM has a new team of customer service agents scouring social media Web sites, such as Twitter and Facebook, looking to reach out to people who've complained about problems with their GM vehicles and offering help to them.

All right, let's try it. GM, your company sucks and here's why. I've owned a 1974 Chevy Vega and a 1985 Oldsmobile Omega. You owe me big time. Shoot me an email and tell me how you're going to make amends. 

Dan Klein's book, Reputation, offers an applicable quote: "Time wounds all heels."

Republican Failure?

Patrick Ruffini argues that the Republicans were outmaneuvered on the health care debate due to their inaction and their unwillingness (and/or inability) to offer a small-government free-market alternative.

When it comes to health care policy, conservatives have been seriously outgunned. And I say this in all fairness to the friends I have who work night and day on free market solutions to health care. On economics, you always know what the conservative answer is: tax cuts and generally hands-off regulatory policies to spur economic growth. No matter how good the Democrats' promises sound, we return to these simple, pro-growth touchtones that resonate with a majority of Americans who intuitively get that you can't micromanage your way to a better future.

On health care, I have no idea what our basic guiding principle is. Seriously, I don't.

We have tried ineffectively to stretch free market rhetoric to health care without appreciating that health care is already too far removed from a free market for the analogy to make sense. Real markets are sensitive to price. Health care isn't. The insurance companies hide the cost of actual care from the consumer.

What we have lacked in this debate is a simple clarion call to address an aching need -- bringing free market principles to bear to improve tangible health outcomes.

Instead, we have allowed the left to define the problem as exclusively one of access -- of the nearly 50 million without insurance dying in the streets (of course, we don't talk about that number anymore because nearly a third of that number are illegal immigrants, an issue Obamacare studiously avoids).

And it's no surprise. The left has had a far greater number of health care analysts devising grand plans for the eventual takeover. And they have invested more political capital in this issue than any other. It should surprise no one that the conservative effort in this space has been paltry in comparison. We just haven't had as many people thinking about health care, and we didn't actively move legislation on it when we were in power.

First, there were plenty of free-market alternatives offered. (And here, here, and here.)   Republicans simply danced around the Big Government alternatives offered by Democrats and ignored those offered by others, especially libertarians.

Second, the Republicans didn't have much to offer largely because they've proven over the past ten years that they lack principle. How can you offer a true free-market, less regulation alternative after their stint in power throughout much of the 2000s?

Third, to the defense of the Republicans, even had they actually concerned themselves with a free-market alternative, it's near impossible to convince voters of the alternative and why it's better. As Bastiat noted more than 150 years ago, it's easy to convince you of the supposed benefits from a government solution to a problem in a matter of seconds. It takes an hour to explain why that solution will fail to deliver on its promises.

Fourth, Big Government ideas flourish with a shortsighted electorate. As the saying goes, socialism promises everything but delivers nothing, while capitalism promises nothing but delivers almost everything. Capitalism promises no utopia. If you wish to bore a voter or voters to death, try explaining to them the virtues of capitalism.

Lastly, it's easy to say that Republicans should have bargained, but in doing so they may have simply marginalized themselves more than they already are. There is no reason at all that Michigan's Governor Jennifer Granholm should have been reelected in 2006 - the state's economy was already in a shambles after four years under her watch. But her challenger, Dick DeVos, shifted away from his smaller government, more markets platform and began tailing Granholm and advocating a "me too" platform. He lost handily because there really wasn't a significant difference between the two, and given the broad overlap of their platforms, it came down to the devil voters knew differing little from that of the devil voters didn't know. Why take a risk on the unknown?

Recommendation for Prospective Homebuyers

Simple: Never buy a home in a declining market. Trying to time the bottom of the market is futile; in fact, there may be a double dip.

Here's further info on the precarious state of the national housing market with an interview with Zillow's chief economist, Stan Humphries. 

A recent Zillow.com survey shows 8% of homeowners, or about 10 million Americans, are "very likely" to sell if and as local conditions improve.

Humphries doesn't expect anywhere near 10 million more homes to come on the market in the near term. But this "pent-up supply" combined with foreclosures already in the pipeline and those yet to come because of negative equity and job losses means it will take three-to-five years "before we see more normal appreciation rates return to the market," the economist predicts.

In other words, time is still on the buyers' side -- yes it is.