Monday, February 28, 2011

What Has Government Done to... Our Stock Returns?

Leaving aside for a minute the Austrian theory of the business cycle, and asset bubbles and whatnot, this graph shows pretty explicitly just how damaging inflation is. 

CPI is the red line, indexed to the secondary axis. The S&P 500 nominal is the blue line (Adj. Close) which includes dividend adjustments. The green line is the real (adjusted for inflation) S&P500, indexed to be equal to nominal S&P500 in Jan. 1960. Both S&P 500 indices are mapped onto the primary axis. Yeah. Prof J out.

Friday, February 25, 2011

Can buying local lead to inflation?

Russ Roberts blogs over at the CafĂ© about buying local in “Don’t follow the money.”  In his post, Russ talks about why buying local can be loco, especially if you’re spending more to essentially get less.  Makes sense to me.  

A reader then posts a comment linking buying local to inflation.  It’s an interesting comment, and while in theory it could happen, I’m skeptical.  So, I’ll throw it out there and perhaps we can get Prof J to leave a few comments.

Here’s the quote from Michael:

“Since local production omits economies of scale, production will be lower and less goods and services will be produced. Goods will be sold outside the community, but only green pieces of paper will come in - not other goods. The amount of money inside the community will increase while the goods and resources they represent will diminish - therefore, inflation. Prices will continue to rise from this localized inflation.”

Wednesday, February 23, 2011

Some Thoughts on Big Business and Big Government

Greg posed the question the other day, and I'll paraphrase, that asked why libertarians appear to worry so much about the problems of big government, and not so much about the problems of big business. Fair question. The answer is that we do, but to a great extent we believe the solution to big business is to shrink the government. What we're talking about here, really, is crony capitalism. This is a similar concept to mercantilism and fascism (as an economic system, not a political one).

Quickly, the reason one worries about big government is twofold: public choice issues, and knowledge problems. The public choice problems are that agents of the government can use their office to pursue their own agendas, rather than the agenda that is in the public interest. The knowledge problem is that the government agents do not (cannot) know all the relevant facts of a particular problem, so that their solutions in fact make things worse rather than better. There's boatloads of research on this, I just wanted to get into place for the next step.

The reasons we worry about big business are: monopoly/monopsony power; externalities that cost the public something but the company doesn't have to answer for (think poisoning water ways through pollution); and the ability to 'capture' regulators. I believe these are legitimate concerns, except for concerns over "natural" monopolies since these are unlikely to exist.

Where I'm from, certain utilities used to be monopolists. Some still are. The reason they were monopolists was because the government would only allow one company (in fact the state-owned company) to provide the utility in question. The reason was because it was a critical utility (telephony) and the government didn't want the people to be at the mercy of greedy capitalist pigs (my words). Eventually, the monopoly was ceased and competition opened up. The price of telephone service subsequently dropped precipitously. This trend is ubiquitous when a monopoly is ended. Therefore, this was not a natural monopoly, but one created by the government. Thus we should oppose governments giving monopolies to any business (yes, this included the Federal Reserve being the currency monopolist).

The other concern is that "business" can act as a monopsonist in the labor market and dictate terms to those who want to work for them. I think there are times that has been true - West Virgina coal mines come to mind. But to me it seems the solution is to have more business, not government control. Why? Because with government control comes the opportunity for political entrepreneurship - the big business has the resources to influence politics. I think we can all agree this is not desirable from a people point of view. It benefits a few at the expense of the many. The financial sector is a very good example of this behavior, by the way. The connections between Wall Street and the federal government are deep.

Finally, pollution. Here's another area where big business captured government power. But, I think this pollution issue is going to make for a different direction, so I will carry on later - need to get my thoughts together first.

I hope I have shown that, in fact, libertarians want to reduce government not just because government is bad but because big business feeds off big government.

Tuesday, February 22, 2011

We can learn from Angie’s List

You’ve heard of Angie’s List – the subscription based rating service that assigns letter grades to contractors based on performance.  I had heard of Angie’s List and decided to buy a year’s subscription after moving to San Antonio, TX.  It has proven to be a valuable resource, and one that can have broader implications.

The American populace suffocates under needless regulation – rules that promise to protect us from Visigoths and fly-by-night contractors.  Many states have enacted laws requiring practitioners of countless trades to obtain professional licensure in an effort to protect the needy.  While the rules may weed out a few bad seeds, these laws usually do more harm than good.

Often, licenses require a minimum number of educational hours, or the passing of a exam before obtaining the blessing of the state.  These rules force practitioners to spend valuable time away from their trade and depart with their hard-earned money, while doing little to protect the public.  Many professions grow large and lobby state legislatures for even more stringent minimum standards in an attempt to thwart competition.  These rent-seeking lobbyists serve only to drive up costs for consumers and ultimately reduce quality and standards on their products and services.  I propose to replace this distorted system with something akin to Angie’s List.

Angie’s List allows consumers to grade the services they receive from contractors.  Angie ranks providers based on customer feedback, and potential customers can peruse the rankings and read full reports at anytime.  This information is much more useful than knowing a contractor passed a test and obtained a license from the state.  Instead of abdicating our responsibility to the state, let’s make an effort to be responsible for our own decisions.  

I give Angie’s List an A+ for advancing the interest of the consumer.

Monday, February 21, 2011

Think you know what you want?

Not sure how I came across this video, but I found it pretty interesting.  It's about 17 minutes long and the talk is about how we make decisions.  Good stuff.

Behavioral Economist Dan Ariely on Decision Making

Who are the Great Presidents?

A new ranking method, based on the principles of peace, prosperity, and liberty, ranks the presidents.

I always thought Coolidge was my main man.

Sunday, February 20, 2011

Uncle Sam – the Biggest Landlord

Did you know that your favorite uncle is quite the property owner?  I’m sure most folks knew the government owned some land: Yellowstone National Park, Yosemite, and the Rocky Mountains (not all of them) come to mind.  However, I was shocked to learn just how much land the government has in its portfolio.

Care to wager a guess at how many acres the federal government owns and controls?  100 million?  Half a billion?  Try 630 million acres.  This makes Donald Trump look like small potatoes. Interestingly, much of the land owned by the feds is situated in the West, where abundant stocks of natural gas and oil are found.  For example, the federal government owns about 75% of Alaska.  Additionally, they own about 80% of Nevada, half of Oregon and a third of Colorado.  In total, the federal government owns about 30% of the land mass of the United Sates.  (Source: 

A question that comes to mind is: why does the federal government own so much land and what exactly is it doing (and not doing) with this resource?  It costs taxpayers millions for the feds to maintain the land.  Sure, some of the land generates funds, such as national parks and the selling of mineral rights, but this pales in comparison to what the land could generate if left to private ownership.

The federal government isn’t known for employing the best land management practices.  Think of wild fires that burn hundreds of thousands of acres each year, or potentially vast oil and gas deposits that are banned from production.  This is a direct cost to our economy. 
I would argue that only land in private hands can be effectively and efficiently managed.  Government owned land is very often subject to the political whims of elected officials, and is grossly mismanaged by a bureaucracy whose main goal is their own job preservation. 
Now, some may say that big corporations would only strip and pollute the lands, and that the government is preserving the land for our posterity, but know this: the US Government is one of the country’s biggest and nastiest polluters.  Many current and former military installations are superfund sites as is the most heavily polluted and contaminated site in the US – Hanford, WA.

I say Uncle Sam needs to return much of this land to the private sector.  We should allow entrepreneurs the chance to utilize effectively these lands for their best and highest use.  Hundreds of thousands of jobs are awaiting the chance should Uncle Sam decide to become a much smaller landlord.

Saturday, February 19, 2011

Unemployment by Sector

Here is a graph presenting the current employment index for various industries. The base is 100 in January 1st of 2007.

The colors might be a little hard to see, but construction is lowest (duh) followed by durable goods manufacturing and then non-durable manufacturing. Education and health services appear to be recession proof. Government includes fed and state and local. Big jump because of the census temp workers.The cluster below the top three is retail, business services, and trade, transportation and utilities.


Going back to 1995, we see that there is great dispersion in sectoral growth rates. Now, we are capturing the tech bubble bursting and the real estate crash. These separately explain the crash in IT workers (although the year 2000 thing is important too) and the construction and manufacturing crashes. Note that long-run decline in non-durable manufacturing. Durable manufacturing seems to plateau for a while, and then crashes cause it to move again. This is at a time when value-added from manufacturing in the U.S. is ever-increasing, mind (peaked around '08).

Below that, I provide another graph where I reset the base month to Jan of 2000. Patterns (of course) are the same, but some may find it a clearer graph.

Friday, February 18, 2011

Cookies and Economics

I just got back from a week in Austin, TX.  If you’ve never been to Austin, well, it ain’t exactly Texas.  I saw a bumper sticker that portrayed perfectly the prevailing attitude of town’s populace: Keep Austin Weird.  So far, it’s working very well.

I attended training and our employer paid to occupy a meeting room.  Part of that package included a mid morning and mid afternoon snack.   For our PM sugar rush, the hotel provided large cookies.  Anything left over was presumably discarded. 

On Wednesday afternoon, one of our instructors grabbed the remaining cookies and paced the room trying to unload the few remaining cookies onto the group.  Her words were, “We bought these, so we better not waste them.”  As she approached me, I told her to please throw them away and spare us the unneeded calories.  Half the folks in here were obese!  Okay, I didn’t say that, but what I did tell her was that it didn’t matter what happened to the unused cookies, the money has been spent.  Eating the cookies or discarding them would yield the same result – economically, we’d be no different.  She couldn’t grasp this, and told me if we didn’t eat them, the cookies would be wasted.

So, had she not found a weak-willed humanoid to consume the cookies, and actually threw them away, would the cookies have been wasted?  I suppose throwing good food away is wasteful, but in my mind, the money used to purchase the cookies – that’s what was wasted.  And that money is gone.  No action (eating or not eating) would change that.   

So, am I right here, or were we being wasteful?  I guess it depends on your definition of wasteful.

Thursday, February 17, 2011

Austrian Economics is NOT Libertarian Economics

The field of Austrian economics has gained some popularity in non-economist circles. This is partially because many people feel that government has intruded too much in their lives, and partially because Austrian economics seems more accessible to the lay person - no complicated mathematical formulas and whatnot. Such people find they agree with many of the policy conclusions of practitioners of Austrian economics. The policy conclusions are usually: intervention by the state in the market created XYZ problem, so the fix is to get the state out of the market.

News flash: Neoclassical economists often have the same conclusions. Price controls, for example, are always bad because they create gluts (price floors) or shortages (price ceilings). Neoclassical economics shows that markets were very well, most of the time, and most problems come from interference with the market.

So the policy conclusions of the Austrian economists are not unique. Economists of the Austrian persuasion don't start by saying "the state is the cause of the problems!" That's actually a conclusion of a rigorous analysis of economic principles and history. Economists of different schools of thought may come to different conclusions because the paradigms are different. This is especially the case in macro and monetary economics.

Yes, many Austrian economists are aligned with libertarianism. Still more might say they are "classical liberals" of the Smithian/Lockeian sort. And there is probably a self-selection bias there. I know what Hayek's and Mises' positions were vis-a-vis state intervention, and this certainly attracted me to the study of Austrian economics. (Although I think Hayek is too much of a statist). But the problems of state intervention are a conclusion of Austrian analysis, not an axiom.

So, Austrian economists is not unique because of its policy conclusions. What separates it from the crowd is the method of analysis, and the focus on individual decision making with its attendant knowledge problems. The method is praxeology, which is essentially logical reasoning from a few basic axioms - the primary one is "humans act." Knowledge problems are probably what made Hayek famous (Use of Knowledge in Society, AER, 1945). Finally, Austrians view competition as a process, not a state of being. That makes the Austrian view of Industrial Organization a little different than the standard Neoclassical take on it.

Do libertarians follow Austrian economics? Yes, it appears they do. And the less educated they are about it, the worse it is for Austrian economists. The last thing we want is nut-job gold bugs aligning themselves with a school of thought because some within that school suggest a return to the gold standard would be stabilizing. In fact, within the Austrian school, this is a most controversial position to take.

I don't want Austrian economics to be inaccessible. I think everyone should read Economics in One Lesson (Hazlitt) or Economics for Real People (Callahan) both available for free (as a .pdf) from Ludwig von Mises himself thought economics should be studied and be accessible to everyone, not just professional economists. What I want, though, is for people to spend the time and really learn the material before agreeing or disagreeing with policy conclusions.

Friday, February 11, 2011

Commentary on the Moral Implications of Taxation

Mercier, a French physiocrat, stated (to Catherine the Great) that: [t]he science of government… is to study and recognize the ‘laws which God has so evidently engraven in the very organization of man, when He gave him existence,’” and “‘[t]o seek to go beyond this would be a great misfortune and a destructive undertaking.’”[1] Of course, the physiocrats’ arguments didn’t require God’s existence for the existence of natural law. But speaking with monarchs of the time, not invoking God would have been nonsense.

To summarize the physiocratic position (which arose from the work of Locke and others): natural law, like (say) the law of gravity, is already really existing in the world. Our job, as theorists, is to discover those laws. Discovery occurs by experimentation. If a ruler makes a law that is in concert with natural law, harmony will obtain. If a ruler makes a law that is in discordance with natural law, disharmony or chaos will obtain.

According to the natural law position, humans exist for themselves, not for others. That one exists means that one owns one’s self. In other words, property rights begin with one’s own body. This extends to the principle of non-aggression: that no person may rightfully use force against another person “except where the individual coerced has aggressed upon the sovereignty of another unaggressive individual.”[2]

Self-ownership is the basis of property ownership that extends beyond the self. A person owns land, for example, by being the first person to mix her labor with the land – tilling the soil, cutting down trees, building a house, etc. Once first ownership has been established, it can be abandoned or passed down or sold, but any attempt to remove the land from the owner without the owner’s consent is an act of violence. This ownership extends to all the fruits of one’s labor. For example, if I hire you to harvest my apples and agree to pay you in room and board for the duration of the harvest, no one may rightfully force you out of the room, or prevent you from eating (assuming you do harvest the apples and don’t steal any.)

How does this all relate to taxation? Well, a tax is a charge against a person’s property or activity for the support of government. It is enforced through the coercive power of the government. If you think this latter statement is incorrect, try not paying your taxes for a while. Actually, if you work for a business, you can’t really avoid paying taxes unless the business owner goes along with it; although you can try to avoid annual reconciliation. Fines will be assessed first, and if you ignore that, criminal prosecution is possible.

Therefore, a tax is the forcible removal of the fruits of one’s labor, and it is backed by the coercive force of the government. By the natural law position stated above, this is morally wrong. Furthermore, taxation is a (but not the only) cause of discord in a society.

As I see only one argument in response that would not require a refutation of the natural law position, for all other arguments in favor of taxation must refute the natural law position, I will take up that argument now. The argument is that taxation is voluntary. In other words, continued residence in a territory that levies taxes is implicit consent to be taxes. I have two responses to this argument (which is of the “if you don’t like it, leave” variety).

First, if one looks at inter-state migration patterns in the U.S., there is evidence that people move from high-tax states to low-tax states.[3] So, in fact, people do vote “with their feet.” But note there are high switching costs. If you are an advertising copywriter living and working in New York City, the ability to switch to a similar job in one of the no-tax states, like Florida or Texas, is likely to be limited by job opportunities and personal tastes. Other jobs are similar in the sense that they are only available in certain areas. Working in one’s field often is a benefit high enough to overcome differences in state taxes. Nevertheless, paying a state tax comes closer to a voluntary tax than a national tax because of the open migration.

This leads to my second response, that of exiting the national tax scene. There are significant barriers to this. First, one must locate a new country in which to live. That country may have barriers to entry. Second, the costs, especially emotional, of leaving family and friends can be very high. Third, in the case of the U.S., expatriates are taxes by the U.S. government on their world income. So, you can live and work in Hong Kong, but if you are a U.S. citizen, you pay federal income tax to the U.S.

I have made the case, based on natural law, that taxation is a violation of property rights. I have attempted to refute the “voluntary tax” argument by illustrating the very real barriers to avoiding taxes and by pointing out that people do avoid taxation when possible. I have not attempted to refute any “moral obligation to others” argument in favor of taxation since I see that as an argument in favor of charity, which I support, and not taxation.

I will close by offering a solution. Rather than having a overarching federal government that taxes, government should be small and local, like counties. County governments could levy taxes and as long as people were free to migrate among the counties those taxes would not be coercive since paying the taxes would be voluntary.

[1] Henry Higgs, The Physiocrats (1897), New York: The Langland Press, 1952, pg.45.
[2] A. Herbert and J.H. Levy, Taxation and Anarchism, London: The Personal Rights Assn., 1912, pg. 24.