On Regulation

Regulation is government’s default (and blunt) instrument to bring about (or stop) certain behavior in response to a perceived market failure.  And there are some instances when regulation is needed, such as when dealing with certain types of pollution.  I know of no market for dealing with air pollution, so the government steps in to correct the externality.  However, we’ve completely neglected free market ideas and relied too much on government intrusion into the free market.

There are some that say “markets fail, use government.”  After all, this used to be very reason for regulation.  However, as Don Boudreaux explains in the latest edition of the Freeman, the lack of market perfectionism isn’t reason enough to abandon markets.   One should not assume that benevolent government bureaucrats can write perfect rules, completely devoid of unintended consequences, with zero social costs.  On the contrary, the blunt instrument that is regulation can rarely achieves the high minded effects its proliferators desire. Instead of “markets fail, use government”, think “markets fail, use markets”! 

The Competitive Enterprise Institute goes on to demonstrate that how regulation is practiced differs greatly than how it should work.  They quote from Litan and Nordhaus’s Reforming Federal Regulation, 

In theory, regulation should arise as a response to market failures. In practice, regulation is more accurately characterized as a government tool for redistributing society’s resources toward those groups that have successfully enlisted the support of the government on their behalf.

Many firms have abandoned traditional pursuits of increasing profits by conforming to consumers’ wants, and instead lobby the legislature.  But here’s a question: can you blame those that rent-seek?  As federal agencies churn out more and more regulation, firms in some markets are essentially coerced into this despicable behavior as a last resort.  Greasing the federal skids is often the only avenue left on the road to survival.  

Lastly, Dan Mitchell over at Cato argues that free markets can and do a good job at self-regulation.  I think his argument centers around the firm’s reputation as the primary tool to regulate behavior.  He uses the airline industry as an example.  In the absence of the FAA, would airlines suddenly curtail aircraft maintenance to save a buck?  Probably not.  An airline with a crashed jet on its hands due to botched maintenance would soon find itself out of business.  Reputation goes a long way in self-regulation, especially in our highly-connected world today.  Twitter, Facebook, and YouTube have transformed how quickly information is disseminated.  Bad firms can run, but not hide.

My closing thought on regulation is that it should be avoided because of its enduring nature.  Regulations are almost never rescinded.  When was the last time Congress passed a law to undo a previous law or the EPA revoked a rule?  Hence, this explains why the code of federal regulations has ballooned to 169,000 pages in length.  The permanence of federal regulation is reason enough to use it sparingly.  Changes occur rapidly in modern economies and federal rules serve only to hinder progress.   Eliminating outdated rules takes enormous effort and often bears little fruit.  We should instead rely on markets.  While not perfect, perfection isn’t the goal.

Markets fail, use markets.

Do we Need More Infrastructure Spending?

I was having a debate with a friend about a post my wife made on Facebook.  In response to the wild claims about “creating X number of jobs” by both presidential candidates, she posted: “Entrepreneurs and innovators create jobs, not presidents.”  In response to her post, my friend commented that FDR’s New Deal and Eisenhower’s highway jobs programs created many jobs, which in turn benefited entrepreneurs and innovators.  After a little back and forth between us, he then posted this:

“Anyway the American Society of Civil Engineers claim America needs to invest between 1&2 trillion on infrastructure in the next 10 years just to replace the outdated roads, potable water, sanitary sewer, electrical grid, etc., such investment would save and create many jobs and better our society. As far as Japan I'm not sure but I'll guarantee that in the 90s money was not as cheap as today's historical rates at which the gov. can borrow today. I pay no attention to any evidence provided by the Cato Inst., Heritage Foundation, Tea Party or any other think tank funded by the Koch brothers and their agenda based opinions. Thom Hartmann has debated top officers of the Cato Inst.several times about the theory of FDRs' policies and lengthening the recovery of the first Republican Depression and clearly showed their attempt to rewrite history. "

Here are my thoughts on the matter:

1.       It should come as no surprise that a group like the American Society of Civil Engineers claim we need to spend up to $2 trillion on infrastructure.  Who would benefit more from such a spending spree than the ASCE?  I don’t want to call into doubt their objectivity, but I’m somewhat skeptical about following the advice of a group that would richly benefit from spending more tax money on roads.  It would be like Boeing saying America’s military needs 500 new aerial tankers.  I suspect some rent-seeking here.

2.       We have a process for repairing roads and infrastructure already.  If our infrastructure is in tatters, why aren’t funding requests being submitted in the regular process?  I fail to see why $1 - 2 trillion in additional spending is immediately necessary. 

3.       The “Japan reference”.  I mentioned Japan spent about $1 trillion on infrastructure spending during the 1990s to alleviate their economic quagmire to no avail (Frank & Bernanke, 2009, p. 325).  My friend suggests that current low interest rates, at least in part, are reason enough to undertake additional spending.  I’m skeptical.  Much of Japan’s spending was later thought to be wasteful (i.e. building new roads that paralleled existing ones, etc.)

4.       My friend’s bias leads him to completely ignore the likes of Cato and Heritage.  Fine, but do so at your own peril.  Both of these organizations are full of experts who regularly publish on matters such as infrastructure spending, and ignoring their work doesn’t invalidate their findings.  I would encourage my friend to resist his confirmation bias and read published works by other organizations.  Then, refute their findings.  Choosing to completely discount entire think tanks because of their funding source doesn’t nullify their findings.

(non)News Flash!

A headline from the Washington Post:

“A majority of Americans would rather see higher taxes on the wealthy before cuts are made to public services such as food safety and border security, according to a survey released Monday by a major federal employee union.”

This is news?

Written another way, “A majority of Americans, most of whom pay little or any federal income tax, would rather see higher taxes on people other than themselves before cuts are made to public services such as food safety and border security, according to a survey released Monday by a major employer of those Americans who would directly benefit (in the form of more jobs) from higher taxes on people other than themselves.

Written even more simply, “Group A would rather see taxes raised on group B enabling group C to provide services to group A using group B’s money.”

Sometimes news isn’t news.

From Seoul, South Korea

Greetings from Seoul, South Korea!  I’ve been in country now for about one month, and have fully (finally!) acclimated to the time difference.  Adjusting to 13 hours ahead was very difficult for some reason.  Unfortunately, I will have to visit the states from time to time, and I dread it for that reason.  Ugh.  Nevertheless, we are enjoying and adjusting to our new home.   

Seoul is a sprawling mega city. Counting all the adjoining neighborhoods, the population of Seoul is somewhere north of 20+ million. It’s an endless plain of high rises, apartments, office buildings, shops and stores. If there are 20 million Seoulites, then there are 21 million Korean restaurants. I’ve never seen so many (Korean) eateries situated in such a densely populated area. Although I’m not 100% certain, it appears restaurants and eateries don’t require American style licenses or permits to operate. I’ll talk more about that, and the Korean mentality on “personal safety and responsibility” later. Needless to say, one shouldn’t go hungry living in Seoul – provided you like Korean!

We have transitioned from the hotel to our apartment, which is situated near the financial district of Seoul. Our stay at the hotel, by the way, was a magnificent experience.  We stayed at the JW Marriott near the Han River.  The service extended to us was unlike anything we’ve ever experienced anywhere.  We were truly sad to leave.  But all good things must come to an end.

As I mentioned, our apartment sits in downtown Seoul very near the financial district.  We live on the 26th floor and enjoy an awesome view of Seoul Tower (on Mt. Namsam) and the downtown area. We are high enough that the city sounds are very muted, but low enough to still make out street level businesses. This is my first high rise living, and the views from up here make the city seem quiet and sleepy. Nothing could be further from reality.  Seoul never sleeps, or so it seems.

I plan to blog about my experiences here and places we visit during trips abroad.  My first such blog will cover driving in Seoul.  Navigating the streets of Seoul is shear madness, but out of the chaos emerges order.

So, welcome to the Land of the Morning Calm!

In Defense of Mr. Libertarian

No, not Milton Friedman. Murray Rothbard! There is an anti-Rothbard cult which I simply don't understand. There's also, of course, a pro-Rothbard cult. Both are wrong, although the pro-Rothbard cult is much less wrong than the anti-Rothbard cult. I just think there is danger is 'cults of personality.' I never met Murray Rothbard. Would that I had! But he died in my freshman year of university, and I'm Canadian where the spirit of liberty is much less developed. So I didn't even hear of Rothbard until 2005/2006 when I heard Peter Schiff talking about real estate bubbles and I started digging into Austrian economics thereafter.

I read Man, Economy and State and found it to be a very good economics textbook. It is Austrian because of the methods employed (verbal logical as opposed to symbolic) but not because of the conclusions. Most conclusions are not that different from neoclassical economics. What is different is the deep attention paid to production. No school outside of the Austrian school takes the structure of production & capital as seriously. It's an important defining characteristic.

Moving on, I've read a few other books by Rothbard. The man is a virtuoso of the English language, which makes his incredible volume of writing all the more impressive. Plus - typewriter! No word processors in the '60s. It will take me longer to read his contributions than it took him to write them.

His "For a New Liberty" is an excellent vision of what a libertarian society would look like and how it would operate. He tackles all the hardest issues, like private policing and courts. You can argue with the points he makes, but he has some very good arguments.

"History of Money and Banking in the United States: The Colonial Era to World War II" is an excellent history book. Not filled with simplistic aggregates of money and so forth, this is a nitty-gritty tale of the people and events involved in shaping the current monstrosity that is the U.S. bank system. You could make a mini-series out of this book. Ever wonder why the Wall Street guys love the Fed? This book contains the answer.

Currently, I'm reading "Classical Economics: An Austrian Perspective on the History of Economic Thought" which is post-Adam Smith to early 20th century. Some excellent work here too, as Rothbard gets deeply into the economic controversies that motivated all the writers he reviews. This helps the reader understand the contributions of each economist and how they advanced the science. Reading this type of book also shows how many old arguments keep coming up. I think all students of economics (formal and informal) should know their history, and this book and its predecessor "Economic Thought Before Adam Smith" are excellent places to start. And stop if you haven't much time.

Finally, I was motivated to write this post by the excellent Tom Woods, who illustrates Murray Rothbard's character and contributions in this moving presentation: http://www.lewrockwell.com/lewrockwell-show/2012/07/31/297-the-anti-rothbard-cult/

Calling BS on Sticky Wages

There's a lot going around the economics blogosphere about sticky wages. A great deal has been made of various graphs that show wages are sticky downward (but not upward). Here's one from George Selgin, a researcher whose work I greatly respect: http://www.freebanking.org/wp-content/uploads/2012/07/fredgraph3.png. The graph does, in fact, show that average hourly earnings in the private sector have steadily increased every month from 2005 to now.

Unfortunately, and like most aggregates, that's only part of the story. I looked at the change in average hourly earnings from April 2006 to June 2012 for the following sectors: Construction, Durable Goods, Education and Health, Financial, Good-Producing in general, Information, Leisure & Hospitality, Manufacturing, Mining and Logging, Nondurable Goods, Other Services, Private Services, Professional and Business Services, Retail Trade, Total Private, Transportation and Warehousing, Utilities, and Wholesale Trade. I have graphs for all these, and they generally show upward trades, although slopes differ across the industries.

What's more important for the argument regarding 'downward stickiness' or the reluctance of firms and employees to settle on a decrease in wages is the frequency we observe negative changes (decreases) in the average hourly earnings. You'd think from the 'sticky' arguers that we never see negative changes. This is wrong. In fact, wages do decrease, about 22% of the time (average across all industries). The industry with fewest wage decreases is Private Services (4% of all changes are negative), and the industry with the most is Utilities (40% of all changes are negative). The magnitude of decreases is -0.27% across all industries, while the magnitude of increases is 0.40% across all industries. The industry with lowest decreases is Private Services (-0.06%) and the industry with highest decreases is Mining and Logging (-0.82%).


My point is this: wages do not appear to be sticky. At least, the evidence isn't all in favor of stickiness. Viscous, maybe, but not sticky. Also, here are three graphs drawn from the extremes of my wage change distributions showing the relationship between employment and wages. The first is Private Services, then Mining and Logging, and then Utilities. I see upward trends post-recession of both employment and wages. Riddle me that Batman.

For a strong theoretical point as to why wages are NOT STICKY, see my former Prof and blogger extraordinaire David Andolfatto: http://andolfatto.blogspot.com/2010/07/sticky-price-hypothesis-critique.html

That Other War for Independence

On this particular Independence Day, I want to discuss a different war of independence - the war for Southern Independence. In common parlance, the Civil War. Civil War is a mistaken nomenclature, however. Civil War means to parties fighting for control of the same government. The War for Southern Independence was an invasion of a foreign country, as the states in the South that were attacked by the North had all seceded and were thus no longer part of the United States.

I have to put in a paragraph here that I am not, nor would I ever, defend slavery. It is an unfortunate statement about the quality of education in this country that I have to say this. The War of Southern Independence was not about slavery. (On this see Tom Woods "Politically Incorrect Guide to American History, for example; also see Tom DiLorenzo's work on Lincoln). So when I am talking about the evils of the war, I am not talking about a noble endeavor to free slaves. I am talking about aggression based on economic concerns. Note that if the war was about slavery then the U.S. would have been the only country that had a war to free slaves. Also, four states in the Union allowed slavery after the secession: Missourri, Kentucky, Maryland, and New Jersey. If this war was about slavery, why were these states not warred upon?


The point I am trying to make is that states are the source of federal power, not the other way around, and states have a right to leave the union if they want to (again see Tom Woods on this, and it's important derivative power: nullification). The American war for Independence (the Revolution) was fought to establish the principle of self-government. The independent states, after the war, formed a union and a central government. This was done mostly because of the two-fold need of wanting a central representative to deal with foreign governments and to provide defense services generally. The federal government was not supposed to have more power than the states. The War for Southern Independence and Reconstruction changed that.


The Declaration of Independence states that if a government is destructive to the ends of the people, then the people have the right to dissolve that government and start a new one. That's what the secessionists were after, in the same way the Founding Fathers wanted to remove the British government and establish their own. And didn't the British have forts in the American colonies, just like the Union had Fort Sumter in South Carolina? 


The Union had the option to let, as is proper, states secede from the Union. And President Buchanan did not go to war with the first seven seceding states. But Lincoln, once President of the Union, did. And then the next four seceded because they were forced to choose. Lincoln fought to preserve the Union, not to free the slaves. Lincoln viewed the Union as his empire, and was not about to allow it to shrink.


Had the Union shrunk, the likely outcome would have been catastrophic for the North. Why? Because of trade tariffs. The North was industrialized and the South was agrarian, and the Union had a trade tariff raising the cost of imported goods. This policy obviously favored the North over the South, since cotton and tobacco traded on world markets. Now, if secession had been allowed, the South would have been a free trade zone and foreign powers would have preferred to trade with the South, not the North. So the North saw a huge loss of trade if the South were to successfully secede.


And then, after the war, Reconstruction came. Reconstruction was essentially reparations the Republicans wanted from the South. The most important effect, though, was to install the 14th Amendment. The 14th Amendment essentially puts the federal government above the various state governments as the last word on laws that affect the state. And that was the end of the united States of America, and the beginning of the USA.