I’ll punish you tomorrow so that you look back and think today is a success.

Princeton economics professor Alan Krueger offers a national sales tax as a path to prosperity. The key bit:

Here is a suggestion to address both the short-run and long-run problems. I pose it only as a suggestion for serious discussion; I’m not sure it is the best way to go. But here goes: Why not pass a 5 percent consumption tax to take effect two years from now? There are many different ways to implement a consumption tax, but for simplicity think about a national sales tax.

So he prefaced it by saying it’s only a suggestion. It’s a path to prosperity that should be so obviously doomed to failure that an economics professor would trash it before submitting it to an editor, but still, the caveat is there. He continues:

In the short run, the anticipation of a consumption tax would encourage households to spend money now, rather than after the tax is in place. Along with the rest of the economic recovery package, this would help jump-start spending in the economy and thereby increase production and employment.

Just like the federal government, consumers can create prosperity by spending more. Somehow, defined as shifting spending from a post-tax world two years from now presumably to today’s pre-tax world. This is an interesting theory, but let me ask a question: If you know a 5% tax looms two years from now and you have a significant purchase planned more than two years from now, is that going to shift your spending to today? Or will it shift your spending to 1 year, 364 days from today? The two year window is pointless to get the economy rolling today, if we’re working under the silly notion that a tax increase will grow the economy.

Also, if you shift that spending from some date more than 2 years in the future to 1 year, 364 days in the future, have you increased (i.e. “jump-started”) consumer spending, or have you shifted the same spending around in time? Will this shifting in time increase production temporarily or permanently?

Notice, too, that the entire argument is built around the false assumptions that we need not question government spending and that tax increases have no negative effect on an economy.

Via Kip

Chant it with me: 1/20/2013! 1/20/2013! (1/20/2017?!?)

This story is from earlier this week, and the Bush Administration refuted the underlying claim. However, that it could be true illustrates a fundamental flaw in politics.

The struggling auto industry was thrust into the middle of a political standoff between the White House and Democrats on Monday as President-elect Barack Obama urged President Bush in a meeting at the White House to support immediate emergency aid.

Mr. Bush indicated at the meeting that he might support some aid and a broader economic stimulus package if Mr. Obama and Congressional Democrats dropped their opposition to a free-trade agreement with Colombia, a measure for which Mr. Bush has long fought, people familiar with the discussion said.

If this is true and it ends this way, Americans will lose free trade with Detroit to gain free trade with Colombia (among others).

I hate politicians.


An amusing paragraph in the article:

Mr. Bush has drawn his line at the automakers’ doors, having already been forced to shelve the free-market principles of his Republican Party to bail out the financial industry over the past two months. But Republicans say he would acquiesce in aid to automakers in return for Congress’s ratification of the Colombia pact and pending trade agreements with Panama and South Korea.

President Bush was not forced to shelve the free-market principles not possessed by the Republican Party.

No we can’t repeal the laws of economics.

I hope I don’t need to reference this example too many times over the next 4-8 years:

In an almost-too-good-to-be-true foreshadowing of the Obama presidency, the donutistas said that they were concerned about running out of the free election-themed donuts. Apparently, when you give something away for free, it’s hard to know how much of it to make. They’d resorted to (semi-illegally) demanding to see “I Voted” stickers for the special donuts in order to stretch out the supply. They also said customers weren’t as polite as usual. Go figure—when people feel entitled to something, they act as if they value it less. Who could have foreseen such a thing? Oh, wait.

Who wants to talk about free health care?

Headlines can be misleading.

Reading USA Today I encountered this headline:

Majority of economists in USA TODAY survey back 2nd stimulus

I was skeptical, so I skimmed the article to figure out how the paper got to such an unlikely conclusion. Will you be surprised that the headline derives from this?

Congress should pass a second economic stimulus bill that could include tax cuts, an extension of unemployment benefits, or funds for roads and bridges, say a majority of economists polled recently by USA TODAY.

Thirty-two of the 43 economists (74%) who answered the question last week in a survey by USA TODAY said lawmakers should pass a stimulus bill to soften the blow. “It won’t keep us from going into recession,” PMI Group chief economist David Berson says. “But it may make the difference in preventing a worse recession.”

“Majority of economists who responded to USA Today Survey back 2nd stimulus” is not quite the same, is it? It loses a little punch. At the expense of some truth, since self-selected responses to a politically charged question is hardly objective. But the news isn’t about the objective, I suppose.

Note: Every blog entry can’t be a winner. I’m distracted by the World Series, so I needed to flex my blogging muscles.

Ideology versus Efficiency

One of my long-running frustrations with libertarian thought is the idolization of gold (and to a lesser extent, silver). I could be wrong and there is substantial merit to the argument. I just don’t think so. All currency is relative. During a famine, would you accept gold for a loaf of bread? A loaf of bread for gold? The answer is different, right?

Megan McArdle posted about this last week:

“Hard money” types tend to denigrate the dollar as little green pieces of paper, not a real thing that’s actually worth something. This seems to me like a version of the Marxist fallacy, the belief that value can be somehow intrinsic rather than relative. Gold is pretty, of course, but not actually much more “useful” than a dollar bill. It does have some industrial application, but the vast majority of the gold in the world is used for money or jewelry.

A dollar is a real thing: a store of value and a medium of exchange. These are extraordinary valuable uses. Indeed, the need is so great that if currency is restricted or unavailable, people do not simply revert to barter; they turn something into a currency.

She continues, leading to a story about prisoners using canned mackerel as currency. We can, and probably should, complain loudly about fiat currency, if only to encourage and force more responsibility and less maniuplation by the government. But fetishizing gold misses the point. The point that gold has an extra application is most irrelevant because most people are not interested in bartering with organizations interested in gold’s industrial applications. Gold has value for the same reason a dollar isn’t a mere piece of ink-stained paper: someone else values it.

That is real, but it is also subjective. Argue for gold. Argue against fiat. Just remember that they are separate issues.

Restrict Employer Choices, Have Fewer Employers

BusinessWeek has a debate today on the Employee Free Choice Act, which is up for consideration before Congress. I’m against based on the very little information I know. Essentially, the pro and con between Rep. George Miller (D-CA) and Home Depot co-founder Bernard Marcus provides the bulk of my knowledge. If Rep. Miller’s rhetoric sufficiently corresponds to what the Act would do, I’m against it because Rep. Miller demonstrates that he only recognizes rights that are convenient for his partisanship.

(Note: I’m not advocating the opposite of his view. Rather, I believe the relationship between employers and employees must be voluntary and mutual. I am not qualified to set all rules for all exchanges. No one is.)

To Rep. Miller’s essay:

Unfortunately, in recent years, the middle-class life has become increasingly difficult to maintain. Workers’ wages have stagnated as the cost of everything from milk to college tuition has skyrocketed. The staples of a middle-class life—a fair wage, access to health care, a sound retirement—are getting squeezed. The percentage of national income going to workers’ wages is at its lowest level since 1929, while the percentage of our nation’s wealth going to corporate profits is at its highest since the 1940s.

I’m a skeptic; I want data where Rep. Miller provides anecdote. He’s a politician, so I never expect to see it. But, for fun, I’ll assume he’s telling the truth. If “national” income is now being directed to corporate profits rather than to workers, then workers should become investors. They will claim “their” share of the “national” income.


The Employee Free Choice Act would fix this broken system so workers can freely exercise their right to organize. It would do three things. First, it would allow workers to use a majority sign-up process to form their union, without their employer vetoing that choice. Second, it would increase penalties on employers who violate workers’ rights. Third, it would ensure that, once workers form a union, collective bargaining leads to a first contract—not delay and more union busting.

Focusing on point two: what penalties do we have on employees who violate employers’ rights? (I refuse to concede Rep. Miller’s ridiculous use of employer/worker rather than the objective employer/employee.) To demonstrate what I mean by this, Rep. Miller later writes this:

If these advantages aren’t enough, an employer can fire a pro-union worker to make its point, or threaten to close the business down if workers vote the wrong way, without facing more than a slap on the wrist. At the end of this process, the NLRB holds an election on the employer’s premises.

Employees have rights, but employers do not. At least, they do not have the right to shut down their business if one of the inputs (labor) is not to their liking. That’s absurd. Rights belong to the individual, not groups. But if they applied to groups, all groups would have rights, not just the groups who agree with us. Starting a business is not an agreement to perpetuate the business beyond the owner’s desire to continue it. The Employee Free Choice Act seems to suggest that the ultimate decision in running a business – whether or not to continue – becomes the sole discretion of employees. This is a blatant violation of one individual’s rights to satisfy another’s (claimed) rights.

This is not any democracy that most Americans would recognize as such. Yet this is the system that opponents of the Employee Free Choice Act want to preserve. Another process exists. If an employer allows it, as some major companies already do, workers can avoid the conflict-ridden NLRB process and form a union by signing cards, the same way you might form a civic association. When a majority has signed up, the employer recognizes the union.

Unfortunately, current law allows employers to veto the use of this freer majority sign-up process—and they do. The Employee Free Choice Act would simply take this veto power away from the employer and restore the democratic principle of free choice to the workplace.

The right for an employer to determine that she will employ individuals on the condition that they deal with them individually rather than collectively – the employer’s freedom of (voluntary) association – is subject to the whim of the majority. Remember that potential and current employees for any organization can always refuse to continue providing their services. If the employer is unable to find enough people willing to agree to her terms, she will either offer better terms or go out of business. This is the freedom of association perpetuated by natural incentives for cooperation that need no encouragement from government. Rep. Miller’s advocacy for the Employee Free Choice Act shows his misunderstanding of the American concept of individual rights.

Saturday Linkfest: Economics Questions

During a hurricane, is it better to have no gas at a low price or some gas at a high price?

For police motorcycles, is it better to ride American motorcycles or ride quality at the best price? Maybe those are the same subset of the market, but Senator Obama is hardly making that a requirement.

When setting CEO pay, is it better for an organization to consider the general health of the organization or the general health of society? Does the former not lead to the latter?

How did presidential candidate Obama determine that we need to double funding for the Manufacturing Extension Partnership? (Link provides no answer, making this question non-rhetorical.)

If presidential candidate McCain wins, how will he dictate to “… oil producing countries and oil speculators that our dependence on foreign oil will come to an end – and the impact will be lower prices at the pump”? Doesn’t the law of supply and demand suggest that, if we have less oil available for purchase, the price will increase rather than decrease? Will we have a new national anti-price gouging law to “repeal” the law of supply and demand?

Today’s lesson: America is the land of economic opportunity, where we can legislate low-paid CEOs buying American motorcycles improved through government picking supply-chain winners and refueled with air-masquerading-as-cheap-gas. And we’ll solve global warming, too, since the motorcycle won’t have any gas to burn!

The invisible hand always loses to the visible fist.

Who will be the loudest voice to proclaim this proof that the government must rescue us from a market failure?

The Treasury Department seized control of Fannie Mae and Freddie Mac, the nation’s giant quasi-public mortgage finance companies, and announced a four-part rescue plan that includes an open-ended guarantee from the Treasury Department to provide as much capital as they need stave off insolvency.

When even the New York Times realizes that Fannie and Freddie are quasi-public rather than quasi-private, there can be no defense for the failure of the private market. Lawmakers encouraged these two to grow into the mess they are now through poor oversight and perverse incentives. When organizations exist where subjective, politically-favored goals matter more than objective, profit-driven goals, the private market has nothing to do with the organizations.

To be fair, I will not attribute this solely to government failure. I do not concede that the private functions are failing, though, because they are signaling exactly what they’re supposed to be signaling – there was too much cheap and irresponsible money in the mortgage market. This should be a lesson learned. I doubt it will be, precisely because neither is being allowed to fail. Perhaps that’s the right decision; I do not claim to know. But we shouldn’t be here.

Should we move next into discussing American automakers?

Headline of the Day

Yesterday, actually, but I’ve been busy.

Democrats See a Need for Further Economic Stimulus

This should probably be filed under “Duh”, if I had such a category. I’ll assign “Propaganda”. But let’s consider the idea.

“We ought to see how the first one works,” Mr. Bush said. “Let it run its course. I’m an optimist.”

Oh, wait, that’s considering the issue. That’s not how politicians work. (That President Bush was complicit in the first round of Free Money and will inevitably sign the second round is noted and irrelevant for my purpose here.) Instead, they seem to believe they can do nothing wrong. Forget that some checks from the first round of Free Money haven’t been mailed. It’s not working. It’s not not working because it’s a stupid idea. Of course. No, it’s not working because it’s not enough. So, Free Money is good. More Free Money is better. Who doesn’t realize that $1,200 (or whatever figure the Congress invents as necessary) is better than $600? I’d raise my hand, but my opinion doesn’t count. I was ineligible for the first $600 of Free Money that I will nevertheless have to repay.

I’m realistic without being cynical about the value of our currency. That position is getting harder to maintain. For example, I’d love to have a contract to supply the paper the government uses to print all the new money it keeps imagining. And I’m honestly thinking of how fascinating the loop will be when the Fed has to raise interest rates to pay for the money Congress prints. At least the worthless paper will earn high returns!