This is your friendly reminder that a government shutdown is a form of political hostage taking wherein non-controversial government services are suspended in order to pressure parties into assenting to legislation they would otherwise not support. Continuing resolutions can be used to fund any program enjoying broad support, thus if an essential service ceases to function during a shutdown, it was shuttered deliberately. Parties dissatisfied with the budget refused to allocate funds which everyone agrees should be allocated, scheming that enough voters would blame the wrong side for their shutdown and would bring enough political pressure to bear against them to make them cave.
Sadly, this is usually the way shutdowns end, which explains why we keep having them. They work. Voters reward the culpable. The hostage takers get their way. We have reached a point where we need to scrap an idea of producing a unified behemoth document called “the budget” altogether, and rather pass each individual program on a line item basis. Continue Reading…
This will be something of a long one, but I have arrived at a conclusion that must be shared with the world. Or at least with Facebook and Goose.
From a libertarian position, both the president and his (main) challenger believe in a myriad of policies with which no sane person should ever agree, ranging from protectionism to prohibitionism to the executive’s warmaking powers to extrajudicial killing by executive order, but when they stop agreeing about how wonderful all the foreign and domestic blood and gore is and actually disagree on something, Romney is usually right.
I have thought this for some time, but what prompts my public declaration is the left’s blather over a lack of detail in Romney’s tax plan. Dearest reader, public finance is not all that difficult to understand. If a suggestion is made that tax rates be lowered and that tax deductions be eliminated to make tax reform revenue neutral, you don’t ask for further “details.” Those are the details. The rich are taxed at X%. They actually pay closer to Y% because of deductions. Change the tax rate to Y% and disallow them from having any deductions. Tax rates are now lowered without lowering revenues by a bill that could be written in one paragraph. Quid erat demonstratum.
You cannot debate with such people, and I will go so far as to say that I am entitled not to be governed by them.
The only potential hitch is that a deduction phaseout would need to be implemented after a certain threshold of deductions is reached if it is decided to keep the existing structure for the bottom 90% of the country, but that’s a high school math exercise once the powers that be finally reveal to us what the definition is of this “middle class” of which we hear so often, such that we know which threshold to use.
The more sophisticated critique has focused on the supposed mathematical impossibility of crafting a revenue-neutral tax reform bill with Romney’s numbers. Romney would lower tax rates further than Democrats argue he can balance with cuts to deductions, but their analysis is based on the conceit that marginal tax rates don’t affect income earned. Present income is merely multiplied by the proposed tax rate, and the product comes out too low, they say. But cutting tax rates while eliminating deductions is a textbook example of a tax reform that will increase taxable income. For the long reason, see here: http://econlog.econlib.org/archives/2012/10/romney_tax_cuts.html . For the short reason: A high burden of tax makes you poorer. A poorer person has to work harder to recoup income the government takes from him. Thus he wants to work more and take less leisure time. This is called the income effect. But a high tax rate means that an hour’s work produces less after-tax money than it used to, making work less valuable relative to leisure time. Thus he wants to work less and take more leisure time. This is called the substitution effect. It’s debatable to what extent these two forces cancel each other out in a tax raise or tax cut designed to change the burden of taxation. But a tax cut designed to cut tax rates and leave tax burden alone only increases the value of work relative to leisure. Thus more people will choose work over leisure, revenues will be significantly higher than would have been expected using a static tax analysis, and any revenue neutral tax reform proposition must lower tax rates significantly below the level which static-taxers require if their math is to add up.
Thus we get to the heart of the matter. I’ve been following tax reform proposals from the wonks on the right of the debate for years, and I fully expect that Paul Ryan of all people in Washington has been doing the same. Tax reform has always been premised on the idea that deductions are indefensible and must be eliminated. They masquerade as tax cuts which are supposedly good for the economy – indeed, Obama has run on his claim to have cut taxes for nearly everyone in the country, by which he means he’s created or maintained all these deductions – but they harm us dearly because they consist of a revenue-negative income effect which does nothing to actually soften the revenue negative-substitution effect caused by the high tax rates from which the deductions are in the first place deducted. If Ryan knows this it seems obvious that the Republicans’ plans to reform the tax structure began with the goal of eliminating deductions as an end in itself, but wanting to pass a plan that would be in all other ways outcome-neutral, proposed lower tax rates which would not modify the actually dollar amount paid in to the government after accounting for a stronger economy once the deadweight of deductions is cut away. But the left is perpetually deluded by visions of class warfare, and compulsively accuses its opponents not merely of being wrong, but evil, for disagreeing with it. Thus a fairly mundane tax reform proposal based on mainstream economic thought is, like so many similar proposals in the past, being recast as merely an attempt to lower the taxes* of the richest in society, as if that, and not a century of fairly well accepted public finance, were the driving force behind all but social-democratic tax proposals. You cannot debate with such people, and I will go so far as to say that I am entitled not to be governed by them.
Thus, I throw my endorsement once again behind Not Obama.
*Can we dispense with imprecise language like this? Taxation can be measured in at least four separate ways: the percentage of one’s dollar taken, the proportion of one’s income one is left with after taxation (these are different, and if you yet do not see how, I have failed you as a writer), the quantity of one’s dollars taken, and the percentage of government revenues provided from one’s income percentile. These four indicators seldom all move in the same direction under a given policy, which means every politician can (dis)honestly claim to have cut taxes, or claim his opponent has raised them. Bush could just as legitimately have claimed he raised taxes on the 1%** because both dollars raised and percentage of revenue paid by the top 1% rose to all time highs under his presidency.
**We need to dispense with imprecise language like this too, but that is a matter for an entirely different piece.
When those uninitiated to political theory hear the word “libertarian,” if they’re familiar with the term at all, they tend to think of the Libertarian Party. While the Libertarian Party is perhaps one of the more successful nationwide third parties, it tends to garner on the order of 5% of the vote at the best of times, which leaves the uninitiated with the perception that libertarianism is a minor issue with little importance to modern American politics. I have contended for some time that libertarianism is significantly more widespread than people give it credit for being; we simply don’t recognize it for what it is when we see it because we confuse many parts of it with conservatism. I myself, for instance, never converted to libertarianism. I identified as conservative, but as I began exposing myself to political thought, I kept running across these people who believed what I believed, but they kept calling themselves libertarians, or, if they were older, were termed classical liberals by those who wrote about them. This left me more than a little bewildered as I tried to discover why my apparently libertarian beliefs were being identified as conservative by those around me. Over the years I’ve discovered that I’m not alone in this, that a large portion of the conservative movement is composed of individuals who, if not libertarian outright, are at least equal parts a libertarian-conservative hybrid, but don’t realize it.
Since then, I’ve put much thought into writing up some kind of “you may be a libertarian if…” test, something that could demonstrate to other would-be conservatives that their ideas may be more closely aligned to an altogether different school of thought. This is not that test. However, today I most definitely found something that belongs on it. You may be a libertarian if this makes your blood boil.
The libertarian believes law is violence, and clearly not without reason. If someone resolutely refused to comply with a law, law enforcement has no carrots, only sticks. It can’t coax or bargain; it has to threaten, since force is all it has. Because we fear being attacked by the government, we rarely resist it to the point of actually being attacked by the government, and this allows us to blind ourselves to the reality that law is violence, but when people do resist, the truth comes out, as in the above video. A city in Delaware has a law declaring basketball hoops, among other things, to be a public nuisance if less than seven feet from the street. The department of transportation comes to take it down. The landowners attempt to prevent it. Libertarians reject the legitimacy of such laws, and what comes next is why. They’re threatened with arrest over a zoning ordinance. Because the city wants some trivial law of no serious importance enforced, they’ll manhandle, chain, and haul a person off until they comply. Proportionate response? Forget it. Government will not be denied what it demands.
Now, some will object that the law may be over a trivial matter, but resisting the police is never trivial and therefore those who resist deserve whatever they get. This is absurd. Passive resistance is never more or less serious than the thing being resisted. Obstructing a paramedic on the way to an emergency is serious, as medical emergencies are serious. Obstructing a paramedic trying to clip his fingernails will earn you a few funny looks, but nothing else, since it’s a trivial matter. Same of firemen, politicians, librarians, and all civil servants. Police are to be exempted? Resisting the police is always serious, even when it’s trivial? This attitude is merely a throwback to a more barbaric age when the class of people who were allowed to carry weapons were allowed to do well-nigh whatever they wanted without being resisted. It’s not an appropriate principle for modern, supposedly more civil humanity to follow.
Because law (and by extension government itself) is violence, libertarians accordingly reject the legitimacy of government except as a proportional response to other acts of violence. If someone tries to shoot, manhandle, or detain someone, society may shoot, manhandle, or detain him if necessary to prevent his act of violence. But such a response to zoning laws? What’s next, hit squads going after jaywalkers? This is arguably the chief value of libertarianism: freedom from government in all things nonviolent. If this resonates with you, you may be a libertarian.
One of the major distinctions of a libertarian is his separate treatment of liberty and democracy. Modern American political thought tends to blur the lines between these concepts, but libertarian political philosophy treats them as quite separate. A state is democratic if government obeys the people, or at least a majority of the people. A state can only be free, however, if government cannot violate the basic liberties of any segment of the population, even if the majority of the people wish to do so democratically. The libertarian, or more broadly any liberal (according to the classical definition of the term, not the modern American usage) prefers freedom to democracy. Ideally, a liberal would consider an enlightened autocracy which embraces the ideals of liberty to be the best form of government, but enlightened autocrats have benighted heirs, so we settle for the next best thing, a democracy with clear limitations on powers enforced by splitting such powers among competing branches and levels of government, such that an oppressed minority can find protection from the tyranny of the majority by appealing to a separate government minister who has an interest in preventing other branches of government from overstepping their bounds.
Accordingly, as a libertarian, it frustrates me to no end that Americans are taking such an uncritical look at the consequences of the pro-democracy protests in the Middle East, and particularly Egypt. Last Friday in Tahrir Square, the epicenter of the protests that ousted Mubarak, a crowd of the same protesters estimated in the hundreds of thousands to a million was chanting “To Jerusalem We go, for us to be the Martyrs of the Millions.” They were led by Sheik Yusuf al-Qaradawi, went on record in 2009 with this to say about Egypt’s northeast neighbor:
“Throughout history, Allah has imposed upon the [Jews] people who would punish them for their corruption. The last punishment was carried out by Hitler. By means of all the things he did to them – even though they exaggerated this issue – he managed to put them in their place. This was divine punishment for them. Allah willing, the next time will be at the hands of the believers.”
And this individual just happens to be a leader in the Muslim Brotherhood, who have a good chance of occupying a major role in Egypt’s next government.
Where are the Egyptians promising to protect basic human rights? Separation of mosque and state? Free press? Protection of Women? (Egypt still heavily practices ritual female genital mutilation) How about promising to maintain peace with Israel? For a start, it would be nice not to have national leaders lionizing Hitler. Did I miss all these things? Or is it really possible that Americans overlooked the fact that Egypt needs the above as much as, if not more than the right to elect the government?
Certainly this is a a rare oversight on our part – we don’t chronically ignore these issues in the world, do we? I mean, if America were to, let’s say, manufacture two whole states in the middle east, we’d certainly have enough sense to build protections of basic human rights into their government and insist they be observed for at least as long as we’re providing their security for them, right? Then perhaps someone in the state department can explain why Iraq and Afghanistan both have state religions and Afghanistan has tried to execute converts from Islam on several occasions?
Recent developments in Libya have provided the only bright spot for me in all this. Earlier this week, the opposition to Kadaffi took control of Benghazi, Libya’s second largest city, and it looks as if Kadaffi’s now fled Tripoli as protesters took that as well. Kadaffi was enough of a goon that (provided the opposition doesn’t follow the model of the French Revolution) it would be very hard for things to get any worse.
First observation, on the Delaware senate race. Choosing Christine O”Donnell over Mike Castle was perhaps the most self-destructive primary choice I have ever seen since I began watching politics, easily trouncing the previous record holder, John McCain”s presidential bid. The wildly popular Castle was thought to be a shoe-in for this seat, whereas O”Donnell never had a chance, and everyone knew she had no chance in the general well before the primary.
To support her regardless meant the concept of a moderately liberal Republican was so abhorrent to her supporters that they”d rather have an even more liberal Democrat – well, either that, or they all deluded themselves about her prospects. I could never buy this line of thinking, but perhaps that”s because I”m one of the myriad Libertarians who vote Republican for lack of a better party. I”ve found this to be a common theme among such Libertarians: since all of our votes end up being choices between the lesser of two authoritarians, we tend to roll our eyes when someone gets worked up because his would-be candidate doesn”t fill out all the correct bubbles on the political purity-test. Join the club, Delaware Republicans.
That said, this sends a powerful message to Republican moderates. You have exactly as much freedom to vote the way you want as Democratic moderates do: none. “Moderate” is an act you play to get re-elected; it isn”t actually allowed to influence your votes. Votes will be determined by the will of the party. One needs look no farther than Obamacare to prove that there isn”t a single Democratic senator willing to obey his constituents instead of the party. Now Republicans won”t be permitted to do so either. I can”t say I care much for this message. It seems to me that knocking off pseudo-centrist Democrats is a better way of getting conservative votes.
Second observation, also on the same race, criticizing the other side. The problem with Christine O”Donnell isn”t that she was too conservative, rather, she was just a bad candidate. The entire idea that statewide electability is determined by how close a politician is to that state”s mainstream is absurd. If Chris Christie, arch-fiscal conservative, can get elected Governor of New Jersey, clearly the problem isn”t that the Mid-Atlantic requires more centrism out of its candidates. Is there any senate seat in the country that Marco Rubio, Florida”s new senator elect and Tea Party favorite, couldn”t get within five points of winning? Most voters want a candidate who can demonstrate that he understands what he”s doing and can handle the reigns of power, i.e., a good communicator with solid credentials who inspires confidence in his audiences. Political positions matter, but are something of an afterthought as long as the candidate himself is sharp and inspiring.
Back to criticizing Tea Partiers: If the above is true, stop nominating conservative flakes merely because they”re conservative. If you don”t like moderates, find the conservatives that aren”t flakes and run them instead. If you promise to be real good on this one, Minnesota might lend you Chip Cravaak to give you some pointers on identifying them. Hint: They”ll look like Chip Cravaak.
Third Observation, on Connecticut. I know what you were thinking, Connecticut. “Let”s nominate McMahon for the senate seat! She has gobs of money, and money buys elections, right?” Turns out, Connecticut, that money can”t buy an election. A certain amount of money allows a candidate to get enough airtime to introduce himself to the people, butonce the candidate is a known entity, additional spending produces negligible results. For further reading, I refer you to Steven Levitt”s work on campaign spending influence, which concludes that spending has one tenth the effect that is commonly accepted. I bet you now wish you had nominated Rob Simmons for that seat instead, Connecticut. A retired Colonel who won a house seat in a Democratic stronghold… boy, he looks a lot like Chip Cravaak, doesn”t he?
And now, a personal note to some of the Minnesota house districts. To MN-7, you have no business being a Democratic stronghold. Why can”t you act more like your older brother, MN-8? To MN-3, please move east a few miles and get me out of Keith Ellison”s district. To MN-1, your representative has no business being a Democrat if he”s too afraid to include the word “Democrat” in any of his campaign ads. MN-2 and MN-6, keep up the good work.
Also, to our probable governor. Congratulations on doing what no Democrat has done in 20 years. I”m sure, barring a recount upset, that you”ll get straight to work on lots of important progressive goals like higher taxes, more spending, and trying to redistrict Michele Bachmann out of existence. I”m sure you”ll have no trouble doing that, what with your ironclad grip on the legislature – wait, what”s that? You”ve lost the house and senate? Well, you”d better go find them, since you can”t do anything without them. That was rather irresponsible of you. No one”s lost the senate since the 1970″s.
Now, if you”ll excuse me, I have to add Cravaak to my spell checker.
It’s 1776. For centuries, European countries have been conquering and colonizing weaker powers for financial gain. Oppressive taxes prompt discontent. Barriers to trade cause poverty in occupied lands. After witnessing the devastation brought by English taxes upon his home country, one man pens a work that will challenge the world’s prevailing notions of how and when it is appropriate to tax. The country: Scotland. The man: Adam Smith. The work: “The Wealth of Nations.”
Up until the latter half of the eighteenth century, European governments were devoted to an economic theory called mercantilism. Mercantilism, put roughly, is the belief that exports are good and imports are bad. A country becomes rich, according to a mercantilist, when more money flows into a country through the sale of exports than exits the country through purchasing imports. A mercantilist, therefore, wants lots of taxes on foreign goods to make them more expensive, so that consumers will choose to buy domestic, keeping a country’s gold within that country’s borders. Closely aligned with mercantilism is another theory, protectionism, which argues that strong tariffs on foreign goods are necessary to protect domestic industries from cheap overseas competition. Without said tariffs, the protectionist argues that domestic industries would either be shut down or at least be forced to slash wages, impoverishing a country’s workforce. Governments loved this idea. The prevailing wisdom today is that taxes harm the economy. But, with mercantilism, you get to raise taxes in the name of helping the economy! You can see the appeal. Merchants were big fans too. After all, government is knocking out your major competitor for you, allowing you to raise prices and increase profitability.
The problem in all this, one of the many things Smith pointed out, is that it harms the consumer by impeding efficiency, forcing him to purchase fewer goods at higher prices. Smith argued instead that government should eliminate tariffs on traded goods, allowing foreign manufacturers to compete freely with domestic producers. Domestic prosperity is a consequence of manufacturing the highest possible quantity of goods, thus allowing consumers to attain the highest standard of living. Protecting inefficient domestic industries by keeping prices high is thus counterproductive. We call his proposal, the abolition of trade restrictions, “free trade.”
A few decades after Smith, another early economist, David Ricardo, published the math to back up the nascent theory. When one compares any two countries manufacturing any two goods, Ricardo argued, one country will always have a comparative advantage with one of the goods, and a comparative disadvantage with the other. Let’s say a factory worker in China can make one computer or television per hour, and a factory worker in America can make five computers or ten televisions per hour. Though we may be able to do either job more effectively, we cannot simultaneously employ our workers on both jobs at the same time. For every worker we designate towards making computers, we forfeit the ability to make televisions. This is called an opportunity cost. America’s opportunity cost in this scenario is two televisions to one computer, since our workers can produce twice as many in the same time period. China’s in this scenario is one tv to one computer. This means America has a comparative advantage in making televisions, since it needs to forfeit half as many computers as China would to make the same quantity. China has the comparative advantage in making computers, since it needs forfeit half as many televisions as America would to make the same quantity. Now, if China and America negotiate a trade arrangement where 1 computer is worth 1.5 tv’s, America can acquire computers at a cost of 1.5 tv’s instead of 2, and China acquires 1.5 tv’s per computer, instead of just the 1 they could produce domestically. Both countries are capable of getting better deals through trade than they could domestically.
Beginning with Smith, continuing through Ricardo down to this present day, a group of academics has strove to explain the damage inflicted by protectionist taxes, and the benefits of free and unrestricted trade. We call these men “economists.” The superiority of free trade is one of the few positions in that discipline which may be called a consensus, gaining broad support from economists of all political persuasions. You wouldn’t know it, however, given the talk out of many politicians.
For instance, it’s quite common in several current Minnesota races to hear horror stories (from Democrats) about how the other party (those greedy Republicans and their special business interests) allowed such and such a quantity of jobs to be outsourced overseas, and how horrible that is. To prevent further losses, we are assured that tax breaks for companies that outsource must be closed off (which has the same effect as a tariff). Of course, this is economic nonsense. Whenever two countries engage in free trade, those industries at a comparative disadvantage are lost in both countries. Instead of fighting to save every last job, we should focus our energies on those industries where we have a competitive edge against foreign goods, and replace outsourced jobs through growth in industries where we have the comparative advantage. We offshore some of our jobs to China, China offshores some of its jobs to us, and our job gains and losses negate each other. Certainly, this is unpleasant for those who have to transition from jobs in inefficient industries to jobs in efficient ones, but the net benefit to society far outweighs the loss to impacted businesses. Now, one caveat. Various structural problems can distort all the above, such that job losses to offshoring are not met with equal opportunities for foreign growth. One major issue in the world right now is that China artificially cheapens its goods by undervaluing its currency, which itself is a quasi-mercantile strategy. In such cases, a protectionist tax is still a bad idea. A tax on imports invariably falls squarely on those who buy goods the price of which cheap imports were holding down. Punishing your citizenry with higher prices at the grocery store is a stupid way to deal with a foreign country manipulating its exchange rate.
Economics aside, there’s another more sinister problem with protectionism. Protectionists have opened themselves easily to the charge of xenophobia over the centuries. After all, their argument is essentially that foreigners are trying to steal your job. This generally does not inspire peace and understanding between neighbors. For that reason, an honest protectionist will also become an isolationist, and oppose any large-scale flood of immigrants. It doesn’t really matter to an honest protectionist whether a job is being “stolen” by a Chinese man in Beijing or one who moved to New York. Both supposedly threaten the ability of America to have strong industries and provide high paying jobs to our workers. This is an economically illiterate position, but at the very least, it’s consistent. When one believes the economy to be delicate and fragile, needing government to defend it from destruction at the hands of foreigners, one becomes wary of cooperation with foreigners.
Unfortunately, honest protectionists are rare. More frequently, one runs across the politician who seems to care only about one specific kind of dangerous foreigner. This isn’t mere xenophobia, it’s bigotry. To complain about outsourcing of jobs to one nation while ignoring another loss of jobs to another people group is hypocritical and looks an awful lot like racial favoritism. Take note Democrats: you cannot complain about outsourcing while trying to admit millions of guest workers from Mexico. The offending politician I have in mind, the one who prompted this note, is one Tarryl Clark, the DFL hopeful running for Minnesota’s sixth US house district. As of perhaps a week ago, she has launched a massive ad campaign bemoaning how horrible it is that so many jobs have been outsourced to China and India under Michele Bachmann’s watch. While she’s been largely silent on immigration issues during the campaign (this is not perceived to be a winning issue for Dem’s this year) she shows no signs of being a radical border-closer. And good for her; isolationism is bad. However, as she’s not an isolationist, these ads may as well be saying she doesn’t care how many American jobs are lost to foreigners, provided they’re not oriental.
“Wait,” some will say, “That’s an explosive charge, you can’t be serious.” Well, yes and no. Remember from the beginning: governments like protectionism. It gives them an excuse to tax in the name of job creation. Never mind the fact that it’s the economic equivalent of bleeding with leeches – if you belong to a party that wants to solve everything with tax hikes, and are about to take a beating for failing to create jobs, protectionism is one of the few ways to claim with a straight face that taxes can actually create private sector jobs. I doubt any of the Democratic politicians who have railed against Republicans who outsource jobs are actually cogently trying to wage war against Asians. It’s just political propaganda. Nonetheless, it’s an inherently incendiary piece of propaganda to blame the far east and those who want to trade with them for our current economic mess, intentions notwithstanding. It’s always irresponsible to blame economic ills on another people group. This breeds a kind of hate that can blow up in unthinkably violent ways.
We got rid of this idea in the first place because it’s the enemy of both prosperity and peace. Protectionism: just say no.
As campaign season has been heating up, embattled Democrats are taking serious poundings over the government”s failure to restore employment numbers to pre-recession levels. Their prevailing defense, when one is given, is that government action did create jobs, however the economy lost more jobs than were created, therefore the economy lost net jobs, even though the various stimulus programs were successful.
This sounds reasonable, but it overlooks the basic theory underlying government job creation policies, which I laid out in an earlier note this summer. According to modern Keynesian economic theory, which has been endorsed, at least nominally, by Democrats since the time of FDR, jobs are created by demand and consumption. Under-consumption leads to underproduction, as fewer goods are necessary if no one is buying them. Underproduction causes unemployment, as fewer employees are necessary to manufacture fewer goods. Therefore, to whatever degree the economy is under-consuming and under-producing, unemployment will rise, and to whatever degree that output gap closes, unemployment declines.
Now, here”s where things get problematic for the President”s defenders. When we calculate the relationship between underproduction and unemployment, both are given in terms of deviation from trend by percent. In other words, we don”t say that an increase of X dollars of GDP creates or saves X many jobs. We say that a GDP which is trending X percent below its usual growth rate creates X percentage points of unemployment above the usual rate. Since World War II, that ratio has been roughly 2 percentage points of underperformance to one percentage point of unemployment. We call this relationship Okun”s Law, and used it to calculate the impact of government stimulus, until it broke.
Over the course of 2009, when the stimulus was taking effect, GDP stabilized. For the sake of the argument, let”s assume the stimulus was responsible for that. If we apply Okun”s law, unemployment should have reached only around eight percent, which is what the administration said it should be. Instead, it jumped to nearly ten. It can”t be argued that this was simply the consequence of the economy being worse than we imagined it was – if that were so, this unexpected one and a half percent increase in unemployment would have coincided with an additional unexpected three percent decrease in GDP. That didn”t happen. Thus, it isn”t that the administration fed optimistic GDP numbers into the economic model to calculate an optimistic impact for the stimulus. The numbers are fine; the problem is that we no longer know what the relationship is between GDP underperformance and unemployment rates, such that the model itself is suspect. With more and more frequency economists are suggesting that we”re in a period of structural unemployment instead of cyclical unemployment, which means among other things that unemployment can”t be fixed with traditional recession mitigation tactics, such as, say, propping up GDP through government spending. If so, America flushed nearly a trillion dollars down the toilet which had very little effect on unemployment.
Incidentally, if government spending doesn”t end up in worker”s pockets, it”s worth exploring where it actually does go. If we accept the idea that government spending efficiently stimulates the Gross National Product (which is itself dubious given the lack of long term effects of certain programs like Cash for Clunkers), then the stimulus money is paid to those industries which do the producing of said products. If, for whatever reason, those industries find they don”t actually need more employees to fulfill these new orders, then part of the stimulus money goes to cover other kinds of overhead, but much of it is kept as profit. So the next time you hear someone advocate that government should do something about these greedy profit makers who prosper while millions are out of work, remember: if Obama is to be believed when he claims that the stimulus increased GDP, then government already has done something about these “outrageous” profits. In large part, it created them.
Once a year, America celebrates the end of summer with a national holiday dedicated to dubious economics: Labor Day. Organized labor, we are assured, lifted the working poor out of poverty, allowing us all to escape wage-slavery by redistributing wealth from the greedy fat-cats to the working classes. Why, without unions, we”d probably still be working sunup to sundown just to provide food and rent! Clearly, we need a holiday to celebrate our excellent standard of living, brought to us by trade unions. So in honor of this auspicious occasion, I bring you a parable.
Off hidden away in the wilderness is a village you”ve never heard of before. In this village are one hundred families, who each send one member to work each day in the town factory. In this factory, villagers build boxes-of-stuff. Each box is filled with the necessities and basic niceties of life: food, clean water, medicine, fuel, clothing, and a number of other sundries. At the end of each day, the factory produces about one hundred crates and ships them off to the market.
After being paid, all the village men head off to the market to supply their households. Each day, the headmen find that they”ve been paid enough to purchase a single box-of-stuff, which they take back to their families. Now, a box is good enough to keep a family from dying of starvation, but it”s not exactly high luxury. Families are fed, but not quite to their satisfaction. Houses are heated, but you”d still want to keep a sweater on. People have sweaters, but they”ve all seen better days.
Eventually, the town workers are quite fed up. “Every day,” they protest,” we work and work, but our wages are never high enough for us to buy two crates, not one single day of the week!” A union is formed. Demands are made. A general strike is called. “Workers of the village, unite! Two boxes for every house!” As no one works, no one gets paid, and people grow thinner while houses grow colder, but everyone is assured that eventually the factory must give in, and new, higher wages will make up for this current suffering.
After two weeks, the factory gives in, and wages are doubled. After their first shift back, the workers rush to the market with more money than they”d ever dreamed of before. The first man in line buys two crates and heads home, as does the second, the third, and so forth, until the fifty-first man. For, you may recall, the factory only makes one hundred crates a day. After the first fifty men bought two apiece, there remained nothing more to sell to the last fifty. Half the village feasted, while the other half starved. The next day, those who starved decided not to risk the same thing happening twice, and made a dash to the market after work in record time. Each of these bought two crates apiece and feasted, while the other half found the market oddly sold out before they arrived.
By the third day the shopkeepers realized that the workers had more money, but were competing for the same number of resources, so they doubled the price of a crate of goods. After all their trouble, the villagers found themselves unable to afford anything more than the one box apiece they had to make do with in the beginning.
We in the modern world often make the serious mistake of confusing currency for wealth. Currency isn”t wealth. Currency buys wealth. Real wealth consists of the goods and services people actually consume. If we increase the amount of currency people receive in wages, but do not increase the quantity of goods manufactured, it doesn”t make anyone richer, it just makes the same finite quantity of goods more expensive to purchase, stimulating inflation. Instead, if through industrial and technological advances we increase the quantity of goods we can manufacture per capita, we”ll find that the purchasing power of our wages will increase. In America, the drastic increase in standard of living over the past century cannot be explained as a consequence of unions fighting for higher wages. No level of wage would allow the masses to consume goods which weren”t being produced in sufficient quantity. Instead, as technology improved in the 20th century, things like mass production and free trade made market prices drastically cheaper, and the working poor found they could suddenly afford luxuries previously afforded only to the rich.
So, this Labor Day, enjoy the ability to live a comfortable life and still take a three-day weekend, brought to you by capitalism. Not unions.