Economics | More Liberty - Less Government

Balanced Budget Amendment No Holy Grail

March 19, 2014April 3, 2016 George Noga

By: George Noga – Updated March 10, 2014

A balanced budget amendment (“BBA”) is favored by 80% of all Americans in the belief it will, once and for all time, force fiscal discipline on the government. They are putting way too many eggs in the BBA basket. Watch out what you wish for. If there is a BBA, all those eggs will end up scrambled into a rather unpalatable omelet.

There are myriad paths through, over, under and around a BBA. In short, it would not be worth the paper it was written on – assuming it can garner two-thirds majorities in Congress and ratification by 38 states. Following is a partial list of ways a BBA could be eviscerated.

A BBA appears simple but is complex. How do you define budget; what does balanced mean; what is a tax? It would be the only part of the Constitution that could be waived.
What are allowable exceptions such as for military actions and natural disasters? There will be escape hatches big enough to drive a truck through. Whatever exceptions are carved out for some things, expect many more of such things. How would waivers work?
How would a BBA deal with economic cycles? Revenues can both skyrocket and plunge from year to year. Are we to slash spending in a recession and be profligate in a boom? How do we define recession and boom? How is a BBA to be managed over the course of an entire economic cycle without opening to door to great mischief?
Lawsuits will tie up a BBA for decades and federal judges will wind up with enormous power to change it. Consider how the federal bench has dealt with desegregation and busing; they still are entangling themselves over 60 years after the initial ruling.
How do we distinguish capital expenditures from annual expenses? Surely, the argument will go, a BBA was not meant to include infrastructure spending that has a life of 50 years. If capital is treated differently, more expenditures will be classified as such.
How do we address off-budget spending such as by Fannie, Freddie, USPS and the Federal Reserve? Who will prevent government from creating scores of new off-budget entities? Do we exempt interest on the debt; what happens when interest rates skyrocket?
Watch out for so-called special taxing districts; these are favorites of local government with 50,000 nationwide. If they are not under the BBA ambit, they will mushroom.
Are Social Security, Medicare, Medicaid and civilian/military pensions to be part of the regular budget? Are they no longer to be considered off budget entitlements?
User fees will sharply increase and the government will be creative in imposing new ones. Be prepared to pay handsomely for everything you get from Washington – how about $100 to file a paper income tax return or $50 to get into a national park?
Loan guarantees will become de rigueur as a way to fund programs off budget. After all, a loan guarantee is not an expenditure – is it?
Instead of direct taxation, costly new regulations will flourish. Rather than spend tax money, Congress will bypass taxes and accomplish the same result through regulation.
The tax code can be used for far more than raising taxes subject to a BBA. It can be larded with tax expenditures, incentives, penalties and all sorts of tomfoolery.
Don’t forget mandates. Since the ObamaCare mandate survived judicial scrutiny, what is to stop government from substituting mandates for taxes or spending? The feds could mandate that states, counties, cities (and even people) spend money not subject to BBA.
A budget can be balanced with tax increases. This would strictly comply with a BBA but tax increases are certainly not what BBA proponents intended.

Reluctantly, I have come to the view that a BBA is not the answer because: (1) we would expend lots of energy (perhaps for naught) enacting a BBA better spent elsewhere; (2) it will not work for all the reasons noted supra; (3) it would beguile us into falsely believing the problem is solved once and for all; (4) many of us would declare victory and move on while the other side would keep fighting; and (5) you can’t take the politics out of politics.

The solution is to remain engaged permanently, albeit this is contradictory to human nature. Once a problem appears solved, we tend to go back about our private business. But big government and its acolytes never stop and neither must we. As seductive as it may seem, a balanced budget amendment is fool’s gold; it is not the Holy Grail.

The Natural Condition of Mankind

February 1, 2014April 3, 2016 George Noga

By: George Noga – February 1, 2014

Whenever I want to understand an economic issue, I use a didactic aide that never fails me. I reduce elusive concepts to their simplest form by assuming the world consists of a small island. For example, if I wish to understand the economic effects of labor unions, I think through the effect on the island before and after unions are created; who benefits and why; who suffers and why; and what is the net effect on wealth creation and/or destruction. I call this Island Economics. Following is the first lesson from island economics – it explains a powerful, yet simple, economic precept.

Many eons ago on a small as yet unnamed island, the denizens subsist as hunter-fisher-gatherers. They are unaware there may be other islands. There is no economy per se; people are divided into small families or clans, each of which functions as a putative economic unit. They coexist with other such units – sometimes peaceably, sometimes not. Their lives, short and brutish, are on a bare subsistence level, dependant on the fickle bounty of the sea, the exigencies of the hunt and the caprice of nature. They still are many generations removed from division of labor, having a medium of exchange or even agriculture and animal husbandry.

“The natural and normal condition of mankind is poverty.”

What economic lesson can we sophists of the twenty-first century learn from such primitive people? What, if anything, can they teach us? Surprisingly, they teach us an ineffaceable economic truth applicable across all time and space. Indeed, the lesson applies throughout the universe even on other planets wherever scient beings may exist. The lesson: it is universally true that the natural and normal condition of mankind is poverty.

There is no instance where any aboriginal population existed in a state other than poverty. Yes, some aboriginal populations were better off than others; any such distinctions however were due solely to the beneficence of nature and not to any form of economic activity.

Okay, so you already knew the normal condition of mankind is poverty. But, do you understand all the implications that flow from that axiom? It is clear from their behavior that many folks today do not fully understand that immutable truism. Progressives still prattle about poverty and ruminate about its root causes; we even have declared war on poverty. If everyone understood the natural state of man is poverty, there would be nothing more to discuss.

“The question we should be asking is:

What causes wealth and how can we bring it about?”

Those who futilely and unproductively seek to understand poverty are wasting their time. The question they should be asking is: What causes or creates wealth and how can we bring it about? Wealth is not a natural condition of man; indeed, it is rare throughout human history. Wealth creation must be studied, understood, fostered and replicated for progeny. Indeed, it is only by understanding wealth that poverty may be alleviated. Someone may assert that, for example, ignorance or lack of education creates poverty. This is a posteriori reasoning. People are born ignorant and uneducated. To better create wealth they need to become educated. Education creates wealth; ignorance does not create poverty.

The aboriginal inhabitants of our unnamed island did not even know wealth existed. If they had, they likely would have attributed their impoverished state to displeasure of the deities. Perhaps a few of them viscerally understood their poverty was a natural condition; but they would have held no clue about how to escape it via economic activity that resulted in wealth creation. This was a process that required mankind millennia to discern and about which our present grasp remains far more tenuous than it should.

Let’s review lesson number one, arguably the most basic lesson of economics. This prime lesson, compliments of our aboriginal island dwellers, is a valuable one not fully appreciated several millennia later. Poverty has no causes; it is the natural condition of mankind. We have known that for centuries. We also understand what causes wealth even though we are doing much today to destroy it – purely for ideological and political reasons.

“Poverty today continues because of obsience to false gods.”

Mankind will continue to advance economically only by shedding its shibboleths which we possess in abundance. Unlike our island denizens, we do not blame poverty on deities, animal spirits or natural phenomena. Oh no – we have progressed to where we assign fault based on ersatz science, modern mythology and political correctness. We now blame poverty on bogeymen like greed, multi-national corporations, western civilization, and capitalism.

Nothing causes poverty; it is our natural state. To escape poverty we must focus on what is required to create wealth. At the dawn of the twenty first century, we understand reasonably well how to create wealth but we fail to do so solely because of obseiance to false gods.

Public Choice Economics Explains Government Failure

July 1, 2013April 14, 2016 George Noga

By: George Noga – July 1, 2013

The science of economics, far from being dismal, can be truly exciting; it offers much more than arcane supply and demand curves. In recent years economists have captured the public imagination with books such as Freakonomics, Super Freakonomics, More Guns – Less Crime and More Sex is Safer Sex. They are popular because they use the tools of economics, including rigorous logic and analysis, to reach what often are counter intuitive, but valid, conclusions.

So it is with public choice economics. In the private sector, theoretically correct economic solutions usually are positively correlated with real world decisions In the public sector however, there is a huge chasm between the correct theoretical (economic) solutions and the choices made by decision makers, i.e. politicians. Public choice economics explains this chasm.

Many citizens, particularly young people and liberals, have an infatuation with government. They see elected officials as benevolent, dispassionate planners looking out for ideal social outcomes as contrasted with self-interested actors in the private sector. Yet we constantly are bumfuzzled by political decisions contrary to all logic and national self interest.

“We constantly are bumfuzzled by politicians acting illogically.”

Why is private sector decision making far superior to government? Business ownership and governance do a much better job of aligning business and personal objectives and incentives so that decision makers choose the economically (theoretically) correct decision. In government there is a wide gulf between self interest and public interest.

In both government and business, decision makers usually decide on the basis of personal risks, rewards and incentives; this is embedded in human nature and is immutable. The private sector understands this. The founders of our country understood this, hence our constitutional system of federalism, limited government and checks and balances. Public choice economics explains why government fails us; consider five tenets from public choice economics.

This comes as no surprise but politicians are far more interested in winning the next election than in doing the right thing. Their desire to win elections far outstrips their duty to the country. Their personal incentives are grossly misaligned with the public interest.
Politics is extremely shortsighted, favoring debt financing over taxes; that explains why we have had deficits in 47 of the last 52 years. Politicians love to make unfunded promises such as unsustainable pensions and benefits. They want to provide immediate benefits while borrowing, hiding or deferring the costs as far into the future as possible.
Special interest groups and rent seekers (those who extract value from government without giving value in return – such as public sector unions) dominate the process. Politicians always favor highly concentrated and organized groups (that return the favor in various ways) at the public expense and contrary to the public interest. A great example is sugar subsidies where a few growers share nearly $1 billion a year in added profits while all 310 million of us Americans pay $30 too much for sugar each year.
There is a myth that central planning leads to good decisions. This ignores the real world preferences of real people, creates perverse incentives and disincentives and inevitably creates a myriad of unintended consequences. The real world is far more complex and dynamic than any central planner or computer model can ever simulate.
Whereas in business the culture is to quickly recognize and to cut losses, the incentive in government is to deny anything is a blunder and continue to throw more money at it.

Public choice economics can lead to better decisions if we give it heed. We must recognize economic science is just as applicable to government as it is to business. We must understand human nature has not changed since the dawn of time. People are people and they do not suddenly become benighted when they enter public service. We need to return to the system envisioned by the founders where government is so limited as to minimize the harm it wreaks. Failing that, we must closely align the risks, rewards and incentives of public officials with the long-term public interest – just as the private sector has done so successfully.

Lessons From the Bangladesh Tragedy

June 17, 2013May 30, 2016 George Noga

By: George Noga – June 17, 2013

Our hearts go out to the victims of the building collapse in Bangladesh; they were hard workers striving simply to build a better future. The government building inspectors and all others who are complicit deserve severe punishment. However, it is crucial we learn the correct lessons from the workers’ terrible sacrifice. The media and their liberal camp followers have been quick to draw conclusions and to apportion blame; among the things they believe are:

Greedy capitalists choose to pay subsistence wages for working in intolerable conditions;
Capitalists’ ill-gotten gains can be used for higher wages and better working conditions;
Desperate conditions in Bangladesh are due to an absence of government regulation;
Globalization and free trade harm the poor and exploit child labor; and
Boycotts of companies that sell products made in bad conditions help the poor.

Each and every one of the above beliefs is wrong; they are voodoo economics and the consequences of acting on these beliefs is highly destructive. The masses in Bangladesh already are living at bare subsistence; anything that increases the cost of employing them – be it higher wages or better conditions – comes at their expense and results in unemployment. The higher the price of anything, the less will be bought; this applies universally including in Bangladesh.

“Economic Liberty – not government intervention – creates wealth.”

Everyone desires higher wages and better working conditions for third-world workers. Ignoring the laws of economics (media and liberals) only worsens the situation. To actually bring about such results requires the maximum degree of economic freedom and the dead minimum of government and outside interference. We have seen time and time again – in Hong Kong, South Korea, India, and now China that within one generation workers are much better off. New factories open with more advanced equipment and competition for labor intensifies leading to higher wages. As wages rise, workers are willing to trade off for better conditions.

Globalization – Free Trade – Child Labor – Boycotts

Globalization and free trade benefit the poor in particular. To the chagrin of elitists, the poor grasp this viscerally; that’s why, inter alia, they embrace Wal-Mart. The greatest beneficiaries are those who live in poor countries (including Bangladesh) with whom we trade. Voluntary labor – yes including children – and even at low wages and less than ideal conditions – is not exploitative. Workers choose to work because it is better than what they had before and offers a path to a better life. This is how they work their way out of poverty.

Workers (including children) in Dickensian England were better off in the factories than the life they voluntarily left. It was the same in the United States where child labor was common until the early part of the twentieth century. My uncle began working in the coal mines at age six because young children with their small, lithe bodies could crawl into small places.

“Who do you trust to look out for children: government or parents?”

In England and the US, child labor had vanished well before the passage of child labor laws. As soon as humanly possible, parents remove their children from the labor force. It comes down to who do you trust to have the best interests of children at heart – their parents or government?

Boycotts are primarily the province of economically illiterate movie stars with too much time on their hands. Even if a boycott could be effective, the greatest harm would befall the displaced workers trying desperately to lift their families out of poverty. Low income Americans also are harmed by having to pay more for many products just to pander to the falsetto angst of Hollywood types who feel but do not think.

The media and liberals set up straw men, in this case greedy businessmen, and then rail against them. They don’t understand economics and they don’t know what they don’t know. They ignorantly call for boycotts that harm those they seek to help. Then, satisfied they have demonstrated their compassion and good intentions, they retreat back inside their plastic bubble where life is so much simpler than in the real world, where thinking rather than feeling counts.

You Didn’t Build That

December 8, 2012May 30, 2016 George Noga

Prehistoric Barbarians and Bandits Knew Better

By: George Noga – December 8, 2012

The very instant I heard Obama’s infamous “You didn’t build that” statement I knew it was not only wrong but bass ackward. Economic literati understand viscerally that economic activity must precede political activity. However, it took Tom Palmer in “The Origins of State and Government” to provide much of the necessary historical and logical underpinnings to juxtapose economic activity (business) and government.

“Economic means must always precede political means. Nomads and hunter-gatherers never have a government.”

Palmer’s axiom is that the economic means always must precede the political means. That explains why there never are governments among primitive societies; they have leaders but never a state. Hunter-gatherers and nomads don’t generate enough of an economic surplus to support a permanent predator class. Nevertheless, such societies were victimized by roving bandits (precursors of government) who moved on once they plundered what little was available. There was no reason for them to stay once they pillaged all the meager supplies available. Also, the nomads and hunters were not stationary and not easy targets for predators.

Everything changed once people settled permanently and established agriculture. Now they generated a constant economic surplus and remained vulnerable in one location. Once again, roving bandits came, pillaged and plundered. However, the bandits were not stupid. They quickly understood and grasped the opportunity. Now there was a reason for them to stay inasmuch as the farmers couldn’t migrate and they could pillage permanently. Hence, roving bandits morphed into stationary bandits who, through sheer force (subjugating the people and keeping out other roving bandits), acquired a monopoly on sanctioned physical violence within a given territory and, viola, government was created.

“Once agriculture was established, roving bandits became stationary bandits enforcing a monopoly on physical violence in a given territory and, viola, government was created.”

The evolution and causation is clear enough. An economic surplus is an a priori condition for the existence of a state. Indeed, government cannot exist without the entrepreneur class; they have to build it before government can plunder it. Without those who invest, take risks and build businesses (despite hindrance by the state), government wouldn’t have any resources and would not exist. Even the earliest farmers had to invest (plant seeds, tend the crops) and take risks (drought, pestilence, etc.) while the now-permanent bandits did nothing productive.

It is no different today. Permanent bandits, who now sanctimoniously go by titles such as kings, emperors, presidents and prime ministers, plunder billions through their enforced monopoly on violence. It continues in kleptocracies across the globe; witness Putin and the ill-gotten wealth of Chinese leaders on full display during the sordid Bo Xilai affair. Witness most of Latin and South America, the Caribbean, most of Africa, all of Arabia and all the countries ending in stan. Don’t forget the narcostate of Mexico and significant pockets of Southeast Asia.

“Even authentic bandits in ancient times sometimes understood that pillaging less today enabled them to pillage even more tomorrow – thus benefiting both the pillagers and pillagees.”

Is America really any different just because our rulers may govern with the pro forma consent of the governed? They may call themselves mayor, governor, congressman or president but they continue to behave like bandits. They enrich themselves in many illicit ways including money, perquisites, preferments, legal exemptions and power. They plunder from the rest of us in reliance on a legal monopoly on violence largely to ensure their reelection and thereby continued membership in the predator class. And now the chief bandit in all the land has the sheer chutzpah to proclaim that government is the font of all economic success – a notion that even the barbarians of yesteryear would have found absurd. Even they, lacking any education, understood that the plunderers did not help the plundered create their businesses.

We may be better off with authentic bandits of ancient times, like those in the Capital One commercials. At least sometimes they got sated and left us alone. And some of them even understood that pillaging less today caused the economy to grow faster such that they could pillage even more tomorrow, thus benefiting both the pillagers and the pillagees. Were it so in America today. Our current crop of bandits never gets sated and is less enlightened than some of their counterparts who swept into the west from the steppes of Central Asia.