Bottled Water and Socialism

A simple bottle of water, available in stores for under a dollar, proves why
communism, socialism and all command economies are doomed to failure.
By: George Noga – March 27, 2016

       In the 1970s still water began to be offered for sale in the USA in single serving sizes. I knew sparkling water had been sold for some time and there was a market for bottled water in parts of the world where the tap water was not safe or of poor quality. But I thought “Who in America would pay for single serving still water when safe, good quality water runs Scott free out of faucets, water fountains and coolers?

     I am trained in economics and like to consider myself as reasonably bright, possessing integrity and motivated to make the best possible decisions to serve my fellow man. Yet, if I were a 1970s era government planner, I would have prevented our economy’s scarce resources from being used to produce and distribute bottled water.

     I would have been dead wrong! Today, bottled water is the second largest beverage sold – ahead of both milk and beer. In 2014, 11 billion gallons ($25 billion) were sold in just the USA – equal to 34 gallons per American and this ranked the US as only 10th in the world. This was true despite its cost of around $1 for 500 milliliters which works out to $7 per gallon – nearly three times the price of gasoline.

     Education, training in economics, smarts and logic coupled with the very best of intentions would have proved incapable of discerning the preferences of my fellow citizens, the ambitions and creativity of entrepreneurs and the behavior of consumers armed with a free choice. If I had been the chief government planner in the 1970s, there would be no bottled water available for sale today in the USA.

     Yet, despite a government apparatchik being as totally wrong as I would have been about bottled water, no one ever would have known about my mistake because  no one could possibly have known what would happen with free people in a free market. And it isn’t just bottled water. There would be no copy machines or personal computers; IBM originally estimated the world market was for only 5,000 copiers and under 100 personal computers. There would be no internet as the cognoscenti of the time believed it would only be used by government and universities.

     The humble bottle of water we now take for granted proves all forms of socialism and command economies are frauds and conversely proves why free markets work.


The next post will be on April 1st; readers may think it is an April fool, but it isn’t!

MLLG

The Panacea of Economic Growth

By: George Noga – November 1, 2014
       Throughout its 238 years, the US economy has grown by over 3.0% annually, although data for the early years are problematic. For the 60 years from 1940 to 2000, the US economy grew at a rate of 3.6%. For the following 14 years from 2001 to the present, GDP grew by 1.8%, exactly half that rate. If growth remains tepid, Americans will not recover the ground they lost and their children and grandchildren will, for the first time, be worse off than the previous generation.
        America has transmogrified into Europe which is in permanent recession due to its failed economic policies. Even stalwart Germany is beginning to stagnate. France is destroying its economy in a fit of socialistic angst. Italy has a lower GDP per capita than it had 15 years ago. Meanwhile in Brussels, Jean-Claude Junker continues to strangle EU countries with bureaucrats and regulations. In Europe a 2% growth rate is seen as optimistic, 1.5% as acceptable and no growth as possible. The average European in one generation fell 25% behind the average American due solely to differences in GDP growth. As I wrote last month, just in the past 5 years, the average American has been impoverished by 17% due to the low growth rates coming out of the recession compared to the historic growth rates in similar times. In short, we already have become like Europe although Europe continues to plumb ever new depths. We are well along in suffering a lost decade on the path to a lost generation; our progeny, like Europeans today, will lead lives of quiet desperation.
“Failure to grow America’s economy is a choice; decline is not inevitable.”
        Failure to grow our economy is a choice; decline is not inevitable. It is a choice made by our political leaders solely because they prefer to demagogue inequality, class warfare and corporate profit for perceived electoral gain. It is a choice made by the media because they are lazy, economically illiterate and prefer to flog dead camels. It also has been a choice made by ordinary Americans in the voting booth for all of the aforementioned reasons advanced by politicians and the media. There are strong signals however that ordinary Americans now are beginning to want economic growth.
Economic Growth as the Panacea

        As trumpeted by the headline of this blog post, economic growth is a panacea; indeed, it is the only solution for every problem (real and perceived) that we face today and for the coming generation. It is apropos that Panacea is the Greek Goddess of healing because strong economic growth will heal everything; to wit:

  • The crisis of spending, debt and deficits: A sustained period of strong economic growth (combined with some spending restraint) will enable the US to restore fiscal balance and to stabilize its debt thereby gradually lowering the Debt/GDP ratio to its long-term historical level of around 30%.
  • Climate change and environment: If in the distant future climate change causes some issues, the best antidote is a vibrant economy that will easily enable us to spend whatever is needed to mitigate any such problems.  Only countries with strong economies can afford to spend copiously on the environment.
  • National security: The single greatest asset (weapon) we possess for our national security is a growing, resilient economy. This enables us to spend whatever is necessary to deter any possible adversaries and to defend ourselves should that be necessary. Weakness invites aggression and fosters terrorism.
  • Jobs, poverty and inequality: It is economic growth, not government, that creates jobs. It is sustained growth that fulfills the American dream and eliminates poverty; moreover, growth is the great equalizer.
  • Unfunded mandates: The USA is facing $350 trillion (over one-third of a quadrillion) in unfunded commitments in the next 50 years for Social Security, Medicare, government pensions, Obamacare and other programs.   Absent  a high rate of growth, these promises not only cannot be kept but will require drastic reductions in programs.
Recipe for Economic Growth

      Okay, so economic growth is the panacea; what must we do to achieve it? The answer is straightforward and attainable. If we do the following  we will achieve vigorous, long-lasting economic growth.

  1. Political consensus: Probably the single most difficult hurdle for achieving growth is reaching a political consensus. Politicians and the media must agree to pursue policies that maximize growth and agree to stick with such policies for the long term. They can continue to argue over how to divide the wealth that results; that is what politics is about. Absent some consensus however, achieving sustained growth becomes problematic.
  2. Tax and fiscal policy: Taxes (personal and corporate) must be reduced, simplified and stable. People and businesses must be able to plan ahead and certainty about taxation is indispensable to investment and job creation. In the same vein, spending needs to be restrained.
  3. Eliminate uncertainty: Business hates uncertainty; it stifles planning and results in gridlock. There needs to be a broad and sustained political understanding about taxes, regulations and new initiatives.
  4. Sound money: The Fed should focus only on maintaining sound money and fighting inflation. A strong, stable and sound dollar are indispensable for a vibrant economy.
  5. Regulation: The economy is being strangled by regulation and litigation. We need to have a moratorium on new regulations while we gradually reform and roll back existing ones. Our tort system needs to be reformed.
  6. Energy: We should develop every possible energy source including ANWR, offshore and shale and natural gas on federal and state lands. We should export LNG immediately from many terminals and, of course, construct the Keystone XL Pipeline. Such a policy will create jobs, make us energy independent, stimulate the economy and, importantly, prove to be a potent weapon in keeping Putin and Russia in check.
  7. School choice: I include this because educated, trained workers are a potent economic resource. Further, school choice will bring about more equality and reduce poverty. It also is a panacea.
     The choice is ours. We can continue on our present slow growth trajectory which will condemn future generations to a downward spiraling economy and reduced living standards; they will experience untold miseries as the crisis of spending, debt and deficits culminates in a meltdown. They will inhabit a Clockwork Orange nation drowning in taxes, regulation and uncertainty. They will have part time jobs for low wages. At best they will collect 65% of the present Social Security benefits deferred until they are age 70; Medicare and Obamacare (also age 70) will be busted; health care rationed and long waits common for poor treatment. They will inherit a volatile, dangerous world where nuclear weapons proliferate, a revanchist, aggressive Putin-led Russia and all without the resources for adequate national defense.
       Or, we can make a different choice; we can choose to reject decline and to embrace high-growth policies. This would lead to a virtuous circle of better education, abundant and cheap energy, and to a far safer and more secure nation and world. It would result in fixing the debt crisis and funding all the promises we have made for the future. Most of all, it would help ordinary Americans. As year after year of high growth enriches America, the politicians can fight over how to best divide up this cornucopia – including addressing any inequality issues.
       Firstoff however, we must make the right choice. This gets us right back to the heart of Alexander Hamilton’s question: “Whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend on accident and force.” Is America today still capable of putting politics aside when self preservation is at stake? Or, do we heed the Siren song of politicians advocating failed ideologies, searching for Utopias and demagoguing political correctness, class warfare and inequality?

MLLG Special Posting – The VA Scandal

By: George Noga – June 3, 2014
        The MLLG blog, usually written far in advance of distribution, has never devoted an entire post to a current, breaking news story. The Veterans Administration (“VA”) scandal is the exception because it is the perfect storm: (1) it is the poster child for public choice economics – a frequent topic of MLLG posts; (2) the VA is a sacred cow beloved by liberals; and (3) the scandal provides a stark preview of ObamaCare. Finally, the VA issue fits MLLG’s forte, placing a complex issue in perspective through fact-based and principled analysis – and all in about 1,000 words.
“The VA is a government jobs program that incidentally provides health care.”
        To be fair, the problems with the VA go way back – preceding the Omar Bradley Commission of 1955-1956. There have been 18 reports warning of the wait time problems just since 2005 – of which 70% occurred during the Obama Administration. Although Obama did not create the problems, his ineptitude and obeisance to public unions raised them to a new level. Also to be fair, the VA is not uniformly dismal and enjoys support among many vets – not altogether unsurprising from an agency that has $154 billion to dispense and which often certifies routine aging problems (heart disease) as service related and certifies maladies of dubious provenance as eligible for tax-free disability pensions.
“The real scandal is that the VA considers a 14 day wait to be very satisfactory. Throughout the private sector, wait times are measured in hours and not in days.”
        The VA problems have nothing to do with money. The VA budget has gone from $49 billion in 2001 to $154 billion in 2014. Just since 2003 the VA budget is up 106%, while the number of vets increased 30%. The government tends to throw money at the problem; but, just as with failing schools, no amount of money can ever fix the problem.
Real Causes of the VA Problems
        The cause of the VA mess is easily and fully explained by pubic choice economics which teaches that people respond to personal (not public) objectives. An illustration from the Soviet Union is instructive. Glass manufacturers in the USSR made windows too thin and they tended to break easily; they did this because they were evaluated based on the number of square feet of glass produced. To fix this problem, the erudite commissars changed the evaluations from square feet to pounds of glass produced. Thereafter, the factories began to produce uber thick windows with limited translucence.
       We can chuckle at the clueless Soviets, but the VA is no different. They were evaluated based on patient wait times and they responded in accordance with public choice theory – they rigged the system for their personal benefit. This is no different in principle from changing the thickness of glass due to different incentives. No one should be surprised. Of course, private sector workers also respond to personal incentives; however, business does a much better job of aligning personal incentives with those of the organization. Hence, it would be rare in the corporate world for endemic problems like those at the VA not to be immediately reported up the chain of command where action would be swift and where the failure to report negative information also would carry swift and strong personal disincentives.

        Following are some other more salient causes of the VA problems, although all are readily explainable by the theories of public choice economics.

  • In some VA clinics physicians see only one-eighth (12.5%) as many patients per day as in private practice. Each day the operating rooms are shut down by 3:00 PM. The VA is essentially a government jobs program that just happens to provide some health care – after patients wait 145 days and provided it is before 3:00 PM.
  • The VA is 70% unionized with over 200,000 unionized workers. Obama and the Democrats put the wellbeing of  unions above veterans. Public sector unions have hijacked the VA for their own aggrandizement.
  • Union work rules and seniority cause serious problems as, inter alia, unions have squelched outsourcing VA patients to reduce the backlog because outsourcing is a direct threat to union jobs.
  • VA scheduling software uses a DOS operating system – found only in museums – and 1990s era computers.
  • As to be expected, waste, fraud and abuse are endemic given the vast amount of funds and no accountability.
  • The wait time (Phoenix) to see a physician was 145 days from when a patient requested an appointment; much longer counting the entire process. The real scandal is that the targeted wait time (considered satisfactory) was 14 days. In much of the private sector, wait time is measured in hours, not days. In the early 1990s Kaiser Permanente had a 55 day wait but changed to same day scheduling. Within a year they reduced the wait time to one day.
Real Solutions to the VA Problems
        The near term future is as predictable as a Kabuki. First, liberals will claim the Shinseki resignation  brings closure to the problem. His resignation was forced not by Republicans but by Democrats up for reelection who desire to make precisely that argument. Second, there will be some short term patient outsourcing but it will end just as soon as the problem fades from view – the public sector unions will see to that. Third, government will throw some more money at the problem and they will claim victory. These raison d’etat actions will succeed in getting the issue off the radar screens of the toothless media watchdogs (and the public) until well after the next election.
“Worst of all, the VA is a precise microcosm and road map for ObamaCare. What is harming 25 million veterans today soon will afflict all 315 million Americans. Some, perhaps many, of us will die while waiting 145 days or more for an appointment.”

        The real solution, dear readers, will never happen. There is little or no raison d’etre to have a separate health care system for veterans; this makes no more sense than having a separate medical system for any other profession or line of work. To the limited extent veterans may need certain highly specialized care (such as for prosthetics), this could be accomplished via a small number of – preferably private – facilities. Care of veterans should be integrated into the civil health care system much the same as Medicare. At the very minimum, all acute care shoud be privatized and voucherized, with the VA maintaining only rehabilitation and long term care facilities. Following are the main takeaways:

  1. There is no logic for a separate VA health care system; it must be completely or mostly integrated into the  private economy – especially the acute care portion.
  2. The VA problems can never (and will never) be fixed because government is incapable of such fixes.
  3. Liberals and Democrats never fix anything – real fixes are not important; all that counts to them are intentions.
  4. Everything is predictable and explainable by reference to public choice economics.
       Worst of all, the VA system is a precise microcosm and road map for ObamaCare. Each and every problem identified in this post will be multiplied in spades for ObamaCare. The disaster that now is preventing veterans from getting care and, in some cases, has killed them, will be inflicted on all 315 million Americans. It is only a matter of time until ObamaCare makes all Americans wait 145 days (and likely more) to get an appointment and many will die waiting.

Inequality in America – Part 2

By George Noga – April 23, 2014
        Our post of February 7, 2014 addressed income inequality in America between rich and poor. Since then we have been bombarded by the Obama administration and its sycophant media about income inequality between men and women. Therefore, we now focus on gender inequality and, more importantly, on who is creating inequality in America.

Income Inequality Between Men and Women

       Firstoff, this is an old issue. For over 30 years, Democrats have waived the bloody shirt of gender inequality. They resurrect the issue whenever they feel it necessary. It has been revived now for one, and only one, reason. Polls show women disinterested and less likely to vote in November. Liberals cynically believe they can get more women to vote by patronizing them with warmed over lies. That shows what they really think of women. To their consternation, it now looks like the issue is backfiring on them as more information comes to light.
       Obama asserts women earn only 77% of what men earn. That’s roughly analogous to saying women are only 77% as strong as men without making any adjustments for height, weight or physical condition, i.e. it is meaningless. It is well known and long understood that when making appropriate adjustments for: (1) level of education; (2) type of degree (engineering vs. sociology); (3) experience; (4) hours worked; and (5) level of danger (lumberjack vs. teacher), women earn on a par (96%) with men. Moreover, deaths in the workplace are 92% men.
“It is impossible to be too cynical about any claims made by Obama; he hasabsolutely no shame or compunction about lying whenever it suits him.”
       The issue  now is backfiring on Obama. It was revealed female White House staffers earn only 88% of men. Not one Democratic senator has a female chief of staff or head of communications, whereas Republican senators have several. If Obama were correct, private businesses could hire all female workforces and gain a 23% payroll cost advantage over their competitors. That this is not happening speaks volumes about the veracity of Obama’s claims. It is impossible to be too cynical about any claims made by Obama; he has absolutely no shame or compunction about lying whenever it suits him.

The Top 10 Real Sources of Income Inequality

       To the extent income inequality is increasing, the cause is none other than Obama himself. Following are the top 10 Obama policies that are making the poor even poorer.

  1. Tobacco tax increases: Taxes on tobacco, especially in states with liberal governance, have vastly increased. Smokers are in the lowest income quintiles and they have been savaged by effete progressive ideas.
  2. Opposition to free trade: The underclass benefits more than any other group from free trade. Obama, in obeisance to labor unions, has put the kibosh on new trade agreements despite giving it lip service.
  3. Higher taxes: A variety of new and increased taxes (including Obamacare) harms the poorest cohorts. Even taxes on business harm the poor by discouraging investment, lowering productivity and stunting economic growth.
  4. Unemployment: Employment is far from where it should be; this is the worst economic recovery of all time – thanks to Obama no-growth policies. The percentage of Americans working is the lowest since 1978.
  5. Minimum wage hike: Raising the minimum wage causes unemployment among the poor. If you increase the cost of anything (labor), you always get less of it – a fundamental economic truism.
  6. Energy policy: Energy takes 25% of the income of a poor household but only 10% of a high income household. The average cost of a kilowatt hour is up 39% since 2003 – the vast majority under Obama. Need I mention Keystone?
  7. Monetary policy: Due to Obama’s horrendous spending, debt and deficits, interest rates are kept low, savaging the savings of poor elderly Americans. The little guy can get only a fraction of 1% on his money instead of the 5% that should be normal. If a retired couple has only $25,000 in savings, this costs them $100 per month.
  8. Tepid economic growth: Hyper regulation and enormous uncertainty about future taxes and regulations have cast a pall over economic growth. Companies are not expanding or hiring – again harming the poorest among us.
  9. Obamacare: Health care costs are rising along with taxes to fund it. The poorest Americans bear the brunt – not just economically – but due to doctor shortages, rationing and death panels. The legions of 49ers and 29ers are growing!
  10. School choice/charters: Teachers union wars against choice and charters condemn the poor to inferior educations and hence much lower paying jobs. They are killing poor children educationally solely to pay back unions.
       The level of hype and downright lies about inequality is unprecedented. The liberals are circling the wagons. Believe it or not, we are being told that (non existent) manmade global warming now causes greater inequality. The IMF is putting income inequality on the top of its agenda for aid to poor countries. It is good to recall the words of Milton Friedman: “A society that puts equality of outcome ahead of freedom will end up with neither equality nor freedom“. The next time you hear about inequality in America, remember that the blame lies at the foot of one Barack Hussein Obama.

Obama Agonistes: Boneheaded Economics

By: George Noga – Substantially Updated April 8, 2014
 
        Milton Friedman once asked a foreign government official why workers building a canal were using shovels instead of excavating equipment. The official proudly responded “to create more jobs of course”. Friedman’s classic retort was: “Then why not use spoons instead of shovels?” Most who hear this story viscerally comprehend the foolishness of the government official – except President Obama. He and his minions have said things every bit as wacky as saving jobs with shovels instead of bulldozers.
“Obama’s solipsism and narcissism shield him from his economic illiteracy
and give him delusions of adequacy. He is not unlike a blissfully ignorant child incessantly toying with the economic dials that control the real world.”
        Obama linked technology to job losses: “A lot of businesses have learned to become much more efficient with a lot fewer workers. . . . when you go to a bank and use an ATM machine you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate.” Even Economics 101 students  recognize ATMs and kiosks as progress, as greater productivity, as the sine qua non of a higher standard of living and as an unalloyed blessing. Becoming more efficient and productive, doing more with less, produces the cornucopia of goods and services that makes America the envy of the planet. That our president misunderstands this reinforces the image of a child fiddling with the economic dials.
        Obama, Biden and Pelosi have touted unemployment benefits as an economic panacea. They all have stated that unemployment benefits create jobs faster than any other initiative and they have the double benefit of putting money in the pockets of the jobless who then spend the money on consumption to create yet more jobs. Please Mr. President, can we have even higher unemployment so that we can create even more jobs? As far back as Adam Smith (1776) it was well understood that production, not consumption, is what makes us rich.
       The USSR had enormous pent-up consumption but there were no goods to buy. John Stuart Mill debunked the consumption myth best: “the man who steals money from a shop, provided he expends it all again in the same shop, is a benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman a fortune.” Obama has said that government created jobs will lead to stronger economic growth. He again has it bass-ackwards; economic growth must precede job creation. Obama is ignorant of fundamental economic truths known for at least 250 years. It is hard to dispell the image of a toddler in diapers playing at economics. A toddler is shielded by his age and lack of education; Obama is shielded by his solipsism, narcissism and an equally ignorant sycophant media.
       Obama is harming the very people he passionately asserts he wants to protect, i.e. the downtrodden. He claims his spending binge is for social welfare and health care. Yet, he is condemning the current and future underclass to a much more hardscrabble life. America’s GDP growth already has slowed to European levels and over time the poorer among us will be infinitely worse off than they would have been with higher economic growth. Of course by then few will care or remember – no less understand, who was responsible.
“Obama’s failure to grasp the depth of his economic ignorance is wholly consistent with that of a solipsist and narcissistwho believes only the self exists and who is preoccupied with only his feelings and is egotistically self-absorbed.”
        Obama Agonistes’ slavish ideological dogma and economic illiteracy are leading us all into a netherworld. The president’s people gleefully depict political adversaries throwing grandma over a cliff. Obama is throwing all of us (including his supporters) over the cliff – and all for a failed socialist chimera. Obama’s failure to grasp the depth of his economic ignorance is consistent with the behavior of a solipsist and a narcissist who believes only the self exists, who is preoccupied with only his feelings and who is egotistically self-absorbed.

Balanced Budget Amendment No Holy Grail

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.  

  1. 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.
  2. 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?
  3. 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?
  4. 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.
  5. 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.
  6. 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?
  7. 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.
  8. 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?
  9. 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?
  10. 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?
  11. 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.
  12. 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.
  13. 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.
  14. 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

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

 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.
  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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

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:

  1. Greedy capitalists choose to pay subsistence wages for working in intolerable conditions;
  2. Capitalists’ ill-gotten gains can be used for higher wages and better working conditions;
  3. Desperate conditions in Bangladesh are due to an absence of government regulation;
  4. Globalization and free trade harm the poor and exploit child labor; and
  5. 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.