Mon, 26 May 2003
Make Sense, Christopher!
Sigh. Christopher Lansdown asks me to comment on his opinion
piece. Okay, well, I will, but I'm not too sure he'll like
what-all I have to say. It's not good, Chris, it's not good at all.
At least he is not satisfied with what is taught as economics in the
universities, I'll say that much in his favor.
Backing up one moment, the problem is relatively simple. You
can't spend what you don't have, and so if you take in money slower
than you spend it, you build up a deficit.
No. If you take in money slower than you spend it, that is
a deficit. When you run out of savings, a deficit has to be covered
by borrowing money to create debt.
If this doesn't change, you will eventually build up so much
debt that no one will lend to you any more and everything will fall
apart. Tax cuts without reducing spending is doing exactly this:
decreasing income relative to expenses and thus creating a deficit
which spirals out of control.
No. The problem is not that no one will lend to you any more. The
problem is that they want so much in debt service that you cannot
afford the debt. It is not that the deficit spirals out of control.
It is that the debt service becomes an increasingly larger and larger
proportion of your budget. It's not that Chris is wrong, it's that
Chris is not writing clearly and carefully. I'm not always careful
either, so no pejorative intended.
To get it out of the way quickly: fear of debt aside, debt is
a useful tool for producing wealth. The times when you want to borrow
are precisely the times when you don't have: bad economies and
No, debt is not necessarily useful. Public debt is usually a sign
of bad debt. When money becomes public, it is often spent more
foolishly than if it remains in the pockets of taxpayers. If you're
spending money because you have a "bad economy", you need to look in a
mirror. Free markets are naturally resilient. It is not normal for
businesses to all run into trouble at the same time. When they do, it
is because a single powerful entity (aka a central government) has
made a mistake. So, for the government to try to fix the economy is a
misnomer: the problem was created by government action, so why does
anybody expect that government action can fix it?
update: Christopher comments: "The tech bubble of the late 90s was
not regulated into existence by the government, it was caused by a
general excitement as well as a dutch tulip trade effect." Greenspan
admits that the fed was concerned about receipt hoarding because of
Y2K concerns, and that the fed printed up many new dollars and put
them into circulation. Where did those dollars go? Into the stock
Wars are typically paid for by inflating the currency. The War of
Iraq Regime Change will be no exception.
The important thing which is so often forgotten is that money
is not static. If you hold spending constant over years, you are
actually cutting it. Money becomes progressively worth less, and the
economy continually grows.
Christopher is again half right. Money is definitely not static in
value. A constant amount of money actually progressively becomes
worth *more* as the economy grows. The reason Christopher has this
exactly backwards is simply because governments with a central bank
cannot resist the temptation to raise money by printing money. Oh,
the theory is that the central bank adjusts the rate of inflation so
it is equal to the rate of growth of the economy, so that the number
of receipts is kept equal to the amount of the value. Great theory,
but it never really pans out.
we borrow money to stimulate the economy,
No. It's not possible to stimulate the economy by taking money
from people. What were they going to do with it? Keep it in their
mattress? Of course, if they were going to do that, then you wouldn't
be able to tell that they had it, and you couldn't tax it away from
them. No, the only money you can tax is money that the owner isn't
spending because nobody has persuaded him to spend it.
If you have a government populated solely with wise people, who can
take money from foolish people and spend it better, then you
can stimulate the economy. With the simple addition of wings, pigs
can fly. Rather, there is a reason why pigs do not fly, and there is
a reason why governments are not populated solely with wise
update: Christopher comments "What government can do in this case
is force people to borrow the money and do work to create wealth. The
nice thing about steel mattresses is that you do know where the money
is, and can force people to spend it." Unfortunately, this requires a
government wiser than the people that make it up. Where are you going
to get these people when by your own accounting, the people are
behaving foolishly? You can't make a silk purse from a sow's ear.
Forcing people to waste money is not productive; it's just wasteful.
Note: Christopher seems to be talking about what is politically
possible. I acknowledge that the level of economic education is very
poor (in fact that is why I write) and that people want the government
to spend all sorts of money on their behalf. That is wrong, and we
must be clear on that. If economists are to speak truth to power, we
must say what is best for everyone, not just what is best for tax
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Fri, 23 May 2003
Taxes spent badly are wasted
Andrew Sullivan takes a potshot at deficit
spending, and deservedly so. A lot of people think that
government spending can somehow improve an economy. "Economic
development", it's called. No, no, and no. When a government takes
money from people in the form of taxes or inflation, it is destroying
one kind of spending and replacing it by another.
Now, it may be that the current owners of the money (or more
properly, liquid value) don't want to spend it. Maybe they want to
keep it as capital. And yet, capital does nobody any good (earns no
interest) unless somebody spends it. It's a completely wrong
idea to think that government spending does anything other than
replace private spending.
So when talking about government spending, the first and foremost
question is "is it wise spending"? Is the money going towards capital
or consumption? If you educate someone in something useless
(e.g. underwater basket-weaving), that is consumption. If you educate
them in something useful (and I'm not smart enough to give any
examples of what will be useful; only what might be useful, but
heck, you can do that as well as I), that is a capital investment.
If a government builds a road, is that capital investment? Not
necessarily. If the road goes nowhere anybody wants to go, it's
consumption. If the road replaces a congested road, it's capital
(maybe; there are better ways of dealing with congestion; public roads
are subject to commons tragedies).
Consumption isn't necessarily bad. People consume all the time.
Entertainment is consumption. Consuming something which is currently
capital is wasteful. Coercing someone's capital away from them, and
consuming it is very, very bad. It makes society in general worse
off. Unfortunately, most government spending is consumption, simply
because governments aren't wise enough to spend other people's money
as well as the person would.
Now, of course people consume their own capital, and of course
people spend their own money foolishly. No one thinks otherwise. The
real concern is whether governments waste money more often
and to a larger degree than private spenders. There is plenty of
evidence that they do.
A society with a large private sector is more resiliant than a
society with a large governmental sector simply because the number of
decisions that are being made is larger, and the amount of resources
they are made over is smaller. People make mistakes, and the more
powerful a person the more significant their mistakes. Oh, if you
could get power to wise people, you could address this
problem. Unfortunately, wise people don't seek power, being wise after
all, you see.
Hrm. I see that I haven't said a word about deficits, have I?
That's probably because the real problem with deficits is that they
are just another form of government spending. Deficits are bad simply
because all government spending is bad (or at least, not as
good as the private spending it replaces). Doesn't matter how you get
the money, whether by borrowing it (deficits), by coercing it
(taxation), or by printing it (inflation).
Please understand that I am completely unswayed by any amount of
anecdotal evidence. Sure, you can point to a lot of
government spending that has improved people's lives. That's not the
point. The point is that people would have been even better off if
the money had been spent by its owner.
All of that said: the only problem that a government can solve is
transaction costs, and it does so at a cost of its own. Only by
comparing those two costs can you properly decide if the government
spending makes sense or not. Far too many people look at the end
product, value it, ignore the cost of government spending, and skip
over the comparison. This is an ineconomic idea. The science of
economics exists to answer these questions. Skipping over the
question doesn't answer it.
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Tue, 13 May 2003
The cost of fiber optic cable
If you read this in North
Country This Week, skip down to the part you haven't already seen. What follows is
the letter to the editor:
I'm glad that a journalist has finally addressed the DANC fiber scam. I
told Tom Sauter (head of the project at DANC) over a year ago that his
misrepresentations were going to catch up to him. He said that what
he was saying was technically accurate because DANC was going to only
sell dark fiber and that Verizon and Time-Warner wouldn't sell dark
fiber. He felt it was fair to say that there was no [dark] fiber in
the North Country. Now that DANC is going to light the fiber I wonder
if that's still true?
DANC should understand that people don't care about fiber optic cable
when it comes right down to it. They only care about the services you
can get from fiber. Data communication services are expensive up
here, but that's because it's expensive to install and maintain so
many miles of fiber at union rates.
Now, one thing that the Verizon camp isn't telling you is that there
are actually TWO sets of fiber optic cables in the North Country:
Verizon's, and Time-Warner's. Every road going out of Potsdam has
Time-Warner fiber optic cable, and has for a half-dozen years. You
can see it for yourself -- it's the black cable lashed to the silver
cable above the telephone cable and below the power cable. At the
poles it has an 4" long orange sleeve that says "Fiber Optic" on it.
Everything Verizon says about their investment has been true. If
you want to take a drive, you can see for yourself. In West
Stockholm just south of the village market is a brand-new remote
telephone switch served by a fiber optic cable. There's an excellent
place north of Potsdam to see the two sets of fiber. Right where the
road to Unionville meets Rt. 56, on the west side of the road, to the
south of the pole nearest the intersection, are two
fiber splice cans: the lower one belongs to Verizon, and the upper
one to Time-Warner.
Looking at the both of them makes
it clear that we probably already have more than enough fiber optic
cable in the North Country. Fiber optic cable is a lot like a
railroad. Once you've got one, you don't really need another. Once
you've got one, you can't really afford another. All over America,
many railroads put in competing
lines. Nearly all of them are gone now.
You can make a case for publicly-owned fiber optic cable, but not
an overbuilt (built alongside existing facilities) publicly-owned
fiber optic cable. The characteristics of fiber optic cable make it
such that installation is more expensive than the fiber itself.
Invariably several times as many fiber strands are installed as are
ever expected to be needed. If you think you need two, you install
six or eight, and so on.
Telecommunications in the North Country would be much better if
DANC were to consult with Verizon and Time-Warner, find out where they
would *like* to have fiber, install it there, and trade, route-mile
for route-mile, with existing V and T-W (I got tired of typing them
out) fiber strands. Obviously, V and T-W would not be incredibly
excited about doing this, but DANC could threaten them with an
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Mon, 12 May 2003
Creating Jobs by Firing Workers
Steven den Beste writes about Hiring
and Firing, defending the American practice of actually firing
workers when there is no longer a business requirement for their
labor. Bing! Right on, Steve! He didn't say so very much about it
(in contrast to some of his other writings which go on for pages and
pages) probably because he doesn't think much of himself as an
I, on the other hand, have no such modesty, and plenty of reason to
write about economics (I am The Angry One after all). Everything
Steve said is true, and I'll assume that you've gone off and read it,
and have come (back) here. His main point is true. American
businessmen do not suffer the risk of being forced to employ when the
reason for the hiring has lapsed. Ironically, this results in less
unemployment because of a coincident effect: the ease of growing or
starting a business. If that was not present, then a company's ease
of firing workers would be difficult to justify. I don't know enough
about the difficulty of growing or starting a business in Europe. I
suspect that it's hard: A customer in Norway told me that a business
was required to supply every employee with a view of sunlight.
Steve didn't answer John's question fully: "I'm curious what your
views are on corporations rush to save money by laying off or letting
go (a nice term for firing), employees. I think its somewhat foolish
to go that route first. If every company were to do this then how
could anyone purchase their products or services?" One implication of
free markets is that a company not only can, but should fire
every worker possible. There are two reasons why
The first reason to "fire a worker if possible" is that everyone in
a market is better off if the same output can be produced from the
same input with less labor. It doesn't matter if the employee is
purposefully or accidentally being unproductive. In either case, if
their labor doesn't eventually contribute to the bottom line, their
employment should be terminated. This comes from having a free
Now, some people would read this and say "Well, obviously this is a
problem with free markets." Not so. It is what causes free markets
to create and share such wealth. In the short term, yes, the
corporation gains all the benefit from the worker's loss of their job.
In the longer term, though, that benefit is competed away. If Company
A can fire a worker, so can Company B. They'll want to sell more of
their output, so they'll cut their prices relative to Company A.
Their sales will go up. Company B will either have to cut their
prices as well, or live with reduced profit. Either way, the value of
the fired employee's job gets returned to society in the form of lower
prices for the product he (wasn't helping to) produce.
The compassionate person would say "fine, but that doesn't help the
fired person". Ahhh, but yes, it does. That person also lives in the
market, and gains his fair share of the increased productivity from
his lost job. Not only does he gain it from his lost job, but also
from everybody's lost job.
This brings us to the second benefit from firing workers:
unemployment. Ahhhh, but how can unemployment be a benefit? It
is a benefit if you're starting a company, or trying to add
workers. When a worker gets fired, you increase the availability of
workers. Workers become cheaper. When a business finds that a
resource (and labor is a resource) becomes cheaper, it will try to
restructure its business so that it uses more of that resource. So,
when one business fires a worker who is not being productive, another
business will go looking for that worker to be productive in their
Of course, some wags would point to persistent levels of
unemployment and say "Okay, if you're so smart, why aren't all these
people being employed?" This question is relatively straightforward
to answer. Any particular level of unemployment has two parts to it:
the natural level of unemployment, and the unnatural, or created
level. Natural level first.
There really is a natural level of unemployment. Zero
unemployment is unnatural. It is caused by interference in the free
market, such as that by the USSR which forced all workers to either
find a job, or be employed by the state doing menial labor. In a free
market, where people make their own decisions, people need time to
find a new job. Gainful employment is *always* available to everyone,
at some low wage. Nearly everyone refuses to take the first job
available to them, seeking instead to find a job which pays them
better, or uses a skill for which they are trained. This is the
natural level of unemployment. Exactly what it amounts to is a matter
of the nature of the mix of people who are unemployed.
Unnatural unemployment is unemployment created by government edict.
Yes, the government claims credit for creating jobs at the same time
it destroys them. Anything that interferes with the natural
functioning of the free market will create unemployment. For example,
if you force employers to pay a minimum wage, not everyone will be
able to find employment at that price. If employers are forced to
supply health care, or unemployment insurance, or time off, or
anything else, that will result in less employment.
One more note to answer John's concern: labor costs form the bulk
of the cost of all but the most unusual businesses. If a business
gets into trouble and needs to cut costs, the very first thing it's
going to do is try to reduce employees. This is a natural consequence
of the (relative) wealth of the ordinary laborer, and not something to
be decried. For over five hundred years the lot of the ordinary
laborer (those people formerly called peasants) has been improving.
There is no reason why it should stop improving.
I know that all of this sounds cold and cruel-hearted. "Think
about the workers!" no doubt some will cry. I do think about the
workers. I want them to live in a vital and growing society where
there are well-paying jobs enough for everyone. Such a society must
be a free-market society, over the long term.
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Honestly, folks, some economists write books just so they can show
their parents how successful they've become. They know their parents
are never going to read the book, so it doesn't matter if the book is
complete balderdash. Michael
H. Shuman's book, Going Local, is one of them. Here's a quote
from the local newspaper: "St. Lawrence County must think about the
holes in its economy and become self reliant." Quite obviously this
means not importing self-impressed pundits.
Okay, so Shuman goes on a book tour (want to bet you could buy his
book in the lobby? And that he would graciously sign it after his
sales pitchtalk?) and misleads innocents. Is this
forgivable? I don't think so. If you call yourself an economist, and
he surely does, then you've got to be aware of the principle of
comparative advantage. It's not new. If it was a new idea and he was
an old guy, he might be forgiven. There are a fair number of things
which an economist trained fifty years ago might not have learned.
Michael isn't 75. He has no excuse, even if comparative advantage was
a new idea, which it isn't.
Adam Smith was a popularizer of ideas, not necessarily an
innovator. Still, it's fair to give credit to the person who got the
idea to you, not just the person who came up with it. Adam Smith
taught us (at least, those of us who are listening) that it's
always in your best interest to do the thing you're best at,
and trade that for what you're not. I can hear Homer Simpson now:
D'Oh! There are a lot of things that science has discovered which
isn't obvious. Comparative advantage is not one of them.
Shuman is quoted as saying "When you are import dependent you are
doing an enormous disservice to your economy." No man is an island.
Everybody -- all of us -- even you -- are dependent on imports. You
can see how confused Shuman is by thinking, not about "economies" (too
abstract), but about yourself. Are you dependent upon imports? Not
just yes, but heck yes, darn it! You need to import food into your
body. How do you get this food? By spending effort. Why do plants
and animals feed us? Because we protect and nourish them.
Shuman's suggestion that communities should be self-reliant makes
about as much sense as suggesting that people keep chlorophyll pods
underneath their skin and stay out in the sunshine all day. I've got
better things to do than that. Rather than calling his book "Going
Local", he should have called it "Going Loco", because that's what his
ideas are: just plain crazy.
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Tue, 06 May 2003
I'm not defending vouchers, no way
commented on an earlier posting of mine about vouchers. Well, actually, it
wasn't about vouchers per se except to diss somebody who was attacking
vouchers. I had much more to say about her motivation for attacking
vouchers than the actual attack itself. But Kim isn't sure vouchers
would be so wonderful. Rather than praising the reasonable things to
say (how outré), I'll just attack the economically-ignorant things he
says. Um, at least I think it's a he. Kim is one of those sexless
names, you know.
But in a free-market
situation for education, which vouchers would theoretically
produce, the poor would get the worst quality education of
anyone in the country. Do we really want that? Since all the
studies say that education level is the best predictor of future
income, wouldn't we be setting up a system that ensured a
permanent lower class? It seems like we'd be denying the poor
the single most important antidote to being poor.
Many poor parents realize this, and pour a higher percentage of
their resources into education. Some don't. Remember that poverty is
not a disease of the stupid, yet some people who are poor will be
stupid. The existance of some young people who are badly educated by
their parents does not mean that all young people should be badly
[...]Well, there's only so many jobs. If the best 30% of jobs
go to the 30% best educated, then it won't wake any difference
if we improve the education of the poor if it doesn't increase
in step to the other economic classes. We'll just have better
educated McDonald's workers.
"Well, there's only so many jobs" is a damfool thing to say.
Sorry, but it's just plain silly. Think about all the jobs that exist
right now: grass blade straightener (think of all the blades of grass
that get bent over in parks), garbage washer (don't you think it's
horrible that garbagemen have to endure smelly garbage?), glass
picker-upper (every minute, another glass bottle is broken in
America). Okay, enough abuse. The problem clearly is not jobs.
There are plenty of jobs out there, most of which suck. The problem
is not JOBS (yo, politicans, read this sentence again!) the problem is
Capital formation is the #1 primary problem facing people. If not
for the presence and utility of capital, we would each and every one
of us still be scratching in the dirt for our living. Not that I wish
to demean anybody who makes the choice to scratch in the dirt! It's
just not a job that I'd choose to do for my sole source of income.
I really ought to be linking to Human
Action by Ludwig von Mises (pronounced like pieces). He points out that
there are generally three commercial roles (and it must be noted that
these are roles, not people): the laborer, the entrepreneur, and the
capitalist. Here is generally how commerce works:
- The entrepreneur conceives of an unease in people.
- The entrepreneur thinks of a way to fulfill that unease.
- The entrepreneur locates a capitalist to get capital.
- The entrepreneur pays capital to the laborers to create the
product, buys them the equipment they need, rents the building, etc.
All of these are a capital expense, because there are no sales yet.
- The entrepreneur sells the product to customers.
- The entrepreneur pays the capitalist for the use of his capital.
- (Note that the laborers have already been paid out of the capital).
- The entrepreneur rebuilds the pool of capital to pay the laborers
for the next production run.
- If anything is left over, the entrepreneur keeps it.
- If the entrepreneur makes a lot of money, other entrepreneurs are
attracted like flies to garbage.
- If the entrepreneurs doesn't make any money, he leaves the business
to succeed or fail on its own.
- Over time, the competition reduces the entrepreneurial profit. In
order to make more money, the entrepreneur must create new businesses,
new products, or new cost savings. An entrepreneur must keep
innovating to make money.
There is no shortage of jobs. There is only a shortage of capital.
Capital comes from savings. Who generally saves the most? The
wealthy. That is why taxing the wealthy is a regressive tax. Over
the long time, taking most of your tax dollars from the rich leaves
the poorest worse off. It's called "eating your seed corn" and
everybody knows that you only do that when you're most desperate,
Am I missing something here? I hope so. I think the best
solution to the educational crisis would be to delink school
spending with property taxes, which produces the same sort of
perpetual underclass I describe here, and instead federally fund
it. But that's not currently politically viable, so vouchers
seem to me a second-best solution.
Vouchers are definitely a second-best solution. They
create a market, but it's not a terribly free market. Vouchers will
inevitably come with strings; whether tests or certifications or
minimums, vouchers substitute one really bad bureaucracy (the public
school system) for a better bureaucracy (the voucher system). You
still have population A spending population B's money; never a good
idea, and the root cause of a low-quality educational system.
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Fri, 02 May 2003
Vouchers drain money
Barbara Miner recently complained in a Knight-Ridder op-ed column,
that vouchers drain money from public schools, and that a priori this
is a bad thing. Well, I'm sorry, Barbara, but tough titty. The whole
point behind a voucher system is to let money flow to those who
provide service. If people chose private schooling for their children
over public schooling, it is because the public schooling is inferior.
One aspect of a free market that leftists (and you don't get much
more leftist than government-paid schooling) don't like is the fact
that it creates winners and losers. They don't like competition,
preferring instead, cooperation. Cooperation is so much better, they
say, because it doesn't make for winners and losers.
What these idiots completely fail to see is that competition is not
a replacement for cooperation, but is instead the precursor to
cooperation. Once the sale has been made, the competition stops and
the cooperation begins. Without cooperation, there is no sale, no
trade, and no profits.
Here's how you can put these people in their place (the trashbin of
history, one hopes): ask them what their plan is for optimizing
cooperation. Ask them how they would create the largest amount of
cooperation. After all, not every offer of cooperation is equal. If
I offer to cooperate with you by paying you $3 for a blinky light,
that's different than if I can pay $1 for a dozen blinky lights from
Which is better? Which causes more cooperation? Not obvious.
Only way to find out is to let everyone make their offers, and allow
the participants to decide whose cooperation they prefer.
So when vouchers take money away from public schools, and Barbara
Miner whines "For the sake of our nation's children and our future, we
must save our public school system", spit in her eye and say "I want
more cooperation than I'm getting from the public school system."
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