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 wars.

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 market.

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 people.

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 recipients.

Posted [09:50] [Filed in: ] [permalink] [Google for the title] [digg this]

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.

Posted [14:59] [Filed in: ] [permalink] [Google for the title] [digg this]

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 overbuild.

Posted [00:09] [Filed in: ] [permalink] [Google for the title] [digg this]

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 economist.

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 market.

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 business.

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.

Posted [23:38] [Filed in: ] [permalink] [Google for the title] [digg this]

Fri, 09 May 2003

Going Loco

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.

Posted [02:19] [Filed in: ] [permalink] [Google for the title] [digg this]

Tue, 06 May 2003

I'm not defending vouchers, no way

Kim 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.

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 educated!

"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.

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:

  1. The entrepreneur conceives of an unease in people.
  2. The entrepreneur thinks of a way to fulfill that unease.
  3. The entrepreneur locates a capitalist to get capital.
  4. 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.
  5. The entrepreneur sells the product to customers.
  6. The entrepreneur pays the capitalist for the use of his capital.
  7. (Note that the laborers have already been paid out of the capital).
  8. The entrepreneur rebuilds the pool of capital to pay the laborers for the next production run.
  9. If anything is left over, the entrepreneur keeps it.
  10. If the entrepreneur makes a lot of money, other entrepreneurs are attracted like flies to garbage.
  11. If the entrepreneurs doesn't make any money, he leaves the business to succeed or fail on its own.
  12. 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, right?

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.

Posted [19:47] [Filed in: ] [permalink] [Google for the title] [digg this]

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 someone else.

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."

Posted [00:48] [Filed in: ] [permalink] [Google for the title] [digg this]