Friday, July 31, 2009

An announced recovery

The economy continues to decay, but people in various media and government outlets were cheering the fact that the economy only shrank by one percent in the prior quarter, unlike the over six percent shrinkage in previous quarters. That the economy continued to get worse is considered good news because it got less worse instead of more worse.

Some, such as Bernanke, conclude that the economy will recover by the end of the year. Bernanke was saying the same thing back at the beginning of the year though, so the only real strong point he has is consistency. While unable to foresee the recession he sees that it will soon be over.

Naturally anyone familiar with Austrian Economics can poke holes in the pronouncements of recovery.

The GDP only shrank by one percent, in a quarter which saw phenominal increases in government spending. Unfortunately government spending is considered a contributing factor to the GDP instead of either an outside factor or a subtractive factor. The basic equation for the GDP is: GDP = private consumption + gross investment + government spending + (exports − imports). A corrected equation for the GDP would be GDP = private consumption + gross investment - government spending + (exports − imports).

The second formula accurately represents the drain on the economy that is the government. But that may be too controversial for most economists, and just leaving out government spending as a whole would still give a clearer picture of the GDP. GDP = private consumption + gross investment + (exports − imports).

In either case, the GDP smaller than actually reported. And that smaller GDP would indicate a larger decay of the economy considering how rapidly the federal budget is growing.

But supposing that Bernanke is right, that the economy is starting to recover. According to Austrian economics, that will mean that the USA will have to deal with the negative effects of the efforts of the government to stave off the inevitable liquidation of malinvestments. Since this was done by doubling the money supply, the negative effect will be a havling of the value of the currency. That means if the recession does indeed end in 2009, the next one begins in 2010.

Thursday, July 23, 2009

Fallacy of the Broken Window

Anyone who has studied economics is familiar with the parable of the broken window. One day in a peaceful small town some kid throws a rock through the Baker’s window. Understandably the baker is upset about this because now he has to buy a new window. A Keynesian economist comes along and declares this to be a good thing because this stimulates economic activity, as the Baker will buy a new window enabling the Glazer to make purchases he would not have otherwise been able to, creating a ripple effect throughout the economy. He calls it "The Parable of the Broken Window."

But a Misean economist comes along and calls it "The Fallacy of the Broken Window” instead of "The Parable of the Broken Window" because the Keynesian assumes the Baker's money was doing nothing and is now being put to use. The Misean says that we do not know what the Baker might have done with the money, what he would have spent it on instead. The Baker might have purchased, for example, a newer and better oven, increasing his productivity. Instead of everyone being better off, because bread is now cheaper and more plentiful, the town is really only poorer by the amount of one window. This is commonly referred to as the problem of the unseen.

Socialists and Keynesians hate the fallacy of the broken window. It undermines their entire view. Creative destruction and central planning do not create wealth if the story of the broken window is considered a fallacy instead of a parable. But for a long time the only response was to say that calling it a fallacy is wrong. But now it seems there is circulating in the discussions of central planners a new counter to "The Fallacy of the Broken Window." Some central planners are starting to call it "The Fallacy of the Fallacy of the Broken Window."

Their argument is that we do not know that he would have spent the money in a productive manner. Since we do not know that the money would have been used productively if the Baker's window were not broken, and we do know that the money was used productively since the Baker’s window was broken, the certainty of productive use in the latter situation means that the problem of the unseen is a fallacy and therefore advocating for the former situation is uninformed.

There is a major problem with that counter argument.

While it is true we do not know exactly what the Baker might have spent the money on otherwise, we do know it in a few broad categories. He would either have saved it, spent it, or given it away.

If he gives it away then the three options pass on to another person, who either spends it or saves it or give it away. Eventually the wealth will get spent or saved, so this option can be ignored as simply regression.

If he spent it, then it is a given it would have been spent in a productive manner given that people do act in their own rational self interest within the confines of their knowledge. To say it was spent in an unproductive manner is a subjective value judgment that Keynesians are not actually capable of making. This is also true if the recipient of giving the money away spends it.

Finally if he saves it, it is a use. This is the biggest Keynesian stumbling block, but as all Miseans know saving is not detrimental to the economy. Saving is how a person is able to consume in the future. The Baker might be saving up for that new oven, and in another month would have been able to purchase it, but now cannot because his savings must be spent unproductively on a new window. If the money is saved in a bank, the bank lends it out for economically productive purposes. But even if the money is saved in a box buried in the back yard it is still being put to the economically useful activity of saving for the purpose of future consumption.

The central planner's response to "The Fallacy of the Broken Window" by calling it “The Fallacy of the Fallacy of the Broken Window" is actually "The Fallacy of the Fallacy of the Fallacy of the Broken Window."

Friday, July 17, 2009

Public and Private Competition

One way those who want to "improve" the free market do so is by introducing competition in the form of a government program or agency that duplicates work done outside the government. Usually those in the afflicted field would be surprised to know that the field doesn't currently have competition. But in order to correctly analyze the claim, it is good to look at fields where the government directly competes with private enterprises.

First and foremost on any list of government activities that compete directly with private endeavors is education. At one time education was largely private, and to a great extent taxes were not used to pay for education. Yet education was available at all levels, although non-compulsory, to the point where religious groups were even offering free education to the poor. But government sponsored education has only increased. Since it is paid for by taxes the direct consumer does not directly pay for the education and therefore mistakenly considers it free.

As a result, private schools have diminished in number. While they generally provide a much higher level of education, only those who are either make major sacrifices or are wealthy can take advantage of the better education offered.

The second endeavor to be examined is in delivery of the mail. Libertarians are generally familiar with Lysander Spooner's attempt to deliver first class mail, and how the Post Office used legal coercion to shut it down. Package delivery still has private competition in the form of UPS or FedEx.

The prices for package delivery by the USPS are lower than UPS or FedEx, due to undercutting. The low price is supported by raising the rates on first class mail. Even with that undercutting those who can afford it (and in this case many but not all can) prefer to use FedEx or UPS. What makes the USPS special among cases of comparing private and public offering of services is that the user does pay for the service directly. But even then the USPS is subsidized by the Federal Government.

Another is the providing of security. It is well known that the rich do have private security in private communities or residences that respond quickly in the event of a disturbance. Those who are of average means can afford to defend themselves by the purchase of a firearm. Those who cannot afford any better rely on the police, who arrive after a crime has already been committed to make the report and try to apprehend the criminal. The rich have proactive protection, the middle class can protect themselves, and the poor have no protection.

The building of roads has been entirely taken over by the government to the point where many cannot imagine it being any other way. In the former Soviet Union people could not imagine how shoes could be distributed if the government did not do so, and wondered if those who thought a free market in shoes meant that only the rich could get shoes. There is nothing to compare the building of roads to, given that the ability of government to force everyone to pay and offer the resuliting roads for "free" has completely driven private roads out of business. Those toll roads that are managed by special grants from the states do not count as they are not free market but are corporatism.

In every case except the Post Office, the ability to force payment into the program, combined with while offering the service for "free" has driven competition out of the market for all but the very wealthy. The same is true to a lesser extent for the Post Office. This has resulted in only the wealthy being able to truly afford high quality goods or services.

The health care plans offered by President Obama include a "Public Option" where the Federal Government directly competes with private insurance companies. If history is any indication this will result in only the wealth being able to afford high quality medical insurance. Taxes will be raised to provide the service, and the public will be lied to about how the service is free. Those who advocate anything other than a program which will result in only the rich being able to afford quality insurance will be accused of wanting a program which will result in only the rich being able to afford quality insurance.

I'd like to welcome as readers the Complete Liberty Podcast, as I've just discovered that they've used two of my articles in their podcasts. I'm flattered.

Edited to add:

A critic of this article pointed out that education is somehow disproof of the proposition that public and private competition leads to only the rich being able to afford quality services. What was offered as proof wasn't primary education but colleges, which in the United States are still considered to be very good.

It is true that on the level of Masters or Doctorate the United States is of exceptionally high quality, and in some fields a Bachelor's Degree is worth more than the paper it is printed on. But as is being pointed out on Lew Rockwell's website the cost is becoming prohibitive. Students graduate with many thousands of dollars in student loans just for a Bachelor's, after scholarships and grants. Those who go for even higher degrees finance it almost entirely by borrowing. Education is becoming a way to become an indentured servant of the lending agencies.

It is true that a Bachelor's Degree holder statistically earns more over the course of his life than someone with only a High School degree. It is also true that the costs of paying for that degree are rising to the point where they may be higher than the lifetime earning differential. If that happens than the economic decision would be to forego higher education.

That would mean that thanks to public versus private competition a quality higher education is only the rich can afford.

Saturday, July 11, 2009

Secession Day in Retrospect

July fourth rolled around with many of the comments one would expect. Republicans and Democrats turned it into yet another opportunity to worship the state. Libertarians bemoaned the chasm between the original intensions of the signers of the declaration and how far this country has gone since.

But there was another thread in libertarian blogging on the subject. There were more than a few bloggers who pointed out that the signers were not trying to “work within the system” but had openly taken up arms against the government in open revolt. Those bloggers were also questioning the reluctance of modern libertarians to make such an open revolt against a government far more oppressive than the king of England was.

The question was asked, as an imperative, if libertarians had what it takes to say to the government “I’m not going to obey your laws anymore.” There are many people every day who say that. They are called “criminals” by the government. True if everyone became a criminal at once the government would fall but that is not what the authors are actually urging.

What these authors actually want is a movement to join that will actually be a revolt. If they really stood by the call to arms at this time, they would be taking up arms at this time. They would become criminals. But they do not want to go to jail for their solo efforts.

The signers were not individual criminals funding a revolt. They were politicians. They had worked their way up through the political system and were speaking on behalf of the states that they were delegates from. John Hancock, first president of the United States, was one of the wealthiest men in the colonies before the declaration was signed. Early in his political career he was one of the five selectmen of Boston. He served in various political offices until he was made president of the Continental Congress. The rest of the singers were all people of influence, prominent lawyers, doctors, military officers, shippers, educators, publishers, and politicians. They all served in offices, elected or appointed, before they were appointed as representatives – by their states – to speak for their states in the Continental Congress.

The second revolt was also led by those who had already established themselves, when the eleven Confederate States seceded. Like the secesion of 1776, the secession of 1861 was a product of those who were already withing the political system. The vote to secede took place in the legislatures of the states.

In other countries, where avenues such as that are not available, instead of prominent politicians leading an anti-government movement, other institutions where one can have influence are used as a vehicle for revolt. In many countries religious leaders and institutions are vessles for this kind of activity.

If what the authors of those blog entries really want is a movement that people can join, what they should do is find a way to start such a movement. They need to form their own militia, train it themselves, and fund it themselves. Like everyone else raised in the current system of dependency on the government, they are waiting for someone else to handle the organization aspect of this problem. The real work is to become influential enough to create this sort of movement, instead of waiting for the movement to exist and urging everyone else to join it.

Friday, July 03, 2009

California issues IOUs

While everyone else in the libertarian blogosphere is writing about how the founding fathers were rebels, traitors, and secessionists, and encouraging us to live up to their examples, I decided that while they are right my own input on this is not needed at this time. So I decided to write about something a lot more current.

First the government of California passed the single largest state tax increase in the history of the United States. Then ballot propositions are sent to the voters to extend the tax increases, which the voters reject. The propositions were rejected by all groups in California; they were rejected by blacks, whites, Hispanics, Asians, and "others", they were rejected by men and women, by Republicans and Democrats, by conservatives and moderates, and only broke even among liberals. They were most strongly rejected in Orange County and barely rejected in San Francisco County.

The rejection of the propositions threw the budget into unbalance again, and as time went on and the economy worsened (and the tax increases failed to provide a corresponding increase in revenue for reasons Miseans would understand but would confuse Keynesians) the need for a balanced budget grew more urgent as the state Comptroller warned repeatedly that the state was running out of money. In the time between the failures of the propositions to the deadline the deficit rose from a projected $16 billion to a projected $24 billion.

The deadline came and went, a budget was not passed, and so on July 2nd the State of California started issuing IOUs. This was largely because although the Republicans were more than willing to aid and abet the last tax increase the voter reaction was so strong that they thought it better to actually follow their election promises this time around.

The reaction from the politicians is the most interesting part.

In the Assembly Budget Committee, a Democrat on the committee opined that while he supported the new round of tax increases perhaps it was time for the state to start living within its means. Chairperson Noreen Evans disagreed saying "There is this mantra out there 'living within our means' and while it sound really nice it sounds really simple and it sound really responsible it's meaningless. Our means are completely within our control". She opposed any cutting of the budget on the grounds that the state can always raise taxes to cover any needed revenue.

In an interview Assemblywoman Karen Bass reacted to the Republican refusal to approve of any tax increases. The recall effort against Assemblyman Anthony Adams (as well as other Republicans who violated even indirectly their no-tax pledges) has scared the rest of the party straight. Assemblywoman Bass opined about those who dare oppose tax increases by saying "The Republicans were essentially threatened and terrorized against voting for revenue. Now [some] are facing recalls. They operate under a terrorist threat: 'You vote for revenue and your career is over.' I don't know why we allow that kind of terrorism to exist. I guess it's about free speech, but it's extremely unfair." Daring to hold politicians accountable is now a form of terrorism? She called the taxpayers of California "terrorists" for being over-taxed already and not wanting to be even more over-taxed.

Finally Proposition 13, the favorite scapegoat of all who believe in government instead of the people, is being blamed with any rationale that makes limited sense at the moment. Some say it works too well. Others say that it holds the majority hostage to the minority, as if requiring 2/3 to pass a tax increase means that the remaining 1/3 is actually in charge.

So after all of that the state is issuing IOUs instead of payments. There is no information yet on whether or not the banks will accept these interest bearing IOUs, although the likelihood of that increases with the proffered interest rate. If the banks decline to accept the IOUs the willingness of the public to receive them will plummet, as will the credit rating of the state. Where California goes, so does the rest of the nation.