Yearly Archives: 2012

Where are the jobs?

Following up to last week’s post (read here). Although the constant cycle of supply and demand tends to make it unclear which process came first, in the end we can trace the inception point to supply. Supply that can be used to satisfy demand comes about through savings and so it is savings that ultimately is the source of jobs (employees are paid prior to sales). So, since the popular media tells us that corporate profits and cash on hand have never been higher, why is job growth so anemic?

There is actually a great deal of job creation (see chart), even at the height of the recession there were millions of jobs being created. Unfortunately, more were being destroyed. However, it is misleading to suggest there are few jobs being created. Further investigation of the chart reveals that  job growth rates have been trending downward for the last 12 years (no BLS data for this statistic exists prior to 1992). Why would this be?

Quarterly Job Creation & Loss as % of Workforce

 

1) Regulation: regulation hinders jobs in three ways: (a) it acts as a stealth tax by increasing dead-weight costs (for example, a report last year by the House Government Oversight and Reform Committee stated the Obama administration has established nearly 300 new regulations that will cost businesses an additional $60 billion each year), (b) it acts as a barrier to new firms that would otherwise compete with established firms either by criminalizing innovative ideas or imposing paperwork compliance costs that are disproportionately burdensome to smaller business and (c) in some cases it simply outlaws entirely certain types of business (see the Lacey Act as one example). To illustrate point B consider the following: where would Apple be today if Microsoft had encouraged regulations that required competitors to conform to their standards. It would be illegal for Apple to innovate and thus deviate from those “standards”… and we’d all be running Windows 95 while listening to our Zunes and the iPad would be mere fanciful sci-fi fodder. Because the computer industry is relatively unregulated, there has been tremendous innovation and growth. But in other heavily regulated sectors (health insurance, agriculture, automotive, etc.) there is little to no innovation because bureaucratic micromanagement simply does not allow it. Without innovation there is no growth and without growth there is no reason to have a new job.

2) Risk: Many of those in government condescendingly dismiss the idea that risk arising from unknown tax costs contributes to slow job growth. Their condescension is rooted in ignorance of the real world, a world where risk is a constant companion. But in the government’s ivory tower that companion is nowhere to be found. Their obliviousness to risk is apparent in the squandering of other people’s money on “good ideas” that ultimately fail and for which they have zero accountability. Although taxes were higher in the 1990’s, at least they were stable. Tax rates that vary year to year on the whim of Congress are more destructive than high taxes as people focus their energy on gaming the tax system rather than in pursuing productive goals.  Think of it like this: what if the final price for a car you bought today would not be revealed to you until 5 years from now. You would start your monthly payments now and at the end of 5 years you’ll either have it paid off or owe a whole lot more. How likely are you going to buy a car with that level of cost risk? Likewise, those with money to invest in new jobs also will wait until they can be certain of the final costs. Risk makes people cautious… unstable tax policies that increase financial risk will increase cautiousness.

Risk makes people cautious… unstable tax policies that increase financial risk will increase cautiousness.

3) Training: the stock bubble destroyed financial capital, however the housing bubble destroyed financial & human capital. Financial capital destruction can be swept under the inflationary rug through Federal Reserve printing press slight of hand, however there is no keystroke subterfuge that can wipe away the years people spent training and gaining experience in construction and related industries. In short, human capital was misallocated into the wrong sectors of the economy. The government operated a national multi-year housing circus financed with artificially suppressed interest rates and the implied moral hazard of “too big to fail”. People were attracted to that monetary opportunity like flies to honey. But then overnight the government flipped the switch and the circus went dark. Now the circus participants must spend years retraining. Training takes time.

Ultimately the market can heal itself if the price mechanism is left to operate free of government manipulation or interference (the mechanism whereby wages for high demand jobs will rise and thus attract people to train for those sectors). Propping up burst economic sectors or inflating new ones will only postpone the fever that ultimately is needed to cure the economy and restore healthy job growth.

Chicken or the egg?

Which came first, supply or demand? At first blush this question appears to be of the intractable “chicken and egg” variety, however upon closer inspection we find the correct answer: Supply. How so? Surely no one will supply something if there is no demand. In order to solve this riddle we must first understand what is meant by “demand.” In the vernacular it means mere want or desire, however in economic parlance the meaning has a subtle and important difference. Demand is both the desire AND the means to fulfill that desire. In other words, it’s not enough just to want something; you must have something to offer in exchange.

No one can demand something until AFTER they themselves have produced something.

 

Why are demand and desire not economically equivalent? Consider the following: how relevant are people with no money at an auction? If we define demand as mere desire then as human desires are unbounded so too must be demand. Since we know there is not universal infinite demand for every good (i.e. infinite prices), we then know that demand and desire cannot be equivalent for economic purposes. However, desire does play a role. It is the spark that determines what should be produced. Entrepreneurs gauge market desires in order to determine the things that are a safe bet to produce while accounting for people’s ability to pay for such new goods (e.g. high desire/low affordability: people desire flying cars, but few could afford them, low desire/high affordability: nobody desires mud pies even though they could be affordably made, and high desire/high affordability: smartphones are desirable and since they could be affordably produced, they were).

So, if I want what Joe has, I have to two choices: (a) I can take it from Joe by force (the warrior path) or (b) I can produce something Joe wants and trade with him (the market path). In order for me to “demand” something I must first produce (supply) something. No one can demand something until AFTER they themselves have produced something. If Joe and Greg exist alone in the universe we can demand things all we want, but none of those demands will be met until we first produce something. Therefore supply must come first.

So if supply comes first, then where does job creation start, from those that spend money (demanders) or those that save it (suppliers)? Popular opinion and a Keynesian worldview err in the belief that demand drives job creation, but that is mere superstition. Logic clearly demonstrates it is savings that are the source of new jobs. It might seem intuitive that spending would create new jobs, after all, that money eventually goes to pay workers, right? True, but applauding the result of production (demand) while ignoring the source of such demand (supply) is a disingenuous attempt to ignore reality: that jobs are produced from saved funds. Policies that ignore reality and promote spending at the expense of saving can do nothing but harm job growth.

To understand why savings are critical to new jobs we must spiral all the way back to a business’s inception. What was the source of funds to pay those first workers before anything they had produced was sold? It came from the invested capital of the owners of the business, i.e. their savings (profit from prior ventures). To make this point a bit clearer imagine the following: all businesses decide to disburse all profit as bonuses to their employees, so all business net income is $0. Should be great for the economy right, all that extra cash floating around? Not really, the increased demand cannot be met because businesses have no unused funds (i.e. saved profit) from which to hire any new employees or purchase equipment. If they hired any now it would have to be on the condition that they could not be paid until the things they produced actually sold. Of course they can lower the pay of the other workers, but that’s my point, the funds withheld to lower the pay represents what was previously characterized as profit/savings: only profit/savings can create new jobs. Every attempt to redistribute it or tax it only undermines the job creation process.

So this begs the question, since companies have a lot of saved funds and profit why isn’t there more job creation going on now? The answer to that question will have to wait until next week…

Legalize potato marriage now!

President Obama’s recent “outing” by Joe Biden on the same sex marriage issue along with North Carolina’s Amendment 1 which bans all non heterosexual marriages has bubbled this divisive issue back to the top of the lava lamp that is our political landscape. It does not matter what the President nor the voters of North Carolina think. Laws based on the mercurial moods of the public are a recipe for tyranny, i.e. the Rule of Men rather than the Rule of Natural Law. Natural law is the immovable bedrock that supports a stable framework that PROTECTS our natural rights, not abridges them.

 

Not so recently marriage licenses were used as a mechanism to prevent whites from marrying non-whites.

To understand the marriage issue we must first gain some perspective. The historical purpose of a state granted marriage license was to cause the applicants to plead to the state for permission to marry in order that they prove that there was nothing about the marriage the state might find objectionable. In other words you had to ask for permission from your master (the state) to partake in a natural right (right of association and speech). State prohibitions on marriage fluctuate with public perceptions of what constitutes a “valid” marriage. Not so recently marriage licenses were used as a mechanism to prevent whites from marrying non-whites. Today we view that as an absurd restriction, but the public did not view it that way a mere 50 years ago. If the majority is always right then does that mean the “rightness” of an action depends upon mass opinion? Surely such moral relativism has no place in a modern constitutional republic.

For those that suggest the Bible establishes inerrant moral edicts and therefore the ban on same sex marriage is valid, please recall that the Bible too was often used not only as justification against interracial marriage but as a justification for slavery as well. My point is not to disparage the Bible but rather to point out that whether it is the Bible or the US Constitution, humans will always find a way to interpret a complex document to fit their desired viewpoint. How do we know we aren’t doing that right now? Some are sure they aren’t doing so now, but people 50 years ago were sure they weren’t doing it then either. But even were we to agree the Bible is clear on this issue, do we truly want to live in a theocratic state where laws are based upon current religious viewpoints? As I have covered previously, morality that is imposed by law does not make one righteous. God gave us free will, our laws should not take away that which God granted (for victimless “crimes”).

Some have argued that if there are no restrictions on marriage this will lead to crazy scenarios with people marrying their cat or a potato. Please. Anybody crazy enough to marry their cat is already crazy… you can’t outlaw crazy, they’ll just find some other crazy thing to do. But even if they did marry their cat, so what? How does that in any way affect your marriage? Do you suddenly stop loving your spouse? Are matrimonial vows nullified? Others argue that children are best raised in a two parent male-female household. I’m not sure by what metric one objectively measures the outcome of child rearing but current evidence shows no deleterious effects. Besides, if we assume that two parent male-female households are best and “best” is the basis by which to outlaw that which is not “best”, then I suppose we must make single parent households illegal as well?

At the end of the day what I propose likely would make neither side of this debate happy, so that by itself should suggest it is the best course of action. In short, return marriage to the private realm. The state (government) has no place in regulating or licensing marriage (contractual associations). The right of association/contract implies we may associate with whomever we choose and in whatever manner we choose as well as giving public notice of such associations. Likewise, no individual or group (churches, health insurers, employers, etc.) can be required to formally recognize such associations. They can if they want to, but there should be no legally mandated consequences to not doing so. That’s what freedom is, freedom to do as you desire as long as it does not infringe on anyone else’s freedoms.

 

Prosperity through tools

What is wealth, or rather, what is the point of wealth? Wealth is the promise of the ability to obtain our wants and desires with minimal effort. In general those that produce much with little effort are wealthier than those that produce little with great effort. And how does one go about producing much with little effort? With tools. Tools make the difficult easy and the impossible possible. Tools are the reason we don’t spend most of our lives simply trying to obtain our next meal. Tools are the reason we have at the beginning of the 21st century a higher standard of living than we did at the beginning of the 20th century or any period prior to that. Increasing wages and increasing standard of living are a direct result of improvements in the efficiency of our tools. Wages did not rise because of unions or the minimum wage, they rose because our tools became more productive.

To those that believe unions or government can force higher wages absent improvements in productivity, please consider this scenario: A bakery employees two people and they make by hand 20 loaves in 12 hours. They are paid $1/hour, or $24 for the pair per day in wages. The bakery sells the loaves for $2 each so it can make up to $40/day, or a net $16 in profit. Now suppose the two employees join a union that demands they be paid $1.50/hour and the bakery has no choice but to agree. Wage costs have now gone to $36/day and to maintain the 40% margin it must now charge $3/loaf. There are three possible outcomes: (1) the public can no longer afford to buy the loaves and the bakery goes out of business (involuntary closure), (2) the bakery tries to operate with a lower margin but quickly finds there are more profitable ventures than baking and since all other bakeries have the same new cost structure all bakeries close (voluntary closure) and an entire industry ceases to exist in the market or (3) the customers accept a higher cost…which then compels them to join unions to demand higher wages from their employers, who in turn raise their prices until all prices spiral upward until a new equilibrium is reached of higher wages AND higher prices.* So ask yourself, what was the point? Either businesses are driven to close their doors (leading to unemployment) or the end result is entirely neutral (wages go up 3 fold and costs go up 3 fold).

Here is how better tools make everyone wealthier. The bakery purchases a new fangled gadget that allows the two employees to make 200 loaves a day. It can now afford to charge only 28¢/loaf while still doubling profit. The employees continue making $12/day but because they are so much more productive the bakery offers them the option of only working 8 hours for the same $12 ($1.50/hour). Because bread costs have gone down everyone in society has more disposable income. The employees are working fewer hours and earning more per hour and the bakery is earning more as well. Everyone wins (society, employees and employer) and no coercion from the state was necessary. Now repeat that in multiple other industries over many years and what you see is an increasing standard of living and wealth. Everyone’s condition is improved over what it otherwise would have been. Some believe that it is mere “high paying” jobs that make society wealthy, but unproductive high wage jobs can do nothing to raise society’s standard of living. I will close with a quote  (attribution varies but the sentiment is valid nevertheless) that crystallizes this sentiment: “While touring China, a businessman came upon a team of nearly 100 workers building an earthen dam with shovels. The businessman commented to a local official that, with an earth-moving machine, a single worker could create the dam in an afternoon. The official’s curious response was, “Yes, but think of all the unemployment that would create.” “Oh,” said the businessman, “I thought you were building a dam. If it’s jobs you want to create, then take away their shovels and give them spoons!”

* For my Austrian economics friends I am glossing over the “supply of money” point so as not to overly detract from my main argument, but for those uninitiated in the core logic of Austrian economics here are more details on the various paths Scenario 3 can take: Of course with point (3) all prices can only rise if the government prints more dollars… in a hard money economy where the supply of money remains constant some prices would go up and others must necessarily go down thus potentially driving those businesses to close shop and their employees to become unemployed. To simplify the supply of money argument imagine the following: You have $10 and there are 4 vendors each selling their wares for $2.50. You are able to buy from all 4. But if they all demanded $5 for their wares then you would only be able to buy from two of them… you would choose the ones you find most valuable and the other two would simply not receive the sale. Repeating that multiple times means those businesses must close as they have no sales. But some could stay open if for example two raise their price to $4, then the other two could obtain sales if they dropped their price to $1 ($4x 2 + $1 x 2 = $10). If they can stay in business on $1 they will survive but if not then they will go out of business. A real world example wherein prices were driven up but vendors were not permitted to drop their prices was with minimum wage laws, these include such services such as milkmen, full-service gas, door men, they simply cease to exist because no one is willing to pay an amount for that service that will cover the government mandated minimum wage that must be incurred to provide that service. Now although these out of work employees would increase the labor supply and drive labor costs down somewhat (to the extent there was still non-union labor in existence, if all were unionized then they would simply remain unemployed and would have to start their own businesses to fend for themselves in a new “underground” union-free economy). To the extent there was not 100% union coverage of the workforce non-union wages would be driven down, i.e. the gains of the union are offset by the losses of everyone else. But even with this net 0 in wages for society there would still be a net loss to society in that the goods and services supplied by those businesses that closed are removed from society and thus it is a net loss to society… the value they formerly produced simply no longer exists.

 


Moral Hazard at the local level

A few weeks ago it was reported in the Morgan County Citizen that the Morgan County Board of Commissioners agreed to fund a $15,000 study in order to determine the economic viability of creating a regional “food hub” in Morgan County. It would seem government backed subsidies of private businesses is not just a federal or state issue but a local one as well. In an of itself there is nothing wrong with the idea of the food hub, the problem is why is any government in any way assisting in funding a possible private enterprise? If the backers of this idea feel it may be a good idea then they need to invest their own funds for this study. If the study finds it is viable and this new enterprise comes into existence will they refund the county the $15,000 fee? Perhaps, but if it indicates it is not viable will they still refund the fee? I’m guessing not, otherwise what would be the point in having the county pay for it, why don’t they just pay for it to begin with? This is a case of “heads I win, tails you lose.”

The wider issue here is this is a miniature version of why we had the recent housing bubble, and that issue is known as “moral hazard.” Moral hazard is when someone else takes on the responsibility for any bad decisions you might make. This tends to increase the number of bad decisions. For example if I told you to go into a casino and gamble as much as you wanted and that if you lost I would reimburse all your losses, how much constraint would you feel about gambling as much as you could vs if it was your own money and it would not be reimbursed? No constraint at all. This is a similar situation. If a group of private investors have an idea for a new venture but they are unsure of the viability of it, why not get the government to pay for the background information? If it is a winner they will start the business, and if a loser than none of them are out any money, only the government (the people) are.

Now I am not accusing anyone of any malfeasance or sinister motives here, my point is that our system is set up in a way where this is simply the normal mode of operation, so why not take advantage of it? But when you codify moral hazard into your governmental system you will only increase the odds for a lot of waste. The counter argument here may be that “this will lead to jobs possibly.” Yes, maybe it will, and maybe it won’t, but why should the people (the government) gamble their money on ideas that may or may not pan out. If the investors think it is a good idea then they need to spend their money and put their money on the table. Diffuse costs and concentrated benefits inevitably lead to problems of economic distortions and cronyism.

A reply to objections raised against Educational Responsibility

My “Education” editorial prompted a rational and cogent response from David Land in the Morgan County Citizen. This is one of the reasons I began writing this column, to engage those with differing views in polite discourse free of the usual “Left-Right” rhetoric. Thank you David. I would like to respond to the issues raised.

should anything benefiting the individual be subsidized by the state?

First point: Education is a public good because it tends to benefit society; therefore society should subsidize it. Anything that benefits the individual can benefit society (because society is composed of individuals). This begs the question: should anything benefiting the individual be subsidized by the state? For example, automobiles permit a broader range of employment options and access to goods, so one could argue businesses should subsidize (through taxes) automobile purchases, as that would ultimately benefit those businesses that will have access to more employees and customers. But we don’t do that. Why? Because the free market responded to the demand for this valuable good, thus transforming the car from a luxury available exclusively to the wealthy into a luxury available to every sector of society.  The point is that while a K-12 education is now extremely costly (+$100,000) this would not be the case had there been a free market in education all along, the cost would be closer to an affordable $30,000 over 13 years and thus the argument over “who should pay for it” would vanish. Companies need educated workers, but workers need an education to get jobs. It’s a two way street in which two parties engage in a mutually beneficial exchange (labor <–> money) and there is no a priori reason to assert that party A must provide resources to party B in order that party B may meet the requirements of said exchange and thereby benefit both parties. If you want to buy my house should I be forced to lend you money because said purchase ultimately benefits me?

If shifting costs from an employee to their employer tends to drive wages down, why is it hard to accept that shifting costs from an employer back to the employee would not drive wages up?

Second point: In a free market business owners would never pass on the tax savings derived from elimination of subsidized public education. I do understand the basis for this objection: normally if a business has a good year or receives a tax cut there is no incentive to simply divide the surplus among all employees. However the situation I was describing is unique because it is a specific trade of funds, namely, the tax being cut is used for a known (earmarked as it were) cost of living for the majority of employees. So the incentives are different from that of a “normal” tax cut. If we understand the incentives then we can understand why most would raise wages and/or lower prices. Let us suppose we could wave a magic wand and eliminate all property tax and most state income tax overnight. Employees would now find themselves in the position of having to pay for their children’s education directly. Those formerly subsidized employees would jointly demand higher wages to approximate their net increase in costs. The incentive to comply for the employer is two fold: 1) maintenance of employee morale through a raise that employers can easily afford (for example, we could easily afford this as we pay over $60k/year into the school system) and 2) lack of rehiring options if a trained employee quits over wages…most potential replacements would be demanding the same higher wage. But let us assume for the sake of argument that no employers would give raises. What would be the result? Because most (99%+) employees with children would value their children more than anything else in their lives they would pay for their education first, thus decreasing their demand for discretionary goods and services. The decline in that demand would result in lowered revenue for those businesses, who would then in turn lower their prices (which they could afford to do out of the tax savings) in an attempt to attract back customers…this would thus make goods and services more affordable for everyone. Even if nominal wages ($) are static, real wages (purchasing power) increase as prices decline (price deflation). Because education costs could drop by as much as 2/3rds the overall effect is a net gain to the aggregate productive capacity of the economy. If you’re still skeptical, ask yourself this: Imagine the reverse, imagine that the government instituted a new “food tax” that supported a program that provided all food for all citizens, would we not expect wages to decline over time (e.g. if you spend $12,000/year less on food it makes it easier to accept a lower wage)? So if shifting costs from an employee to their employer tends to drive wages down, why is it hard to accept that shifting costs from an employer back to the employee would not drive wages up?

Wouldn’t we expect automobile ownership (that is, any luxury item) to be lower in Haiti?

Third point: Haiti as a real world example where a mostly private education system has failed. This is an interesting example, however it is an apples to oranges comparison that only underscores the expected market penetration of a luxury item in an impoverished country.  Education, while desirable and beneficial, is not essential to life and so it is economically classified as a luxury good. So are automobiles. If we were comparing automobile ownership between the US and Haiti wouldn’t we expect automobile ownership (that is, any luxury item) to be lower in Haiti? In fact they are: 12 vs. 808 per 1000 people. So if one luxury good has a low market penetration in a poor country wouldn’t we expect all other luxury goods to as well, including education? Using an impoverished country such as Haiti as an example of how the free market cannot provide education to all citizens is as fallacious as arguing that the private market in Haiti has been a failure in making automobiles available to all citizens and thus the only answer is a publicly subsidized automobile ownership program.

Fourth point: Children of the poor would suffer due to lack of educational opportunity. Poor children would not experience a lack of educational opportunities as schools would offer needs based scholarships (as private schools do today) and charitable organizations focused on education would quickly sprout up (funded by those who honorably believe it is their obligation). But let us assume again a worst-case scenario and that those in poverty could not go to school. Will they just lay down in the street and die? Of course not. If there is a demand, the market will respond. Perhaps home schooling co-ops might form. Perhaps businesses would charter trade-focused schools. One example of how the market can quickly and effectively provide a superior education to those in the low income spectrum was the destruction of the public school system in New Orleans by Hurricane Katrina. Charter schools were quickly legalized and the market responded with schools that have by every measure outperformed the old system (see video at 30:00 mark). The point is that the creative brain power of millions of people will find solutions to even the most challenging issues.

I could just as easily argue that public education was the cause of those countries’ poor GDP as I could argue that private education was the cause in Haiti.

Fifth point: Education drives productivity and since private education would result in fewer people being educated this would result in lowered US productivity. Again, private education would not result in fewer people being educated, but even if we assume for the sake of argument it is true it would not change the productivity of the US. Enhanced educational opportunities are not what drove the tremendous growth in the US, but rather are a result of it. It’s like saying “look at that wealthy guy with the fancy car… if I buy a fancy car then I can become wealthy too!” If we accept this assertion then we would expect in every country where there is public education we would find a GDP comparable to the US. But that is not what we see. There are numerous countries that have public education and a GDP near that of Haiti’s . Why would education be a determinant in GDP outcome in Haiti but not in these other countries? I could just as easily argue that public education was the cause of those countries’ poor GDP as I could argue that private education was the cause in Haiti. In point of fact, Cuba ranks above the US in the United Nations Education Index, so that alone should dispel any notion of education driving economic prosperity.

Sixth point: Uneducated masses being unable to secure jobs would turn to crime. The correlation between crime and education is real, but the assumed causal relationship is backwards: lack of education doesn’t make criminals, rather most of those with criminal proclivities are afflicted with a pre-existing condition: contempt for education (by either themselves, their families or culturally). Every criminal in our jails went through our public school system. Clearly a lack of educational opportunity played no roll in their current status.

If we had a non-monopolized private system of K-12 education then education would be one of those “luxuries” that all could enjoy, just as things that were once considered luxuries only for the wealthy are now commonplace (e.g. cars, cell-phones, ball point pens, air travel, air conditioning, etc). That’s what a free market does over time, it becomes more efficient at producing those goods and services in high demand until they become affordable for all. Affordability eliminates subsidization.

Better regulation through competition

Monopolies are bad. The supposed truth of that axiom is nearly universally accepted. Government demonstrates its adherence to this precept through such devices as anti-trust legislation. Curiously though, government itself is the biggest monopolist like entity. I say “monopolist like” because even the so-called monopolies of Standard Oil or AT&T could not force people to purchase their goods via legally imposed violent coercion. Government is monopoly at the barrel of a gun. So, if the truism that monopolies are bad is generally accepted, why is the public so willing to blithely accept the monopolist enterprises the government imposes on us? For some reason the public holds those in government to be members of a class of altruistic super humans that think only upon the betterment of society and never upon themselves, that they are selfless servants of their fellow man (angels?). To quote John Stossel, “Give me a break!” Those in government are humans, just like us, with the same weaknesses, foibles and strengths (witness the recent GSA convention debacle). They are not magically transformed upon taking an oath of office or employment within the government. To persist in such a belief is as delusional as believing in the Tooth Fairy or Santa Claus.

the public holds those in government to be members of a class of altruistic super humans that think only upon the betterment of society and never upon themselves

If all humans are the same, whether they are employed in “public” monopolies or private firms why do private firms consistently deliver better, more effective, more efficient and less expensive results? Competition. When private firms compete the ones that deliver what the customer wants survive, and the ones that can’t deliver do not. So when there are calls for less regulation or elimination of the FDA or EPA do not confuse that with a desire for actually no checks on safety and efficacy. Rather it is a call for a free and open market based regulation. In order to have such a free regulatory system, entities like the FDA and EPA must be stripped of their legal government backed authority so that all may engage in fair competition. The reason there are currently no other “FDA” like entities is that there is no incentive to start such a business. Why do so if your customers must use your competition? Without legal stricture, firms addressing the role the FDA plays in the market (insurance risk mitigation) would arise (just as Underwriters Laboratory did for electronics).

For example, if a company wants to produce drugs it may do so without any insurance or oversight. Those drugs would be quite inexpensive. Purchasers of those drugs would be trading an increased risk of deleterious effects for a lower price. The company is trading its competitive advantage of low price for the increased risk that it will be put out of business by the first lawsuit from an injured customer. So virtually all such firms would purchase insurance. Insurance companies, thus having an incentive to not pay out claims, would require their insured to be inspected (regulated) by any of a number of private drug regulators. Those drug regulators would likewise be legally liable, so they too (unlike the current FDA which has no accountability) would be highly motivated to do a good job. Those private regulators that are effective would grow due to their good reputation; those that do a poor job would disappear due to their poor reputation (and lawsuits). The FDA does a poor job but there is no mechanism to drive it out of business… they get more money when they do a bad job. Drug makers and insurers would preferentially use the regulators that approve and examine drugs quickly and effectively. So rather than waiting 10 years for a lifesaving drug we might only need to wait 1-2 years. Not only does this save lives but it dramatically lowers cost. The FDA is likely responsible for more deaths by the drugs it has kept off the market for too long then the bad drugs it let slip through. That is the unseen harm of government mandated legalized monopolies.

The market will never be perfect because it is composed of imperfect humans, but competition allows society to shed those imperfections, not some utopian concept of the selfless government servant who can do no wrong.

Education is your responsibility, not society’s

On the front page of the April 19, 2012 issue of the Morgan County Citizen there were two(1,2) apparently unrelated articles juxtaposed. They actually were as deeply related to each other as the eternal ying and yang of taxing and spending. The first pertained to a $4.8 million projected shortfall in the FY2012 budget for the Morgan County School System (MCSS). The second concerned a proposal to exempt seniors from paying ad valorem property taxes that fund the school system. The rationale for the exemption is that seniors have no children in the school system so why should they bear that cost burden. Why indeed? According to Madison city councilman Michael Naples, “the education of the local youth was the community’s responsibility” and that such support “has been a long standing practice in this country.” Hmmm… perhaps this “community responsibility” is part of this so-called “social contract” I keep hearing about but have yet to actually see anywhere?

Perhaps this “community responsibility” is part of this so-called “social contract” I keep hearing about but have yet to actually see anywhere?

“Community responsibility” is an oxymoronic notion predicated on the notion that we are born into this world burdened by an obligation to support our fellow man under threat of violence and/or loss of liberty to ourselves if we refuse that obligation. Communities or groups do not have rights or responsibilities; only individuals do. Furthermore, to justify this practice based on the longevity of its existence is tautological! That’s the same argument that was used to justify maintaining slavery: “well, we can’t do away with slavery sir, it’s a long standing tradition in these parts!”

Seniors should be exempted from paying for the education of the youth. As should businesses. As should the childless. Other people’s children are not my responsibility. My children are my responsibility. But, this begs the question. What of those that can’t afford to educate their children? Cost would not be an issue were schools not run as government mandated monopolies. Like healthcare, which has also been subsidized and manipulated by government mandates, the reasons for increased education costs are too numerous to delve into here, however one of the principle reasons is the notion that a smaller student:teacher ratio is the solution to the declining educational standing of the US. When I was in the public school system in the 70’s and 80s class sizes were always right at 30 students to 1 teacher… and yet somehow I and the rest of my generation all managed to somehow get an education and become productive citizens. Using the MCSS as an example (see this document and MCMS website), I determined the approximate student:teacher ratio is anywhere from 18:1 to 10:1 (depending on whether or not you count educational support staff). If the county were to simply move that ratio back to 30:1 (i.e. terminate 2/3 of the teaching staff), the county would save approximately $14 million/year. Since 1970 we have more than tripled (see this link and this link ) the cost of education per student in this country with absolutely no change in test results, so clearly the 10:1 ratio is not paying off.

Education does not need to be subsidized by the state any more than day care does. Using simple calculations based on raw labor value inputs, I compute that monthly education costs per student (including administrative support and capital costs) should be around $200/month (using an annual teacher salary of $67k/year and 30 students per teacher + overhead). If you subtract what most are already paying in property taxes and state income taxes this would basically be a wash or net gain for most. Absent property and income taxes imposed on businesses the “poor” could demand higher wages and lower rents. One of the primary reasons private schools currently cater to the wealthy is that only they can afford to subsidize the education of multiple other children AND their own. If all were released from this subsidization requirement you would see a range of new private schools at different price points (just as we see a range of car options from Kia to BMW).  Doing the same thing over and over and expecting a different result is the definition of insanity. Let’s try something else, because clearly the last 40 years of government monopolized school systems have yielded no improvements.

What does that “L” stand for again?

On July 31, 2012 there will be a statewide vote on whether to adopt yet another 1¢ sales tax (bringing us to 8%! ) This new tax is known as the “TSPLOST” (Transportation Special Purpose Local Option Sales Tax – authorized by the 2010 “Transportation Investment Act”). This SPLOST tax is unique from all prior SPLOST initiatives in that it represents the first step toward loss of local sovereignty. The TSPLOST breaks Georgia up into 12 “economic development” regions. It is the aggregate vote within each region that determines whether the tax is implemented. This multi-county vote aggregation is unique in the history of Georgia as it violates the central tenant of “home rule” written into the Georgia constitution. This means simply that even if one county is 100% opposed, if all the other counties in a region (see map of region here) are for it, then the tax will be imposed in all counties for the next 10 years (even in the ones that did not approve it). This is a disturbing precedent toward slowly shifting political power away from the local level and towards a more centralized authority. We see the same trend today with the states versus the central authority of the federal government. The parallels are uncanny. Just as the states send money for education or highways to the federal government only to have it redistributed back to the states in a non-proportionate manner we will see counties sending TSPLOT money to the state only to have the state send back less to some counties and more to others (see this file for details). Now some might argue that unequal distribution of tax receipts is endemic to any taxing scheme in a region, whether it be city, county, or state. That is quite true. However using the fact that our current tax system is unfair is a poor justification to continue using that same system at a new level.

Those in favor of this new tax rely on the same old hackneyed Keynesian fallacy that somehow public works projects magically pump up an economy… by forcing the taxpayer to spend money on roads and bridges and bike paths (dubiously justified) when they would have otherwise spent it on other goods or services. Road construction companies will be doing quite well (an additional $19 billion over the next 10 years) to the detriment of all other businesses that will see a decline in sales of $19 billion. At best it is a zero sum game, the only difference being that with the tax we are saying we think the government is more properly suited to know how to spend our money and without the tax we are saying we should decide how to spend our money.

Ok, so by now you’re asking, “Ok, Mr. Smarty pants, how should we fund transportation infrastructure?” – Well, I’m glad you asked! Transportation more than any other government monopolized “service” is a user based service for which assessing a service use fee is easily implemented and justifiable (if you use it, then pay for it). There are a number of ways to do this and I’ll list them in increasing order of their effectiveness in terms of fairly assigning cost to usage: gasoline tax, annual odometer tax, general highway tolls, “tiered” highway tolls (i.e. pay more to drive in less congested lanes), fully private roads (where the desire for profit drives new PRIVATELY FINANCED road construction). Any of these options would be better than a general sales tax because those who are on limited or fixed incomes and who do not drive much are being forced to subsidize large businesses and freight carriers who disproportionately utilize the “public” roadways. Taxing activity directly related to road usage at least makes an attempt to fairly assign cost to those that are using them. It is a step in the right direction and it is the step we must take lest we continue sliding down the slippery slope of nebulous centralized taxation for anything that seems like it might be “good.” Vote for local control and fiscal responsibility and vote NO on TSPLOST.

Rage against the machine

Imagine that you are a pioneer of the old west. Over many years you have worked hard to establish a home and a farm. Now imagine that a marauding gang of thieves has begun to harass you. They destroy your crops. They threaten your safety in order to extort money from you. When you are away they vandalize your home and poison your livestock. Year after year it continues. You are peaceful and do not resort to violence. You follow all legal remedies attempting to end the persecution, but it is all for nothing. Judgments in you favor are simply ignored. You soon learn the marauders in fact want what you have created; they want your land for their own use. You offer to sell it to them if only to end the nightmare. They refuse. They would rather scare you off so they can simply take what is yours.

Sounds pretty terrible? Surely this is a scenario for which we need government? Sadly, it is government itself that is the villain in this story. This story is true. It took place in our own backyard in Roswell, Georgia. The gang of marauders is none other than the local code enforcement office and police department of the city of Roswell. This is the story of Andrew Wordes (aka “the chicken man”) and his fight against an intransigent bureaucracy. When you battle an implacable foe something must eventually give.

The details of this story are sufficient fodder for a feature length film. To read a more detailed account please see this report or to hear the story in Mr.Wordes own words please listen to this. In synopsis: In December 2008 Andrew Wordes was cited by the Roswell zoning department for having chickens on his property (even though the ordinance specifically permitted such chicken husbandry). The mayor of Roswell actually stepped in to help but the city bureaucratic “machine” ignored all attempts at reason. Even former Governor Roy Barnes represented Mr. Wordes in his suit against the city (being a chicken farmer Mr. Barnes was partial to his plight). They won the suit against the city. In response the city rewrote the law so that he could only keep chickens if the city fixed a drainage problem that the city itself was responsible for: they refused to fix the problem. Then the harassment really began. He was constantly in court due to numerous petty citations (e.g. improperly stacked firewood). The city’s police department routinely waited outside his house in order to follow him and issue citations for minor infraction. The city (illegally) pressured his mortgage holder to foreclose on the mortgage. Someone poisoned all his chickens when he was away one weekend. He was jailed for 3 months for minor zoning violations (grading himself to try to fix the problem the city refused to fix) and while in jail had to file bankruptcy. While jailed his home was burglarized. He spent his life savings legally fighting every instance of this unwarranted harassment. On March 26, 2012 he was to be finally evicted. The police showed up and after multi-hour standoff he instructed them all to move back. Seconds later he lit the match that ended his life and engulfed his home in a fireball.

They pushed him to the edge. And for what? Turns out that the “Roswell 2030 Plan” includes a parks area that just so happens to be centered on his property. Imagine that. Perhaps the scariest part of this story is that even with the political clout of the mayor and a former governor on his side he remained helpless against the onslaught of harassment from those truly in power: the faceless machinery of the “state”. When even elected officials cannot help the average citizen in their fight against unelected bureaucrats we are well on our way on the road to serfdom.