Category Archives: Internventionism-economic

Plugging the tailpipe

Newton’s third law of physics posits that every action has an equal and opposite reaction. From the kickback on a firearm to the lift provided by chemical propellants in a rocket, nothing in this universe acts in perfect isolation. This dictum applies equally to everything in the universe; from muon to man. Human action will also induce a feedback-based response; love begets love and violence begets violence. When the actions are voluntary and un-coerced we tend to see predictable outcomes (if I am kind, you are quite likely to be kind in return, but, if I hit you, you are most likely going to hit me back). When the actions are involuntary or otherwise unduly influenced then the results become unpredictable. Economic interventionism is like plugging a car’s tailpipe to silence it; it may bring temporary silence, but the building pressure will soon be relieved. The only question is when and where.

So just as plugging a tail pipe to silence a car is a fool’s endeavor, so too are forced attempts to mold society and the economy to suit the ideological leanings of those in power. Such attempts at societal meddling always end badly, typically in the form of increasing that bad thing one was trying to eliminate. The interventionist approach has all the logical soundness of hitting people in order to reduce violence in the world, yet the politicians continue to do such things everyday. For example, paying people to be unemployed augments, rather than diminishes, the number of unemployed. Likewise, subsidies for certain industries results in a whole array of undesirable side effects. Subsidization of corn production in combination with tariff-based protection of the domestic sugar market has distorted the economy and our health. Tariff-fueled high domestic sugar prices creates an incentive for sugar users to seek a lower cost alternative, which just so happens to be state subsidized HFCS (high fructose corn syrup). The state is simultaneously constraining supply of one product and expanding supply of another to make up for the ongoing constraint. This distortion alters the market in ways that would not exist absent this intervention. It has caused HFCS to become the dominant material used in domestic food production – pushing the somewhat healthier straight sugar out the door. That the overwhelming prevalence of HCFS has recently been implicated in the obesity epidemic (and all the costs associated with obesity related health ailments) should give anyone pause the next time a politician tells you they have the perfect solution to a problem.

Another side effect of agricultural interventionism is in of all places immigration. When the government guarantees a price floor for certain agricultural goods it creates a natural incentive to over produce those goods. The excess is then dumped at low subsidized prices into other countries (such as Mexico). Farmers there can’t compete with the low prices and soon go out of business. Those farmers are now desperate for work. So they come to the US. And then people wonder why so many “illegal” immigrants are pouring into the country. Time again for the government to fix the problem they created. You’ll never go out of the tire business if you keep dumping nails in the road.

The height of absurdity though is that when those in power are faced with the reality of the damage caused by subsidies they find it easier to expand those subsidies rather than to contract them. The most inane example of this is the fact that the US government pays Brazilian cotton farmers the same subsidies it pays US cotton farmers so that they can better compete with cheap US imports.

The moral of the story here is that economic interventionism (supported by the implied violent power of the state) will cause parties to behave differently than they otherwise would absent such threats. These differences lead others into altering their behavior so as to neutralize the effects of the initial intervention in a predictable sort of feedback loop. Plugging the tailpipe merely reroutes the exhaust. Equal and opposite reactions are on net a null.

Shortages the Spawn of Short-Circuited Prices

Although the recent drought experienced by much of northern Georgia a few a years ago pales in comparison to the ongoing drought in California, the response by each region’s government is equally misguided. The shortsightedness of the standard “solution” to a drought tends to scale with its severity. While we only suffered through time restrictions on outdoor watering, California has upped the ante to rather invasive levels in their pursuit of the “common good.” They are now all too happy to step into dear citizen’s shower and issue fines for lingering too long.

Droughts are a product of nature. Water shortages are a product of man; or, more precisely, a product of government. If a shortage is occurring in any market, it is guaranteed some form of price control (private or public) is in play. It is one simple lesson from Economics 101 that so many consistently fail to grasp: demand curves slope downward. Stated differently, prices (naturally) go up as supply decreases (all other things equal). But when part of that equation is artificially constrained (prices) the effects of the decreased supply are magnified, not ameliorated. When prices rise there is a two-fold socially beneficial effect: it (a) provides a rationing/conservation incentive (people only purchase that which they absolutely need) and (b) it sends a signal to everyone that a tidy profit can be had by supplying the market with that good. High prices are the market’s method of eliciting an economic immune response. As swarms of people respond to the wailing klaxons of above average profit, supply swells until prices begin to fall. It is this natural up/down demand/supply equilibrium that lets a market know where to devote more or fewer resources.

High prices are the market’s method of eliciting an economic immune response. As swarms of people respond to the wailing klaxons of above average profit, supply swells until prices begin to fall. It is this natural up/down demand/supply equilibrium that lets a market know where to devote more or fewer resources.

But governments don’t like the price system. It is they, not the market, who should be in control. Of course they have their image to protect and the last thing they want is to be accused of being an evil “price gouger.” So instead of allowing the price system to modulate usage, they instead impose egalitarian restrictions so that all may suffer “equally” the effects of their economic ignorance. In other words, they choose the hard way rather than the easy. They deploy sticks (restrictions, fines, penalties) that require resources to enforce compliance, rather than employing carrots (demand based pricing), that require zero resources to ensure compliance.

If prices are allowed to rise, then people will switch from being wasteful to having an incentive to use as little as possible and to seek out new water savings and new efficiencies, to boldly use less than any man before. For those concerned about how the poor would fare under rising water prices, it is entirely reasonable to expect that a base tier of minimum human requirement could exist alongside progressively rising prices for greater usage. There is little daylight between this and the progressive income tax system where the poor pay virtually nothing and the wealthy pay the most. Except with this system one’s “tax” (water bill) would be within their control. If one voluntarily uses less, they will pay less. The outcome of raising prices will be either (a) similar usage with a windfall income or (b) much reduced usage with similar income. If the former is the result, then one can continue to raise prices until (b) is achieved if that is the goal, or one can use the extra income to invest in systems that will increase the supply.

At least in California one of the reasons they are hesitant to raise prices is the crony-capitalist nature commonly found among governments. The largest user of water in the state is agricultural (83%) . The powers that be are afraid that higher water prices could disrupt the state’s economy by pricing California agricultural products out of the market. So once again the marriage between big government and big business ensures private profits at public expense (restrictions and fines). Wait, I thought government was supposed to protect the little guy? Well, while you ponder that little fantasy I’ll leave you with an apropos Milton Friedman quote – “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.”

The Unseen (Septic)

What does a septic tank have to teach us about economics? This rather mundane bit of technology is at the center of depressingly familiar story figuratively brewing in my backyard. It’s not my septic tank that is the issue, but rather one literally just down the street from me in the small town of Bishop, GA. Bishop residents Blyth and Diana Biggs purchased the “Fambrough House” on the main thoroughfare (Hwy 441) with the intention of residing there and turning it into the first ever restaurant in Bishop. They were on target to open in August 2014 when they hit a snag, well, more of a massive pothole, on the road of entrepreneurship. It seems the Oconee County Health Department is going to require them to rip out their current septic system and install a commercial grade unit to the tune of a mere $75,000. Why? Well, ‘cause regulations say so. And we all know that regulations are infallible because the mantra “one size fits all” has never ever resulted in unintended consequences. Suffice it to say, when I saw their post about this last year on Facebook, all I had to read was “We’ve run into a bit of a problem…” and I instantly knew what the source of their problem was – the state. Nothing will throw cold water faster on the dreams of an entrepreneur than a byzantine labyrinth of irrational regulations.

So, to return to the original question, what does a septic tank teach us about economics? In this case it reminds us of the central lesson of Frédéric Bastiat’s Broken Window Fallacy – unseen effects must also be brought to account when analyzing economic outcomes. In this case, a restaurant that never opens would be an “unseen” effect of a gross misapplication of this particular regulation.

Regulations are an economic good. They provide a benefit, but like all economic goods they have a cost. However, when economic goods are forcibly imposed their cost no longer bears any relationship to the true demand (and hence price) for them. For example, some people like aquariums, but not everyone does. If the government made a law that required all households to have an aquarium, this would naturally shift the demand pattern from partial to universal. From this universal demand we would then witness an elevated price (Econ 101: as demand increases so does price). In the same way an artificially increased demand for regulation drives up the costs for those regulations. The price of these imposed regulations operates in a vacuum, uninfluenced by any other considerations that might compel one to balance their costs with other equally important considerations. For example, if the owners were not compelled by the threat of violence to keep their doors shut they would then be able to freely weigh the costs of opening with a potentially undersized septic vs. the costs of a delayed opening. All things being equal, absent state imposition of these regulations, we would find that demand, and hence price, for septic installation would be lower. This leads to the rather ironic outcome that in the absence of state mandated regulations many places like the Bishop House would actually be more likely to make these such changes owing to their lower costs).

But, if the Bishop House is unable to open due to this artificially imposed barrier, then we will all be the poorer for it, for what is wealth if not the betterment of our lives by the voluntary actions of fellow human beings? Every person barred from adding his own unique contribution to society by artificial barriers (the economic interventionism of regulations, licensing and employment law) erected by the state makes all of society that much poorer.

P.S. If you would like to learn more about The Bishop House or help them please see

Substitute Band Leader

President Obama unwittingly invoked dramatic irony during his recent state of the union address. For those unfamiliar with this less common definition of irony I provide herewith a definition: “dramatic irony: a literary technique by which the full significance of a character’s words or actions are clear to the audience or reader although unknown to the character.”

He opens his speech with, “Tonight, after a breakthrough year for America, our economy is growing and creating jobs at the fastest pace since 1999.” For now we’ll ignore the dissembling in that remark (faster growth has actually occurred 4 times since 1999 – in 2010, 2006, 2004 and 2000). Later in the speech he then remarks that, “we’re the only advanced country on Earth that doesn’t guarantee paid sick leave or paid maternity leave to our workers.” Again, not entirely accurate – Canada and Japan also do not.

However, the point of irony here is that while he praises the capacity for the American economy to foster vigorous job growth he is entirely oblivious to the fact that the rate of productive job creation (that is, not busy-work jobs) scales with the level of freedom of the individual to pursue their own ends, unmolested by meddling third parties. And being so oblivious he then calls for yet another layer of regulation that is guaranteed to retard the very job growth he praises.

More individual freedom translates into more opportunity, but less freedom, by way of a mountain of inscrutable regulations, increases the net cost of hiring. Given a fixed source of funds, one has no choice but to buy less of something if its cost goes up. The President seems to be under the impression that wages are derived from a bottomless pot of money kept at company headquarters, the disbursement from which is artificially limited by Monty Burns-style corporate bosses. Companies, unlike the government, can’t steal or print their money; they have to actually earn it by giving the consumer something they want.

Just as with his perplexing proposal to zero out the tuition of community colleges he is once again answering a question no one is asking. He claims 43 million workers have no access to sick leave. Since he doesn’t cite his source it’s unclear if that number would be reduced if we included workers that are permitted to substitute vacation time when sick. Nevertheless, this certainly sounds like a lot of people. Let’s parse it out. Using data drawn from the government’s own Bureau of Labor Statistics ( we find total employment for 2013 averaged around 143 million. We also find that 75% of full-time workers and 23% of part time workers had access to paid sick leave. That’s about 93 million with such access. If we are to be impressed with the President’s figures, we should be doubly so impressed with this one. However the weedy details are not nearly as interesting as the game he is playing. He is imitating quite well his political predecessors who also sought to take credit for something the market had already brought about. He would like nothing more than to step in front of the ongoing parade and pretend it was following him all along.

Market forces have independently, and in the absence of government coercion, expanded access to an economic good that employees demanded: paid sick leave. In 1950, 46% of full-time workers had access to paid sick leave. In 1970, 51% did. By 1992 that number had risen to 58% and then by 2012 to 75%. A similar narrative can be found for other “we only have this because of government” myths, such as the 5 day, 40 hour work week, ending of child labor, or worker safety.  All improved over many decades long before politicians got involved and passed “laws” that simply memorialized what was already common practice.

The growth of such benefits is akin to the steady growth of stock dividends. Both increase at a steady pace because the growth in human ingenuity (leading to greater productivity) is an incremental process. We didn’t go from the steam engine to the integrated circuit overnight. Productivity enhancements accruing from incremental improvements in mechanical capital take time. As a society and an economy becomes more productive it becomes more able to afford things it could not afford in the past, like paid sick leave, paid vacations, or paid maternity leave. In 100 years our economy may be so productive it is literally only necessary to work 1 day a week. So if government is the true source of all that is good and fair in the world, why don’t they pass a law now capping work to 1 day a week? Because even they know that will fail. It is much more expedient to find something the market has already nearly achieved and swoop in at the last minute in order to take full credit. Perhaps their next act will be to pass a law mandating the sun rise each day. Isn’t law just grand?

Dumbed down

The President recently announced his plan to destroy the community college system. It is really a clever plan. In Trojan horse-esque fashion it cloaks the seeds of destruction in an appealing wrapper. Step 1: identify a non-frivolous economic good and declare it to be “free” for all. Step 2: step back and watch prices soar while quality plummets in a vain effort to keep up with exploding demand. Sound familiar? Healthcare. 4-year College education. The President is clearly an environmentalist; how else to explain his effort to recycle this garbage.

By guaranteeing full payment of tuition only for students maintaining at least a 2.5 GPA, this scheme will not incentivize students to work harder, but rather for teachers to inflate grades. Or rather, students may believe they will have to work harder, but it is far easier to inflate a grade than to study, thus grades will quickly reach that floor long before the efforts of increased studying are needed. Once that happens the value of a 2-year degree will be depreciated. There is no way for a prospective employer to distinguish between a graduate that really did learn the material vs. one who is the product of either inflated grades or a “dumbing down” of the curricula.

Once the administrators realize they can raise tuition each year at a rate vastly exceeding the rate of inflation (because the normal feedback of the customer opting to not purchase a too expensive good vanishes), those administrators in turn will make sure the professors understand their salaries depend on maintaining a certain enrolled student count. Of course the blame for skyrocketing tuition will be that the increased student load requires expansion of services (politely ignoring the economic axiom that individual prices tend to fall as volume goes up, not the other way around). That this will happen is not mere opinion or conjecture, but history: 4-year college tuition has risen at over 3x the rate of inflation since 1978.

The odd thing about this proposal is that community college tuition is already very inexpensive. Typically government only wants to make things “free” after they have meddled in the market long enough to drive prices upward. But the states and local communities already subsidize community colleges in order to keep prices low. The fact that tuition is charged at all is a function of the inability of local government to run their own printing press as well as more direct voter feedback on taxes.

It seems like the President is answering a question no one was asking. How much of a barrier can tuition be – there are already millions paying for it now. And even though the barrier is low, it is important to have some sort of barrier, if only to separate the serious from the unserious student. The President’s proposal mistakes a speed bump for a retaining wall and seeks to eliminate even that minimal level of self-selection. The people already attending have proven that they contain the seeds of success. They made the hard choices and saved their money in order to achieve a better life for themselves.

A secondary, and more sinister, effect of removing that self-selection barrier is it will transform the serious student into a less serious one. No longer is their money on the line, no longer is there pressure to perform lest they waste their hard-saved cash. Humans perform best under pressure, and if you remove that pressure you remove the motivation to perform at one’s peak. So, by removing the pressure of being out of pocket for the tuition, this policy will foster the learning style of the perpetual procrastinator. “So what if I do poorly, I can try again and again, and again” (at least until that GPA dips to a 2.5, that is, a practically failing D-).

I’m not suggesting this drop off in motivation will happen to everyone attending community college. What I am saying is that in aggregate this will be the outcome more often than not. There is a reason there are no private charities that indiscriminately fund adult tuition – it’s a bad idea from a utilitarian standpoint – it harms the individual receiving it and by extension the society in which that individual lives