Off budget

This is rather scary. Using figures directly from the IRS we see than in 2008 (the latest year for which there are figures and which represents most accurately pre-recession income since the recession did not start until the very end of the year) the total personal income was $8.3 trillion. Further we see that the income for all corporations in 2008 was $0.9 trillion for a total of $9.2 trillion. Due to the down economy it would not be expected to be significantly greater than that value by 2013. Obama’s proposed 2013 budget is $3.8 trillion.

In other words the President believes it is entirely justified that the federal government alone consume $41 out of every $100 earned.

In other words the President believes it is entirely justified that the federal government alone consume $41 out of every $100 earned. When you add in state and local taxes then all government spending consumes at least half of all income from the entire economy. Half. And we aren’t even paying for all of it right now. The 2013 budget has a deficit equal to 100% of all corporate income ($0.9 trillion). Obviously corporations can’t be taxed at 100% so clearly the bulk of the eventual tax increases will be from the $8.3 trillion in personal income rather than from a paltry $0.9 trillion in corporate income. Since we can assume that Obama will continue the current tax policy whereby 50% of all Americans pay no income tax that means the income taxes on everyone else (people and corporations alike) would necessarily have to double to close the gap. Double. Have any other expenses in your life doubled in the last year? Didn’t think so. And for those that believe everything government does is so essential we (or rather “they”) must simply be willing to fork over one out of every two dollars that we earn then consider this: From the founding of this country until the passage of the 16th Amendment in 1913 the government got by just fine with no income tax and consuming only 3% of GDP  as tax revenue from other sources. For 125 years somehow this country did not succumb to anarchy, chaos or mass starvation while operating on a mere 3% of GDP. Today 3% of GDP would be a budget of only $0.4 trillion (1/10th the current budget). That budget is entirely “doable” today if government was only concerned with its core focus of defense and judiciary. If 90% of that $0.4 trillion were devoted to national defense it would equal the defense budget we had in 2000. I don’t recall any outcries of America being woefully militarily vulnerable in 2000.

In closing I’d like to share a simple yet hard hitting illustration of this countries’ current budget problems. This has been going around the Internet recently and is really an excellent way to relate to the enormous sums of money discussed (numbers modified to reflect 2012 values).

US Budget 2012 (http://goo.gl/Ad9CD)

• United States Tax Revenue:              $2,468,599,000,000

• Federal Budget:                                $3,795,547,000,000

• New Debt:                                        $1,326,948,000,000

• National Debt:                                $15,400,000,000,000

• Recent budget cut:                               $38,500,000,000

Remove 8 zeros and pretend it’s a household budget.

• Annual family income:                                         $24,686

• Money the family spent:                                      $37,955

• New debt on credit card:                                      $13,269

• Outstanding debt on credit card:                         $154,000

• Total budget cuts:                                                   $385

There are only two candidates proposing any kind of serious budget cuts to solve this nightmare. Ron Paul, Republican and Gary Johnson, Libertarian ($1 trillion and $1.3 trillion respectively in 1 year, not 10 years). We finally have a real opportunity to fix this. Let’s not blow it.

Playing the odds…

Is insurance gambling? It feels like we have “won” if we suffer a loss and it is covered. In point of fact, insurance is not gambling. In gambling you start in a position of low probability of a loss (money safe and secure in your wallet) but move to a high probability of loss (once you lay your money down the odds are very good you will lose it). You move from a “more-sure” to a “less-sure” state. With insurance, however, you move from a “less-sure” to a “more-sure” state. Without insurance you have a non-zero chance of a bad event occurring (less-sure state) that will result in a loss, but with insurance you have reduced that non-zero chance of a loss to zero – so you have moved from a less-sure position to a more-sure position.

Health insurance in its current form (laden down by numerous government mandates) is not insurance anymore but rather is simply prepaid consumption.

Likewise the insurance carrier is not gambling because they actuarially know for a given number of insured that they will experience losses of $x/year, so they simply set rates high enough to ensure all claims can be paid and they can still make money and thus build up a reserve for those years where the predictions are off. Insurance costs scale directly with the likelihood and magnitude of a covered loss. That’s why a several million dollar liability policy can be had for only a few hundred dollars per year but a health insurance policy costs several hundred dollars per month and pays only a fraction of what the liability policy would pay. Health insurance in its current form (laden down by numerous government mandates) is not insurance anymore but rather is simply prepaid consumption.

For an event to be insurable it must be statistically unlikely (e.g. theft, fire, being sued, etc). Health insurance covers events that are statistically guaranteed (routine exams, drugs, contraception, pregnancy, etc). Why are routine events 100% covered? Government mandates. For example, as we have all learned recently, Obamacare requires 100% contraception coverage. <sarcasm> Apparently women who desire contraception are unreasonably barred from obtaining this essential human right due to a burdensome $30/month cost barrier </sarcasm> and so it is mandated that all of society must subsidize this cost. This and many other mandates drive up cost. A catastrophic health policy would be relatively inexpensive. For example last year I investigated the cost of a non-group health plan for my family and discovered that simply removing pregnancy coverage cut the cost of the policy in half! But a group plan cannot remove this coverage and thus most pay for a coverage they can never use. As an employer I’m not even allowed to offer more than three health plans. Why? Government mandates.

Individualized prepaid consumption (saving) is an effective method to address intermittent but regular events. However aggregated and shared prepaid consumption is a terrible method. It has the effect of actually raising costs. In order to understand this, just imagine that we had “food insurance”. The premium would be equal to the total of all money spent on food in a given time frame divided by the population. For some the premium would be more than they would have spent on their own. In those cases there would be an increase in consumption (so as not to get short changed). That increase in consumption increases demand, and hence prices. Additionally, the “food insured” won’t be directly paying for any of their food thus they’ll have no inclination to restrict their intake (why buy ground beef when you can get grade A sirloin). This overall increase in demand will drive up prices. Insurable events can’t be “over consumed” because they rarely occur. Prepaid events can be over consumed because they occur regularly and thus there is ample opportunity. Just imagine what would happen to auto insurance costs if the government mandated that it had to cover the cost of oil changes, brake pads, and other routine maintenance.

Who will speak for me?

All too often violations of liberty by our government upon its citizens occur silently, sheltered from the bright lights of the Fourth Estate as it were, because the victims are singular. Abner Schoenwetter was sentenced to 8 years in federal prison for violation of the Lacey Act because he imported seafood from Honduras in plastic bags rather than cardboard boxes. Civil asset forfeiture incidences are on the rise, such as the case of the Motel Caswell in Massachusetts wherein the local police are attempting to seize an entire hotel from its owner under federal law (the police get to keep 80% of the value of seized property under federal law but only 50% under state law) because over the last 20 years 0.05% of guests had been arrested for drug offenses. These repugnant violations of civil rights occur every day as a consequence of the over bearing government that now exists in this country. The president can laugh all he wants about “spilt milk” but these are real people with real lives that are destroyed due to the passage of thoughtless laws whose “unintended” consequences could have clearly been seen by Ray Charles.

If you’re going to point a gun at someone you can’t cry foul when they grab that gun and point it back at you.

Oh, but I must chuckle when I hear the howls and screams from the large indignant organizations who have recently become ensnared in the briar patch that is our Federal government. Oh, the humanity! We cannot permit such violations of our basic freedoms (because now those violations affect us!) A few weeks ago it was the SOPA flap. Nearly the whole country stood arm in arm with the big Internet companies (Google, Wikipedia, etc.) to fight back against government intrusion. Why? Because it affected them. When government violates other people’s rights nobody cares, but when it affects us, well that we cannot stand for! Likewise the Catholic Church was rather upset that Obamacare will force them to provide health insurance that covers contraception. This requirement would force the church to violate one of its core beliefs. I would argue it is not so much a 1st Amendment issue as it is rather an issue of “the government has no right to tell anyone how to spend (or not spend) their money.” The Church is right in their opposition. But what is humorous is that the church in the US was a proponent (3/23/10) of Obamacare  (except as it related to coverage for abortion). What’s the saying…“If you dance with the devil, you will get burnt.”

Although both groups are absolutely correct in their stance in proclaiming that the government is violating their rights, they are both somewhat hypocritical (and please don’t accuse me of Catholic bashing, I’m Catholic, all right). The internet companies are all too happy to push for “net neutrality” regulations that employ government force to compel others to behave the way they want, yet they don’t like it when such force is turned on them. Likewise the Catholic Church is equally happy to endorse laws that restrict civil unions or outlaw state recognition of homogender marriage, yet they don’t appreciate that same force being turned on them by people who find their stance on contraception as archaic. If you’re going to point a gun at someone you can’t cry foul when they grab that gun and point it back at you.

When violations of liberty are perpetrated we must all stand together at all times, not just when it affects us. The lessons of political apathy were summed up well in the words of Martin Niemöller (a German pastor who initially supported Hitler but then opposed him and was jailed for that opposition) – “First they came for the communists, and I didn’t speak out because I wasn’t a communist. Then they came for the trade unionists, and I didn’t speak out because I wasn’t a trade unionist. Then they came for the Jews, and I didn’t speak out because I wasn’t a Jew. Then they came for me and there was no one left to speak out for me.”

 

Bubbles…

The higher education bubble will soon burst. Like the popped housing bubble, higher education prices are being distorted by massive government subsidization. Subsidization causes prices to increase at a rate dramatically above what they would have otherwise increased absent subsidization. It is true that bubbles can occur “naturally”, but these are called “crazes” or “manias.” The most well known example is the “Tulip mania” in Holland in 1636-37. It is the first recorded example of a speculative bubble, but it lasted only 6 months. These “natural” bubbles are limited in scope and size by the limited savings of those involved. Government bubbles are different. The earliest government influenced bubbles were the bank “panics” of the 19th century. They were the result of legalized embezzlement otherwise known as fractional reserve lending (it was thought that a Central Bank (The Fed) would solve these panics but it only made them worse (e.g. the Great Depression and every recession since then)). Government bubbles grow quicker and longer than natural bubbles. Government bubbles can grow over decades because they have no built in monetary constraints. Governments are free to tax, borrow and print as much money as they desire.

Government has no feedback mechanism to limit the bubble because they “have no skin in the game”, that is, it’s not their money.

To understand why prices go up in a government induced bubble we must first understand how normal economic transactions occur. Actor 1 (Buyer) wishes to obtain a good or service from Actor 2 (Seller). What Seller can charge is constrained by the willingness of Buyer to pay (max price). Likewise, how much Buyer can purchase is constrained by the willingness of Seller to sell (min price). A pricing equilibrium is maintained through the efforts of both parties to maximize their self-interest. However, when government gets involved (Actor 3) they insert themselves in the middle of the transaction. Actor 3 now pays Seller for what Buyer wants (typically by stealing from Actor 4). The shackles of price restraint are severed and thus Seller is free to perpetually escalate pricing because (a) Buyer doesn’t care about price because Buyer isn’t paying and (b) Actor 3 doesn’t care about price because it’s not their money. Likewise nothing inhibits Buyer from limiting their consumption because (a) price increases don’t affect Buyer and (b) Actor 3 doesn’t care because it’s not their money. In a free market an increased demand by Buyer upon Seller would drive prices up, however that would attract new providers who, through competition, would drive prices down. However with the presence of Actor 3 this feedback is disrupted. Increased prices do attract more providers however not for purposes of competition. They are joining everyone else at the government trough of largesse.

Government has removed the price barrier to education by providing grants and guaranteed loans. Students don’t worry about price because someone else is paying for it right now, and the schools have no constraint on limiting price increases because they know the government will subsidize whatever tuition is charged. College education costs have gone up at nearly 5 times the rate of inflation. To put that in perspective, health care costs have gone up “only” about 3 times the rate of inflation.

To underscore the point that costs are driven by government subsidization – cosmetic surgery, which is not subsidized nor paid for by insurance – has actually gone DOWN relative to inflation.

Education costs are doubling about every 10 years. In 2011-12 the average cost of tuition and fees for in state four-year college was $8,244/year. Private college tuition and fees average $28,500/year. Based on present trends I predict the education bubble will burst around 2025-2030. So clip and save this article so that you may impress your friends with your ability to predict the future… it will happen, just as the tech stock and housing bubbles burst, so too will the education and healthcare bubbles burst. Apparently the old aphorism is true, “Those that fail to learn from history are doomed to repeat it.”

Do carts push the horse?

President Obama remarked in the recent state of the union address that he is “proposing that every state require that all students stay in high school until they graduate or turn 18.” A laudable goal (for students to finish school) however the idea that this goal must be forced upon the student by the state is a symptom of how some confuse cause with effect. The effect they wish to see is a “successful” adult and they mistakenly assume that completing school causes this. Motivated individuals will complete schooling just as naturally as a fish swims in water (it is inherent to their nature). Forcing unmotivated individuals to graduate will no more make them successful than does teaching a man to swim make him a fish. Besides, what is the plan here? Jail or fine the student or parents if the kid doesn’t graduate?

Before college tuition costs had ballooned out of control it was only students that had a genuine interest in expanding their knowledge and skills that went to college. These individuals were naturally driven to be successful; going to college was simply a way station on the road to success. Those in government looked at the statistics and saw that successful people had gone to college and thus they confused correlation with causation. Government enabled more and more to attend college each year and thus the floodgates opened to not only ever increasing tuition costs but also a new generation of students where college is no longer viewed as an opportunity to grow one’s knowledge and skills but rather a rite of passage that one is obligated to endure in order to assure “success”. Those that simply endure it exit with a degree and a slightly greater perspective on western culture than your average high school graduate, but that’s about it (oh, and the morale crushing debt burden).

The ultimate goal of government subsidization of college education is nothing short of 100% college education for every citizen. But it should be obvious that were this to be achieved nothing will be gained. If everyone has a college degree then how is that supposed to lead to a high paying job? Salaries depend directly on the number of people capable of performing the desired task. That’s why janitors don’t make much money (everyone can clean) and brain surgeons make a lot. If everyone has a college degree then you’re competing with everyone… that’s a lot of people! So wages will go down for jobs that formerly required a college degree (over supply of labor). Wages will remain high for those that excelled in college (constrained supply of labor). But those were the people that used to be the only ones going to college. So nothing will change, wage disparities will remain since wages are driven by supply and demand. If you don’t believe me then just look at the unemployment levels among recent college graduates, the stories of college grads living with their parents, or college grads working at low paying jobs because they can find no other work. These are all symptoms of oversupply, in this case one that is artificially driven.

It’s not the student’s fault. They’ve been duped by promises of the moon if they can just cross the finish line. So they waste their time on useless (for real world jobs) degrees (i.e. anthropology, women’s studies, etc) that have no value to an employer. However, as with most government policies, the unintended consequences of subsidizing college education are coming home to roost. Turns out there is a large labor shortage in this country: a shortage of skilled trade labor. Because culturally and governmentally we look down on such trades there are fewer and fewer capable of performing these jobs. I suppose when a plumber makes as much as a lawyer the tide will turn naturally, but the point is this “bubble” of unemployable college grads would not exist if government had not meddled in the higher education market.


The Minimum Wage fallacy

One of the more pervasive economic myths is the need for a mandated minimum wage. This belief is the manifestation of an irrational fear. The fear is predicated on the notion that absent a minimum wage employers would pay the absolute lowest subsistence wage. For the sake of argument let us assume this is true. Were this true we would predict the following: (Given) employers strive to pay the least amount possible (Given) the minimum wage is the lowest legal wage, (Conclusion) employers would pay only minimum wage to the majority of the workforce. What do we find if we would look at actual wage data? As of 2006 a mere 2.2% of US workers actually make minimum wage. Therefore we can conclude this argument is irrational and without merit.

 

Would you buy a Kia or a BMW if the government mandated the Kia could not be sold for less than a BMW?

 

Now the argument switches from an “evil employer” focus to a “safety net” focus. The safety net argument presumes ALL workers require sufficient pay to independently support themselves. Not all workers are the same however, nor do they all have the same goals. Many workers (e.g. teenagers) are inexperienced and do not need to work for self-sufficiency. Such workers would be happy to receive a starting wage in exchange for the opportunity to gain work experience while earning some spending money. By “happy” I mean they would prefer that versus no job at all. However “no job at all” is what most of them (and other low-skill workers) encounter because the minimum wage is higher than their productive capacity. With the recent increase in the minimum wage this is exactly what we got. As of 2011 unemployment for those 16-24 was over 50%. It doesn’t make sense to pay someone $7.25/hour for $4/hour work. The net result is that the unskilled and inexperienced never get the opportunity to get their foot in the door to gain the experience they need so they can demand a higher wage. Low starting wages are a stepping-stone to higher wages. Outlawing low wages is like outlawing the 1st grade in an attempt to eliminate illiteracy among 1st graders. Kids don’t stay in the 1st grade their whole life just as the same people aren’t making low wages their whole life.

The minimum wage overprices the unskilled out of the labor market (would you buy a Kia or a BMW if the government mandated the Kia could not be sold for less than a BMW?) thus it reduces the supply of available workers which then drives up wages for the skilled laborers as they are now not having to compete with low priced labor. This is why unions are ardent proponents of the minimum wage. It is not for altruistic “help the worker” sentiments, but rather because it benefits unions by restricting the pool of cheap labor that might otherwise compete with union labor. The best example of this union-government cronyism is the Davis-Bacon Act of 1931.

Perhaps the best argument against the minimum wage though is to accept the assumption that the minimum wage is a good idea. Let us imagine we raise the minimum wage to $40/hour. Surely that would eliminate poverty once and for all! But here’s what would happen – all industries employing workers making less than $40/hour would see their employment costs skyrocket. Those industries that have elastic pricing (e.g. fuel, food, utilities) would be able to pass the higher costs on thus decreasing the gains from the increased wage. Those industries that have inelastic pricing (e.g. discretionary leisure goods) would not be able to increase prices. They would go out of business. This would create unemployment due to the destruction of entire industries.

When the minimum wage is high these problems become apparent, but these same problems nevertheless exist at smaller scales. The irony is that the minimum wage is putatively sold as helping those most in need of government assistance, the unskilled worker, when in fact it actually harms those workers by preventing them from gaining employment. But I guess that’s why they invented welfare. Better to pay someone to do nothing than work for “too little.”

Price Gouging

Economic freedom is a willing buyer purchasing from a willing seller at a mutually agreed upon price without state interference. Curtailment of this freedom occurs if one party feels the terms of the prospective sale are unsatisfactory and so utilizes coercive state force against the other party. When the seller does it we call this “minimum price fixing” (e.g. minimum wage laws, crop price controls, etc.), which makes it a CRIME to sell below a government-mandated price. Likewise a buyer desirous of similar protection will petition the government to invoke anti-gouging laws or “maximum price fixing” which makes it a CRIME to sell above a certain price.

Price gouging is nearly universally reviled. Surely this is one place where we can agree that the government needs to step in, right? Wrong. There is nothing wrong with price “gouging” or “scalping”. These actions are merely manifestations of the law of supply and demand. Supply goes down, price goes up. This attracts other sellers, which thus opens the floodgates of competition, which increases supply and ultimately drives down price. “Gouging” is beneficial for two reasons: (a) it promotes a needs based market driven rationing of a scarce resource and (b) it ensures a consistent supply of a scarce resource.

A rising price ensures supply never goes to zero by incentivizing reduced consumption. No matter how scarce a good becomes there will always be some of it available to those who truly require that resource because they are willing to pay. If price is artificially suppressed when supply is short this invites those with early information to consume as they normally would, leaving none for those truly in need. Raising prices gives everyone an equal opportunity to partake in the resource even if they are last in the information chain. Some might say the rich have an unfair advantage, that they could buy everything up if we don’t force arbitrary rationing. But this is illogical. The argument is basically that the wealthy are compelled to buy up all expensive goods in short supply. Funny, there doesn’t seem to be a shortage of diamonds or gold watches. Some might then say the “poor” are excluded when price goes up. Perhaps if the price of gas went to $10,000/gallon, but in practice that can’t happen. Prices can’t exceed the level at which the population can pay. If they did the seller makes no money, so he must lower price until people are willing to pay. It will be less burdensome for the wealthy to pay higher prices, but that’s no different than during “normal” times. So if we don’t need government price controls during “normal” times then we don’t need them during “shortage” times.

High prices also afford the seller the ability to ensure continuing access to a scarce resource. For example, when Hurricane Katrina destroyed refining capacity it affected gas prices in Georgia. Gas prices went way up the next day. Surely this is unfair, right, the cost of the gas in the tanks didn’t suddenly go up overnight? No, this means the owner is exercising good business sense. Just think about it. If the station did not raise prices the amount of money they would get at the old price would not be enough to buy an equal quantity of “new” gas. This would only exacerbate the shortage. Raising price on current inventory ensures that the seller can completely replace it with more expensive inventory and outbid other stations if necessary. Sellers can’t provide their customers with a service if they have nothing to sell due to artificial price restrictions. Who do price restrictions help? No one. Or rather it helps the lucky few that buy early but only to the detriment of everyone else.

Even though at face value government control of economic relationships might seem beneficial (“stop those evil gougers”), ultimately unintended consequences end up harming the very people it was purported to help. If anyone has an area that they believe government should exercise economic controls please send me a note at morin.greg@gmail.com and I will gladly do my best to debunk it in an upcoming column.

The “Buy Local” Canard

One of the most compelling economic myths is that of “buy local.” On its face it seems a rather compelling argument: spending money locally keeps local businesses going and keeps that money in the community. Such a policy is easy to praise because we see the positive effects, but what we don’t see (the “unseen” harm referred to by Bastiat) is the sales that did not go somewhere else… and those sales result in less income for “non-locals” by which they can come and buy “local” from us. So, there might be a small temporary uptick in the local economy, but eventually equilibrium is restored. The root of this myth is predicated on a jingoistic guilt trip. The “localness” of a business is elevated to being the sole consideration in one’s buying decisions (e.g. “buy “American” not because it’s the best, but because, well,it’s your patriotic duty!”).

The jingoism argument is that people should buy only goods and services sold within that community. The problem is that “community” is a completely arbitrary distinction. For example, we are told we should “buy American” because it’s good for America. But then we’re told we should buy“Georgian” because it’s good for the state. Then we’re told we should strive to buy “Morgan” because it’s good for the county. Then we’re told we should buy“Madison” because it’s good for the city. So, if we follow this argument to its logical conclusion, then we should then further strive to only buy goods from people that live in our neighborhood, right? And one step further would mean we should only buy goods made by our family members. And finally, finally, the best would naturally be if we only did everything for ourselves. Crazy result,right? This is why it is important that if you are going to make an argument,you understand the logic of the argument and test all scenarios using that logic. If the outcome is deleterious at the end of the logic chain then it must be deleterious along the chain.
You can’t be “buy American” and “buy Georgian” at the same time. Buying from Idaho would be buying American but not buying Georgian, so clearly you can’t buy from Idaho. Oh, right it’s ok to buy “non-locally” if whatever you want isn’t made “locally”. So, if it is sold in Alabama and Georgia, then the more desirable path is to buy from Georgia? Unfortunately this argument presupposes an impossible world. It assumes a world where Business A in Alabama and Business G in Georgia make absolutely identical products, provide an identical level of service and provide identical pricing(free shipping). If every metric of the two businesses were absolutely identical then there’s no upside or downside to buying local. The outcome is neutral because in this hypothetical Utopian scenario it also means an Alabama resident has no more impetus to buy local or from Georgia than does the Georgia resident. But, since there has never been and will never be identical businesses competing, we should make our buying decisions not on an arbitrary metric like geographical coordinates, but rather on differences in what or how something is being sold. Choose based on quality, service, or price, not on arbitrary characteristics.
Exhortations to purchase based solely on arbitrary traits of the business (location, gender, race, religion, etc.) are actually discrimination. It is just as discriminating to choose to only associate with others because of an arbitrary trait as it is to choose to not associate because of that trait. And while I will defend one’s right to associate as they see fit, I also have an obligation to point out the flaws in the arguments made to support those decisions. If a “local” business is so uncompetitive that the only way it can gain sales is to participate in jingoistic appeals, then perhaps it should go out of business to make room for the next guy who can sell a product so good nobody cares about where it’s located.
FOLLOWUP – I received a Letter to the Editor on this column in the Morgan County Citizen which you can see here. Here is my response:
In response to Joe Houston:  I am puzzled. You claim to disagree with my editorial and yet offer no argument (other than dismissive phrases) to specific points raised. Your attempt at refutation is to merely cite positive economic effects as though they are the direct result of “buy local” when in fact they are the result of increased sales. “Buy local” followed to its logical conclusion in all communities cannot increase sales. If you gain $100 in new local sales but lose $100 in non-local sales (because the non-locals are now buying in their local community) what have you gained? The laudable effects outlined in your letter can be achieved through growth based on competition and not on illusory gains dependent on appeals to loyalty. Don’t misunderstand: I’m not saying to NOT buy local, but rather that buying decisions should be based on price, service or convenience and not SOLELY on arbitrary distinctions like geographical coordinates.

Mind Your Own Business

Ron Paul is frequently accused of having an “isolationist” foreign policy. The media and the other republican candidates giddily overuse that word (perhaps because it has 5 syllables and they think it makes them sound erudite)…but in the immortal words of Inigo Montoya (The Princess Bride),

“You keep using that word. I do not think it means what you think it means.”

Ron Paul’s foreign policy is one of non-interventionism, not isolationism.Isolationism means that a country cuts off diplomatic ties, closes its borders,and invokes high tariffs. That is not what Ron Paul is advocating at all.

Non-interventionism simply means we mind our own business. It means closing hundreds of foreign military bases. If the prospect of closing these bases is held as being “isolationist” then apparently Canada, China, and India are all “isolationist” as they lack foreign military bases. Is it really a threat to national security to close our bases in Germany, bases that are a relic of a war that ended 67 years ago and that exist in a country that poses no threat to us? What is the point? Are we afraid that if we close those bases suddenly Russia will invade Germany? Give me a break. Closing bases doesn’t mean we forego operational readiness. Water covers 70% of the planet, so a strong ocean presence will ensure that we are capable of responding to any threat.
Our foreign policy in the Middle East is a tragic comedy. It is the consequence of unpredictable outcomes that results from operating under the delusion that we are in control. For example, in 1953 the US openly overthrew (operation Ajax) the elected prime minster (Mosaddegh)of Iran, which allowed the Shah to assume power. These actions fomented anti-American sentiment, which culminated in blowback in 1978 with the Iranian revolution and hostage crisis. Iraq, under Saddam Hussein, then opportunistically invaded Iran in 1980 owing to the disarray caused by the nascent revolution in Iran. We didn’t like Iran anymore so we backed our ally Iraq and supplied Hussein with weapons. Russia invaded Afghanistan in 1980. We didn’t like Russia so we supplied the Mujahedeen, led in part by Osama bin Laden, with weapons.Then Iraq invaded Kuwait using the weapons we supplied them with during their war with Iran. That invasion led to US military bases on Saudi Arabian soil.bin Laden despised the bases so he became our enemy. His attacks during the1990s climaxed on September 11, 2001. 9/11 was the culmination of blowback from our foreign policy for the prior 50 years.
Simply recounting these events does not mean that we“deserved” the attacks or that they were “justified”. It merely explains how our interventionist actions got us from Point A to Point B. If I keep poking my brother in the eye until he hits me upside the head with a baseball bat I certainly do not deserve such an extreme reaction, however I’m not totally blameless and innocent. Actions have consequences and they often are not the ones you expect. If non-interventionism had been US policy then the Iran hostage crisis would not have occurred and Iraq would not have invaded Iran or Kuwait. So, there would have been no US-Iraq wars and no US military bases in Saudi Arabia. Without those bases bin Laden would have taken no interest in us.
Imagine if China openly interfered in our elections and installed a puppet communist regime. Imagine then if China established a military base in the US ? Do you not think we Americans would resent this greatly?Of course we would, so why should we expect any different when we do the same to other countries? The path to peace is to mind our own business, maintain a deterring military force, and promote free trade to all countries (sanctions are an act of war). The “selfish” motives of capitalism will ensure peace. Why?Invading and killing your customers is bad for business. 

Incentives and Taxes

Bill O’Reilly is disingenuous when he says high taxes might compel him to quit his lucrative job. Although there is a level where taxes can have that effect (why engage in challenging work if taxes limit your income to that of someone flipping burgers), we are nowhere near it. However, taxes and regulation do result in a net decline in businesses and jobs albeit by a different mechanism than “quitting”. The mechanism is attrition. Businesses fail due to normal changing market demands, bad luck, poor leadership or other reasons. New businesses take their place, however as taxes and regulations increase, the rate of business replacement declines. Why? Some business ideas are high risk and some are low risk and both types may have a high or low reward. A graphical metaphor works best here (Figure 1).

Imagine a square, the left side indicates increasing reward (bottom to top) and the bottom indicates increasing risk (left to right). As taxes and regulations increase it makes those endeavors in the lower right corner (high risk-low reward) less appealing because of reward diminishment (taxes and regulation costs consume the reward). As taxes and regulation climb we continue to move across the square from lower right to upper left along a diagonal front: everything to the right of the diagonal will not be attempted, everything to the left will be attempted. As taxes and regulations continue their march upward that diagonal shifts further and further to the left until the only thing remaining is extremely low risk-high reward ideas.

Why should taxes and regulations yield such a result? Let’s say you need an income of $50,000/year to live on and you start a business with a 2:1 return on invested capital. That means if you invest $25k you’ll reap a profit of $50k. If you are taxed at 50% then you will be left with only $25k. So you would steer clear of investing in such a business since the reward is insufficient for your needs. You would only invest in a business that had a much higher return on capital, at least 4:1. The aggregate net result is that a lot of otherwise profitable businesses simply don’t get started or funded because their potential for gain after taxes simply isn’t worth the risk relative to other ways the money could be spent. And if no potential projects exist with a sufficiently low risk and high reward then investors simply sit on their cash until one does come along.

Some hold the condescending view that if a business can’t turn a profit after taxes then it just shouldn’t exist. The presumption is that if people aren’t willing to pay a price with large embedded taxes and regulatory costs then they have no right to such a good or service. The fatal flaw in this reasoning is an assumption that it is impossible for there to exist a level of taxation or regulatory burden that is unjustifiable. This mindset leads to business destruction. When a business is caught between government mandated costs and the unwillingness of the public to pay prices that reflect those costs then that business is squeezed out of existence.

If ten businesses fail each year and only seven new ones start there will be a net decline in businesses. Absent high taxes and regulations there would have be another five that would have opened. We don’t see what wasn’t created so there is no obvious cause and effect at first glance. Analyzing the problem from an economic incentives framework quickly reveals the source of the problem. Regulations and taxes are like a flood – they drown everything in its path. To restore prosperity we must allow good ideas to flourish by removing the artificial shackles that incentivize only low risk-high reward ventures.