Russell Roberts (Cafe Hayek) exposes the phoniness of the “growing gap” between “rich and poor.”

Donald Luskin (Chronicle of the Conspiracy) vindicates the Laffer Curve.

McQ (QandO) points to more evidence that Maryland’s anti-Wal-Mart legislation will harm Marylanders.

Thomas DiLorenzo, writing at the Mises Economics Blog, asks “Is Wal-Mart Overpaying?“:

If the idea of prices and wages is that they should clear the market, leaving neither shortages or surpluses, consider that Wal-Mart might be overpaying. According to ChicagoBusiness.com: “The new Wal-Mart Stores Inc. location opening Friday in suburban Evergreen Park received a record 25,000 applications for 325 positions, the highest for any one location in the retailer’s history.”

My comment:

There are a few things missing from your formulation. First, Wal-Mart is seeking persons with certain qualifications (as low as those qualifications might seem to us lofty bloggers). Having been in the business of hiring people (my portfolio included what’s now called “human resources”), I can tell you that job openings typically attract dozens of unqualified applicants for every qualified applicant.

Second, it’s also conceivable that Wal-Mart is offering better compensation than the applicants (including the qualified ones) are able to command elsewhere in the relevant geographic area. Given Wal-Mart’s superior business model, a person with a given set of qualifications is worth more to Wal-Mart than he or she is to, say, a 7-11 down the road.

Third, it’s also conceivable that there is presently a “surplus” of persons with the requisite skills in geographic area; reluctance to move, for various reasons, tends to create a kind of geographic “stickiness.” Thus, Wal-Mart’s entry creates jobs and soaks up some of the surplus.

The market-clearing notion applies only in the “perfect” microeconomic world where there is no stickiness and no growth.

The Skeptical Optimist seems to like this passage from Jane Jacobs’s The Economy of Cities:

The primary economic conflict, I think, is between people whose interests are with already well-established economic activities, and those whose interests are with the emergence of new economic activities. This is a conflict that can never be put to rest except by economic stagnation… The only possible way to keep open the economic opportunities for new activities is for a “third force” to protect their weak and still incipient interests. Only governments can play this economic role.

But, as I found in a post by Arnold Kling, there is more to that paragraph:

And sometimes, for pitifully brief interludes, they do. But because development subverts the status quo, the status quo soon subverts governments. When development has proceeded for a bit, and has cast up strong new activities, governments come to derive their power from those already well-established interest, and not from still incipient organizations, activities and interests.

The lesson is simple: What government can “give,” government can take away.

More fundamentally, the first quotation above betrays a zero-sum view of economics. There is no real “economic conflict” unless economic decisions are taken to the political arena. It is a grave mistake to say (or believe) that the “only possible way to keep open the economic opportunities for new activities is for a ‘third force’ to protect their weak and still incipient interests. Only governments can play this economic role.” There is — or can be, in the absence of government interference — ample support for “new activities” and new entrants to the labor force. That support comes from entrepreneurs who bootstrap themselves, and from capitalists whose investments underwrite new technology and job creation. Government interference — through redistribution, regulation, and research funding — hampers the undertaking of “new activities” and elevates political judgments above consumers’ actual wants and preferences.

Arnold Kling, in an article about productivity growth at TCS Daily, notes the burst of productivity growth since 2000, but . . .

What does this outstanding productivity performance say about economic policy under President Bush? Nothing. Let me repeat. Nothing. There is no political point-scoring to be made out of the news on productivity.

First of all, it is important to understand that, for the most part, productivity growth is the economy’s gift to policymakers, not the other way around. It would be foolish to attribute to tax cuts that which ought to be attributed to Moore’s Law.

Second, even when economic policy affects productivity growth, the effect comes with a long lag. We do not know how much of today’s productivity growth reflects Clinton-era policies or Reagan-era policies or even the deregulation that began under President Carter.

Finally, one should not necessarily use these productivity figures to brag about anyone’s economic policy. One could argue that our productivity growth really ought to be higher. In a column I wrote called Rationally Exuberant, I pointed out that computers are an ever larger-share of the economy. Suppose that productivity growth in the traditional economy is 1 percent per year and that productivity growth in computers is 50 percent per year. In that case, an economy that is 6 percent computers and 94 percent everything else should grow at a rate of 3.94 percent per year. If so, then perhaps from a policy perspective the question we ought to be asking is, “What are we doing wrong?”

All very sensible, but I think that Kling may be too quick to disassociate productivity growth and tax cuts. Drawing on BLS data, I constructed the following graph:

Note: Derived from annual data for nonfarm business productivity, 1948-2005, which are available via this link. The productivity gain for 2005 is based on the average for the first three quarters.

I take the gain for 1948-51 to be related to retooling after World War II. But productivity surges since then seem to have had something to do with cuts in federal income-tax rates:

• The productivity surge that peaked around 1965 followed quickly from the reduction of the top marginal rate from 91% in 1963 (where it had been since 1954), to 77% in 1964 and 70% in 1965. (Those cuts were proposed by President Kennedy in 1963.)

• The rebound in the 1980s followed the cut in the top rate from 70% to 50% in 1982. (The almost-certain prospect of Reagan’s election in 1980 surely led many investors to anticipate tax-rate cuts even before Congress had approved them.)

• The end-of-century surge that began around 1996 may have been given a boost by the anticipation and realization of Bush’s tax cuts.

To take the longer view:

• During the long decline in the rate of productivity growth from the early 1950s to the early 1980s, the top marginal tax rate dropped by only 24 percent (from 91% to 70%). The reduction in the top income-tax rate wasn’t enough to offset the growing regulatory burden and the prospect of permanently high inflation.

• That changed, however, with the Republican resurgence that began with Reagan’s election in 1980. There has since been a 50-percent reduction in the top marginal tax rate (from 70% to 35%), which neatly dovetails with the rebound in productivity since the early 1980s.

A cut in the top marginal tax rate leaves more money in the hands of those who are most likely to invest in productivity-enhancing technology, either directly or by acquiring equity in new and established companies. So, I would give tax-rate cuts at least a share of the credit for productivity growth. Specifically, the resurgence of tax-cutting Republicanism has given investors renewed confidence that their investments will pay off. That boost survived Bush Senior’s modest tax hike and Clinton’s somewhat less modest one. Had Bush Junior not been elected in 2000, however, I believe that the productivity surge would have been curtailed, and that we would now be in the grip of stagflation.

From yesterday’s edition of the local rag:

Race for oil heats up
Fueled by big profits, companies expand their search.

The reference to “profits” is meant pejoratively, no doubt. But what the heck, at least they got it right: the quest for profits leads to investment, which leads to greater output, which means higher real incomes and more jobs.

Meanwhile, Maverick Philosopher observes:

In this season especially we ought to find a kind word to say about the much maligned Ebeneezer Scrooge. Here’s mine: Without Scrooge, that bum Cratchit wouldn’t have a job!

Precisely.

Econbrowser offers this observation:

[H]ourly traffic count data compiled by the Federal Highway Administration suggest that the August gas price increases held U.S. highway travel in August 2005 to the same level as in the corresponding month of 2004, while the September price spikes led to a significant drop in car travel. . . .

Cafe Hayek weighs in with this:

. . . People want freedom not just to do great and momentous things. Mostly, they want freedom to pursue their everyday pleasures and dreams and interests as they wish without interference from others. . . .

Ain’t it great that Frank Perdue cared about the water his chickens drank? Ain’t it great that he bred a new breed of chicken? Sure, he did all this to make money for himself. But so what? His means of making money inspired him to care deeply about what the typical chicken eater likes and dislikes about chicken.

Why is it that so many people admire the likes of FDR and LBJ who uttered fine phrases but whose ideas of helping people never went beyond stealing from some, showering part of the booty on others, and bureaucratically regulating everyone?

Amen to all of that.

For related posts, go here and follow the links.

A few days ago I posted ten twelve commandments of economics. Here are some more (#19 UPDATED, 12/06/05 @ 10:36 PM):

13. The economy isn’t a zero-sum game; for example:

Bill Gates is immensely wealthy because he took a risk to start a company that has created things that are of value to others. His creations (criticized as they may be) have led to increases in productivity. As a result, many people earn more than they would have otherwise earned; Microsoft has made profits; Microsoft’s share price rose considerably for a long time; Bill Gates became the wealthiest American (someone has to be). That’s win-win.

14. Externalities are everywhere.

Like the butterfly effect, everything we do affects everyone else. But with property rights those externalities (e.g., pollution) are compensated instead of being legislated against or fought over in courts. Relatedly . . .

15 . There is no such thing as a “public good.”

Public goods are thought to exist because certain services benefit “free riders” (persons who enjoy a service without paying for it). It is argued that, because of free riders, services like national defense be provided by government because it would be unprofitable for private firms to offer such services.

But that analysis overlooks the possibility that those who stand to gain the most from the production of a service such as defense may, in fact, value that service so highly that they would be willing to pay a price high enough to bring forth private suppliers, free riders notwithstanding. The free-rider problem isn’t really a problem unless the producer of a “public good” responds to requests for additional services from persons who don’t pay for those services. But private providers would be contractually obliged not to respond to such requests, of course.

Moreover, given the present arrangement of the tax burden, those who have the most to gain from defense and justice (classic examples of “public goods”) already support a lot of free riders and “cheap riders.” Given the value of defense and justice to the orderly operation of the economy, it is likely that affluent Americans and large corporations — if they weren’t already heavily taxed — would willingly form syndicates to provide defense and justice. Most of them, after all, are willing to buy private security services, despite the taxes they already pay.

I conclude that there is no “public good” case for the government provision of services. It may nevertheless be desirable to have a state monopoly on police and justice — but only on police and justice, and only because the alternatives are a private monopoly of force, on the one hand, or a clash of warlords, on the other hand. (See this post, for instance, which also links to related posts.)

You may ask: What about environmental protection? Isn’t it a public good that must be provided by government? No. Read this and this. Which leads me to “market failure.”

16. There is no such thing as “market failure.“

The concept of market failure is closely related to the notion of a public good. When the market “fails” to do or prevent something that someone thinks should be done or prevented, the “failure” is invoked as an excuse for government action.

Except where there is crime (which should be treated as crime), there is no such thing as market failure. Rather, there is only the failure of the market to provide what some people think it should provide.

Those who invoke market failure are asserting that certain social and economic outcomes should be “fixed” (as in a “fixed” boxing match) to correct the “mistakes” and “oversights” of the market. Those who seek certain outcomes then use the political process to compel those outcomes, regardless whether those outcomes are, on the whole, beneficial. The proponents of compulsion succeed (most of the time) because the benefits of government intervention are focused and therefore garner support from organized constituencies (i.e. interest groups and voting blocs), whereas the costs of government intervention are spread among taxpayers and/or buyers of government debt.

There are so many examples of so-called public goods that arise from putative market failures that I won’t essay anything like a comprehensive list. There are, of course, protective services and environmental “protection,” both of which I mentioned in No. 15. Then there is public education, Social Security, Medicare, Medicaid, Affirmative Action, among the myriad federal, State, and local programs that perversely make most people worse off, including their intended beneficiaries. Arnold Kling explains:

[T]he Welfare State makes losers out of people who want to get ahead through hard work, thrift, or education. Those are precisely the activities that produce economic growth and social wealth, and they are hit particularly hard by Welfare State redistribution.

The Welfare State certainly has well-organized constituencies. The winners, such as the AARP and the teachers’ unions, know who they are. The losers — the working poor, children stuck in low-quality school districts — have much less political clout. The Welfare State has friends in both parties, as evidenced by the move to add a prescription drug benefit to Medicare.

As the Baby Boomers age, longevity increases, and new medical technology is developed, the cost of the Welfare State is going to rise. Economists agree that in another generation the share of GDP required by the Welfare State will exceed the share of GDP of total tax revenues today. The outlook for the working poor and other Welfare State losers is decidedly grim.

17. Borders are irrelevant, except for defense.

It is not “bad” or un-American to “send jobs overseas” or to buy goods and services that happen to originate in other countries. In fact, it is good to do such things because it means that available resources can be more fully employed and put to their best uses. Opponents of outsourcing and those who decry trade deficits want less to be produced; that is, they want to shelter the jobs of some Americans at the expense of making many more Americans worse off through higher prices.

For example, when Indian computer geeks operate call centers for lower salaries than the going rate for American computer geeks, it makes both Indians and Americans better off. Few Americans are computer geeks, but many Americans are computer users who benefit when they pay less for geek services (or the products with which geek services are bundled). Those who want to save the jobs of American computer geeks assume that (a) American computer geeks “deserve” their jobs (but Indians don’t) and (b) American computer geeks “deserve” their jobs at the expense of American consumers.

See also this, and this, and this.

18. Government budget deficits aren’t bad for the reason you think they’re bad.

Government spending is mostly bad (see No. 15) because it results in the misallocation of resources (and it’s inherently inflationary). Government spending — whether it is financed by taxes or borrowing — takes resources from productive uses and applies them to mostly unproductive and counterproductive uses. Government budget deficits are bad in that they reflect that misallocation — though they reflect only a portion of it. Getting hysterical about the government’s budget deficit (and the resulting pile of government debt) is like getting hysterical about a hangnail on an arm that has been amputated.

There’s no particular reason the federal government can’t keep on making the pile of debt bigger — it has been doing so continuously since 1839. As long as there are willing lenders out there, the amount the amount of debt the government can accumulate is virtually unlimited, as long as government spending does not grow to the point that its counterproductive effects bring the economy to its knees.

For more, see this, this, this, and this.

19. Monopoly (absent force, fraud, or government franchise) beats regulation, every time.

Regulators live in a dream world. They believe that they can emulate — and even improve on — the outcomes that would be produced by competitive markets. And that’s precisely where regulation fails: Bureaucratic rules cannot be devised to respond to consumers’ preferences and technological opportunities in the same ways that markets respond to those things. The main purpose of regulation (as even most regulators would admit) is to impose preferred outcomes, regardless of the immense (but mostly hidden) cost of regulation.

There should be a place of honor in regulatory hell for those who pursue “monopolists,” even though the only true monopolies are run by governments or exist with the connivance of governments (think of courts and cable franchises, for example). The opponents of “monopoly” really believe that success is bad. Those who agitate for antitrust actions against successful companies — branding them “monopolistic” — are stuck in a zero-sum view of the economic universe (see No. 13), in which “winners” must be balanced by “losers.” Antitrusters forget (if they ever knew) that (1) successful companies become successful by satisfying consumers; (2) consumers wouldn’t buy the damned stuff if they didn’t think it was worth the price; (3) “immense” profits invite competition (direct and indirect), which benefits consumers; and (4) the kind of innovation and risk-taking that (sometimes) leads to wealth for a few also benefits the many by fueling economic growth.

UPDATE: What about those “immense” profits? They don’t just disappear into thin air. Monopoly profits (“rent” in economists’ jargon) have to go somewhere, and so they do: into consumption, investment (which fuels economic growth), and taxes (which should make liberals happy). It’s just a question of who gets the money.

But isn’t output restricted, thus making people generally worse off? That may be what you learned in Econ 101, but that’s based on a static model which assumes that there’s a choice between monopoly and competition. I must expand on some of the points I made in the original portion of this commandment:

• Monopoly (except when it’s gained by force, fraud, or government license) usually is a transitory state of affairs resulting from invention, innovation, and/or entrepreneurial skill.

• Transitory? Why? Because monopoly profits invite competition — if not directly, then from substitutes.

• Transitory monopolies arise as part of economic growth. Therefore, such monopolies exist as a “bonus” alongside competitive markets, not as alternatives to them.

• The prospect of monopoly profits entices more invention, innovation, and entrepreneurship, which fuels more economic growth.

20. Stay tuned to this blog.

For much more, go here and follow the links.

Nobel laureate James M. Buchanan, writing in the inaugural edition of Cato Unbound, observes in passing that

[p]olitical leaders, both legislative and executive, with public support, act as if it is possible to spend without taxing, indeed as if the fisc offers the political equivalent of perpetual motion. This observed fiscal profligacy stems from diverse sources: institutional history, Keynesian follies, supply-side exaggerations, and, finally, the very logic of collective action, which fosters the personalized illusion of something for nothing, especially amid the natural constituency pressures of representative democracy.

Everything about that paragraph is correct but for the implication that it is not possible to spend without taxing. It is possible for the federal government to spend without taxing; it can simply borrow (or it can print money, which would amount to the same thing). Taxation and borrowing have similar results from the government’s standpoint; that is, both allow the government to commandeer resources and put them to work on things deemed “important” to government officials and their constituencies. But taxation and borrowing do differ in their effects on the public.

1. Through taxation, government confiscates taxpayers’ claims against current output and converts those claims to government programs that (for the most part) either increase the incomes of certain persons (e.g., most welfare recipients and many government employees who otherwise would fare less well in the private sector) or create “psychic income” for the proponents of those programs (even as those programs erode economic performance).

2. Borrowing doesn’t change the effects of government spending, but it does fund government spending in an importantly different way. That is, lenders (unlike taxpayers) voluntarily relinquish their claims on current output, in return for larger claims on future output (i.e., principal plus interest). And those claims on future output can be redeemed by additional borrowing in the future. (As I have argued here, there is no obvious limit on the amount the amount of debt the government can accumulate. I assume, of course, that the government’s appetite for spending would not become voracious enough to bring the economy to its knees.)

3. When the government borrows from foreigners instead of Americans, those foreigners willingly assume the real “burden” of the debt; that is, they relinquish some of their claims on the current output of the U.S. economy. Foreigners can transfer their “burden” to Americans only as Americans are willing to buy government debt from foreigners. To the extent that government spending provides any benefits for Americans, foreigners are doing Americans a big favor by lending money to the government. Why? Because they are subsidizing the output of government services that are, in the main, “enjoyed” by Americans.

MAKE THAT 12 COMMANDMENTS . . . UPDATED 12/03/05

1. Self-interest drives us to do good things for others while striving to do well for ourselves.

2. Profit is good because it drives people to invent, innovate, and invest in new and better products and services.

3. Incentives matter: Just as self-interest and profit drive progress, taxes and welfare stifle it.

4. Only slaves and dupes can be exploited. (Wal-Mart employees are not exploited because they are not forced to work at Wal-Mart; anti-Wal-Mart activists are exploited because they’re dupes of the anti-business Left.)

5. There’s no free lunch, all costs must be covered by prices or taxes.

6. The appearance of a free lunch (e.g., government’s assumption of risk for retirement savings, company-subsidized health insurance) leads individuals to make bad decisions (e.g., not saving enough for old age, overspending on health care).

7. Paternalism is for children; when adults aren’t allowed to make economic decisions for themselves they don’t learn from mistakes and can’t pass that learning on to their children.

8. All costs matter; one cannot make good economic decisions by focusing on one type of cost, such as the cost of energy.

9. There best way to deal with pollution and the “depletion” of natural resources is to assign property rights in resources now held in common. The owners of a resource have a vested interest (a) in caring for it so that it remains profitable, and (b) in raising its price as it becomes harder to obtain, thus encouraging the development of alternatives.

10. Discrimination is inevitable in a free society; to choose is to discriminate. In free and competitive markets — unfettered by Jim Crow, affirmative action, or other intrusions by the state — discrimination is most likely to be based on the value of one’s contributions.

11. Voluntary exchange is a win-win game for workers, consumers, and businesses. When exchange is constrained by regulation, someone loses, namely, the worker (fewer jobs and lower wages) and the consumer (higher prices and less freedom of choice).

12. Absent force or fraud, we earn what we deserve, and we deserve what we earn.

Economic historian Robert Fogel, in an interview with Nick Schultz at Tech Central Station, makes some passing observations about private saving as an alternative to Social Security:

Nick Schulz: In the book [The Escape From Hunger and Premature Death: 1700 to 2100] you see a growing demand for leisure and retirement, and education and health care. Now, in current debates, especially in Washington, that sounds like more Social Security. . . . How do you see that?

Robert Fogel: . . . .

We’re probably going to shift gradually, despite the opposition to it, to private accounts, which exist in some countries, which require everyone who enters the labor force to put aside 30 percent of their income into a fund to cover retirement, health care, and education. In some countries, they permit you to borrow against that fund to buy houses.

And, it’s approaching what American academics have. You cannot teach in American universities without having TIAA-CREF. In American universities, you’re required to put aside between 12-and-a-half and 17 percent (it varies from university to university) into this fund so that when you retire you don’t end up with a tin cup sitting on the administration building saying, “I was a good teacher once, please help me.”

So, that’s a forced retirement system. It has the advantage over Social Security that the government can’t take it away. . . .

Nick Schulz: And you see that as a potential model for Social Security or public pension programs?

Robert Fogel: Right. Now, there is an argument which says it’s not as secure as the guaranteed government program. Well, ultimately, what the government can pay depends on how the economy performs. . . .

Fogel’s last comment is good as far as it goes, but it doesn’t go far enough. Every dime the government takes from a worker and gives to a retiree is a dime that cannot be invested in economic growth. So, it’s true that the “guarantee” of Social Security is only as strong as the economy. But that’s only half the story. It’s true also that Social Security weakens the economy by diverting resources from investment to consumption. The “guarantee” that liberals and leftists like to tout when they defend Social Security is therefore the opposite of a guarantee. Forced participation in Social Security is an insidious form of rot that actually undermines economic security by undermining the economy.

Yesterday I filled my car’s fuel tank at a price of $2.299 per gallon. Some 35 years earlier I was able to fill up at a price of $0.299 per gallon. Adjusted for inflation, yesterday’s price was about $1 per gallon higher than the price I paid 35 years ago.

Should I be outraged? At what? At the fact that a particular type of product now costs more (in real terms) than it did 35 years ago?

If that should outrage me, then I should be overjoyed by the fact that the car I drive now is vastly superior to the one I drove 35 years ago. In fact, my present car, even though it’s a moderately priced and popular Japanese make, is vastly superior to almost any car I could have bought at any price 35 years ago. But I’m no more overjoyed by the fact that I can now own an excellent car than I am outraged by that fact that it costs more to fuel that car than it would have cost 35 years ago.

Nor am I overjoyed by the many other products that I enjoy today that are superior to — and less expensive (in real terms) — than their counterparts of 35 years ago, or by the many other products that weren’t even available to me 35 years ago, or by the many services that weren’t available to me 35 years ago.

I’m neither outraged by higher gasoline prices nor overjoyed by a plethora of better, cheaper goods and services because they’re simply what I would expect in a dynamic economy based on (relatively) free markets. Such an economy continuously yields better products and services, and competition pushes the prices of those products and services down over time. But not everything gets better, and not all prices go down. The beauty of free markets, however, is that better, less-expensive products and services arise to push aside their inferior, more costly predecessors.

I can’t predict what will arise to replace gasoline and the kinds of automobiles that are powered by gasoline. But I can predict that if government will stand out of the way, our dynamic economy will produce such alternatives.