Author Archive for Randall Holcombe

Ralph Nader Cites Mises, Hayek, and Rothbard

download (2)Ralph Nader argues in his new book, Unstoppable, that the left and right are coming together in their opposition of corporatism: those government policies that favor the economically powerful over the general public interest.  This convergence of the left and right presents an opportunity for people to drop their political labels and unite to overturn the nation’s corporatist economic policies.

He wants to eliminate corporate welfare and bailouts, but is short on details about how this can be done.  I’m not objecting here.  The first step is recognizing a commonality of interests that could organize to limit government in this area.  But because I don’t see a clear mechanism here that will be sufficient to overturn entrenched and powerful special interests, it is not apparent that this commonality of interests really is unstoppable.

One interesting thing about Nader’s book is his favorable references to prominent Austrian school economists, including Mises, Hayek, and Rothbard.  References like this from a beacon of the political left are a good sign for the visibility and credibility of the Austrian school.

Political Spam

OLYMPUS DIGITAL CAMERAI don’t know if you are as popular with the political insiders as I am, but already today I have received emails from Joe Biden, Nancy Pelosi, and Debbie Wasserman Schultz. In fact, I’ve received more than a dozen emails today alone from either the Democratic Party, Democrats involved in election campaigns, or Democratic interest groups.

The Democrats aren’t the only ones who email me. I’ve also received emails today from Republicans and Libertarians, though not as many.

I am somewhat interested in getting the emails just because I’m curious about what they are saying (besides “Send Me Money’), but the Democrats are trying my patience with their huge volume of daily spam. I think it’s amusing, for example, to get an email that says I should donate because “We have to defeat the Koch brothers.” I didn’t know the Koch brothers were running for anything.

But really, how effective can these emails be when more than a dozen arrive every day. Today’s volume of political spam is not unusual for me; it’s just the day I decided to blog about it.

I have no idea where any of these parties got my email address. I assure you I did not provide it to them. Also, I have never donated any money to any political party. I have, on occasion, given money to individual candidates, but I do have a rule about candidate contributions that I’ve never violated: I only give money to candidates who I actually know in person. I’ve never given money to any candidate I’ve never met, or to any political party.

So, it’s not like they’ve found a sucker who will respond to these emails by giving them money. I’ve never done that. But I keep getting this political spam anyway. Of course, once they have your email address, it costs them nothing to send me an email along with the rest of their email list.

The Economics of Offensive Trademarks

RMMS-LogoReflecting on the Patent and Trademark Office’s decision to rescind protection of the Washington Redskins’ name, whether some people view a trademark as offensive should not be a criterion for determining whether it should be protected.

If a large number of people are offended by a trademark, then it will be a liability rather than an asset to whomever uses it, and economic forces will limit its use. People of a certain vintage will recall Sambo’s Restaurants, which were forced into a name change (and perhaps bankruptcy) because people were offended by the name.

The purpose of a trademark is to identify a firm’s products. If people like the firm and its products, the trademark will attract customers. If people are offended by the firm and its products, the trademark will alert customers to avoid that firm. The market system works to weed out offensive trademarks, and the U.S. government should not be in the business of determining whether trademarks are offensive.

Ironically, if Redskins really is an offensive term, then denying the team trademark protection will allow others to use the term, and the offensive term could see even more widespread use.

But while I’m discussing the subject, I will admit to being a bit sensitive to the issue myself, because my own heritage is being demeaned by being used as a team mascot by a different team.

I’ve lived in the South most of my life, and am proud to be on the faculty at Florida State University (home of the Seminoles), but (and I rarely share this bit of my background with others), I was born in the North, in Bridgeport, Connecticut. Yes, I am a Yankee. I didn’t have any say in the matter; I was born a Yankee. But I admit to being sensitive to this part of my background, and find it demeaning to have a sports team mocking my heritage.

If the Redskins lose their trademark protection, the Yankees should too.

Taxpayers Are Shocked to Discover That When They Vote for Government Services, They Have to Pay for Them

4122172006_0c704ae171_zTaxpayers in Austin, Texas, are upset that their property tax bills are rising. This article reports that taxpayer Gretchen Gardner is “at the breaking point” because of her increasing property taxes.

Gardner says, “I have voted for every park, every library, all the school improvements, for light rail, for anything that will make this city better. But now I can’t afford to live here anymore.” It appears that Gardner strongly supports more government spending, as long as someone else pays the cost.

She is going to protest her tax assessment.

She goes on to say, “Someone needs to step in and address the big picture.” As I see it, the big picture is that our country has too many voters like Gardner who keep asking for more government spending without thinking that somebody has to pay for it.

How Valuable Is a Federal Grant?

5265260921_199021dabf_zSometimes, a federal grant is worthless. The federal government has the ability to attach enough costly provisions to its grants that the net value is less than zero.

A recent case in my home town of Tallahassee illustrates this. The Tallahassee Democrat, May 21, page A1 (sorry, no link because a subscription is required) reports that project organizers who plan to build a $1.5 million homeless shelter have turned down $500,000 in funding because the money was to come from a federal grant. The article said, “…stringent reporting requirements, mandates to exceed prevailing wages and required environmental assessments would have increased the cost and delayed the completion time of the project significantly.”

The bottom line: the project’s developers believed that the costs associated with accepting the federal grant would have exceeded the $500,000 the grant would have given them.

The good news in this case is that the grant wasn’t accepted, so the money wasn’t wasted. But what if the project’s organizers had decided that accepting the grant would have imposed costs of only $400,000 on them? They would take the $500,000, which would have only been worth a net of $100,000 when accounting for all the costs and benefits. In this hypothetical case, the federal government would have taken $500,000 in tax revenues and produced a net value of $100,000 with it.

In this particular case in Tallahassee, the conditions lowered the value of the grant to below zero and it was refused, but in other cases grants are accepted even if they on net provide only a minimal value to recipients. Federal grants forcibly take money from taxpayers to give to grant recipients who value them considerably less than the value of the revenues that finance the grants. Federal grants destroy value. Sometimes they destroy so much value that recipients who are offered grants refuse to take them.

 

Piketty on Inequality

6736The ultimate thesis in Thomas Piketty’s best-selling Capitalism in the Twenty-First Century is that the return on capital is higher than the growth in output and wages, so the owners of capital will see their wealth, and therefore, incomes, rise faster than those who earn the bulk of their incomes through labor. The distribution of wealth and income will become increasingly skewed to the benefit of the owners of capital.

Piketty recommends progressive taxes on income and capital as the remedy to the growing inequality he forecasts. He says (p. 471), “…the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a global tax on capital.” The tax (p. 516) “…ought to be a progressive annual tax on individual wealth.”

Piketty makes clear that the purpose of the progressive taxes he recommends is not to provide funds to raise the incomes of those at the bottom, but rather to lower inequality by reducing the incomes of those at the top.

Recommending a progressive income tax with rates of 50-60% on incomes over $200,000 and a top marginal rate of 80% on incomes above $500,000-$1 million, he says (p. 513), “A rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level…” Recommending a progressive tax on capital, Piketty (p. 518) says, “The primary purpose of the capital tax is not to finance the social state but to regulate capitalism.”

Piketty freely admits that the policies he recommends to reduce inequality would not do so by bringing up those at the bottom end but rather by bringing down those at the top.

When one looks at the remarkable accomplishments of capitalism, an economic system that is roughly 250 years old, among its top accomplishments is how much it has done to improve the standards of living of average citizens and the working class. The rich have always been very comfortable, and capitalism has brought a level of comfort to working-class people today that would have been unimaginable to even the most well-off people a century and a half ago.

Why should average citizens be concerned about the wealth of the very well-off if the system that makes them well-off produces prosperity for everyone? Evidence suggests that most people are not that concerned. In big government countries ranging from Canada to Sweden, the government sector has shrunk with public support, and in the United States, lower taxes and smaller government remain politically popular (even as the government increases its involvement in health care and energy).

Piketty promotes the politics of envy, in which greater equality is a goal in itself — as opposed to the goal of helping out those at the bottom of the income distribution — and Piketty plainly states that the policies he recommends to reduce inequality would do so by pulling down those at the top rather than bringing up those at the bottom.

Piketty’s Capital and Actual Capital

piketty_0Thomas Piketty’s book, Capital in the Twenty-First Century, has received lots of press and been reviewed dozens of times, so I’m not going to write a general review, but I do want to comment on his depiction of capital, contrasting it with a more Austrian approach.

Piketty’s main conclusion is that the return on capital is greater then the overall growth in income, so owners of capital will see their incomes and wealth rising faster than the general population, causing rising inequality over time.  He has an impressive data set, and his analysis shows fairly convincingly that inequality has been rising since 1980.

There are a number of issues one could raise regarding Piketty’s analysis, but I will just raise one here: the way he identifies the relationship between the stock of capital and the income that is generated by it.

Piketty identifies what he calls “the first fundamental law of capitalism” as α=rxβ, where α is the income derived from capital, r is the return on capital, and β is the value of the capital stock.  (As Piketty defines them, both are divided by income, but we can safely ignore this by multiplying both sides of the equation by income, which simplifies the discussion that follows.)

As Piketty sees it, the return paid on capital is determined by the value of the capital times the rate of return, as the equation shows.  Piketty confirms that this is his view in examples he gives in the book.  But this is backwards.  The return on capital isn’t determined by the value of capital; the value of capital is determined by the return it produces.  The correct view on this is clearly stated in Carl Menger’s Principles of Economics.

While Piketty measures capital by the value of the capital stock, in fact capital is a collection of heterogeneous inputs into production processes, and capital only earns a return if it is employed productively.  The value of capital is determined by the return it earns, and the return it earns depends on the value it adds to the economy.

If capital is productive and earns a high return, it will have a high value.  If it is used unproductively and earns little or no return, its value may be low, and may go to zero.  The capital employed by Wal-Mart has been productive, giving the company value, while the capital used by Circuit City was not, and its value fell to zero.

Capital does not just earn a rate of return, its return comes from the decisions its owners make as they employ it in various uses.  A better statement of Piketty’s first fundamental law is β=α/r, which is equivalent to Piketty’s law in a mathematical sense, but more correct in an economic sense because it says the value of capital is a function of the income it produces, rather than that the income it produces is a function of its value.

Does this make a difference?  Piketty argues for a global tax on capital as a mechanism for lowering inequality, and the economic impact might be minimal if people own capital and it just earns a return based on ownership as Piketty implies.  But if the owners of capital have to make decisions about how to allocate their heterogeneous assets to get the best return on them — or even to get a positive return — a tax on capital can have a devastating effect on economic growth and productivity.

Piketty’s law amounts to an accounting identity as he defines it, and in that sense it is not wrong.  But giving some thought to the components in the aggregate variables in that identity, we can see that it does not give a clear picture of the individual components that are being measured, nor the causal relationships among them.

My Book on the Austrian School of Economics

781955734I’ve just published a short book, Advanced Introduction to the Austrian School of Economics, which is designed to give people with some knowledge of economics an explanation of what ideas distinguish the Austrian school from mainstream economic thought. The paperback is relatively affordable ($22.36 if ordered on-line). The book is much slimmer in person (144 pages) than it appears in the graphic on the web site.

The book is written for readers who have some knowledge of economics, but are curious about the ideas that distinguish the Austrian school from mainstream economics.  It is not an introduction to economics from the point of view of the Austrian school.

The publisher is hoping that the book will be used as a textbook for courses in Austrian economics.  I don’t think there are many.  If you are at a university that subscribes to Elgaronline, you should be able to read the e-version of the book for free.

Readers on this website are probably already familiar with the ideas of the Austrian school, but it may be handy to see them presented as an overview this way, and also may be a way to introduce your acquaintances to the school’s ideas.  Should they ask you, “What are the distinguishing ideas of the Austrian school?” this book is intended to answer that question.

Exaggerating the Damage Caused by Climate Change

2398383691_78085614c6_zHere is a link to the abstract of a peer-reviewed article in the American Journal of Agricultural Economics. (You may be able to download the full article. I could, from my university computer.)

The abstract says, “It appears that news media and some pro-environmental organizations have the tendency to accentuate or even exaggerate the damage caused by climate change. … We find that the information manipulation… induces more countries to participate in an IEA [International Environmental Agreement], which will eventually enhance global welfare.”

The article argues that by exaggerating the harmful effects of climate change, advocates can gain more support for government climate change policies.

The article says, “Linking climate change to extreme weather may be a powerful way to motivate people.” Referring to the Intergovernmental Panel on Climate Change, it says, “The IPCC has tended to over-generalize its research results and accentuate the negative side of climate change. Following its lead, the mainstream media has gone even further.”

Later, “…it may be better for the countries to hold a pessimistic view of the climate problem, as it will induce more countries to participate in the IEA…” The paper then goes on to develop a mathematical model to demonstrate why this is the case.

The paper’s conclusion begins, “This article offers a rationale for the phenomenon of climate damage accentuation or exaggeration on the part of the international mainstream media or other pro-environmental organizations.” And then to show the bias of the authors, “Forming a binding IEA to curb climate change is a matter of urgency… When the media or pro-environmental organizations have private information on the damage caused by climate change, in equilibrium they may manipulate the information to increase pessimism regarding climate damage, even though the damage may not be that great. Consequently, more countries (with overpessimistic beliefs about climate damage) will be induced to participate in an IEA in this state, thereby leading to greater global welfare…”

The paper concludes, “This article further explores how the mass media may manipulate the information it privately has to influence behavior related to the environment … this article introduces a novel mechanism, ‘information manipulation.’”

This article is noteworthy because it is published in a peer-reviewed academic journal. This is not right-wing political propaganda, and it is apparent from reading the article that the authors are sympathetic to the idea that more global action needs to be taken to combat what they believe are the negative effects of climate change.

The article is written by advocates of international environmental agreements who plainly state that climate scientists and the media exaggerate the negative effects of climate change, and explain why doing so helps further their goals.

Joseph Stiglitz on Crony Capitalism

download (2)Although Joseph Stiglitz has a reputation as one of the most prominent defenders of big government, I found much to agree with in his book, The Price of Inequality. It does appear to me that throughout the political spectrum, from left to right, there is a substantial consensus that government is the cause of many of the problems people perceive. The disagreement is over how to solve those problems.

Stiglitz sees many negative consequences from income and wealth inequality, and while I would question whether these negative consequences are as substantial as Stiglitz says, we both agree on the negative impact that government policy has in our society. Stiglitz, a critic on the political left, is in surprising agreement with David Stockman, a critic on the political right, that many of today’s economic and political problems are caused by government.

Both Stiglitz and Stockman argue that cronyism is damaging both our economic system and our democratic political system.

Criticizing the cronyism between business and government, Stiglitz (p. 59) says, “It’s one thing to win a ‘fair’ game. It’s quite another to be able to write the rules of the game–and to write them in ways that enhance one’s prospects of winning. And it’s even worse if you can choose your own referees.”

Stiglitz (p. 62) says, “It doesn’t have to be this way, but powerful interests ensure that it is.”

In a chapter titled “Why It Matters,” Stiglitz (pp. 104-105) says, “When one interest group holds too much power, it succeeds in getting policies that benefit itself, rather than policies that would benefit society as a whole. When the wealthiest use their political power to benefit excessively the corporations they control, much-needed revenues are diverted into the pockets of a few instead of benefiting society at large.”

In another chapter titled “Democracy in Peril,” Stiglitz (p. 167) says, “In this chapter we have described the construction of a political system that, though nominally based on the principle of one person one vote, has turned out to serve the interests of those at the top.” Why can’t we reform the system? Stiglitz (p. 170) says “moneyed interests have the incentives and resources to ensure that the system continues to serve their interests.”

Stiglitz has explained how the rich gain control of the political process and use it for their benefit, so the idea that more government can solve these problems that are created by government in the first place seems to be nothing more than wishful thinking. Stiglitz’s insights on the way that the 1% controls thepolitical process should lead him to the conclusion that less government means less control by the economic and political elite.

Read More→

Civic Engagement

3457967_28818ce3e9_bMy local newspaper, The Tallahassee Democrat, ran a story on March 19 reporting on a talk given by former Florida Governor and former US Senator Bob Graham. In his talk, Graham calls for more civic engagement. His talk was a part of a larger program titled “Choosing to Participate: The Power of Civic Engagement.”

For most citizens, civic engagement is futile. I’m speaking from my own experience. The few times I have attempted to speak at city commission meetings or county commission meetings, I’ve been met with indifference. I’ve been given a three minute time limit to speak (I can understand why they do that), and then when I’m speaking I’ve watched commissioners get up and leave in the middle of my three minutes, or talk among themselves as I’ve been talking to them. For people like me, civic engagement is nothing but frustration. Most people realize this, which is why they would rather use their time in other ways rather than waste it on civic engagement.

But what happens when people who really can make a difference choose to participate? Two of those individuals are Charles and David Koch, who Senate Majority Leader Harry Reid called “un-American” for their civic engagement. Reid said, “The Koch brothers and other moneyed interests are influencing the politics in a way not seen for generations. … Not only have Senate Republicans come to the floor to defend the Koch brothers personally, they have again and again defended the Koch brothers’ radical agenda – and it is radical, at least from the middle-class perspective.”

It is interesting that Senator Reid says, on the one hand, that the Koch brothers have a radical agenda, and on the other hand, that many of his colleagues in the Senate support that agenda.

I don’t want to draw a connection between the ideas of former Senator Graham and Senator Reid, who are two different individuals. But it is worth a remark that while some politicians call for more civic engagement, others castigate people for their civic engagement, when those people (1) have ideas different from their own, and (2) are actually able to participate in a way that makes a difference.

President Obama’s Investment Skills

Philippine-stock-market-boardAfter the Obama administration bailed out General Motors by purchasing a 60.8% ownership share in the company for $49.5 billion, President Obama said, “We expect taxpayers will get back all the money my administration has invested in GM.” (I do like the way the president takes responsibility for the investment.) Now, the president’s administration has sold all of its ownership in GM and taken a $10 billion loss.

It is worth noting that what the president called an investment on behalf of the taxpayers lost 20% of its value, and that the president’s expectations on the investment his administration made did not pan out.

I don’t know whether the president actually believed the GM bailout would yield a profit or whether that was just political rhetoric he hoped people would forget over the years. Either way, it turned out not to be true.

The loss on the GM investment did not attract much notice, especially compared to other investments the president has made on behalf of the taxpayers, such as the $500 million it lost on the Solyndra loan guarantees. Interesting, considering that the GM loss was 20 times larger.

Intergenerational Transfers and Political Support for the Welfare State

Walletssn2Supporters of the welfare state might see it as a mechanism for transferring income from rich to poor with the idea of helping those at the bottom end of the income distribution, but in the United States, the welfare state is increasingly transferring income from the young to the old, regardless of the wealth or income of the transfer recipients.

Obviously, this is the case with Social Security and Medicare, the federal government’s two biggest expenditure programs, because only old people are eligible, and there is no means test to determine eligibility for the transfer. And, not only are the old wealthier than the young, the wealth gap between the old and young is growing.

These programs transfer resources from the young to the old, but also, on average, from the poor to the rich.

Add to these long-standing programs Obamacare, which charges the young rates above what it costs to insure them so that the old can pay rates below what it costs to insure them. The program’s designers made no secret of the fact that the program was intended to impose costs on young Americans to transfer benefits to the old.

Obamacare makes the intergenerational transfer even greater. Thus, it is somewhat paradoxical that young voters have increased their support for the welfare state even as old voters have decreased theirs.

The transfer recipients, who are older and wealthier than average, and who will be dead when the true cost of the current welfare state must be paid, increasingly oppose the transfers. Meanwhile, young voters increasingly support these programs that cannot possibly provide them with the same level of benefits they now approve paying to their elders.

The young and old are, on average, both moving away from supporting policies that are in their narrow interests.

The most paradoxical part of this paradox is that the policies the young support not only work against their current interests, but also against everyone’s interests in the future because the high cost of funding these programs will slow economic growth. Today the old benefit from those transfer programs; in the future, everyone, both young and old, will be worse off because of them.

The President’s Foreign Policy: Speak Loudly and Carry a Small Stick

-Getting_em_up-_at_U.S.Naval_Training_Camp,_Seattle,_Washington._Webster_&_Stevens._-_NARA_-_533698.tifAt the beginning of the twentieth century, President Teddy Roosevelt’s foreign policy was, “Speak softly and carry a big stick.” At the beginning of the twenty-first, President Obama’s policy appears to the the opposite: “Speak loudly and carry a small stick.”

President Obama threatened Syria not to step over a “red line” by using chemical weapons or they would face serious repercussions, but they did, without the serious repercussions. He threatened Iran if they continued their nuclear enrichment programs, but they continue as we ease sanctions on them. More recently, he warned Putin “there would be costs for any military intervention in Ukraine,” but realistically, what could he do? Everybody can see it’s big talk with no stick to back it up.

Meanwhile, Putin has indicated a retreat in Ukraine, not because of the big talk from Obama, but because Russia’s hand was slapped by the response of markets. Russian stocks fell by 12% after Russian military forces moved into the Ukraine, and the ruble took a serious hit as well. The reaction of the market had a bigger effect on Putin’s aggression than Obama’s small stick.

The discipline of the market in international affairs is not new to Russia. The Berlin Wall fell, and the Soviet Union dissolved, not because of the military might of the Cold War nations, but because of the economic strength of capitalism compared to socialism.

Because our Cold War adversaries are increasingly a part of the global economy, markets generate repercussions to belligerent actions beyond those of any prudent political responses.

I don’t expect the Russians to pull out of the Ukraine. They are still occupying a part of the Republic of Georgia after having invaded there in 2008. What I’m saying is that any moderation of Russian policy there is more directed by the market’s response rather than any international political response.

I am not too concerned about President Obama’s actual policy responses. The small stick is OK with me, and we can see in Iraq and Afghanistan what can go wrong when we try to play the role of the world’s policeman. The problem is the “speaking loudly” part, because it costs our president, and our country, some credibility when people know the president won’t follow through on his big talk.

Common Ground

800px-Farming_near_Klingerstown,_PennsylvaniaI often find myself disagreeing with Cynthia Tucker, the Progressive journalist and professor, so I was happy to read a recent column of hers, on the farm bill that just passed the House, and find that she and I share some common ground on our views toward government.

She considers the bill an example of congressional priorities that “…protect the rich and punish the poor, comfort the comfortable while brutalizing the afflicted.” Indeed, it is an example of the cronyism that always accompanies political power, in which those who hold power use it to aid the rich and powerful. Should we expect anything else?

She says about Republicans, “…if they really want to rein in government, if they believe people ought to stand on their own two feet and refuse the ‘welfare state,’ why are they preserving welfare for those who need it least? Do they not see the glaring hypocrisy in their insistence on farm subsidies?” Of course they see the hypocrisy. That’s how cronyism works. You help your cronies, not those who actually might need help.

Tucker offers a great example. “One case of mind-boggling hypocrisy is that of U.S. Rep. Stephen Fincher, a Republican and a farmer from Frog Jump, Tenn., who collected nearly $3.5 million in subsidies from 1999 to 2012, according to the Environmental Working Group. In 2012, he received $70,000 in direct payments alone…”

She goes on to note, “Fraud, by the way, is rampant in farm subsidies, although you’re unlikely to hear anything about it. … You have to burrow into reports from the Government Accountability Office for that.” Of course the cronies don’t want you to know what they are doing.

I recently noted that politicians can gain more political support if they campaign against the status quo rather than in favor of some specific policy to replace it.  Tucker’s column is a good illustration.  Though she calls herself a Progressive, her recognition of the rampant cronyism that characterizes politics is shared by observers from one end of the political spectrum to the other.

Tucker doesn’t suggest any solutions to this cronyism, and we might have less in common there. Meanwhile, it is nice to see that people coming from conservative, libertarian, and Progressive points of view all share common ground in recognizing that government policy favors the politically connected at the expense of the general public.

Winning Ideas in Politics

I have often thought that the best way to run a political campaign and gain popular support is to run against the status quo, rather than in favor of policies to replace it. That’s why politicians run on slogans like “It’s Morning in America” or “Hope and Change” rather than offering real policy alternatives.  More people will agree with the political candidate who opposes current policies than with the candidate who advocates specific remedies.

I was reminded of that when reading David Stockman’s book, The Great Deformation: The Corruption of Capitalism in America. Stockman describes in detail case after case in which the economic and political elite team up to pass legislation for the benefit of the crony insiders, but to the detriment of the nation.  Stockman argues (p. 693) that this cronyism will inevitably lead to a fiscal collapse.

I was right with Stockman as he railed against the rampant cronyism that has been growing in America. That’s the status quo he and I are against. But when I got to his recommendations, which include public funding of election campaigns and a 30% wealth tax to pay down the national debt, I found myself in disagreement. We oppose the same things; we just don’t agree on what should replace them or how they should be replaced.

The book is a worthwhile read. We need more books like Stockman’s, and like Peter Schweizer’s Extortion, to shed light on the state of contemporary American politics.  Political competition isn’t Republicans against Democrats; it is the political elite against the rest of us.  These books show us that the political elite is winning.

President Obama on Inequality: Rhetoric vs. Reality

0d6092f08b456ce7b551d2dc0739960fPresident Obama has recently promoted inequality as a fundamental threat to our way of life, saying, “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe.”  You can read the rhetoric here.  Let’s look at the reality.

The president suggested policy initiatives to address these issues, so presumably, the president’s policies can make a difference.  What has he done so far?

He has presided over corporate bailouts, not only declaring the Wall Street banks too big to fail, while a multitude of small businesses did fail, his policies continue to support the banking industry through low interest rates and the payment of interest on reserves held at the Fed. Banks holding bad mortgages were bailed out while individual homeowners were evicted from their homes.

While the president does not directly determine Fed policy, Bernanke was all-in on the president’s agenda, and now the president has appointed Janet Yellen as Fed chair because she supports a continuation of those policies.

The low interest rate policy has hurt small savers, who tend to keep their savings in fixed-interest assets, but has propped up the stock market where the wealthier tend to invest.

The president’s support for extended unemployment benefits has taken away some of the incentive for people to find work, which is the best way to escape poverty.

After campaigning against them, the president worked hard to preserve the “Bush tax cuts,” with ultimately just a small increase in rates for the highest-income individuals.

Then there is Obamacare, which provides financial incentives for employers to convert full-time jobs to part-time jobs to avoid the health insurance penalties, further eroding opportunities for those at the bottom of the income scale.

What has been the effect of the president’s economic policies?  The unemployment rate remains high, at 6.7%, and long-term unemployment has spiked to its highest level in history, largely because of the extended unemployment benefits. The labor force participation rate has fallen from 66% in 2008 to below 63% today, so fewer people are even looking for the jobs that could help them escape poverty.

In 2008 13.2% of Americans fell below the official poverty line.  By 2012 the poverty rate was 15%.  The president’s policies have increased poverty.

How about the rich?  The Dow Jones Industrial Average, which hovered around 8,000 when the president took office in 2009 has more than doubled to top 16,000 today.

Despite the rhetoric, the reality is that the president’s policies have created more inequality.  They have hurt the poor, but Wall Street has done well.

Extortion!

booksI’ve recently read Peter Schweizer’s book, Extortion: How Politicians Extract Your Money, Buy Votes, and Line Their Own Pockets.  The book offers a solid account of the way politicians use their political power to extract money from interest groups for the benefit of the Permanent Political Class.

Interest group activity is often viewed as bribery: interests offering campaign contributions and other benefits to legislators to get legislators to pass legislation those groups favor.  Schweizer argues that the reality is the opposite: legislators hold out on putting legislation up to a vote unless interest groups who support it pay up; or worse, legislators threatening to pass legislation that will harm those interests, unless they pay the legislators to kill the legislation.

Payment typically comes in the form of “contributions” to campaign coffers, and Schweizer explains in detail how legislators are able to convert funds for their personal benefit, using lots of real-world examples.  In addition to personal consumption, legislators can hire friends and relatives, and can extort firms to hire their friends and relatives.

The book explains how the legislative process really works.  It is the antidote to what is typically taught in public school civics classes.  The book offers numerous examples, and is well-documented and footnoted.  Every American should read this book.