A Capitalist Argument Against Price Gouging
I thought these were some very good points over at the First Things blog.
(HT: Justin Taylor)
Why We Need to Give Creative and Competent Thought to Addressing Global Poverty
Psalm 41:1 says “Blessed is he who considers the poor.” In his commentary on the Psalms, Derek Kidner points out: “The word considers is striking, in that it usually describes the practical wisdom of the man of affairs, and so implies giving careful thought to this person’s situation, rather than perfunctory help.”
Tim Keller draws out the implications of this in Ministries of Mercy: “God requires not only a significant expenditure of our substance on the needy. We are obligated to spend our hearts and minds as well. . . . We are to ponder the condition of the poor and seek ways to bring them to self-sufficiency. This takes a personal investment of time and of mental and emotional energy. God looks for a willing, generous heart, which freely helps those in need, and what we give with our hands is not acceptable without it (2 Cor 9:7).
So we are to be eager, not begrudging, in helping the poor and we are to give thought to how to do this in a way that helps bring them out of poverty over time, rather than merely doing a few things here and there.
Both of these are related. For if we are eager to help others, including the poor, this implies that we will give careful consideration to how we do it, even creating plans and generating ideas and initiatives to serve with insight in ways that help over the long term. And it means, when possible, we will ultimately seek to address root causes rather than give relief only — as important as relief itself is, all on its own.
Job is an example of this. In chapter 29 he mentions how he not only provided relief to those in need, but also “broke the fangs of the unrighteous and made him drop his prey from his teeth” (v. 17). As Keller points out in his article The Gospel and the Poor, the prophets also denounced “corrupt business practices (Amos 8:2-16), legal systems weighted in favor of the rich and influential (Deut. 24:17; Lev. 19:15), [and] a system of lending capital that gouges the person of modest means (Lev. 19:35-37; 25:37; Ex 22:25-27).”
So we should both seek to provide relief and have a view towards helping the poor become self-sufficient, ultimately seeking to address the root causes that keep people in poverty.
Lots could be said here about the various factors involved here and how to go about this, but I will mention one thing that is not commonly mentioned, at least in the church.
Many attempts to help alleviate poverty (whether in Africa, the US, or elsewhere in the world) have often been based on an inaccurate understanding of economics. As a result, they have often failed to have a last impact, and sometimes have hurt more than they have helped.
Consequently, I would argue that one of the most important things we can do if we are going to make an effective contribution to the solutions for global poverty is gain a correct understanding of economics. There is more that we need to do, of course, but gaining a right understanding of economics is critical for knowing how to direct our efforts rightly. A right understanding of economics, I would argue, is part of considering the needs of the poor (Psalm 41:1).
One of the most helpful books for this is Thomas Sowell’s Basic Economics. Sowell’s classic is one of those rare books that helps put all the pieces together. And it’s helpful not only for thinking correctly about global issues, but also issues in our own country (which was his primary purpose in writing it; the sub-title of the first- edition was A Citizen’s Guide to the Economy).
I first came across Basic Economics in a bookstore in about the year 2000. It was shortly after that I made my first trip to Africa, where many of the things I encountered illustrated the economic principles Sowell discussed.
For example, in the country we were in, the government controlled the tea industry and the zinc industry (zinc was used to make the roofs for the houses). This was supposed to make tea and zinc more affordable. Instead, it actually increased the price and decreased the quality. Sowell’s book shows why this is so — namely, because the government monopoly on these items eliminated competition, and thus the incentive to keep prices down and quality up. The nation would have been better off if the government did not seek to control these industries, but instead allowed companies to be free to produce tea and zinc as they chose, thus enabling competition to keep prices down while preserving quality.
Now I’m back in Africa and encountering similar poverty — though not necessarily to the same degree as on my prior trip (which was to a different part of the continent). I think a lot in general about “what can we do about this? How can we help more, and in a way that makes a long-term difference?” And when I’m here, it gets me thinking about it even more.
Anyway, Sowell’s book is very helpful because the only long-term solution to poverty is economic growth — which comes through business and entrepreneurship. Foreign aid can be helpful, but businesses create goods and create jobs — and keep producing goods and providing income through the jobs year after year. Thus, business is the best long-term solution to poverty.
Yet, as Sowell illustrates, certain economic policies make it harder for businesses to start and grow. Furthermore, some of these policies that hinder economic growth actually seem sensible at first. And that’s why it’s so important to educate ourselves on economics — so that we aren’t guided in our thinking and initiatives by stage-one solutions that actually hurt more than they help, and so that we don’t advocate such solutions when they are promoted by others. We have to think beyond stage one.
When it comes to economics in general, here are two very helpful and easy to read books:
- Basic Economics, as I’ve mentioned
- Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics
When it comes to economics and global poverty, here are some of the most helpful books I’ve come across:
- The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
- When Helping Hurts: Alleviating Poverty Without Hurting the Poor. . .and Ourselves
And here are some books I look forward to reading when I get the chance:
- The Shackled Continent: Power, Corruption, and African Lives
- The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good
- Solutions for the World’s Biggest Problems: Costs and Benefits
- How to Spend $50 Billion to Make the World a Better Place
William Carey — Economist?
From The Legacy of William Carey: A Model for the Transformation of a Culture:
William Carey … introduced the idea of savings banks to India, to fight the all-pervasive social evil of usury. Carey believed that God, being righteous, hated usury, and that lending at interest rates of 36 to 72 percent made investment, industry, commerce, and economic development impossible.
Economics Does Not Lie: A Defense of the Free Market in Times of Chaos
I’m looking forward to reading Guy Sorman’s new book Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis. Here is the summary from the inside jacket, which is a really good education in itself:
In an economic crisis, it would be fatal to forget everything we know about economics. Though cyclical downturns do occur in the free market — they are due to uncontrolled innovation — this is a defect in the system, not a failure of it. To abandon the free market because it is imperfect would be a dangerous overreaction. After all, state intervention is imperfect, as is human nature itself.
During the current crisis, it’s crucial to recall the unprecedented benefits that free markets have brought to global economics. Since the public sector gave ground to market capitalism, beginning in the early 80s, the results have been breathtaking. The opening of economic borders and the promotion of free trade in Europe after 1990 contributed to the reconstruction of Eastern Europe and lifted 800 million people out of poverty across the globe.
In Economics Does Not Lie, Guy Sorman shows that behind this unprecedented growth is not only the collapse of state socialism but also a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. He reminds us that bad economic policies ravaged entire nations during the twentieth century, producing more victims than any epidemic did. Any attempt to return to those obsolete policies would bring chaos and poverty. The way out of the current crisis is to restore trust in the free-market society and the policies that have provided economic recovery over the last thirty years.
Myths and Money: Inoculating Against the Socialist Flu
Marvin Olasky has some good words about Jay Richards’ book Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem:
Many of us have had flu shots this fall, but what about an inoculation against the hate-America economics that many colleges teach? Money, Greed and God: Why Capitalism Is the Solution and not the Problem, by Jay Richards (Harper One, 2009), undercuts myths that students might otherwise accept as facts.
Among the myths Richards demolishes: The Nirvana Myth (contrasting capitalism with an unrealizable ideal rather than with its real alternatives), the Piety Myth (focusing on good intentions rather than results), and the Materialist and Zero-Sum Game Myths (believing that wealth is not created but simply transferred).
Richards, one of that rare breed with a theology doctorate but an understanding of economics, also points out the errors of the Greed Myth (believing that the essence of capitalism is greed), the Usury Myth (that charging interest on money is immoral), and the Freeze-Frame Myth (that what’s happening now regarding population, income, natural resources, or so on, will always happen).
After knocking down the concept of Christ against capitalism, Richards summarizes proven ways to alleviate poverty: Teach that the universe is meaningful, thrift is good, and the rule of law is essential. He discusses the importance of delaying gratification, establishing property rights, and building stable families. An appendix helpful to libertarians shows why “spontaneous order” in economics does not argue against Intelligent Design in biology.
Why Third-World Capitalism is Not Flourishing
Here’s a quick statement of the reason, from my notes on the subject:
The mystery of capital is this: Assets (property, money, the means of production) are not automatically capital. Capital is like electricity. Until it is there, the assets are dead. Property rights are what close the circuit and bring dead assets to life. This is chief reason third world capitalism is not flourishing.
This is the premise of the book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.
De Soto’s book has revolutionized our understanding of capital and “points the way to a major transformation of the world economy.” According to The Economist, it is “the most intelligent book yet written about the current challenge of establishing capitalism in the developing world.”
John Mackey on “Conscious Capitalism”
From a good interview with John Mackey, co-founder and CEO of Whole Foods:
“Before I started my business, my political philosophy was that business is evil and government is good. I think I just breathed it in with the culture. Businesses, they’re selfish because they’re trying to make money.”
At age 25, John Mackey was mugged by reality. “Once you start meeting a payroll you have a little different attitude about those things.” This insight explains why he thinks it’s a shame that so few elected officials have ever run a business. “Most are lawyers,” he says, which is why Washington treats companies like cash dispensers.
Mr. Mackey’s latest crusade involves traveling to college campuses across the country, trying to persuade young people that business, profits and capitalism aren’t forces of evil. He calls his concept “conscious capitalism.”
What is that? “It means that business has the potential to have a deeper purpose. I mean, Whole Foods has a deeper purpose,” he says, now sounding very much like a philosopher. “Most of the companies I most admire in the world I think have a deeper purpose.” He continues, “I’ve met a lot of successful entrepreneurs. They all started their businesses not to maximize shareholder value or money but because they were pursuing a dream.”
Mr. Mackey tells me he is trying to save capitalism: “I think that business has a noble purpose. It’s not that there’s anything wrong with making money. It’s one of the important things that business contributes to society. But it’s not the sole reason that businesses exist.”
What does he mean by a “noble purpose”? “It means that just like every other profession, business serves society. They produce goods and services that make people’s lives better. Doctors heal the sick. Teachers educate people. Architects design buildings. Lawyers promote justice. Whole Foods puts food on people’s tables and we improve people’s health.”
Then he adds: “And we provide jobs. And we provide capital through profits that spur improvements in the world. And we’re good citizens in our communities, and we take our citizenship very seriously at Whole Foods.”
The Results on Cash for Clunkers
The Wall Street Journal summarizes the the results of the cash for clunkers program.
The Economic Stimulus Didn’t Work
A good article from the Wall Street Journal. It begins:
Is the American Recovery and Reinvestment Act of 2009 working? At the time of the act’s passage last February, this question was hotly debated. Administration economists cited Keynesian models that predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs. Our own research showed that more modern macroeconomic models predicted only one-sixth of that GDP impact. Estimates by economist Robert Barro of Harvard predicted the impact would not be significantly different from zero.
Now, six months after the act’s passage, we no longer have to rely solely on the predictions of models. We can look and see what actually happened.
And it concludes:
Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic–not the fiscal stimulus program–deserves the lion’s share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.
(HT: Glenn Brooke)
The Housing Boom and Bust
Thomas Sowell’s new book, The Housing Boom and Bust, would be worth a read by those wanting to learn more about the housing bust and its role in the current financial crisis. From the Amazon product description:
This is a plain-English explanation of how we got into the current economic disaster that developed out of the economics and politics of the housing boom and bust. The “creative” financing of home mortgages and the even more “creative” marketing of financial securities based on American mortgages to countries around the world, are part of the story of how a financial house of cards was built up—and then suddenly collapsed.
The politics behind all this is another story full of strange twists. No punches are pulled when discussing politicians of either party, the financial dangers they created, or the distractions they created later to escape their own responsibility for what happened when the financial house of cards in the financial markets collapsed.
Sowell also wrote a column a few months ago on summarizing some of the main themes of the book. Justin Taylor points out today on his blog that Sowell was recently interviewed on the subject on “Uncommon Knowledge.”
Another helpful book on the financial crisis and the causes of the housing boom is Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Meltdown was a very clear and enlightening book that I would love to summarize sometime (someday/maybe).
Spending Does Not Drive the Economy, Part 2
I posted a few weeks ago some thoughts on how spending does not drive the economy. My point is not that spending is unimportant to the economy, but rather that lack of spending is not the core problem. For before you can spend, you need to have something to spend.
Therefore, attempts to re-start the economy by encouraging spending are addressing the symptom, not the problem. If we want to address the problem — and see spending revive — we need to realize that production precedes and enables consumption. Thus, any stimulus package needs to focus on removing obstacles to production (usually taxes and excessive regulation), rather than stimulating consumption.
This point is made very well in the book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Reading that book is actually what sparked my first post on spending and the economy. To flesh things out a bit more, here is one of the most helpful (and extended) quotes from that book on spending and the economy, which I’ve broken up a bit through some brief summary statements.
(By the way, if you are aware of the “paradox of thrift,” the seeds to a large part of the answer are in this quote. If I get the chance, I’ll post more thoughts on the paradox of thrift down the road.)
Patrick Lencioni on the Two Core Problems with Socialism
Patrick Lencioni is an excellent business thinker. He is known for simple yet powerful management wisdom through books like The Five Dysfunctions of a Team and The Three Signs of a Miserable Job.
Recently, he has started The Simple Wisdom Project, which is intended to be “a source of perspective and common sense about topics relating to family, faith, and life’s daily challenges.”
His latest monthly article discusses socialism. He writes it in response to a reader who “wanted to understand why socialism is a bad thing, especially in the context of the Christian commandments to love thy neighbor, care for the poor and avoid materialism.”
The short article is well worth your read. Here are a few key excerpts.
Socialism doesn’t work:
First, it just doesn’t work. At least not for very long. That’s because people are flawed and, outside of a family, a religious order, or a small group of friends, they will not continually work hard for the ‘greater good’ if they do not receive the fruits of that work themselves. As an economics major in college, I learned that this theory had a name: ‘the free-loader effect’. It is the natural tendency of people to do less and less work when they realize that they won’t see a proportionate increase in what they can get for it.
Over time—and this is an inevitable consequence of the free-loader effect—socialist societies experience decreasing productivity, risk-taking, and innovation, along with increasing tax rates, promises of government programs, and expectations from citizens about what they can get from those programs. When the economy inevitably falters under its own weight, those expectations cannot be met.
Socialism diminishes the dignity of human beings:
The second reason why I believe socialism is such a bad idea is very much related to the first, but much more important to me as a Christian: it diminishes the dignity of human beings. In socialist societies, individuals grow increasingly dependent on the government for their well-being, and less and less confident that they are capable of and responsible for themselves. This is an inevitable recipe for cynicism, fatalism and depression.
Socialism advances through a subtle, “slow creep”:
… socialism does not usually spring up over night. Instead, it creeps. Little by little we grow accustomed to new and higher taxes (“it’s just a one percent increase in the sales tax”), more government programs (“how can I vote against free ‘fill-in-the-blank” for children?”), and the false lure of getting something for nothing.
What should we do if we really want to be compassionate and make a difference?
So what are we to do if we want to act on our desire to do good and make a difference? Work hard. Create jobs. Treat our employees with dignity and love. Give generously of our money and our time to good charities and directly to those in need. And demand that our government compassionately provide effective programs and services for those who are truly incapable of providing for themselves.
But we should never, ever, support a program, a tax or a proposal that makes us feel good but ends up making the lives of the people we are supposed to be helping, and the society in which they live, more difficult and dependent.
False Solutions and Real Problems
Thomas Sowell has a great column from the other day on the housing crisis. Here are the first two paragraphs:
Someone once said that Senator Hubert Humphrey, liberal icon of an earlier generation, had more solutions than there were problems.
Senator Humphrey was not unique in that respect. In fact, our present economic crisis has developed out of politicians providing solutions to problems that did not exist– and, as a result, producing a problem whose existence is all too real and all too painful.
Read the whole thing.
Free Jay Leno Tickets Provide Lesson on the Free Market
This is an amusing story from Greg Mankiw’s blog that also shows how free markets improve the allocation of resources.
Spending Does Not Drive the Economy, Part 1
The belief that spending drives the economy is pervasive. It manifests itself in two sub-categories: First, the belief that consumer spending drives the economy and, second, the belief that government stimulus spending assists the economy.
We’ll look at each of these in turn, and then show how this relates to the topic of productivity.
UCLA Economists: FDR’s Policies Prolonged Great Depression by 7 Years
A study by two UCLA economists argues that FDR’s policies prolonged the Great Depression by 7 years.
This should come as no surprise to those who understand some of the basic principles of economics, as articulated in books like Basic Economics: A Common Sense Guide to the Economy by Thomas Sowell or Free to Choose by Milton Friedman or Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics by Henry Hazlitt.
Also, a recent book called FDR’s Folly delves into the Great Depression in detail and shows very specifically how FDR’s policies prolonged and deepened the Great Depression. What is unique about this particular study is how it also seeks to quantify that impact specifically.
Here are some very helpful excerpts:
“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”
….
“President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services,” said Cole, also a UCLA professor of economics. “So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.”
….
“High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,” Ohanian said. “As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.”
….
“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.” [emphasis added]
(HT: Justin Taylor)
Upside Down Economics
Good article the other day by Thomas Sowell on the financial crisis. He begins:
From television specials to newspaper editorials, the media are pushing the idea that current economic problems were caused by the market and that only the government can rescue us.
What was lacking in the housing market, they say, was government regulation of the market’s “greed.” That makes great moral melodrama, but it turns the facts upside down.
It was precisely government intervention which turned a thriving industry into a basket case.
Reaganomics vs. Obamanomics
Peter Ferrara had an excellent article in yesterday’s Wall Street Journal contrasting Reagan’s and Obama’s economic policies. Here are the key points of the article.
In his inaugural address, President Barack Obama said, “The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified.”…
Unfortunately, this rhetoric is not true. Mr. Obama’s economic policy is following not what has been proven to work but liberal ideology.
The best way to understand this is to compare what’s being proposed now with what Ronald Reagan accomplished.
The four components of Reagan’s economic plan were:
- “Across-the-board reductions in tax rates to provide incentives for saving, investment, entrepreneurship and work.”
- “Deregulation to remove unnecessary costs on the economy.”
- “The control of government spending.” (Nondefense discretionary spending was down 14.4% in 1988 compared to 1981 when Reagan took office.)
- “Tight, anti-inflation monetary policy.”
The results of Reagan’s economic policy were remarkable. His policy worked. And this shouldn’t be a surprise to those familiar with the basic principles of economics. Ferrara states:
We know such policies work because they turned around in just two years an economy far worse than today’s. We were suffering from multiyear, double-digit inflation, double-digit unemployment, double-digit interest rates, declining incomes, and rising poverty. In fact, what we suffer with today is not the worst economy since the Great Depression, but the worst economy since Jimmy Carter — the last time liberals were dominant politically and intellectually.
But what is Obama’s plan?
The Obama administration’s economic policies do not include any of the four Reagan components. In fact, the stimulus plan is the greatest increase in government spending in the history of the planet. Meanwhile, the Fed is furiously reinflating, sowing more havoc down the line. Mr. Obama is still promising future increases in tax rates by letting the Bush tax cuts lapse, because for ideological reasons he thinks even current rates are too low. And instead of deregulating for more energy production, he is still promising massive increases in regulatory barriers — through global warming cap-and-trade legislation — to increased production from proven energy sources to serve an extreme environmentalist ideology.
What is the current result of Obama’s plan?
This is why America seems so hopeless right now, and so depressed. We are stuck going in exactly the wrong direction on economic policy because of currently dominant ideological fashions.
What will the longer-term results of Obama’s plan be?
A natural economic recovery will begin sometime this year, not because of the president’s policies, but because soon this will be the longest recession since World War II. However, thanks to the administration’s retrograde policies — cut from the cloth of the 1970s and even the 1930s — the recovery will not be what it should be. Rather, unemployment will remain too high, and inflation will resurge, recreating the disastrous economic results we suffered the last time Keynesian policies were dominant.
(HT: Justin Taylor)
Is Government Spending the Answer to an Economic Downturn?
Keynesian economics — which dominated economic thought for a decent chunk of last century — said yes. Other schools of economic thought — which I find more plausible — do not think so. Gregory Mankiw had a good, brief discussion in the NY Times last month of how there is ample reason to doubt that increased government spending is what the economy needs.
Also of note: At the end of the article, Mankiw gives this quote from Paul Samuelson: “I don’t care who writes a nation’s laws or crafts its advanced treaties, if I can write its economics textbooks.” That’s worth pondering in the event that we ever doubt the importance of sound economic theory.
Cato Institute to Obama: “Mr. President, We Disagree”
The Cato Institute has taken out a full page ad in some major publications stating that “we the undersigned do not believe that more government spending is a way to improve economic performance.”
From their site:
President Obama says that “economists from across the political spectrum agree” on the need for massive government spending to stimulate the economy. In fact, many economists disagree. Hundreds of them, including Nobel laureates and other prominent scholars, have signed the statement that appears in the Cato Institute’s ad in the New York Times and in other national publications.
And here’s the main text of the ad:
Notwithstanding reports that all economists are now Keynesians [this is the view that holds that increased government spending is the way to spur the economy] and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance.
More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today.
To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.
(HT: JT)
Thomas Sowell on the Stimulus
Thomas Sowell has a very thought-provoking column on the stimulus called “What Are They Buying?”
I talked yesterday about how government spending is not the way to stimulate the economy. On top of this, Sowell makes note that “out of $355 billion newly appropriated, the Congressional Budget Office estimates that only $26 billion will be spent this fiscal year and only $110 billion by the end of 2010″
Not all of that $355 billion is for government spending and public works, for sure. But this indicates that, when it does come to the public works projects, most of that spending won’t even happen this year. So even if government spending was a good way to stimulate the economy, the stimulus package would still have this other problem that most of that won’t happen for another year and longer.
Why This Stimulus Package Won’t Work — And What Will
There was a very good editorial in the Wall Street Journal yesterday on the current stimulus package heading through congress and why it won’t work.
Here are a few of the key reasons that it won’t work, some of which are covered in the article and some of which are not:
Public Works Projects Do Not Stimulate the Economy
The government has to fund those projects by taking the money from somewhere else (through taxes or borrowing). Thinking that public works will stimulate the economy assumes that the government will invest that money more productively than the private sector would. But that is almost never true.
Plus, the government is not our parent. It should not try to take care of us by stepping in to create jobs directly. It’s aim should be to keep us — the citizens in the private sector — maximally free to act. Let’s learn from the 1930s!
Government Spending Does Not Stimulate the Economy
This is really another way of stating point one. It is not spending per se that stimulates the economy. It is spending on profitable ventures which advances the economy. The private sector has a litmus test for knowing what society needs and wants most: profit and loss. But the government has no such means of knowing what is truly most wanted and needed.
I know that profit and loss realities alone do not create a good society — we must also have non-profit enterprises, and yes government does have a legitimate role. But the point is that, in the governmental realm, the incentives are not there to direct government spending toward the specific “stimulus projects” that society truly needs. So it needs to keep such initiatives to a minimum.
The business sector, on the other hand, has a clear test governing how it invests: the ventures that a business invests in must be profitable. But this is not so with government initiatives, since they are funded not by business results (profits) but taxes. And those taxes take money away from businesses and individuals — that is, they take it away from those that invest according to the clear and decisive knowledge of profit and loss.
The Problem is Lack of Supply, Not Lack of Demand
During the depression, FDR and his administration kept trying to figure out ways to stimulate demand. That has it backwards. The problem is never lack of demand — human demand is basically infinite.
The problem is that, when it comes to the economy, you first have to produce before you can receive. My family needs a larger vehicle right now. The want, need, and “demand” are there. Here’s what is not there: the money (or, at least, an amount that would leave us with the savings level we want after the purchase). I need to figure out how to produce the equivalent value of a vehicle before I can actually go buy that vehicle. (Or, alternatively, I need to be confident enough in the economy to take out a loan and trust that my future earnings will be sufficient to pay that off.)
So nobody needs to convince me or anybody else to want various goods and services. The issue is that we need to be able to produce enough in order to purchase them. In other words, supply creates demand. If we define “demand” as the actual decision to purchase a vehicle, rather than simply the desire for one, we see that that kind of demand is created by supply — that is, by my producing something of value, which value I can then “exchange” for the vehicle.
The Solution is Immediate and Permanent Tax Cuts
If the problem is lack of supply, then the solution is not to stimulate demand, but to stimulate supply. Or, if we want to put it another way, the way to stimulate demand (defined as the actual decision to buy) is by stimulating supply.
So how do you stimulate supply? Well, you don’t really need to stimulate that, either. It is a part of human nature to seek to be productive. We have an ongoing thirst to create, make things, and produce. That is a good thing.
The problem is that there are obstacles that interfere with this. Sometimes the obstacles are simply that life is hard. But most of the time, the biggest obstacles are created by the government — unintentionally, of course, and usually in the name of “stimulating the economy” or “making things equitable” and such. What needs to happen is simple: these obstacles that we can control, namely those created by the government, need to be removed. The government has to “back up” a bit.
And that means tax cuts. Taxes are legitimate and necessary. But high taxes are the biggest obstacle to the ability of people and business to produce (excessive regulation is a close second). This is because taxation diverts money away from private sector investment in productive goods and services and into government initiatives. In other words, there is less money for businesses to invest in creating and expanding their goods and services.
There is objective, real-world evidence that tax cuts do indeed lead to a growing economy. We saw this with the Kennedy tax cuts of 1964 and Reagan tax cuts of 1983, for example. Further, the WSJ piece notes that “Research by Mr. Obama’s own White House chief economist, Christina Romer, has shown that every $1 in tax cuts can increase output by as much as $3.” This is in contrast even to the best-case scenario thinking behind the government spending approach to stimulating the economy, which is based on a theory that “each $1 of spending the government ‘injects’ into the economy yields 1.5 times greater output.”
Even if that theory were true, that is still only half of the stimulus created by tax cuts. But, more importantly, it’s not true. As the WSJ piece also notes, “There’s little evidence to support this theory [that $1 of government spending creates $1.50 in output], but you have to admire its beauty because it assumes the government can create wealth out of thin air. If it were true, the government should spend $10 trillion and we’d all live in paradise.”
Again, there do need to be taxes. But a 35% corporate tax rate and 35% individual tax rate for top earners is far beyond what the founders would have envisioned (in fact, we did not even have an income tax for the first several generations in our nation’s history). We are in absolutely no danger of taxing businesses to little. There is a lot of room for taxes to come down, in turn resulting in greater economic growth.
Some object that this is not a true picture of the corporate tax burden because many transfer their money to tax shelters (for example, see this article at Smart Money). But that is precisely part of the problem as well: corporations and individuals end up moving portions of their income to less productive tax shelters, which thus also diverts money away from more productive uses. It is ironic that you even see this done by wealthy individuals that espouse the “need” for higher taxes — they call for higher taxes, while at the same time seeking to minimize their own tax burden through various tax shelters.
Let’s affirm that is a good thing, not a bad thing, that people want to minimize their tax burden. Of course most people want to minimize the taxes they pay. We try to minimize the amount we have to pay for everything – we never want to pay more than we have to, whether at the grocery store, Target, or anywhere. That’s part of the reality of living in a world of finite resources, and it is a good thing.
The really incredible thing is that reducing taxes not only syncs with the good and natural human desire to see as little of our income as possible removed from us through taxation, but also frees up people and businesses to more fully invest in productive initiatives, thus expanding the economy.
But the tax cuts need to be permanent, because otherwise they cannot lead to a permanent change in behavior. Further, they need to be immediate and “on the margin”:
To be genuinely stimulating, tax cuts need to be immediate, permanent and on the “margin,” meaning that they apply to the next dollar of income that an individual or business earns. This was the principle behind the Kennedy tax cuts of 1964, as well as the Reagan tax cuts of 1981, which finally took full effect on January 1, 1983.
If the Obama Democrats can’t abide this because it’s a “tax cut for the rich,” as an alternative they could slash the corporate tax to spur business incentives. The revenue cost of eliminating the corporate tax wouldn’t be any more than their proposed $355 billion in new spending, and we guarantee its “multiplier” effects on growth would be far greater. Research by Mr. Obama’s own White House chief economist, Christina Romer, has shown that every $1 in tax cuts can increase output by as much as $3.
This is not hard. Obama could solve this recession in a day. Propose a tax cut bill that cuts taxes immediately, permanently, and “on the margin;” shepherd its approval through Congress (which is controlled by his same party), and then the day that he signs it into law, the recession will be solved. The effects would take many months to be felt, for sure. And the bad loans do need to clear out as well. So I’m not saying the recession would end that same day. But the healing would begin immediately, and would lead to a true and lasting recovery via the quickest route possible.
John Piper on the Economic Downturn
Very helpful and very wise:
(HT: DG)
What is Good About Free Markets
James Stoner has a good article today called “Does Economic Liberty Merit a Public Defense?” His point is that “despite the financial crisis, markets deserve a spirited public defense that acknowledges both their virtues and limits.” He discusses four essential things that free markets provide, and then outlines a few guidelines on regulation.
While I don’t agree with everything he says, it is a very helpful read. He makes the point that “pragmatism alone won’t be adequate to defend market freedom,” which is very true. People don’t only want what works best, but what is in itself best and provides an opportunity for meaning.
Substantial market freedom wins on both counts. It not only works best, but is an intrinsic good in its own right which in fact stems from what it means to be human. He states this very well in his fourth point:
Fourth and finally, the freedom of the market is valuable in its own right, not only for its consequences for material wealth or cultural development. As many have remarked, the ability to choose one’s own way in the world—to develop and share one’s skills or services, or to make and market a product or a work of art—is a mark of human dignity, a basic human right. Free markets are not the only locus for the development of talents, and not all talents are readily or rightly marketed, but many are served by access to the marketplace, and the freedom to choose how to develop one’s gifts is essential to the gifts themselves and only possible in a society with substantial market freedom.
(HT: JT)
Obama: The Economy Will Get Worse Before it Gets Better
“President-elect Barack Obama said the U.S. economy seems destined to get worse before it gets better and he pledged a recovery plan ‘that is equal to the task ahead,’” according to an article today on Fox News.
The part that scares me here is not that the economy will get worse before it gets better. The part that scares me is the pledge of a recovery plan “that is equal to the task ahead.”
Recovery plans can do good, if founded on sound free-market principles of tax cuts that spur investment (rather than tax cuts aimed to stimulate spending — the kind that Obama has been talking about as one part of his plan, where we all get $1,000 or so in the mail).
But when recovery plans are misguided, they do a lot of harm. A lot of harm. For more on this, see my previous posts Five Myths About the Great Depression and The Great Depression as We Know it Was Avoidable.
About Matt Perman
Follower of Christ. Husband of one, father of three. Former director of strategy at Desiring God. This blog exists to help equip Christians in good works, because that's what productivity is really about.
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