Category Archives: political economy

There’s Growth and then there’s Growth

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The outcomes of the Greek and French elections last week, serve to emphasize a perceived, and real, need for economic growth.  That need exists in the US, also; those elections serve to highlight our need, as well.

But what kind of growth is intended?  Carsten Volkery hints at the version preferred by the Left in Europe (and, I submit, it’s a view shared by our Progressives, here at home; accordingly, I’ll just write about Europe in this post and incorporate our Progressives by extension).

Volkery opens his description of the Left’s version of growth this way.

[The European fiscal pact, an effort at national budget discipline] will, however, be augmented by a separate “growth pact.”  It is currently unclear just what form this growth pact will take.  But it seems safe to assume that it will not be particularly ambitious—European leaders want to stimulate the economy without putting too much strain on their budgets.  Massive debt-financed investments are still regarded as a taboo. Additional transfers from the wealthy north to the impoverished south also seem unlikely.  It is, in short, unclear if Europe can even afford growth.

Stimulate the economy through their budgets.  Can Europe afford growth?  I.e., more government spending of some sort.  Volkery then suggests some ways to achieve this greater spending, this “growth.”

Relax the austerity targets…domestic demand would benefit….

But this Keynesian adherents’ conflation of a government-fueled artificial demand with the true economic demand of a nation’s private economic participants—the citizens and their businesses—has already been proven to result in failure to stimulate anything beyond growth in government: here in the US in the 1930s and again in the years since 2008, and in Europe in that same post-2008 era.

Cheap money from the ECB…cut interest rates further, which would stimulate demand.

The US Fed has been holding interest rates artificially low, to the point of going negative in real terms, for years.  No demand stimulus has resulted.  Further, cheap borrowing still is more debt, the wrong answer for an economic dislocation caused by too much borrowing.

Structural reforms…liberalizing the labor market, increasing the retirement age and reducing barriers to trade [to] increase competitiveness, and…stimulate the economy.  Such reforms only have one problem: they don’t help much in the short term.

This is true enough, but it’s not an argument to not implement the reforms; it’s an argument to stop dithering about them, and get them in place.  As the reforms take effect, government’s intrusion into their citizens’ lives will be reduced, they’ll have more room for their own decisions—and more money with which to act on those decisions.  More true economic demand.

EU investments: These could take different forms.

And every one of them amounts to increased government spending, increased government borrowing, or increased government selection of business winners and losers, or all three.

No, the only growth each of these various plans for increasing government spending and borrowing can stimulate is in the size of government’s debt and the size of government and its intrusion into the lives of men and women.

To truly stimulate growth in economies, what is needed is not budget discipline through reduced government spending and increased taxes, but budget discipline through reduced government spending and reduced taxes on a broadened tax base, and reduced government borrowing.  Most especially, there’s no room for increasing (again) government spending or borrowing.

The more money that is left in the hands of the people who’ve earned it, the more freedom those people will have to set their own goals, to develop their own ideas, to do their own innovation, to form their own small businesses—and to hire even just one or two or three others to work in their businesses.  In the aggregate of all these burgeoning small businesses is the growth of employment—with even more money in the hands of those earning it.

The less government competition for goods and services—and labor—the lower prices will be, and so the money left in the hands of those earning it will go farther—further stimulating economic growth.  Yes, those lower prices will impact those small businesses, but those lower prices will impact  their supply prices, too.  The businesses will thrive with the growing demand from that increase in money and decrease in prices—costs.

There’s another effect from reduced government spending that’s often overlooked.  Government spending often serves to substitute for individual spending: why should a person buy this or that good or service, if government is going to buy it for him?  Less spending reduces this substitution effect, putting the money back into the private economy where it belongs.

With more people having skin in the game—from everyone being taxed, for instance, even at those reduced rates—more people will play an active role in their own lives and in the politics that, ultimately, structure their lives.  This is entirely appropriate.  A free people must be politically active, or they lose their freedoms.  Pericles and Plato were right on this.

Expensive Energy

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Do “green” energy subsidies work?  Pretty much by definition, they do not.  Without the subsidies, “green” energy is unsustainably expensive.  Even—especially—when the subsidy is a government mandate to use/buy the “green” energy, the only thing green about it is the money necessary to buy it.  The cost of the ethanol subsidy/mandate in our gasoline has been well documented as appearing not only in the cost of our gasoline, but in the cost our food, as well.

Wind energy provides another example of an expensive, and failed, “green” energy subsidy.  The Wall Street Journal writes

Twenty-nine states have these rules requiring local utilities to purchase between 20% and 33% of their electric power from renewable sources.

Minnesota, in particular, the WSJ reports, required as recently as 2007 that utilities in the state push their use of renewable energy  to 25% by 2025, to 12% by this year.  That means wind energy because in that Midwestern and northern state, the sun doesn’t shine as much as it does in New Mexico or Arizona.

The Minnesota Rural Electric Association says its members lost $70 million last year because these utilities are forced to buy wind power they “can’t use and can’t sell.”  Even so, residential utility bills for MREA’s customers run $50 to $100 per year higher than they would absent the mandate.  That’s not chump change for Mr Everyman.

What are Minnesotans getting for their extra $100 of energy expenditures?  Nada.  Not more energy.  The wind does not blow all the time, so the wind mills stand idle while still costing money.  When the wind blows too hard, the wind mills must be shut down, so they stand idle while still costing money.

Not more jobs.  Minnesota’s wind-generated electricity doesn’t come from wind mills built in Minnesota.  They import it from North Dakota.  When the wind is blowing just right.

The WSJ also described a study published this year by the Manhattan Institute, a New York City-based market-oriented think tank, that compared states with renewable energy mandates with those that allow utilities to purchase the cheapest electricity available.

The states with mandates paid 31.9% more for electricity than states without them.  Residents of North Dakota, a state without a mandate, pay $7.63 per kilowatt hour for electricity.  Neighboring Minnesota pays $10.76.

Hmm….

Unemployment and Unemployment

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Last Friday, the Bureau of Labor Statistics jobs data were released.  Superficially, they seem encouraging—the unemployment rate dropped a tenth of a point to 8.1%, the lowest rate since the month of President Obama’s inauguration.  Moreover, nonfarm payroll employment rose by net 115,000 (130,000 new private sector jobs against a loss of 15,000 government sector jobs).  But the data behind these numbers are appalling.

By April, the number of people not in the labor force at all had risen to nearly 88.5 million, the highest non-participation rate on record.  Indeed, this is a rise of over half a million (ex-) workers just since the March data release.  This has driven the labor force participation rate—the per centage of our population that hasn’t yet given up and are still actively working or looking for work, to 64.3%, a 30-year low.  Other estimates confirm this: 342,000 people dropped out of the labor force, while the ranks of the unemployed fell by just 173,000.

The Wall Street Journal also reported [emphasis added]

Friday’s report was weak across categories.  Manufacturing employment, an area of strength in recent months, grew by a disappointing 16,000 jobs.  Construction employment fell slightly.  Full-time employment plunged by more than 800,000 jobs.

That’s why that headline unemployment rate dropped.  The unemployment ratio is a fraction consisting of the number of people out of work divided by the number of people working or looking for work, and more people gave up and left the work force—became non-persons in the eyes of the Government’s jobs bean counters—than found jobs.  The number of people left who are working or looking for work shrank precipitously.

A couple of pictures illustrate the story.  (The graphs might be a little hard to read.  The Labor Force Participation Rate graph is in two-year increments from January 1980, and the Persons Not In Labor Force is in three-month increments from December 2007.)

The number of folks wanting to work, that labor force participation rate, rose rapidly in the optimism of the Reagan economic boom into the dot-com bubble.  When the bubble burst, participation rate fell off, but was recovering during Bush the Younger’s second term (when his own tax cuts were starting to take effect) until the Barney Frank housing bubble burst.  And during the Obama administration, the participation rate has fallen off a cliff, as more and more Americans give up due to the current administration’s policy failures and stop looking altogether for work.

Beginning with that housing bubble starting its failure, the population no longer in the work force began running up more steeply, and it’s continued without break throughout the present administration’s set of “economic” policies.

 

h/t GayPatriot

Some Thoughts on Free Markets and Limits

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I was driving to the airport to pick someone up after a too-long absence the other day when the traffic load struck me (figuratively).  I was driving on a modern freeway with no impediments to traffic flow.  Adjacent to this was a frontage road with traffic lights.  Even though the traffic loads were the same on both roads, the traffic on the frontage road stayed bunched up and slow moving—neither the drivers who wanted to go faster nor the slower drivers were able to go as fast as they wished due to the limits imposed on everyone traffic by those lights.

On the freeway, however, the traffic quickly got strung out and widely spaced, as the faster drivers moved apace, and the slower drivers—moving faster than their brethren on the frontage road—moved at their preferred slower pace.

What has this to do with free markets, one might ask.  It’s those limits.  The traffic lights—the limits a government applies to a centrally managed economy that requires (limited) licenses to manufacture so as to not over produce, licenses to sell so as to avoid unsanctioned pricing, licenses to handle the manufacturing scraps, donations to the correct political cause, and “protection” for everyone—keep everyone bunched up and slow-moving.  Certainly, the speed range between the fast-movers and the slow-movers was much narrower than the speed range on the freeway, but everyone was moving much more slowly than we were on our freeway.

Of course, on closer inspection, the analogy breaks down, but that closer inspection, now that we have the overall picture from the analogy, demonstrates the power of the free market economy compared to one that’s controlled by government, one that has those “traffic lights.”  Within the context of this post, the individual actors on each of the two highways are largely unrelated to each other, with the cars on the traffic light-limited highway, for instance, connected only by the physical presence of a car in front that’s held up by a red light or that is a slower-moving car in the forced bunch and so is holding up all the cars behind it.

In a free market economy, though, all the players are inextricably intertwined.  Indeed, the fast-movers don’t merely facilitate the slow-movers’ ability to get along down the market road, these fast-movers actually help pull the slow-movers along—even though the speed range between economic fast-movers and slow-movers in the free market is wider than it is in the managed economy.

Take luxuries, for example.  Two come to mind: air conditioners and televisions.

Oh, wait; these aren’t luxuries anymore, and they haven’t been for decades.

When these things first came out, only the rich, the economic fast-mover, could afford an air conditioner in the window of his house or a TV in his house’s living room.  But in a free market, these fast-movers helped create the market for the air conditioner and the television.  Call it a status symbol—I’ve arrived—or a desire to be first on the block to have one, or any other reason, only the rich both could afford such things and were interested in acting on the desire.

Air conditioner and television producers, wanting to sell more into that nascent market, produced more, and so more were bought.  In the free market economy, others wanted a piece of that action, and they produced air conditioners and televisions.  Competition between the producers—which doesn’t exist in a managed economy—began driving prices down, which made these luxuries more affordable—which drew in more producers wanting a taste of the money, which drove prices down even more, and ultimately, nearly everyone could—and did—buy.  Today, most houses have central air, and of those that don’t, most have window air conditioners that cost as little as $100—an unheard of level of cheapness 50 years ago—and air conditioning comes standard in our cars.

Today, most houses have multiple televisions, and increasing numbers have 50″ and 60″ plasma or LCD televisions, technologies not even imagined in the ’50s when television sets first started to become widely affordable.  And our higher end (no longer strictly high end, even) cars now have DVD players, or streaming video, or both—again, technologies unheard of just a bit ago.

Moreover, it’s those fast-movers that do the hiring of those slow-movers, either directly into their own production facilities, or indirectly, by the market’s push to get more manufacturing online, into other production facilities that are newly built or expanding existing operations to support the burgeoning market for all those (ex-) luxury goods. The ripples spread, too.  Supporting functions grow: the transistor and chip manufacturers to support the circuits in all those televisions, for example.

All this because the economic fast-movers wanted a luxury good, and a free market, unlimited by government “guidance,” enabled those luxuries to become commodities.

Finally, one too-often overlooked result is that those relatively farther behind free market slow-movers are vastly better off than are their slow-moving counterparts in the managed economy.  And with the jobs created by that free market, they have excellent opportunities to move up their economic ladder.

Subsidies and Costs

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Much is made of the need for subsidies for things that are too expensive for people/businesses to get into on their own—college and solar energy for example.  After all, if folks want into these enterprises, they’re at all useful, but folks can’t afford to get involved, a taste from government to help them out is good, right?  I’ll leave aside the question of whether such an endeavor actually is useful; it’s not relevant to whether subsidies are beneficial.

The figure below, which comes from OnlineTexts shows in stark terms the effect of a subsidy.  The P and Q (which we always should mind) on the graph’s axes are economist-speak for Price and Quantity.  The line labeled S is a supply line, which simply shows generically how the price of a thing varies with its supply: as the price increases, producers will produce more (no, it does not indicate that as producers make more, the price they can get goes up).  The two lines labeled D1 and D2 show before and after conditions of how price varies with demand for that same thing: for each line, as price goes down, more people want that thing.  The points labeled A and B simply show hypothetical equilibrium price and quantity for the two demand conditions—the price at which, in theory, everyone gets to buy that thing, and no one is left out; and after all that buying and producing, no single example of that thing is left over, every one produced has been bought.  Each D line represents a different population interested in buying that thing.

It’s useful to note that supply lines can shift, also; however, in most cases demand can change faster than supply so that supply will change after and in response to that demand shift.  The change from D1 to D2 occurs today; S will not shift until tomorrow—it takes time to add factories, hire and train workers, and so on.  S will, tomorrow, shift either to the right or to the left, depending on the producers’ actual reaction to the demand shift.

So what does this graph tell us about the effect of subsidies on the cost to all of us of the subsidized thing?  The folks on the D1 demand line represent the folks that can afford to buy the good today—pay for college, build an electricity generating station that uses solar energy exclusively, buy that solar energy-produced electricity for their homes, and so on.

The price for these on D1—Point A—is deemed by government to be too high; more folks “should” be buying these goods.  Government wants to help, so it offers a subsidy for the good.

It doesn’t matter what form that subsidy takes, whether it’s a direct payment to the buyer for the purpose of a specific purchase, a tax deduction—or credit, an even larger subsidy—after the fact for having made that purchase, a payment to the producer/seller for offering the thing at a “reduced” price for certain buyers, etc.  As a result of the subsidy, the population of folks who are interested in buying that thing changes—it expands—and the demand line shifts to the right: D1 moves to D2.  Everyone is happy, right?  But what happened to the price?  It went up: the equilibrium price now is at Point B.  Despite a larger quantity of the thing being available with current production facilities, the price everyone—subsidized and not subsidized—now is paying increased.  After the subsidy was provided, everyone began paying a higher price than anyone was before the subsidy was provided.  There’s more money available with which to buy that thing, so the sellers/producers are able to charge more.

Sure, the subsidized person is paying a relatively reduced price out of pocket, but to the extent he pays taxes—now or in the future—he’s paying a higher price when those taxes are added back in.  And those taxes are inevitable: either they’re current taxes to pay for the current subsidy, or they’re future taxes to pay for the current borrowing that provides the subsidy.  But the unsubsidized person also now is paying a higher price, both out of pocket and through those taxes.

This isn’t theoretical.  As Eric Falkenstein notes on his blog,

Federal college aid has risen 165% over the past decade, and college and college costs have risen about 74% over that same period.

Moreover, as recently as FY2007 (pre-Obama explosions) Federal subsidies for solar-generated electricity amounted to $24.34 per megawatt-hour and $23.37 per megawatt-hour for wind, compared with $0.44 for conventional coal and $0.25 for natural gas and oil.  In fiscal year 2010, the subsidies were  $775.64 for solar power and $56.29 for wind, but for coal, natural gas, and oil were still only $0.64.  Higher subsidies have exploded the total cost of solar and wind energy.