Perhaps I take rhetoric such as Bernie Beaudreau’s in the Providence Journal a bit too personally:
Low-income Rhode Islanders register little in the present tax debate, except for the false promise that there is a connection between tax breaks for the rich and more bread for the poor. “The flat tax will reduce poverty,” we’re told.
They offer no proof for this assertion. The tax proposal does indeed promise to take tens of millions of dollars out of state revenues at a time of budget deficits and when investments are needed to meet the basic food, health and shelter needs of our people. That’s just plain wrong.
As a matter of decency, we all should recognize that everyone in our community should at least have enough to eat, a place to sleep at night and health care before we choose to further enrich the relatively few who live already abundantly. This is a fundamental principle of our great nation.
I am no stranger to the choice between writing checks for housing or for food. At several key points of my life, when doing no more nor less than looking for work, the state of Rhode Island has let me down: out of college, when no longer able to stand the commute to Framingham, Massachusetts, when children required me to work additional hours, and when only partially employed for a year. Mr. Beaudreau complains of Rhode Island’s poor having to work two jobs, well, depending on how the term is defined, I’ve worked between three and five jobs for the past fourteen months, and largely because of the accumulating debt by which I’ve survived in this state for almost a decade, if I can’t maintain 80+ hour workweeks for the foreseeable future, I’ll have no choice but to leave, tearing my children from their large extended family.
For all his lamentations about others’ lack of proof, Beaudreau offers not a single economic fact himself. Instead, he tosses around his own class-warfare assertions and gives absolutely no indication of empathy for those who are struggling to stay out of his food lines. Come to think of it, I don’t think I’ve heard a single member of the charity industry spare a word of understanding for anybody who is feeling the crunch of this state’s economy, but has not yet been crushed by it.
Well, to Mr. Beaudreau and all of his fellow singers in the choir of Give’em Gimme, I suggest that, before they ask where the plight of the rich leaves “the rest of us,” they ponder to whom they’re speaking and what changes to the local government might answer our needs. Cheap lines about “year-round golf” are certain to yield diminishing returns.
Surely a man pulling upwards of $90,000 a year has the time and wherewithal to research economics for himself. Perhaps he can devote his next vacation (a privilege that I haven’t enjoyed for just about seven years) to a search for a bottomless well, and if he doesn’t find one, maybe he can come back home and ask “the rest of us” how our lives can be enriched.
I’m sure I’m not alone among Anchor Rising writers in feeling a glimmer of hope when such letters as Melbourne Fisher’s appear in the paying press:
Columnists Bob Kerr and Charlie Bakst get plenty of ink, and the “loyal opposition” gets an occasional letter to the editor. Keep Bob and Charlie; just get another writer who gives your socially conservative readers a column to read.
But the title that the Projo gives the letter (at least online) reads a bit more like a response to, than a summary of, Fisher’s complaint: “Conservatives need not apply.”
[Open full post]This posting is Part VIII in a series of postings about economic thoughts.
This posting contains excerpts from a previous posting that addressed the often unspoken, but very real and deeply influential, incentives that drive government behavior – and how they compare unfavorably with the incentives that drive behaviors in a competitive capitalism system:
In the book entitled Government Failure: A Primer in Public Choice, Arthur Seldon writes:
Many economics writers and teachers still present economic systems of exchange between private individuals or firms as “imperfect” and requiring “correction” by government. Most teachers of politics, politicians, and political journalists still present government as well-meaning and able to remove such “imperfections.”
In spite of this view of government, Seldon notes:
Economic systems based on exchange between individuals and on selling and buying between firms usually correct themselves in time if they are free to adapt themselves to changing conditions of supply and demand. Government “cures” usually do more harm than good in the long run because of three stubborn and too-long neglected excesses of government: their “cures” are begun too soon, they do too much, and they are continued for too long.
Gordon Tullock, writing in the same book, explains the evolution of public choice theory:
Throughout the 19th and well into the 20th century, economists assumed that individuals were primarily concerned with their own interest and worked out the consequences of that assumption. In contrast, during this same period political science largely assumed that political actors are mainly concerned with the public interest. Thus individuals who enter a supermarket and purchase items of their choice are assumed, when they enter the voting booth, to vote not for the politicians and laws that will benefit themselves, but for politicians and laws that will benefit the nation as a whole. People in the supermarket mainly buy the food and other goods that are, granted the price, found to benefit themselves and their families. However, when individuals become politicians, a transformation is assumed to occur so that a broader perspective guides them to make morally correct decisions rather than follow the course of behavior that pleases the interest groups that supported them or the policies that may lead to reelection.
Economists changed this bifurcated view of human behavior by developing the theory of public choice…
We must accept that in government, as in any form of commerce, people will pursue their private interests, and they will achieve goals reasonably closely related to those of company stockholders or of citizens only if it is in their private interest to do so…
Jane Shaw, in her article entitled Public Choice Theory, offers a more detailed explanation of how there is such a mismatch between our expectations of government and the actual performance by government:
…Economists who study behavior in the private marketplace assume that people are motivated mainly by self-interest…Public choice economists make the same assumption�that although people acting in the political marketplace have some concern for others, their main motive, whether they are voters, politicians, lobbyists, or bureaucrats, is self-interest. In [Nobel Laureate James] Buchanan’s words the theory “replaces… romantic and illusory… notions about the workings of governments [with]… notions that embody more skepticism.”
In the past many economists have argued that the way to rein in “market failures” such as monopolies is to introduce government action. But public choice economists point out that there also is such a thing as “government failure.”…
One of the chief underpinnings of public choice theory is the lack of incentives for voters to monitor government effectively…the voter is largely ignorant of political issues and that this ignorance is rational. Even though the result of an election may be very important, an individual’s vote rarely decides an election. Thus, the direct impact of casting a well-informed vote is almost nil; the voter has virtually no chance to determine the outcome of the election. So spending time following the issues is not personally worthwhile for the voter…
Public choice economists point out that this incentive to be ignorant is rare in the private sector…he or she pays only for the [purchased item] chosen. If the choice is wise, the buyer will benefit; if it is unwise, the buyer will suffer directly. Voting lacks that kind of direct result…
Public choice economists also examine the actions of legislators. Although legislators are expected to pursue the “public interest,” they make decisions on how to use other people’s resources, not their own. Furthermore, these resources must be provided by taxpayers and by those hurt by regulations whether they want to provide them or not…Efficient decisions, however, will neither save their own money nor give them any proportion of the wealth they save for citizens. There is no direct reward for fighting powerful interest groups in order to confer benefits on a public that is not even aware of the benefits or of who conferred them. Thus, the incentives for good management in the public interest are weak. In contrast, interest groups are organized by people with very strong gains to be made from governmental action. They provide politicians with campaign funds and campaign workers. In return they receive at least the “ear” of the politician and often gain support for their goals.
In other words, because legislators have the power to tax and to extract resources in other coercive ways, and because voters monitor their behavior poorly, legislators behave in ways that are costly to citizens. One technique analyzed by public choice is log rolling, or vote trading. An urban legislator votes to subsidize a rural water project in order to win another legislator’s vote for a city housing subsidy. The two projects may be part of a single spending bill. Through such log rolling both legislators get what they want. And even though neither project uses resources efficiently, local voters know that their representative got something for them. They may not know that they are paying a pro-rata share of a bundle of inefficient projects! And the total expenditures may well be more than individual taxpayers would be willing to authorize if they were fully aware of what is going on.
…bureaucrats in government…incentives explain why many regulatory agencies appear to be “captured” by special interests…Capture occurs because bureaucrats do not have a profit goal to guide their behavior. Instead, they usually are in government because they have a goal or mission. They rely on Congress for their budgets, and often the people who will benefit from their mission can influence Congress to provide more funds. Thus interest groups…become important to them. Such interrelationships can lead to bureaucrats being captured by interest groups.
Although public choice economists have focused mostly on analyzing government failure, they also have suggested ways to correct problems. For example, they argue that if government action is required, it should take place at the local level whenever possible. Because there are many local governments, and because people “vote with their feet,” there is competition among local governments, as well as some experimentation. To streamline bureaucracies, Gordon Tullock and William Niskanen have recommended allowing several bureaus to supply the same service on the grounds that the resulting competition will improve efficiency…
From the previously mentioned book, Tullock continues by explaining how public choice theory impacts public policy expectations and the broad question of what role should be played by government:
[Open full post]But the different attitude toward government that arises from public choice does have major effects on our views of what policies government should undertake or can carry out. In particular, it makes us much less ambitious about relying on government to provide certain services…
A deep-seated feeling that government is imperfect carries with it two consequences. The first is that imperfections in the market process do not necessarily call for government intervention; the second is a desire to see if we cannot do something about government processes that might conceivably improve their efficiency…
A final area where knowledge of public choice has an effect on people’s views about policy concerns the behavior of government officials. The student of public choice is unlikely to believe that government officials are overly concerned with the public interest. Because they operate in an area where information is very poor (and the proof that the voters’ information on political issues would be poor was one of the first achievements of the public choice theory), deception is much more likely to be a worthwhile tactic than it is in the marketplace. Therefore, one would anticipate much more dishonesty in government. Indeed, granted that government officials are the only people who can check on the dishonesty of government officials, the problem of curing dishonesty in government involves an infinite regression. Private businesspeople, who deal with better-informed consumers than do politicians, are also subject to surveillance by public officials who, dishonest though some may be, very commonly have no personal motive to protect a particular private businessperson. The amount of dishonesty that has turned up in private business in spite of these inspections gives a rough idea of the almost complete uniformity of dishonesty in politics…
The debate was entertaining, but eventually the RI House pushed through a ballot question asking the RI voters to amend [PDF] the RI Constitution to allow a privately owned casino in West Warwick. The Constitution already makes provisions for the public to vote on the expansion of state-operated “lotteries,” but, as was reinforced last summer by the RI Supreme Court, the Constitution makes no provision for a private entity.
Therefore, assuming the Senate approves the House bill (a fait accompli), the RI voters will be able to decide for themselves if they want to change their Constitution to allow a private entity to run a gambling operation in the state. The Constitutional Amendment route was probably the only way to go about this, but it was unnecessary to include a specific town (West Warwick) in the actual amendment. (Though, I’d be open to the argument for keeping the requirement that any private gaming interest work in concert with Narragansetts.)
In fact, the specific inclusion of West Warwick as the only site for a private casino poses the greatest Constitutional question for this Amendment. Specifically, with the Equal Protection clause (Article I, Section 2) in mind, the question must be asked (and I’m not being rhetorical): Is it fair to designate one town for such “special treatment” within the State’s Constitution? For that matter, given the deal made between the Narragansett Tribe and the State in 1978, is the tribe due such special consideration?
This posting is Part VII in a series of postings about economic thoughts.
This posting contains excerpts from Chapter 2 of Nobel Laureate Milton Friedman’s 1962 classic book, Capitalism & Freedom in which he discusses the role of government in a free society:
…To the [nineteenth-century] liberal, the appropriate means are free discussion and voluntary co-operation, which implies that any form of coercion is inappropriate. The ideal is unanimity among responsible individuals achieved on the basis of free and full discussion. This is another way of expressing the goal of freedom…
From this standpoint, the role of the market…is that it permits unanimity without conformity; that it is a system of effectively proportional representation. On the other hand, the characteristic feature of action through explicitly political channels is that it tends to require or to enforce substantial conformity…the fact that the final outcome generally must be a law applicable to all groups, rather than separate legislative enactments for each “party” represented, means that proportional representation in its political version, far from permitting unanimity without conformity, tends toward ineffectiveness and fragmentation. It thereby operates to destroy any consensus on which unanimity with conformity can rest.
There are clearly some matters with respect to which effective proportional representation is impossible…With respect to such indivisible matters we can discuss, and argue, and vote. But having decided, we must conform. It is precisely the existence of such indivisible matters – protection of the individual and the nation from coercion are clearly the most basic – that prevents exclusive reliance on individual action through the market…
The use of political channels, while inevitable, tends to strain the social cohesion essential for a stable society. The strain is least if agreement for joint action need be reached only on a limited range of issues on which people in any event have common views. Every extension of the range of issues for which explicit agreement is sought strains further the delicate threads that hold society together…Fundamental differences in basic values can seldom if ever be resolved at the ballot box; ultimately they can only be decided, though not resolved, by conflict…
The widespread use of the market reduces the strain on the social fabric by rendering conformity unnecessary with respect to any activities it encompasses. The wider the range of activities covered by the market, the fewer are the issues on which explicitly political decisions are required and hence on which it is necessary to achieve agreement. In turn, the fewer the issues on which agreement is necessary, the greater is the likelihood of getting agreement while maintaining a free society.
Unanimity is, of course, an ideal. In practice, we can afford neither the time nor the effort that would be required to achieve complete unanimity on every issue…We are thus led to accept majority rule in one form or another as an expedient. That majority rule is an expedient rather than itself a basic principle is clearly shown by the fact that our willingness to resort to majority rule, and the size of the majority we require, themselves depend on the seriousness of the issue involved. If the matter is of little moment and the minority has no strong feelings about being overruled, a bare plurality will suffice. On the other hand, if the minority feels strongly about the issue involved, even a bare majority will not do…
…a good society requires that its members agree on the general conditions that will govern relations among them, on some means of arbitrating different interpretations of these conditions, and on some device for enforcing compliance with the generally accepted rules…most of the general conditions are the unintended outcome of custom, accepted unthinkingly…no set of rules can prevail unless most participants most of the time conform to them without external sanctions…But we cannot rely on custom or on this consensus alone to interpret and to enforce the rules; we need an umpire. These then are the basic roles of government in a free society: to provide a means whereby we can modify rules, to mediate differences among us on the meaning of the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play in the game.
The need for government in these respects arises because absolute freedom is impossible. However attractive anarchy may be as a philosophy, it is not feasible in a world of imperfect men…
The major problem in deciding the appropriate activities of government is how to resolve such conflicts among the freedom of different individuals…
…the organization of economic activity through voluntary exchange presumes that we have provided, through government, for the maintenance of law and order to prevent coercion of one individual by another, the enforcement of contracts voluntarily entered into, the definition of the meaning of property rights, the interpretation and enforcement of such rights, and the provision of a monetary system.
The role of government just considered is to do something that the market cannot do for itself, namely, to determine, arbitrate, and enforce the rules of the game…These all reduce to cases in which strictly voluntary exchange is either exceedingly costly or practically impossible. There are two general classes of such cases: monopoly and similar market imperfections, and neighborhood effects.
Exchange is truly voluntary only when nearly equivalent alternatives exist. Monopoly implies the absence of alternatives and thereby inhibits effective freedom of exchange…
When technical conditions make a monopoly the natural outcome of competitive market forces, there are only three alternatives that seem available: private monopoly, public monopoly, or public regulation. All three are bad so we must choose among evils…
In a rapidly changing society, however, the conditions making for technical monopoly frequently change and I suspect that both public regulation and public monopoly are likely to be less responsive to such changes in conditions, to be less readily capable of elimination, than private monopoly…
The choice between the evils of private monopoly, public monopoly, and public regulation cannot, however, be made once and for all, independently of the factual circumstances. If the technical monopoly is of a service or commodity that is regarded as essential and if its monopoly power is sizable, even the short-run effects of private unregulated monopoly may not be tolerable, and either public regulation or ownership may be a lesser evil…
Technical monopoly may on occasion justify a de facto public monopoly. It cannot by itself justify a public monopoly achieved by making it illegal for anyone else to compete…
A second general class of cases in which strictly voluntary exchange is impossible arises when actions of individuals have effects on other individuals for which it is not feasible to charge or recompense them. This is the problem of “neighborhood effects.” An obvious example is the pollution of a stream…
A less obvious example is the provision of highways…
Neighborhood effects impede voluntary exchange because it is difficult to identify the effects on third parties and to measure their magnitude; but this difficulty is present in governmental activity as well…when government engages in activities to overcome neighborhood effects, it will in part introduce an additional set of neighborhood effects by failing to charge or compensate individuals properly…Every act of government intervention limits the area of individual freedom directly and threatens the preservation of freedom indirectly…
Freedom is a tenable objective only for responsible individuals. We do not believe in freedom for madmen or children. The necessity of drawing a line between responsible individuals and others is inescapable, yet it means that there is an essential ambiguity in our ultimate objective of freedom. Paternalism is inescapable for those whom we designate as not responsible…
The paternalistic ground for governmental activity is in many ways the most troublesome to a [nineteenth-century] liberal; for it involves the acceptance of a principle – that some shall decide for others – which he finds objectionable in most applications and which he rightly regards as a hallmark of his chief intellectual opponents, the proponents of collectivism…Yet there is no use pretending that problems are simpler than in fact they are. There is no avoiding the need for some measure of paternalism…There is no formula that can tell us where to stop. We must rely on our fallible judgment…We must put our faith, here as elsewhere, in a consensus reached by imperfect and biased men through free discussion and trial and error.
A government which maintained law and order, defined property rights, served as a means whereby we could modify property rights and other rules of the economic game, adjudicated disputes about the interpretation of the rules, enforced contracts, promoted competition, provided a monetary framework, engaged in activities to counter technical monopolies and to overcome neighborhood effects widely regarded as sufficiently important to justify governmental intervention, and which supplemented private charity and the private family in protecting the irresponsible, whether madman or child – such a government would clearly have important functions to perform…
Yet it is also true that such a government would have clearly limited functions and would refrain from a host of activities that are now undertaken by federal and state governments in the United States and their counterparts in other Western countries…
Part VIII to follow…
For previous postings on Economic Thoughts, refer to:
Part I: What is Economics?
Part II: Myths About Markets
Part III: Why Policy Goals are Trumped by Incentives They Create & the Role of Knowledge in Economics
Part IV: The Abuse of Reason, Fallacies & Dangers of Centralized Planning, Prices & Knowledge, and Understanding Limitations
Part V: The Relationship Between Economic Freedom and Political Freedom
Part VI: More on the Relationship Between Economic Freedom and Political Freedom
This posting is Part VII in a series of postings about economic thoughts.
This posting contains excerpts from Chapter 2 of Nobel Laureate Milton Friedman’s 1962 classic book, Capitalism & Freedom in which he discusses the role of government in a free society:
…To the [nineteenth-century] liberal, the appropriate means are free discussion and voluntary co-operation, which implies that any form of coercion is inappropriate. The ideal is unanimity among responsible individuals achieved on the basis of free and full discussion. This is another way of expressing the goal of freedom…
From this standpoint, the role of the market…is that it permits unanimity without conformity; that it is a system of effectively proportional representation. On the other hand, the characteristic feature of action through explicitly political channels is that it tends to require or to enforce substantial conformity…the fact that the final outcome generally must be a law applicable to all groups, rather than separate legislative enactments for each “party” represented, means that proportional representation in its political version, far from permitting unanimity without conformity, tends toward ineffectiveness and fragmentation. It thereby operates to destroy any consensus on which unanimity with conformity can rest.
There are clearly some matters with respect to which effective proportional representation is impossible…With respect to such indivisible matters we can discuss, and argue, and vote. But having decided, we must conform. It is precisely the existence of such indivisible matters – protection of the individual and the nation from coercion are clearly the most basic – that prevents exclusive reliance on individual action through the market…
The use of political channels, while inevitable, tends to strain the social cohesion essential for a stable society. The strain is least if agreement for joint action need be reached only on a limited range of issues on which people in any event have common views. Every extension of the range of issues for which explicit agreement is sought strains further the delicate threads that hold society together…Fundamental differences in basic values can seldom if ever be resolved at the ballot box; ultimately they can only be decided, though not resolved, by conflict…
The widespread use of the market reduces the strain on the social fabric by rendering conformity unnecessary with respect to any activities it encompasses. The wider the range of activities covered by the market, the fewer are the issues on which explicitly political decisions are required and hence on which it is necessary to achieve agreement. In turn, the fewer the issues on which agreement is necessary, the greater is the likelihood of getting agreement while maintaining a free society.
Unanimity is, of course, an ideal. In practice, we can afford neither the time nor the effort that would be required to achieve complete unanimity on every issue…We are thus led to accept majority rule in one form or another as an expedient. That majority rule is an expedient rather than itself a basic principle is clearly shown by the fact that our willingness to resort to majority rule, and the size of the majority we require, themselves depend on the seriousness of the issue involved. If the matter is of little moment and the minority has no strong feelings about being overruled, a bare plurality will suffice. On the other hand, if the minority feels strongly about the issue involved, even a bare majority will not do…
…a good society requires that its members agree on the general conditions that will govern relations among them, on some means of arbitrating different interpretations of these conditions, and on some device for enforcing compliance with the generally accepted rules…most of the general conditions are the unintended outcome of custom, accepted unthinkingly…no set of rules can prevail unless most participants most of the time conform to them without external sanctions…But we cannot rely on custom or on this consensus alone to interpret and to enforce the rules; we need an umpire. These then are the basic roles of government in a free society: to provide a means whereby we can modify rules, to mediate differences among us on the meaning of the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play in the game.
The need for government in these respects arises because absolute freedom is impossible. However attractive anarchy may be as a philosophy, it is not feasible in a world of imperfect men…
The major problem in deciding the appropriate activities of government is how to resolve such conflicts among the freedom of different individuals…
…the organization of economic activity through voluntary exchange presumes that we have provided, through government, for the maintenance of law and order to prevent coercion of one individual by another, the enforcement of contracts voluntarily entered into, the definition of the meaning of property rights, the interpretation and enforcement of such rights, and the provision of a monetary system.
The role of government just considered is to do something that the market cannot do for itself, namely, to determine, arbitrate, and enforce the rules of the game…These all reduce to cases in which strictly voluntary exchange is either exceedingly costly or practically impossible. There are two general classes of such cases: monopoly and similar market imperfections, and neighborhood effects.
Exchange is truly voluntary only when nearly equivalent alternatives exist. Monopoly implies the absence of alternatives and thereby inhibits effective freedom of exchange…
When technical conditions make a monopoly the natural outcome of competitive market forces, there are only three alternatives that seem available: private monopoly, public monopoly, or public regulation. All three are bad so we must choose among evils…
In a rapidly changing society, however, the conditions making for technical monopoly frequently change and I suspect that both public regulation and public monopoly are likely to be less responsive to such changes in conditions, to be less readily capable of elimination, than private monopoly…
The choice between the evils of private monopoly, public monopoly, and public regulation cannot, however, be made once and for all, independently of the factual circumstances. If the technical monopoly is of a service or commodity that is regarded as essential and if its monopoly power is sizable, even the short-run effects of private unregulated monopoly may not be tolerable, and either public regulation or ownership may be a lesser evil…
Technical monopoly may on occasion justify a de facto public monopoly. It cannot by itself justify a public monopoly achieved by making it illegal for anyone else to compete…
A second general class of cases in which strictly voluntary exchange is impossible arises when actions of individuals have effects on other individuals for which it is not feasible to charge or recompense them. This is the problem of “neighborhood effects.” An obvious example is the pollution of a stream…
A less obvious example is the provision of highways…
Neighborhood effects impede voluntary exchange because it is difficult to identify the effects on third parties and to measure their magnitude; but this difficulty is present in governmental activity as well…when government engages in activities to overcome neighborhood effects, it will in part introduce an additional set of neighborhood effects by failing to charge or compensate individuals properly…Every act of government intervention limits the area of individual freedom directly and threatens the preservation of freedom indirectly…
Freedom is a tenable objective only for responsible individuals. We do not believe in freedom for madmen or children. The necessity of drawing a line between responsible individuals and others is inescapable, yet it means that there is an essential ambiguity in our ultimate objective of freedom. Paternalism is inescapable for those whom we designate as not responsible…
The paternalistic ground for governmental activity is in many ways the most troublesome to a [nineteenth-century] liberal; for it involves the acceptance of a principle – that some shall decide for others – which he finds objectionable in most applications and which he rightly regards as a hallmark of his chief intellectual opponents, the proponents of collectivism…Yet there is no use pretending that problems are simpler than in fact they are. There is no avoiding the need for some measure of paternalism…There is no formula that can tell us where to stop. We must rely on our fallible judgment…We must put our faith, here as elsewhere, in a consensus reached by imperfect and biased men through free discussion and trial and error.
A government which maintained law and order, defined property rights, served as a means whereby we could modify property rights and other rules of the economic game, adjudicated disputes about the interpretation of the rules, enforced contracts, promoted competition, provided a monetary framework, engaged in activities to counter technical monopolies and to overcome neighborhood effects widely regarded as sufficiently important to justify governmental intervention, and which supplemented private charity and the private family in protecting the irresponsible, whether madman or child – such a government would clearly have important functions to perform…
Yet it is also true that such a government would have clearly limited functions and would refrain from a host of activities that are now undertaken by federal and state governments in the United States and their counterparts in other Western countries…
Part VIII to follow…
For previous postings on Economic Thoughts, refer to:
Part I: What is Economics?
Part II: Myths About Markets
Part III: Why Policy Goals are Trumped by Incentives They Create & the Role of Knowledge in Economics
Part IV: The Abuse of Reason, Fallacies & Dangers of Centralized Planning, Prices & Knowledge, and Understanding Limitations
Part V: The Relationship Between Economic Freedom and Political Freedom
Part VI: More on the Relationship Between Economic Freedom and Political Freedom
The Chafee campaign has released its newest television ad. They’ve eschewed the cartoon characters of the previous negative ad, and gone with a traditional I’m good because I’ve been photographed in color; my opponent is bad because he’s been photographed in black-and-white attack ad.
The ad takes a couple of swipes at Steve Laffey’s record as Mayor of Cranston that will be familiar to people who have been following the campaign (I’ll link to the ad as soon as it appears on the Chafee website)…
“[Mayor Laffey] promised spending cuts. Instead he raised spending nearly 20% and raised taxes again and again and again”.The Laffey campaign has already issued a rebuttal. According to figures the Laffey campaign has compiled from Providence Journal reports, Chafee raised taxes more times as Mayor of Warwick than Laffey has as Mayor of Cranston…
As Mayor of Warwick, Lincoln Chafee consistently proposed tax increases despite the absence of a financial crisis:(*)[UPDATE: Mayor Laffey also applied a one-time 12.8% tax-surcharge in his first term in dealing with Cranston’s fiscal crisis.]Mayor Laffey led Cranston from financial ruin to financial success:
- FY 94: 5.0% tax increase
- FY 95: 2.6% tax increase
- FY 96: 4.4% tax increase
- FY 97: 1.9% tax increase
- FY 04: 3.5% tax increase(*)
- FY 05: 4.3% tax increase
- FY 06: 0% (tax freeze)
- FY 07: -1.5% (tax cut)
Obviously neither candidate has any objection to raising taxes to pay for the things they believe to be important. A real debate on tax policy should center on 1) what spending the candidates believe to be important 2) what spending the candidates believe can be eliminated (if the answer is “none” then tax-increases might be justified) and 3) why the candidates believe their plans for taxing and spending are sustainable.
Equally obvious is the fact that this ad is an attempt by the Chafee campaign to neutralize the Senator’s political problems originating with his consistent support for high tax rates. [Open full post]
Many of us have explicit reasons and some intuitive worries about the illegal immigration bill currently being debated in the Senate. Here is the second of two postings which will attempt to characterize the flaws in the bill – from a person who has actually read the 600+ page bill.
Senator Jeff Sessions (R-Alabama) gave this speech on the Senate floor. It is offered in its entirety because you need to see all the words to get the full impact:
[Open full post]Mr. President, I am going to take some time tonight to inform my colleagues about some of the problems with the legislation before us. It is worse than you think, colleagues. The legislation has an incredible number of problems with it. Some, as I will point out tonight, can only be considered deliberate. Whereas on the one hand it has nice words with good sounding phrases in it to do good things, on the second hand it completely eviscerates that, oftentimes in a way that only the most careful reading by a good lawyer would discover. So I feel like I have to fulfill my duty. I was on the Judiciary Committee. We went into this. We tried to monitor it and study it and actually read this 614-page bill, and I have a responsibility and I am going to fulfill my responsibility.
I think the things I am saying tonight ought to disturb people. They ought to be unhappy about it. It ought to make them consider whether they want to vote for this piece of legislation that, in my opinion, should never, ever become law.
I would also just point out I will be offering tomorrow, or soon, an amendment to deal with the earned-income tax credit situation that is raised by this legislation, focusing on the amnesty in the bill and what will happen after amnesty is granted, before they become a full citizen. The Congressional Budget Office has concluded that the earned-income tax credit will pay out to those who came into our country illegally $29 billion over 10 years. The earned-income tax credit has been on the books for some time. It is a good bit larger than most people think. The average recipient of it receives $1,700. Lowerincome people get a larger amount. Over half the people who we expect will receive amnesty are without a high school degree. They are receiving lower wages. They will be the ones who will particularly qualify for this. This is a score that has been given to us by the group that is supposed to score it–$29 billion will be paid out.
If they go all the way and become a citizen they will be entitled to this like any other citizen, and they will be entitled to get it under my amendment. But I do not believe we should award people who have entered our country illegally, submitted a false Social Security number, worked illegally–I do not believe we should reward them with $29 billion of the taxpayers’ money. That is a lot of money.
I will also be offering a budget point of order, I or one of my colleagues will, in the next day or so. We have been working on that. We asked for a report. The Congressional Budget Office has concluded that the budget point of order lies in the first 10 years of this bill. It also concludes that it lies under the long-term provisions of the budget points of order for expenditures in the outyears. They didn’t give us those numbers, but they said, without much work–they didn’t have to do much work–the numbers are going to be much worse in the outyears. It clearly would be a detriment to the Government and these figures would exceed the budget, and a budget point of order would lie.
At the Heritage Foundation, Mr. Robert Rector, who is the expert who dealt with welfare, studied this. He was the architect of welfare reform who has done so much to improve America’s welfare system and improve incomes for low-income families. It really worked beautifully. He was the architect of it. He says this bill represents the greatest increase in welfare in 35 years. With the provisions and benefits that will be in it, he estimates that year 10 through year 20, the cost could be $50 to $60 billion a year to the taxpayers because it takes some time for the people who are adjusting and becoming citizens and/or legal permanent residents to really begin to make the claims.
CBO admits the numbers are going to surge in the outyears. He says it is $50 billion a year. If that is so–and he is not exaggerating the numbers, because that is based solely on the amnesty provisions, not the provisions that will allow 3 times to 4 times as many people to come into the country legally in the next 20 years as come in today, and many of them will go on welfare because that whole system is not based on identifying people with skills and educational levels that would indicate they would be more than low-wage workers–so it could really be more than that. But $50 billion a year over 10 years is $500 billion. That is a half a trillion dollars, and that is why Mr. Rector said this legislation is a fiscal catastrophe. This is a man whose opinions and ideas and research this Congress, and particularly the Republicans, utilized to hammer away, time and time again, year after year, to get welfare reform.
It finally happened. It worked just like he said. The predictions of disaster made against his recommendations proved to be false.
He is saying that about this. So this is not a technical point of order. It represents an attempt to save the fiscal soundness of the budget of the United States.
I want to take some moments here to deal with some problems with the legislation. The American people are suspicious of us. They were promised in 1986, after years of urging the Government, the President and the Congress, promised to fix our borders and end illegal immigration. In exchange for that they acquiesced and went along with amnesty in 1986. They said there were a million, 2 million here who would claim it. It turned out 3 million claimed amnesty after 1986. That ought to give us some pause about the projections that we would have. We have 11 million people here now and only 8 or so will seek amnesty under it. That ought to give us some pause there. It may well be above the number.
So the American people are suspicious and they are dubious and they are watching us carefully, and they should. Let me tell you some of the things that are in the legislation that indicate a lack of respect for the American people, really. Some of these are some of the reasons I said the other day the Senate should be ashamed of itself, the way we are moving this bill.
My staff, working up some of these comments, came up with a title–maybe at my suggestion–“Sneaky Lawyer Tricks” that are in the bill. I will let you decide if that is a fair description of what is in it. I will go down through some of the matters that are important. There are others I could complain about for which we will not have time.
This posting is Part VI in a series of postings about economic thoughts.
This posting contains excerpts from Chapter 1 of Nobel Laureate Milton Friedman’s 1962 classic book, Capitalism & Freedom in which he continues a discussion about the relationship between economic freedom and political freedom:
It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem…The thesis of this chapter is that such a view is a delusion…
Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensible means toward the achievement of political freedom.
The first of these roles of economic freedom needs special emphasis because intellectuals in particular have a strong bias against regarding this aspect of freedom as important…
Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power…competitive capitalism also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other…
Because we live in a largely free society, we tend to forget how limited is the span of time and the part of the globe for which there has ever been anything like political freedom: the typical state of mankind is tyranny, servitude, and misery. The nineteenth century and early twentieth century in the Western world stand out as striking exceptions to the general trend of historical development. Political freedom in this instance clearly came along with the free market and the development of capitalist institutions…
History suggests only that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition…
The relation between political and economic freedom is complex and by no means unilateral…
As [nineteenth-century, not twentieth-century] liberals, we take freedom of the individual, or perhaps the family, as our ultimate goal in judging social arrangements. Freedom as a value in this sense has to do with the interrelationship between people…in a society freedom has nothing to say about what an individual does with his freedom; it is not an all-embracing ethic…a major aim of the liberal is to leave the ethical problem for the individual to wrestle with. The “really” important ethical problems are those that face an individual in a free society – what he should do with his freedom. There are thus two sets of values that a liberal will emphasize – the values that are relevant to relations among people, which is the context in which he assigns first priority to freedom; and the values that are relevant to the individual in the exercise of his freedom, which is the realm of individual ethics and philosophy.
The liberal conceives of men as imperfect human beings. He regards the problem of social organizations to be as much a negative problem of preventing “bad” people from doing harm as of enabling “good” people to do good…
The basic problem of social organization is how to co-ordinate the economic activities of large numbers of people. Even in relatively backward societies, extensive division of labor and specialization of function is required to make effective use of available resources. In advanced societies, the scale…is enormously greater…The challenge to the believer in liberty is to reconcile this widespread interdependence with individual freedom.
Fundamentally, there are only two ways of co-ordinating the economic activities of millions. One is central direction involving the use of coercion – the technique of the army and of the modern totalitarian state. The other is voluntary co-operation of individuals – the technique of the market place.
The possibility of co-ordination through voluntary co-operation rests on the elementary – yet frequently denied – proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.
Exchange can therefore bring about co-ordination without coercion…
Specialization of function and division of labor would not go far if the ultimate productive unit were the household. In a modern society, we have gone much farther. We have introduced enterprises which are intermediaries between individuals in their capacities as suppliers of service and as purchasers of goods…money has been introduced as a means of facilitating exchange, and of enabling the acts of purchase and of sale to be separated into two parts…
…so in the complex enterprise and money exchange economy, co-operation is strictly individual and voluntary provided: (a) that enterprises are private, so that the ultimate contracting parties are individuals and (b) that individuals are effectively free to enter or not to enter into any particular exchange, so that every transaction is strictly voluntary…
The basic requisite is the maintenance of law and order to prevent physical coercion of one individual by another and to enforce contracts voluntarily entered into, thus giving substance to “private.” Aside from this, perhaps the most difficult problems arise from monopoly…and from “neighborhood effects.” [These problems will be addressed in a subsequent posting.]…
…the central feature of the market organization of economic activity is that it prevents one person from interfering with another in respect of most of his activities. The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because of other employers for whom he can work, and so on…the market does this impersonally and without centralized authority.
Indeed, a major source of objection to a free economy is precisely that it does this task so well. It gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.
The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the “rules of the game” and as an umpire to interpret and enforce the rules decided on. What the market does is reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity…
…Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce…The preservation of freedom requires the elimination of such concentration of power to the fullest extent and the dispersal and distribution of whatever power cannot be eliminated – a system of checks and balances. By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.
Economic power can be widely dispersed…Political power, on the other hand, is more difficult to decentralize…if economic power is joined to political power, concentration seems almost inevitable. On the other hand, if economic power is kept in separate hands from political power, it can serve as a check and a counter to political power…
In a capitalist society, it is only necessary to convince a few wealthy people to get funds to launch any idea, however strange, and there are many such persons, many independent foci of support…
…the market breaks the vicious cycle and makes it possible ultimately to finance such ventures by small amounts from many people without first persuading them. There are no such possibilities in the socialist state; there is only the all-powerful state…
…freedom to advocate unpopular causes does not require that such advocacy be without cost. On the contrary, no society could be stable if advocacy of radical change was costless, much less subsidized. It is entirely appropriate that men make sacrifices to advocate causes in which they deeply believe. Indeed, it is important to preserve freedom only for people who are willing to practice self-denial, for otherwise freedom degenerates into license and irresponsibility. What is essential is that the cost of advocating unpopular causes be tolerable and not prohibitive.
But we are not through yet. In a free market society, it is enough to have the funds…In a socialist society, it would not be enought to have the funds. The hypothetical supporter of socialism would have to persuade [various governmental agencies to provide materials and rights to him]…
…What is clear, however, is that there are very real difficulties in establishing institutions that will effectively preserve the possibility of dissent…none of the people who have been in favor of socialism and also in favor of freedom have really faced up to this issue, or made even a respectable start at developing the institutional arrangements that would permit freedom under socialism. By contrast, it is clear how a free market capitalist society fosters freedom.
No one who buys bread knows whether the wheat from which it is made was grown by a Communist or a Republican, by a constitutionalist or a Fascist, or, for that matter, by a Negro or a white. This illustrates how an impersonal market separates economic activities from political views and protects men from being discriminated against in their economic activities for reasons that are irrelevant to their productivity – whether these reasons are associated with their views or their color.
As this example suggests, the groups in our society that have the most at stake in the preservation and strengthening of competitive capitalism are those minority groups which can most easily become the object of the distrust and enmity of the majority…
Part VII to follow…
For previous postings on Economic Thoughts, refer to:
Part I: What is Economics?
Part II: Myths About Markets
Part III: Why Policy Goals are Trumped by Incentives They Create & the Role of Knowledge in Economics
Part IV: The Abuse of Reason, Fallacies & Dangers of Centralized Planning, Prices & Knowledge, and Understanding Limitations
Part V: The Relationship Between Economic Freedom and Political Freedom
This posting is Part VI in a series of postings about economic thoughts.
This posting contains excerpts from Chapter 1 of Nobel Laureate Milton Friedman’s 1962 classic book, Capitalism & Freedom in which he continues a discussion about the relationship between economic freedom and political freedom:
It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem…The thesis of this chapter is that such a view is a delusion…
Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensible means toward the achievement of political freedom.
The first of these roles of economic freedom needs special emphasis because intellectuals in particular have a strong bias against regarding this aspect of freedom as important…
Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power…competitive capitalism also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other…
Because we live in a largely free society, we tend to forget how limited is the span of time and the part of the globe for which there has ever been anything like political freedom: the typical state of mankind is tyranny, servitude, and misery. The nineteenth century and early twentieth century in the Western world stand out as striking exceptions to the general trend of historical development. Political freedom in this instance clearly came along with the free market and the development of capitalist institutions…
History suggests only that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition…
The relation between political and economic freedom is complex and by no means unilateral…
As [nineteenth-century, not twentieth-century] liberals, we take freedom of the individual, or perhaps the family, as our ultimate goal in judging social arrangements. Freedom as a value in this sense has to do with the interrelationship between people…in a society freedom has nothing to say about what an individual does with his freedom; it is not an all-embracing ethic…a major aim of the liberal is to leave the ethical problem for the individual to wrestle with. The “really” important ethical problems are those that face an individual in a free society – what he should do with his freedom. There are thus two sets of values that a liberal will emphasize – the values that are relevant to relations among people, which is the context in which he assigns first priority to freedom; and the values that are relevant to the individual in the exercise of his freedom, which is the realm of individual ethics and philosophy.
The liberal conceives of men as imperfect human beings. He regards the problem of social organizations to be as much a negative problem of preventing “bad” people from doing harm as of enabling “good” people to do good…
The basic problem of social organization is how to co-ordinate the economic activities of large numbers of people. Even in relatively backward societies, extensive division of labor and specialization of function is required to make effective use of available resources. In advanced societies, the scale…is enormously greater…The challenge to the believer in liberty is to reconcile this widespread interdependence with individual freedom.
Fundamentally, there are only two ways of co-ordinating the economic activities of millions. One is central direction involving the use of coercion – the technique of the army and of the modern totalitarian state. The other is voluntary co-operation of individuals – the technique of the market place.
The possibility of co-ordination through voluntary co-operation rests on the elementary – yet frequently denied – proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.
Exchange can therefore bring about co-ordination without coercion…
Specialization of function and division of labor would not go far if the ultimate productive unit were the household. In a modern society, we have gone much farther. We have introduced enterprises which are intermediaries between individuals in their capacities as suppliers of service and as purchasers of goods…money has been introduced as a means of facilitating exchange, and of enabling the acts of purchase and of sale to be separated into two parts…
…so in the complex enterprise and money exchange economy, co-operation is strictly individual and voluntary provided: (a) that enterprises are private, so that the ultimate contracting parties are individuals and (b) that individuals are effectively free to enter or not to enter into any particular exchange, so that every transaction is strictly voluntary…
The basic requisite is the maintenance of law and order to prevent physical coercion of one individual by another and to enforce contracts voluntarily entered into, thus giving substance to “private.” Aside from this, perhaps the most difficult problems arise from monopoly…and from “neighborhood effects.” [These problems will be addressed in a subsequent posting.]…
…the central feature of the market organization of economic activity is that it prevents one person from interfering with another in respect of most of his activities. The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because of other employers for whom he can work, and so on…the market does this impersonally and without centralized authority.
Indeed, a major source of objection to a free economy is precisely that it does this task so well. It gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.
The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the “rules of the game” and as an umpire to interpret and enforce the rules decided on. What the market does is reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity…
…Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce…The preservation of freedom requires the elimination of such concentration of power to the fullest extent and the dispersal and distribution of whatever power cannot be eliminated – a system of checks and balances. By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.
Economic power can be widely dispersed…Political power, on the other hand, is more difficult to decentralize…if economic power is joined to political power, concentration seems almost inevitable. On the other hand, if economic power is kept in separate hands from political power, it can serve as a check and a counter to political power…
In a capitalist society, it is only necessary to convince a few wealthy people to get funds to launch any idea, however strange, and there are many such persons, many independent foci of support…
…the market breaks the vicious cycle and makes it possible ultimately to finance such ventures by small amounts from many people without first persuading them. There are no such possibilities in the socialist state; there is only the all-powerful state…
…freedom to advocate unpopular causes does not require that such advocacy be without cost. On the contrary, no society could be stable if advocacy of radical change was costless, much less subsidized. It is entirely appropriate that men make sacrifices to advocate causes in which they deeply believe. Indeed, it is important to preserve freedom only for people who are willing to practice self-denial, for otherwise freedom degenerates into license and irresponsibility. What is essential is that the cost of advocating unpopular causes be tolerable and not prohibitive.
But we are not through yet. In a free market society, it is enough to have the funds…In a socialist society, it would not be enought to have the funds. The hypothetical supporter of socialism would have to persuade [various governmental agencies to provide materials and rights to him]…
…What is clear, however, is that there are very real difficulties in establishing institutions that will effectively preserve the possibility of dissent…none of the people who have been in favor of socialism and also in favor of freedom have really faced up to this issue, or made even a respectable start at developing the institutional arrangements that would permit freedom under socialism. By contrast, it is clear how a free market capitalist society fosters freedom.
No one who buys bread knows whether the wheat from which it is made was grown by a Communist or a Republican, by a constitutionalist or a Fascist, or, for that matter, by a Negro or a white. This illustrates how an impersonal market separates economic activities from political views and protects men from being discriminated against in their economic activities for reasons that are irrelevant to their productivity – whether these reasons are associated with their views or their color.
As this example suggests, the groups in our society that have the most at stake in the preservation and strengthening of competitive capitalism are those minority groups which can most easily become the object of the distrust and enmity of the majority…
Part VII to follow…
For previous postings on Economic Thoughts, refer to:
Part I: What is Economics?
Part II: Myths About Markets
Part III: Why Policy Goals are Trumped by Incentives They Create & the Role of Knowledge in Economics
Part IV: The Abuse of Reason, Fallacies & Dangers of Centralized Planning, Prices & Knowledge, and Understanding Limitations
Part V: The Relationship Between Economic Freedom and Political Freedom
