DRI-183 for week of 3-1-15: George Orwell, Call Your Office – The FCC Curtails Internet Freedom In Order to Save It

An Access Advertising EconBrief:

George Orwell, Call Your Office – The FCC Curtails Internet Freedom In Order to Save It

February 26, 2015 is a date that will live in regulatory infamy. That assertion is subject to revision by the courts, as is nearly everything undertaken these days by the Obama administration. As this is written, the Supreme Court hears yet another challenge to “ObamaCare,” the Affordable Care Act. President Obama’s initiative to achieve a single-payer system of national health care in the U.S. is rife with Orwellian irony, since it cannot help but make health care unaffordable for everybody by further removing the consumer of health care from every exposure to the price of health care. Similarly, the latest administration initiative is the February 26 approval by the Federal Communications Commission (FCC) of the so-called “Net Neutrality” doctrine in regulatory form. Commission Chairman Tom Wheeler’s summary of his regulatory proposal – consisting of 332 pages that were withheld from the public – has been widely characterized as a proposal to “regulate the Internet like a public utility.”

This episode is riven with a totalitarian irony that only George Orwell could fully savor. The FCC is ostensibly an independent regulatory body, free of political control. In fact, Chairman Wheeler long resisted the “net neutrality” doctrine (hereinafter, shortened to “NN” for convenience). The FCC’s decision was a response to pressure from President Obama, which made a mockery of the agency’s independence. The alleged necessity for NN arises from the “local monopoly” over “high-speed” broadband exerted by Internet service providers (again, hereinafter abbreviated as “ISPs”) – but a “public utility” was, and is, by definition a regulated monopoly. Since the alleged local monopoly held by ISPs is itself fictitious, the FCC is in fact proposing to replace competition with monopoly.

To be sure, the particulars of Chairman Wheeler’s proposal are still open to conjecture. And the enterprise is wildly illogical on its face. The idea of “regulating the Internet like a public utility” treats those two things as equivalent entities. A public utility is a business firm. But the Internet is not a single business firm; indeed, it is not a single entity at all in the concrete sense. In the business sense, “the Internet” is shorthand for an infinite number of existing and potential business firms serving the world’s consumers in countless ways. The clause “regulate the Internet like a public utility” is quite literally meaningless – laughably indefinite, overweening in its hubris, frightening in its totalitarian implications.

It falls to an economist, former FCC Chief Economist Thomas Hazlett of Clemson University, to sculpt this philosophy into its practical form. He defines NN as “a set of rules… regulating the business model of your local ISP.” In short, it is a political proposal that uses economic language to prettify and conceal its real intentions. NN websites are emblazoned with rhetoric about “protecting the Open Internet” – but the Internet has thrived on openness for over 20 years under the benign neglect of government regulators. This proposal would end that era.

There is no way on God’s green earth to equate a regulated Internet with an open Internet; the very word “regulated” is the antithesis of “open.” NN proponents paint scary scenarios about ISPs “blocking or interfering with traffic on the Internet,” but their language is always conditional and hypothetical. They are posing scenarios that might happen in the future, not ones that threaten us today. Why? Because competition and innovation protected consumers up to now and continue to do so. NN will make its proponents’ scary predictions more likely, not less, because it will restrict competition. That is what regulation does in general; that is what public-utility regulation specifically does. For over a century, public-utility regulation has installed a single firm as a regulated monopoly in a particular market and has forcefully suppressed all attempts to compete with that firm.

Of course, that is not what President Obama, Chairman Wheeler and NN proponents want us to envision when we hear the words “regulate the Internet like a public utility.” They want us to envision a lovely, healthy flock of sheep grazing peacefully in a beautiful meadow, supervised by a benevolent, powerful Shepherd with a herd of well-trained, affectionate shepherd dogs at his command. Soothing music is piped down from heaven and love and tranquility reign. At the far edges of the meadow, there is a forest. Hungry wolves dwell within, eyeing the sheep covetously. But they dare not approach, for they fear the power of the Shepherd and his dogs.

In other words, the Obama administration is trying to manipulate the emotions of the electorate by creating an imaginary vision of public-utility regulation. The reality of public-utility regulation was, and is, entirely different.

The Natural-Monopoly Theory of Public-Utility Regulation

The history of public-utility regulation is almost, but not quite, co-synchronous with that of government regulation of business in the United States. Regulation began at the state level with Munn vs. Illinois, which paved the way for state government of the grain business in the 1870s. The Interstate Commerce Commission’s inaugural voyage with railroad regulation followed in the late 1880s. With the commercial introduction of electric lighting and the telephone came business firms tailored to those ends. And in their wake came the theory of natural monopoly.

Both electric power and telephones came to be known as “natural monopoly” industries; that is, industries in which both economic efficiency and commercial viability chose one single firm to serve the entire market. This was the outgrowth of economies of scale in production, owing to decreasing long-run average cost of production. This decidedly unusual state of affairs is a technological anomaly. Engineers recognize it in conjunction with the “two-thirds rule.” There are certain cases in which cost increases as the two-thirds power of output, which implies that cost decreases steadily as output rises. (The thru-put of pipes and cables and the capacity of cargo holds are examples.) In turn, this implies that the firm that grows the fastest will undersell all others while still covering all its costs. The further implication is that consumers will receive the most output at the lowest price if one monopoly firm serves everybody – if, and only if, the firm’s price can be constrained equal to its long-run average cost at the rate of output necessary to meet market demand. An unconstrained monopoly would produce less than this optimal rate of output and charge a higher price, in order to maximize its profit. But the theoretical outcome under regulated monopoly equates price with long-run average cost, which provides the utility with a rate of return equal to what it could get in the best alternative use for its financial capital, given its business risk.

In the U.S. and Canada, this regulated outcome is sought by a public-utility commission via the medium of periodic hearings staged by the public-utility regulatory commission (PUC for short). The utility is privately owned by shareholders. In Europe, utilities are not privately owned. Instead, their prices are (in principle) set equal to long-run marginal cost, which is below the level of average cost and thus constitutes a loss in accounting terms. Taxpayers subsidize this loss – these subsidies are the alternative to the profits earned by regulated public-utility firms in the U.S. and Canada.

These regulatory schemes represent the epitome of what the Nobel laureate Ronald Coase called “blackboard economics” – economists micro-managing reality as if they possessed all the information and control over reality that they do when drawing diagrams on a classroom blackboard. In practice, things did not work out as neatly as the foregoing summary would lead us to believe. Not even remotely close, in fact.

The Myriad Slips Twixt Theoretical Cup and Regulatory Lip

What went wrong with this theoretical set-up, seemingly so pat when viewed in a textbook or on a classroom blackboard? Just about everything, to some degree or other. Today, we assume that the institution of regulated monopoly came in response to market monopolies achieved and abuses perpetrated by electric and telephone companies. What mostly happened, though, was different. There were multiple providers of electricity and telephone service in the early days. In exchange for submitting to rate-of-return regulation, though, one firm was extended a grant of monopoly and other firms were excluded. Only in very rare cases did competition exist for local electric service – and curiously, this rate competition actually produced lower electric rates than did public-utility regulation.

This result was not the anomaly it seemed, since the supposed economies of scale were present only in the distribution of electric power, not in power generation. So the cost superiority of a single firm producing for the whole market turned out to be not the slam-dunk that was advertised. That was just one of many cracks in the façade of public-utility regulation. Over the course of the 20th century, the evolution of public-utility regulation in telecommunications proved to be paradigmatic for the failures and inherent shortcomings of the form.

Throughout the country, the Bell system were handed a monopoly on the provision of local service. Its local service companies – the analogues to today’s ISPs – gradually acquired reputations as the heaviest political hitters in state-government politics. The high rates paid by consumers bought lobbyists and legislators by the gross, and they obediently safeguarded the monopoly franchise and kept the public-utility commissions (PUCs) staffed with tame members. That money also paid the bill for a steady diet of publicity designed to mislead the public about the essence of public-utility regulation.

We were assured by the press that the PUC was a vigilant watchdog whose noble motives kept the greedy utility executives from turning the rate screws on a helpless public. At each rate hearing, self-styled consumer advocacy groups paraded their compassion for consumers by demanding low rates for the poor and high rates on business – as if it were really possible for some non-human entity called “business” to pay rates in the true sense, any more than they could pay taxes. PUCs made a show of ostentatiously requiring the utility to enumerate its costs and pretending to laboriously calculate “just and reasonable” rates – as if a Commission possessed juridical powers denied to the world’s greatest philosophers and moralists.

Behind the scenes, after the press had filed their poker-faced stories on the latest hearings, increasingly jaded and cynical reporters, editors and industry consultants rolled their eyes and snorted at the absurdity of it all. Utilities quickly learned that they wouldn’t be allowed to earn big “profits,” because this would be cosmetically bad for the PUC, the consumer advocates, the politicians and just about everybody involved in this process. So executives, middle-level managers and employees figured out that they had to make their money differently than they would if working for an ordinary business in the private sector. Instead of working efficiently and productively and striving to maximize profit, they would strive to maximize cost instead. Why? Because they could make money from higher costs in the form of higher salaries, higher wages, larger staffs and bigger budgets. What about the shareholders, who would ordinarily be shafted by this sort of behavior? Shareholders couldn’t lose because the PUC was committed to giving them a rate of return sufficient to attract financial capital to the industry. (And the shareholders couldn’t gain from extra diligence and work effort put forward by the company because of the limitation on profits.) That is, the Commission would simply ratchet up rates commensurate with any increase in costs – accompanied by whatever throat-clearing, phony displays of concern for the poor and cost-shifting shell games were necessary to make the numbers work. In the final analysis, the name of the game was inefficiency and consumers always paid for it – because there was nobody else who could pay.

So much for the vaunted institution of public-utility regulation in the public interest. Over fifty years ago, a famous left-wing economist named Gardiner Means proposed subjecting every corporation in the U.S. to rate-of-return regulation by the federal government. This held the record for most preposterous policy program advanced by a mainstream commentator – until Thomas Wheeler announced that henceforth the Internet would be regulated as if it were a public utility. Now every American will get a taste of life as Ivan Denisovich, consigned to the Gulag Archipelago of regulatory bureaucracy.

Of particular significance to us in today’s climate is the effect of this regime on innovation. Outside of totalitarian economies such as the Soviet Union and Communist China, public-utility regulation is the most stultifying climate for innovation ever devised by man. The idea behind innovation is to find ways to produce more goods using the same amount of inputs or (equivalently) the same amount of goods using fewer inputs. Doing this lowers costs – which increases profits. But why do to the trouble if you can’t enjoy the increase in profits? Of course, utilities were willing to spend money on research, provided they could get it in the rate base and earn a rate of return on the investment. But they had no incentive to actually implement any cost-saving innovations. The Bell System was legendary for its unwillingness to lower its costs; the economic literature is replete with jaw-dropping examples of local Bell companies lagging years and even decades behind the private sector in technology adoption – even spurning advances developed in Bell’s own research labs!

Any reader who suspects this writer of exaggeration is invited to peruse the literature of industrial organization and regulation. One nagging question should be dealt with forthwith. If the demerits of public-utility regulation were well recognized by insiders, how were they so well concealed from the public? The answer is not mysterious. All of those insiders had a vested interest in not blowing the whistle on the process because they were making money from ongoing public-utility regulation. Commission employees, consultants, expert witnesses, public-interest lawyers and consumer advocates all testified at rate hearings or helped prepare testimony or research it. They either worked full-time or traveled the country as contractors earning lucrative hourly pay. If any one of them was crazy enough to launch an expose of the public-utility scam, he or she would be blackballed from the business while accomplishing nothing – the institutional inertia in favor of the system was so enormous that it would have taken mass revolt to effect change. So they just shrugged, took the money and grew more cynical by the year.

In retrospect, it seems miraculous that anything did change. In the 1960s, local Bell companies were undercharging for local service to consumers and compensating by soaking business and long-distance customers with high prices. The high long-distance rates eventually attracted the interest of would-be competitors. One government regulator grew so fed up with the inefficiency of the Bell system that he granted the competitive petition of a small company called MCI, which sought to compete only in the area of long-distance telecommunications. MCI was soon joined by other firms. The door to competition had been cracked slightly ajar.

In the 1980s, it was kicked wide open. A federal antitrust lawsuit against AT&T led to the breakup of the firm. At the time, the public was dubious about the idea that competition was possible in telecommunications. The 1990s soon showed that regulators were the only ones standing between the American public and a revolution unlike anything we had seen in a century. After vainly trying to protect the local Bells against competition, regulators finally succumbed to the inevitable – or rather, they were overrun by the competitive hordes. When the public got used to cell phones and the Internet, they ditched good old Ma Bell and land-line phones.

This, then, is public-utility regulation. The only reason we have smart phones and mobile Internet access today is that public-utility regulation in telecommunications was overrun by competition despite regulatory opposition in the 1990s. But public-utility regulation is the wonderful fate to which Barack Obama, Thomas Wheeler and the FCC propose to consign the Internet. What is the justification for their verdict?

The Case for Net Neutrality – Debunked

As we have seen, public-utility regulation was based on a premise that certain industries were “natural monopolies.” But nobody has suggested that the Internet is a natural monopoly – which makes sense, since it isn’t an industry. Nobody has suggested that all or even some of the industries that utilize the Internet are natural monopolies – which makes sense, since they aren’t. So why in God’s name should we subject them to public-utility regulation – especially since public-utility regulation didn’t even work well in the industries for which it was ideally suited? We shouldn’t.

The phrase “net neutrality” is designed to achieve an emotional effect through alliteration and a carefully calculated play on the word “neutral.” In this case, the word is intended to appeal to egalitarian sympathies among hearers. It’s only fair, we are urged to think, that ISPs, the “gatekeepers” of the Internet, are scrupulously fair or “neutral” in letting everybody in on the same terms. And, as with so many other issues in economics, the case for “fairness” becomes just so much sludge upon closer examination.

The use of the term “gatekeepers” suggests that God handed to Moses on Mount Olympus a stone tablet for the operation of the Internet, on which ISPs were assigned the role of “gatekeepers.” Even as hyperbolic metaphor, this bears no relation to reality. Today, cable companies are ISPs. But they began life as monopoly-killers. In the early 1960s, Americans chose between three monopoly VHF-TV networks, broadcast by ABC, NBC and CBS. Gradually, local UHF stations started to season the diet of content-starved viewers. When cable-TV came along, it was like manna from heaven to a public fed up with commercials and ravenous for sports and movies. But government regulators didn’t allow cable-TV to compete with VHF and UHF in the top 100 media markets of the U.S. for over two decades. As usual, regulators were zealously protecting government monopoly, restricting competition and harming consumers.

Eventually, cable companies succeeded in tunneling their way into most local markets. They did it by bribing local government literally and figuratively – the latter by splitting their profits via investment in pet political projects of local politicians as part of their contracts. In return, they were guaranteed various degrees of exclusivity. But this “monopoly” didn’t last because they eventually faced competition from telecommunication firms who wanted to get into their business and whose business the cable companies wanted to invade. And today, the old structural definitions of monopoly simply don’t apply to the interindustry forms of competition that prevail.

Take the Kansas City market. Originally, Time Warner had a monopoly franchise. But eventually a new cable company called Everest invaded the metro area across the state line in Johnson County, KS. Overland Park is contiguous with Kansas City, MO, and consumers were anxious to escape the toils of Time Warner. Eventually, Everest prevailed upon KC, MO to gain entry to the Missouri side. Now even the cable-TV market was competitive. Then Google selected Kansas City, KS as the venue for its new high-speed service. Soon KC, MO was included in that package, too – now there were three local ISPs! (Everest has morphed into two successive incarnations, one of which still serves the area.)

Although this is not typical, it does not exhaust the competitive alternatives. This is only the picture for fixed service. Americans are now turning to mobile forms of access to the Internet, such as smart phones. Smart watches are on the horizon. For mobile access, the ISP is a wireless company like AT&T, Verizon, Sprint or T-Mobile.

The NN websites stridently maintain that “most Americans have only a single ISP.” This is nonsense; a charitable interpretation would be that most of us have only a single cable-TV provider in our local market. But there is no necessary one-to-one correlation between “cable-TV provider” and “ISP.” Besides, the state of affairs today is ephemeral – different from what is was a few years ago and from what it will be a few years from now. It is only under public-utility regulation that technology gets stuck in one place because under public-utility regulation there is no incentive to innovate.

More specifically, the FCC’s own data suggest that 80% of Americans have two or more ISPs offering 10Mbps downstream speeds. 96% have two or more ISPs offering 6Mbps downstream and 1.5 upstream speeds. (Until quite recently, the FCC’s own criterion for “high-speed” Internet was 4Mbps or more.) This simply does not comport with any reasonable structural concept of monopoly.

The current flap over “blocking and interfering with traffic on the Internet” is the residue of disputes between Netflix and ISPs over charges for transmission of the former’s streaming services. In general, there is movement toward higher charges for data transmission than for voice transmission. But the huge volumes of traffic generated by Netflix cause congestion, and the free-market method for handling congestion is a higher price, or the functional equivalent. That is what economists have recommended for dealing with road congestion during rush hours and congested demand for air-conditioning and heating services at peak times of day and during peak seasons. Redirecting demand to the off-peak is not a monopoly response; it is an efficient market response. Competitive bar and restaurant owners do it with their pricing methods; competitive movie theater owners also do it (or used to).

Similar logic applies to other forms of hypothetically objectionable behavior by ISPs. The prioritization of traffic, creation of “fast” and “slow” lanes, blocking of content – these and other behaviors are neither inherently good nor bad. They are subject to the constraints of competition. If they are beneficial on net balance, they will be vindicated by the market. That is why we have markets. If a government had to vet every action by every business for moral worthiness in advance, it would paralyze life as we know it. The only sensible course is to allow free markets and competition to police the activities of competitors.

Just as there is nothing wrong or untoward with price differentials based on usage, there is nothing virtuous about government-enforced pricing equality. Forcing unequals to be treated equally is not meritorious. NN proponents insist that the public has to be “protected” from that kind of treatment. But this is exactly what PUCs did for decades when they subsidized residential consumers inefficiently by soaking business and long-distance users with higher rates. Back then, the regulatory mantra wasn’t “net neutrality,” it was “universal service.” Ironically, regulators never succeeded in achieving rates of household telephone subscription that exceeded the rate of household television service. Consumers actually needed – but didn’t get – protection from the public-utility monopoly imposed upon them. Today, consumers don’t need protection because there is no monopoly, nor is there any prospect of one absent regulatory intervention. The only remaining vestige of monopoly is that remaining from the grants of local cable-TV monopoly given by municipal governments. Compensating for past mistakes by local government is no excuse for making a bigger mistake by granting monopoly power to FCC regulators.

Forbearance? 

The late, great economist Frank Knight once remarked that he had heard do-gooders utter the equivalent words to “I want power to do good” so many times for so long that he automatically filtered out the last three words, leaving only “I want power.” Federal-government regulators want the maximum amount of power with the minimum number of restrictions, leaving them the maximum amount of flexibility in the exercise of their power. To get that, they have learned to write excuses into their mandates. In the case of NN and Internet regulation, the operative excuse is “forbearance.”

Forbearance is the writing on the hand with which they will wave away all the objections raised in this essay. The word appears in the original Title II regulations. It means that regulators aren’t required to enforce the regulations if they don’t want to; they can “forebear.” “Hey, don’t worry – be happy. We won’t do the bad stuff, just the good stuff – you know, the ‘neutrality’ stuff, the ‘equality’ stuff.” Chairman Wheeler is encouraging NN proponents to fill the empty vessel of Internet regulation with their own individual wish-fulfillment fantasies of what they dream a “public-utility” should be, not what the ugly historical reality tells us public-utility regulation actually was. For example, he has implied that forbearance will cut out things like rate-of-return regulation.

This just begs the questions raised by the issue of “regulating the Internet like a public utility.” The very elements that Wheeler proposes to forbear constitute part and parcel of public-utility regulation as we have known it. If these are forborne, we have no basis for knowing what to expect from the concept of Internet public-utility regulation at all. If they are not, after all, forborne – then we are back to square one, with the utterly dismal prospect of replaying 20th-century public-utility regulation in all its cynical inefficiency.

Forbearance is a good idea, all right – so good that we should apply it to the whole concept of Internet regulation by the federal government. We should forbear completely.

DRI-161 for week of 11-30-14: The Enemy Within: The Move to Strangle Welfare-State Reform In Its Crib

An Access Advertising EconBrief: 

The Enemy Within: The Move to Strangle Welfare-State Reform In Its Crib

The resurgence of the Republican Party after the overwhelming victory of Barack Obama and the Democrats in the 2008 elections was led by the Tea Party. This grassroots political movement began as a popular uprising and only gradually acquired formal organizational trappings. As yet, its ideological roots are so thin and shallow that they provide no support for the movement.

This contrasts sharply with the conservative movement, in which the order of development was reversed. Ideology came first, with roots implanted firmly by opposition to the New Deal and a foreign policy led by Sen. Robert Taft. The intellectual foundation laid by William F. Buckley, Jr. in National Review Magazine educated a generation of young Republicans and paved the way for the candidacy of Barry Goldwater in 1964. Goldwater’s landslide defeat nevertheless introduced Ronald Reagan to national politics. By the time Reagan became President in 1980, conservatism had become the dominant political paradigm.

Nowhere is a vacuum more abhorrent than in political ideology. Today’s victorious Republicans may purport to search for a mode of governance, but what they are really doing is belatedly deciding what they stand for. (The hapless domestic and foreign policies of the Obama administration gave them the luxury of winning the elections merely by signaling their lack of congruence with President Obama et al.) They enjoy a surfeit of advice from all quarters.

Nowhere is this advice more pointed than in its economic dimension.

 

Should Republicans “Take ‘Yes’ For an Answer?”

 

Although Buckley died in 2006, National Review still retains some of the intellectual momentum he generated. Its “Roving Correspondent,” Kevin Williamson, devoted a recent essay to an advisory for the Republican Party on post-victory strategy. Williamson sees the solid victory in the 2014 mid-term elections as “a chance to meet voters where they are.” To do that, Republicans need to “take ‘yes’ for an answer.”

Exactly how should we interpret these glib formulations? Williamson insists that Republicans should not treat electoral good fortune as the opportunity to create change. Instead, the Party should reverse the normal order of precedence and cater to popular disposition – “meet the voters where they are” instead of persuading the voters of the desirability or necessity of change. Don’t continue the campaign, Williamson pleads. The votes have already been counted; just “take ‘yes’ for an answer” and get on with the business of crafting a governing compromise that everybody can live with.

So much for the revolutionary stance of the Tea Party; the EPA won’t have to test BostonHarbor for caffeine contamination.

The reader’s instinctive reaction to Williamson’s essay is to flip the magazine over and re-check the cover. Can this really be National Review, legendary incubator of conservative thought, renowned for taking no prisoners in the ideological wars? We have just suffered six years under the lash of a Democrat regime whose marching order was “elections have consequences.” Now the flagship of American conservatism is preaching a gospel of preemptive surrender?

Williamson’s mood is apparently the product of disillusionment. The birth of NR, he reminds his readers, was a reaction to Eisenhower Republicanism. Instead of rolling back the welfare state installed by Roosevelt and Truman, Ike accepted it – thereby setting the tone for Republican policy thereafter. The magazine fulminated, but to no avail. Goldwaterism produced Reagan… “a self-described New Deal Democrat,” pouts Williamson, “who famously proclaimed that he hadn’t left eh Democratic Party but the party had left him.”

Reagan revisionism is part of a new NR realpolitik, it seems. “At the end of the Reagan years, the Soviet Union was dead on its feet, the United States was a resurgent force in the world… and spending and deficits both were up, thanks to the White House’s inability or unwillingness to put a leash on Tip O’Neill and congressional Democrats. The public sector was larger and more arrogant, there were more rather than fewer bureaucrats and bureaucracies, and nobody had made so much as a head fake in the direction of reforming such New Deal legacies as Social Security or even Great Society boondoggles such as Medicaid.”

The author’s psychological defeatism apparently so overwhelmed him that he lost touch with reality. The Soviet Union is “dead on its feet” but the singular responsibility of President Ronald Reagan for this fact is unmentioned. (One cannot help wondering whether this is an oversight or a deliberate omission.) But Reagan is held liable for the actions of the Democrat Speaker of the House and Congressional Democrats! Has anybody blamed Barack Obama for not “putting a leash on House Republicans” to achieve more of his agenda? Has Williamson published his Canine Theory of Congressional Fiscal Restraint in a peer-reviewed journal of political science?

One might have thought that winning the Cold War, taming hyperinflation and reviving moribund economic growth (also left unmentioned by Williamson) constituted sufficient labor unto a Presidential tenure. Various authors, ranging from Paul Craig Roberts to David Stockman, have chronicled the internecine warfare attending the Reagan administration’s efforts to cut the federal budget. Apparently Williamson has forgotten, if he ever knew, that Reagan enjoyed the reputation of a ferocious budget-cutter while in office. This dovetailed with his famous declaration that “government isn’t the solution – it’s the problem.” If, three decades after the fact, Reagan’s efforts seem puny, this may be because we hold him responsible for failing to effect a counterrevolution to match the permanency of FDR’s New Deal. One would think, though, that the only President since FDR to actually reduce the size of the Federal Register deserved better at Williamson’s hands.

Obviously, Williamson paints a false portrait of the Reagan years to justify the counsel of despair he gives today. “We did not undo the New Deal in the 1980s. We are not going to undo the New Deal before 2017 either… the fact remains that the American people are not as conservative as conservatives would like them to be, nor are they always conservative in the way conservatives would like them to be.” It seems that there is a “disconnect between the numbers of Americans who describe themselves as ‘conservative’ or ‘liberal’ and the policy preferences those Americans express.” Americans think of themselves as conservative but favor liberal policies. So, Williamson concludes, the only sensible thing to do is humor them.

“Americans …are, by and large, conservative in the same sense that Ronald Reagan was, not in the sense that Robert Taft was, or… Barry Goldwater was. They intuit that the federal government is overly large and intrusive, they resent the slackers and idlers who exploit that situation, and they worry that our long-term finances are upside down, but they do not wish to repeal the New Deal.”

“Example: A majority of voters believe that something must be done to rectify Social Security’s finances, and a plurality of voters believe that a combination of benefit cuts and tax increases should be adopted to achieve that… [but] strong majorities … of 56 percent… oppose Social Security benefit cuts and Social Security tax increases, according to Gallup. No doubt many of these voters think of themselves as conservatives… it is likely that the great majority of self-described conservatives would support continuing current Social Security policies indefinitely – if they believed it fiscally possible. The current Left-Right divide on Social Security is not a question of what we ought to do, but of what we can do.” Williamson cites Robert Taft’s eventual concession on Social Security as an example of the Right bending its principles to his form of pragmatism. After all, “populist measures are, to the surprise of nobody except scholars of political science, popular, hence the support among a majority of registered Republicans for raising the minimum wage.”

Instead of fighting among themselves on principle, Williamson contends, Republicans should be scanning the polls to find out where their base stands – and adjusting their stance accordingly. They should be meeting the voters where the voters are rather than persuading voters to see the light of sweet reason. They should take “yes” for an answer when they hear it from the networks on election night.

Rebutting Williamson’s “Populism”

 

No full-blooded Tea Party member will swallow Kevin Williamson’s argument, despite the author’s insistence that he is really enunciating their position. They didn’t overcome the twin obstacles of the Democrat Party and the Republican establishment only to be lectured on their extremism in the pages of National Review, for crying out loud. But we must go beyond visceral rejection of Williamson’s moral and psychological defeatism. Straightforward analysis indicts it.

Since the venue is National Review, it is fitting to recall Bill Buckley’s distinction between politics and economics: “The politician says: ‘What do you want? The economist says: What do you want the most?'” For many decades, voters have been offered big government as if it were a consumer product with zero price. That is the context in which to contemplate the poll responses that Williamson treats as commandments graven in stone. In the beginning, there was the word. And conservatives believed the word. But when the world around them changed and God neither smote the unbeliever nor struck down the evil Antichrist, conservatives eventually shrugged and went with the flow. After a while they began singing the same hymns to Baal as the liberals. They couldn’t very well go to jail for non-participation in the Social Security system and they discovered that the government checks always cashed – so why not go along? It was the only way they could get their money out.

In due course, conservatives found out along with the rest of society that they had been lied to and flimflammed by the pay-as-you-go status of Social Security. It was not a system of insurance, after all; the word “social” in the terms “social insurance” and “Social Security” should be taken to mean “not,” just as it does in terms like “social justice,” “social democracy” and “social responsibility.” By then, though, everybody was so thoroughly habituated to the system that it would have required something close to a revolution to change it. Something like what the colonists originally did when they revolted against the British and dumped tea in Boston harbor, for example.

When Williamson implies that conservatives are entirely comfortable with Social Security today, he is being disingenuous. (That either means “lacking in candor” or “naïve;” he is either lying to us or he is plain stupid.) In fact, conservatives (and just about everybody else) below the age of 50 no longer expect even to receive Social Security benefits – they expect the system to go bankrupt long before they collect. They are not comfortable with the system but resigned to it; there is a world of difference between the two. And considering that Williamson himself just published an article on “Generation Vexed” and its growing dissatisfaction with the Obama regime in the previous issue of NR, he cannot claim indifference to their electoral attitudes in this context.

But this attitude of resignation is wildly optimistic compared to the fiscal reality facing America and the rest of Western industrial society today. The welfare state is collapsing around our ears. Central bankers are in extremis; they are reduced to printing money to finance operations. The Eurozone staggers from crisis to crisis. Japan is now working on its third “lost decade.” Demography is a disaster; birth rates will not bail us out. Worse – they are falling like leaden raindrops, reducing the number of workers paying in per welfare-benefit recipient. The crisis is not in the far-off future but today – if the U.S. had to finance upcoming deficits at normal rates of interest rather than the “zero interest rates” of the last five years, the interest charges alone would eat up most of the federal budget. And the entitlement programs that Williamson views as sacred are now eating up most of that budget.

Williamson acts as if Social Security finance were a Starbucks menu. He treats longstanding conservative doctrine on Social Security as if it were excerpted from fundamentalist Scripture out of Inherit the Wind. But he is no Clarence Drummond; Social Security is exactly the Ponzi scheme that conservatives have always fulminated against. In fact, it is worse, because the Day of Judgment is arriving even sooner than prophesied.

True, it isn’t just Social Security – it’s also Medicare and Medicaid and the welfare system. (Welfare reform didn’t come close to reforming the whole system, just one of the six components of it.) The point is that we have passed the elective stage and have now entered the stage of imminent collapse. In that stage, monetary chaos and an uncertain fate for democracy await.

And what is Williamson’s reaction? When Americans protest, “I can be overdrawn; I still have checks,” Williamson nods, “Right you are.” But we’re not just overdrawn – we’re completely bankrupt.

Under these conditions, what are our choices? Suppose we remain in Obamaville. That will result in collapse. Suppose we go Williamson’s route, a route of picking and choosing a few pieces of low-hanging fruitful reform. That will also result in collapse.

We have nothing to lose and everything to gain by telling voters the truth and opting for revolutionary reform. If they reject us, we will be hung for offering a full-bodied sheep – limited government, free markets and freedom – rather than a bleating lamb of meekly pandering populism.

Popunomics

 

Williamson isn’t just selectively bad on economics – he has renounced economic logic entirely in favor of populist emotion. Take the minimum wage – Williamson’s shining example of popular Populism. The minimum wage is one of three or four most heavily researched measures in economics, having attracted empirical studies consistently since the late 1940s. Until the notorious Card-Krueger study in 1993, these found that the minimum wage adversely affected employment of low-skilled labor. These findings jibed with a priori theory, which predicted that a minimum wage would produce a surplus of labor (unemployment), increase the scope for discrimination by buyers of labor against sellers of labor, reduce the quality of labor and/or jobs, encourage businesses to offer fewer benefits and more part-time jobs and encourage businesses to substitute machinery and high-skilled labor for low-skilled labor. All these effects have been observed in conjunction with the minimum wage since its imposition. Card and Krueger offered no rebuttal to the eloquent testimony of the research record and were notably silent on the theory underpinning their own research result, which purported to find an increase in comparative employment in one state after an increase in the minimum wage. Both the validity of their data and the econometric soundness of their results were later challenged.

Having carefully chosen one of the most economically untenable of all Populist positions on which to “meet voters where they are,” Williamson next ups the ante. From the debased coin of the minimum wage, he turns to the fool’s gold of restrictionist anti-immigrationism. The late Richard Nadler painstakingly showed – and in NR to boot, in 2009’s “Great Immigration Shoot-Out” – that restrictionists were big and consistent electoral losers in Republican primaries and general elections. But Williamson is back at the same old stand, hawking “stronger border controls… mandatory use of E-verify… and like measures” because “voters are solidly on the conservatives’ side on this issue.”

Oh really? Just in time – net immigration has been roughly zero for the last few years. Market forces, not government quotas, control international migration; the quotas merely serve to criminalize violators. Immigration benefits America

on net balance, regardless of its legal dimension. Along with free trade and opposition to the minimum wage, place support of free international migration among the issues upon which economists strongly agree.

Wait a minute – Williamson has gone from supporting brain-dead economics because it is generally popular (the minimum wage) to supporting it because it is popular with NR’s constituency. Just as Buckley had to rescue the Right from the anti-Semitism of the American Mercury and the conspiratorial John Birch Society, we are now faced with the task of rehabilitating the right wing from the crank nativism and restrictionism that has asserted squatter’s rights at National Review. Calling Williamson’s version of expedience Populism gives ideology a bad name. The 19th-century Populism of Pitchfork Ben Tillman, et al, featured cheap money and fashionably bad economics but it was more consistent than Williamson’s proposal.

Borrowing the argot of the digital generation, Williamson is expounding not Populism but rather PLR – the “path of least resistance.” Put your finger to the wind and sense what we can get the voters to sign off on. See how many fundamental principles and how much government money we’ll have to sacrifice to win the next election. Williamson purports to be lecturing us on why Republicans fail – because they are too ideologically scrupulous, insisting on free markets, free trade, open borders, flexible prices, deregulation. But the encroachment of big government and the welfare state proceeded mostly unabated throughout the 20th century despite periods of Republican ascendancy. How could this have happened? Because Republicans were really heeding Williamson’s doctrine all along; PLR ruled, not ideological constancy. Goldwater never led the Republican Party, even when he won the nomination. Reagan was detested by the Party establishment and his philosophy was ditched the minute Air Force One lifted off the runway to return him to California. PLR was always the de facto rule of thumb – and forefinger, ring finger and all other digits. How else could a Party ostensibly supporting limited government have countenanced the transition to unlimited government?

Williamson treats the rise of the Tea Party as America’s version of China’s Cultural Revolution. Whew! We must cease all this senseless bloodletting and wild-eyed revolutionary fervor; return to our senses and settle for what we can get rather than striving for Utopia. Back to normalcy, back to pragmatism and compromise and half-a-loaf … well, maybe a quarter-loaf… or even a slice… hell, maybe even a few crumbs, just so its bread.

It is fitting that Keynesian economics has come home to roost in this time of Quantitative Easing and central-banking hegemony and liquidity everywhere with not a loan to drink. “In the long run, we are all dead” was Keynes’ most famous quip. Well, we can’t live in the short run forever. The procession of short runs eventually produces a long run. And the long run is here.

It’s time to pay up. The voters have given Republicans a gift – the chance to tell the truth and turn the ship around before we reach the falls. PLR is no longer sufficient. It’s time – no, it’s long past time to start doing all the things that Williamson says Republicans can’t do and mustn’t do.

The Anti-Economics Party of the Party of Sound Economics?

 

“The American public is in many ways conservative, but in many ways it is not, and its conservatism often is not the conservatism of Milton Friedman or Phil Gramm but that of somebody who fears the national debt and dreads bureaucracy but rather likes his Social Security check.” The Republican Party’s glory days of the post-World War II period came during the Great Moderation ushered in by the Reagan Presidency, beginning in late 1980 and continuing into the present millennium. This success and victory in the Cold War were the only departures from PLR. This period of prosperity was driven by an economic policy whose positive features were disinflation, sound money, low taxes and low inflation. This is a combination that Keynesian economics finds contradictory and now repudiates utterly. Williamson repudiates it, too, hence his explicit rejection of Milton Friedman and Phil Gramm as exponents of conservatism. (Once again, his use of Friedman, a libertarian rather than a conservative, is disingenuous.) He is still living in the past, the days when we could have our conservatism and our Social Security checks, too. Sorry, we have bigger problems now than how to buy votes from our own voter base to win the next election.

For years, Republicans have been able to win occasional elections the easy way, by adopting PLR. Those days are over. From now on, the Republicans will have to earn their money as a party of limited government by actually practicing the principles they profess. That is the bad news. But the good news is that they cannot lose by doing this. The very economics that Kevin Williamson looks down on tells us that.

Economics defines “cost” as the alternative foregone. If telling the truth will cause you to lose the election, you may well decide to lie; the cost of truth-telling will seem too high. But if winning the election and losing the election are reduced to equivalence by the consequences of economic collapse, then telling the truth suddenly becomes costly no longer. Now avoiding collapse becomes the only matter of consequence and the election outcome fades into insignificance.

Ironically, that is not only sound economics; it is also supremely pragmatic.

DRI-303 for week of 8-17-14: When Fighting Fire With Fire Just Makes a Bigger Blaze

An Access Advertising EconBrief:

When Fighting Fire With Fire Just Makes a Bigger Blaze

Fans of the classic television series Get Smart will recall the snappy comeback of secret agent Maxwell Smart to a malefactor indignant at the prospect of detention: “You’re not going to arrest me on this flimsy evidence, are you?” “No,” Smart replied confidently, “I’ve got some more flimsy evidence.”

The quality of empirical debate over public policy has deteriorated to this level. Just as politicians are now compelled to act virtually any time something goes wrong, no matter what it is or how slim the likelihood of successful intervention, no exchange of opposing views is complete without quantitative citation. As soon as one side unveils its numbers, the other side must respond with numbers of its own – no matter how far-fetched or badly compiled. It is a Newtonian law of equal and opposite polemical reaction.

As a result, public discourse is now debased to the point of decadence. The long-running debate over the minimum wage has plumbed these depths of intellectual degradation. In the August 21 Wall Street Journal op-ed, “Do Higher Minimum Wages Create More Jobs?” authors Liya Palagashvili and Rachel Mace probe for the bottom. It is as if they have rewritten Mel Brooks’ script: “You don’t expect me to believe this flimsy evidence, do you?” “Well, my flimsy evidence is a lot better than your flimsy evidence!”

The Left Wing’s Flimsy Evidence

Op-ed authors Palagashvili and Mace (hereinafter, P&M) correctly relate that the left-wing Center for Economic and Policy Research (CEPR) released a report purporting to demonstrate the success of state-level minimum-wage increases in increasing relative employment growth among states. The report was released in June, 2014, and used data compiled by the federal Bureau of Labor Statistics. It examined 13 states that increased their individual minimum wage (as distinct from the federal minimum wage) that month and compared them to the other 37 states whose minimum wage did not rise. The report claimed that the average overall employment growth among the 13 states exceeded that of the 37 states for the five-month comparison period.

The Obama administration appropriated these conclusions with the alacrity of a police department confiscating drug-dealer assets. As P&M note, there was the little matter of “why [the] firms [would] hire more workers when the government raises the cost of hiring workers?” The straight-faced answer was that “hiking the minimum wage raises the incomes of poor workers, causing them to spend more. This additional spending, in turn, is so great that firms hire even more workers.” No less a personage than Barack Obama himself got into this act. “That [worker spending] gets churned back into the economy. And the whole economy does better, including the businesses.”

A priori, this “theory” of economic development is so ludicrous that it would qualify for an evening comedy skit at an American Economic Association convention. “Ludicrous” means ludicrous a priori; its theoretical underpinnings are so completely lacking that nobody would take it seriously enough to investigate. Well, nobody should – these days, no premise is too ridiculous if it can backstop a political point. Our Economist-in-Chief in the White House needs to bolster his standing with the public and shore up two key constituencies. One of those is obvious – the poor, downtrodden low-skilled workers who allegedly benefit from the minimum wage. The other is hidden – the higher-skilled workers, particularly union members, who substitute for the low-skilled workers laid off after the minimum-wage increase.

The “spending rescue” thesis is the culmination of two decades’ worth of left-wing attempts to promote the minimum wage as the salvation of the poor. This crusade began in the early 1990s, when economists David Card and Alan Krueger published a now-legendary study purporting to show that imposition of a minimum wage in New Jersey increased employment there relative to Pennsylvania. The defects of this study have since become almost as legendary as its conclusions. It utilized phone surveys to gather data – a technique heretofore shunned within the profession but thereupon praised as innovative and groundbreaking. But when other economists attempted to confirm the results using payroll data, this change instead reversed the results of Card and Krueger. The study’s econometrics has been panned by expert econometricians. Card and Krueger themselves were unable to supply a theoretical rationale for their result. Ordinarily, this would have been a fatal defect, but the policy implications of the study’s results were so delicious to the left wing that Card and Krueger were lionized and have gone on to professional fame and fortune. The only valid theory that would support their result does not comport with the reality of labor markets.

Why is the left so desperate to validate such a worthless policy measure? Their anxiety derives from the unique qualities of the minimum wage: it hides the benefits to their treasured constituency (unions), masquerades as a godsend to the poor while actually screwing them, and visibly appears to screw the rich (business owners, all of whom are assumed “rich” by definition) while actually doing so only in the short run. What a deal! The “optics” of the minimum wage are ideal for the left; that is, its visible or apparent effects are politically beneficial to them. Of course, its actual effects are harmful to everybody except the special-interest monopolists who comprise the left wing’s leading constituency these days, but that is jake with the left. Their ultimate goal is power – increasing real incomes for special interests are only a means to that end.

The Traditional Economic View of the Minimum Wage

Until Card and Krueger came along, the minimum wage vied with tariffs and quotas on foreign goods for the title of “most unpopular policy measure” among professional economists. Nearly a half-century of empirical examination reaffirmed the verdict of a priori theory: minimum wages redistribute jobs and real income from some poor and low-skilled workers to other poor and low-skilled workers by reducing employment, closing some businesses and temporarily reducing profits earned by businesses utilizing low-skilled labor.

These results are the outgrowth of the impact felt by business upon imposition of the minimum wage. Formally, it acts like a tax on the employment of low-skilled labor, which is the kind of labor directly affected by the minimum wage. That tax has three kinds of impact: a substitution effect, an output effect and a profit effect. (The first two of these are analogous to the substitution and income effect of a price change in consumer demand theory.) The substitution effect causes firms to employ less low-skilled labor and more of other inputs, including the higher-skilled labor previously mentioned as well as machinery that substitutes for labor. The output effect causes businesses employing low-skilled labor to produce less output, thereby employing fewer inputs of all kinds including labor. The profit effect reduces the profits earned by firms employing low-skilled labor. This third effect is only temporary, because the exit of some firms from the industry due to insolvency or better opportunities elsewhere will eventually raise the rate of return back to its previous, competitive level. That is why so-called rich business owners are adversely affected only transitorily by the minimum wage. The “permanent” gains go to workers who retain their jobs at the higher minimum wage. The “permanent” losses are suffered by workers who lose their jobs, some of whom may leave the labor force altogether. This phenomenon of exit from the labor force is by now well-known to most Americans; it has reached its highest level in over thirty years.

This is a formidable a priori case against the minimum wage. Economists never doubted that the minimum wage adversely affected employment of poor and low-skilled workers; they only doubted the degree to which this was true. Empirical studies of this issue began in the late 1940s, conducted by luminaries like future Nobel laureate George Stigler. Over the succeeding decades, economists used formal statistics to enforce the conditions necessary for a valid empirical examination of the issue.

One common defense of the minimum wage made by newspaper editorialists and readers over the years is that “the minimum wage went up but the U.S. unemployment rate did not go up; in fact, it went down, which proves that the minimum wage does not adversely affect employment.” This argument is invalid for several reasons. First, the minimum wage only affects employment within firms and industries that hire low-skilled labor. That does not begin to comprise the entire U.S. economy. Second, even within those industries directly affected by the minimum wage, the overall effects on employment of labor are equivocal. The substitution effect causes employment of less low-skilled labor but more higher-skilled labor, while the output and profit effects cause less employment of all inputs. It is not unusual at all to find that a liberal administration increases both the minimum wage and the money supply, with the latter causing temporary gains in income and employment that can swamp job losses associated with the minimum wage. This is not only ironic – since it harms the very people purportedly highest among the concerns of the left – but fully compatible with a condition in which the minimum wage causes job losses while the overall unemployment rate falls.

To avoid being fooled by effects outside the scope of the minimum wage, economists confined their studies to low-skilled workers and corrected their statistical methods to correct for trends and outside influences. That has been the traditional focus of econometrics, to compensate for the ways in which social sciences differ from the laboratory experiments common to the physical sciences.

Now, though, traditional econometrics has taken a back seat to raw political desire. And this corrupting influence has infected both sides of the political spectrum.

The Right Wing Retaliates With Its Own Flimsy Evidence

P&M disdain virtually all of the history and a priori theory cited above. They have their own flimsy evidence to present against the minimum wage. Their case is purely quantitative; clearly they believe in fighting fire with fire. They begin by finding the portion of the labor force comprised of low-skilled labor, which is roughly 2%, insufficient to generate the high-powered spending necessary to outweigh the minimum wage’s disincentives.

While no doubt true, this leaves room for counterargument by the left. Minimum-wage proponents will respond by accusing P&M of “overlooking” the greater propensity to spend by the poorest families. This is a feeble rebuttal, but the average person won’t know the difference and will probably rule the point a draw at best.

P&M then make a stronger point – that the logic of proponents’ case should mean that bigger minimum-wage boosts should have bigger effects on employment. In fact, the opposite was the case in January-May, 2014. The three substantial minimum-wage increases took place in Connecticut, New Jersey and New York, the three falling between 5% and 14%. Yet these three states had the worst job growth of the 13 increase-states, an average of 0.3% compared to the 1.28% average increase in the other 10 states. “Indeed, job growth was worse in each of these three states than it was, on average, in the 37 states that did not raise their minimum wage at all,” P&M report. And “in New Jersey, the state that hiked [the] minimum wage the most – to $8.25 an hour from $7.25 – employment actually fell by about 0.56%.” In the state with the largest job growth, WashingtonState’s 2.1%, the minimum wage went up by a whopping 13 cents per hour, or almost $24 per month for a full-time employee.

If P&M had rested content with this demonstration, they could have escaped criticism. Up to this point, they were merely using the left’s own evidence against it without accepting its methods. They were showing that the left’s argument wasn’t consistent even in its own terms, albeit without demonstrating how hopelessly confused those terms really were.

But P&M couldn’t stand prosperity. To a roll of drums, they unwrapped the crown jewel in their collection. “We conducted a statistical analysis of the Bureau of Labor Statistics’ data called a two-sample “t” test for comparing two means. We found, for this time period, no difference in the job-growth trend in the states that raised their minimum wages from states that did not. In other words, the correlation cited as debunking the economic case against the minimum wage is not statistically significant.”

Ta-daaaaaaa!!! Too bad there are no bows taken in print media; P&M would surely rate a round of applause in a run-of-the-mill graduate school economics seminar for their performance. It is surely no coincidence that “Ms. Mace studies economics at GeorgeMasonUniversity” while Ms. Palagashvili is a law-school fellow at NYU. Alas, they have displayed academia at its worst.

That is not to say that P&M flubbed their econometric dubs by conventional standards. We don’t know because we can’t see their results and have only their word as to their findings. But taking their comments at face value, it seems that they followed what have become standard econometric procedures. The t statistic is the standard one for small-sample tests of statistical significance. A comparison of sample means is a basic econometric procedure. Almost certainly, they assumed the standard “null hypothesis” of no difference between average job growth in the 13 states as compared to job growth in the 37 states. In this context, “no difference” does not mean that the two averages are exactly the same, which they obviously aren’t. It means that the degree of correspondence between the two is not sufficient as to enable us to be confident that the correspondence was not due to random chance. And just what does “confident” mean? The standard meaning for it is that we must be at least 90% certain. Lacking that degree of confidence, we enter a finding of “statistically insignificant” – which means that the minimum-wage increase did not “cause” the increases in job growth.

It is overwhelmingly likely that the readers of this op-ed – who undoubtedly make up a sample of Americans that is far more intelligent than any randomly chosen sample – fall into two categories: those who have no idea what P&M’s “statistical significance” paragraph meant and those who think they know but are wrong. Those who correctly understand it probably represent a statistically invisible sliver of its readership. And a majority of economists and statisticians are excluded from that sliver.

P&M thought that they were “one up” on the minimum-wage proponents at CEPR because they (P&M) were using the tool of statistical significance as it has been used for decades in academia and government. That statement would be correct only if the word “misusing” were substituted for “using” in two places. That is why they were fighting fire with fire – they were responding to CEPR’s misuse of numbers with their own misuse of statistical inference. Their mistakes were just fancier than CEPR’s, that’s all.

The Flaws of Statistical Significance

Various authors have expounded the flaws of statistical significance as developed by the late statistician Sir Ronald Fisher. The most comprehensive treatment is probably that of Deirdre McCloskey and Stephen Ziliak, The Cult of Statistical Significance: How the Standard Error Costs Us Jobs, Justice and Lives. For our purposes, it is sufficient to summarize how one of the two groups referred to above views the notion of statistical significance and compare it with the truth.

Ask readers of the Wall Street Journal op-ed to explain the meaning of P&M’s statistical significance paragraph in layman’s terms. Those who think they know the answer will probably say something like the following: “Well, it means that the effect of an increase in the minimum wage on overall job growth is insignificant, the opposite of significant. That means it is “too small to matter.” It’s so small we can’t be confident that something else might not be causing what we’re seeing in job growth.” That’s an intuitively appealing explication for at least two reasons. First, it incorporates the familiar meaning of the words “significant” and “insignificant.” Second, it incorporates the kind of answer we are looking for when we do empirical research on issues like this. Typically, we want “how big” or “how much” kinds of answers rather than “yes or no” types of answers.

Unfortunately, the concept of statistical significance is not what most people think it is. Its findings do not convey any quantitative sense of how big an effect is or how much influence one variable (such as an increase in the minimum wage) has on another (such as state-level growth in employment). Rather, it is a binary, “yes-no” type of concept. It registers the likelihood that the influence of one variable on another is random, as compared to systematic or non-random. Because the variables involved are invariably derived from sample data, it can be viewed as a verdict on the representativeness of a chosen sample.

This is useful information, to be sure. But it is not the most useful information we could wish to obtain. And that is a crying shame because the obsession with statistical significance has pretty much overshadowed everything else in empirical research in the social sciences and even in much of the physical sciences today. This has reached such epidemic proportions that McCloskey, a leading economic historian and econometrician, declares that most statistical work in economics done over the last thirty years is useless and must be done over. That is tantamount to saying that we might as well junk the leading academic journals published during that interval.

Fighting Fire With Fire

The proper reaction to P&M’s reaction to the CEPR study and the left-wing minimum-wage ballyhoo is a polite yawn and a “So what?” This should be followed by a trip to the woodshed and back to the drawing board for P&M, where they would be schooled in proper econometric practice. Alternatively, they can do what true free-market economists have done while their colleagues were practicing pretend-Science: spend the time honing their understanding of concepts like the time-structure of production and capital theory. That will better inform their grasp of reality than the most esoteric econometric model.

Fighting fire with fire can work in specialized cases like oil-well fires. But in today’s debates over economic theory and policy, fighting fire with fire does not extinguish the original fire. It does not even provide intellectual illumination. It merely makes the blaze bigger.

DRI-267 for week of 10-27-13: ObamaCare and the Point of No Return

An Access Advertising EconBrief:

ObamaCare and the Point of No Return

The rollout of ObamaCare – long-awaited by its friends, long-dreaded by its foes – took place last week. In this case, the term “rollout” is apropos, since the program is not exactly up on its feet. Tuesday, Oct. 22, 2013 marked the debut of HealthCare.gov, the ObamaCare website, where prospective customers of the program’s health-insurance exchanges go to apply for coverage. By comparison, Facebook’s IPO was a rip-roaring success.

A diary of highlights seems like the best way to do justice to this fiasco. We are indebted to the Heritage Foundation for the chronology and many of the specific details that follow.

Tuesday, Oct. 22, 2013: This is ribbon-cutting day for the website, through which ObamaCare’s state health-insurance exchangesexpect to do most of their business. One of the most fundamental reforms sought by free-market economists is the geographic market integration of health care in the U.S. Historically, each state has its own state laws and regulatory apparatus governing insurance. This hamstrings competition. It requires companies to deal with 50 different bureaucracies in order to compete nationally and limits consumers solely to companies offering policies in their state. But ObamaCare is dedicated to the proposition that health care of, by and for government shall not perish from the earth, so it not only perpetuates but complicates this setup by interposing the artificial creation of a health-care exchange for each state, operating under a federal aegis.

Only 36 of those state exchanges open for business on time today, however. Last-minute rehearsals have warned of impending chaos, and frantic responses have produced lateness. Sure enough, as the day wears on 47 states eventually report applicant complaints of “frequent error messages.” Despite massive volume on the ObamaCare site, there is almost no evidence of actual completed applications.

Wednesday, Oct. 23, 2013: The Los Angeles Times revises yesterday’s report of 5 million “hits” on HealthCare.gov from applicants in California downward just a wee bit, to 645,000. But there is still no definitive word on actual completed applications, leading some observers to wonder whether there are any.

Thursday, Oct. 24, 2013: The scarcity of actual purchasers of health insurance on the ObamaCare exchanges leads a Washington Post reporter to compare them in print to unicorns.  More serious, though, are the growing reports of thousands of policy cancellations suffered by Americans across the nation. The culprit is ObamaCare itself; victims’ current coverage doesn’t meet new ObamaCare guidelines on matters such as openness to pre-existing conditions. Ordinarily, a significant pre-existing health condition would preclude coverage or rate a high premium. In other words, writing policies that ignore pre-existing conditions is not insurance in the true, classical sense; insurance substitutes cost for risk and the former must be an increasing function of the latter in order for the process to make any sense. ObamaCare is not really about insurance, despite its protestations to the contrary.

Friday, Oct. 25, 2013: CNBC estimates that only 1% of website applicants can proceed fully to completion and obtain a policy online because the system cannot generate sufficient valid information to process the others. A few states – notably Kentucky – have reported thousands of successful policies issued, but the vast bulk of these now appear to be Medicaid enrollees rather than health-insurance policyholders. Meanwhile, the Department of Health and Human Services (HHS) announces that its website will be offline for repairs and upgrading.

Saturday, Oct. 26, 2013: In an interview with Fox News, Treasury Secretary Jack Lew refuses to cite a figure for completed applications on the HealthCare.gov website. Among those few that have successfully braved the process, premiums seem dramatically higher than those previously paid. One example was a current policyholder whose monthly premium of $228 ballooned to $1,208 on the new ObamaCare health-care exchange policy.

Monday, Oct.28, 2013: Dissatisfaction with the process of website enrollment is now so general that application via filling out paper forms has become the method of choice. It is highly ironic that well into the 21st century, a political administration touting its technological progressivity has fallen back on the tools of the 19th century to advance its signature legislative achievement.

Official Reaction

This diary of the reception to ObamaCare conveys the impression of a public that is more than sullen in its initial reaction to the program – it is downright mutinous. It was hardly surprising, then, that President Obama chose to respond to public complaints by holding a press conference in the White House Rose Garden a few days after rollout.

Mr. Obama’s attitude can best be described as “What’s the problem?” His tone combined the unique Obama blend of hauteur and familiarity. The Affordable Care Act, he insisted, was “not just a website.” If people were having trouble accessing the website or completing the application process or making contact with an insurance company to discuss an actual plan – why, then, they could just call the government on the phone and “talk to somebody directly and they can walk you through the application process.” (How many of the President’s listeners hearkened back at this point to their previous soul-satisfying experiences on the phone with, let’s say, the IRS?) This would take about 25 minutes for an individual, Mr. Obama assured his viewers, and about 45 minutes for a family. He gave out a 1-800 number for his viewers to call. Reviews of the President’s performance noted his striking resemblance to infomercial pitchmen.

Sean Hannity was so inspired by the President’s call to action that he resolved to heed it. He called the toll-free number on-air during his AM-radio show. He spoke with a call-center employee who admitted that “we’re having a lot of glitches in the system.” She read the script that she had been given to use in dealing with disgruntled callers. Hannity thanked her and complimented her on her courtesy and honesty. She was fired the next day. Hannity declared he would compensate her for one year’s lost salary and vowed to set up a fund for callers who wanted to contribute in her behalf.

Health and Human Services Secretary Kathleen Sebelius was next up on the firing line. Cabinet officials were touring eight cities and selected regional sites to promote the program and at Sebelius’s first stop at a community center in Austin, TX, she held a press conference to respond to public outrage with the glitches in the program.

On October 26, 2013, the Fox News website sported the headline: “Sebelius Suggests Republicans to Blame for ObamaCare Website Woes.” Had the Republican Party chosen the IT contractor responsible for setting up HealthCare.gov‘s website?

No. “Sebelius suggest[ed] that Republican efforts to delay and defund the law contributed to HealthCare.gov‘s glitch-ridden debut.” Really. How? Sebelius “conceded that there wasn’t enough testing done on the website, but added that her department had little flexibility to postpone the launch against the backdrop of Washington’s unforgiving politics. ‘In an ideal world, there would have been a lot more testing, but we did not have the luxury of that. And the law said the go-time was Oct. 1. And frankly, a political atmosphere where the majority party, at least in the House, was determined to stop this any way they possibly could…was not an ideal atmosphere.”

It takes the listener a minute or so to catch breath in the face of such effrontery. The Obama Administration had three years in which to prepare for launch of the program. True, there were numerous changes to the law and to administrative procedures, but these were all made by the administration itself for policy reasons. The Democrat Party, not the Republican Party, is the majority party. The Republican Party – no, make that the Tea Party wing of the Republican Party – proposed a debt-limit settlement in which the individual mandate for insurance-policy ownership would be delayed. It was rejected by the Obama Administration. Ms. Sebelius is blaming the Republican Party for the fact that Democrats were rushed when the Republicans in fact offered the Democrats a delay that the Democrats refused.

Were Ms. Sebelius a high-level executive in charge of rolling out a new product, her performance to date would result in her dismissal. But when queried about the possibility of stepping down, she responded “The majority of people calling for me to resign, I would say, are people I don’t work for and who did not want this program to work in the first place.” Parsing this statement yields some very uncomfortable conclusions. Ms. Sebelius’s employer is not President Obama or his administration; it is the American people. Anybody calling for her resignation is also an American. But clearly she does not see it that way. Obviously, the people calling for her resignation are Republicans. And she does not see herself as working for Republicans. The question is: Who is she working for?

Two possibilities stand out. Possibility number one is that she is working for the Democrat Party. In other words, she sees the executive branch as a spoils system belonging to the political party in power. Her allegiance is owed to the source of her employment; namely, her party. Possibility number two is that she sees her allegiance as owed to President Obama, her nominal boss. This might be referred to as the corporatist (as opposed to corporate) view of government, in which government plays the role of corporation and there are no shareholders.

Neither one of these possible conceptions is compatible with republican democracy, in which ultimate authority resides with the voters. In this case, the voters are expressing vocal dissatisfaction and Ms. Sebelius is telling them to take a hike. In a free-market corporation, Ms. Sebelius would be the one unfolding her walking papers and map.

Whose Back is Against the Wall?

It is tempting to conclude that ObamaCare is the Waterloo that the right wing has been predicting and planning for President Obama ever since Election Day, 2008. And this does have a certain superficial plausibility. ObamaCare is this Administration’s signature policy achievement – indeed, practically its only one. There is no doubt that the Administration looks bad, even by the relaxed standards of performance it set during the last five years.

Unfortunately, this view of President Obama with his back against the wall, despairing and fearful, contemplating resignation or impeachment, simply won’t survive close scrutiny. It is shattered by a sober review of Barack Obama’s past utterances on the subject of health care.

As a dedicated man of the Left, Barack Obama’s progressive vision of health care in America follows one guiding star: the single-payer system. That single payer is the federal government. Barack Obama and the progressive Left are irrevocably wedded to the concept of government ownership and control of health care, a la Great Britain’s National Health Care system. In speeches and interviews going back to the beginning of his career, Obama has pledged allegiance to this flag and to the collective for which it stands, one organic unity under government, indivisible, with totalitarianism and social justice for all.

The fact that ObamaCare is now collapsing around our ears may be temporarily uncomfortable for the Obama Administration, but it is in no way incompatible with this overarching goal. Just the opposite, in fact. In order to get from where we are now to a health-care system completely owned and operated by the federal government, our private system of doctors, hospitals and insurance companies must be either subjugated, occupied or destroyed, respectively. That process has now started in earnest.

Oh, the Administration would rather that private medicine went gentle into that good night. It would have preferred killing private health insurance via euthanasia rather than brutal murder, for example. But the end is what matters, not the means.

Certainly the Administration would have preferred to maintain its hypnotic grip on the loyalty of the mainstream news media. Instead, the members of the broadcast corps are reacting to ObamaCare’s meltdown as they did upon first learning that they were not the product of immaculate conception. But this is merely a temporary dislocation, not a permanent loss. What will the news media do when the uproar dies down – change party affiliation?

For anybody still unconvinced about the long-run direction events will take, the Wednesday, October 30, 2013 lead editorial in The Wall Street Journal is the clincher.

“Americans are Losing Their Coverage by Political Design”

“For all of the Affordable Care Act’s technical problems,” the editors observe, “at least one part is working on schedule. The law is systematically dismantling the private insurance market, as its architects intended from the start.”

It took a little foresight to see this back when the law was up for passage. The original legislation included a passage insisting that it should not “be construed to require than an individual terminate coverage that existed as of March 23, 2010.” This “Preservation of Right to Maintain Existing Coverage” was the fig leaf shielding President Obama’s now-infamous declaration that “if you like your existing policy, you can keep it.” Yeah, right.

Beginning in June, 2010, HHS started generating new regulations that chipped away at this “promise.” Every change in policy, no matter how minor, became an excuse for terminating existing coverage at renewal time. This explains the fact that some 2 million Americans have received cancellation notices from their current insurers. Of course, the Obama Administration has adopted the unified stance that these cancellations are the “fault” of the insurance companies – which is a little like blaming your broken back on your neighbor because he jumped out of the way when you fell off your roof instead of standing under you to cushion your fall. Stray callers to AM radio can be heard maintaining that at least half of these cancellations will be reinstated with new policies at lower cost in the ObamaCare exchanges. If only those hot-headed Tea Partiers would stop dumping boxes of tea and behaving like pirates! Alas, a Rube Goldberg imitation of a market cannot replace the genuine article – with apologies to Mr. Goldberg, whose roundabout contraptions actually worked.

ObamaCare creates 10 types of legally defined medical benefits. They include general categories like hospitalization and prescription drugs. No policy that fails to meet the exact standards defined within the law can survive the ObamaCare review. It is widely estimated that about 80% of all individual plans, which cover 7% of the U.S. population under age 65, will fall victim to the ObamaCare scythe.

The law is replete with Orwellian rhetoric of progressive liberalism. HHS defines its purpose as the “offer [of] a small number of meaningful choices.” Uh…what about allowing individuals to gauge the tradeoff between price and quality of care that best suits their own preferences, incomes and particular medical circumstances? No, that would have “allowed extremely wide variation across plans in the benefits offered “and thus “would not have assured consumers that they would have coverage for basic benefits.” This is doublespeak for “we are restricting your range of choice for your own good, dummy.”

Liberals typically respond with a mixture of outrage and indignation when exposed as totalitarians. It is certainly true that they are not eradicating freedom of choice merely for the pure fun of it. They must create a fictitious product called “insurance” to serve a comparatively small population of people who cannot be served by true insurance – people with pre-existing conditions that make them uninsurable or ratable at very high premiums or coverage exclusions. The exorbitant costs of serving this market through government require that the tail wag the dog – that the large number of young, healthy people pay ridiculously high premiums for a product they don’t want or need in order to balance the books on this absurd enterprise. (Formerly, governments simply borrowed the money to pay for such pay-as-you-go boondoggles, but the financial price tag on this modus operandi is now threatening to bring down European welfare states around the ears of their citizens – so this expedient is no longer viable.) In order to justify enrolling everybody and his brother-in-law in coverage, government has to standardize coverage by including just about every conceivable benefit and excluding practically nothing. After all, we’re forcing people to sign up so we can’t very well turn around and deny them coverage for something the way a real, live insurance company would, can we?

It is well known that the bulk of all medical costs arise from treating the elderly. In a rational system, this would be no problem because people would save for their own old age and generate the real resources necessary to fund it. But the wrong turn in our system began in World War II, when the tax-free status of employer-provided health benefits encouraged the substitution of job-related health insurance for the wage increases that were proscribed by wartime government wage and price controls. The gradual dominance of third-party payment for health care meant that demand went through the roof, dragging health-care prices upward with it.

Now Generation X finds itself stuck with the mother of all tabs by the President whom it elected. The Gen X’ers are paying Social Security taxes to support their feckless parents and grandparents, who sat still for a Ponzi scheme and now want their children to make good. To add injury to injury, the kids are also stuck with gigantic prices for involuntary “insurance” they don’t want and can’t afford to support their elders, the uninsurables – and the incredibly costly government machinery to administer it all.

It’s just as the old-time leftist revolutionaries used to say: you can’t make an omelette without breaking eggs. Across the nation, we have heard the sound of eggs cracking for the last week.

The Point of No Return

The “point of no return” is a familiar principle in international aviation. It is the point beyond which is it closer to the final destination than to the point of origination, or the point beyond which it makes no sense to turn back. This is particularly applicable to trans-oceanic travel, where engine trouble or some other unexpected problem might make the fastest possible landing necessary.

In our case, the Obama Administration has kept this concept firmly in mind. By embroiling as many Americans as deeply as possible in the tentacles of government, President Obama intends to create a state of affairs in which – no matter how bad the current operation of ObamaCare may be – it will seem preferable to most Americans to go forward to a completely government-run system rather than “turn back the clock” to a free-market system.

A free-market system works because competition works. On the supply side of the market, eliminating state regulation of insurance would enable companies to expand across state borders and compete with each other. But this involves relying upon companies to serve consumers. And companies are the entities that just got through issuing all those cancellation notices. For millions of Americans today, the only disciplinary mechanism affecting companies is something called “government regulation” that forces them to do “the right thing” by bludgeoning them into submission. That is what regulatory agencies are doing right now – beating up on Wall Street firms and banks for causing the financial crisis of 2008 and ensuing Great Recession. The fact that this never seems to prevent the next crisis doesn’t seem to penetrate the public consciousness, for the only antidote for the failure of government regulation is more and stronger government regulation.

On the demand side of a free market, consumers scrutinize the products and services available at alternative prices and choose the ones they prefer the most. But consumers are not used to buying their own health care and vaguely feel that the idea is both dishonest and unfair. “Health care should be a right, not a privilege,” is the rallying cry of the left wing – as if proclaiming this state of affairs is tantamount to executing it. No such thing as a guaranteed right to goods and services can exist, since giving one person a political right to goods is the same thing as denying the right to others. In the financial sense, somebody must pay for the goods provided. In the real sense, virtually all goods are produced using resources that have alternative uses, so producing more of some goods always means producing fewer other goods.

This is not what the “health-care-should-be-a-right-not-a-privilege” proclaimers are talking about. Their idea is that we will give everybody more of this one thing – health care – and have everything else remain the same as it is now. That is a fantasy. But this fantasy is the prevailing mental state throughout much of the nation. One widely quoted comment by a bitterly disappointed victim of policy cancellation is revealing: “I was all for ObamaCare until I found out I was going to have to pay for it.” On right-wing talk radio, this remark is considered proof of public disillusion with President Obama. But note: The victim did not say: “I was all for ObamaCare until I found out what I was going to have to pay for it.” The distinction is vital. Today, a free lunch is considered only fitting and proper in health care. And the only free lunch to be had is the pseudo-free lunch offered by a government-run, single-payer system.

As it stands now, few if any Americans can recall what it was like to pay for their own health care. Few have experienced a true free market in medicine and health care. Thus, they will be taking the word of economists on faith that it would be preferable to a government-run system like the one in Great Britain. It is a tribute to the power of ideas that a commentator like Rush Limbaugh can make repeated references to individuals paying for their own care without generating a commercially fatal outpouring of outrage from his audience.

Grim as this depiction may seem, it accurately describes the dilemma we face.

DRI-310 for week of 9-15-13: What is Wrong with President Obama’s Claim that the Government Rescued the American Economy?

An Access Advertising EconBrief:

What is Wrong with President Obama’s Claim that the Government Rescued the American Economy?

This week marked the unofficial five-year anniversary of the 2008 Financial Crisis, inaugurated by the bankruptcy of Lehman Brothers on September 15, 2008. In the world of politics and news media, disasters are celebrated as religiously as triumphs and advances. President Barack Obama delivered a solemn recapitulation of the Crisis and his administration’s actions over the ensuing five years. The President’s use of rhetoric has built a solid constituency that has swept him into the White House twice. A full understanding of economics allows us to understand why his actions (and his justifications for them) have been so popular, why his explanation of events is wrong and what the true nature of the Crisis was (and is).

The ICU Metaphor: Government as Emergency Physician, the Economy as Critically Ill Patient

President Obama described his primary duty as “making sure we recover from the worst economic crisis of our lifetimes.” By implying a crisis from which recovery is problematic, the President draws a clear analogy with emergency medicine. A patient faces a medical crisis; the doctor’s overriding goal is recovery; failure will result in death. Although the President mixes this metaphor several times, the basic structure of life-or-death emergency and problematic outcome is preserved.

In a medical emergency, a series of catastrophic events creates a crisis. This is the format in which President Obama recounted the economic history of the past five years. It was “five years ago this week that the financial crisis rocked Wall Street and sent an economy already in recession into a tailspin.” “…Some of the largest investment banks in the world failed; stocks markets plunged; banks stopped lending to families and small businesses.” And, hearkening explicitly to the medical metaphor, “the auto industry – the heart beat of American manufacturing – was flat-lining…By the time I took the oath of office, the economy was shrinking by an annual rate of more than 8 percent. Our businesses were shedding 800,000 jobs each month. It was a perfect storm that would rob millions of Americans of jobs and homes and savings that they had worked a lifetime to build. And it laid bare the long erosion of a middle class that, for more than a decade, has had to work harder and harder to keep up.”

In a hospital ER, a worst-case scenario will compel doctors to invoke the protocol known as “Code Blue,” a crash program to restore vital signs in the face of complete collapse. This was the Obama administration analogue: The federal government had to “…act…quickly through the Recovery Act” to “arrest the downward spiral” and “put a floor under the fall” by “put[ting] people to work…teachers in our classrooms, first responders on the streets.” The government “helped responsible homeowners modify their mortgages” and “jump-start[ed] the flow of credit.” Thanks to these and other measures, the President concluded triumphantly, “we saved the auto industry.”

Once the emergency has been met and the patient is out of immediate danger, doctors can then proceed with the process of rehabilitation. This may involve a hospital stay of short or long duration or possibly a trip to an outpatient facility and extended therapy. President Obama outlines his analogue of the American economy’s recovery after he saved it: The Obama administration “pushed back against the trends that have been battering the middle class… took on the broken health-care system…invested in new technologies… put in place new rules that we need to finalize before the end of the year, by the way, to make sure the job is done… and …locked in tax cuts for 98% of Americans.” All this was accomplished in exchange for “ask[ing] those at the top to pay a little more.”

How is the patient progressing, five years on? What is the economic prognosis? “So, if you add it all up, our businesses have added 7.5 million new jobs [over the last 3.5 years]” and “the unemployment rate has come down.” The housing market is “healing.” Financial markets are “safer.” Today, we “sell more goods made in America to the rest of the world than ever before… generate more renewable energy than ever before…produce more natural gas than anybody.” Why, “just two weeks from now, Americans [are] finally going to have a chance to buy quality, affordable health care on the private marketplace… we’ve cleared away the rubble from the financial crisis [and] begun to lay the foundation for economic growth and prosperity.”

In true doctorly fashion, the President issued some caveats. It seems that the “top 1% of Americans took home 20% of the nation’s income last year…most of the gains have gone to the top one-tenth of 1%.” Congress should be focused on issues such as “How do we grow the economy faster? How do we create better jobs? How do we increase wages and incomes; how do we increase opportunity… how do we create retirement security….” Government, of course, will have to make “the investments necessary” to achieve all these goals. Government will assume “the critical role in making sure we have an education system …for a global economy.” Congress will enable all this via the budget it passes – provided the quixotic Republicans don’t gum up the works with their monomaniacal insistence on “cuts” to trim the budget deficit. How can they say this when “the deficits are falling faster than at any time since before I was born”?

The Facts are Secondary

It would be easy to get hung up on the facts of President Obama’s “medical report.” Here and there he departs from metaphor to into boldfaced, bald-faced lie. Obama’s bland claim that “we saved the auto industry” doesn’t survive even a fast glance, unless the Ford Motor Company was exiled from the industry by a FISA court in the last five years. Ford didn’t receive any government subsidies, whereas General Motors and Chrysler each got a full-monte bailout makeover. It was telling that the former Big 3 all downsized to broadly similar degrees. In other words, they really underwent a reorganization process even though two of them were spared formal bankruptcy. Now, their lean, mean status has put them back on the front pages of business sections and spawned banner headlines reporting land-office sales of new models. The “salvation” of the auto industry can be ascribed to Ford’s refusal to be bailed out and the successful reorganization of the Big 2.

The President’s dire recollection of the imminent doom of investment banking is droll considering his unrelenting class-warfare assaults on Wall Street, the 1% and bankers generally. Ironically, the big banks who received bailouts were doing little investment banking at the time and are doing even less today. Moreover, neither Bear Stearns (whose failure was masked by its sale) nor Lehman Brothers qualify as among the biggest investment banks, so it is not clear which mega-bank failures the President is referring to.

These are mere quibbles, though, compared to the major point at issue, which is the fundamental basis of President Obama’s rhetoric. To what extent is his medical metaphor rooted in analytical reality?

The Utter Poverty of the ICU Analogy

It is likely that most of the President’s audience did not parse his metaphor as thoroughly as we are about to do. But they instinctively grasped that he was speaking figuratively. They probably experienced a déjà vu feeling of urgency, reminiscent of September, 2008 – a sense that something bad was happening and that something needed to be done quickly to stop it before the world fell apart. How apt was the President’s metaphor; how accurately did it depict the concrete economic reality? Was it true to reality or was it merely the language of political theater, intended to push the emotional buttons of his audience and achieve the desired effect?

The analogy between a modern economy – consisting of hundreds of millions of interacting individuals, and one single patient – suffering a critical illness and facing death – is very bad. There is little or no commonality between the two.

The patient is a single, holistic entity. The economy is an abstraction, made up of many millions of such entities. The patient’s existence is threatened. The economy’s existence is not threatened by a financial crisis, despite the apocalyptic language tossed about indiscriminately by the President. (To be sure, President Obama is only following the example set by Treasury Secretary O’Neill, who spoke darkly of “fac[ing] the abyss” and falsely warned Congress that unthinkable horrors would follow a failure to pass immediate bailout legislation.) The U.S. and every other advanced industrial nation have faced financial crises periodically since the 19th century. No nation has ceased to exist as a result of such a crisis. Indeed, as a first approximation, the individuals within the nation are not threatened with extinction by a financial crisis either, although many people may face a diminution in their standard of living.

A single patient is saved by doctors who utilize resources that originate outside the patient; e.g., outside his or her body. These include medicines, blood for transfusions, glucose and other basic forms of stabilizing fluids and numerous other forms of extraneous assistance ranging from diagnostic tools to organs for transplantation. A government instituting a “recovery program” – whether a Code Blue-type of emergency-bailout plan or intermediate assistance such as Fed Chairman Bernanke’s quantitative-assistance scheme or a longer term program for economic growth – can only use resources that originate inside the economy itself. The resources must come from somewhere and no government has the power to spontaneously generate resources out of thin air. Even money that is borrowed from foreign sources must be paid for by repaying principal and interest and in other ways as well. (A country that enjoys the privilege of “seigniorage” because its money is a “vehicle currency” held for transactions and investment purposes by foreigners may perhaps evade repayment longer than would normally be the case.) Really, “the economy” can be conceived in global terms, since the bailouts were a transnational operation on both sides.

Consider how hampered ER doctors would be if they had to rely on only the patient’s own resources and reserves of strength in fighting emergency illness or injury. Well, that is a fair analogy of the constraints governments face in “rescuing” their citizens from financial crises. Actually, that only begins to describe the limitations of government corrective action. Doctors can learn tremendous amounts about their patients via diagnostic tools like X-rays and cat scans and blood tests. But the information governments would have to know in order to “rescue” an economy is widely dispersed in fragmentary form among hundreds of millions of people. Not only that, much of that information is subjective and wouldn’t be useful to anybody except the particular individuals that possess it.

Doctors can rely on the patient’s help because the patient wants to live. The emergency efforts exerted by the hospital staff often succeed because they are a voluntary cooperative enterprise in which the patient fully cooperates. Governments operate on the basis of coercion and compulsion. This is necessary because governments can acquire resources to help some people only by taking resources away from other people. Coercion is a shaky basis for production and maintenance. If it were a superior form of economic endeavor, the totalitarian dictatorships of the 19th and 20th centuries would have been history’s great success stories. Instead, they were tragic, ghastly failures. The resistance to the bailouts of the big banks is only one of the pushbacks suffered by the federal government’s rescue program. The Fed’s Zero Interest-Rate Program (ZIRP) left millions of elderly Americans adrift without a suitable income-producing vehicle, given the artificially low interest rates imposed on fixed-income investments by the government policy. This population has become highly restive, not to say mutinous. Millions of Americans have left the labor force because the extension of unemployment benefits has made idleness more attractive than work – and because government regulation of the labor market has simply made job creation too costly and dangerous to businesses. These are all cases in which Americans oppose a program ostensibly designed to rescue them from economic emergency and privation.

This highlights the overarching dissonance in the Obama ICU analogy. Treating the economy as a single organic unity fulfills the old socialist dream originally enunciated by the French philosopher Saint-Simon, who declared that a nation should be run as though it were one single huge factory. The pretense that there really is a “nation as a whole” rather than a reality consisting of 312 million individuals allows governments to enact dreadful economic policies like the Economic Recovery Act. Pumping money into an amorphous entity called “the economy” ignores the individual interactions and logical connections that make up a functioning economy. We cannot even draw a useful analogy between the warring organisms within the human body and claim that government is helping the “good” organisms (e.g., people) against the “bad” ones for the good of the “whole body” (e.g., the nation). Doctors know how to separate good from bad organisms for the survival of a single patient; governments have no objective basis for transferring real income from some people to others for the good of the nation.

The Real Nature of Economic Crisis, Financial or Otherwise

Finance differs from non-monetary economic theory in dealing with the allocation of resources over time rather than at a single (hypothetical) point in time.  Thus, complicating topics such as saving, borrowing, interest rates and debt intrude on the analysis. A financial crisis occurs when a gross mismatch between the saving/investing and borrowing/lending desires of the public places financial institutions and mechanisms in jeopardy of failure. The only cure for the crisis is realignment between the value of goods people are willing to commit to future consumption and the value of goods producers commit to make available in the future. Proper alignment implies that the interest rates established in the markets for loanable funds equalize the amounts of borrowing people want to do for each future term to maturity with the amounts of money available for lending in the future. Sooner or later, there is no substitute for this curative process. When values are once again realigned, the resulting pattern of resources will require that businesses wrongly created and jobs formerly occupied due to the crisis will no longer exist. Once again, there is no substitute for this corrective process.

The U.S. has suffered recurrent financial crises throughout its history. Each financial crisis had one thing in common with all others. They all ended. The first financial crisis was in 1807. Another one – a big one – followed in 1837.The biggest one of all may have been in 1873. But none of them went on forever and none of them caused the death of the U.S. economy – whatever that might be interpreted to mean.

Keynesian economics was neither a necessary not a sufficient condition for recovery from a financial crisis. It was not necessary because Keynesian economics was not invented until 1936; numerous financial crises had come and gone by that time. It was not sufficient because the U.S. economy suffered financial crises after the invention of Keynesian economics that were unaffected, even worsened, by the implementation of Keynesian policies.

Bailouts of big banks were no more necessary than were the bailouts of GM and Chrysler. (Once again, blame should go primarily to the architects of these measures, Treasury Secretary O’Neill and Fed Chairman Bernanke – but the policies were wholeheartedly supported by President Obama.) These measures are often supported even by many so-called free-marketers, some of whom cite Nobel Laureate Milton Friedman’s claim that widespread bank failures triggered a massive decline in the money supply that caused the Great Depression. As an explanation of the Depression, Friedman’s view is misleading at best, but even if accepted it does not remotely justify bank bailouts. Friedman was famous for insisting that the Fed could, and should, have increased the money supply to counter the reverse-money-multiplier effects of the bank failures. His famous quip that the Fed could even drop money from helicopters if necessary illustrated his view that the Fed had countless ways to get money into the hands of the public. Bailing out banks – the realization of moral hazard under fractional-reserve banking regulation – has nothing to do with increasing the money supply. That is exactly what Ben Bernanke proceeded to prove with his program of quantitative easing. By creating money hand over fist after the banks had already been bailed out, Bernanke was closing the barn door after allowing the animals to escape!

Citations of Milton Friedman as authority for the bank bailouts by Ben Bernanke and other left-wing economists are an example of what the Soviet KGB used to call “disinformation” and what magicians refer to as “misdirection.” They are designed to confuse and mislead an opponent by presenting a false trail of reasoning and evidence.

The Real Threat to Life and Limb Posed by Economic Crisis

The only form of economic crisis that can, and has, threatened life and limb throughout human history is a monetary crisis. Only a monetary crisis can overturn the entire basis for trade or exchange, making it impossible or prohibitively difficult for people to exchange goods and services. This poses an immediate threat to life and limb because almost everybody specializes rather narrowly in their production. Specialization increases productivity and increases real incomes – provided people are able to exchange the fruits of their productive specialty for the consumption goods they love. But if and when they cannot do this, specialization turns into a nightmare. People cannot acquire the goods and services they know and love. At best, this is an incredible nuisance. At worst, it is a clear and present danger to life and limb.

Technically, it is true that an economy – or, more properly, a nation – will eventually recover from a monetary crisis, too. But prior to recovery, famine, pestilence and death may visit the nation beset by crisis. Ancient Rome was one nation felled by monetary crisis; the crisis not only caused havoc but weakened the Republic so much that it could no longer fight off its enemies. In Germany’s WeimarRepublic; the chaos caused by hyperinflation put the public’s sole focus on day-to-day survival. This completely delegitimized the democratic government and paved the way for Hitler. His authoritarian rule was seen as preferable to the ineffectual efforts of socialists who could no longer fulfill the promises of security that had won them election.

More recently, we have witnessed the devastating effects in such places as Zimbabwe, where hyperinflation was the last refuge of the scoundrel, Mugabe. The failure of investment projects financed by foreign loans, coupled with land-redistribution policies that dispossessed capable farming operations, had decimated the productive capacity of Zimbabwe’s economy. Unemployment reportedly approached 80%. To finance his administration’s regional wars and pay the government’s bills, President Mugabe permitted money creation on a scale not seen since the Weimar inflation. As we would expect, the result was the disintegration of trade and a retreat into dictatorship, subsistence, barter.

Thus, monetary collapse – not financial crisis – is the only real economic approximation to the emergency-threat-of-death metaphor rhetorically brandished by President Obama.

This is a sobering thought, since it suggests that America does, after all, face a potentially life-threatening menace in its not-too-distant future. It is the threat of hyperinflation and monetary collapse presented by the $4 trillion in excess reserves sitting on the accounts of American banks. This money is currently receiving interest, thanks to the change in policy allowing interest to be paid on excess reserve accounts. Should that status change, though, the money might be loaned out to businesses and promptly spent. This large volume of money chasing domestic goods would bid up prices with alacrity. The resulting hyperinflation would jeopardize the value of U.S. money. That is a disaster waiting to happen.

The threat is not in our past. It lies ahead of us, in our future. President Obama’s policies did not save us from it. Rather, they now threaten us with it.

Should we temper this conclusion with the reminder that the unprecedented money creation of the last few years is the work of the Federal Reserve and its Chairman, Ben Bernanke? Is the President exempt from criticism owing to the Fed’s independence from political influence and control?

President Obama has not moved to replace Bernanke. The President has not even expressed disapproval of the Fed Chairman’s policies. And the current favorite to succeed Bernanke early next year, Janet Yellen, is widely considered to favor even looser monetary policy than Bernanke, if such a thing can be imagined. Presumably, if President Obama disapproved, he could find another Fed Chairman. So far, there is no indication that he will do that.

Rhetoric Matters

The problem with President Obama’s recounting of events during and since the Financial Crisis of 2008 is not his errors of fact, glaring though they are. His rhetoric is built upon a superficially attractive but utterly wrongheaded metaphor – Obama Administration policies as ICU measures taken to rescue an economy that is likened to a critically ill patient. The metaphor leads directly to the wrong diagnosis of the Crisis and the wrong medicine for the patients, who are 315 million individuals rather than indistinguishable parts of one gigantic whole.

DRI-287 for week of 9-8-13: Stop the Presses! ‘Government Does Not Spend Money Wisely.’

An Access Advertising EconBrief:

Stop the Presses! ‘Government Does Not Spend Money Wisely.’

When somebody tries to persuade you that they are smart by telling you something you already know, you are not impressed. When they insist that they just learned it after spending years wielding their expertise on the subject, you react by considering them stupid rather than smart. Alternatively, you suspect them of dishonesty. And when your informants turn out to have been highly placed officials in the government, you fear for the future of the nation.

That is the position in which Peter Orszag and John Bridgeland place readers of their article, “Can Government Play Moneyball?” which appears in the current issue of The Atlantic magazine. Orszag and Bridgeland have determined that “less than $1 out of every $100 of government spending is backed by even the most basic evidence that the money is being spent wisely.” To a substantial plurality of Americans – perhaps even a thin majority – this is about as surprising as the fact that the sun rose in the east this morning. But it is ostensibly a stunning revelation to the authors, who profess that “we were flabbergasted by how blindly the federal government spends.”

Are the authors anthropologists who just now returned to the United States after spending the last 50 years on an isolated tropical island, studying the native culture? As John Wayne might put it, not hardly. Both men are “former officials in the administrations of Barack Obama (Peter Orszag) and George W. Bush (John Bridgeland).” Both have sterling educational pedigrees (one in economics, one in law) that equip them to understand the logic of markets and the workings of government.

Both inhabit the belly of the Establishment beast. Orszag is a prep-school graduate and cum-laude PhD product of the London School of Economics. He was Director of both the Congressional Budget Office (CBO; 2007-2008) and the President’s Office of Management and Budget (OMB; 2009-2010). Bridgeland graduated from Harvard University and the University Of Virginia School Of Law and held down several positions in the Bush administration, including Assistant to the President, Director of USA Freedom Corps and Director of the White House’s Domestic Policy Council. He also taught a seminar on Presidential decision-making at Harvard’s Kennedy School of Government. Since 9/11, he oversaw over $1 billion worth of spending on domestic and international service programs. He currently heads a public-policy organization (Civic Enterprises) and vice-chairs a non-profit business created to eradicate malaria in less-developed countries. He is also a noted educational activist who drew attention to the “silent epidemic” of high-school dropouts.

Given their backgrounds, we can assume that Orszag and Bridgeland are not fools. In the first paragraph of their article, they state that “the federal government” is “where spending decisions are largely based on good intentions, inertia, hunches, partisan politics, and personal relationships.” How, then, can Mr. Orszag and Mr. Bridgeland possibly claim to be surprised by what they found when they went to Washington? And what inferences should we draw from their attitude?

The Authors Already Knew That the Federal Government Spends Unwisely

From childhood on, the authors’ own experience already ratified the idiocy of federal- government spending long before they set foot in Washington, D.C. They experienced Social Security withholding from their earliest paychecks. Their schooling taught them the rudiments of the Social Security system and its mandatory character. Orszag’s economics training introduced him to Paul Samuelson’s famous article rejoicing in the Ponzi-like, pay-as-you-go funding mechanism, which Samuelson considered a stroke of genius because the U.S. birth rate was then producing ever-larger streams of payers relative to recipients. And both authors have watched the ensuing baby bust drive the system into actuarial insolvency, bringing the day of default ever closer. Orszag and Bridgeland know only too well that Social Security has long been touted as the crown jewel of 20th-century liberalism’s welfare state. LIkewise, both men have observed Medicare and Medicaid approaching a similar fate after previously attaining similarly sacrosanct status. These entitlement programs are de facto examples of government spending even though they are off-budget in the technical accounting sense. After observing these examples, why should Messrs. Orszag and Bridgeland have been shocked by anything else they found?

“In other types of American enterprise, spending decisions are usually quite sophisticated,” the authors observe. They are referring to American business, the vineyard in which both toiled prior to government service and to which they retreated to recover from the shock of their exposure to profligacy and waste. Corporations formulate a capital budget, in which potential investment projects are evaluated by comparing the present value of their costs and benefits. Shareholders calculate the best alternative use of their money in investment of equal risk and compare it with their rate of return, enabling them to judge the wisdom of their investment choice. Sole proprietors gauge the best alternative use of their labor time – perhaps working as an employee – and compare it to the earnings from their business. These are the ways used to gauge the wisdom and effectiveness of spending decisions in the private sector.

We know these methods work well because the United States became the world’s leading economy midway through the 20th century after carving a small foothold on the North American continent in the 17th century. Other countries imitated our methods and enjoyed similar success. Countries rejecting our methods generally failed. Even the few Scandinavian countries that built successful welfare states did it by utilizing relatively free markets, while countries that moved away from free markets by nationalizing industry (such as Great Britain and Argentina) experienced drastic declines in their living standards).

The federal government – and government generally – has no rational method for evaluating its spending decisions. Private businesses spend money in order to create value for consumers. They gauge the success or failure of their spending by the size of their profits. The federal government ostensibly spends money to benefit the same people served by private business. But the federal government does not earn profit, thus cannot gauge its success by its profits. There is no true owner of its assets – when something is “publicly owned,” nobody owns it and nobody has an incentive to maintain it, husband its productive potential and maximize its value. The government does not normally sell its output to private citizens at prices that are free to fluctuate in accordance with the supply and demand for that output; thus, it cannot use price fluctuations to gauge the success of its efforts. Even if politicians wanted to, they have no way to gather the information necessary to tailor government spending to the desires of all their constituents, in the fashion of markets. Since no human being or institution possesses a complete picture of reality, both incentives and institutions must be favorably attuned to allow our subjective perceptions to satisfy individual wants. Free, competitive markets calibrate the key variables to produce this result while government fails utterly. The last thing politicians, bureaucrats and government employees can afford is a thoroughgoing analysis of government programs, their results and the reasons for them.

So politicians clasp hands earnestly to their breasts and swear to spend money for the benefit of “the 99%, not the 1%,” or “Main Street, not Wall Street.” That is, they profess “good intentions.” They pass baseline budgeting rules declaring that spending on federal programs must always rise by a certain percentage every year, no matter what (e.g., “inertia.”) Politicians spend money on electric cars and wind farms and ethanol subsidies because they have “hunches” that these measures are the wave of the future. First-year legislators are told that they must agree to support the spending programs of their incumbent colleagues in order to gain support for their own legislative proposals, thereby establishing “partisan politics” as a potent force behind wasteful spending.

The authors actually provide a specific example to bolster their choice of “personal relationships” as a roadblock to wise spending. In 2003, Bridgeland and officials at OMB judged that the Even Start Family Literacy Program was a waste of money. Why? Because the children and parents who participated in it showed no more gains in literacy than did those in a control group used for comparison. So the program was marked for elimination. “But Even Start was founded in 1989 by Bill Goodling, a well-liked Republican who had been the Chairman of the House Education and the Workforce Committee, and had previously served as a teacher, principal, and school superintendent in Pennsylvania. So Congress continued to fund this ineffective, if well-meaning, program to the tune of more than $1 billion over the life of the Bush administration.”

Orszag and Bridgeland left out a few important spending determinants from their list. For years, “fraud” and “abuse” have figured prominently in task-force reports on federal-government spending. Both men will recall the infamous “bridge to nowhere” of a few years ago. Fraud has risen to mammoth proportions in the Medicare and Social Security programs. Nothing was said about “graft” in the article, but the movie Mr. Smith Goes to Washington was released before both authors were born and it is safe to assume that both have seen it.

All in all, the faux outrage expressed by Orszag and Bridgeland lacks credibility. Their years of service in government allowed them to fill in the blanks of their indictment, but produced no other added value. They knew going in that the federal government was every bit as wasteful as they now portray it. Their disingenuous attitude – I’m shocked – shocked! – to find gambling going on here! – is borrowed from Claude Rains in Casablanca.

This is bad enough. Their proposed solution is worse. Citing “baseball’s transformation into ‘Moneyball’ as a case of private-sector spending sophistication, they aver that “the lessons of moneyball could make our government better.” You heard right. They don’t want to make government spend less. They want to make it spend better.

“Moneyball” in Government? Why Not “Nomoneyball?”

Orszag and Bridgeland maintain that “the moneyball formula in baseball – replacing scouts’ traditional beliefs and biases…with data-intensive studies of what skills actually contribute most to winning – is just as applicable to the battle against out-of-control health-care costs.” Their argument for assembling expert knowledge and applying it via central planning goes back at least as far as the “soviet of experts” advocated by institutional economist Thorstein Veblen in the early 1900s.

The problem is that it isn’t expert knowledge that is lacking as much as the “particular knowledge of time and place” conveyed by the price system and utilized best by the individual patient and doctor. That truth has already dawned on many doctors, patients and policymakers such as John Goodman of the National Center for Policy Analysis. Obamacare already embodies the demand for government-chosen best-practices medicine, but those choices will be made using the criterion of statistical significance. This is a recipe for disaster, since medicine in fields such as oncology has moved rapidly in the direction of individually tailored drugs and therapies rather than the “one-size-fits-all” approach implied by statistical regression. By its very nature, government action must involve coercion when flexibility and feedback are what is most urgently needed.

Thus, by applying the “moneyball” formula to health care, the authors are actually embracing the pretense of effectiveness in spending rather than the genuine article. They should be arguing for a return to the price system instead. “It is indisputable, however, that a move toward payments based on performance would harm some businesses. If most of your profits come from a medical device or procedure that …doesn’t work all that well, you’re likely to resist anyone sorting through what works and what doesn’t, never mind changing payment accordingly. Health-care interests are wise to invest millions of dollars in campaign contributions and lobbying to protect billions of dollars in profits.” The authors have just made the case against involving the government in health care and in favor of allowing free markets to work. Free markets are the best device ever invented for enforcing “pay for performance.” Leaving government out would eliminate campaign contributions and lobbying completely. As we will soon see, the authors’ method would accomplish none of these objectives.

The Moneyball Hook

The selection of “Moneyball” as the authors’ marketing hook reveals their lack of purpose. They try to persuade their readers by connecting emotionally rather than rationally. Moneyball was a tactic used successfully by one baseball team (the Oakland Athletics) during one pennant race. Its name derives from a book, but the authors picked it because of the successfully movie adapted from it.

Selling “free markets” would make perfect logical sense, since this is the same device that disciplines spending for thousands of businesses around the world. It has worked for centuries. But as a marketing concept, it has no sex appeal. No recent movie used it; no top-40 recording gyrated to it; no leading rap group is named for it. And the authors are only trying to sell a concept; they are not really trying to succeed in reducing spending or improving its quality.

How do we know the authors are not really trying? They tell us – not in so many words, but indirectly.

The System is Rigged Against Spending Changes or Reductions

The authors relate the history of so-called attempts to evaluate government-spending programs and jettison the ones that aren’t working. During the Clinton administration, the Government Performance and Results Act directed Congress “to provide for the establishment of strategic planning and performance measurement in the Federal Government.” The use of vague, circumlocutory language is a classic bureaucratic way of avoiding clarity and specificity – in this case, of avoiding commitment to eliminating wasteful spending. Sure enough, no link was established between performance assessments and continued funding by Congress.

The Bush administration, egged on by Bridgeland, established the Program Assessment Rating Tool (PART). This specifically identified programs that were not working as intended and tried to get them improved or discontinued.

Or did it? It seems that the assessment process has five possible outcomes. A program could be declared “effective,” “moderately effective,” “adequate” or “ineffective.” The fifth possibility was “results not demonstrated” due to insufficient data for evaluation. It is clear that four of the five possible outcomes were designed to justify continued funding, while even a rating of “ineffective” would not necessarily lead to termination of a program but would rather call for “improvement.” Not surprisingly, of the 1,000 programs assessed during Bush’s tenure, only 3% were adjudged “ineffective.” And Congress apparently ignored OMB’s recommendations to reform or abolish even that paltry percentage.

The reader might pause to consider that restaurants serving very good food go broke every day; an Internet review of “effective,” “moderately effective” or “adequate” would probably be the kiss of death in that business. And the people doing the rating have only their own inner fidelity to truth and honesty as an incentive to be honest in their evaluations – the institutional incentives for the federal government to discipline its own spending range from slim to none.

Beginning in 1990, the federal government has actually tested 11 large social programs, comprising some $2 billion in aggregate annual spending; using randomized controlled trials of effectiveness. The trials tested the results of spending by comparing the effects to those experienced by a control group who did not receive the benefits of the spending. 10 of the 11 programs showed either no effects on recipients or only a weak positive effect.

In some cases, programs were found to do positive harm. Government funding of so-called “Scared Straight” programs was found to “make kids about 12 percent more likely to commit a crime.” 21st Century Community Learning Centers, an afterschool program designed to improve academic performance of elementary-level students, has failed to affect academic outcomes but has increased the number of school suspensions and other behavioral infractions. Even this verdict of counterproductive was not enough to kill funding for the Learning Centers, which were saved by the intercession of then-gubernatorial candidate Arnold Schwarzenegger of California and are still receiving $1 billion in federal funds today.

Are the Authors As Mad As Hell? Are They Not Going to Take It Any More? Not Even Close

 

You might suppose that by now Messrs. Orszag and Bridgeland are mad as hell and aren’t going to take this any more. No, unlike Howard Beale, Network‘s “Mad Prophet of the Airwaves,” the authors are mildly irritated and ready to offer constructive alternatives. By golly, a non-profit organization called Results for America “is calling for reserving 1 percent of program spending for evaluation: for every $99 we spend on a program …we would spend $1 making sure the program actually works.” Don’t you just love those calls for action? Don’t you just love those non-profits?

“The more evidence we have, the stronger it is; and the more systematically it is presented, the harder it will be for lawmakers to ignore.” Uh… haven’t you just been telling us that they’ve done just that, for decades? “Still, linking evaluation to program funding will be tough, as both of us have seen in practice, again and again.” Aha. So the upshot of the authors’ ineffectual whining is that we’re supposed to do more of what’s conclusively failed in the past, but expect a different outcome this time. This is the operational definition of insanity – as if we weren’t already being driven insane by the actions of government gone wild.

Grasping at straws, the authors ask hopefully (drum roll, please):”What if we had a Moneyball Index, easily accessible to voters and the media, that rated each member of Congress on their votes to fund programs that have been shown not to work?” At ages 44 (Orszag) and 53 (Bridgeland), respectively, the authors are not too young to recall Sen. William Proxmire of Wisconsin, whose “Golden Fleece” awards were designed to attract media attention to Congressional spending projects that Proxmire felt were wasteful or even counterproductive. Awardees included a science grant to study why people fall in love, a study of Peruvian brothels (which proved particularly popular with its researchers) and a study of the buttock dimensions of airline stewardesses. (Proxmire’s awards were handed out from 1975 to 1987, when the job description of “airline stewardess” was still operative.)

The authors should ponder Proxmire’s fate. After a dozen-year run in which he actually succeeded in killing a few small-scale raids on the public treasury like the above examples, Proxmire’s career ended at age 74 in 1989. He didn’t retire due to age; his well-publicized physical-fitness regime made him perhaps the best-conditioned Senator. Instead, he was “retired” by the government-spending Empire, which struck back at him electorally when he finally lampooned a few too many of their pet projects. It should also be remembered that Proxmire, the scourge of wasteful spending, was a consistent supporter of dairy price-supports.

So much for “public shaming.” There is little point in shaming people who have no shame. Is there a group more institutionally bereft of shame than the U.S. Congress, whose poll approval rating hovers near single digits yet adamantly refuses to reform themselves?

Too Little, Too Late, Too Ineffectual

Figuratively speaking, Orszag and Bridgeland are canvassing the Titanic lifeboats to recruit passengers to go on iceberg watch. If there was ever a time to fussily insist upon substituting wise spending for wasteful spending, it expired nearly a century ago. Today, the Federal Reserve is directly buying new Treasury debt to the tune of a trillion dollars per year. Banks are husbanding $4 trillion or so in excess reserve accounts. The Fed has been desperately pegging short-term interest rates as close to zero as possible for years. It has not been trying to “stimulate the economy,” because it has encouraged banks to hold the reserves rather than loaning them out. (Had they been loaned out, we would have experienced hyperinflation.) Rather, it has been trying to buy time during which the Treasury can pay the lowest possible interest on outstanding debt, so as to keep interest payments from overwhelming the federal budget.

Orszag and Bridgeland should be advancing on the federal budget with a meat ax, intending to decapitate entire cabinet-level departments. They should be screaming at the top of their lungs in press conferences, not daydreaming about cutesy marketing ploys like “Moneyball” in the pages of a left-leaning opinion journal like The Atlantic (circulation: 400,000+). And they should have started their campaigns while still in government, not after bailing out to the private sector. The fact that two former “spending czars” – heads of CBO, OMB and DPA – were too timid to speak out against runaway spending while in government and still didn’t come within shouting distance of the whole truth years after leaving the bureaucracy tells us that there is no hope at all of reforming government from the inside. That is, the real shocker about this article is not even what the authors say; it is what they have refused to say.

What really motivated Orszag and Bridgeland to speak out? After all, they could have simply sat silent. Perhaps they were caught between two alternatives, like Buridan’s Ass. As members in good standing of the Establishment, they couldn’t simply up and admit that the federal government is one big welfare project – not for the purported beneficiaries, the program recipients, but for government employees who pick up paychecks while performing work of little or no true value. Yet neither could they do nothing while watching their country go down the drain. This half-hearted, empty-headed response was all they could muster.

DRI-259 for week of 2-10-13: Coverage of President Obama’s SOTU Minimum-Wage Proposal

An Access Advertising EconBrief:

Coverage of President Obama’s SOTU Minimum-Wage Proposal

As advertised, President Barack Obama’s 2013 State of the Union (SOTU) address outlined the economic agenda for his second term in office. Among its planks was a proposal to raise the minimum wage to $9.00 an hour from its current $7.25. The reputation of economics as “the dismal science” is vindicated by the coverage of this proposal in the news media, which is indeed nothing short of dismal.

The Wall Street Journal‘s Coverage of Obama’s Minimum-Wage Proposal

The Wall Street Journal is the leading financial publication in America – indeed, in the world. On page four of its morning-after coverage of Obama’s SOTU message, the Journal provided a five-column box headlined “Bid on Minimum Wage Revives Issue That Has Divided Economists,” written by reporters Damian Palette and Jon Hilsenrath. The pair predicts that “President Obama’s proposal… is likely to rekindle debates over whether the measure helps or hurts low-income workers.” And the debates will be between “White House officials” who “say the move …is aimed at addressing poverty and helping low-income Americans” and “Republicans and business groups, which have traditionally said raising the minimum wage discourages companies from hiring low-skilled workers.”

The article rehearses the specifics of the President’s proposal, which raise the minimum wage in stages to $9.00 per hour by 2015, after which it would be indexed to the rate of inflation. It reminds readers that Mr. Obama originally proposed to raise the minimum to $9.50 by 2011. It reports confident projections by “Administration officials” that at least 15 million Americans would directly benefit from the increase by 2015, not counting those now earning above the minimum whose wages would be driven higher by the measure.

Three paragraphs in the middle of the piece gloss over the views of “economists and politicians [who] are divided over the issue.” These consist of two economists, one proponent and one opponent, and one central banker. David Neumark of the University of California Irvine unequivocally maintains that “the effects of the minimum wage are declines in employment for the very least skilled workers,” while “a lot of the benefits …leak out to families way above the poverty line.” Alan Krueger from PrincetonUniversity, currently Chairman of the President’s Council of Economic Advisors, “found positive effects” from the minimum wage on fast-food workers in New Jersey. The authors do not remark the apparent coincidence that Neumark and Krueger studied precisely the same group of workers in reaching their conclusions. Janet Yellen, Vice-Chairman of the Federal Reserve, was quoted as refusing to endorse the minimum-wage increase on grounds of its irrelevance to current conditions, while admitting its adverse effects would probably be small.

The authors close out by summarizing the political strategies of the White House and Republicans in proposing and opposing the measure. The authors toss in a few numbers of general economic significance – surging stock market, recent increase in hiring, persistently slow economic growth, nagging high unemployment, decline in median real income since 2000. They cite the most recent minimum-wage increase in 2009 and note that 19 states already have statewide minima in excess of the current federal minimum.

The reader will notice that the Journal‘s headline refers to a revival of a debate between economists. Yet the article only cites two economists and the debate consists of approximately five lines out of five columns of prose – just over 4% of the article’s 120 lines. A reader who isn’t already thoroughly familiar with the issue will learn virtually nothing at all about why the minimum wage is bad or – for that matter – why its proponents think it is good. The closest thing to analysis are cryptic references to “discourages companies from hiring,” “declines in employment” and – most mysterious of all – “benefits” that “leak out to families way above the poverty line.”

Between 90% and 95% of the article is devoted to politics. And that is utterly superficial. The world’s leading financial publication has devoted substantial space to a Presidential proposal of economic significance, yet its readers would never suspect that the subject is one of the most highly research, well-considered and settled in all of economics. The minimum wage has been a staple application in microeconomics textbooks for over a half-century. Along with policy measures like free international trade and rent control, the minimum wage has generated the most lopsided responses in opinion surveys taken of economists. In percentages ranging from 75% to 90%, economists have resoundingly affirmed their belief that minimum wages promote higher unemployment among low-skilled workers – among their many undesirable effects.

Yet today Wall Street Journal reporters imply that it’s a 50-50 proposition. Or rather, they imply that economists are evenly divided on the merits of the measure. The article mentions a revival of a debate without explaining the terms of the debate or its previous resolution. Indeed, even the arguments of the proponent economist – the Chairman of the CEA, no less! – go unmentioned.

Something more than mere journalistic incompetence is on display here. The WSJ reporters are showing contempt for the discipline of economics. The only significant thing about economists, they imply, is that they are “divided.” The economics itself is hardly worth our attention.

Economists have only themselves to blame for their low repute. But readers deserve a truthful and complete understanding of the minimum wage.

The Minimum Wage As Seen by Economics – and Economists

The minimum wage is a species of the economic genus known as the “minimum price.” Other species include agricultural price supports, imposed for the ostensible purpose of increasing the incomes of family farmers. The idea behind all minimum prices is to make the price of something higher than it would otherwise be. The alternative embodies in “otherwise” is to allow the price of human labor to find its own level in a free labor market. That level is the point at which the amount of labor workers wish to supply is equal to the amount that businesses want to hire. Economists call the wage that equalizes the quantity of labor supplied with the quantity demanded the equilibrium wage.

In practice, the minimum wage is always legislatively pegged at a higher level than the current equilibrium wage. Otherwise there would be no point to it. And in practice, the minimum wage applies only to low-skilled labor. This is because wages reflect the value of labor’s productivity and low-skilled labor is the least productive kind. What is the effect of a higher-than-equilibrium wage for low-skilled labor?

Holding the price of anything above its equilibrium level produces a surplus of that thing. A surplus of human labor is called “unemployment” in layman’s terms. Thus, a minimum wage produces unemployment where there would otherwise be no (persistent) unemployment.

If this sounds pretty categorical, cut-and-dried and matter-of-fact, that’s because it is. Supply and demand are economics. More precisely, they are what we today label “microeconomics.” Since there is no macroeconomic theory left standing that is worthy of the name, that leaves us with supply and demand and very little else.

The federal minimum wage was first introduced in the Fair Labor Standards Act of 1938. It first began attracting attention from academic economists after World War II when George Stigler wrote a celebrated article outlining its basic effects in 1946. The first edition of Stigler’s legendary textbook on microeconomic price theory appeared in 1949. This may have been the debut of the minimum wage as a textbook application – a way of illustrating what happens when the principles of supply and demand are flouted by government.

Stigler may have been the first future Nobel Laureate to oppose the minimum wage, but he headed up what became a long procession with few absentees. Since then, it has been rare to find an intermediate (junior-senior level) micro textbook that didn’t feature an analysis of the minimum wage and the effects of the labor surplus it causes. This practice has crossed political lines. Liberal economists write textbooks, too, but they were pitiless in their view of the minimum wage – at least until recently, anyway. Alan Blinder, former CEA member under President Bill Clinton, was embarrassed by the revelation that his political support for a minimum wage conflicted with his textbook’s unsparing criticism of it.

The Effects of a Minimum Wage

The effects of a minimum wage are those of a minimum price generally, translated into the specific context of the market for low-skilled labor. The overarching effect, whose implications far exceed the obvious, is the surplus of labor created. The resulting unemployment, in and of itself, confounds the expectations of minimum-wage proponents. Their stated purpose is to increase the monetary incomes, hence real incomes, hence well-being of low-income workers. But you can only benefit from a higher wage if you have a job from which to earn that wage. The low-skilled workers whose jobs are lost because of the minimum wage are harmed by it, not helped. Moreover, they have nowhere to go except the unemployment line. Ordinarily, people who lose their job look for another job. But low-skilled workers are already scraping the bottom of the barrel – when that residue is suddenly denied them, they’re out of luck.

But what about the people who don’t lose their job? They benefit, don’t they? True enough, at least as a first approximation. The minimum wage should be viewed as transferring income from some low-skilled workers to other low-skilled workers. It is tempting to say it transfers income from some poor workers to other poor workers, but this is not always true. Sometimes it transfer income from poor people to rich people or, more precisely, to the offspring of rich people. That outcome will be explained below.

Wait a minute – what about employers? To hear the left wing talk, the problems of the poor are mostly the fault of greedy bosses who refuse to pay the poor what they’re worth. (The ever-popular formulation is that employers owe their workers a “living wage.”) At least the minimum wage sticks it to those greedy bastards, doesn’t it?

The answer is: Yes and no, but mostly no. In the short run, owners of businesses share the cost of the minimum wage with workers who are driven out of work. Business owners share that cost because higher wages mean higher costs, and higher costs will reduce revenues and profits and drive marginal businesses out of business. The reduced supply of goods will drive prices to consumers higher.

In the long run, though, the higher price gradually attained by the market in response to the higher costs will restore the business rate of return (i.e., profit) to its “normal” level. So, the remaining businesses in the market do not suffer long-run harm from the minimum wage. In the long run, the burden of the minimum wage is borne by consumers of the products produced using low-skilled labor and by low-skilled workers who remain out of work or whose prospects for work and productivity are permanently reduced by their sojourn into unemployment.

In other words, the minimum wage does not exact class revenge against evil, greedy businessmen. It harms poor, low-skilled workers and consumers – who are mostly ordinary people. Is it any wonder, then, that even liberal economists have traditionally refused to endorse the minimum wage as a means of transferring income to the poor?

Wait – There’s More. A LOT More

If John Paul Jones were an economist, he might interject at this point that we have not yet begun our analytical fight against popular misconceptions about the minimum wage. The artificial surplus created by the minimum wage has even more insidious implications.

In a competitive market, the tendency toward equality between quantity supplied and quantity demanded of the good or service being provided exerts a restraining influence on the actions of buyers and sellers. If you show up to rent an apartment or house and the landlord doesn’t like the color of your skin, he might decide to not to rent to you. But when there are exactly as many buyers as there are apartments and houses on the market, this will cost him money. The economic history of the world – and the history of discrimination in the American South and South Africa, among other places – very strongly confirms that competition and economic incentives are the best means of overcoming racial discrimination.

But when the market is in surplus, the picture changes dramatically. Now the landlord can afford to discriminate among would-be buyers by turning down one he doesn’t particularly like, because he knows that others are out there waiting for his unit.

The logic applies to buyers as well. Under competitive conditions, employers cannot afford to discriminate against workers for any reasons not related to productivity. They know only too well how hard it is to find good help when the market is tight. But when unemployment is high, an employer with a “taste for discrimination” can afford to indulge it. (It is idle to talk about whether that behavior is against the law or not. In practice, the case for discrimination cannot be proved; legal cases are won by imposing heavy costs on defendants until they give up and settle by admitting guilt whether true or not. And the cases are prosecuted in the first place for political or economic reasons, not to achieve justice for defendants.)

One of life’s supreme ironies is that the very people who cry the loudest for an end to racial discrimination and lament the injustice of our racist society are the same people who lobby in favor of the minimum wage. By creating a surplus of low-skilled labor and reducing the effective cost of discrimination to zero, the minimum wage surely makes it easy for employers to exercise whatever racist urges they might feel.

…And More

The minimum wage is anti-black in its effects not only because it promotes discrimination, but also because it places blacks at an objective disadvantage. One thing employers look for is experience. On average, blacks are younger than other ethnic groups and have less experience. Thus, they are less able to cope with the labor surplus created by the minimum wage.

Both minimum and maximum prices bring the issue of product quality to bear on the decisions of businesses. When businesses can’t raise prices due to maximum prices, or price controls, they try to reduce product quality instead. Similarly, when businesses suddenly face an increase in the minimum wage, they look to offset its effects by retaining only their highest-quality low-skilled workers. That is, they retain the best-dressed, most punctual, technologically adept workers rather than the shabbier, less reliable, socially and technically awkward workers. All too often, the workers let go are the ones who need the job the most – namely, low-income blacks picking up the necessary skills to succeed in the working world. Their places are taken by the sons and daughters of the well-to-do, whose cultural and economic advantages gave them an occupational leg up when they entered the labor market. This is what David Neumark meant by benefits leaking out to the well-to-do.

Black (illicit) markets are an inevitable by-product of minimum and maximum prices. In this case, the existence of a labor surplus means that there are people willing to work at a lower wage than the prevailing wage. By offering sub-standard working conditions and employment “off the books,” some employers can induce workers into work that they wouldn’t accept in a competitive labor market. This is still another ill effect of the minimum wage and another way in which low-skilled workers bear its brunt.

The late Milton Friedman was outraged by popular efforts to depict the minimum wage as the salvation of the poor and underprivileged. He called it the most anti-black law on the books.

The Card-Krueger Study

In 1993, two economists made a bid to overturn the decades-old economic consensus against the minimum wage. David Card and Alan Krueger conducted a phone survey of fast-food establishments in New Jersey and Pennsylvania. They chose these two adjoining states because New Jersey had raised its minimum wage prior to the study period, during which Pennsylvania’s law remained unchanged. Their study found that New Jersey’s employment of low-skilled labor increased by 13% relative to Pennsylvania’s. They ascribed this to the fact that the higher wage had certain desirable effects on the labor force.

Both the general public and the economics profession went gaga over this single result. Despite decades of studies and negative results by dozens of distinguished economists, this one study was said to have revolutionized thinking on the minimum wage. In reality, its effects were more political than economic.

An attempt to replicate the study by the National Bureau of Economic Research used payroll records from the businesses surveyed by Card and Krueger rather than relying on the phone surveys. Apparent anomalies had been found in both the New Jersey and Pennsylvania date using the phone surveys, so the payroll records were substituted as a check on the results. Sure enough, recalculation of the results using the payroll records reversed the results of the study – New Jersey employment was now found to have declined by about 4% relative to Pennsylvania’s.

Alan Krueger parlayed the popularity of his study into the Chairmanship of the President’s Council of Economic Advisors. David Card has recently written a book about the subject of the minimum wage. But there is little reason to accept the results of their original study at its face value.

The Political Purpose of the Minimum Wage

Economists have long known that the true purposes of the minimum wage are political rather than economic. Low-skilled labor is a substitute for unionized labor and higher-skilled labor. By making low-skilled labor less attractive to employers, the minimum wage makes union labor more attractive. That is why unions have supported a minimum wage since long before it was actually adopted, both in the U.S. and in places like South Africa.

Unions are one of the strongest and most numerous constituent groups of the Obama administration. That is why the President has now opted to advance this proposal to increase the minimum wage. Yet The Wall Street Journal‘s piece – which purported to describe the economics and politics of the measure – did not breathe a word of this.

Note: The first draft of this post erred by saying that the minimum wage was introduced in the Wagner Act of 1935, rather than the Fair Labor Standards Act of 1938.

DRI-179 for week of 12-23-12: Shoot the Shooter

An Access Advertising EconBrief:

Shoot the Shooter

By this time, few if any Americans can be unaware of the slaughter of 20 elementary schoolchildren and 6 teachers and administrators at the Sandy Hook elementary school in Newtown, CT, on Dec. 15. The perpetrator, 20-year-old Adam Lanza, used a semi-automatic rifle belonging to his mother, whom he killed first of all. The shootings have maintained a stranglehold on the attention of the news media since they occurred, fending off even the “fiscal cliff” for primacy.

The news media, mainstream politicians and the left wing reacted to this horrific act with utter predictability. They all blamed the physical instrument used to commit the crime – a gun – for the purposive acts of the perpetrator. Calls went out for heightened gun control. The word “heightened” is apropos because guns are already the most heavily regulated consumer purchase in America.

The apogee of this predictable reaction was reached with a call by President Barack Obama for legislation to be recommended by a committee headed by Vice-President Joe Biden. The legislation would purportedly be directed at “gun violence,” but this is widely understood as a euphemism for gun control; e.g., further restrictions on the possession, purchase and use of guns.

This is the latest in a string of mass shootings, each of which has received lavish publicity, triggering (no pun intended) similar calls for regulatory screw-tightening. There is a rapidly forming consensus that “this time is different.” The reasons for the difference vary from cumulative disgust (“Enough is enough,” proclaimed President Obama in heralding the formation of his commission) to the ostensible escalation of horror resulting from the murder of children.

This space thoroughly analyzed the last mass shooting (in an Aurora, CO cinema premiering the latest installment in the Batman franchise) and provided the logical response. Not surprisingly, that response was thoroughly ignored – although the evidence has continued to mount in its favor. Now, with the Second Amendment rights of Americans and their very safety at risk as never before, those arguments are well worth rehearsing.

The Problems

There are three problems associated with mass shootings of the Newtown type. Listed in descending order of importance, they are:

The problem of dealing with the shooter. The overarching problem is the fact that a group of people is faced by an armed man intent on killing as many of them as possible – or at least killing until his need or desire to kill has been satiated. The immediate imperative is an emergency of the highest order: to stop the killing as quickly and completely as possible.

The problem of deterring further shootings. Once the killing has been stopped, the highest remaining need in the hierarchy of urgency can be addressed. That is the need to deter further shootings of this type. In criminal justice generally, deterrence is accomplished by apprehension and punishment. Mass shootings present a unique and anomalous case. Apprehension is not a problem because the shooter continues to shoot until interrupted by the arrival of the police and then either commits suicide or (rarely) surrenders. Punishment does not deter because the shooter is obviously fully prepared to die at the scene or, failing that, following conviction. The shooter is someone for whom life holds no further attraction and meaning is reduced to taking random vengeance for the perceived slights he has suffered. Thus the problem of deterrence appears in a peculiar and unique guise.

The problem of uncovering the “root cause” of the shootings; e.g., of discovering the precise motive that constitutes the perception of injury and source of homicidal rage. The ostensible presumption is that this discovery will unlock the door to deterring further shootings.

Mainstream media attention has focused on these problems in inverse order of their actual importance. From the first media reports – long before any of the details of the crime were accurately relayed – the obsessive focus has puzzled over the shooter’s motive. Of course, motive plays a key role in a typical murder investigation, but that is because the murderer’s identity is usually unknown or in dispute. Motive, means and opportunity form the triad of elements necessary to secure a criminal conviction under those circumstances.

That is all too obviously not true here. The shooter is known. Even in the unlikely event of a trial, even given the proverbial difficulty of actually proving simple guilt in a capital case, the issue of motive is surely peripheral to guilt or innocence because the physical circumstances are utterly damning.

If we don’t need to know the shooter’s motive to convict him, why does motive matter? The vague presumption is that if we only knew what makes people do these things, we could prevent them – somehow, some way. That explains the repeated references to “mental illness” as a common denominator among shooters and the blaming of the de-institutionalization policies adopted in the 1970s for allowing time-bomb killers to roam the streets.

“Mental Illness” as Scapegoat

Unfortunately, the mental illness paradigm is doubly disappointing as an answer to the problem of mass shootings. It can neither satisfactorily explain their incidence nor offer the key to deterrence. The term “mental illness” is a throwback to the days of Freudian psychology, before neuroscience came along. The days of belief in “diseases” of the unconscious mind, analogous to diseases of the body but treatable via psychotherapy rather than medicine, are blessedly behind us. What we once called mental illness has gradually revealed itself largely as aberrant brain chemistry, treatable with drugs. Psychiatrists have traded in their couches for a pharmacopeia. Cultural lag has restrained public recognition of the fact that “mental illness” is an obsolete term.

Despite the claims of institutionalization proponents like Dr. E. Fuller Torrey, however, we cannot confidently sort out potentially violent sufferers of (say) bi-polar disorder, let alone distinguish dangerous psychotics from harmless ones. The traditional legal definition of insanity has long been the inability to distinguish right from wrong, but there is little or no reason to believe that today’s mass shooters are insane in this sense, although they may well be mentally ill in the physical sense.

Institutionalization of the mentally ill fell from favor for the very good reason that the practice was routinely and grossly abused. The protections against seizure and detention that all of us take for granted were suspended on supposed medical grounds that we now know to have been all too often spurious. State mental institutions were not always the hellholes depicted in the 1948 movie The Snake Pit, but the shoe fit well enough to touch off a nationwide furor and set events in motion that culminated in the 1970s.

Now that the pendulum of political theater has swung back to focus on mass shootings, the political establishment has whistled up a dragnet for scapegoats and the mentally ill are easy pickings. How many votes do they command, after all? It is much more politically correct to come out as homosexual than as mentally ill. While it may be easy to pretend to solve the problem of mass shootings by stigmatizing a vague class of people that are hard to identify, actually getting results that way is a different story.

The attempt to use mental illness as a scapegoat for mass shootings is really a variant of the old left-wing “root cause” approach to criminology. For decades, garden-variety criminality was excused as the product of sociological deprivation. The only way to fight crime, the left insisted, was to abolish poverty by fighting a “war on poverty.” That war was lost long ago when we discovered that fighting it benefitted the fighters more than the poor and that poverty was a relative, not an absolute, phenomenon. Ironically, the only viable “root-cause” solution is one we refuse to adopt; namely, drug legalization.

The Real Solution

As originally noted in our first discussion of this problem, the most urgent item of business is to neutralize the shooter. The following thought experiment is instructive: Assume that an experienced policeman happens to be on the scene of a mass shooting. What would he do when the shooter produced one or more weapons and opened fire? The answer is blindingly obvious.

He would draw his weapon – policemen are required to carry one even when off duty – and shoot the shooter. There is only one way to handle an armed perpetrator bent on immediate and indiscriminate homicide – by shooting him. The policeman would not try to negotiate with the shooter. He would not call for backup, call for a SWAT team or call for Phillip Morris. And his shots would have only one objective: to kill the shooter. A wounded armed opponent can still kill you and other people in the vicinity.

The crystal clarity of this insight contrasts jarringly with the public refusal of most people – particularly politicians and journalists – to face it. When Wayne LaPierre, President of the National Rifle Association, declared that “the only thing that can stop a bad guy with a gun is a good guy with a gun,” his call to station a policeman in schools was met with derision. A typical reaction from academia was that return fire from police would increase risk by increasing the number and sources of fired bullets that might injure students.

That a response so staggeringly inept could originate with an educator – ostensibly a font of wisdom and reasoned thought – speaks volumes about the degradation of education in general and current public discourse in particular. Failure to shoot the shooter will (as it has in every case to date) allow him to kill his fill of innocent citizens until the police arrive. Return fire, even if ineffectual, will draw the shooter’s attention and shots toward the retaliator and away from the audience, allowing the unarmed to escape.

Another inane argument advanced against retaliating fire is that mass shooters now often sport so-called bullet-proof vests. This is not only true but also quite significant, since it shows that shooters are not too deracinated to carefully plot their crime and anticipate opposition. But the use of (say) a Kevlar vest is no reason not to shoot the shooter. First and foremost, a vest does not protect the shooter’s vulnerable head and neck. Equally telling, a vest-wearing shooter does not continue his work unperturbed like Superman while bullets bounce off his vest harmlessly. A bullet-proof vest is designed to prevent a mortal wound, not to completely overcome all effects of a fired bullet. The impact of a slug from a large-caliber handgun will probably knock down and badly bruise a vest-wearing human target. At the very least, it will allow an audience time to escape and a retaliator time and opportunity to finish him off. (Vest-wearing police normally conduct firefights in pairs or teams and rely on their colleagues for protection when struck.)

The Anti-gun Movement: Cynicism and Hysteria

The foregoing arguments are a sample of how the left wing wages its current fight to control guns. (The word “debate” does not apply to these exchanges since the left wing proffers neither logic nor empirical evidence and makes its points by shouting down the opposition.) The left runs the gamut of emotional reaction from cynicism to hysteria.

President Obama’s reaction to the shooting was political cynicism in its purest (or impurest) form. “Enough is enough,” he intoned solemnly. The nation could no longer afford to indulge the freedoms traditionally accorded gun owners. But enough only became enough after the President’s reelection, not after the previous mass shooting in the Aurora, CO movie theater in July, 2012. Had some sort of cumulative numerical threshold for mass murder been surpassed?

No, the hurdle presented by the President’s reelection had been surpassed; that was the difference in the two situations. Now the President could apply his trusty rule-of-thumb: Never let a crisis go to waste. The President’s black constituency is a dedicated group of gun-bearers. Prior to reelection he could hardly have risked incurring their wrath by threatening their rights and property. Now, with 94% of their votes safely recorded and his tenure secured, he can go back to ignoring their welfare in favor of the hard-left agenda of gun proscription and confiscation.

At the other emotional pole is the hysterical fringe. Their poster boy is British-born Piers Morgan, host of CNN Tonight. His notion of hospitality to guest Larry Pratt, longtime Second Amendment defender and gun educator, was to hurl imprecations at him. Morgan called Pratt an “idiot,” “dangerous” and “an unbelievably stupid man” – all within the space of less than a minute. Later, Morgan asked rhetorically “how many more kids have to die before” more restrictive gun laws are passed.

The reaction to Morgan’s tantrum is instructive. To date, over 70,000 signatories have urged his deportation (!) in an online petition posted to a White House website. The episode is a classic illustration of what F.A. Hayek called absolute or unlimited democracy at work. Opposing sides expend vast quantities of resources to gain political power which, when attained, they then use to deprive the other side of its rights. The left tries to deprive the right of the right to self-defense; the right tries to deprive the left of freedom of movement.

Readers of the world-famous British weekly The Economist know how Morgan came by his arrogant tunnel vision. The magazine noted that mass shootings in Great Britain and Tasmania in 1996 led directly to a ban of most private handgun ownership in Great Britain and a ban on most semi-automatic weapons in Australia. “If similar laws had been in effect in Sandy Hook,” the magazine piously declared, “some of those lost might have survived.” In fact, England’s gun ban was followed by an epidemic of gun-related violence. Handgun crime doubled and English police began carrying guns for the first time. In Australia, assaults – particularly sexual assaults – went up dramatically following the bans, while homicides continued a modest decline that started prior to the ban.

A once-great magazine has sunk to unimagined depths of demagoguery and incompetence. Bad enough to have refused to face the truth of a single historical example, but The Economist has turned its eyes away from 25 years of pathbreaking social and economic research spanning the globe.

Guns are the Answer, not the Problem

The left-wing movement for gun control was sparked by the political assassinations of the 1960s and turbo-charged by the attempted assassination of President Reagan and his press secretary in 1981. Serious research into the incidence of gun ownership and violence followed later in that decade. Gary Kleck, a liberal academic at FloridaStateUniversity, began with the general expectation of documenting the case for gun control. To his great surprise, he found that cases of gun use for self-defense and protection vastly outnumbered cases of criminal use – by a factor of six in 1993, according to his estimates based on a household survey of 5000. Economist John Lott did extensive research on the extension of rights to carry and conceal firearms, finding that rates of violent crimes in general and murder in particular declined when and where these rights were granted. David Kopel was another researcher whose work in this field has been widely noted and cited. The field of research eventually broadened to include worldwide study of violence and mass killings. The latter are not, as often claimed, unique to the United States. They are a trans-national and cross-cultural global phenomenon, perpetrated with and without guns.

As one would expect, critics (i.e., the left wing) did everything but dismember these men in order to discredit them. But those efforts failed, because all Kleck, Lott, Kopel, et al were doing was empirically bolstering a case that was already logically airtight. Even if recorded instances of handgun defensive use were actually outnumbered by numbers of crimes committed using handguns, this doesn’t even start to make a case for gun control, let alone a gun ban. We can never record all the cases in which citizens interrupt a crime in progress by brandishing a handgun. We can never even begin to imagine all the times in which criminals are deterred from crime by the knowledge or the suspicion that the potential victim is armed. It is no accident that mass shootings occur in so-called “gun-free” settings, where guns are available only to criminals, not law-abiding citizens in need of defense.

Gun control and gun bans do virtually no good at all, only bad. They do nothing to prevent mass shootings or, indeed, crime of any kind. Criminals do not obey laws – including gun laws. Ordinary criminals prefer to work with guns whose identifying marks have been erased; these are available in the black market. Black markets in beverage alcohol and recreational drugs developed quickly and massively in response to the combination of widespread demand and official proscription. Minutes after restrictive gun laws or gun bans were officially put on the books, black markets in guns would spring up.

It is both ironic and fitting that the left-wing solution is especially inappropriate in the case of mass shootings. Adam Lanza obtained his weapons illegally. Like other mass shooters, he had access to wealth that he could and would have used to acquire guns in the black market had they been illegal. Mass shooters are the last people in the world to be deterred by the high price and inconvenience of black-market transactions; after all, they are preparing to leave this world. They face only one possible deterrent – the possibility that they cannot execute their plan to kill large numbers of people. The only roadblock to that plan is the presence on site of somebody with a gun to shoot them.

Economists use two Latin phrases that explain the fallacy under which gun controllers operate. Gun bans implicitly assume a condition of ceteris paribus (“all other things the same or unchanged”); the left believes that they can ban guns without causing huge behavioral responses by the public. But economic reality follows the principle of mutatis mutandis (“let those things change that will change”); behavioral changes will accompany severe gun restrictions. Those changes will create black markets that will neutralize the effects of the gun restrictions and wreak havoc on our lives. Criminals will have guns but law-abiding citizens will not have them for self-defense. So, law-abiding citizens will have to become criminals in order to protect themselves.

It would be bad enough if gun control and gun bans were only ineffectual, if the left wing were guilty only of good intentions gone wrong. But the truth is much worse. It indicts the left of exactly the crime of which they accuse gun owners and the NRA – indifference to the fate of innocent children and adults. Guns themselves are the solution – the only solution – to the immediate problem posed by gun-related violence. The police recognize that; in response to the increased firepower utilized by drug cartels, the police have become virtually paramilitary in size, scope and technique.

Police in the Schools?

The proposal put forward by Wayne LaPierre of the NRA is a perfect reflection of the zeitgeist. In these times, the only politically way to oppose a big-government power grab is to respond with a Newtonian equal-and-opposite-reaction – your own big-government counter-proposal. That is what the NRA has done. Presumably they did it for political reasons, because they believe that putting somebody in authority behind the gun will somehow soften or sanctify a reaction that would otherwise be objectionable. Predictably, this did not work. The left wing reacted just as emotionally as if the NRA had proposed installing a Tea-Party-certified marksman in each school. The same left-wing media figures who recoil in horror from armed police in public schools send their own children to private schools like Sidwell Friends, which employ armed guards.

Now the right wing is stuck with its own big-government proposal, made in the heat of panic. The vague notion that each policeman is somehow well-versed in the care and handling of firearms is periodically dispelled when a gaggle of policemen take a dozen shots to dispatch a “dangerous” neighborhood pit bull or expend fifty rounds or so inside a bar or into the body of an unarmed suspect. These days, the real experts on guns are detailed to SWAT, where they are much too valuable on drug patrol to be wasted as public-school monitors.

The likely government alternative to the police would be the HSA, another unlikely source of genuine protection. Retired military veterans are the only source of actual expertise in weapons and combat who might be available for this duty. As one might expect, the best way to handle the problem of mass shootings in schools is to stop the government from getting involved.

But stopping the government from getting involved in something – anything – has now become just about the most difficult thing in the world to do.

DRI-416: ‘Recession Ride Taxi’ is the Epitome of Capitalism

“We are all of us teachers,” was Nobel laureate-economist Milton Friedman’s thumbnail sketch of his profession. Teachers are continually on the lookout for real-life illustrations of their subject. Last week, National Public Radio (NPR) provided a dandy.

Apparently NPR saw no need to interpret its facts with the use of economic logic. Fortunately, we can remedy that monumental oversight.

Eric Hagen’s “Recession Ride Taxi”

In a June 26, 2012 story, NPR introduced its audience to Eric Hagen, a taxicab owner-operator in Burlington, VT. Like many a taxi driver, Hagen traveled a roundabout route to his profession. Laid off his job as a Wall Street banker during the Great Recession, Hagen next worked for the American Red Cross – a job that would presumably earn the approval of Barack Obama and the NPR audience. Unfortunately, it didn’t earn enough money to pay Hagen’s mortgage.

So, like millions of Americans before him, Eric Hagen found himself pushing a hack to pay his bills. But unlike his predecessors, Hagen had both the institutional freedom and the native instincts to sell himself and his service to the public.

For upwards of a century, taxis have priced their services using taxi meters that recorded both mileage and time. Eric Hagen’s method for determining his taxi fares is: “Whatever the passenger can afford.” He names his business “Recession Ride Taxi.” Not surprisingly, his stated business rationale is that many people can’t afford to pay traditional taxi rates because they are experiencing hard times. Listeners are cordially invited to the conclusion that he is being kindly and altruistic by letting each passenger set the fare.

But don’t passengers double-cross him by low-balling their rates – or even stiffing him completely? “People know there’s value in a service,” Hagen replies, “and they’re generally not going to try to get over on you.”

Never has NPR accepted a businessman’s rationale so unblinkingly. “At a time when former colleagues on Wall Street continue to feel public scorn,” the station intoned piously, “Hagen says Recession Ride Taxi is running on trust.”

And Now for the Rest of the Story…

At this point, the late Paul Harvey might have intervened with: “…and now it’s time for the rest of the story.” It begins with the recognition that Hagen is not practicing altruism, but rather the most calculated kind of economic logic. His technique dates back at least to 19th-century railroads and country doctors. Airlines have used it for decades. It underlies the success of Priceline, among other online companies.

It is called price discrimination. A seller charges different prices to different buyers (or groups of buyers) for the same good or service at the same point in time. The different prices are not functionally related to different costs of serving the different buyers or buyer groups.

Why would a seller choose this strategy in preference to the simper one of charging a uniform price to all? To earn larger total revenue and profit. It won’t always be either feasible or desirable to discriminate on the basis of price, but the potential advantage in doing so lies in the possibility that different buyers differ in their sensitivity to price. The term economists use to denote sensitivity to price is price-elasticity of demand.

Two prime sources of demand for taxis in large urban markets are out-of-town visitors (tourists and business travelers) and low-income natives. The visitors have fewer and less satisfactory substitutes for taxi travel and tend to have higher incomes. Thus, they are less sensitive to price and more willing to pay higher prices than are natives, who can acquire their own cars or beg a ride, take a bus or subway or simply walk. In the vernacular, we say that visitors’ demand is more price-inelastic (less price-sensitive). Thus, it is in a taxi owner’s interest to charge differential prices, the higher one being assigned to visitors.

Even within groups of buyers whose price sensitivity is broadly similar, there will still be individual variations in price elasticity. The dream of a taxi owner would be to somehow charge each rider the highest price he or she would be willing to pay for the trip – what the economist calls the reservation price. That would constitute the practice of perfect price discrimination and would result in the maximum collection of revenue. Of course, this is only the stuff of dreams; no seller has enough individualized information about customers to realize their dream.

Now the method in Eric Hagen’s seeming madness starts to take form.

Crazy Like a Fox

The knee-jerk response of most people would be that a seller who allowed his customers to set the price is crazy. But Eric Hagen is really allowing individual customers to tell him what price they will accept – information he can’t get any other way. His modus operandi has the general appearance of a system of perfect price discrimination, except for one thing – he can’t be sure that the price they pick will be their reservation price. In fact, he can be pretty sure it isn’t.

Still, he has gained a great deal compared to the standard, taxi-meter-determined, single-price model. Consider the comments of one regular customer, sous chef Alan Flanders. “I’d be walking to work this morning if it weren’t for Eric.” That sounds pretty extreme, but NPR pointed out that “in most cabs, this ride would cost more than $20.” But because “Hagen takes whatever amount Flanders can afford, today it’s $12.” From the consumer’s standpoint, a 40% discount on a daily commute is a stunning saving.

We have a reflexive tendency to compare the $12 Hagen collects with the $20+ he “could” have collected from a regular taxi-metered ride. Wrong, wrong, wrong. Mr. Flanders makes it clear that at a price of $20, he was walking to work, not taking a taxi. Hagen’s alternative take was $0, not $20+. The genius of Recession Ride Taxi is that it brings customers into the market who otherwise wouldn’t ride taxis at all. A taxicab driver’s competition consists not merely of his fellow cab drivers, if there are any. It also includes subways, buses, shuttles, walkers, self-drivers, people who oblige hitchhikers – every alternative means of transportation. (In Burlington, VT, the second-most-popular commuting method is walking.) His most expensive input isn’t gas or repairs – it is time. His worst enemy is an empty cab.

No wonder that the motto of veteran cab drivers has always been “keep the meter running.” In this case, Eric Hagen has taken that excellent axiom to its logical extreme. He has realized that the best way to keep the meter running is to throw the meter away.

The Implications of Profit Maximization

Not long ago, President Barack Obama made headlines by stating that profit maximization by business owners served their interests at the expense of the general societal interest. This has long been an article of faith and a general principle on the left wing. Adam Smith founded the modern study of economics in 1776 by observing that trade proceeded on the principle of mutually beneficial voluntary exchange. The left has treated this concept with a mixture of incredulity and disdain, but mostly as if it were a deus ex machina invented to excuse the excesses of capitalism.

Members of the right wing and economists have responded by citing the role played by profit in allocating resources. It is fluctuations in profit, the argument runs, which allow consumers to direct the activities of producers – increasing profits cause producers to redirect resources toward goods and services in high demand, falling profits draw resources away from things for which demand is waning. This thinking is correct and conclusive, as far as it goes. But, as the example of Recession Ride Taxi suggests, it doesn’t go nearly far enough.

Eric Hagen is admittedly and avowedly utilizing a particular pricing technique. An economist recognizes this technique as price discrimination, which is practiced by sellers expressly to increase their total revenue and profit. In the great American tradition of motivational deception, he disavows a desire for personal gain while seeking exactly that. But the overarching significance is that his customers gain from his pursuit of profit maximization and his gains in total revenue and profit.

A layman will be persuaded of this result by hearing the testimonials of Hagen’s customers. The economist is used to hearing people lie about or rationalize their actions, but expects people to act in their own interests; the proliferation of Recession Ride Taxi’s customers means that buyers are better off riding it than not. Hagen claims that he averages 20 trips per day, the average fare running somewhere between $10 and $15. That works out to an annual income in the $50-75,000 range. Not Park Avenue territory, but not bad for low-skilled labor.

The presumption that the interests of buyer and seller are inexorably at odds is utterly false. Adam Smith’s dictum has found its practical expression – unwittingly unearthed by NPR, the unlikeliest of sources.

The Implications for Regulation

The agency of NPR isn’t the only improbable feature of this case. Economists would have quoted heavy odds against the taxi business being the locus of innovative entrepreneurship. For nearly a century, in most cities and towns of the U.S., taxicabs have been stifled under a choking blanket of regulation.

Early in the 20th century, the taxicab began to threaten the streetcar as a means of commercial passenger transport. Because of relative easy of entry into the business and low labor-skill requirements, taxis were plentiful, cheap and competitively attractive to riders. Streetcar companies combined with the largest taxi companies – usually Yellow Cab – to cartelize the taxi market by tightly regulating taxi fares and entry into the business. Fare schedules – soon replaced by taxi meters – and strict limitations on the number of taxi licenses issued combined to prevent effective competition among taxi firms. This raised profits for incumbent firms but harmed consumers. In New York City, where the number of taxi licenses has not increased since World War II, the monopoly profits capitalized into the price of a (transferable) taxi license (called a medallion) have raised its value to over six figures.

Strict regulation has been another hallmark of the Obama administration. The tacit premise has been that markets are not self-regulating, beneficial mechanisms, but rather treacherous, double-edged swords that cut safely only when their every move is guided and supervised by appointed regulators. (Where these regulators acquire the moral wisdom and practical knowledge required to manipulate markets is never specified.) One might have supposed, then, that a story on NPR about mutually beneficial success in the taxi industry would have featured regulators as the prime movers and market principals as passive reactors.

The truth is just the opposite. Eric Hagen is a lone entrepreneur who succeeded by discarding the most sacred tool of taxi regulation – the taxi meter. Indeed, in most American cities, what he did would be illegal. Even if it were technically permissible, owners of airport buses, municipal buses, shuttles, and competing taxi firms would throw a fit about it – which leads us to still another field of significance.

Implications for Antitrust

Traditionally, the practice of price discrimination is viewed with ambivalence by economists. On the one hand, when different consumers within a particular geographic market face different prices for the same good, this is inefficient. Each consumer will maximize his or her utility by arranging consumption so as to equate personal willingness to sacrifice alternative consumption with the objective rate of tradeoff offered by the marketplace, where the latter is embodied in the price paid. Suppose, for example, that one consumer faces a $5 price for good X and another consumer faces a $3 price. The first consumer’s personal marginal valuation of X is $5; the second consumer’s personal marginal valuation of X is $3. Give each the opportunity to trade in X at a price of $4 and both will do so – the first would gain by buying more X and the second by “selling” (consuming less) X. That tells us that the initial position was inefficient.

Carrying this logic to its ultimate end requires that all consumers in a given market face equal prices of a good or service, in order for consumption to be efficient – that is, for all consumers to get the most satisfaction.

The theory of equilibrium price formation studied by students in their college price theory courses brings about just this outcome. The problem is that the underlying assumptions behind this theory are seldom spelled out fully enough for the students to appreciate its highly abstract character. In fact, it often seems that economists (and lawyers) are often unaware of it. Goods are assumed to be homogeneous; each seller is assumed to supply an infinitesimal fraction of the total market amount; all buyers and sellers are assumed to possess all relevant information about available goods, costs and future contingencies.

Undoubtedly, this accounts for the prima facie structure against price discrimination in the Clayton Act, one of the earliest antitrust enactments. Price discrimination is inefficient, according to the textbooks. Those same textbooks also describe a perfectly competitive industry as one in which no seller possesses any power over price – but price discrimination couldn’t exist in this environment.

A price-discriminating seller must have some discretion over price. He must also be able to segment or divide his market into identifiable groups or individual buyers and prevent them from re-selling the good or service – otherwise, the low(er)-price buyers could themselves re-sell the good to the high(er)-price buyers at a slightly lower price, thereby spoiling the would-be discriminator’s party.

Real-world markets are a good deal messier than textbook ones. The information assumed by textbooks can only arise from a market process, and the equilibrium outcome proudly touted is an ever-receding goal. Recession Ride Taxi displays the opportunistic tenor of true capitalism – regulation strands sous chefs without a ride to work and the free market comes riding to the rescue with an improvised solution – imperfect, but a major improvement on the status quo.

This has always been true. Consider our early historical examples. A railroad often provided the only timely means of getting farmers’ crops to market, and the railroad magnate would sometimes charge farmers more for a short haul on which he faced no competition than for a long haul served by one or more competing roads. Outrageous! The first federal regulatory agency, the Interstate Commerce Commission (ICC), was created to remedy just such excesses. And so it did – by raising the long-haul rates into equality with the short-haul rates! This ended the price discrimination but it worsened the exercise of monopoly pricing power.

Country doctors often served sparse, strung-out populations that were unattractive markets. In order to increase their total revenue, country doctors charged much higher rates to wealthy patients, whose price-elasticity of demand was much lower than their poorer neighbors’. Communities encouraged this as a means of attracting physicians. Doctors rationalized it as favoring the poor; this inaugurated the practice of treating physicians as noble, self-sacrificing healers rather than ordinary businesspeople.

Clearly, price discrimination could be a good thing when it promoted competition and enabled consumers to enjoy a good or service that otherwise would not be provided. And regulations against it were no panacea for improved consumer welfare. Economists took this lesson to heart by qualifying their disapproval of price discrimination to cover only those cases where it harmed competition and promoted monopoly. It is perfectly obvious that Eric Hagen has enhanced both competition and consumer welfare with his Recession Ride Taxi.

Can We Generalize the Example of Recession Ride Taxi?

It may occur to the reader to wonder: If Eric Hagen’s Recession Ride Taxi is a boon to consumers and a specimen of marketing genius, where has it been all our lives? Why hasn’t it swept all before it over the course of one century of taxicab-industry history?

The short answer is two-fold. First, it’s been there all along, right under our noses. Second, it is right for some market circumstances and wrong for others. Most American cities represent intermediate cases, in which a mix of Hagen’s technique and conventional techniques are currently optimal. But the best approach would be to junk all forms of taxicab regulation and give the “Hagen System” full scope to operate.

Veteran taxicab drivers in virtually all American cities have utilized a species of the Hagen System by engaging in informal negotiation for taxi fares. Although variation of fares by time of day is typically illegal, it is common practice among business travelers and longtime drivers to vary airport fares by time of day. This helps travelers by securing passage and gaining discounts. It helps drivers by increasing capacity utilization during slack periods of demand.

A more comprehensive allegiance to Hagen’s methods is practiced by drivers who develop a personal clientele, which they service to the exclusion of radio calls and street hails. This tends to evolve naturally into a system of tailored fares, negotiated informally between driver and customer. (Depending on circumstances and the letter of the law, the taxi meter may or may not be engaged during the trip, but its reading is irrelevant.)

The central principle of Hagen’s Recession Ride Taxi – customer-chosen fares – practically requires this kind of repeat-customer format. Hagen may give lip service to “trust” in his customers, but he wants and needs the freedom to drop the occasional customer who stiffs him or intends to repeatedly shortchange him. He undoubtedly does this not by explicitly refusing to carry, which is illegal in most cities, but by “inadvertently” lengthening his response time to the deadbeats until they drop him. (This highlights a subtle but important aspect of the business – that the taxi fare is determined not just by the monetary fare but also by the time taken for the cab to show up.)

Why hasn’t this approach – developing a personal clientele – utterly overshadowed the visible taxi market of radio calls and street hails? Much taxi business is opportunistic, arising from unique and unforeseeable circumstances that cannot be handled in a personal, repeat-customer framework. Even more telling is the fact that the repeat-customer system requires the driver to incur substantial dead mileage and time wastage in servicing what often amounts to a predetermined route. In densely packed cities with large, continuous taxi demand like New York City, Las Vegas and Washington, D.C., drivers can operate much more efficiently “on the radio” and the street by taking their next call at the closest location.

But small towns like Burlington, VT face a taxi problem not unlike the old country doctor scenario. With around 40,000 people and no other close metropolitan areas, Burlington needs to generate a critical mass of driver income in order to get any taxi service at all. Price discrimination is the tried-and-true means of accomplishing this. Economic theory predicts that the Hagen System will predominate in this setting.

Most American cities fall in between these two clear-cut cases. They are oppressed by taxicab regulation and high meter rates that have suppressed or virtually killed off demand among low-income and minority populations. (Sometimes this demand is services by informal car or bus service provided by jitneys – vehicles owned by private individuals not affiliated with a business.) The climate is favorable for the Hagen System, but it is employed only at the cost of violating the law. Big government has created so many laws, almost all of which are counterproductive and contain innate incentives for violation, that governments cannot begin to enforce most of them. Thus, enforcement is lax to non-existent.

Nonetheless, the case of Recession Ride Taxi sharpens the case against taxicab regulation. Taxi meters are not valuable ipso facto; neither are newer computer systems for automatic dispatch that have largely replaced human taxicab dispatch. Technology should be judged according to the economic value it creates for consumers. The only way to do that is to allow the market to value technology and govern its use. The illusion that sellers set price is just that – an illusion, a mirage. Pricing is a negotiation between buyer and seller and either should be free to initiate the process. When regulation interferes with that freedom, it harms those it is ostensibly set up to protect.

Thanks, NPR

We have discovered that the simple case of a single taxicab driver in Burlington, VT is, in reality, a microcosm for capitalism at work. How much of the panorama we unfolded above was dealt with by NPR in their report on Eric Hagen’s Recession Ride Taxi?

None of it. NPR ignored every relevant economic issue, presenting the case as if it were nothing more than what the late Richard Nadler satirically called “caring and sharing.” Still, we should be grateful to NPR for at least reporting the news. There is no precedent for expecting this station to produce an incisive interpretation.