Tag: economics

Monday Links

CBO, the Wizard of Oz, and the Keynesian Fairy Tale

The Obama Administration said that the so-called stimulus was necessary so that the unemployment rate would not rise above 8 percent. Indeed, the White House warned that the joblessness rate would climb to 9 percent if lawmakers did not approve the $787 billion package. Critics responded by explaining that making government bigger would divert resources from the productive sector of the economy and hurt growth. These skeptics also noted that nations using “Keynesian” policy, such as the United States in the 1930s and Japan in the 1990s, did not generate good results. And since the unemployment rate is now above 10 percent, it certainly seems like opponents were correct.

But now the supposedly non-partisan Congressional Budget Office has jumped to the defense of the White House, estimating that the spending bill actually generated beween 600,000 and 1.6 million jobs. How can that be, you may ask, when the number of jobs has fallen by more than 3 million? The CBO neatly sidesteps that real-world concern by moving the goalposts, using a slightly more sophisticated version of Obama’s “jobs created or saved” alchemy. Their jobs-created estimate is compared to a make-believe baseline of how many jobs there would be “without the law.”

CBO estimates that in the third quarter of calendar year 2009, an additional 600,000 to 1.6 million people were employed in the United States, and real (inflation-adjusted) gross domestic product (GDP) was 1.2 percent to 3.2 percent higher, than would have been the case in the absence of ARRA. …CBO’s current estimates differ only slightly from those CBO prepared in March 2009. At that time, CBO projected that in the third quarter of 2009, U.S. employment would be higher by 600,000 to 1.5 million people with ARRA than it would be without the law, and real GDP would be 1.1 percent to 3.0 percent higher. CBO’s new estimates reflect small revisions to earlier projections of the timing and magnitude of changes to spending and revenues under ARRA. …Economic output and employment in the spring and summer of 2009 were lower than CBO had projected at the beginning of the year. But in CBO’s judgment, that outcome reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects of ARRA.

Needless to say, this means there is no objective benchmark. The unemployment rate could jump to 15 percent and total job losses could reach 10 million, but CBO would continue to say, for all intents and purposes, that the results from their Keynesian model are more important than any real-world numbers. This is the fiscal policy version of the Wizard of Oz, and we’re supposed to ignore reality just as Dorothy and friends were supposed to ignore the man behind the curtain.

To be fair, there is nothing inherently wrong with CBO’s methodology. Economic analysis frequently requires people to make assumptions about how the world would behave with or without a certain policy. So the real question is whether Keynesian economics makes sense from a theoretical perspective, whether there is any supporting evidence, and whether there are more compelling alternatives. Click the links and decide for yourself.

Greedy Local Politicians Attempt to Grab Revenue Far Outside Their Borders

Regular readers of this blog are familiar with the tax competition battle, which largely revolves around high-tax governments attempting to track – and tax – economic activity that migrates to lower-tax jurisdictions. But this is not just a global fight between decrepit welfare states such as France and fiscal havens such as the Cayman Islands. American states also compete with each other, and there are numerous examples of high-tax states such as California and New York trying to grab money from people who escape to zero-income tax states such as Nevada and Florida. The fight even exists at the local level, and a good example is the attempt by politicians to tax faraway online travel agencies. The Orange County Register opines about these extraterritorial tax grabs:

A recent legal victory for some Texas cities against online travel companies over hotel taxes may have given Anaheim officials hope for their own case, but they shouldn’t start celebrating just yet. Other cities have not fared as well in similar lawsuits. …Here’s what Fairview Heights, Anaheim and other cities wanted to change: In a typical transaction, a traveler picks a hotel and books a room, stays there, and pays the hotel a room charge plus a local occupancy tax based on the room charge. The hotel keeps the room charge and forwards the tax money to the government. Enter online travel companies like Expedia, Hotels.com, Orbitz, Priceline and Travelocity, which allow travelers to sort through hotels and book a room on a central Web site. These companies do not reserve or resell hotel rooms, but act as intermediaries to facilitate the transaction between hotel and traveler. The hotel receives an amount for the room, on which the city’s hotel tax is based. Let’s say I search a Web site and book a $100 hotel room. The online company charges me $10 for their service. Anaheim argues that hotel occupancy tax should be paid not only on the $100 room charge, but also on the $10 service fee. …A federal bill is pending to limit hotel taxes to amounts collected by a hotel for occupancy purposes, excluding service fees and markups by intermediaries. The Constitution permits Congress to pass such laws if there is a danger that state and city laws are interfering with interstate commerce. Hotel taxes are attractive to local politicians because they are a way to shift the tax burden to “outsiders.” But because every U.S. city has a hotel tax, we’re all somebody else’s “outsider.” The net result is that everyone is taxing everyone else in an unaccountable way, and unless the cities and their lawyers are stopped, in an unpredictable way, too.

Even Obama’s Make-Believe Jobs Are Not Real

The White House recently began claiming that the “Recovery Act” had “created or saved” 640,000-plus jobs. This turns out to have been a political mistake, in part because even sympathetic reporters understand that the “jobs saved” measure allows for creative accounting. But the White House also erred by providing (supposed) details about the jobs that were created. This made it very easy for reporters and other curious people to do a bit of fact checking, which has generated a spate of stories showing that the White House’s numbers are wrong, even using make-believe methodology. The Washington Examiner has put together a very useful interactive map which links to many of the news reports debunking the Administration’s fraudulent numbers.

Vikings and Pirates and Taxes, Oh My!

Today’s episode of “Hagar the Horrible” could be an epigraph for the new Fall 2009 issue of Cato Journal.

Hagar_The_HorribleThis issue includes Greek economists Michael Mitsopoulos and Theodore Pelagidis on “Vikings in Greece: Kleptocratic Interest Groups in a Closed, Rent-Seeking Economy” as well as Peter Leeson, author of The Invisible Hook: The Hidden Economics of Pirates, writing (with David Skarbek) on the effects of foreign aid. As for taxes, well, editor Jim Dorn has assembled a number of useful papers:

  • Andrew T. Young on taxing, spending, and “fiscal illusion”
  • Michael J. New on the “starve the beast” hypothesis
  • Alan Reynolds on Paul Krugman’s misunderstanding of the monetary and fiscal lessons of the Great Depression and Japan’s lost decade

And on the general rapaciousness of the state, don’t miss Jason Kuznicki’s careful review of government racial discrimination from the end of Reconstruction until the civil rights movement.

ACORN and Health Care

Last week, editors at Politico posed two questions to an online panel to which I contribute: “ACORN: Underplayed or overblown?” and “Will the Dems ever get their act together on healthcare?”

The two are intimately connected by a simple proposition: “Most people want more housing and health care than they can afford.” Of course, for “housing” or “health care” one could substitute whatever one wishes: food, clothing, cars, education, entertainment, vacations, you name it. Economists call this the problem of scarcity, and it’s the beginning of economics.

In a free society, most individuals, families, and firms will deal with that problem through such homely measures as creating and husbanding wealth, planning for the future, and living within their means. Some, however, will be indifferent to such discipline and will demand more than they can afford. Enter thus ACORN and the Dems – the party of government. ACORN, like our president, is in the “community organizing” business – a euphemism for putting (some) people in a position to better demand things from government. Some of those demands are perfectly legitimate: reduce crime; fix the potholes. But others, the demands ACORN specializes in, are not thus “common.” They can be satisfied, in a world of scarcity, only by taking from some and giving to others.

And that’s what the housing and health care debates today are largely about. And it’s why on both, the Dems are having difficulty getting their act together, because however much they turn a blind eye toward scarcity or pretend that they all agree, the truth is that they represent discrete constituencies, with discrete conflicting interests. That’s what happens when we’re all thrown into the common pot. What once was decided by individuals, reflecting their own particular interests, is now decided by government – and it’s a Hobbesian war of all against all.

The AP report on ACORN last week illustrated that nicely. ACORN has been in the forefront of those browbeating banks, under the Community Reinvestment Act, to provide housing loans to people who couldn’t afford them. Banks were reluctant to make those loans, of course – until the government stepped in to “guarantee” them. Well, we’ve seen where that ended: we’re all paying the price, especially those who couldn’t afford the homes in the first place, and will be for years to come. AEI’s Peter Wallison details some of that fiasco in this morning’s Wall Street Journal, placing a finger on none other than Barney Frank, who parades now as our savior.

But the same something-for-nothing mindset is at work in the health care debate. Here again, many people want more health care than they can afford, which means that someone else will have to pay for it – the government having nothing except what it takes from us. The pretense that it is otherwise – or that they can redistribute more equitably than the market does – is what drives the Dems to their pie-in-the-sky schemes – until some among them realize that it is they and their constituents who are being taken for a ride. At that point, either the recalcitrant are silenced, with some temporary sop, or the bottom falls out of the scheme, which is what many of us are hoping for here. If not, the housing debacle will prove in time to be a pale harbinger of the health care debacle, at least for those who live to see it.

C/P Politico’s Arena

What Is Regulation?

The New York Times tries to spin the work of Nobel laureates Elinor Ostrom and Oliver Williamson as not anti-regulation:

Neither Ms. Ostrom nor Mr. Williamson has argued against regulation. Quite the contrary, their work found that people in business adopt for themselves numerous forms of regulation and rules of behavior — called “governance” in economic jargon — doing so independently of government or without being told to do so by corporate bosses.

But none of us “anti-regulation” folks are against “rules of behavior that people in business adopt for themselves independently of government.” The world is full of rules, from wearing clothes in the office to customary trade practices to the rules for managing common-pool resources that Ostrom studied. Anyone who opposed such “forms of regulation” wouldn’t be a libertarian or even an anarchist – he’d be a nihilist. (Of course, one could sensibly oppose particular rules; but no one seriously wants a world without rules of behavior.)

David Henderson analyzes one of the misunderstandings about the laureates’ findings:

Some have summarized their work by saying that institutions other than free markets often work well. But that statement can mislead you to conclude that government solutions are the answer. Free markets are only a subset of free institutions. A better way to sum up their work is that what Ms. Ostrom and Mr. Willamson really show is that voluntary associations work.

The Concise Encyclopedia of Economics defines “regulation” this way: “Regulation consists of requirements the government imposes on private firms and individuals to achieve government’s purposes.” That’s the kind of regulation that is controversial among economists and often criticized by libertarians. It is entirely different from “rules of behavior that people in business adopt for themselves independently of government.” Those sorts of rules – often called “governance,” as the New York Times notes – are private and voluntary, made by the voluntary interactions of a few or many people.

The work of Ostrom and Williamson supports the idea of spontaneous order, an order that emerges as result of the voluntary activities of individuals and not through the commands of government. Spontaneous order can be hard to grasp, though it is the background of our entire world – language, common law, money, and the economy are all spontaneous orders (though government has intruded into some of those orders). It’s misleading to say that work of Ostrom and Williamson is somehow supportive of “regulation,” given the way that word is commonly used.

Sheldon Richman made a similar point back in June and wrote a Facebook note on the same paragraph that caught my eye.