Making Work, Destroying Wealth

Journalists are telling us that John Maynard Keynes, the intellectual inspiration of the New Deal and its tax-and-spend philosophy, is all the rage again. The Wall Street Journal offers an interesting vignette on Keynes’s view of how to create jobs:

Drama was a Keynes tool. During a 1934 dinner in the U.S., after one economist carefully removed a towel from a stack to dry his hands, Mr. Keynes swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.

Now I should say that various people report this story, including Ludwig von Mises, but no one cites an original source. Assuming it’s true, though, it just seems to underline the absurdity of the whole “make-work” theory that is back in vogue. Keynes’s vandalism is just a variant of the broken-window fallacy that was exposed by Frederic Bastiat, Henry Hazlitt, and many other economists: A boy breaks a shop window. Villagers gather around and deplore the boy’s vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, “Maybe the boy isn’t so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!”

But as Bastiat noted, “Your theory stops at what is seen. It does not take account of what is not seen.” If the shopkeeper has to buy a new window, then he can’t hire a delivery boy or buy a new suit. Money is shuffled around, but it isn’t created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, “Society loses the value of objects unnecessarily destroyed.”

And the story of Keynes at the sink is the story of an educated, professional man intentionally acting like the village vandal. By adding to the costs of running a restaurant, he may well create additional jobs for janitors. But the restaurant owner will then have less money with which to hire another waiter, expand his business, or invest in other businesses. Before Keynes showed up in town, let us say, the town had three restaurants among its businesses, each with neatly stacked towels for guests. After Keynes’s triumphant speaking tour to all the Rotary Clubs in town, the town is exactly as it was, except the three restaurants are left to clean up the disarray. The town is very slightly less wealthy, and some people in town must spend scarce resources to restore the previous conditions. The man built an economic theory on this!

Now we are told that “Keynes is back,” and we need a new New Deal, and the Obama administration is going to create millions of jobs by shuffling money through the federal government. And the theoretical underpinning of this plan comes from a man who thought you could stimulate employment by breaking things.

As Jerry Jordan wrote in the Cato Journal, the real challenge for society is not creating jobs but creating wealth – that is, a higher standard of living for more people. There are many destructive ways, beyond messing up the towels in a restroom, to create jobs:

I am reminded of a story that a businessman told me a few years ago. While touring China, he came upon a team of nearly 100 workers building an earthen dam with shovels. The businessman commented to a local official that, with an earth-moving machine, a single worker could create the dam in an afternoon. The official’s curious response was, “Yes, but think of all the unemployment that would create.” “Oh,” said the businessman, “I thought you were building a dam. If it’s jobs you want to create, then take away their shovels and give them spoons!”

President-elect Obama proposes that the federal government “create or save” jobs by spending upwards of $600 billion. Where would this money come from? If it comes from taxes, it will be taken out of the more efficient private sector to be spent in the less efficient government sector, and the higher tax rates will discourage work and investment. If it is borrowed, it will again simply be transferred from market allocation to political allocation, and our debt burden will grow even greater. And if the money is simply created out of thin air on the balance sheets of the Federal Reserve, then it will surely lead to inflation.

There is no magic road to wealth. You have to work, save, and invest. And when the government lures individuals and businesses into making bad investments with cheap money, the malinvestment has to be liquidated. Avoiding that truth, prolonging the process of adjustment, is a good way to turn a recession into a depression. And you can’t get economic growth back by breaking windows, throwing towels on the floor, or spending money you don’t have.

Obama Backs Off Hiring 600,000 More Bureaucrats?

In his weekly radio address on January 4, President-elect Obama promised that his economic plan would “create three million new jobs, more than eighty percent of them in the private sector.” Dan Mitchell pointed out that that suggested that he intended to hire 600,000 new bureaucrats. That point got some attention, and apparently it actually made Obama and his supporters nervous.

Because in his January 11 radio address, he promised that 90 percent of the jobs he creates or saves will be in the private sector. And interestingly, both the Washington Post and the New York Times put that in the first sentence of their page-one stories on Sunday. This was the first sentence in the lead story in the Sunday Post:

Facing increased skepticism from both parties about the details of his economic stimulus proposal, President-elect Barack Obama and his team yesterday laid out new claims regarding the $775 billion package, saying that 90 percent of the jobs produced would be in the private sector, including hundreds of thousands in construction and manufacturing.

Well, it’s good to know that the Obama team is now thinking about – or at least wants us to think they’re thinking about – creating private-sector jobs rather than just hiring more bureaucrats. Of course, we still have the problem that huge government spending programs won’t actually create jobs.

Supreme Court Makes It a Little Interesting

The common refrain this Supreme Court term is that, after several years of blockbuster cases—race-based school assignment, partial-birth abortion, the rights of Guantánamo detainees, the D.C. gun ban, etc., etc.—this year the Court is giving the front pages a break. Indeed, as we celebrated the advent of 2009, the only cases guaranteed to make it into the Cato Supreme Court Review were a drug regulation case (Wyeth v. Levine) and one involving the detention of a civilian in the United States as an enemy combatant (Al-Marri v. Pucciarelli). Almost all the cases garnering media and scholarly attention would have been after-thoughts in previous years.

On Friday, however, as it rounded out its docket for the term (no more than a handful more will be added to the list of cases to be argued and decided before the Court recesses in June), the Court gave us four fascinating cases to chew on:

Northwest Austin Municipal Utility District Number One (“NAMUDNO”) v. Mukasey

This is a challenge to the requirement of section 5 of the Voting Rights Act that certain state and local governments, mostly but not entirely in the South, obtain “preclearance” before making any changes affecting voting. A small (3,500 residents) utility district in Austin, Texas, argues that it has never been accused of voting discrimination or other irregularities and should not have to seek federal permission to, for example, move the location of a polling place or coordinate voting for its board with other county or state elections. You may recall that the latest extension of the VRA, in 2006, did not pass without some controversy. Indeed, in our federal system, should certain jurisdictions still be under the Justice Department’s thumb over 40 years after the demise of Jim Crow (and to this extent of micromanagement)?

Ricci v. DeStefano

A group of firefighters (19 white, 1 Hispanic) allege that New Haven city officials racially discriminated against them when they refused to certify the results of two race-neutral promotional exams that yielded racially disproportionate results (i.e., a much higher percentage of whites and Hispanics qualified for promotion than did blacks). As offensive as the facts of the case are, the way that the Second Circuit—a panel including oft-mentioned Supreme Court contender Sonia Sotomayor—summarily dismissed the petitioners’ appeal is even more disconcerting. When the full court voted 7-6 not to rehear the case en banc, Judge José Cabranes (a Clinton appointee) excoriated his colleagues, concluding that “[t]his perfunctory disposition rests uneasily with the weighty issues presented by this appeal.” I won’t get into the weeds of legal analysis here, but Ed Whelan has two excellent posts discussing the Second Circuit shenanigans over at NRO and Stuart Taylor last month wrote a typically hard-hitting piece on it for the National Journal. But again, however the Supreme Court decides this one, it has already provided a potent line of attack on Judge Sotomayor when the next vacancy arises on the high court.

Republic of Iraq v. Beaty

This case asks the simple question of whether U.S courts have jurisdiction over claims regarding misdeeds committed by the Saddam Hussein regime—or whether today’s Iraqi government can assert sovereign immunity. This simple question actually involves the interplay of a host of legislative and executive action that the Court will have to wade through. Beaty joins the Eurodif (international trade, about which I wrote here) and Elahi (treaty enforcement) cases as this year’s leading contributions to the Court’s international law jurisprudence.

Horne v. Flores

Taking up a complicated conflict between the No Child Left Behind Act and earlier legislation, this is the term’s leading education case. The main issue is whether a state, in this case Arizona, which complies with NCLB on English language instruction can still be violating the funding requirements for such instruction imposed by the Equal Education Opportunity Act of 1974. The Ninth Circuit declined to modify an eight-year-old injunction requiring Arizona to spend millions on this instruction and imposing millions in fines. It’s a highly technical case but one with significant ramifications for a key part of President Bush’s domestic policy legacy.

Despite these four grants, however, it is still safe to say that Court shied away from many, many cases that should interest readers of this blog—not least the patent/abuse of state sovereign immunity case called BPMC v. California, which I had earlier urged the Court to accept for review.  I will be commenting further at least on NAMUDNO and Ricci when the Court hears argument and decides them.

Rubin Resigns from Giant Bank Taxpayergroup

The Washington Post reports:

Robert Rubin, a key figure in the U.S. financial boom as Treasury secretary and then as a senior adviser at Citigroup, announced his retirement from the troubled New York bank yesterday in the latest sign that Citigroup wants to break from its recent past.

Rubin joined Citigroup in 1999, soon after the company emerged as a financial services giant. He has since earned more than $115 million as Citigroup has suffered through setbacks and missteps that culminated in a November bailout by the federal government….

Citigroup, the long-time champion of free markets and deregulation, is increasingly dependent on the federal government, which has invested more than $50 billion to help it weather the economic crisis.

After we’ve invested $50 billion in the company, seems like we ought to call it Taxpayergroup. It’s not really a private company more, though private parties like Rubin may still profit handsomely from it.

“Fear Placebos” and Homeland Security

In the ongoing Cato Unbound discussion about how the government should respond to excessive fear of terrorism, Bernard Finel writes:

The cynical response focuses on continuing the sorts of grand, empty gestures we have already pursued since 9/11. We can continue to pack our shampoo in 3 oz bottles and ignore the color coded signs and tolerate the petty annoyances. Over time, fear will fade and it is unlikely that this unfocused motion will result in grievous consequences.

Finel rejects this approach in favor of what he calls a pragmatic one. I wonder if the cynical approach is the pragmatic one. A realist might say that we can never get the public to be rational about the odds of dying from terrorism, so let’s hold down spending and try to push it toward uses that have benefits other than counterterrorism, sort of like how fear of Soviet missiles justified spending on scientific research and highways. I called this the “fake it” option in a list of possible approaches to homeland security. This approach is dishonest and patronizing, but not necessarily wrong, especially if efforts to correct overwrought fears fail.

Apparently, Obama’s nominee to head the Office of Information and Regulatory Affairs is on the same page. Here’s the conclusion to a working paper called “Overreaction to Fearsome Risks” that Cass Sunstein wrote with Richard Zeckhauser:

Government regulation, affected as it is by the public demand for law, is likely to stumble on the challenge of low probability harms as well. The government should not swiftly capitulate if the public is demonstrating action bias and showing an excessive response to a risk whose expected value is quite modest. A critical component of government response should be information and education. But if public fear remains high, the government should determine which measures can reduce most cost effectively, almost in the spirit of looking for the best “fear placebo.” Valued attributes for such measures will be high visibility, low cost, and perceived effectiveness.

They meant, I believe, to include the word “it,” meaning “public fear” after “reduce.” So, in other words, fake it. It’s not surprising that Sunstein wrote this – his books, from which I learned a lot, head toward the same conclusion. But it will be interesting to see whether this kind of talk, shrouded though it may be in academic speak, gets him into any trouble now that he’s up for an important government job.

In other cost-of-fear-of-terrorism news, both Stephen Dubner of the Freakonomics blog and Bruce Schneier ask whether the diversion of federal attention from crime to terrorism since 9-11 helped cause an outbreak of financial fraud. They cite this New York Times article discussing the shift of FBI resources to counterterrorism. Dubner is unsure, but I say it’s a no-brainer that moving 2,400 FBI agents from crime to counterterrorism and the resulting 40 percent drop in financial crimes referred to US Attorney’s for prosecution caused more financial crime.

We will be discussing the cost of counterterrorism at the conference taking place Monday and Tuesday. Registration is closed because we’re full. But the event will be webcast live on Cato.org. C-SPAN will also be taping Monday afternoon.

Would Daschle’s Federal Health Board Ration Medical Care?

Matthew Holt implausibly says no.

Tom Daschle is a former majority leader of the U.S. Senate, and president-elect Barack Obama’s pick to head the Department of Health and Human Services.  Daschle will also head up the Obama administration’s health care reform efforts.

Which is why Daschle’s proposal for a Federal Health Board has received so much attention. Holt reports:

the main role of the Federal Health Board would be as a cost-effectiveness review organization with teeth—in that Medicare, Medicaid & FEHBP would all be bound to follow its guidelines.

Holt continues:

Critics on the loony right … will call this rationing.

What’s interesting about that comment is that Holt merely associates the “rationing” claim with people who are loony.  He doesn’t actually say they’re wrong.  In fact, Holt himself writes:

we need to make cardiologists in Miami behave like cardiologists in Minnesota with a consequent impact on the incomes of doctors, hospitals and stent & speedboat salesman in high cost areas … If the Federal Health Board has teeth, that’s what it’ll do, and the AMA, AHA, AdvaMed, PhRMA et al know it. Which is why the PhRMA front organizations have been railing against cost-effectiveness for so long.

So Holt acknowledges that the point of comparative- and cost-effectiveness research – and Daschle’s Federal Health Board – is to do something that would reduce the incomes of doctors, hospitals, and drug/device manufacturers.  That something would be so dramatic that it has the providers and manufacturers up in arms and funding front organizations.  If that something is not refusing to pay for some medical services – i.e., rationing – then what is it?

Rationing medical care is not just essential, it’s unavoidable.  And the way we ration medical care today is unconscionable.  But so too would be having the government ration medical care.  Which is probably why proponents of government rationing don’t want to call it that.