Posts categorized “Economic Theory”

You Didn't Build That

July 19, 2012   1:19 am

I enjoy economics. I’ve enjoyed studying theory, debating with others, and when I had to choose an elective for my degree a few years ago, my economics class was among my favorites. I also enjoy how sound economic policy squares with my world and political views; it’s quite the harmonious union. The run-up to the presidential election every four years, though, is a painful time for those of us who have looked at the numbers and believe that the free market gives the best possible outcome. There are always the fringe or down-ballot candidates, like Fauxcahontas of the North, who are way out in left field. Over this past weekend, though, this lunacy came out right at the top of the ticket.

The transcript for the video clip is below; if you want to watch it for yourself, you can see it in this article. (I tried to embed it, but I couldn’t make it look right.)

We created a lot of millionaires; and, you know, there a lot of wealthy, successful Americans who agree with me - "cause they want to give something back. They know they didn’t… If you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, “Wow, it must be because I was just so smart.” There are a lot of smart people out there. “It must be because I worked harder than everybody else.” Let me tell you something - there are a whole bunch of hard-workin’ people out there.

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested roads and bridges - if you’ve got a business, you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own; government research created the Internet so that all the companies could make money off the Internet.

Let’s get the “you didn’t build that” thing out of the way up front. There is a case to be made that the “that” refers to the roads and bridges, not to the business that was build. Neither reading of it changes what I believe is the real issue with these words, though if “that” is the business, it only confirms my analysis. And, although it is tempting to go to snark with this (“We created a lot of millionaires.” Yeah, but you started with billionaires!), that won’t be productive; I’ll try to keep that to a minimum.

We will start with the millionaire line, though. Who is the royal “we” he is talking about? His administration? America? From his other speeches, and the context later in this one, he is likely referring to the government. So, the government created millionaires? If we take that at face value, and your net worth is less than a million dollars, why didn’t the government pick you to be a millionaire? This illustrates the lack of substance in that statement. America, as a nation, has seen many people attain a net worth of one million dollars or more; but, to say she created it is a different thing altogether. It was definitely not the government who created them!

But, this flows into the point of the speech. American government, by creating roads and bridges, maintaining an educational system, and developing technology, created the environment in which such success could occur. On this point, I agree. Building out infrastructure led to expansion of our nation, and as families are spread across the nation, and commerce is transacted around the globe, infrastructure needs to be maintained and upgraded. Where the government has a vested interest in that infrastructure, they should be involved at the appropriate level.

Where this goes astray is the next logical step people like our 44th President want to take from that. The next step - well, it’s right there in his speech, that horrid phrase “give back.” (I’ve written about that before, though I don’t think I’ve dedicated an entire post to it. Great, another post for the draft pile.) Implicit in that phrase is that the entity that should “give back” did not earn or deserve what they have acquired, or that they got it for free. That’s not the way businesses work (which he would know had he ever… aw, darn, that snark is hard to hold back). Business owners:

  • Have an idea for a product or service for which they believe they can convince people to trade some of their money
  • Put in the work to develop the product or train people to provide the service
  • Develop a plan to provide that product or service
  • Secure the necessary infrastructure to run the business (physical, accounting, legal, etc.)
  • Risk a great deal of their or their investor’s money or, in some cases, their homes and cars, in the process

Now, if we look at that list, it backs up the “you didn’t get there by yourself” line. Who all do we see in that list above? Employees, designers, architects, lawyers, accountants, human resources, communications, logistics, and investors would be a quick list. These are the people who “gave you some help.” But, did they give you the help? Very few people involved gave their help. The materials were not given, they were purchased; employees did not volunteer, they were paid; communications and logistics didn’t “spot” the business free service, they charged this business their going rate for those services.

No, I am not picking at words - this phrase was chosen precisely because of its meaning. If a business owner does all of the above, and ends up with less than $250,000, they won’t raise the liberal’s ire. However, if they end up with $10M, they must have ripped off someone to get that, so we get this “give back” nonsense. Never mind that they contracted with each employee or service provider for a price agreeable to them, and they contracted with their customer to provide the good or service at a price that was agreeable to them. Never mind, too, that they were the last to get paid; before they saw any money, they took care of the government (taxes), then employees (payroll), then contracted costs (business-to-business, professional support, etc.), and then maintaining inventory/training (keeping the business sustainable).

“But what about teachers? Don’t they count?” Well, what about them? They contracted with the government or a private institution to teach for a given amount of money. Teachers don’t work for free either; just because their paycheck comes from the government doesn’t make their efforts any more or less valuable.

At various points in my educational career, I had to study different companies. I also worked to type others’ research papers at one point, and got to see a lot more interesting things about many different companies. Nearly all large companies have benefits like continuing education or charitable contributions (including skimming off the top for United Way). They offer matching retirement account contributions. They sponsor volunteer events in the community. When you look at the owners of these companies, you find contributions to charities, churches, and foundations. If that isn’t “giving back,” what is it? (As an aside, I much prefer the phrase “pass it on;” it’s a conduit, not the Dead Sea.)

It is class warfare. By definition, the middle class is in the middle. They are employees, not owners. They get a paycheck. They volunteer at their school, their church, or other civic organizations. They go on vacations every so often, and they have fun playing with their kids. They are not being ripped off; they are living a comfortable life (particularly when contrasted with the rest of the world) because of the fruits of their labor. But, to hear this speech, you’d think our country was filled with a bunch of greedy, evil business owners, ripping off the public to accumulate great wealth to their own exclusive use. (Yes, there have been those, and they have rightly come to legal, and sometimes even physical, consequences. The presence of abusers does not nullify the principle.)

Sure, there are a lot of hard-working people; not nearly as many as there used to be, but they are there. However, if you work really hard at an unsuccessful venture, you are not going to be more successful; you may delay the failure of the effort, but it will come around. No one on the right is saying that people aren’t working hard; it is the left who are saying that those who are successful did not.

Now, let’s take a look at that famous line - “you didn’t build that.” If the “that” is the business - well, I think the above pretty much covers that. If the “that” is the roads and bridges, though, then yes, he’s probably right. However, did the bridge cause the business owner to succeed? If so, then what about the guy living under the bridge - did the bridge cause him to fail? If the bridge has some magical economic power, we must recognize that its power affects different people in different ways. Government is no less infallible than business (in fact, it’s usually more fallibl… sit down, snark boy); if government is to be credited with all these “millionaires we created,” it must be blamed for those below the poverty line. The only time it’s blamed for that is when there’s a Republican in the White House, though.

The Internet - ah yes, that powerful conduit that enables greater middle-class rip-offs than ever before. The Internet was developed by DARPA. Care to venture a guess as to what the D in that acronym stands for? Defense. Yes, the Internet grew out of a defense research project. Just as NASA isn’t all about space, defense isn’t just about guns and bombs. The very department that Obama wants to gut is the one that gave us the Internet. It would be funny if it weren’t so sad.

So - if you built a business, you didn’t build it on your own; but, that doesn’t mean you ripped off those who helped you build it. Rather, your building of a business created a better life for those helped you build it. Maybe our next president will understand that; hopefully it won’t take him 4 years to get here.

Health Care - From the Folks Who Brought You "Cash for Clunkers"

August 5, 2009   2:12 am

I made a Facebook status update earlier today where I said I hoped that the mismanaged “Cash for Clunkers” program (C4C hereafter) had caused some people to think about whether they wanted the same people in charge of their health care. Of course, with the limited space for status updates, and my double-dose of verbosity (which is genetic, I thnk), I really didn’t have room to flesh out my thoughts on the matter.

A review would be in order here. C4C is a government program that gives incentives for people to trade in cars deemed older and less fuel-efficient on a new car that is more fuel-efficient. A consumer group has a FAQ. A controversial provision of this bill is that these trade-ins must be completely destroyed - no parts can be salvaged at all, no tires, no body parts, nothing. One of my Facebook friends described the process they used - drain the oil, replace it with water, and run the engine until it seizes up. Anyway, this program was funded at $1 billion to go from July 24th to November 1st of this year. Yet, a short week later, the news begins to break that the program is almost out of money. There is talk of adding another $2 billion - that’s $3 billion of our tax dollars to buy and destroy perfectly functional cars, because they don’t fit someone’s idea of a “good car.”

Regarding the way these cars are being destroyed - this is the classic broken window fallacy, the economic theory that says that vandalism is good for the economy. A boy breaks a window; the shopkeeper must get it replaced. This benefits the window maker, which can benefit others in turn. However, the fallacy is that it does not look at what the money that the shopkeeper had to use to fix the window might have otherwise been used to do. For example, while the window maker advances, the shoe maker and baker, who might have received the money the shopkeeper would have spent, are hurt. (As an aside - wouldn’t it be better to keep the window maker in business by providing windows for new business? Oops - that was the greedy capitalist in me.)

Now, let’s look at the health care issue. Nearly every proposal I’ve heard coming from Washington decries the number of uninsured people in this country, how much we pay for health care, and how bad the insurance companies are. There are many ways to go about this; I’ll look at each of these in turn. As we do, keep in mind what happened to the “bad” cars in C4C.

We hear bad, bad things about the number of uninsured Americans - the latest numbers have it about 47 million. That’s a lot, right? Maybe, but maybe not. One thing that these stats do not take into account is the number of people who choose to be uninsured. Many college students are uninsured by choice (or by lack of giving it a thought - that would have been me right after high school!). The census bureau said that the number of college students was 15.9 million in 2004. How about single people? I certainly didn’t worry about health insurance when I was single. The census bureau said in 2007 that of the 92 million single people, 60% had never been married at all, and 15 million were over 65. Certainly not all of these are without insurance, but a good many may very well choose not to have it. That leaves the ones that can’t afford it - we’ll look at ways to make it more affordable in our third point.

Next up is how much we pay for health care. Yes, just like our military prowess, America is #1 in the world at spending per-capita on health care. We are also #1 in the world at medical advances and technology. These things do not come for free - what is the incentive for a company to develop the newest bang-up drug if they aren’t going to be able to make enough money on it to fund the research it took to develop it? Altruism may be nice, but it doesn’t put food on the table. While the exchange of money for services seems to be distasteful to some people, you’ll look long and hard to find a better motivator. Why do doctors put themselves through years and years of education after most people are already out working? For a few, they may just love their fellow man that much, but for the most part, it’s that American dream of making it, and having the things they want. How does one acquire things? Money.

All this talk about money brings us to those evil, horrible insurance companies. I’ve dealt with them just as many of you have, and it’s frustrating to have things denied because a t wasn’t crossed or an i dotted. However, let’s look at what we expect from insurance. Does homeowner’s insurance cover carpet cleaning, painting inside and out, and re-weatherstripping the windows? Does auto insurance cover oil changes, new tires, detailing, and radio upgrades? Then why must any health insurance cover check-ups? The litany of required services on some insurance providers is astounding - and, the consumer has no choice. I don’t think I could go to a state in the Union and get an insurance plan that didn’t cover maternity; as a male, I really don’t think that’s coverage I need. People view health insurance completely different from any other insurance. Why is it that, if something exists, people think that their health insurance should cover it? Some of these treatments or experimental procedures weren’t even in existence when the policy was written, but people think that they’re entitled to them.

This is where affordability comes in. Let insurance companies customize plans, so that people can buy just what they want (catastrophic coverage, for example) and exclude what they don’t (TMJ). End the ridiculous “discounted rate” on the billing - doctors have artificially raised their rates because they know that, for the most part, their patients’ insurance will only pay a portion of it. The price should be the same for someone paying out-of-pocket as it is for the insurance companies. (Back to auto insurance, does Ford offer Allstate a discount? Yeah right.)

What happens with this is the regular free-market benefits. First, the availability of health care goes up, because the people who opted out of “hypochondriac” coverage will not take up a doctor’s time for every sneeze and sniffle. Second, there is an incentive for providers to get into the business, as the playing field is more level and less laden with red tape. Third, people will be so happy that we’ll never have to hear about this ridiculous socialized health care mess ever again! (Well, okay, maybe that last one is a stretch.)

Now, let’s look at C4C health care. You’ll have politicians and government paper-pushers determining what’s covered and what isn’t, with their decisions holding the force of law. The thresholds will be hard - the qualifying line is drawn in the cement as it hardens. It will cost 10 times what “they” estimate - at least. Wait times will be through the roof, as anyone who qualifies for something will get in line for it, whether they need it or not. Over five or ten years, there will be a shortage of providers, because doctors will decide that law is a much more lucrative field. And, one of the founding principles of our nation will have been sacrificed on the altar of good intentions.

I know which one I’d prefer.

Paying for Facebook: A Lesson in Economics

May 11, 2009   3:32 am

This is the first time my blog and Facebook accounts have crossed. If you’re not a member of Facebook, you may not know exactly what I’m talking about. However, you know my enjoyment of economic discussions, and this is a good learning opportunity.

Recently, several of my Facebook friends joined a group called “We Will Not Pay for Facebook.” They’re not alone - this group boasts over 4.4 million members. The group had articles referring to the profit that the current owner is making on the site, and various purchase offers. Then there was this…

Because of Facebook’s huge popularity Mark Zuckerberg is getting a lot of offers from people wanting to buy Facebook. People Who WILL turn it into a paysite.

The assumption here is that if anyone buys the service, they will change it to a pay site. This is FUD*, and to illustrate this, we’ll look at Facebook compared to another site, Classmates.

What makes Facebook valuable is its large (and exponentially growing) user base. Facebook can charge advertisers a premium for ads placed there, and if they make it paid-per-view, they make even more money, because they get lots of eyes on them. There are people who, like me, pay for very few websites (the only one I’m currently paying to use is Geocaching), and were Facebook a pay site, would not have signed up it. With this high user base, and high business value, comes the innovation - while few people I know like the new “stream” home page, there are things that Facebook can do that few other sites can match.

Contrast this with Classmates - this site has been up longer than Facebook, does pretty much the same thing as Facebook, yet is nowhere near as hot a commodity or as valuable a business as Facebook. Why is this? The fee model. Classmates requires a fee for an account (or at least they did when I looked at them, which hasn’t been recently).

If someone bought Facebook and changed it to a fee model, it would kill the business value of the site. Sure, you’d have people who got addicted to the free stuff and would pay to maintain their addiction, but you’d have other people (myself included) who would simply let the account go. I have other ways of doing pretty much anything that site can do. It’s nice to have it all in one place, but it’s not worth $3.95/mo to me. All this would severely stifle the growth of the site, thereby reducing its business value.

If this happened, there would then be demand - demand for another free bring-it-all-together social networking site. The entire science of economics is defined as the study of the allocation of scarce resources. Demand causes resources to be allocated - whether it was “iShare,” or “Friends and Family,” or “Facepedia,” some other site would sprout up that would provide the services that Facebook used to provide.

That being said - I don’t see Facebook going to a fee model, whether it changes hands or not. It just doesn’t make economic sense. And, if the owners decide to go that route, it still won’t be a big deal, as something else will rise up to replace it. Don’t believe the FUD. :)

* Fear, Uncertainty, and Doubt - rumors of impending doom not based in fact

On Government and Private Business

April 15, 2008   2:07 am

This past weekend during Sunday School, we briefly discussed the raid of the polygamist compound in Texas. During this discussion, one very good point was raised - those handling this situation need wisdom. Previously decided cases hold a lot of weight in the judicial realm, and while, by all accounts, what was going on at that ranch was illegal and immoral, they are claiming it is part of their religion. It is good that those people have been stopped - however, what is to stop the government from deciding that something most mainstream churches do is illegal?

That led the discussion to this story about a photographer in Albuquerque, New Mexico who refused to photograph a “commitment ceremony” between two people of the same gender. There are lots of ironies in this story, and I would expect that this decision would be quickly vacated / overturned / made null. Can you really legally force someone to photograph an event that’s illegal by nature? However, if it stands, there are much more troubling questions, some of which we have already seen. In California, a Catholic-run hospital was sued for refusing to perform gender reassignment surgery, and the state has sued the US government over a provision that strips Federal funds from states that force medical practitioners to perform or refer abortions.

During the course of the discussion, I took the (somewhat unpopular) opinion that a business should have the right to refuse service to whomever the business owner wanted. (I also did that a bit strongly at one point - if you’re reading this, sorry about that.) Someone asked “What if they say they’re not going to serve Jews?” My reply was that, if that was their stance, the word would get out, and those who found that abhorrent would also not patronize them, and they would go out of business. (And yes, I think I did actually use the word “abhorrent” in class… heh…) In further discussions with other people, including my wife, my position continued to be unpopular. I heard things like “What about people in the South not serving blacks?” and “I just think discrimination is wrong.”

I still cannot see the government requiring a private business to serve, sell, or perform any good, service, or person that the owner does not want. Why should I invest my money and time in an enterprise if the government is going to come and mandate to me how I do it? However, by the same token, I also feel that racial discrimination is bad. However, for anyone to say, unqualified, that “discrimination” is wrong simply doesn’t realize how much discrimination occurs on a day-to-day basis.

Let’s imagine I’m a photographer. I don’t like trying to get kids posed for a picture, so I create a policy of no more than one child per pose. That’s discrimination - I am discriminating against large families (though not completely - they’re just not going to get an entire family portrait from me). Maybe I don’t want to photograph some people because I feel they’re unattractive - do “Uglo-Americans” have a right to have me photograph them? Maybe I’m a really popular photographer, and I can’t be in two places at once. I’ll have to be discriminating in how I set up my schedule. There simply isn’t a scenario that convinces me that the government has an overriding interest in forcing me to photograph someone I don’t want to. The “right to photography” is nowhere in the Constitution.

Now - let’s put the brakes on that and look at the government. While I believe that a business owner has the right to discriminate pretty much however he or she feels like, I also just as strongly believe that the government should not be in the discrimination business. Equal protection under the law should be just that - equal. Firefighters should (and do) respond just as quickly to fires in desirable neighborhoods as they do to fires in undesirable neighborhoods. Everyone should (and does) have access to their legislators, and the right to vote for the ones they think will best represent them. Everyone should have access to government-run educational facilities, with the same requirements for everyone. (OK, we need to work on that last one…) The bottom line is, government should not discriminate on anything other than merit and scarcity (i.e., we can’t give everyone $1k if we don’t have it).

But, in reality, this isn’t the way it is; I alluded to it above regarding education. When the government starts trying to play identity games, “level the playing field,” or any other sort of tinkering, they invariably get it wrong. According to the NM government, this photographer “violated human rights” by refusing to photograph a same-sex commitment ceremony. Would the pastors of my church be guilty of the same if they refused to officiate one? In finding this photographer guilty of discrimination, the state is, in effect, discriminating against her free exercise of religion. (See? Every choice is discrimination!) This is the danger of giving the government the power to decide what’s “good” discrimination versus what’s “bad” discrimination.

The solution? From my view, I believe that there are very powerful forces at work in the economic marketplace. Eliminating “Jim Crow” laws was a good thing - they were a violation of the equal protection clause. Forcing state-run universities to integrate was a good thing - again, equal access to government resources. Forcing businesses to cater to those to whom they do not wish to cater? That’s bad. Sure, I believe that businesses shouldn’t discriminate based on race - but is it the government’s place to tell them they can’t? Some people think that discrimination based on gender is wrong; in fact, a few years back, there was a big kerfuffle over Augusta National not allowing women to become members. How many of those people would advocate my joining Curves? It’s all perspective, and because one person’s perspective may be different than another’s, the government should stay out of it.

To me, this is a heart thing. Sure, you can pass a law and make people comply, but all you’ve done is made people upset by forcing them to do something that they didn’t want to do. I believe in giving people enough rope so that they can hang themselves (figuratively speaking, of course) - if someone wants to open a racially-discriminatory business, that’s their own stupidity in eliminating a big chunk of their potential customer base. If someone wants to open the “No Purple Pants Club” and refuse to admit anyone wearing purple pants - well, it’s their money and time they’re pouring into the business. And, if someone wants to refuse to provide their goods and services to those they find morally reprehensible, more power to 'em.

In each of these cases, one of two things will happen. One, they may flourish as a business, which will prove there was a market for their goods and services, even without the people they excluded. Two, they will fail, and learn via the “school of hard knocks” that they shouldn’t restrict their pool of potential customers. Either way, the business owner gets out of his business exactly what he put into it, and I really don’t have a problem with that.

Debunking Democrat Demagoguery (Economically)

October 18, 2004   1:25 am

John Kerry and John Edwards (“Kedwards” hereafter) are making some significant claims about their plan for this country, and using some pretty strong but rather hackneyed rhetoric to get their point across. The term “demagoguery” is defined as “impassioned appeals to the prejudices and emotions of the populace.” Democrats are renowned for this, from the “New Deal” to Clinton’s famous “I feel your pain,” Democrats base a lot of their policies on what they can spin to appeal to emotions, rather than facts. Let’s take some of these areas, specifically some of those having to do with economics, and see why, I believe, Kedwards is wrong for America.

Tax Cuts for the Rich - This has been a favorite claim of Democrats for ages, and it shows a basic lack of understanding regarding basic economic principles. The biggest thing that Democrats have wrong is their belief that taxes are the governments, to be “given back” to the people. Taxes are the people’s money, given to the government to fund needed programs, such as national defense, highways, etc. Tax cuts are not “giving back,” they are letting people keep more of their money.

Another problem with their rhetoric is that speaking of taxes in dollar amounts is inherently going to sound skewed to someone who isn’t paying attention (which, sadly, represents a lot more of our current electorate than we’d like). Imagine that there are two people - one makes $10,000 a year, and the other makes $200,000 a year. In this imaginary world, everyone pays 10% taxes. This means that person A pays $1,000 in taxes a year, and person B pays $20,000. Now, here come the media reports about a budget surplus, and Congress and the President decide to cut taxes by 1%. Person A saves $100, and person B saves $2,000 - in both cases, a 10% reduction in the total amount of taxes they have to pay. If you use Democrat thinking, person B got 95% of the tax cut.

Tax cuts benefit everyone. Those who make more, by virtue of simple mathematics, will receive a larger amount reduction whenever tax rates are lowered. However, these are also people who will use this money to reinvest in our economy, either through business expansion (which leads to more jobs), investments in stocks and bonds (which helps fund the economy), or through charitable donations (which improves the quality of life in local communities).

Another point on tax cuts - sometimes a reduction in the tax rate can actually increase tax income. If done correctly, tax cuts don’t have to be “paid for,” they pay for themselves. If a gas station lowers its price for unleaded gasoline by $.02 a gallon, they will more than make up for their $.02 loss with their increase in volume. Taxes work the same way - when the rates are reduced, the economy grows; so, while we all pay less rate-wise, we pay more in real dollars. Everyone wins.

Minimum Wage Increase - Yet another favorite topic, and another place that Democrats don’t understand economics. A wage is a negotiated contract between employee and employer. Most often, all negotiating is done on the part of the employee, as an employer would say “Here’s a job, and here’s the pay - want it?” Very few people are raising families on minimum wage, and in their “average annual minimum-wage salary” statistics, the Democrats are including teens, college students, and spouses who work as secondary wage earners in their household. When the government interferes in business by forcing them to pay their entry-level workers more, what do the businesses do? There are either fewer entry-level jobs, or the products and/or services the company produces begin costing more.

There is one segment of the population who benefits from minimum-wage increases - union members. Many union contracts stipulate their wage in relation to the minimum wage - when it increases, their wages increase as well.

Corporate Tax Loopholes - Again, more cries of how these evil corporations are trying to get out of paying their taxes. And, yet again, this is a place that the Democrats don’t just get it. They miss it because, economically, there is no such thing as a “corporate tax”. There is a finite amount of money in this country, and corporations only have money if they extract it from the general public. The most common method is by providing a good or service for which people will give their money. With this money, they have to cover their operating expenses, the cost of the good or service itself, the cost of paying their employees, and what is left is called “profit.” Under the current structure, they also have to pay taxes with that money, which eats into profits. The company sets their price based on a few factors, two of which are desired profit, and the market value of their good or service.

With that, what happens when the government takes more money from the corporation? Who pays that tax? The general public, that’s who. Corporate taxes make everything cost more, while giving no benefit to the economy whatsoever. All they do is penalize success.

(Things have been pretty crazy here lately - lots of work and family events, with little free time. I hope to have time to attack some other lines from Kedwards in the next few days.)