Wacked Econ

The Filter makes an important point about rhetoric and how clever economists make “innuendo towards government” but use “words that might also imply laissez-faire.”

This tendency is even worse among conservative think tanks. If I hear one more “market-based” solution or “public/private” partnership, my head will explode. Something is either left to the free market or government is involved, it cannot be “based” on the market -the socialists/communists big claim was that the government could use scientific and mathematical methods to replicate market movements. How is basing public policy on the market any different?

A public/private partnership is little more than corporativism or fascism-light.

Of course, the Heritage Foundation coming out with a policy paper titled “A Fascist-Light Proposal for fixing Social Security” probably wouldn’t win it too many friends, but at least it would be honest.

Best quote I’ve seen explaining the mortgage crisis and inability to price financial products accurately:

There is a wonderful parallel here to the collapse of the Soviet Union. As the great Austrian economist Ludwig von Mises argued almost 100 years ago, central planning inevitably fails because there are no market prices to allocate resources. Market prices can only be the outcome of actual market transactions among buyers and sellers. Planners used mathematical formulas to value resources, especially capital. Now Wall Street wizards have imported Soviet thinking to allocate financial capital. Is it any wonder that it failed?

And is it any wonder Wall Street apparatchiks went running to Washington for help when things went sour?

Economist Bryan Caplan has an op-ed in The New York Times that pretty much mirrors my view of the McClinton gas tax proposal. While it won’t benefit consumers much, if at all, eliminating the tax is still a good thing.

Even a “giveaway” to the oil industry sets a positive course for the future. During the last crisis, the industry was a scapegoat for scarcity. Politicians scrambled to stop oil companies from profiting from the crisis, even though temporarily high profits end shortages by giving businesses an incentive to figure out how to increase output.

Focusing on the fixed short-term supply of oil seems to ignore the long-term benefit of encouraging oil companies to find more reserves and invest in innovative energy solutions.

Arnold Kling explains why the gas tax holiday will help suppliers not demanders of oil:

We can’t get more gas out of the wholesale market, because for the next few months the supply is essentially fixed. So what’s actually going to happen is that the gas stations are going to bid up the price of gas on the wholesale market. In fact, this process is going to reach a point where in order just to keep my share of gas, I’ll have to bid higher by $.18. The net result is that more money goes to refiners, my gas station pays less in taxes, but we pay more for gasoline wholesale, and the consumer gets no benefit.

Again, I have no problem with consumers not seeing any cut in prices at the gas pump. The refiners are consumers too and since investing in refineries is a regulatory nightmare, I’m sure they will take their extra profits and either spend or save them. Either way, the economy will get the benefit of the government gobbling up a smaller share of the country’s wealth.

More broadly, why are all these “free market” and supply side economists suddenly against a tax cut? Sure, suspending the gas tax only benefits a select few in the refinery and oil discovery business, but an income tax cut only benefits those who pay income taxes.

According to the Tax Foundation about 121 million Americans, 41 percent of the population, pay zero or negative (receive money) Federal income taxes. Of course, lowering income taxes directly benefits more people, but it is still a select group -like oil refinery employees.

If someone really favors smaller government, wouldn’t it be advisable to support any policy that shrinks governmental revenues and power even the slightest amount? And, as Caplan writes, although this isn’t a great proposal it is certainly better than the populist nonsense that is sure to follow.

Politicians are constrained by public opinion. When the public rejects the mundane explanations for high gas prices — big boring facts like rapid Asian growth — politicians aren’t going to correct them. The best we can expect is for Washington to try to channel the public’s misconceptions in relatively harmless directions. We could do a lot worse than the gas tax holiday; in fact, we usually do.

That said, what I feel is really driving (I’m sorry, terrible, I know) economists’ rejection of the plan isn’t theory but personal preference. Mainstream conservative economists like Greg Mankiw are on record in support of the gas tax. They couch their position in the language of externalities, accusing cheap gas of hurting the environment and crowding the highways. I am still suspect of the environmental argument, but even assuming there is a connection I think improving liability laws and tracking individual emissions are better alternatives.

As for crowded roads, why not try a direct approach like, hmmmmm…charging a fee for access to the highways. I think this is called a “toll.” Turning highway management over to private road companies would align incentives to concentrate on reducing congestion and accidents.

The most disingenuous argument is that it would help solve the looming budget crisis. This is like taxing cigarettes to cover government spending. If the goal is to stop Americans from driving so much you then can’t expect tax revenue from selling gasoline to save Social Security and Medicare.

Another contention is the U.S. needs to be energy independent for “national security.” I have trouble with this thinking because it contradicts the importance economic theory gives to the division of labor and indirect exchange. If being independent is good for national security, shouldn’t we just stop trading and produce all our own steel, water, microchips, etc.? Of course not, because we would be the poorer for it -to understand the logic just imagine if you had to self-produce everything you consume in a single day. How much of what you use, wear and eat would suddenly vanish or become prohibitively expensive in terms of time invested?

Repeating the point I made in a previous post, I suspect most of the pro-gas tax stances from economists have less to do with economics and more to do with their lifestyle preferences.

She just can’t help contradicting herself (see here and here). First, while dissing Hillary for pandering to the electorate by proposing to suspend the gas tax, McArdle claims that this election, Americans are most concerned about “the troubled housing market, and the short supply of oil.”

Ok, fine. But then, in an over-written, jargon-filled post attempting to explain why suspending the gas tax is bad policy, McArdle writes:

Oil companies can discover more oil, but they are hard put to increase refinery capacity, because no one wants any refineries near anyone; virtually all of our refineries are decades old, with improvements coming from throughput enhancement rather than new built capacity. The limiting factor on gasoline right now is refinery capacity, not oil supplies.

According to McArdle, suspending the gas tax would allow companies to increase the supply of oil, which is now a bad thing because the real problem is a lack of refineries. Except, I thought Americans wanted more oil?

Anyway, in the next few lines she reveals (finally) her real reasons for not wanting to suspend the gas tax: oil companies “are already making really quite a lot of money. We don’t need to give them even more.”

Ummmm…why not? Clearly, I’m not smart enough to understand, but fortunately Megan is there to decide which industries make too much money -BTW, is she applying for a job at the European Commission’s competition regulatory board?

And then, she adds that the gas tax, by raising the price of filling up your car “encourages people to invest in more fuel efficient cars, which I think iis also good.”

Wonderful, I’m glad McArdle thinks smaller cars are better, but that is just her preference not a logical reason for keeping or eliminating the gas tax.

Matthew Yglesias discusses first and second tier comic book characters. He is right that the first tier is reserved for Spiderman, Superman and Batman. The second tier, however, is where most fans’ favorite heroes reside. A list of the best second tier super-powered wonders that haven’t had a movie made about them:

Green Lantern
Flash
Silver Surfer (his appearance in the Fantastic Four movie doesn’t really count)
Dr. Strange
Thor

These are just the first that came to mind. I’m sure there are others.

Bryan Caplan sums up why most libertarians I know, myself included, hope Hillary beats Obama for the Democratic nomination:

In terms of policy, Hillary and Obama look extremely similar to me; I prefer either to McCain because I think they’re more likely to get the U.S. out of Iraq. But Hillary worries me a lot less than Obama because leaving Iraq is likely to be her only major political success. Hillary has a built-in army of enemies, and she’s making more enemies every day. (I’ve talked to Obama supporters who hate her more than Rush Limbaugh does!) Obama, in contrast, is genuinely likeable. At least during his honeymoon period, he might be able to unite the country behind a long list of “progressive” reforms. And that’s what makes him dangerous to liberty.

The ability to “get things done” is exactly what liberty-loving Americans do not want from their politicians. Passing legislation means more regulations, larger bureaucracies and greater interference in individuals’ personal and financial lives. No thanks. And with that, a big GO Hillary! Bring gridlock to Washington. Please.

This from The Boston Globe:

A woman accused of running down a man in her car after a Red Sox-Yankees argument in a bar never hit her brakes as she accelerated toward the small group he was in, a prosecutor said Monday.

Leaving aside the tragic aspect of this event, I wonder if government needs to step in and regulate baseball rivalries. Given its intense nature, subject to unpredictable market forces and uninformed participants, the Red Sox-Yankees hate-fest might need the calming hand of a state bureaucrat to avoid future run-downs, bar fights and general emotional distress among fans.

I suggest imposing a tax on all other fan bases to subsidize anger management courses for Boston and New York baseball supporters (Mets not invited).

Si si si, asi gana Madrid! The Real Madrid football (soccer) club won its 31st Spanish League title last night. Congratulations to all Madridistas!!

In its leaders section, the Investor’s Business Daily profiles Ludwig von Mises and his contributions to economic theory and individual liberty. It isn’t often a major newspaper makes room for the greatest economist of the twentieth century so our hat is duly tipped.

Because Mises developed a consistent set of principles based on a logical analysis of human action, he went to the root of political and economic problems, exposing unpleasant truths along the way. His wife Margit says:

‘Lu’s writings were hated by socialists of every type: Nazis, communists, fascists and, as I later found, American socialists as well,’ his wife, Margit, wrote in “My Years With Ludwig von Mises.”

I doubt there is better proof of Mises’ unparalleled insight than the fact all three variations of socialist hated him. Anyone proposing the expansion of state power is a socialist. That linked Nazis with communists with fascists. All three ideologies distrusted individual thought, action and initiative. All three felt “expert” leaders using the latest science were better placed to direct society -personal liberty be damned. Americans ought to keep this in mind when listening to Hillary, McCain or Obama.

As grateful as I am for the IBD’s article, I must quibble with the following line:

Despite being out of step with the spirit of his times, von Mises triumphed.

In what way did Mises triumph? He used logic to develop his theories and lost out to the math-centered approach that has come to dominate economics departments around the world. This was part of why he could never find an academic post in the United States.

As the article explains, Mises “correctly predicted the stock market crash of 1929,” and yet Wall Street and the Federal Reserve and mainstream economists ignore his ideas on credit expansion and the business cycle. As Frank Shostak writes, most people in the 1920s were:

Looking at the price level and growth rates as indicators of economic health. Mises’s theoretical insights led him to look more deeply, and to elucidate the impact of credit expansion on the entire structure of the capitalistic production process.

Hmmm…where have I been hearing about the dangers and damage credit expansion and easy monetary policy can inflict on an economy? Just as he did in 1929, Mises would have predicted the current home lending mess. And still no one listens. Well, almost no one. Fortunately, one former Fed-man has been paying attention. Robert Formaini, once a member of the Federal Reserve Bank of Dallas, explains that:

Mises’ 1912 book, “The Theory of Money and Credit,” is still valuable. He says that his old Fed colleagues aren’t much for reading anything but data, but that the book would be helpful to them.

“They should read it. I don’t know if Bernanke has read it, but he should,” Formaini said of Ben Bernanke, the Federal Reserve chief.

Yes, yes he should. But he won’t.

Mises didn’t only foresee the problems printing money out of thin air would cause. He also knew that, operating without a price system to allocate resources, the Soviet Union was doomed to collapse on itself. While other economists were fooled by the data coming out of the communist block, Mises knew no single governing unit could organize production to satisfy the wants and needs of millions of individuals. Again, he was right.

To end, a quote from the great man. Describing pro-state politicians of every stripe, Mises said:

They promise the blessings of the Garden of Eden, but they plan to transform the world into a gigantic post office.

So the next time McCain talks about national greatness driving the U.S. to save the world, or Hillary details the wonders of government health care, remember they couldn’t even deliver letters on time.