Debating Drug Laws & “War on Drugs”

It was notable that Guatemala’s President Otto Perez Molina, among other Latin American officials, called for a debate on the impact of America’s drug laws & it’s “war on drugs”.

As it is, decriminalization of illicit drugs has worked well in Portugal.

Given the waste of resources (US federal government spent over $15B in 2010 on the War on Drugs, about $500 per second for a total of $1T over 40 years), the loss of freedom & property due to “forfeiture laws” in the USA, the search for alternatives must occur, sooner rather than later. More urgently, there must be a solution to the continued bleeding of Mexico where “collateral damage” from the spillover of America’s drug war has cost the lives of tens of thousands of people.

Horror stories appear often in the USA about the appearance of SWAT teams disguised as “storm troopers” breaking into an innocent citizen’s home. When will people be more reflective about the harms to liberty & life & livelihood from aggressive state action against people engaging in vices that should not be crimes.

Mysteries of Job Creation

There is considerable misunderstanding about the process of job creation. Adam Smith provided clear insights into how specialization & division of labor is the key to economic growth that bring increased wealth & income along with more jobs.

Unfortunately, there are many, especially in the political classes, which believe that governments can “create” jobs. What they overlook is that if governments grant any payment or service, they must first take away the equivalent amount (or more!) from some other citizens. As such, a job “created” by government is offset by the lost opportunity of a job created elsewhere in the economy so that there can be NO NET gain.

In a recent article (Nick Hanauer, “Rich Americans Aren’t the Real Job Creators”), a self-described “capitalist” asserts that “that rich people in general — and business-people in particular — are not job creators”. He makes the uncontroversial suggestion that “jobs are the consequence of the feedback loop between customers & businesses”.

But he follows this up with an incoherent claim that suggests it is better to place a heavier “burden of taxes” on top income earners.

But it is not clear that there are efficiency gains from placing a greater relative burden of taxation on ANY group, whether defined by income or any other metric.

This assertion follows Keynesian logic that reflects outmoded thinking. Once when “rich” people did not spend a certain amount of their income, these funds could be removed from the economic system since individuals were allowed to hold gold money.

Since the “barbarous relic” no longer serves as money, funds not spent find their way into the financial system. In that sense, there is no real danger of “hoarding”.

In all events, it is chimerical to claim that handing over larger chunks of income to government can lead to efficiency gains or even boost aggregate demand. That is, unless one believes that governments spend money more wisely & with less “waste” than private individuals. It is easier & more fun to believe in the “tooth fairy”.

There is more confusion about the nature of capitalists & entrepreneurs. In understanding that a capitalist is the owner of capital, the following comment misses the point.

“Capitalists are idea creators, not job creators.”

Capitalists need not be job creators, as such, for it is entrepreneurial actions that are the basis of economic growth that leads to the creation of wealth & jobs.

He is on to something in another comment:

“Finding clever ways of securitizing imaginary assets may not create a lot of social utility. Finding cheap ways of converting the sun’s rays into electricity unquestionably does.”

It turns out that he senses a symptom of a problem that he cannot define. What has been happening is that central bank policies to push down interest rates so aggressively have caused a massive shift of wealth from the industrial sector to the financial sector.

In turn, this is the main story about the “rich getting richer” while other’s incomes have lagged. So, the massive increases in wealth & the skewed distribution of income should be seen as a matter of central bank policies rather than a market failure.

But an exploration & explanation for all this is a matter for a future blog entry….

Pretending to Act in Name of the “Poor” is Last Refuge of Scoundrels!

According to Boswell, Samuel Johnson said that. “Patriotism is the last refuge of a scoundrel.”

Were the good doctor to be alive today, surely he would change his declamation to note that declarations that political actions/intentions are to serve the “poor” is truly the last refuge of scoundrels (or morons).

For their part, politicians & bureaucrats try to hide rent-seeking behavior that enriches cronies or provides opportunities for corrupt diversion of resources behind the mantle of doing good for the disadvantaged.

Yet even if their intentions are pure, the certainty of unintended consequences leads to a waste of resources. In the case of India, its former Prime MInister Rajiv Gandhi admitted that about 10% of funds allocated to projects to help India’s “needy” persons actually reached them. (“If Central government releases one rupee for the poor, only 10 paisa reaches them.”)

Alternative to Raising Tax Rates & Controlling Government Spending

Governments around the world are scrambling to find new revenues sources by imposing new taxes or raising existing tax rates.

Citizens should resist this. A study by Christina & David Romer to examine the impact of changes in taxes for reasons other than to respond to conditions in the economy concluded that: “Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of 1% of GDP lowers real GDP by almost 3%.” (emphasis added here)

Before any new tax revenues are collected, governments should prove they can reduce corruption & waste while also reviewing whether the services they provide are really essential.

As for collecting additional revenues, other alternatives exist.

One way is to privatize ALL government properties & assets whether land or buildings used by any government organ, agency or ministry, but perhaps, not monuments. Those assets that are not sold off should be managed by a private company to insure that they cover operating costs, if not capital costs.

In turn, ALL government agencies or ministries at ALL levels, including federal, state & local governments would pay market rents to use buildings & property out of their budgets.

This will lead to more rational use of land & other resources by government. Imagine how much less land the military would require if it paid market value of land where bases are situated.

As it is, many government offices are situated on valuable real estate that consumes taxes, instead of generating taxable income. Since many government services that once required face-to-face encounters are & be conducted on-line, these offices can be moved out of city centers. And they almost certainly would be if the agency using the space was paying market rents.

It turns out that before introduction of federal income tax , the US government relied on excise taxes, tariffs or land sales for revenues. For example, federal land sales in 1836 were 48% of federal income.

Most obviously, the privatization process would generate substantial one-time revenues. Additionally, transferring these assets into private hands would also create a continual flow of additional revenues from property taxes & income earned from using the assets.

According to the Economic Research Service of the USDA, of 2.3 billion that comprise the USA land area, the federal government owns 635 million of them. In addition, state and local governments own 195,000,000 acres of land.

As such, private owners held 61% in 2002, the Federal Government 28%, State & local governments 9%.

The FY2012 Budget of the US put the value of all federal lands in 2010 at $408 billion. This includes National Parks, National Forests & National Wildlife Refuges.

The Bureau of Land Management manages about 245 million acres & has responsibilities for about 700 million acres of sub-surface mineral estate beneath Federal & non-Federal lands. It also manages 58 million acres of mineral estate beneath surface lands owned by non-Federal entities such as States and private landowners.

Additionally, the replacement value of federal government “building assets” was set at $1.26 trillion.

From an economic standpoint, transferring these assets out of the hands of government officials will change the incentives for their use. Once these assets are in private hands, the owners or managers will be accountable for assigning them to their highest & best use.

Are Regulatory Costs Crippling Economic Recovery?

Wayne Crews of the Competitive Enterprise Institute estimates regulatory costs to be about $1.8 trillion annually. (“Tip of the Costberg“)

This estimate is similar to one offered by the Small Business Administration but about 20 times the $88 billion in 2010 dollars that the OMB reports.

The Obama administration has imposed a raft of new regulations, including ObamaCare, that place a heavy compliance burden on private taxpayers and businesses.

Among the “usual suspects” is the baseline for annual economic regulation = $373 billion; a baseline for aggregate annual social regulations = $406 billion; regulations on the Department of Health and Human Services = $184 billion; Federal Communications Commission = $141 billion; Department of Homeland Security = $55 billion.

Added to these are costs of antitrust intervention, regulation of electricity networks & costs arising from constraints imposed on exploiting natural resources.

Central Banking, Economic Instability & Hyperinflation: Historical Evidence

With the FED & other central banks racing to engage in monetary pumping (e.g., Quantitative Easing), there are real reasons to be concerned about price inflation, & in the extreme, hyperinflation.

(Following Philip Cagan’s definition, hyperinflation begins when monthly increases in the price level are at least 50% & when monthly inflation rate goes below 50% & stays there for at least a year, the episode is over.)

In a Cato Institute working paper (World Hyperinflations), Steve Hanke & Nicholas Krus examine 56 episodes of hyperinflation over 250 years. It appears that almost all occurred under a centrally-controlled monetary arrangements, either by a central bank or government treasury.

In these instances, there was neither a de jure nor de facto commodity standard based on either gold or silver nor was there a constraints based on a foreign-exchange standard whereby the local currency was redeemable at a fixed rate aginst foreign currency(s).

This undermines arguments against “sound money” under either a gold standard or “free banking” on the grounds that they cause more monetary instability than is experienced with a fiat money monetary system guided by central banks.

America’s Fiscal Cliff….

Massive deficits & ballooning public-sector debt in the USA is NOT about too few people paying too few taxes or the rich not paying their “fair” share.

It is about waste, corruption, populism & rent seeking that leads to too much public-sector SPENDING.

As for allowing the Bush-era tax cuts expire, expect the following:

“Capital gains and dividend tax rates will climb to 20% & 39.6%, respectively, from 15%, & the top two income tax rates will climb to 38% & 41% (including deduction phaseouts), from 33% & 35%. The typical family with an income between $40,000 & $75,000 a year will pay as much as $2,000 more in 2011, as the 10% tax rate bracket & the $1,000 per child tax credit vanish. “

‎”No legal plunder: This is the principle of justice, peace, order, stability, harmony, and logic.”
~Frederic Bastiat~ (The Law, 1850)

"Taxation is theft."

Markets & Morality

While economists mount a convincing case that competitive markets lead to efficient outcomes, there is more ambiguity about the social & moral consequences of market activities. Indeed, there are concerns that markets tend to encourage immorality & reduce human dignity.

However, “free-market capitalism” is perhaps the best of all alternative systems that support & promote basic moral standards.

This is because markets encourage us to treat strangers as friends to support our own attempts to improve our own lives. In this sense, markets encourage social harmony & human cooperation that depend upon participants engaging in moral behavior.

“Moderating the Dark Side of Emotional Morality with the Bright Side of Market Morality”