Archive for the ‘Economics’ Category

Why Not Give Them Spoons?

Economics is a topic that seems particularly susceptible to ideologically-driven emotions overtaking reason.

With that in mind, the Assume a Can Opener category is supplemented with illustrations of seemingly logical propositions which, upon further examination, fall short. They demonstrate the need for critical thinking, and highlight those who count it among their achievements.

This one gives opportunity to recognize Milton Friedman, a great mind in 20th century political/economic thought.

[O]ne is reminded of an incident in an Asian country where Milton Friedman upon arrival to a public works program finds that workers are using only shovels and not any earth-moving equipment. Upon questioning about this lack of use of heavy equipment, Friedman is told that this was a public works program and the aim is to employ as many workers as possible. Friedman then quips, “why not give them spoons to dig?”

Source: World Bank

[ The story has been recounted in somewhat different variations, but with the same punch line, in a wide range of publications, from the WSJ to the Huffington Post. PBS Nightly Business Report described it as possibly apocryphal. I looked for an authoritative source but was unable to find it, so chose a version to my liking. No matter the origins, it is insightful. ]

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What is a “Special Interest?”

In a daily mailing from Silicon Valley Mercury News, the following blurb caught my attention:

The predicted flood of money behind Proposition 23 has yet to materialize. With barely more than two weeks to the election, opponents of the controversial ballot measure to suspend California’s landmark global warming legislation have far outpaced the proponents in fundraising. As of Thursday, the No on 23 campaign — a coalition that includes environmentalists, venture capitalists, social justice groups and some of Silicon Valley’s hottest cleantech companies — had raised $19.6 million while Yes on 23 had raised $9.1 million.

It was the innocuous description of those raising money to defeat the proposition that stood out.  They are a “coalition” not “special interests.”  It reminded me of something I once read (believed to be from George Will but couldn’t be found) that can be paraphrased: A special interest is a group that contributes to the other guy’s campaign. Those who contribute to mine are constituents.

To be fair, the full article includes this quote:

“It appears that the billionaire hedge fund manager and the venture capitalists — some from California, some from other states — who are bankrolling the No on 23 campaign have decided that defeating Proposition 23 is a good investment that will reap them huge returns,” [spokeswoman for Yes on 23] Mangels said. “Investing in No on 23 is the ultimate self-interested political ploy that will help the rich campaign contributors get richer and make it even harder for struggling California families to make ends meet.”

The article lists Thomas Steyer (hedge fund), John Doerr (and wife Ann) (venture capital), and Vinod Khosla (venture capital) as 3 of the top 4 contributors against prop 23, having given $8 million to the cause. There is no hand-wringing about the probable self-interest of the donors at the expense of regular California citizens.  There is no hue and cry over “special interests” buying our democracy.

There should be yet another layer concern.  Presumably the listing of John and Anna Doerr is because that money came from their foundation.  If so, those are tax advantaged funds paid, likely, to protect vested commercial interests. The probable “defense” of all this monied influence would be that the self-interest is incidental, that the intent is serving the “public interest.” Should that be blindly accepted?

I submit the reason for the blind eye is not simple hypocrisy, but willful ignorance.  If you think you can have a government that limits rent seeking only to those causes you approve, and that such monied influence can be kept benign, than you know nothing of human nature, nor the history of government.  Some would probably argue that lower carbon emissions are an unmitigated public good, the benefits to be enjoyed by all.  Tell that to the people who lose their jobs.

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Supporting Socialism Requires Head-In-Sand

This quote from Thomas Sowell just came across twitter (@ThomasSowell).  As is usual from the distinguished professor, it is exquisitely pithy. It also shines a light once again on the “assume a can opener” thinking infecting the ivory tower.

“Socialism in general has a record of failure so blatant that only an intellectual could ignore or evade it.”

– Thomas Sowell

Many years ago a textbook of his was assigned in a macroeconomics class I took at Northwestern University. I really must drag it out and read it again. (Otherwise, what was the point in saving it for the last 30+ years?)

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A Primer on Progressive Taxes

[Note: this is not my work. It’s something that was mailed to me during the “tax cuts for the wealthy” “debate” in the early Bush years.  Source unknown.]

Let’s put taxes in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this.

The first four men — the poorest — would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh $7, the eighth $12, the ninth $18,  and the tenth man — the richest — would pay $59.

That’s what they decided to do. The ten men ate dinner in the restaurant  every day and seemed quite happy with the arrangement until one day, the owner threw them a curve (in tax language a tax cut).

“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily meal by $20.” So now dinner for the ten only cost $80.00.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six — the paying customers? How could they divvy up the $20 windfall so that everyone would get his “fair share?”

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, Then the fifth man and The sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount,  and he proceeded to work out the amounts each should pay.

And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. Each of the six was better off than before. And the first four continued to eat for free.

But once outside the restaurant, the men began to compare their savings. “I only got a dollar out of the $20,” declared the sixth man, then pointing to the tenth, “But he got $7!” “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got seven times more than me!”.

That’s true!” shouted the seventh man. “Why should he get $7 back when I got only $2? The wealthy get all the breaks!” “Wait minute,” yelled the first four men in unison, “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up. The next night he didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!

And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.

Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straight-forward logic!

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