Tiger Woods Makes How Much??

“I can’t believe that America pays athletes and movie stars so much!”

The presumption in this statement is that “America” is some single entity that has decided it values athletes more than police or teachers and that if only “America” changed its mind, this could somehow be “fixed.” However the reality is that in economics, having an available substitute usually drives prices down. For example, despite the importance of Police Officer Smith’s job, he is far easier to replace than Michael Jordan. The same can be said for teachers, nurses, firemen and even soldiers. In most cases, there is no shortage of applicants possessing the necessary skills to fill these important roles.

The movie-star effect is also a product of mass media. There are two ways to get rich: bring a million dollars’ worth of value to one person, or bring a dollar’s worth of value to millions of people. When an actor’s effectiveness was limited to the number of people you could fit in a single theater, their economic position was similarly poorer. Once they were able to bring their performance to millions of people through movie reels, their value and wealth increased dramatically.

So, why are athletes paid so much? Because you, me and millions of other people are willing to pay a few dollars for their performance, and that adds up. But when someone complains about their salaries, what are they suggesting? Are they willing to launch a campaign to convince millions of people to stop paying to watch sporting events? Or are they suggesting that by fiat, dictate or some other law we should place a cap on how much we value those individuals?

I’m often torn on whether people who make such statements are simply ignorant of basic economics or truly desire to wield power over others to bring into existence their own world view. I’d prefer to think it’s the former.

Regression to Serfdom

The market has failed. That's a frequent justification for expanding the powers granted to politicians. But how has the market failed? By who's standards? When we miss a hole in one do we talk about "physics failure?" Or if we can't balance the checkbook is it a "failure of mathematics?" What it really means is that people's interactions haven't produced the results the speaker wanted. But how often do these same folks talk about legislative failure? About programs and politics that have unintended consequences?

These days it is rare that people seize power by force of arms. The people violently wrested power from the ruling class in a series of revolts over hundreds of years. Now, the approach of the ruling class is to convince the people to freely gift that power back to the government, where it can be conveniently bought and sold. As I've said before, when you hear "the free market has failed" just mentally substitute "freedom has failed" and you'll begin to see through the lies used to convince us to return to serfdom.

"Is not this simpler? Is this not your natural state? It's the unspoken truth of humanity, that you crave subjugation. The bright lure of freedom diminishes your life's joy in a mad scramble for power, for identity. You were made to be ruled." - Loki

The Laws of Supply and Demand

"Profits don't create jobs, demand creates jobs!" is the mantra I've been hearing lately to justify Keyensian intervention in the market. The flaw of course is that in a market free of political meddling, the two are inseperable.
Profits are the signal and incentive to increase production to meet demand. Profit indicates consumer preference for using scarce resources in one manner verses alternatives. People will enter or reinvest in a market so long as they see a profit opportunity. Eventually demand is met, prices and profits decrease and the niche stablizes (it matures from a "growth" industry to a "value" industry).
Interfering with those signals leads to distortions that hurt the consumer. If you artificially depress profits, there is no incentive to increase production and you end up with shortages, which then leads to calls for gov't incentives (witness the effect of Medicare price controls on people's willingness to become doctors).
If you artificially increase profits, you end up with surpluses of the wrong things, thus diverting scarce resources from other things that you or I would really want (for example, the Volt which was artificially incented yet isn't any better than other much more efficiently made and cheaper "green" cars; and now it looks like Uncle Sam will have to buy the excess with our taxes).
As Adam Smith pointed out, profits in a free market are transitory but vital hints about what to produce (or what degree to major in). Government depressing profits hurts us, and government protecting profits hurts us. As in many cases, the best approach would be one of laisse faire. You and I should make the decisions that affect our own lives, not politicians in Washington.

The Happy Fantasy

A common mantra that I’ve heard from my left-leaning friends is that a) everyone should be able to earn a “decent” living doing whatever they enjoy and b) that everyone deserves to have a “decent” car, house, clothes, vacation, etc.  Blame touchy-feely high school guidance counselors for the first fallacy, which has directly led to the disillusioned masses of psychology, fine arts and literature majors populating the Occupy Wall Street movement.

The hard facts of life are that not everyone can do what they enjoy most for a living.  Otherwise there would be far more rappers, football players and fly fishermen than we would know what to do with.  Meanwhile, sewers would go uninspected, crime scenes would go uncleaned and garbage would collect by curbside.  Seriously.  If it weren’t for an appealing paycheck (or a lack of other opportunities), who would wake up in the morning and say “Gee, I really want to muck through people’s feces today”?  Similarly, jobs that are stepping stones to bigger and better things would also be avoided entirely.  Intern?  Nope, I want to be CEO.  Apprentice?  Just let me rig that wiring.  Draftsman?  I’m ready to build skyscrapers.  If you enjoy your work, consider it a bonus.  Otherwise, many of us go to work each day at a job we don’t mind doing (too much) so that we can do the things we enjoy (such as fly fishing).

The second fallacy lies in the varying standards of what constitutes “decent.”  If you ask ten people to describe a decent car, you’re bound to get twelve answers.  And there are folks who are willing to trade a less than decent car in exchange for, say, vacationing in France every year.  As any marketing major will tell you, tastes vary widely across the spectrum, because value (like beauty) is truly in the eye of the beholder.  Systems that try to meet everyone’s needs with a one-size-fits-all approach generally do it badly, leaving no one satisfied.  As the saying goes Comrade, it comes in two sizes: too big or too small.

The endless summer, where everyone lives in a mansion and gets paid to surf and look good, exists only in imaginations and fantasies.

 

Faust's Bargain: Charity and Government

The latest edition of Columbia includes an article by Alton J. Pelowski entitled "In Defense of Life, Love and Freedom" describing the problems when a private charity becomes dependent on public funding.  Similarly, Catholic Charities in Illinois are closing their adoption services because of new requirements to change their screening criteria to accept gay couples in order to receive government funding.

Although I empathize with their distress, American Catholics who have traditionally supported government-sponsored social programs have only themselves to blame.  Non-profit organizations who have been happy to trade arduous fund-raising for siphoning tax revenues are likewise guilty.

"Free money" is always hard to resist, but there's always a catch.  Once you've accepted the money you lose the freedom to run your organization as you like (which is why some organizations like Hillsdale College eschew public funding).

Indeed, the Catholic charities are faced with a dilemma of their own making.  If they refuse to  compromise their principles for money, they must either close their doors or return to the days when they relied on their own voluntary fund-raising efforts.  The latter option is obviously more difficult; a consequence of diverting funds from private donations to publicly mandated tax revenue.

Instead it looks like they're taking the easy option: quitting.

Freedom in the Market

When people say “Capitalism has failed,” mentally replace “Capitalism” with “Freedom” and then consider what they’re saying. After all, capitalist was the label used by Marxists to describe those who believed in the free market. Even “free market” is a misleading term because it conjures up an image of some separate entity acting on its own without our involvement. It would be more accurate to describe it as the freedom to act within the market, i.e.: the principle of free exchange.

Capitalism is just another word for economic freedom.

Of course those calling for the eradication of capitalism aren’t asking to give up their own freedom. They still want the right to negotiate their wages and purchase (or not purchase) products as they see fit. What they really want is the ability to negotiate other peoples wages, force others to agree to their desires, and split the tab for things that they want to have but don’t want to pay for. They’re eager to see shackles placed on others, not realizing they may wind up wearing them in the end.

“He that would make his own liberty secure must guard even his enemy from oppression; for if he violates this duty he establishes a precedent that will reach to himself.” - Thomas Paine

Freedom of Consent

We have to remember that the people in government are just like people in the corporate world.  They're ultimately self-interested.  They need to feel the connection between their actions and their consequences to make good decisions.  The difference is that we've entrusted them with coersive power; the authority to use force to compel us to do or not do certain things.  And power once ceded is rarely given back.  We really ought to remember that before inviting them into every aspect of our daily lives:

The problem... is that government is no different from any other organization in society -- it seeks its own aggrandizement. AT&T, General Motors, and Microsoft would love to have world monopolies, controlling all the resources and expanding into every corner of people's lives. But they are limited by competition, the dynamics of the marketplace, and the need to win people's consent in order to market their products.

Government is different. It expands by fiat, through legislation, through taking advantage of emergencies, and by declaring that private entities can't be trusted and government intervention is necessary. Most of all it grows by raising taxes and hiring more and more people so that soon its voter base approaches a majority of the electorate.
http://spectator.org/archives/2011/09/26/the-moochers-credo/

Let's face it.  It's easier to convince a majority of 435 people in Washington D.C. than it is to try to win the consent of millions of consumers exercising their freedom in the market.

Bad, Productivity! Bad!

Are Workers Too Productive?

Increased productivity is exhausting the workers?  Yet the source of the increase in productivity is tools which multiply the effects of their labor... which creates more output for the same effort. Really?  Yeah, that doesn't quite jive when you think about it...

You can find similar doom-and-gloom predictions in historical documents from the agricultural revolution and the industrial revolution (and I'll bet all the way back to the Bronze Age "Woodcutters will be WAAAAY too productive!"). Times of change often result in displaced workers, which eventually frees up enough people to shift into new or expanding industries. Productivity in one area or another may create saturation in that particular market, but I can't believe that we've exhausted the capacity of human demand. First, that doesn't mesh well with accusations of "boundless capitalist greed" and it also conveniently ignores large parts of the world where people's wants and needs for goods and services are certainly not being met.

The big factor here is globalization. Localized industries (like retail and other services) remain little changed, while easily transferred industries (like manufacturing and export) shift to developing countries. But with 15% annual salary growth in India, how long do you think it will remain profitable to shift jobs there? The short term impacts are unsettling, but the long term result will be more countries with populations that produce things that we want and that want things we produce. The alternative is to condemn entire nations of people to living in squalor and subsisting on handouts: much better to allow them the dignity of work.

Grading Solyndra on the Adoption Curve

So Solyndra goes bankrupt and the taxpayer is left holding the bag, to the tune of five-hundred million dollars ($500,000,000).  This really isn't a surprise and is a stellar example of why the free market, rather than government, is much better suited to speculative investment.  This is especially true in the case of technology.  Now, I'm a dollars and sense kind of guy, and I'll adopt "green" technologies when it makes sense.  Kinda like the commercial where all these folks are badgering this guy to "save the planet" and finally the technician says "The money you save on the washer will pay for the drier" and the guy says "Why didn't you say that in the first place?"

For example, ten years ago I looked at hybrids and there was just no way; they were too expensive.  Five years ago I looked again and I actually considered it; but the numbers still didn't quite work out.  I imagine in a few years the return on investment will be there and I'll buy some sort of low fuel consumption vehicle.  Until then, I'll keep driving my 27 mpg sedan.

This is known as the technology adoption curve:















Full Size Version

Once something becomes indisputably efficient and easy to adopt, it becomes mainstream and the majority of consumers buy it.  Until then, people buy the technology for other reasons: because it's "cool" or a status symbol, they like "new" things or because they want to make an investment (and possibly make a profit).

Those early adopters can afford to throw money away, and it's their choice to do so.  However, when government gets into the game it makes ALL of us into early adopters, whether we want to or not, whether we can afford it or not.  This sort of "venture cronyism" is a bad parody of its free-market equivalent.

I accept that businesses fail.  That doesn't bother me.  What makes me mad is that someone else forced me to cover a throw of the dice and they came out snake-eyes.

Successful Subsidized Energy? Not so fast...

The news coming out of the German energy market is a fascinating case study but it follows the typical pattern. Central planners decide they want to influence the supply and demand by manipulating producers and consumers. They are successful in that they get more of what they subsidize and less of what they penalize. However, they also have unintended consequences. In this case it is surpluses and shortages, reminiscent of the gas shortages of the 70s in the US and numerous other examples in the USSR. Laws are in place preventing the individuals from making adjustments to address the imbalance, in this case compulsory preference for the intermittent energy sources (solar and wind). Consumers still need a reliable source of energy that can pick up the slack when solar and wind are unavailable, but government interference is discouraging investing in conventional plants. Since the people are bound by law from fixing the problem it falls to the central planners to develop a solution. Their answer is as typical as it is ironic; subsidize coal plants.

But wait! Consumers are getting paid to use energy! They're getting it for free, right? Well not exactly. The subsidies aren't free; they are simply obfuscated by the tax code. Furthermore they represent a compulsory cost; what people pay to subsidize the energy industry is disassociated from their purchasing choices or their actual energy use.

The definition of insanity is doing the same things and expecting different results. Central planning consistently results in shortages and excesses, increased collective costs borne by the taxpayer, disenfranchising of the consumer and empowerment of the centralized planners and their crony capitalist / special interest lackeys. This latest example from Germany is no exception.

http://www.bloomberg.com/news/2011-09-29/utilities-giving-away-power-as-wind-sun-flood-european-grid.html

Financing a $447 Billion Stimulus Injection

A recent article phrased the new stimulus plan as “injecting $447 billion into the economy,” which made me stop and think. Where exactly is this money coming from? I doubt the politicians in Washington are going to pay for it out of the vaults at Fort Knox (which would only cover about $278 billion or a little over half the bill anyway). That just leaves us with the three usual suspects; taxes, treasuries and the printing press.

Raiding private investment capital, ie: raising taxes, in order to “create jobs” is absurd. If the money was actually directed towards funding projects, it would simply mean diverting money from privately planned investment into politicians’ pet projects (a time-honored way of ensuring reelection). This plan will also use that money to extend unemployment checks, which is just as foolish. I would rather let someone buy a boat, thereby paying someone for building the boat, then tax the money away and hand it out as an unemployment check. However, this plan also includes tax cuts (without accompanying spending cuts), which leaves us with the other two options.

For the past few decades, we’ve gone to foreign investors to finance our government spending. The problem with this approach is two-fold. First, by competing for foreign investment dollars we crowd out private investment. In other words, businesses that are looking to finance expansion and real job creation are competing with the Federal government for the same scarce resource of investment capital. Secondly, those bonds incur interest payments down the road. That interest will have to be paid in the future from the same three sources (taxes, debt or inflation) which is the sort of kick-the-can politics that Washington D.C. loves.

That leaves the final source of funding; the printing press. The treasury prints the cash to cover the portion of the debt financed by the Federal Reserve. In simple terms, printing new money makes the money in savings and circulation worth less. Some people support this, since it makes our products cheaper for export. However, it makes everything we import (which is quite a lot these days) more expensive. It also hurts people living on fixed incomes and makes a joke out of long-term investment planning. In other words, it contributes to job-killing instability.

“Injecting” $447 billion really means deciding between taking domestic investment capital, competing for foreign investment capital, and pillaging our remaining savings. Instead of reactionary short-term fixes and more government controlled pork-barrel projects, we need to be thinking long-term. Stop spending taxes frivolously. Stop jerking the economic steering wheel by meddling with the currency. Return control (and money) to consumers and small businesses.  Let them drive the economy the way they’ve driven it since our national inception. They don’t need to be “stimulated” to make that work.

Make Mine Freedom

This is a fantastic cartoon.  It was true sixty years ago, just like it was true two hundred years ago and just like it's true today:

http://nationaljuggernaut.blogspot.com/2009/09/this-cartoon-seemed-far-fetched-in-1948.html