On Wisconsin

The teachers are rioting in the streets and many other unions have joined them. They believe they are underpaid and the new contract will make them even worse off. To make matters worse (from their perspective) the government is no longer going to allow collective bargaining of salary and any non inflation pay increases must be voted on by the government. I will argue that they are either not underpaid or they should bust their own union.

Teachers claim they are underpaid, which I can only take as meaning they are getting paid below their fair market value. Fair market value is defined as a price both the willing supplier (teachers in this example) and the willing buyer (the state in this example). Said differently, if there was no coercion against either party, what salary and benefit package would the individual teachers agree to.

Unions are criticized by the vast majority of economists as artificially raising the salary of their participants. For example, if I was getting paid $1.00 an hour for a job if I joined the union, I would get paid $1.50 an hour. Of course, this extra 50 cents doesn't come from thin air it comes from the consumers of the good (the tax payers in this example). The extra cost might make the business uncompetitive but the state has a permanent resource stream.

Sometimes, unions do not artificially raise the salary. They work with management to deflate the members. The union bosses might know the management team, they might be wanting to move over to the company after their union job is up, etc. In this case, the savings are passed on to the consumer but the one who pays is the worker. They are paid less than they deserve to be for no reason other than the union is corrupt.

This leads me to my pain point. If teachers HONESTLY believe they are underpaid, they should get rid of their unions. This means they would do better to negotiate their contracts on an individual basis and they should do so.

The practical reality is that teachers likely aren't underpaid (as defined as current fair market value). They are probably paid above market wages as evidenced by teachers in charter and private schools being paid less than public school teachers. The teachers are really arguing that the public isn't properly valuing their services. This is a wholly separate debate and one they surely cannot win while just claiming to be underpaid. They should go on TV and try to boost demand of their product (which will raise their salary) by talking about how important their job truly is.

If demand is increased the salary will rise and there will be a new fair market value. If demand does not increase, it is disingenuous for teachers to claim to be underpaid and not remove their own union.

Capitalism part deux

Capitalism as a concept needs to be redefined. We need to start to break things up into subcategories of what kind of capitalism we are talking about. Rajan talks about managed capitalism in his book. China has state-run capitalism. We had free market capitalism, which wasn't that free market. Now we have some government ownership of some means of production but we won't stop calling it capitalism.

We need new words and names for all these types of systems so we can adequately discuss the. Sure, socialism and communism are dead but there are still too many types of capitalism to honestly compare them.

Thoughts on Capitalism/ Personal

So, I have tried to write three blog posts today but keep thinking about this one to the extent that I scrap whatever garbage is on my screen. This will be a longer and more personal post than this blog is accustomed to, so I apologize if that bores or frustrates you. This entry will discuss why I believe in capitalism and some of the reasons I am rethinking some of my positions into a softer capitalism.

I am a capitalist for two reasons. First, I believe it to be the most efficient ever devised by man at allocating scarce resources. Second, every person deserves to be free and capitalism allows and requires a level of freedom that other systems do not permit.

Let's look at the first reason:

Capitalism is certainly the most efficient system once it gets up and running. This fact is nearly beyond dispute. Even those that support a system closer to socialism than I am comfortable with admit that they are sacrificing some level of efficiency for equality. No one has been better about analyzing this topic that Peter Leeson, who is a Professor at the University of Chicago and George Mason University. In one of his best papers entitled Two Cheers for Capitalism (linked) he argues that people in countries that have become more capitalist in the last 25 years are generally doing far better than those who live in countries that have become less capitalist. No one should be shocked by this. I was just strumming along the last 18 or 9 years content with the belief that free markets, free trade and free people lead to a more productive and better society... until a month ago when I picked up Raghuram Rajan's absolutely fantastic book Fault Lines (Amazon link Provided).

Rajan argues that recently developing economies have built up their economies through a "managed capitalism." He goes so far as to say that no recent country has built up their industries by the stereotypic austrian beliefs of free trade, free markets, etc. The rise in free markets has ONLY occurred after a period of protectionism in which their countries industries were allowed to grow after building up organizational capital (think networks). This would tend to suggest that Leeson's study might show that the countries that have become more "capitalistic" are just further along in their development track.

Why this kept me up last night: I am genuinely concerned that Rajan might be right. The progression of the country might go from making bad products that are illegally manufactured though use of copyright violations, etc to making higher quality goods after a learning curve. Then, and only then, can the country feasibly export the good to become more productive. If a country needs to have "managed capitalism" to seriously expand, my worldview, at minimum, needs to be altered and that is something I am currently thinking about and researching. So far, I have read an article that gives me some hope. It argues that Rajan's theory is correct for some of the cases but points to the error that he is only looking at countries and not cities. So, China is doing well under a managed capitalism but that is because of Hong Kong which had far more stereotypic capitalism. China piggybacked on that success. I will be looking into this over the next few months so look for updates.

The second reason I support capitalism is the freedom it allows individuals to experience. Capitalism permits and even requires individuals to act in their own self interest. Central planning is not just inefficient, but I believe, morally abhorrent. People deserve to be free and make their own choices. Central planning is a lesser form of slavery. In both systems people are forcing decisions on unwilling participants. There is no doubt the degree of the force is different, but similarly, there is no doubt that the force is still present.

The biggest problem I have with other forms of government is the condescending attitude the powerful have against the powerless. They somehow have deemed themselves to be so superior that the rest of the community at large that they have the right to demand me to take a positive action. In many cases, no one has even elected these individuals. Their only power is violence and threat of violence. Humans were meant to live free from this type of force and coercion and capitalism provides the single best way to create an environment where the attitude of freedom prospers and the attitude of coercion disappears.

Just my .02 of this tricky matter.

Laffer Curve is Dead

This chart which was stolen from my favorite economic blog, Carpe Diem, shows that the laffer curve is likely not as dead as some (Paul Krugman) would want you to believe. The marginal tax rate goes down and the government just gets a smaller piece of a bigger pie.

Economics and Jesus

In my spare time, I enjoy few debates more than what Jesus' view on the economy would be. So, this morning and after every one left (about an hour ago) I treated myself, this Christmas, to reading a few articles debating the issue.

I love this topic because both side has excellent points and, due to the topic, is impassioned. Some people will adamantly swear that Jesus was a socialist. They use quotes like "Give up all your possessions and follow me." They also use some of the parables, mainly the parable of the good samaritan, which is in Luke 10: 25. They argue that Jesus was a radical who cared nothing for the ways and means of the world but only sought to follow God. He flipped over tables in church because he was so incredibly anti-materialistic. He freely gave up himself for the good of others. How can one not see how clearly socialist he is?

The other side says that Jesus is an anarcho-capitalist. He did not believe in the hierarchy and believed in direct aid to the poor. Notice that Jesus did not dictate someone else to die on the cross for the sins of mankind. Jesus came to this earth to set us free. Governments can do nothing but inhibit freedom, so therefore, Jesus must be an anarcho-capitalist. They then point to the parable of the sower which is in Matthew Mark and Luke. He told us to use our talents wisely. There is no wiser use than what the free markets will determine.

The benefit of this argument is that both sides have a great deal of evidence. I will not tell you where I stand on this argument tonight, because I want to clearly state my views on this topic and that will simply take more time than I am willing to commit this close to midnight.

I hope all of you had an incredibly Merry Christmas and I hope that God blesses you in the upcoming new year.

Why the last post matters

Thanks to Angry Bear Blog for creating this fantastic chart. The author is a liberal economist who I read every day and encourage you to do the same.

If companies and people save their money, they can't spend their money on improving and growing their business... meaning they can't hire.

Tax Cuts

There are two real questions when dealing with tax cuts. The first, and the one this entry will not address, is whether it is moral for a government to take money from individuals based on the threat of force to give to programs the individual does not agree with. The second, and the reason for this entry, is whether it can get an economy rolling again. Will the people spend enough money to stimulate the economy.

We will first deal with why these tax cuts will not be as effective as possible, if at all. Milton Friedman, likely the best economist to ever live, spent a great deal studying the effect of tax cuts on the population. He developed the Permanent Income Hypothesis which states that people's consumption patterns are not determined exclusively, or even primarily, with current income levels. Instead, people base their consumption patterns on long term income expectations. People consume based on a constant proportion of their long term income.

He also found that short term increases do little to nothing to increase consumer spending. In fact, in one situation, a government gave the people a one term tax refund before hiking the tax rates. Friedman predicted consumer spending would go down even though the people received the refund and he was correct.

The tax bill passed is not an effective way of spurring consumer spending because it is a temporary increase. These increases are not effective. If Congress truly wanted to increase spending and spur economic growth they would pass permanent tax cuts. Unfortunately, this is politically impossible.