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Don Boudreaux over at Cafe Hayek does a nice piece a few weeks ago, outlining the inefficiency of rent control. As his comments on the subject were part of a larger discussion, I have summarized his points below. If you want to go back to the original, you can go here.
Brian,
Boudreaux notes that “the assumption of a perfectly inelastic supply of rental housing is not realistic.” But at the same time, he wagers it is incorrect to say that, were this assumption to hold in reality, rent control would create no deadweight loss.
In what Deirdre McCloskey calls “the first act” there is indeed, unlike with an upward-sloping supply curve of rental housing, no deadweight loss. It’s all transfer from landlords to tenants. But unless we assume also a perfectly inelastic demand for rental housing, rent control will in the second act cause current and prospective renters to waste resources as each competes to increase his or her chances of securing one of the rent-controlled apartments. Losses – ones in every relevant way comparable to conventional deadweight losses – ensue.
Picture a standard supply-and-demand graph, but one in which the supply curve is perfectly vertical. With the demand curve shaped as it usually is – namely, sloping downward to the right – rent control will still cause a shortage of rental housing. Tenants will therefore compete more vigorously – now using only non-price means of competition – to secure these rental units. The use of resources in such non-price competition – for example, wining and dining landlords, racing or keeping constant vigilance to sign up for newly vacated rental units, whatever – is a waste of resources from society’s perspective.
It’s true that these wastes are conventionally called “rent-seeking wastes” rather than “deadweight losses.” But Boudreaux takes Gordon Tullock’s point to be that rent-seeking-‘rectangle’ losses are no less real or important losses than are deadweight-loss (or Harberger) ‘triangle’ losses: both losses act as deadweights on society. Valuable goods and services that would otherwise have been produced remain unproduced because of the interventions that cause these losses. Both losses emerge because government interventions render uses of resources that were once profitable now unprofitable. Both losses ‘measure’ the reduction in valuable output. Both losses ‘measure’ the reduction in the size of the economic pie.
Boudreaux doesn’t wish to defend too strongly his claim that rent-seeking losses should be called and classified as “deadweight losses” (although I do believe that that claim is defensible). But he does wish to insist that the absence of conventionally defined deadweight losses does not mean that an intervention, such as rent control, effects only a transfer and, therefore, causes no real losses. The resulting non-price competition among potential renters results in losses.
Note too that he mentions neither rent-seeking efforts by tenants to secure rent-control regulation from government nor rent-‘protecting’* efforts by landlords to fight rent control. These rent-seeking and rent-‘protecting’ efforts only increase the social losses from rent control beyond the losses that Boudreaux identifies above.
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Here’s another ridiculous article by “economist” Grep Ip, wondering aloud once again why the economy isn’t doing any better. (“Why Aren’t Low Rates Working? Blame Dividends!” WSJ, June 5). Either he’s truly incompetent as an economist not to see the detrimental effects of government policies on businesses and the economy, or he’s playing dumb to give political cover to the Obama Administration by pretending their policies aren’t harmful and looking the other way in his analysis.
Ip writes, “One of the great mysteries of the recovery is why low interest rates have done so little to lift business investment. After all, that is supposed to be one of the ways monetary policy works: A lower cost of capital makes any project more viable. But what if lower interest rates are actually hurting investment by encouraging companies to pay dividends or buyback stock instead?”
This is exactly what is happening — it’s no mystery. But he draws no substantial conclusions. If he would just come down from his ivory tower of what is “supposed to happen” under Keynesian economics, and actually observe what is happening, he might actually learn something. The fact of the matter is, Obama’s policies are destroying our business environment and eliminating the opportunity.
The burden of overregulation, the increases in taxes, the litigation-friendly environment, the overreaching government agencies, Obamacare, unprecedented debt and more — all of these factors cause businesses to essentially pause their business strategy. Who in their right mind really would consider substantial investment in an environment that is hostile to workers, and an economy that is now seeing more businesses close instead of open? The risk is often too great. Sitting it out is a safer bet.
Not only is it not a mystery as to why low interest rates haven’t spurred growth, it’s a no-brainer. To ignore the government’s effect on business and the economy is unprofessional and incompetent. “It’s the government, stupid!”
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The Competitive Enterprise Institute periodically reviews the Federal Register and the amount of regulations that the Obama Administration churns out. Here’s a snapshot of it; it’s the daily publication of proposed and final administrative regulations of federal agencies.
“The Federal Register once again topped 2,000 pages last week, and included a year-high 137 final regulations, ranging from eggs to groupers.
On to the data:
The amount of regulations have exploded in recent years and is a major reason why the economy hasn’t recovered.
by | ARTICLES, BLOG, BUSINESS, ECONOMY, GOVERNMENT, OBAMA, OBAMACARE, POLITICS, TAXES
Here’s another ridiculous article by “economist” Grep Ip, wondering aloud once again why the economy isn’t doing any better, and why low interest rates haven’t helped. Either he’s truly incompetent as an economist not to see the detrimental effects of government policies on businesses and the economy, or he’s playing dumb to give cover to the Obama Administration by pretending their policies aren’t harmful and looking the other way in his analysis.
Ip writes, “One of the great mysteries of the recovery is why low interest rates have done so little to lift business investment. After all, that is supposed to be one of the ways monetary policy works: A lower cost of capital makes any project more viable. But what if lower interest rates are actually hurting investment by encouraging companies to pay dividends or buyback stock instead?”
This is exactly what is happening — it’s no mystery. But he draws no substantial conclusions. If he would just come down from his ivory tower of what is “supposed to happen” under Keynesian economics, and actually observe what is happening, he might actually learn something. The fact of the matter is, Obama’s policies are destroying our business environment and eliminating the opportunity.
The burden of over-regulation, the increases in taxes, the litigation-friendly environment, the overreaching government agencies, Obamacare, unprecedented debt and more — all of these factors cause businesses to essentially pause their business strategy. Who in their right mind really would consider substantial investment in an environment that is hostile to workers, and an economy that is now seeing more businesses close instead of open? The risk is often too great. Sitting it out is a safer bet.
Not only is it not a mystery as to why low interest rates haven’t spurred growth, it’s a no-brainer. To ignore the government’s effect on business and the economy is unprofessional and incompetent. “It’s the government, stupid!”
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My friend Fred Smith over at Competitive Enterprise Institute (CEI) wrote a nice piece on the subject of income inequality.
Smith discusses the common beliefs and untruths of the topic, reminding us that “to the extent that inequality is a problem, it is because people are kept from working, saving, and investing in ways that make the most sense for them by bad government policies.” I have reprinted his piece in its entirety below:
“Despite living at a time of unprecedented decreases in poverty around the world, we’re witnessing a seemingly unprecedented increase in worry about income inequality in wealthy countries like the United States. And, not surprisingly, capitalism and its practitioners are often said to be to blame. When the news media and the general public look to the nation’s business leaders for an explanation, however, the response is rarely inspiring.
Whether it’s Fortune profiling “7 Billionaires Worried about Income Inequality” or Chief Executive listening while “8 CEOs Weigh in on Income Inequality,” we hear a lot of platitudes about how income inequality is a divisive social problem that “has to be dealt with,” followed quickly by a mumbled caveat about how this vitally important challenge, of course, does not require drastic measures like capping CEO pay or anything that would impact the competitiveness of one’s own firm.
On the other hand, we do hear a few high-profile CEOs advising political leaders to deal with inequality concerns by doubling-down on existing anti-poverty programs. Morgan Stanley CEO James Gorman is pushing an increase in the minimum wage and Berkshire Hathaway’s Warren Buffett is recommending an expansion of the Earned Income Tax Credit (EITC). Unfortunately the fact that higher minimum wages actually result in fewer low-wage jobs gets only slightly more acknowledgement than the fact that the EITC fraud rate is one of the worst of any government program. More of that? No, thank you.
So what should the titans of Wall Street be saying about this terrible scourge of some Americans being richer than most other Americans? Let’s start with the basics:
First, inequality per se in a game of envy and class warfare. Any objective measure of poverty or deprivation deserves its own assessment and debate and, if appropriate, its own public policy response. No one ever went without food, shelter, clothing, education, or healthcare just because the Gini coefficient was higher than 0.57. As my colleagues Iain Murray and Ryan Young discuss in a new study “People, Not Ratios,” statistical measurements of inequality are no substitute for focusing on the quality of life of real people. Ryan Bourne and Christopher Snowdon of the UK’s Institute for Economic Affairs come to the same conclusion in their own study, also released this week.
Second, it’s better to lift the floor than lower the ceiling (and again, that’s doesn’t mean raising the minimum wage). The best way to help people earn a better living – let’s consider a revolutionary idea – is to get rid of the obstacles that block people from earning a better living. This means, among other things, repealing an array of labor rules and licensing restrictions, both at the federal and state level. And, as Bloomberg View’s Megan McArdle reminds us, we can’t fall into the trap of thinking “entrepreneurs” have to be unicorn-founding tech gurus. Anyone who finds a new way to make money (or an old way to make more money) can be an entrepreneur, even if they never give a TED talk or buy a mega-yacht.
Third, economic inequality, the measurement of which is itself the subject of contentious debate, rises and falls for a variety of reasons. Jim Pethokoukis of the American Enterprise Institute points out that the 1990s economic expansion, the years before the Great Recession and dotcom bust that we’re all supposed to be pining for, also saw a significant increase of inequality, while the mortgage meltdown gave us a decrease. Inequality rose and fell long before Thomas Piketty’s Capital in the Twenty-First Century made headlines for becoming the most unread book of 2014, and the self-righteousness pandering about it that followed hasn’t improved anyone’s quality of life (unless, of course, you’re an Ivy League graduate student looking for a research grant).
Fourth, prosperity is not automatic. For thousands of years, most of the human race was dirt poor, and then, a couple of hundred years ago, living standards began shooting up. First in Europe and the U.S., but then dramatically all over the world. We have a good idea why this amazing thing happened, and the economist Deirdre McCloskey gives the best explanation of it: liberty. A political and social system that allows everyone to seek their chosen goals according to their own merits with as few restrictions as possible has moved the world from perpetual poverty to widespread prosperity. Hard work, commerce, and thrift – what Deirdre calls the “bourgeois virtues” – will get you a happier, healthier, and more peaceful society every time. Whatever brilliant new plans for reordering the economy that the inequality activists come up with, we ignore this lesson as our peril.
So there you have it, my CEO friends. If your critics come at you with questions about what you or your company are doing about inequality, tell them you’re selling goods and services to willing customers. You’re not cheating or defrauding anyone. You follow the rules and pay your taxes – even when they finance less-than-effective government programs. To the extent that inequality is a problem, it is because people are kept from working, saving, and investing in ways that make the most sense for them by bad government policies. We have real problems and challenges in this country – inequality, on its own, is not one of them.”
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A few weeks ago, the Feds trotted out a statistic aimed to bolster support for the fledgling Obamacare legislation amid steep premium hikes and costly non-compliance fines. While the Obama Administration celebrated the fact that the uninsured rate was finally below 10%, in reality, this same statistic actually represents the most colossal failure of any government program in the history of this country.
In 2010, we had nearly 307 million people living in the United States, with a 16.3% uninsured rate — or a record number of 49.9 million uninsured, according to the Census Bureau. On March 20, Nancy Pelosi presented a letter to the House of Representatives showing the yearly effects of Obamacare on insurance coverage — which included estimates on the number of uninsured each year. Obamacare passed three days later.
Looking at the data that was used to persuade passage of Obamacare, the number of estimated uninsured in 2016 was projected to be less -30 million and a 95% insured rate. That means the government predicted that by now, the uninsured rate would have dropped from 16.3 down to 5% — not 9.1% which is the current statistic. Going from 16.3% to 9.1% (instead of 5% by now) means that the government hit only 63% of the projected number of uninsured. (For the sake of also considering population increases, let’s say that the government only hit about ⅔ of its target).
This is a big deal. Congress and the public were told that the intended effects of getting the number of uninsured Americans down to a low number were worth it in the long run even if it meant that rest of the population — some 257 million people who currently HAD insurance at the time — would experience some sort of disruption with their health insurance. Most of these 257 million people were relatively happy with their plans and prices but the government decided that mucking with the system for all, for the reduction of some uninsured, was worth it.
And yet, only ⅔ of the projected uninsured has gotten insurance. 28.6 million people in the population remains uninsured, when it was projected that about 20 million (down from 50 million) would be uninsured by this time. How is this a success? It’s not, of course. Financially too, this program is derelict.
Celebrating an “under 10% uninsured number” is a hollow victory, a gimmick, a ruse to hide the truth about Obamacare. This statistic is an unmitigated disaster, an admission of utter failure of a program that has encroached into the lives of every American and arguably the biggest government program failure this country has had to contend with.
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Deidre McCloskey’s recent treatise (How the West (and the rest) Got Rich) on was a thoughtful essay on the power of liberty and its impact on economics. For the most part, McCloskey did a fine job explaining classical liberalism (“worthy of a free person”) and how the Great Enrichment — our uplifting out of poverty — really came about only when man began to have the liberty to think new ideas and create them.
There was one section, however, where Ms. McCloskey was incorrect. She indicated in passing the right had championed “Social Darwinism” and put forth concepts like eugenics — but this is incorrect. The idea gained footing during the Victorian Era due to the evolutionist Herbert Spencer, and it was promoted by progressives such as Teddy Roosevelt and Woodrow Wilson in the United States. The idea that people should be left by the wayside in a “survival of the fittest” kind of mentality is particularly repugnant and certainly not one espoused by conservatives or libertarians. Conservatives and libertarians are notoriously more generous; liberals don’t take their own money and give to the poor — they take other people’s money and give to the poor.
Consider for a moment too, the idea of wealth input. When people like Bernie Sanders suggest that wealth is unfairly going to wealthier people — well, how do you determine how much should go to each person? Should it really all be the same? Is that equality? Should LeBron James get the same as the least talented player in the NBA? We should be focusing on the equality of opportunity — the quality that you put in is equal to what you get out of it.
For example, Bill Gates make tens of millions a year and he pays several people $1 million or more a year because they are worth it to him. If Gates paid only the minimum wage, other companies would snap the employees up because of their talents . Gates, in paying some of his employees large sums, has recognized their worth because they are generating whatever output was satisfactory to Gates — for example, a strong ROI for the year.
On the other hand, if minimum wage advocates insist on paying $15/hour just for the sake of paying $15/hour instead of $7.50, why should they? Why should the employer be forced to take on the extra cost if the output isn’t worth $15/hour, if they aren’t generating that kind of value? Thus, with that kind of imbalance, the employer must make changes in other areas of his business to make it work — whether it be one or more fewer job overall, price increases, etc.
If people aren’t being paid $100,000 because they are not worth it to their company of employment, that’s a part of business. But it is patently unfair to make arbitrary wage increases in the guise of “fairness.” Why is it fair to some but not others? Why are the people earning $500,000 not suddenly getting $600,000 if others making less get arbitrary wage increases? Why are they excluded? Is that fair? That is why such policies are inherently unfair. The employer should be able to determine, on his own, to pay what his employee is worth and what his employee can generate — without artificial wage policies or government coercion.
It’s difficult to own a business and stay in business when the government comes along and makes changes to how the company is allowed to be in business in the middle of the game. That is patently unfair and unequal. These types of actions stifle a business’s freedom to do business, which is why McCloskey’s era of the “Great Enrichment” is proving to be on the decline.
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Congressman Dave Brat wrote a stunning Op-ed in the Richmond Times Dispatch (“Immigration is killing Americans’ job prospects“) in which he blames immigrants — both legal and illegal — for the current anemic economy. Rightly citing “meager job growth” and “stagnant wages” as symptoms, he then makes a crass and erroneous conclusion that the problem is immigration.
Immigration is not killing Americans’ job prospects — government policy is. We all know that. Why does Congressman Brat ignore the elephant in the room? Brat talks about statistics and “jobs availability” as if the economy was a zero-sum endeavor and there is a finite amount of jobs available to go around, from which outsiders are taking more than their fair share. That’s absurd.
The reality is that job creation and growth by businesses — signs of a healthy economy — have slowed to a crawl because of 1) excessive and onerous regulations unleashed in the last several years; 2) increased taxes, and the high corporate tax rate; 3) overreaching agencies such as the NLRB and EPA; 4) Obamacare; and so forth.
These are all aggressive, anti-business policies that small and large businesses have had to increasingly contend with in our country. They are the reasons why more businesses are closing than opening and investment has declined. Businesses can’t afford to stay in business, comply with government diktats, and create new jobs.
To go after legal and illegal immigration while simultaneously ignoring the government’s culpability is disingenuous at best and pandering at worst. With a diatribe that strenuously complains about “the presence and availability of immigrants — whether legal or illegal, permanent or temporary — in the job market,” Congressman Brat sounds like he may be setting us up for a Trump endorsement down the road; such a line of ridiculous thinking is more compatible with Trump’s “Make America Great Again” slogan than any rational, logical economist — which is what Brat purports to be.
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Entitlement reform is necessary for the fiscal health of this country, but it is something that no one wants to talk about, much less tackle. How can we begin? How can we open up the conversation and the possibility to reform and improve our social security system?
One step in the right direction would be to treat Social Security as a true retirement plan, and not as a wealth transfer system that it currently is. This could begin with reclassifying the payroll tax. The majority of the payroll tax covers Social Security retirement benefits. If we actually used it (or at least most of it) for that individual’s social security retirement, everyone’s perception would change. Instead of being viewed as a hated tax (just ask any young person who has received their first paycheck), it would be viewed as a desirable saving for their future!
A move in this direction could be helped by a characteristic of the present structure. The employer and employee contribute equally to the Social Security Tax. If the individual’s part went towards his personal retirement, the other part could go towards defraying the past obligations that are coming due. If we had done such a thing 20 years ago, the entire system would have been fixed. . Unfortunately, the present situation would probably require some portion of the individual’s portion to also go towards paying the ever growing obligation for past unfunded promises. It’s that dire! And it gets worse every year.
Let’s stop treating Social Security like welfare or wealth transfers and start treating it like a retirement system. It’s our money anyway, even though the government wants to act like it is being generous when it gives us back our money. This would lessen the loose-and-fast accounting gimmicks that contribute to the fiscal mismanagement of Social Security anyway — and may move it away from its impending insolvency.
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Our Social Security System is bankrupt. In fact, there is not enough money in the entire world for the United States to make good on its entitlement promises to its present and future retirees. And one of the key reasons for this is that the government uses a fraudulent, incompetent accounting method to report its costs.
As a CPA, it is frustrating to hear Social Security repeatedly being described as a pay-as-you-go (“PAYGO”) system, which gives credence to something that is terribly incorrect. PAYGO operates by calling all social security payments received by the Government in a year as income, and all monies paid out as expenses. It does not account at all for the fact that millions of workers are earning billions of dollars of Social Security pension every year, but since it will only be paid to them in the future, PAYGO ignores it! It would be as if your local mom & pop store promised its employees a retirement pension, but never recorded it as an expense and never put aside any money to pay for it when it would come due. This is not only totally unacceptable to the accounting professions, the SEC, and the Department of Labor, but it would be a criminal violation with jail time for any corporate officer allowing it.
The fallacy of calling it PAYGO is that it reports employees contributions as income, but the purpose of these payments is to pay for their ultimate retirement pension – yet none of this obligation to pay future benefits is recorded.
We need to be including in our current budget the amounts we are promising to pay in the future! The promises that we’ve made in the past — what we are paying out today — are not a part of this year’s costs – these are old liabilities and are part of our already existing debt. The US debt is currently being reported as just over $19 Trillion. When the real social security debt is added, the true National Debt becomes almost $60 trillion. (As an aside, Medicare payments and benefits are treated the same as Social Security – if the unrecorded Medicare existing debt were also properly included, the National Debt would be over $100 Trillion – way more money than exists in the entire world!)
It is clear that these promised benefits have ZERO chance of ever actually being paid. And the longer our legislators allow this fraud to continue, the worse it will be for ourselves, our children, and our grandchildren.
