Funding Space Travel

By Russ Roberts

As much as commentator Russell Roberts loves the idea of space exploration, he doesn't want to have to pay for it.

Audio (listen/download)

In Defense of High Prices and Profits

By Russ Roberts

From National Public Radio's Morning Edition
Click here for audio edition.

Those Senate hearings on the cause of high gasoline prices should be really brief. Three words. Supply and demand.

When hurricanes destroy refining capacity, pipelines and drilling platforms there’s less gasoline to go around and prices rise.

Everybody knows what’s bad about high prices. Less money for us. More money for the oil industry.

But high prices are good, too. When prices are high, some people will drive less, car pool, buy more energy efficient cars allowing the people who really want gasoline to have it.

There’s another benefit of high prices. They encourage greedy oil companies to pull oil out of the ground that isn’t worth pulling out of the ground when prices are low.

Getting oil out of the ground and into your car in the form of gasoline is an extremely expensive and unpredictable process. ExxonMobil spent almost $15 billion last year on equipment to find new oil and make refineries more productive.

As consumers, we want oil companies to take risks and spend money searching for new supplies. Profits are the reward for risk-taking and investment. Take away profits when they're high and oil companies will take fewer risks and invest less. That means less energy in the future.

But isn’t the recent run up of prices just corporate greed run amok? I don’t know. At my local station, prices are down 85 cents per gallon from the peak of a few weeks ago. Did the owner just get nice overnight? Did he forget how to gouge? Did he figure he’d made plenty of money and it was time to give me a break? I actually think he’d still charge $3.50 a gallon if he
could. But now that there’s more gasoline on the market, he can’t charge what he did before and still get my business. Too many competitors are charging less.

And next summer, if there’s no hurricane, what will happen if oil companies try and raise prices back to $3.50 per gallon? It won’t work. There’ll be too much gasoline to go around and prices will fall.

If the Senate does have hearings on oil industry profits. My fantasy is that an Exxon executive will have the courage to say:

“Yes, we made a lot of money last quarter. We earned it and we’d like to keep it. And in those times when we make a lot less, or even lose money, we won’t expect to be bailed out.”

I doubt I’ll hear that. But leaving profits alone and the incentives they provide, works better than having the government decide how much the oil industry deserves.

In Praise of Mercenaries

By Russ Roberts

From the St. Louis Post Dispatch

If all the economists in the world were laid end to end, they still wouldn't reach a conclusion. So goes the joke.

Most of that reputation for wishy-washiness comes from economists trying to predict things like next year's interest rate. You might as well toss a coin.

Yet it was a consensus reached by economists that helped end the military draft and launch the all-volunteer armed services 30 years ago this month.

Back in 1962, in Capitalism and Freedom, Milton Friedman argued for abolishing the draft, at least during peacetime, and replacing it with a volunteer army: "There is no justification for not paying whatever price is necessary to attract the required number of men. Present arrangements are inequitable and arbitrary, seriously interfere with the freedom of young men to shape their lives, and probably are even more costly than the market alternative."

In the decade that followed, Friedman and others—Walter Oi, William Meckling, Martin Anderson and Alan Greenspan among them—carried the intellectual day by showing how the draft was "more costly than the market alternative."

Seems like a difficult case to make. You'd think forcing someone to serve and then paying an artificially low salary would be a lot cheaper than having to pay a high enough wage to get soldiers to step forward voluntarily.

It is cheaper—from the perspective of taxpayers. But the savings to taxpayers is mirrored by a financial loss to the soldier. So the true cost of an army of conscripts is hidden and paid, by those unfortunate enough to be drafted, in the form of artificially lower pay. The economists made the case that a volunteer army is more fair than a draft. Draftees risk death. Why make them suffer financially as well? Better for taxpayers who enjoy the benefits of defense to also bear the financial burden.

Besides, the real cost to society of an army isn't the budgetary cost of paying the soldiers. It's the pleasure and production lost because people are pulled out of the civilian sector and put into the army. There's no virtue in doing it randomly. That leads to the costs of disruption that Friedman mentioned. And that's why an army of conscripts can actually be more costly in a real sense than an army of volunteers. Volunteers can at least plan their future.

The economists who favored abolishing the draft had to answer the charge that there was something unseemly about paying soldiers enough to step forward. During the hearings on abolishing the draft, Gen. William Westmoreland challenged Friedman and asked him how he felt about being defended by an army of mercenaries. Friedman's answer was that he preferred mercenaries to slaves.

Besides losing the rhetorical debate, Westmoreland misunderstood the role of pay in motivating workers. Doctors earn a nice living in America but that doesn't rule out compassion and care as part of the motivation for going to medical school. Paying people to serve in the military doesn't rule out people stepping forward who love their country and want to serve.

Thirty years ago, the volunteer army was a great experiment. Today, even the military has embraced it. The quality of recruits is higher than it was, and morale is strong. And the American people seem to like it, too. In a poll last year for ABC News and the Washington Post, 97 percent of the American people said they were either very proud or somewhat proud of the armed forces. Pretty good for mercenaries.

The Price of Romance

By Russ Roberts

From the St. Louis Post Dispatch

You've seen the old grainy black and white photos of American cities from the early part of the 20th century-model T's, streets teeming with people, and streetcars. Milk trucks wend their way to make their deliveries and the iceman cometh, bringing merely ice.

We have a nostalgia and romance for those days. It's a selective nostalgia of course. We want the romance of streetcars without the unpleasantness of say, typhoid. Or racial intolerance.

A longing for the rosy part of those black and white memories is behind the proposal to bring streetcars back to University City. And as a University City homeowner not far from the Loop, I can imagine the appeal. I can see my sons in their oversized caps jumping onto the still-moving trolley, holding on with one hand as the bell rings.

What price nostalgia? Alas, there is no free lunch. Reliving the past in this case will cost about $32 million according to one study. Let's assume that figure's accurate. So is that a good deal or a bad one? Proponents will tell us about all the benefits-a further revitalized Loop area, increased business traffic, sales tax revenue, and so on. Maybe those benefits are real. Maybe they're not. If they're real, are they worth $32 million?

That's the $32 million question. To make the University City streetcar project work, $26 million of the $32 million will come from the Federal budget. When at least $26 million of the cost is coming out of the pockets of others, it's easy to be enthusiastic without worrying too much about whether the project's worth doing in the first place.

Milton Friedman illustrates the problem with this kind of financing system in the following way. You spend your own money on yourself very carefully. You spend other people's money on yourself less carefully. You spend other people's money on other people with even less care.

So it's very hard to know whether a trolley is a good idea. You can see the problem clearly when you think of an alternative way of handing out money. Let's just give the $32 million to Joe Edwards. Joe Edwards owns Blueberry Hill and the Tivoli Theater in the Loop. He wants to see the Loop thrive. He's the driving force behind the trolley's planned return.

Just give Joe the $32 million with no strings attached. Well, maybe one string. He can't use the money to buy a condo in Manhattan. He has to spend it on developing the Loop.

When taxpayers outside of St. Louis are footing most of the bill, romance is a bargain. But if the call were totally on Joe's shoulders, romance suddenly comes at a real price. The cost of romance would be what you could have if you gave up the trolley. So you'd have to start weighing the value of that romance against other improvements.

With $32 million, you could really fulfill some dreams. Choose one or two from the following list. You could widen the sidewalks along Delmar Blvd. and put in some incredible gardens. You could take out some traffic lanes and create bike lanes. You could rent out mopeds or bicycles built for two at for free use for the day. You could stable horses and give people some 19th century nostalgia. You could build a sculpture park for kids. You could bring in Cirque De Soleil to perform in the streets a few times a year. You could have the greatest jazz festival in the world. You could probably build a mini-Venice with gondolas. Or how about a less romantic but maybe more powerful vision-you could lower bus fares and help the people who depend on buses.

Are any of those ideas as good as a trolley?

Maybe not. We'll never know. The sad part isn't that the trolley's a mistake. It may be a great idea. But my guess it that when romance is subsidized by others, you tend to buy more than you would then when you're paying the bill.

I know. The Feds won't give Joe Edwards the money. And it comes with strings. But all that means is that we should be careful and perhaps a little bit reluctant to spend other people's money on ourselves.

Disorder on the Court

By Russ Roberts

From Ideas on Liberty

What does Adam Smith have to do with basketball? You will not find the word in either The Theory of Moral Sentiments or The Wealth of Nations. Yet Smith has much to say about the game played with the round ball on a hardwood court. Consider the following quote from The Theory of Moral Sentiments:

The man of system, on the contrary, is apt to be very wise in his own conceit.... He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously.... If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

Chess is not basketball, you mutter, and you are correct. And yet, and yet. Consider the National Collegiate Athletic Association, the NCAA, the governing body of college sports. The NCAA rule book governs how universities treat their athletes and how athletes must behave if they wish to retain their eligibility. The main function of the NCAA is to prevent people from doing what comes naturally. But of course Adam Smith understood that those chess pieces want to move in the ways that they want to move. Trying to place them where they do not want to go is ultimately going to lead to disorder.

Having a successful college basketball team is very lucrative. It leads to attendance at the NCAA Championship tournament held every March. That in turn leads to money. And glory. Publicity. So a 18-year-old high school graduate who excels at basketball is a highly valuable and highly scarce commodity. Scarce valuable resources usually get paid for the employment of their services. In a normal competitive environment, talented basketball players would receive a salary in return for their work at the University. And Universities would be happy to pay to get those students just as they pay to attract high-quality coaches and high-quality chemistry professors. Competition among universities would determine the market price for such students.

But universities are even happier getting those resources for free. That way, the university can capture the profits from athletic success rather than having to share them with so-called student/athletes. So the NCAA bans all payments to students other than tuition and room and board, books, fees and a very modest stipend often referred to as laundry money.

That might seem generous enough, but alas, you have not reckoned with those chess pieces. Evidently, it is not generous enough. We know that tuition and room and board are less than the market clearing price because every once in a while, a scandal emerges that highlights the competition that is going on underneath the placid waters of universities complying with NCAA rules.

Such a scandal is unfolding at the University of Michigan. A fan of Michigan basketball was caught "lending" some of the players some money. A large sum of money. A very large sum of money. Eddie Martin has pleaded guilty to giving four University of Michigan players $616,000.

The scandal was uncovered after a car accident—a basketball player on the Michigan team crashed his new $35,000 Ford Explorer after a party for a new recruit.

Cars, cash and "loans" are ways that wealthy fans and sometimes coaches compete to get the best players. The NCAA may try to stop such behavior, but it's very hard to get those chess players from moving in the directions that come naturally. And of course even "clean" athletic programs compete in non-monetary ways. They build luxurious training facilities for their students. They hire talented coaches and trainers.

The University of Michigan has announced a self-punishment in hopes of averting more serious sanctions from the NCAA. Five years of victories have been wiped off the books. Championship banners have been removed. The basketball team will refrain from post-season competition for two years. And they have returned $450,000 in tournament money form previous NCAA Tournament experiences.

That's a lot of disorder, to use Adam Smith's phrase.

After scandals like the one at Michigan, there always are calls from the sports pages for colleges to clean up their act and play by the rules.

Yet the rules imposed by the NCAA are not natural. They are designed to inhibit the movement of the chess players. And the real source of the problem isn't the players who take the money. The real source of the problem is you and me, the fans. The people who care about how our schools perform. The people who fill the stadiums and crowd in front of the TV set on those March nights. It is that enthusiasm that creates the pot of money at the end of the NCAA Tournament, driven by TV revenue and advertising revenue. All driven by fan interest.

As long as fans care intensely about how their teams do in March in the NCAA Tournament, there are going to be scandals.

But the real scandal is the exploitation of players who would normally receive some of the largesse that such fan interest generates. Only the NCAA keeps that largesse largely in the hands of its member institutions rather than in the hands of the players.

There's an interesting footnote to the University of Michigan story which also relates to Adam Smith and those chess pieces. The story broke after a grand jury indictment of Eddie Martin, who was bankrolling those basketball players with hundreds of thousands of dollars. Martin is a former worker at a Ford automotive plant. What was a grand jury doing investigating NCAA violations? How did a Ford worker have $616,000 dollars to spend on players?

Martin ran a illegal gambling operation out of the Ford plant—a lottery, a numbers game. The money he gave those players came out of those illegal winnings. He was indicted for gambling and money laundering. He probably has a few tax problems too.

So all of this really began with illegal gambling—an attempt on the part of the state to keep people from engaging in behavior that is harmless to the gamblers. Behavior that the state bans because it competes with the government's take in its lottery monopoly. Oh, those chess pieces. So hard to keep them from moving the ways they want to move on their own.

Cut Taxes, Help the Rich (And the rest of us too)

By Russ Roberts

Text from National Public Radio, Morning Edition
Audio

A lot of people seem to think that the Bush stimulus plan is just a way for the President to pay off some of his fat cat friends.

Could be. But for those who always assume the worst about this President, I have two words: Jimmy Carter.

Jimmy Carter also supported the centerpiece of the Bush plan, the elimination of the tax on dividend income.

Wow. Who knew that Carter had a secret agenda for helping his fat cat friends? Or maybe there's another reason for cutting taxes on dividend income. Actually, for over fifty years, prominent economists have opposed taxing dividend income and the so-called double taxation of corporate earnings.

The President's plan increases how much investors get to keep, after-tax, from investing in successful companies. That makes it easier for corporations to raise money for risky investments. That gives corporations more machinery and capital to work with, boosting productivity and wages.

That's the idea, anyway. The President's plan also makes it more attractive for corporations to pay out the profits from successful investments to shareholders in the form of dividends. Those corporations already paying dividends will have an incentive to increase them.

Increasing the use of dividends should reduce the kind of accounting shenanigans we've seen lately. It's one thing to have high profits on paper based on an arcane Caribbean partnership. But you can't pay a dividend out of a paper profit. You need to earn real cash. So dividends encourage credible accounting.

That's one reason why the Carter administration dropped the idea of eliminating the tax on dividends. Big business wanted a murkier playing field, earnings kept inside the company for CEOs to play with rather than paying them out to shareholders. CEOs didn't want the pressure of having to make dividend payments. Sure they could choose not to offer dividends. But the companies knew that if dividends were tax-free to investors, there would be pressure from investors to offer dividends as a way of proving a company's reliability.

Getting rid of the taxation of dividends will make some rich people richer. But it will also make the rest of us richer too. Not just those of us who happen to invest in dividend paying stocks. The real gain will an increase in investment that will raise our wages and our standard of living. Will it fix the sluggishness of today's economy? Probably not. For that, we're going to have to resolve the situation with Iraq.

Here's to Your Health

By Russ Roberts

From the St. Louis Post Dispatch

If arsenic is unhealthy, then you'd think that the less arsenic the better. Same with radiation, mercury, dioxin and a whole host of environmental toxins.

But zero tolerance is expensive. There's no free lunch. Getting rid of the last molecule of dioxin in the environment means we'll have less money to get rid of something else that might give us more bang for the health buck.

It's not just a question of money. Think about air quality. We support government regulations on pollution, because we want clean air. But most of us don't want perfectly clean air. Most of us are willing to accept some pollution in order to have the freedom that comes with our cars. Attaining zero pollution is too expensive, not only because it hurts our pocketbook, but also because there are other things we value besides cleaner air.

Using the same logic, we ride airplanes and cars, and live in big cities. All of these choices are more dangerous than staying at home on a ranch in rural Missouri. (And it would have to be a horse-free ranch, because horses are dangerous, too.) Yet we understand that it is sometimes better to accept a little more risk in return for something of greater value.

Now along comes Edward Calabrese, a toxicologist at the University of Massachusetts, whose review of research done on toxins shows that a little bit of exposure to toxins can actually be good for your health. That's about the closest thing you can find to a free lunch. The phenomenon is called "hormesis," from the Greek work for excite. Thousands of studies confirm that at super-low levels, toxins like radiation, arsenic and mercury have beneficial effects on plants, people and other living things. (You can find out more about Calabrese's work at www.discover.com by searching on calabrese)

How can hormesis possibly be true? Poison stimulates. It mobilizes the body in complicated ways. At high levels, the body is overwhelmed. But at very low levels, the body can respond in good ways. Think of so-called healthy things like Vitamin C. Too much Vitamin C is harmful. A little television can be educational. A lot of television turns you into a couch potato. One man's meat is another man's poison. And, as it turns out, one man's poison is another man's meat.

Calabrese is not a crazy man. He doesn't advocate the ingestion of just the right amount of mercury, or hanging out near a lead smelter. His work doesn't mean we can ignore the dangers of toxic chemicals. It doesn't mean we should gut environmental regulations. The tipping point where a poison becomes harmful is hard to measure, and it will differ for every individual. Better safe than sorry remains a good working hypothesis. But Calabrese's work does challenge our obsession with creating a risk-free world. And measuring the correct relationship between good health and exposure to various chemicals may lead to important health breakthroughs in the future.

A clear example of the benefits from understanding hormesis is called alcohol. We know that excessive drinking can rot your liver and kill you. But the evidence appears overwhelming that a little bit of alcohol is good for you, particularly for men over the age of 40. A drink or two at dinner apparently reduces the risk of heart disease and stroke.

So is alcohol a good idea or a bad idea? It depends. We may long for the black and white of "Don't drink." But a lot of life's most interesting choices involve risk, ambiguity and the ability to embrace moderation.

Edward Calabrese's analysis shows the wisdom in the old proverb, "Danger and delight grow on the same stalk." It's not a bad lesson to remember. Some risks are worth taking, because the benefits outweigh the costs.

And some risks might not even be risks at all. For some of us, at least when we look at the wine list at dinner, it's a lesson that might help us live long, and live well.

Widening Route 6

By Russ Roberts

From Ideas on Liberty

I really shouldn't tell you this, but Cape Cod is a very beautiful place. I shouldn't mention its beaches with their towering sand dunes. I shouldn't mention the golden eagle I saw soaring over the marsh near our cottage where we stayed on vacation. I shouldn't mention the charm of the Cape Cod baseball league where college players try to show major league scouts they can hit with a wooden bat and where the fans get in for free and the dogs and toddlers are unleashed.

I shouldn't mention all this because it might encourage a bunch of you to come to Cape Cod when I'm there. That would drive up the cost of the rent I pay. And it would make the traffic problem on Cape Cod worse than it already is, hard as that is to imagine for those of us who already know the place.

For those of you who don't know the Cape, there's basically only one road, Route 6, that runs the length of its arm-shaped peninsula If you want to get to Provincetown at the fingertip, or Chatham at the elbow or most of the points in between, you've got to get on Route 6. If you're in Truro and it's raining and you want to do something with the kiddies in Orleans, you've got to get on Route 6. And if you do this or anything else on Route 6, you're doing it with all the other folks trying to do the same thing or anything else of consequence that involves a car.

Oh to be a golden eagle and soar above it all. Or a gray seal bobbing freely in the surf. Or even a pilot whale. (But a smart one. Not one of the ones that beaches itself and tries to find Route 6.)

Problem is, none of those solutions can carry the kids and luggage along. So it's get in the car. Stop-and-go on weekends, in the rain and sometimes even on a sunny Wednesday. On a rainy weekend, it's mostly stop.

What's to be done? The obvious solution is simple enough-widen Route 6. Yet there doesn't seem to be much interest in widening Route 6. Or as one recent study of Cape Cod development put it:

"Options for significantly increasing Route 6's capacity involve serious environmental and community character decisions."

The Cape is a somewhat fragile place. But I wonder if the real reason for the lack of interest in widening Route 6 has a lot more to do with the community character issue than it has to do with environmental consciousness.

Consider an experiment. Let's double the number of lanes on Route 6. Let's assume there's no environmental impact. And let's make the ridiculous assumption that we widen Route 6 by snapping our fingers rather than through what it would really take-the ruining of two or three summers of traffic due to construction.

Who would benefit from a wider Route 6 vs. a narrower one? The answer would seem to be obvious. With a wider Route 6, traffic congestion will ease. The winners will be those who visit the Cape and who to have sit in traffic with the current version of the road.

Yet, my guess is that most people on the Cape would disagree. And I think they're right to disagree. Because I think a wider Route 6 would actually punish those who would visit Cape Cod and even some of the permanent residents.

How can that be? Start by remembering that Cape Cod isn't the only place in the northeast with sand. Cape Cod draws people from New York and Boston and Philadelphia and even a family or two from St. Louis. Alternative destinations include the Hamptons and the Jersey Shore and the Maryland Shore and Gloucester and so on.

If the Hamptons get less attractive because of pollution or fashion or for whatever reason, a few more people are going to head to Cape Cod. And if Cape Cod gets more attractive because it's easier to navigate the Cape via car, then more people are going to head to Cape Cod.

When people choose between vacation spots, they look at all the costs and benefits and choose according to their tastes. Traffic congestion is one of the prices you pay to visit the Cape. And if Route 6 gets wider, that lowers the price and increases the number of people that want to vacation on the Cape. As more people visit the Cape, Route 6 will start to get congested again.

And therein lies the essential element of the political support (or lack thereof) for widening the road. Route 6 may end up a little less congested after it's been widened. But it will still be congested. And everything else is going to be dramatically more congested, particularly the beaches and the side roads. And unpredicted bottlenecks such as accidents and rain will have even less pleasant consequences than they do now.

On the plus side for generating political support for a wider Route 6, property owners will be able to charge higher rents as a wider Route 6 will lead to more demand for scarce beachfront and non-beachfront property. The political problem is that those owners often vacation on the Cape during those weeks when they're not renting out their property. True, they'll get a higher rent if Route 6 is widened, but they'll also have a less pleasant time getting around the rest of the Cape when they're taking their vacation. That reduces the value to them of a wider Route 6.

In the real world, it will take a lot of time to widen Route 6. So even those who might see a net gain have to put up against it the hassle of putting up the construction costs.

Some might argue that the easy way to fix all this is to make Route 6 a toll road, either now or after you widen it. By adding a monetary price on top of the time price, congestion can be eliminated under either scenario and the world will be a better place. But that solution is even less attractive politically. The toll would be paid by the users of the road, so they'd be worse off again, even though there would be a reduction in congestion. So while widening Route 6 may have some appeal, ultimately, its appeal is greatly reduced by the realization that the net impact for many will be negative. Until we all get wings or fins, getting up and down the Cape will be a nuisance for a long, long, time.

Tiger Woods Takes The Times To Task For Its Masters Disaster (Satire)

By Russ Roberts

From the St. Louis Post Dispatch

The New York Times has conceded that the all-male Augusta National Golf Club has a constitutional right to bar women from membership. Still, women have called on Tiger Woods to use his constitutional right to boycott this year's Masters golf tournament as a way of pressuring the club. "A tournament without Mr. Woods would send a powerful message that discrimination isn't good for the golfing business," said The Times in a recent editorial.

In a surprise development. Mr. Woods, or Tiger, as he is more often called, has agreed to the boycott. Widely acknowledged as the greatest golfer in the game, Woods announced at a recent press conference that he would happily sit out this year's tournament as long as The Times made a similar set of sacrifices to make the world a better place.

First, he asked that The Times remove all coverage of the National Football League from its sports pages. "We all know African-Americans are underrepresented as coaches in the NFL. If The Timesstopped covering the NFL, it would send an important signal to the NFL that such discrimination is bad for the football business."

In addition, Woods asked The Times to discontinue all reporting of financial statistics in its business section, including closing stock prices on the New York Stock Exchange and the Nasdaq.

"Hellllooooo?" Woods asked rhetorically. "Hasn't The Times noticed that there have been a few accounting irregularities among some major American corporations? But it keeps covering business news as if nothing has happened. By eliminating end-of-the-day stock quotes, The Times has a chance to really have an impact on the accounting profession and corporate governance."

Woods conceded that The Times has a constitutional right to print whatever it wants. "But," he pointed out, "they're also free to use the power of the press to encourage good behavior whenever possible."

Finally, Woods asked that all employees at The Times start brown-bagging for lunch and dinner rather than patronizing any restaurants or delis in the New York City area. "Everyone knows New York waiters and waitresses have a reputation for being rude and inconsiderate, particularly to tourists. The Times has an opportunity to really improve the civility of the city," he said.

The Times responded with a blistering editorial. "Mr. Woods," The Times harrumphed, "has gone too far. He fails to understand the responsibilities and rights that go with being the paper of record. It's one thing to knock a little ball into a little hole. We print all the news that's fit to print. Besides," The Times concluded, "if we decided to boycott everyone we disagreed with, the world would be a very lonely place."

Voodoo Taxation

By Russ Roberts

From the St. Louis Post Dispatch

Should the Bush income tax cuts be made permanent? Answering this question is likely to be one of the first orders of business for the new Congress. Opponents complain that the tax cut is a giveaway to the rich. Fat cats are going to get fatter. Defenders of the tax cut answer that the rich pay a lot of the taxes, so an across-the-board tax cut is going to help the rich. It's inevitable.

Both sides are only about half right.

Talking about a giveaway makes it sound like the U.S. Treasury is going to write checks to the richest Americans. But that's not true. In fact, after the tax cuts are put in place, the rich will pay more taxes in the future.

How can that be? The real confusion here is between tax rates and tax revenue. You can cut rates and collect more revenue. And you don't have to believe in the Laffer Curve or voodoo economics. You just have to believe in growth, whether it's caused by lower tax rates or other causes.

Between 1981 and 1990, the income tax revenue increased more than 60 percent even though rates were lower, because incomes grew. Incomes were sufficiently higher at the end of the decade so that even at lower rates, more revenue was collected. (The budget deficits of the 1980s occurred because spending grew 85 percent from 1981 to 1990.)

And even with lower tax rates, the rich shouldered a bigger share of the revenue burden. In 1981, the richest 1 percent of taxpayers paid 18 percent of the money collected by the income tax. By 1990, even with dramatically lower tax rates for the rich, the top 1 percent paid 25 percent of the taxes. Today, that number is close to 40 percent.

When opponents of the tax cut complain that the rich are going to get half a trillion dollars, what they mean is that the rich are going to pay less in taxes in the future than they would have if rates were left unchanged. That may be true. But given the usual growth in income, even with lower rates, the rich will end up paying more in taxes than they do now. It's not literally a giveaway to the rich.

But fans of the tax cut also are dishonest. When they say that the rich should get a large share of the benefits from a tax cut because they pay such a large share of the taxes, they talk about only the income tax. But what about payroll taxes? A true across-the-board tax cut shouldn't be limited to the income tax. It also should include the payroll tax that is paid by every worker, rich or poor.

What we should do is get rid of the payroll tax and create a tax bracket for low-income workers that leaves their total tax burden lower than it is now under the payroll tax. Fund Social Security benefits out of general revenues.

Then we can talk about an honest across-the-board tax cut. Fans of the tax cut might settle for a smaller tax cut if it had to be truly across the board. And opponents of the current tax cut might support it if it helped low-income Americans.

But if Social Security receives its funding from general revenues, the elderly will have to depend on the will of Congress to keep benefits intact. If you think that's scary, I've got some bad news for you— that's exactly the world we're in right now. The payroll tax hides the reality.

The Social Security trust fund and the "lockbox" are accounting fictions. When the baby boomers retire, we'll turn to those trust funds and find out there are no real assets there, just government bonds that will have to be paid for out of—you guessed it—general revenue. With or without a payroll tax, Congress can lower benefits or raise the retirement age. It is the political cost of such moves that ultimately protects our Social Security benefits.

Getting rid of the payroll tax will lead to a less polemical debate about tax cuts and a more honest, fair and transparent tax system. It's probably a little too honest and transparent for a politician, but I can dream, can't I?

Don't Mend it, End It

By Russ Roberts

From the St. Louis Post Dispatch

Take a look at your pay stub and you'll see separate amounts withheld for income taxes and the payroll tax called FICA.

Listing them separately makes people think that the FICA tax must be something different from the income tax. And it is—in the sense that the size of each is determined by separate formulas.

But the money from both gets mixed into the same pot. Both taxes go to help pay for national defense and food stamps and social security. None of the payroll tax is "earmarked" or set aside for its alleged purpose of paying retirement benefits. None of it is put in an account with my name on it. There is no trust fund. There is no lock box. They are figments of accounting and political rhetoric.

Defenders of the current system tend to romanticize social security as a "compact between the generations." Some compact. You submit gracefully to taxation today under the understanding that future generations will submit gracefully to pay for you. Forget the romance—Social Security is like most government programs—it takes money from one group of people and gives it to another.

What makes Social Security unusual is that unlike, say, the farm subsidy program, a vast number of Americans will eventually get something back from the system. Some people will get more out of the program than they put in. With Social Security, those tend to be people who live longer or who retired when the system was young and put little into it. I don't know why we'd want to subsidize people who live long or who were born at the right time.

A more common criticism of the system is that we could do even better if we were allowed to invest our own money for ourselves. But asking if it's a good deal or a bad deal is the wrong question.

Why would you want your retirement to be funded by younger workers, who need the money for their children's education or a down payment for a house? Why would you want the amount you get when you retire to be independent of the risks you took or the ones you passed by? Why would you want your retirement income to be based on a political struggle between young and old and the tradeoff between the votes of the elderly and the pain of the payroll tax?

Why would you want the government to take responsibility for your retirement instead of you taking that responsibility for yourself? I think the world is a better place when adults are treated like adults.

Allowing individuals to be responsible for their own retirement isn't a good idea because it's profitable. It's a good idea because it empowers us to make choices for ourselves and take responsibility for those choices.

I'd prefer a totally private system where people are free to save a lot or a little for their retirement. But replacing the current system with mandatory private retirement accounts are a step in the right direction and an improvement over the current system. The stock market is a risky place—that's why private retirement accounts would be allowed to hold a wide range of assets to hedge that risk.

If private accounts replaced the current system, we may want government to augment low-income workers retirement funds with additional money. The current system has this welfare component built in already, but it's hidden by the complexity of the system. Doing it out in the open would be a lot more honest. And it would have dramatically lower costs and enjoy much wider support than the current system.

Some critics of the current system call it bankrupt and beyond repair. I think they're wrong. We can mend the current system with a mix of payroll tax increases, reductions in benefits and infusions from general tax revenue. But I'd prefer ending the system to mending it. Not because it will make us rich. But because it will reduce the political fight between generation and make us all a little more accountable for our actions.

Do-Over Democracy

By Russ Roberts

Audio (listen/download)

Don't Bash the 'Burbs, Improve the City

By Russ Roberts

From the St. Louis Post Dispatch

I love the phrase 'urban sprawl.' Can you think of another phrase for a social issue that reminds you of someone lounging around the house? Vaguely judgmental, it also conjures up an image of haphazardness, a lack of control, an attitude of let-things-fall-where-they-may.

The Sierra Club's against sprawl. So are a lot of politicians. And city planners. And city residents. When opponents of sprawl see people sprawled out in the suburbs, they see longer commutes, more pollution and more fossil fuels being wasted. Sprawl chews up wetlands and farmlands. Sprawl is to be "fought" or "reduced." Living in cities is good. Suburban living is somehow less virtuous.

I take a somewhat less judgmental perspective. Some people like city living. Some like the country. Land is cheaper in the suburbs. There's usually less crime. The schools are usually better.

Nothing's free. Sprawlers tend to have longer commutes. They have longer drives to the zoo or the stadium. Neighbors are farther away, though for some, that's just one more item on the plus side of the ledger.

Do the benefits of suburban life outweigh the costs? Some like to argue that suburbanites don't realize what they're missing. I assume they realize it, but just value the pluses above the minuses. I don't think I'd like to live in St. Peters or Glen Carbon. But I understand why some might prefer it to University City. And someone else might prefer the true city living of a Washington Avenue loft. Some like chocolate, some like vanilla and for inexplicable reasons, some prefer strawberry. It's just a matter of personal preference.

But sprawl is different, its opponents claim. When people choose to live in the suburbs, they impose costs on others in the form of more pollution, more gasoline usage and the infrastructure that the county and state must develop to make suburban life as pleasant as it is. The costs of suburban life are artificially low because suburbanites don't pay the full price for the infrastructure the suburbs require.

I'm all in favor of making county dwellers pay the full cost for their roads and water and electricity. But there are all kinds of federal and state tax breaks and subsidies for city life as well. I'd like to see a careful study of the whether city mouse or country mouse gets the better deal.

Until I see that study, or even one that's not so careful, I'm agnostic about the evils of sprawl and whether "too many" people live out in the suburbs. But if you disagree and would like to see more people in the city, maybe there's a better way to fight sprawl than complaining that the suburbs are artificially attractive. Why not eliminate what makes the city unattractive?

Get rid of the 1% city income tax. Supporters of the tax say it provides crucial revenue. Maybe. But it also discourages businesses from locating in the city and people from living there. That means lower sales tax and property tax revenue. Those taxes would pick up some of the revenue slack if the income tax were eliminated.

Get rid of the red tape that discourages job creation in the city. Get on the city's web site and check out what it takes to start a business. It's a sticky web of paperwork and fees. Lower the fees. Reduce the numbers of permits a business needs. Reducing the number of offices that impose red tape and monitor it would help make up for lost tax revenue from getting rid of the income tax.

Finally, if you want to reduce sprawl, break the connection between where people live and where their kids go to school. Fight for vouchers that allow parents who dislike the city schools to live in the city and send their kids elsewhere. If you don't like vouchers, support more charter schools or magnet schools.

I like living in the semi-city of University City. But for those of you who want to boost population in the "real" city of metropolitan St. Louis, particularly downtown, a positive approach might be more effective than railing against the suburbs.

Curing What Ails Corporate America

By Russ Roberts

From the St. Louis Post Dispatch

(The title has been changed to protect the author.)

When the prizes get bigger, people run a little faster, jump a little higher, try a little harder, rest a little less often and do all the things competitors do to get an edge.

They also cheat.

Over the past 25 years, interest in sports has grown dramatically. As a result, salaries, television rights and championship money are all much, much higher than they once were.

So athletes train longer and harder. Coaches get paid more and stay up later analyzing film. Universities compete for television contracts and post-season pay-outs by devoting more resources to athletic facilities.

Look at highlights from men's college basketball from the 1970s. Today's players are men; yesterday's look like boys. That's not evolution. It comes from hitting the weight room and maybe stopping by your favorite street-corner for pharmaceutical assistance.

Because when the prizes get bigger, some people cheat. They break the law. They violate the implicit and explicit codes of conduct. Baseball players take steroids. College football coaches recruit more violent players who act less and less like students. A 1997 survey of the NFL found that over 20 percent of the players had a criminal record.

Most if not all of those rapists and felons went to college. Why would universities allow such people to represent them? When winning gets more profitable, people do things they wouldn't think of doing when there's less money on the table.

Which brings us to the current state of corporate America. Alan Greenspan recently blamed "infectious greed" for the increase in corporate crime. But were people really immune from greed in more placid times? No. What changed in the business world was the same thing that changed in the sports world. The prizes got bigger.

Through most of the 20th century, a dollar of earnings added roughly $15 to the value of a company's stock. But in the past five years of the century, the multiple went past 20 and then into the previously uncharted territory past 30. So the return to earnings went up. And because of the widespread use of stock options, executives and employees had an even bigger stake in the market than before.

So there was a huge increase in the ever-present incentive to increase earnings. One way to increase earnings is to create new products that people value. A second way is to make a pre-existing product better or cheaper. Many corporations and CEOs followed these paths, prospered and benefited others. But there is a third way: Cheating and lying to inflate accounting profits artificially. That path rewards the cheater at the expense of others.

So what's to be done?

Put the cheaters in jail. Use existing laws to take away ill-gotten gains and return that money to defrauded investors. Expand the staff at the SEC to uncover existing and future wrong-doing.

Let corporations compete to convince skeptical investors that their books aren't cooked. Coca-Cola recently announced it will put stock options on the books as expenses. Here in St. Louis, Emerson and Charter Communications have announced that they will join that movement. Good idea? Let investors decide, not Congress. If investors value the expensing of options, then these companies' stocks will rise and other companies will follow their example.

Let the private sector impose its own punishment. Let Enron and WorldCom go bankrupt. Watch as the reputations of former geniuses are left in tatters. Jail and shame will encourage a return to integrity.

Not surprisingly, Congress is taking a more expansive approach. Some of the provisions of the recent reform bill signed by President George W. Bush are a step in the right direction, such as increased penalties for fraud and document shredding. But the bill also creates a private oversight board for the accounting profession and new responsibilities for all CEOs. The costs of these provision will fall on all businesses, even those that are run honestly.

Ultimately, business will pass these costs on to stakeholders. Investors will earn lower returns, consumers will pay higher prices and workers will earn lower wages.

I hope the government continues to focus its efforts on the guilty.

When a 78-year-old man like John Rigas of Adelphia is dragged away in handcuffs, it gives all executives pause. And that's the way it should be. Even when there are big prizes, jail and humiliation will keep a lot of people from temptation.

More money hasn't made public schools better

By Russ Roberts

From an editorial in the St. Louis Post Dispatch

So education vouchers are constitutional after all. At least that's what the Supreme Court says, and they're the only ones that count. So forget about the legal issues for now and focus on the educational impact of voucher programs. Are they going to be good or bad for students?

Voucher opponents advance a powerful logic in making the case against vouchers. Here's how a New York Times editorial put it: "What is holding the public schools back is the resources to succeed. Voucher programs like Cleveland's siphon off public dollars, leaving struggling urban systems with less money for skilled teachers, textbooks and computers."

The Times has a point. Wouldn't it be better to give public schools more money rather than less? Unfortunately, money does not appear to be the problem facing public schools. I say unfortunately, because the world would be a lot better place if we could simply solve the last four decades of poor public school performance by spending money. Over the last four decades, expenditures per pupil in America's public schools have more than tripled. That's corrected for inflation. Public schools have more than three times the resources to spend on each student than they had 40 years ago.

Sadly, there is no indication that spending more money produced any improvement in America's public schools. It meant smaller classes. It meant better paid teachers. It meant more administrators. A lot more administrators. Yet it did not mean better student performance as measured by test scores or other objective measures. Study after study has failed to find a positive impact of these changes on student performance. How can that be? One answer is that other factors outside the school, such as students' home life and street life have overwhelmed the positive effects of increased spending.

Perhaps. But I'm drawn to another explanation. Spending money is not the same as spending money wisely. Without incentives to spend money wisely, money will be spent in ways that may be unrelated to educational outcomes. When parents have few if any realistic alternatives to their local public school, then the local public school will not necessarily serve them or their children well.

Consider an analogy with the automobile market. We're often told to buy American. After all, every dollar spent on a foreign car reduces the money available to American car makers to improve quality. Yet banning foreign car sales so that American car makers could have more money would reduce the quality of American cars. Giving people the option to buy foreign cars actually increases the quality of American cars. It was the threat of Japanese competition that forced Detroit in the 1980s to improve. Having to match the quality of the Honda Accord created the Ford Taurus and other American successes. Insulating Detroit from competition is the road to mediocrity.

Detroit tried to prevent Americans from having a wider array of choices. That's understandable. Having to compete with Japan and other nations means working harder and accepting more risk and uncertainty.

So I understand why the teachers unions and the school boards are so upset with the Supreme Court decision. Their lives may become more challenging. But ultimately, a world where vouchers are an option means that public schools will have to do more to please their customers. That will be a tougher world for school boards and administrators and a better world for students.

A school is not a car factory. But everyone responds to incentives. When public schools have less money, they may actually do a better job because of the incentives they face in a world of vouchers. School boards and principals will be motivated to do a better job. Teacher pay may become based on performance rather than years on the job. And there is the possibility of innovation in the classroom rather than the dreary status quo.

You might be skeptical about the beneficial effects of competition. But the current recipe for success—the recipe of spend more money and hope it does some good—has failed two generations of students, particularly in the inner city. Isn't it time to try a different approach?

What Do Farmers Want From Me?

By Russ Roberts

From Ideas on Liberty

You'd think in a democracy that the greater the number of people on your side of an issue, the more likely it will be that you'll get your way. But it ain't necessarily so. As Mancur Olson, Gary Becker, and others have pointed out, in politics, small is often beautiful.

Take farmers. When farmers were numerous in this country, they had less political influence than today now that they're a miniscule portion of the population. The reason is that we're not a pure democracy where majority rule decides every issue. We're a constitutional republic. That's a glorious thing. It prevents minorities from being tyrannized by the majority. But it also allows minorities to exploit the majority.

In the case of agricultural policy, the geographic concentration of farmers leads to farmers having much more political power than they otherwise would have in a pure democracy. Their small numbers make it easier for them to organize effectively to lobby and fundraise. Their geographic concentration means that in some states, their political power is enhanced. And because each state receives two Senators regardless of population, farm-state Senators have disproportionate influence on political outcomes.

It's an international phenomenon. French farmers have disproportionate power compared to the average citizen. And the same goes for Japan. But it doesn't happen in India where farmers are numerous.

America's farmers recently flexed their muscles in getting a new farm bill with billions of dollars worth of subsidies. You'd think farmers would be embarrassed to be on the dole, one hand on the plow, the other hand rifling through my wallet and yours. Some of them are embarrassed. But a lot of farmers try to keep the moral high ground at the same time they're stooping to take taxpayer money. In Japan, farmers propagandize about the dangers of foreign rice. That helps rationalize protectionism that keeps Japanese rice prices many times above prices outside of Japan.

In America, farmers talk about the inherent importance of farmland for farmland's sake. They talk about the importance of guaranteeing America's food supply. (Yet somehow, for the myriad of food stuffs without subsidy, the shelves are always full.)

Farmers and their friends in Washington can get pretty creative when finding reasons for why they should be protected from competition. The milk business in America is highly regulated. Such regulations lead to strange outcomes that would never persist in a free market-dairy farming in Florida and large, persistent differentials in milk prices across state lines.

I once heard the director of the Northeast Dairy Compact try to justify its existence at a Congressional hearing. The Compact is a cartel Congress authorized to protect northeastern dairy farmers in the United States from competition. Why was such a cartel justified? Milk is different from other products, the director explained-it's perishable. But lots of products are perishable, a Senator pointed out. Well, it's more than that, said the director. Milk's bulky, he explained.

Bulky? There are many bulky products that do just fine without federal subsidy. But even so, how is milk bulky? He might have just as well have said that milk is special because it's white. Really white. Really white products need government support.

But sometimes you hear a more basic argument. The bumper sticker version goes like this: "Don't complain about farmers with your mouth full." I guess a shorter version might read: "Don't complain about farmers." We all have to eat to stay alive, so the implication is that we owe farmers for our existence and should limit ourselves to the emotion of gratitude rather than its opposite.

Parents sometimes try a similar ploy on their kids. "I brought you into this world, I fed you, I clothed you, so I don't want to hear any whining about my imperfections as a parent."

There's a certain logic to this view when it comes from a parent. Only after you have a child do you realize what your parents went through. On the material and financial side, it is a one-sided relationship that is rarely balanced even at the end of our parents' lives. You should be grateful to your parents. But of course, that doesn't entitle a parent to berate or abuse a child on the grounds that "Hey, I might be cruel and malicious, but on net, you're still ahead, you little brat."

And farmers aren't parents. My relationship with farmers is a reciprocal relationship. I pay for the food I eat. If farmers showed up at our houses out of the goodness of their hearts and literally put food on our tables, I'd feel a great deal of gratitude. But that's what my parents did. They put food on the table with no expectation of receiving anything in return.

But farmers get paid for the food they provide. They don't put food on the table. They sell me the food that I put there. People farm for lots of reasons including the joy of working the land and the satisfaction of producing one of life's essentials. But the money is what keeps people in the business and gets them to put up with the long hours and the uncertainty and everything negative about being a farmer.

And the last time I looked, farmers weren't chained to the land. They were free to leave as millions have over the last century. In a free society, the price of food adjusts to keep enough farmers on the land to satisfy the demand for food. Prices produce sufficient income for farmers to make it worth their while to stay in what is a tough and demanding profession.

I'm glad there are farmers in America. It's a tough job. But there are a lot of tough jobs. After I've paid the market price, I don't owe anything additional. I may feel gratitude. The farmer may feel the satisfactions of the job that go beyond money. But I don't expect the farmer to lower the price of the product because the job is a satisfying one. I would never tell a farmer or a teacher or a gardener: the non-monetary part of your job is so rewarding, you should be willing to do it for less. Or for free.

And similarly, I don't expect a farmer to demand more money from me, above and beyond the market price, just because eating is essential.

Napsternomics: What's the Most Effective Way to Protect Intellectual Property?

By Russ Roberts

In the heyday of Napster, you could steer virtually any song onto your computer desktop. Without much additional effort, you could then download it onto an MP3 player or burn a CD. Both methods allowed the listener to enjoy high quality music akin to a purchased CD but without having to shell out any cash.

The critics of Napster argued that Napster was theft. And even though lovers of music loved Napster, the critics argued that a thriving, legal, accessible Napster would ultimately punish music lovers. If Napster were legal and widespread, sales of recorded music would go to zero. That would destroy the incentive to be a musician. So Napster would mean the end of the professional music community. In this view, the only reason anyone bought CDs in the heyday of Napster was because they didn't know about it or didn't have access to broadband. The critics triumphed in the courts and Napster is twisting in the cyberwind, dying a slow death.

Was the old world where Napster operated freely a world of theft? I don't know. But I will argue here that the decision to shut down Napster via the courts may ultimately harm music lovers, even those like myself who never used Napster. In other words, I will argue that allowing the theft of music via Napster could have actually increased revenue for the music industry benefiting music lovers and the creators of music.

Farm Aid

By Russ Roberts

Text from National Public Radio, Morning Edition
Audio

I suspect the irony was lost on the President. On the same week he signed the farm bill, he was in the midwest advocating tougher workfare requirements for welfare moms.

Six years ago, Congress passed the Freedom to Farm Act promising to phase out farm subsidies. It would introduce farmers to the power of markets. Farmers would learn to stand on their own two feet. And taxpayers would benefit from reduced spending.

We heard similar arguments when Congress passed welfare reform. Welfare moms would learn about the virtues of the marketplace. They would learn to stand on their own two feet. And taxpayers would benefit from reduced spending.

Welfare reform was deemed a great success. Welfare rolls have shrunk by more than half. And the percentage of children living in poverty is down.

But the President's acquiescence on the new farm bill says that we have given up on reforming welfare for farmers.

I guess the farmers didn't like all that tough love. Sure it's hard to step away from the government trough. But if welfare moms can do it, why can't farmers?

There's no good economic reason for having farmers on the dole and welfare moms off it. But the politics must be pretty persuasive.

The farm lobby speaks loudly in a number of states. When farmers feel pinched or even poked, lots of their suppliers and their employees feel it and complain.

These folks have a lot of power. They are highly organized. And their representatives in Congress are powerful, too.

But there's another group that helps smooth the political way for paying big subsidies to farmers. You and me. Many Americans romanticize farming. We don't think of farmers being on the dole. Welfare moms get called lazy or cheats. But that's never stopped us from paying farmers not to farm.

When we think of farmers, we think of sturdy folk in overalls working the land. Never mind that a lot of farmers who receive government payments are millionaires with clean fingernails.

It's depressing but not surprising that politicians from farming states are in favor of spending my money and yours to enrich their constituents.

But the President campaigned on free markets and free trade. When he endorses a massive porkfest like this, it has consequences. It will be harder for him to stump for free markets at home and abroad. He's in favor of free trade, except for steel. He's in favor of self-reliance for welfare moms, but not for farmers. By signing the farm bill, he has betrayed his principles.

In Praise of That Ugly Box On the Edge of Town

By Russ Roberts

From the St. Louis Post Dispatch

Wal-Mart has become the biggest corporation in the world, measured in annual sales. To some, Wal-Mart's success is the ultimate symbol of the hollowing out of the U.S. economy. We were once the workshop of the world. Now we're nothing but a service economy of minimum wage jobs.

When did the "hollowing-out" begin that so alarms the critics? It's hard to pin down a precise date, but manufacturing employment has fallen steadily while service employment has increased steadily since the end of World War II. In 1950, 34% of non-farm employment was in manufacturing. Today it's under 14%. What is left are those manufacturing jobs that are still best done in America-those that apply cutting-edge information technology to the manufacturing process. And those technologies inevitably require fewer people to do the work.

Yet the last half of the twentieth century transformed the standard of living in America. Maybe a large manufacturing sector is not the key to wealth. Maybe an economy can thrive by success in health care or education or telecommunications or computer software or even retailing. America has been doing it for 50 years.

But can we say anything even remotely nice about Wal-Mart? Surely, say the critics, those are the retail jobs we don't want. Goodbye, quaint general store on Main Street. Hello, ugly box on the edge of town.

Sam Walton had a lot of charm, but he couldn't force people to shop in his stores. People shop at Wal-Mart because they like the prices and the quality. When a Wal-Mart comes to town, everyone celebrates except the folks who run that store on Main Street. They will probably go out of business. But they will go out of business because consumers prefer shopping elsewhere.

Sam Walton had more than charm. He understood how to harness information systems and technology to reduce inventory costs. He also understood how to outsource—how to buy low-cost goods made all over the world. He passed the savings on to the customer.

Has it been a good deal for the customer, this world of lower prices and a less quaint Main Street? I'd leave that for the customer to decide. But even if you don't like the customer's preference for Wal-Mart, know that there are other benefits to Wal-Mart than cheap socks and underwear.

Those benefits are harder to see. But they are real. Because of Wal-Mart's relentless pursuit of profit through lower prices, consumers have more money left over to spend on other things. That means more music lessons for the kids, more evenings at romantic restaurants. Does that make up for the ugly box that ruins the view of the meadow and leaves a hole on Main Street? I can't judge that. I only know that the full effects of Wal-Mart are a little more life-enhancing than they appear at first glance.

Because of the efficiency of the retail sector and a slimmer but still successful manufacturing sector, we as a nation have more resources for both sublime and ridiculous ends-a health care revolution and better special effects at the movies. Gourmet coffee and drugs that prevent heart attacks. Viagra and Amazon. More of everything. More life. Literally. Today, life expectancy is more than eight years longer than it was in 1950.

What does Wal-Mart's success and the growth of retailing and other services have to do with living longer? Our increased life expectancy isn't a natural phenomenon. It's an economic phenomenon. It requires venture capital and investments in research and development. It requires better nutrition and knowledge about disease and how to cure it. It takes money. The wealth we have accumulated over the last fifty years has let us create better health care. It has let us have the resources to make our air and water cleaner. It has let us produce more of everything.

The critics said the shrinking of the manufacturing sector would hollow us out and make us poor. The critics called for subsidies and protectionism to preserve manufacturing jobs. Most of the time, the government didn't listen. And we have thrived as a result of that decision.

If we had decided back in 1950 to preserve the size of the manufacturing sector and choke off the move to the service sector, we would be dramatically poorer. We wouldn't have the resources or standard of living to fund all of the new industries and products that have changed our lives over the last half-century.

Not everyone has benefited from that transition. But for the overwhelming mass of Americans-black and white, rich and poor, young and old-life is much better today than it was 50 years ago. And some of that improvement is due to Wal-Mart. Wherever you are Sam, congratulations.

Cipro and Price Controls on Pharmaceuticals

By Russ Roberts

From National Public Radio
Audio

The critics say it's immoral for Bayer to profit from fear and disease. After all, other pharmaceutical manufacturers have said they'll give away their antibiotics in the fight against anthrax. Tommy Thompson of the Department of Health and Human Services even threatened to ignore Bayer's patent and allow other companies to produce a generic form of Cipro.

Is it immoral for Bayer to profit from the misfortunes of others? I don't know, but I do know why pharmaceutical companies get started. I know why investors invest in pharmaceutical companies. I know why pharmaceutical companies take risks on unknown compounds. I know why they spend billions on research, much of which will come to nothing. All these things take place because pharmaceutical companies exist to profit from the misfortunes of others. Really, that's what they do.

And in our system you make profit by reducing misfortune or preventing it. It works extraordinarily well. Money and profit aren't the only motivations.

There's great satisfaction in knowing that your insight and labor and struggle and failures prevent people from dying, but without the money, there'll be less effort.

That's one of the reasons Poland and China and Cuba don't lead the world in pharmaceutical innovation. America and Germany do. And the profit motive has driven the pharmaceutical revolution of the last 100 years.

“But don't drug companies make enough money already?” you ask. I don't know. I don't know the definition of enough, but I do know what happens when we lower the profits from discovering new drugs. We reduce the incentives to find the yet to be discovered drugs of the next 100 years that can eradicate cancer, heart disease, AIDS and Alzheimer's.

It may seem compassionate for the government to take away Bayer's profits -- but politicians always like policies where the benefits come today and the costs come tomorrow. But still, isn't it wrong for people sick with anthrax to have to pay for something that could save their lives?

It would be nice if new drug discoveries were like manna that fell from heaven, but they aren't. New drugs come from hours of toil and millions of dollars. And when we force or intimidate drug companies to give away their products, we're not really making the drugs free. We're making investors pay for them. And we're also making our children and grandchildren pay.

They won't get the drugs that would have been discovered had we left incentives in place. I'd rather have Congress tax all of us to pay for the needed drugs or have charities cover the cost of drugs for people who can't afford them.

Only politicians can claim that there is such a thing as free drugs. The rest of us should know better.

Social Security—Where do they put our money?

By Russ Roberts

Text from National Public Radio, Morning Edition

What do you think of when you hear the phrase "raid Social Security?" I see an elderly person, maybe a nice white-haired Grandma about to take a spoonful of soup on a cold winter night. Suddenly, someone grabs the sweet old thing's wrist in mid-slurp. "Sorry, Ma'am, but we need these resources somewhere else in the economy." The bowl is whisked away and elderly Americans everywhere go to bed hungry.

Too dramatic? Then what could it mean to "raid Social Security?" Surely it means less money for the current elderly or at the very least for baby boomers approaching retirement age. Maybe twelve billion less.

The President pledged during the campaign to leave that money in the Social Security Trust Fund. The Democrats say he's breaking that promise. Even the President's budget director, Mitch Daniels, says we could use as much as 12 billion from the Social Security Trust Fund for general government expenditures this year, if the economy doesn't hold up.

When I hear the phrase, "Social Security Trust Fund" I think of an account in a bank, accruing interest over time. Maybe you envision Al Gore's old Lock Box. Alas, that is not how the Social Security Trust Fund works.

Today, because the baby boom generation is hard at work, the government collects more money from Social Security taxes than it pays in Social Security benefits. The promise not to touch this surplus is a lie.

OK, maybe not a lie, but an enormous deception. They claim it's being set aside for Social Security in the Social Security Trust Fund. But the Social Security Trust Fund is not really a trust fund at all. There's no money in it.

As soon as the money enters the Trust Fund it goes out the door at the Treasury Department. The Treasury Department spends it, the same way it spends money collected from the income tax. It then leaves behind an IOU which says that, in the future, the agency will use taxes or bonds to pay back Social Security. The IOU even includes some interest.

That's a lovely promise. But there's no money or real assets backing up that promise. The promise will be enforced in the future with future taxes, just as it would be if the Social Security Trust Fund didn't exist.

Whether the government spends the social security surplus on defense spending, education, or paying down the federal debt, there is no extra money being set aside today for the Social Security recipients of tomorrow.

Both the President and the Democrats should stop engaging in dishonesty. Stop treating us like children. Tell the truth about Social Security. Otherwise we'll have to call it the Social Security DISTrust Fund.

A Sausage By Any Other Name

By Russ Roberts

A version of this essay ran in the St. Louis Post Dispatch on 4-4-01

It is said that there are two things you should not watch being made: sausage and law.

Once upon a time there was a great sausage maker from Arizona. He made sausage from the innards and entrails and unmentionables of the pig and of the cow. His sausage was delightful. It was the Rolls Royce of sausage, the Mark McGwire of sausage. His customers loved it and kept coming back for more.

One day a journalist read the label on a package of sausage. He was shocked to see it contained entrails and innards, not to mention the unmentionables. So he wrote a devastating article exposing the nature of sausage making. He demanded reform of the industry.

The newspaper readers were disgusted when they read about how sausage was actually made. People began to be uncomfortable with the smell coming from the sausage factories. The customers of the great sausage maker began to complain. Maybe you could use something other than innards. Maybe you could do without the entrails.

Even the great sausage maker began to be embarrassed. So he called a great convocation of all 535 sausage makers.

"We have lost the confidence of the people," he said. "Our livelihood is in jeopardy. We must bring about change."

But what can be done, someone asked.

"From this day on, we will no longer make sausage from innards, entrails, and unmentionables."

A great hubbub rose up from the group. No innards? No entrails? That wouldn't be sausage!

"Relax," said the great sausage maker. "I'm mainly talking cosmetic, here. We will still use the pancreas and the brains and all the other unmentionables. But from now on our labels will just say parts. Pig and cow parts. Instead of calling the outside of a sausage an intestine, we'll call it a casing. And we'll perfume the air outside our factories so people can enjoy the smell of our work once again. Think of it as casing fragrance reform."

But will it work, someone asked.

"It will save our industry. Wouldn't you rather have paté instead of chopped liver? Or gelatin instead of boiled cow hooves?"

A moan went up from the group. Gelatin is boiled cow hooves?

"I'm afraid so," said the great sausage maker. "It's all marketing. Once these reforms are announced, most people will stop paying attention. The press will leave us alone for 25 years."

A few dissident voices were heard. A sausage maker from Kentucky claimed a First Amendment right to call an innard an innard. He said that customers deserved the truth even if the truth was sometimes uncomfortable.

But in the end, the great sausage maker from Arizona was triumphant. The newspapers announced the reforms with great fanfare. All the nastiness had been removed from the sausage-making process, or so they said. And the people congratulated themselves that their sausage makers were so enlightened.

And the 535 sausage makers? Their work became a little less convenient. To maintain appearances, their suppliers made their deliveries at night and at the back entrances of the factories. But it was worth it. The livelihood of the sausage makers was more secure than ever.

Relying on Relatives

By Russ Roberts

From Ideas on Liberty

One of the highlights of the 2000 presidential campaign was Winifred Skinner. You may remember her—she was the can-collecting 79-year-old woman who used the money from her foraging for tin and aluminum to finance her prescription drugs. She was interviewed on Good Morning America about her plight, and Al Gore highlighted her story in his campaign speeches. Chosen by Gore to be one of his 13 "citizen advisers" before the first presidential debate in Boston, she even traveled there in a Winnebago to do her part in bringing about change.

At some point in the saga, it came out that Winnie had a son who was quite well off, perhaps even wealthy; he presumably could make up for the shortfall in income that might occur if she stopped walking the streets in search of a nickel's worth of tin. But that revelation failed to derail the media's love affair with Ms. Skinner, and it didn't stop Al Gore either. He explained that we still need a prescription drug program for seniors because Winifred prized her independence. She didn't want to depend on her son.

No. She wanted to depend on me. And you. Strangers. And Al Gore's idea of compassion was to force us to support her.

Fast forward to the present, which for me as I write this column is late December 2000. George W. Bush is making cabinet choices for his administration in the abbreviated time available after the circus in Florida. As Bush assembles his cabinet and begins speaking about his policy agenda, we now hear from the equivalent of Winifred Skinner's son. In this case, it's Sarah Jessica Parker, the acclaimed star of the acclaimed HBO hit Sex and the City.

Sarah Jessica is concerned about a Bush presidency. Speaking to a Washington Post reporter, she said, "I'm worried about the kind of cuts he might make in domestic programs that mean something to a lot of people, including people in my family who depend on certain things from the government." (I wish I had the same grounds for concern. I cannot remember Bush mentioning a cut in any domestic programs during the campaign.)

But the truly fascinating aspect of the remark is that I think Sarah Jessica Parker actually expected that her quote would make her appear compassionate. According to a story this past summer in the New York Times, she is worth about $4 million. Her annual income is certainly what most people would call a great deal of money. Apparently it does not occur to her that she might be an appropriate source of help for the less fortunate members of her family. In her mind, as in Gore's and Winifred Skinner's, struggling loved ones should be cared for by strangers. There is another possibility, suggested by the peculiar wording, "people in my family who depend on certain things from the government." She did not say they were on welfare or food stamps or Medicaid. It is possible that they "depend on certain things from the government" such as agriculture price supports or cheap airwave frequencies to run radio stations or government-limited taxi medallions or export subsidies to favored companies and industries. Compensating relatives for these losses, should the government decide to cut back, might even challenge Sarah Jessica Parker's monetary resources.

Without Social Security

I am reminded of those who pronounce that without Social Security, millions of elderly Americans would starve to death. This image, designed to enforce the policy status quo, ignores the way the world might work in the absence of government-enforced "compassion." In the absence of Social Security, people would plan differently for their own retirement. (They are doing it now in a world where Social Security's future is merely uncertain.) But the most important difference between a world with Social Security and a world without is that relatives would help one another instead of relying on welfare payments financed by payroll taxes. That is true private social security.

A world of true private social security has many challenges. Many siblings do not get along, and it might be difficult to coordinate assisting poor elderly relatives. Many would use the financial leverage to manipulate relatives in various ways. The cold, heartless public Social Security system avoids these problems, and it allows for the illusion of dignity. Winifred Skinner may prize her independence. By not relying on her son, she is free from his meddling in her life. But is she really independent when she relies on me and you?

The Sarah Jessica Parkers and the Winifred Skinners may believe that the illusion of independence is worth preserving. I generally prefer truth to illusion, but let's assume that it is better to depend on strangers than loved ones. Maimonides, the great Jewish thinker of the thirteenth century, argued that the highest level of charity is when the donor, through a loan or gift, creates the opportunity for the recipient to get a job or start a business, thereby becoming truly independent. The next highest level is for the recipient to depend on the donor, and for both to be ignorant of the identity of the other. The government system does have that desirable outcome. But producing that outcome through public means comes at a tremendous cost.

It creates a world where people rarely if ever look to one another for help. It creates a world where true compassion is deadened, a world where gratitude is lost. It means a one-size-fits-all system where people with radically different circumstances are often treated identically.

Put yourself behind John Rawls's veil of ignorance, not knowing your situation or that of your parents. Would you deliberately create a world where the situation of the elderly was determined by the political process rather than by individuals and families? Is the illusion of independence that precious?

Would a ban on soft money hurt special interest politics?

By Russ Roberts

Text from National Public Radio, Morning Edition

The rush toward campaign finance reform continues to pick up momentum. People want to purge money from politics. That's a little like asking to take the grinder out of the sausage factory. The whole thing is about money.

The Federal government will spend around 1.7 trillion dollars this year. How the money gets spent is in the hands of roughly 536 people-our elected Senators, Representatives and President.

The reformers want the people, not special interests, to influence how that money gets spent. That's the appeal of banning "soft money," the money spent by the political parties and donated by the special interests.

One snag with this plan is that it may conflict with the First Amendment. But even ignoring the Constitution, will a ban on soft money increase the power of the people?

It will enhance the power of incumbents. Incumbents don't need money to generate name recognition and publicity. They already have it. If soft money isn't available to be spent on behalf of new candidates, incumbents' seats become even safer. Without the threat of a well-financed challenger, incumbents won't have to be as responsive to the electorate.

But the real problem is those pesky special interests. If soft money is banned, do you think they'll stop trying to influence policy? With almost 2 trillion dollars to be spent and countless regulations to be written, do you think those lobbyists and industry groups and unions are going to shrug, fold their tents and disappear?

If the special interests can't donate soft money, they'll still find ways to influence government. Under Gore's proposal, lobbying groups will still be able to make so-called independent expenditures on issues they care about.

They'll also find ways to influence policy that are harder to detect. They'll befriend legislative aides and staffers with gifts and favors. They'll try to position friends and allies as delegates and party officials. When $1.7 trillion dollars is up for grabs, special interests will work awfully hard to have a say in how it's spent.

In a world without soft money, the influence of the special interests won't be eliminated, just further removed from scrutiny and accountability. Instead of trying to sweep special interests under the rug, let's keep their impact out in the open. Let money flow freely and openly. Eliminate the limits on hard money, the direct contributions to candidates, and post all contributions on the Internet.

Letting money flow freely creates more challengers to incumbents. That means more choice for the voters and more competition within the political parties. Letting it flow openly gives the voters a chance to judge whether a politician is in the pocket of special interests. More choice and more information enhances the power of the ballot box. That's the best way to give power to the people.

Transforming the Political Marketplace

By Russ Roberts

From Ideas on Liberty

What we expect from our politicians goes a long way toward determining what kind of politicians we can expect to find in office. Just as suppliers compete by trying to please their customers, politicians compete by trying to please voters. Just as the features of cars tell us something about the preferences of car buyers, the actions of politicians tell us something about the electorate.

In the marketplace for cars, competition insures that the products mirror consumer tastes. Unfortunately, politicians have created barriers to entry that make political competition less vigorous than it might be. And voters do not bear the consequences of their choices with the same immediacy of car consumers. Still, the politicians who survive in office tell us something about ourselves.

We could, for example, expect our politicians to uphold the Constitution and maximize our ability to lead the lives we choose. After all, elected officials at the federal level swear to "support and defend the Constitution of the United States against all enemies, foreign and domestic."

In contrast, we might expect our politicians to see their job as pleasing their constituents regardless of constitutional constraints. And because constituents are a diverse lot, the politician who wants to stay in office focuses on the most influential constituents.

Frederic Bastiat described the state as "the great fiction by which everyone seeks to live at the expense of everyone else." Everyone may try, but only the politically powerful succeed. When the state is devoted to such efforts, what Bastiat called plunder, a peculiar sort of person succeeds in politics. No, not a thief, but a thief in saint's clothing.

The political marketplace teems with those who sugarcoat redistribution with claims of helping the general public: "We need farm subsidies because the family farm is the backbone of this great nation." A politician who can make that claim with a straight face has a much better chance of being elected than one who says, "I have a lot of friends who are farmers and when elected, I intend to make them rich using your money."

Helping the District

In today's political landscape, however, some politicians dip their hands into the treasury without invoking the legerdemain of the public good. It is not uncommon to read of a member of Congress making the case for his re-election on the grounds that he has successfully steered large amounts of so-called federal dollars into his district.

You would think he might be embarrassed to have taken money from neighboring districts and states merely to enhance, say, the roads of his constituents. But he's actually proud of it. When he is called to task, his supporters have a quick justification: it's his job to help his constituents.

His job? It's his job to use the fiscal process to enrich A at B's expense? I guess that oath of office is just for show. If the Constitution could weep, it would cry us a river.

We once lived in a different world.

We once, at least from time to time, had politicians who understood that the Constitution constrained their ability to spend the people's money. One such man was Grover Cleveland. In his first Inaugural Address, in 1885, he said: "In the discharge of my official duty I shall endeavor to be guided by a just and unstrained construction of the Constitution, a careful observance of the distinction between the powers granted to the Federal Government and those reserved to the States or to the people, and by a cautious appreciation of those functions which by the Constitution and laws have been especially assigned to the executive branch of the Government."

Such language sounds quaint to our ears: a president promising to restrain himself based on higher principle. When push came to shove, Cleveland refused to budge from that principle. In 1887, when a drought hit Texas, a bill arrived on his desk providing funds to buy seeds for struggling Texas farmers. Who could oppose such a worthy cause?

Cleveland vetoed the bill and wrote the House of Representatives that "I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and the duty of the general government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit." Cleveland went on to explain to Congress that when the government got into the business of relieving suffering, it discouraged private efforts to fight hardship and hurt our character.

How would the voters of today describe such a veto? Heartless? An example of grid-lock? How the world has changed! A reluctance to spend other people's money has become a vice rather than a virtue.

Notice that Cleveland said nothing about the morality of helping the farmers of Texas. He might have felt their cause to be just. But he could not justify federal intervention constitutionally. This narrow perspective reduces the potential for plunder. And one of the purposes of the Constitution is to limit even our honorable desires to alleviate suffering with the public's money. Otherwise, the power of government grows and that of individuals falters.

It is tempting to say that Cleveland's integrity and respect for his oath of office were politically courageous. Perhaps they were. He made plenty of enemies. But he was also popular with the voters. He managed to win the popular vote in three consecutive elections, his two terms book-ending an electoral college defeat. The voters of the late nineteenth century respected the Constitution and honored Grover Cleveland with their support.

If we want politicians who respect the Constitution, those of us who care about it will have to do a better job encouraging our fellow citizens to feel the same way. Then the politicians who will thrive in the political marketplace of the next millennium will be less interested in spending other people's money and more interested in letting us make our own decisions about living life to the fullest.

Nothing's Free: How Lotteries Work

By Russ Roberts

From Ideas on Liberty, at FEE.org

My brother and I have a game we play from time to time. He calls me with a can't-miss investment opportunity and my job is to figure out what's wrong with it. There is always something wrong with it. In fact, the better it looks on the outside, the worse it looks on the inside when you take a closer look. That doesn't necessarily make it a bad investment. But it's never the bargain in appears to be at first.

Such is the economist's burden and blessing. There is no free lunch. The bigger the bargain, the more likely it is that something worrisome lurks beneath the surface that needs to be examined. There's always a catch. Usually it's easy to discover: the bargain is of questionable quality; the bargain has a hidden payment that comes later; the bargain involves an unforeseen risk. But every once a while a bargain comes along that looks so good, you wonder if it might actually be a genuine bargain. This should make you especially nervous. For that means the catch is especially hard to see. So look carefully before you leap, then look some more.

So it is with the "free" education that is being offered in some states with lotteries. In Georgia, for example, any student with a sufficiently high grade point average gets "free" education at any public Georgia college. The funds come from sales of lottery tickets. It sounds like the ultimate bargain. Who can quarrel with free education?

Let's take a closer look. There are many senses in which that University of Georgia education is not free. Resources get used up to provide that education. Those resources could have provided something else of value.

But who provides those resources? If the education is not really free, someone must be paying. Who is it? It would seem to be the losers in the lottery. And that's why it seems free. We know that there have to be losers in the lottery. So now they help pay for education. Sounds great. And besides, no one forces you to play the lottery, so the whole thing is more like a voluntary contribution, not a tax.

To see the flaw, suppose the government decided to fund free education by opening a chain of dry cleaning stores. Profits from the store will be used to pay for "free" education. To make sure the stores are sufficiently profitable, the government decides to charge $1 more per shirt than the dry cleaners who are currently in operation. And to keep those privately-run stores from attracting customers at lower prices, the government decides to ban all private competition and enjoy a monopoly.

We would all understand that in this world, the "free" education is being paid for by people who enjoy pressed and clean clothes. Such people would be paying in two senses. The first sense is literal: their excess payments above and beyond the competitive prices that would prevail without a government monopoly are what fund the education. They also pay in the sense of having their clothes cleaned less often than they would under a private system. Given the higher prices, some people are going to do less dry cleaning and some are going to do none at all. Under such a system, it would be ludicrous to claim that the education is free. It's clearly being paid for by the users of dry cleaning services. Funding education from the pockets of dry cleaning customers also raises a question of morality. Why should the burden of funding education fall arbitrarily on those who like clean clothes?

Now, let's return to the state lotteries. About 55% of the receipts go to prizes, 10% to expenses and 35% of the receipts go to education or some similar unimpeachable cause. Because 35% goes to neither winners or losers, the real cost of the lottery is that you win less often and there are smaller prizes than there would be in a world without a government monopoly. If government allowed competition or made gambling legal, people who like to gamble would have a higher chance of winning and there would be more money distributed to winners.

So it's not free after all. Subsidizing education out of lottery proceeds punishes people who like to gamble. Those turn out on average to be people who are relatively poor with less education. Can you think of a more immoral solution for funding education than to put it on the backs of the people with the least education?

People like to defend the lottery by saying it's voluntary. After all, you don't have to play. It's also true you can avoid the income tax by not working. So I guess that's voluntary, too. But it's hard to argue that the lottery is a voluntary tax when the government has a monopoly on lotteries. Can you imagine how many people would play the state lotteries if there were competing private lotteries with 90% of the money going to prizes instead of the 55% the states typically allot?

Under a private, competitive lottery system, the prizes would be bigger and the odds of winning would be higher. It would be a better world than the one we live in now, where people in search of hope are forced to pay a 35% tax to finance the education of college education of the mostly upper class. That's why I like my dry cleaning proposal. Sure it's unfair. But it's better than using the money from a government lottery.