Part 7: Of Presidents, Groceries, and Inflation

Thomas Woods' lecture title was a little deceiving, "American Presidents vs. Economic Law." He did not so much talk about particular presidents as much as he did two lesser known general examples of presidents going against economic law: income transfer programs and foreign aid programs.

 

Once upon a time, one Charles Murray wrote a book called Losing Ground, which explained the theoretical background to income transfer programs. His thesis was that many social problems are actually caused by the welfare programs. In fact, he proposes not merely difficult but absolutely impossible to devise a wealth transfer program that will not create net harm. He justifies this with a thought experiment. Suppose we wanted to institute a government program to discourage smoking. We would need to provide incentive for people to quit, so we decide that giving the quitting smoker money would be appropriate. Suppose we make a law that says if you quit smoking and abstain for a year you get $10000. Furthermore, we can't just let anybody get in on the deal, so only those who smoke a pack a day for 5 years will qualify.

 

Think about the repercussions for this type of program. Those currently in their 4th year of smoking would have no incentive to quit at all! It's much more difficult to kick the habit if you've been smoking for 5 years, but now you have incentive to keep going if you have more recently started. The person who isn't quite smoking a full pack a day would increase their consumption of cigarettes. Teenagers on the edge of smoking have incentive to start, because of course the government will bail you out in the end! Murray concludes that whatever you do, however you change the program, regardless of the incentive, you will disproportionately cause more harm than good. Read the book if you don't believe me.

 

Murray describes three laws of income transfers. First, the law of imperfect selection - any objective rule for a program will irrationally exclude some persons, and by extension could irrationally include some persons. Second, the law of unintended rewards - any social transfer increases the value of commencing with the action that prompted the social transfer. People on the edge will get into the bad situation in order to receive that social transfer. Third, the law of net harm - the less likely it is that the behavior will change voluntarily, the more likely it is that a program will cause net harm. A program that consists of entirely positive characteristics will not work, as being part of the "helped group" becomes more valuable for each positive reward give.

 

Clearly Murray's laws and observations can apply to foreign aid programs also, which create absolutely perverse incentive effects in the countries receiving the aid. Few (notably Peter Bauer) dissented from the conventional wisdom in the 60s and 70s that poor countries cannot lift themselves out of their "vicious circle of poverty." Supposedly, a poor country cannot get the capital investment to improve industry. Of course, that statement begs the question: how did ANY country EVER get out of poverty? How did the FIRST country get out of poverty? Martians?

 

Even basic humanitarian assistance has the potential to hurt the economic life of a country. Many countries with developing industries are short-circuited by unnecessary aid. For instance, countries trying to build textile industries suffer from other countries sending them free clothes all the time. In other words, the transfer may manage to do more harm than good. Clearly, this doesn't mean all privately funded assistance is bad, but one can't just tacitly assume what another country really needs.

 

More often than not, foreign aid money gets monopolized by politicians who then siphon it to political connected people. Thus, the poor never see the money anyway, because they are never politically connected. In fact, studies show that increases in aid are positively correlated with corruption, especially aid from the US. Of all despotic governments who received aid, only one has not received money from the US. To those who think the Marshall Plan was good, Africa has received the equivalent of FIVE MARSHALL PLANS and yet still is destitute. Bauer concluded that for a country to lift itself out of poverty the country does not need foreign aid, but rather the rule of law and respect for private property. Since none of these despotic countries have any true rule of law and true respect for private property, is it any surprise that they are what they are?

 

The new stupidity in government's foreign aid department is that "You just need to find good recipient governments for foreign aid!" But even if you find a government who isn't committing atrocities against private property, the aid is a problem in and of itself because it increases the power of the public sector. Aid increases the propensity of population to seek to obtain that aid - negative incentives are encouraged regardless of the recipient government.

 

For more information about income transfer programs, check out FDR's Folly by Jim Powell, and Out of Work by Vedder and Gallaway.

 

Thomas DiLorenzo's lecture was a fun exposition on the economics of the public sector. He proposed a facetious plan for "restructuring the grocery industry." First, each family will be assigned a neighborhood grocery store by the government. This family will pay one lump-sum fee per month for use of the grocery store. Every employee of the stores will be paid the same wage, regardless of their type of job. Any cost increases will mandate a fee increase, and each family will bear that burden. If a family decides to shopping at a non-neighborhood store, they will have to pay twice. This sounded like a pretty horrible idea to me, and I laughed at its absurdity! The proposal is effectively a government monopoly, first of all. There will be excess demand because it's free! Shelves will simply be empty from the demand. There will be no incentive to work, because everyone gets paid the same. In turn, there are no incentives to cut costs, because any problems end up being the burden of the families. The poor, although they get something, may be unable to get what they really want - and what right does anyone have to tell them what they need.

 

Imagine our surprise when DiLorenzo said this is exactly like the public school system! It's strange how profits and losses drive business, but in government you need failure to continue your funding. When analyzing a government program, you must first think about opportunity cost, what Frederic Bastiat calls the "seen and the unseen" in an economy. Whenever the government does something, consumer sovereignty is replaced by the whim of the bureaucrat. Think about that for a while…

 

George Reisman gave a lecture focused on inflation and central banking. There are two definitions of inflation. The first definition, which is popularly used in the news and such, is that inflation is rising prices. However, this definition is so wrong it deserves to be smashed! Rising prices are a result of inflation, but rising prices are most certainly not inflation! Ludwig von Mises defines inflation as "an undue increase in the quantity of money" (Human Action, pp 422-423), or that the increase in the quantity of money exceeded the corresponding increase in gold. Many confusion result from the definition of inflation as "rising prices." For one thing, it results in too many explanations for the rising price, causing ignorance in any particular case. Rising prices could occur because of a wage push, profit push (Sellers' inflation), supply shock (oil or bad crops), a wage-price spiral, an exchange-rate depreciation, credit cards, inflation psychology, or even consumer greed. Calling inflation "rising prices" implies that the cause is businessmen, when in fact it is government. It also implies to many people that price and wage controls are the solution. Price controls, however, will result in shortages of those controlled goods and services - short-circuiting the market process. It's like moving the needle in a pressure gauge to say the tank is not going to blow up. The faulty definition also implies that one can limit inflation by expanding the quantity of money, such as subsidizing sellers to keep prices lower. Yet the expansion of the fiat money supply without hard money is the root cause of inflation, so how could that help?

 

Inflation is ultimately the fault of the government, which can only be mitigated by the Federal Reserve Bank losing the power to print money at the will of the government. Only then can we begin the path to the restoration of sound money - based on gold and not government fiat.