Anyone who has been on Drudge Report the last few days will know of the Obama-Rush feud in which Obama asked congressional minority leaders to stop adhering to Rush’s advice and politics. Well Rush has responded to the President’s criticisms through National Review Online being that his show doesn’t operate on weekends. Without going into the specifics of the response, one particular phrase really stood out for me:

“Obama was angry that Merrill Lynch used $1.2 million of TARP money to remodel an executive suite. Excuse me, but didn’t Merrill have to hire a decorator and contractor? Didn’t they have to buy the new furnishings? What’s the difference in that and Merrill loaning that money to a decorator, contractor and goods supplier to remodel Warren Buffet’s office?”

Why didn’t I think of that? This perfectly demonstrated the utter inconsistency in how the left seems to approach economic matters. Subscribing to this crude Keynesian framework of all marginal deficit spending will entail a multiplier effect which will be the catalyst of “priming the pump” of aggregate demand.

I am not really qualified to comment on the validity of the multiplier effect and whether the inflationary pressures along with mounting debt are worth the tradeoff. In another post, it might be necessary to point out the additional public choice issues that arise such as bureaucratic inefficiencies in determining highest values at the lowest costs, rent-seeking problems, incentive problems, red tape, bloated oversight, and other governmental problems that, even if the Keynesian theory is entirely true, would limit its effectiveness.

What is so amazing about what Rush has pointed out is that Obama is entirely correct about being angry with Merrill Lynch and yet the President doesn’t seem to make the connection with his greater stimulus. Government does not possess the ability to effectively identify value. This is because value, with the exception of clearly defined public goods, can only be understood by its profitability. Lowering unemployment cannot be understood as a virtue in itself- it must be tied to productive growth. The tribes of thousands of years ago always had full employment- every single person worked, and yet it would be ridiculous to call those times prosperous relative to ours.

But to view every single marginal dollar spend as equal is complete economic ignorance. North Korea, for example, in an act of proving economic and social prowess, created plans to federally finance a massive epic building (I forget the name). They employed thousands of workers and tons of capital and resources. In the end because of no market price mechanism for conveying the best way to produce this building at the lowest price, it was never completely finished and is considered one of the ugliest sky scrapers ever constructed. But people had jobs!!! – all at the expense of foregone resources, squandered capital, and wasted tax dollars. By and large the American plan doesn’t include much public design of projects so it’s not entirely analogous (or maybe it does? I don’t know. If that is the case it will be even worse). But nonetheless, how is the government to know where to throw the money? If its goal is to get people working again, shouldn’t Obama praise Merrill Lynch for stimulating the decorating business so they can hire more people and those people can spend money in other industries and then they can hire more people and so on and so on as the multiplier theory tells us.

But Obama nailed it. Dollars can be wasted. A dollar spent doesn’t necessarily increase economic value and most of the time doesn’t. Hopefully he will display this same brilliance when it comes to his dear stimulus.

(I am in a huge hurry writing this and only have 15 minutes so I hope it sounds logical. If anyone doesn’t understand a certain point its probably not you but me and I will fix it later)

President-Elect Obama is literally bringing back a type of draft:

“The Obama Administration will call on Americans to serve in order to meet the nation’s challenges. President-Elect Obama will expand national service programs like AmeriCorps and Peace Corps and will create a new Classroom Corps to help teachers in underserved schools, as well as a new Health Corps, Clean Energy Corps, and Veterans Corps. Obama will call on citizens of all ages to serve America, by developing a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year. Obama will encourage retiring Americans to serve by improving programs available for individuals over age 55, while at the same time promoting youth programs such as Youth Build and Head Start.”

This is truly unbelievable and so ominously indicative of what other steps he may take down the road to serfdom.

HT: Great Mankiw

The bad economist only notices what is seen. The good economist sees what is unseen. Bastiat’s timeless observation of the problem with popular economic reasoning is sadly still so very relevant today. This point can best be illustrated by presenting a most extreme example where nearly everyone only saw what was seen and fatally missed the unseen.

Hurricane Katrina was a devastating moment for all Americans. We saw one of our most beloved cities suddenly underwater, with our fellow compatriots struggling and suffering. We sympathized with the stragglers who failed to leave the town in time and all the anarchy that ensued. Many of us sent charity and many even volunteered to try to help mitigate the crisis.

We all hated one thing: the exploiters- the people who took advantage of this tragic incident in order to line their pockets.

None were probably more disdained than the individuals that sold water to these helpless refugees for obscene prices; sometimes 10 to 20 dollars a bottle. Many wanted them arrested. Many called for laws to prevent this sort of price gouging in a time of crisis. How in a just society, these well-intentioned individuals ask, can we allow this to happen?

My question: How in a just society can we not allow this to happen and indeed encourage it?

My first question I would ask to these well-intentioned kind hearted individuals would be: How much money would I have to pay you to drive to New Orleans to deliver water? Say you from Arizona. That is some 2000 mile more or less. How much would it take you to load your car up with water and deliver it to the people most desperate? Perhaps $1,000, maybe $2000, maybe even $10,000?

Perhaps they would respond nothing, I would do it out of my own good will. Ok fair enough, then I might ask, did you? The answer 99.999% will be no, they didn’t.

As any economist will tell you as the price of a good rises it attract suppliers into the market. When the prices raise fast and high, it attracts many suppliers into the market.

Given the market circumstances of the New Orleans during this time, the price was high enough to attract individuals from Alabama and other bordering states to load up their pickups and deliver a good that was in extraordinarily desperate need. The sufferers of Katrina were not concerned with paying $15 dollars a bottle, their mind was much more preoccupied with survival. These evil price gougers provided water in area where charity and government failed. After all, logically, if the people had a choice between $15 bottles and the free water given out by charities and the government why would they choose to pay $15? The answer is simply that they didn’t have that option. The charities and government had failed to reach everyone in need of this good. Therefore the sad reality is that these people would not have had water had these evil price gougers not contributed to the desperate demand.

Price signal demand. They allow suppliers to know how much and where a product should be supplied. Furthermore, they ration goods. Suppose a law was imposed to limit the price of water to $2.00. What type of incentives does that create? What are the possible unintended consequences? What would the rational individual do? I know what I would do: buy up the shop. I would purchase as many as I could possible afford and carry. I would buy more than I could possible need as a precaution. Many might say that “no no people will realize this and only take what they need”. But this statement is a truly ignorant understanding of human nature. The tragedy of the commons is true everywhere: where there are fixed prices, there are invariably shortages. Thus in a short amount of time only the first few consumers have purchased all the available water leaving nothing available for the others.

The high prices of water motivated individuals to action, to supply a good desperately shortage and allowed that good to rationed to the most amount of people.

Its easy to sit back and criticize but I wonder how many of you actually did anything to alleviate the suffering. The evil price gougers provided a service that was desperately demanded. The price gouger benefited as well as the hurricane victim. It was mutually beneficial. I can assume that is more than you did.

To paraphrase the greatest of economic polemicists, Frédéric Bastiat, the difference between the good economist and the bad is the very extent to which they perceive what is “unseen”. The bad economist can only grasp the façade of the issue, while the good economist penetrates the obvious and see down the path- sees the intended as well as the unintended consequences of the action- they see what is unseen.

With the election on the horizon, Arizonans have begun to debate various propositions to which they get to decide. One of which is Proposition 200. Prop 200 entails the restructuring of payday loans. In this article it would be irresponsible of me to advocate one side or another as I lack intimate familiarity with the details of the law. What I wish to do today is instead discuss the problem with popular economic reasoning that has been used to attempt to discredit the bill.

Frédéric Bastiat

The argument goes that the proposition should be voted no on grounds that Payday lending is exploitative because they charge interest rates that are exponentially higher than the standard financial institutions rate of interest. If this bill doesn’t pass, in 2010 ( I believe) the current law permitting this sort of lending will expire forcing these “predators” out of the state. I am not sure whether this is indeed correct, but the point of writing here is much less about this actual bill and much more about the theory of usury.

The left has always had a tendency to magically and arbitrarily determine which and how much profits can be labeled as “obscene”. They live in a dichotomous world where everyone fits neatly into the categories of either oppressor or oppressed. Through the prism of this worldview, they see victims everywhere, unaware of the unscrupulous and pernicious intentions of the exploiter. They want to help out. They want to protect the ignorant and uneducated victim from the victim’s own well intentioned, but misguided actions- to protect the victim from themselves.

So naturally, it should be no surprise that they see Payday loans as predatory sharks preying on the people “most vulnerable”- to quote the official line of the Arizona Democratic Party. How can a just society allow rich capitalists to profit so obscenely from those most vulnerable?

My question is: how can a just society not?

Payday loans, Cash Advancement Centers, and all Loan sharks in general serve a function that people desire. I am not even going to waste my time elaborating on the obvious point that if something is profitable on the free market, then it must be by definition demanded. What I wish to point out is that often well intentioned, caring individuals often only see what is seen: relatively extreme rates of interest, but fatally misunderstand what is not seen.

What is not seen? What is beyond stage one? Consumers utilize these services because they have some sort of need for them. These institutions allow individuals experiencing a liquidity crunch to avoid default. Perhaps their mortgage is due and they didn’t budget correctly. Perhaps their child had a sudden illness. Perhaps they did. The list continues indefinitely. There are countless amount of reasons why someone would need money fast and upfront- even if it requires a hefty fee. And that is the point: they alone determine what is best for them and what is the better trade off.

It is so easy for bourgeois leftists who don’t depend on these institutions when they need money quickly. They are accustomed to calling their parents or friends or busting out their platinum credit card. Why would anyone use this service they ask. Its inconceivable- they must be getting tricked.

But what these well-intentioned activists fail to realize that if these services are eliminated, many will have few other options. They might go to straight up mafia loan sharks, they might commit some other criminal act, or most likely- they will just default.

It is not necessary to point out that the high rate of interest exists as a risk premium for the high level of default that occurs in this line of business. No justifications needed. This article isn’t about whether these institutions are evil or not, it is about whether in a free society an individual should be able to decide on their own what are the best trade-offs, what is the best action to improve their current state of affairs.

A free society requires choice and it requires personal responsibility. The individual alone possess the ability to know what actions are most beneficial, not some paternalistic, arrogant, big brother who lacks any insight into what is unseen.