Opportunity cost. The concept is so simple that a first-grader could understand it. I know, because I used to teach it to first-graders. Had you walked past my classroom at just the right time, you might have heard 20-something first graders chanting, “Opportunity cost is the opportunity lost.” The students understood that our decisions have consequences. It was a lesson they learned every time they went out to recess. If they chose to play kickball, they couldn’t play basketball. This basic life lesson bears some repeating for the adults who set policy in our state.

Though the term opportunity cost was not coined until 1914, French economist and writer Frédéric Bastiat provided one of the most salient examples of the concept in his 1850 work, “What Is Seen and What Is Not Seen.” Using the parable of the broken window, Bastiat explained how money being spent on one activity is money that cannot be put to more productive use elsewhere. Imagine that a pane of glass is broken at a baker’s shop. Obviously, the money that the baker must pay to have it repaired becomes revenue for the window repair man. Anyone walking by can see the repair man doing work and recognize that he’ll be paid for his labor. But it makes no sense to look at the repair man’s good fortune in isolation. Doing so would lead to the harebrained conclusion that breaking windows leads to economic growth! Instead we need to remember that, had the window stayed intact, the baker could have done something else productive with the money. The problem is that we can’t see what the baker could have done with the money—only what he actually did with it.

Unfortunately, our board of aldermen and other policymakers regularly make decisions based on what they see without accounting for what they can’t see. Take for example the earnings tax in Saint Louis. Policymakers can see the revenue generated by the tax, but they can’t see the economic activity that has been lost. They can’t see the jobs that might have been created had those dollars been reinvested by the businesses. Nor can they see the economic activity that might have been generated if those dollars had remained in workers’ pockets.

Think about opportunity cost the next time you see a ribbon-cutting at some new development that has received tax breaks or some other form of support from the government. Whether it is a property that has been blighted and given property tax abatements for development in the Central West End or a big box store that receives tax-increment financing, we can see the product of those government actions. We cannot see the harm they do to other businesses through unfair economic competition.

I was reminded of these ideas when I read Lindenwood economist Howard Wall’s most recent paper for the Show-Me Institute, “Is Growth in Outstate Missouri Tied to Growth in the Saint Louis and Kansas City Metro Areas?” Wall uses an econometric model known as Granger-causality to estimate the impact of employment growth in Saint Louis and Kansas City on the rest of the state. He finds a statistically significant downstream relationship between Saint Louis and the rest of Missouri. That is, employment growth in Saint Louis leads to employment growth in the state. He estimates that a 1 percentage point increase in growth in Saint Louis would lead to an increase of 0.35 percentage points in outstate Missouri within two or three years. Why this connection exists (he doesn’t find a similar relationship in Kansas City) is a matter for some hypothesizing or future research. Nevertheless, the point is clear—Saint Louis is an economic driver for the state.

While Wall’s paper does not deal directly with the idea of opportunity cost, his findings make it all the more important for policymakers to understand the importance of their actions. When they support an earnings tax or other policies that harm the city’s economic growth, they are hurting the economic growth of the entire state.

Missourians, not just those who live in the city, benefit from a thriving Saint Louis economy. That’s why we need policymakers to put in place pro-growth policies that create the economic conditions for the market to thrive.

The post Opportunities Squandered in St. Louis Affect All of Missouri appeared first on Show-Me Institute.

Bastiat (1801–1850) was a French economist. In his most prominent essay, What is Seen and What is Not Seen, he explained how policymakers often tout the immediate effects of a policy but ignore what might have happened without the policy—what is not seen. This would later be known as the concept of “opportunity cost.” Whether discussing tax subsidies for sporting stadiums, tax-increment financing for development in flood plains, or a host of other issues, policy analysts at Show-Me Institute regularly follow in the tradition of Bastiat by explaining what is not seen.

In another of his popular essays, The Law, Bastiat explains that “the law is justice.” The purpose of the law is not to bestow rights or benefits on members of society, but instead: “Its function is to prevent the rights of one person from interfering with the rights of another.” His ideas on property rights and the purpose of the law help form the foundation of the classical liberal tradition.

Lately, I have been particularly intrigued by his essay Justice and Fraternity. I am an educator by trade. My bachelor’s and master’s degrees are in elementary education and my Ph.D. is in education policy. I have been a classroom teacher in public schools and I currently teach university classes for aspiring principals and superintendents. Through my experiences, I have developed some specific views on the purpose of education and what constitutes great teaching. Often, I find these views are not shared by others. Indeed, there are many ideas on the matter that are often incongruous with one another. This is one of the reasons I am so supportive of school choice; it allows individuals to explore the type of education they view as the best.

Others, however, are not sold on school choice. They believe the state should dictate what and how students learn. Oh, they may not say this directly, but consider what they propose. They want the government to dictate which schools children will attend. They want those schools to be accountable to government agencies and financed by funds from the government. They want the government to certify teachers who will teach  government-approved content standards. In short, they want a heavily regulated and centralized system of education.

Now let’s suppose that there is one best way to educate students. Bastiat suggests in Justice and Fraternity that the best way to discover this one best way is through a decentralized system:

Obviously, if people could agree on the best possible kind of education, in regard to both content and method, a uniform system of public instruction would be preferable, since error would, in that case, be necessarily excluded by law. But as long as such a criterion has not been found, as long as the legislator and the Minister of Public Education do not carry on their persons an unquestionable sign of infallibility, the true method has the best chance of being discovered and of displacing the others if room is left for diversity, trial and error, experimentation, and individual efforts guided by a self-regarding interest in the outcome—in a word, where there is freedom. The chances are worst in a uniform system of education established by decree, for in such a system error is permanent, universal, and irremediable. Therefore, those who, in the name of fraternity, demand that the law determine what shall be taught and impose this on everyone should realize that they are running the risk of having the law direct and impose the teaching of nothing but error; for legal interdiction can pervert the truth by perverting the minds that believe they have possession of it.

There are two important points made here. First, that the rational self-interest of diverse groups of individuals is better suited to discover the best way to educate students, or at the very least to satisfy the desires of the most individuals. Second, instituting one method from on high via government agencies is a surefire way to mandate error. At present, we do not have the magical education bullet that will meet the needs of every child. Therefore, a centrally imposed system will by its very nature force some students into a system that doesn’t work for them.

Think about this as we move forward in the coming months. As schools remain closed, parents throughout the country will be taking on the new role of home educator. They will, undoubtedly be working to find the system that works best for them. These parents will need the support of teachers and schools, but they are most likely to find that system through their own trial and error. They do not need a government order that forces every family to conform to the same routines.  

In my estimation, some of Bastiat’s essays should be required reading for high school economics students. Maybe I should work to impose that view on others. 

The post Homeschooling, Centralized Education, and Bastiat appeared first on Show-Me Institute.

It seems so, if we take him at his recently tweeted word (“Trade wars are good, and easy to win”) and take the liberty of injecting him into the center of the argument found in the “Candlemaker’s Petition,” a satire of protectionist tariffs written by the great French economist, Frédéric Bastiat (1801–1850).

In this classic economic parable, published in 1845, the manufacturers of “candles, tapers, lanterns, and street lamps” join forces with the producers of “tallow, oil, resins, and alcohol” in demanding protection against a powerful foreign competitor – namely, the sun. They ask for a law ordering their countrymen to keep all windows and doors covered during the day. Their petition states:

We are suffering from the intolerable competition of a foreign rival, placed, it would seem, in a condition so far superior to ours for the production of light that he absolutely inundates our national market with it at a price fabulously reduced.

Even in pre-electrical days, if a government were to order everyone to switch from sunlight to candlelight, it might create a number of jobs in candlemaking and related industries. However, it would also impoverish a far larger number of people by forcing them to replace a free and plentiful resource with an inferior yet costly product. In this case, the money people would spend on additional lighting products would raise profits for candlemakers – but as a needless expense for everyone else, it would lower disposable incomes and reduce productivity across the board (forcing even candlemakers to work in poorly lit conditions).

The same logic applies today if the president proceeds with plans to slap a 25-percent tariff on steel imports, along with a 10-percent tariff on aluminum imports. Above all, such duties would hurt a thousand or more people for every one they help – limiting choice and pushing up prices for most consumers, while imposing a significant burden on steel-dependent industries that employ 6.5 million people, or close to 50 times the number of U.S. steelworkers (140,000).

In the opening words of his essay, Bastiat paid mocking tribute to politicians opposed to free trade, saying:

Gentlemen: You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

Free markets and free trade come down to the same thing: voluntary exchange for mutual benefit. It makes no difference whether that happens within a country or across national borders. In the absence of job- and growth-destroying government coercion, the buyer or consumer holds the upper hand. In a competitive marketplace, unless buyers agree to part with some of their money for someone else’s product, there is no trade and there are no transactions.

With his recent tweet, President Trump seems not (or pretends not) to understand that basic idea. Let’s hope it is pretends.

The post Would Trump Banish Sunlight to Protect American Jobs? appeared first on Show-Me Institute.

Who preys upon the sightless with such cruel impunity? More often than not, it is leading citizens and business organizations, taking advantage of poorly conceived laws with the stated purpose of promoting economic development.

Under Missouri laws established in the 1990s, transportation development districts (TDDs) and community improvement districts (CIDs) operate as micro-governments that direct tax revenues to private interests to use for the supposed benefit of their local communities. A primary benefit of a TDD – from the viewpoint of a single property owner or a group of owners banding together to form a district – is the ability to impose a tax on people with no vote in the matter.

Over the past two decades, more than 200 TDDs and nearly 300 CIDs have sprouted up in big cities, small towns, and suburban enclaves across the state. In 2014 and 2015, TDDs collected more than $175 million in tax revenue, according to the Missouri State Auditor’s Office. “Given that TDDs have been operating this way for nearly 20 years,” Show-Me Institute Policy Analyst Graham Renz has observed, “their collective impact is in the billions.”

Before becoming a city councilman and later mayor of Neosho (pop. 12,000), south of Joplin, Richard Davidson served on the town’s school board from 2004 to 2008. He was shocked when supporters of a TDD sought an $800,000 contribution from the school district to support the building of new roads. “We educate kids,” he told the TDD proponents. “We don’t build roads.” Later he wrote a column for the Neosho Daily News titled, “TDD Spells Trouble for Our Schools.”

The Neosho TDD was set up in 2009 to fund $6.9 million in transportation projects, with a projected $4.5 million coming from a half-cent sales tax from businesses within the district and another $2.4 million from the Missouri Department of Transportation. Like many TDDs, this is a special taxing district with no residents. Within its boundaries, the 550-acre district includes the city’s golf course, wooded areas, and mostly uncropped farmland, along with a small commercial strip with a Wal-Mart, a Lowe’s, and some other shops and restaurants. Through the half-cent sales tax, customers of those businesses have paid in excess of $500,000 a year to support the TDD’s activities.

So far, those efforts have not stimulated any new business development. But who is to say that the millions of dollars spent by the TDD on roads and transportation won’t at some point turn woods and idle farmland into valuable commercial property?

Davidson, who served as mayor of Neosho from 2010 to 2016, regards the TDD as a clear case in which the end (not so much economic development as the enrichment of a small number of private property owners) does not justify the means (taxing unseeing and unsuspecting consumers).

Community improvement districts work in a similar way. Examples include the luxurious Intercontinental Hotel on Country Club Plaza in Kansas City and the Cardinals’ Ballpark Village in downtown Saint Louis. CIDs allow both of these commercial ventures to collect a one-percent sales “tax” from patrons, which is really just an artfully disguised part of the selling price.

It is time to jettison two-decade-old Missouri laws that promote taxation without representation and provide a textbook example of what the 19th-century economist Frederic Bastiat called “legal plunder.”

The post How Missouri’s Special Taxing Districts Promote “Legal Plunder” appeared first on Show-Me Institute.

But we must not ignore the shopkeeper’s opportunity cost of fixing the window, namely those products and services that she had to forgo. The businesspeople selling these forgone items take a hit as a result of the broken window.

I was reminded of all this while reading a recent report from goodjobsfirst.org. One section outlined the subsidy programs offered to incentivize private enterprise to move from Kansas to Missouri. The Show-Me Institute’s Patrick Ishmael and Michael Rathbone have expressed concern about such programs over the past few months (here and here).  In 2012, Freightquote moved its headquarters from Lenexa, Kan., to Kansas City, Mo., which landed the company $64.3 million in tax incentives. In 2011, North American Savings Bank received almost $6 million in subsidies to relocate to Missouri. Velociti benefited from $1.6 million in corporate welfare for moving to Riverside, Mo. The list goes on . . .

Such programs are defended on the grounds that they bring much-needed jobs to the state, but one cannot ignore the means by which they are financed. The government is not an exogenous entity, magically creating wealth out of nothing. (Trillion dollar coins notwithstanding.) To provide anything, it must first take from others. This confiscated wealth constitutes revenue that would have otherwise been spent, invested, or saved in the private economy. Accordingly, it is not a stretch to contend that the state creates jobs only by means of destroying them. Bastiat’s sage advice unfortunately seems to have been lost on many of our public officials.

The post The Cost Of Ignoring Opportunity Cost appeared first on Show-Me Institute.

Now, legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on. All these plans as a whole — with their common aim of legal plunder — constitute socialism.

Provocative enough for your tastes? Do you vehemently disagree? Is Bastiat a kook? Come join us for spirited discussion and snacks this Wednesday; Bastiat is our topic.

The Show-Me Institute’s Book Club meets the second Wednesday of each month at our headquarters, located at 4512 West Pine Blvd. in the Central West End. Meetings begin at 7 p.m. and typically last until 8:30 or so. See link for more information. 

Please bring a friend. Hope to see you there.

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Questions to ponder if you dare:

Did Hamilton, Madison, and Jay overestimate the soundness of the federal design when advocating for the adoption of the U.S. Constitution? Why did Frederic Bastiat carry such a negative view of morality, law, and government? Has our federal government succumbed to many, if not most, of the corrosive influences Bastiat identified as likely to corrupt civil society?

Please join us for a lively discussion of life, liberty, and the pursuit of happiness. You may email the Book Club at bookclub@showmeinstitute.org. RSVPs are appreciated.

The post Did Hamilton, Madison, and Jay Overstate Their Case for Adopting the U.S. Constitution? appeared first on Show-Me Institute.

Chairman Mange and Honorable Members of the Commission:

Thank you for the opportunity to submit my comments about Saint Louis County’s capital investment proposals. I attended the public forum on June 12, where a presenter stated that capital investment in public infrastructure leads to job creation. That is certainly true in many capacities, but there is another thing that leads to more job creation: low taxes. A lower tax rate leads to an increase in private investment in the county, which grows the tax base and expands revenues without the heavy hand of a tax increase.

The infrastructure needs discussed in the presentation are no doubt real, but the tax increases proposed to pay for them are not without costs of their own. These proposals, if implemented, would have counter-effects for the county’s economy. Saint Louis County might well get more money after passing its proposals, but residents and businesses in the county would have less money to spend and invest as they see fit. In some cases, the higher taxes could encourage people or businesses to shop less, or even to move out of the county, thereby achieving the exact opposite of the proposals’ goals. To quote famed economist Frederic Bastiat about the effects of any tax increases, you should consider both “What is seen and what is not seen.”

Passing a new transportation sales tax, a park sales tax, and a use tax in close proximity, all while issuing bonds that will require bonding property tax rates to remain consistent — or, perhaps, increase — would have a detrimental impact on Saint Louis County as a whole. It is not my place here to debate whether or not voters would pass these proposals. I would, however, like to remind the members of this commission about the dangers of initiating a cycle similar to the one the city of Saint Louis has experienced in recent years, constantly asking voters for, and usually receiving, a small sales tax increase here or a minor property tax increase there. Since 2000, the city of Saint Louis has placed 11 citywide tax increases, tax renewals, or bond issues on the ballot, and nine of them have passed. This cycle turns vicious as the small increases add up over time and harm the very economic environment that many of the taxes were intended to help improve, under the guise of “investment.”

A use tax aimed at businesses could be a particularly harmful proposal. Saint Louis County needs to make itself more inviting to all businesses. Increasing general business taxes, and then giving some back to chosen companies as subsidies, is not the way to accomplish this. Saint Charles County provides a useful contrast. Although it has generally lower property tax rates than Saint Louis County, the differences particularly stand out in the commercial tax surcharge, which is just $0.53 per $100 dollars of assessed valuation in Saint Charles, while in Saint Louis County it is $1.70. That difference of $1.17 can mean thousands of dollars each year to a commercial enterprise. One competitive advantage Saint Louis has over Saint Charles, though, is its lack of a use tax. If Saint Louis County were to institute a use tax, this important competitive advantage would disappear — serving as another incentive for businesses to move outside the county, as Mastercard did several years ago. Private capital flows to the areas in which it is subject to fewer taxes; that is a fact of economics at all levels.

Saint Louis County should continue to look for opportunities to work with the private sector in providing services, such as its extremely successful privatization of pharmacy services. The emergency communication system is one such area, in which private companies could be asked to submit proposals (although this has, admittedly, been very rare in the United States for this field). Metro should be encouraged to allow competitive bidding on its bus routes and consider using private companies to provide a portion of the area’s transit operations, as Denver has done. One of the currently proposed tax increases is a sales tax for the parks. Has the county considered contracting out security services for county parks to a private security company? More radically, the county should work with the city to have Saint Louis re-enter the county as its 92nd municipality, significantly expanding the county’s tax base and allowing for both revenue increases and tax reductions.

As you move forward in your considerations, the substantial amount of bonding authority available to Saint Louis County should be the primary vehicle for addressing the county’s infrastructure needs. The county benefits from an excellent combination of the low level of current bonding (just 3 percent of the county’s legal limit), the county’s excellent bond rating (for which current county leadership deserves credit), and the upcoming retirement in 2013 of many current bonds (plus the Edward Jones Dome bonds, ten years later). This allows for bonds to be a reasonable and valuable way for the county to meet many of its legitimate infrastructure goals. Property taxes are less mobile than sales taxes, and in any event the county bond retirement property tax might only be extended, but not necessarily increased, in order to pay off the bonds. Furthermore, bonds paid off via property taxes are readily deductible from taxpayers’ state and federal income taxes, unlike sales taxes.

Strong consideration should be given to further expanding county operations outside of the Clayton central business district. There is no absolute need to keep the Family Court Center in Clayton. The city of Saint Louis has its family courts located in midtown, away from the other courthouses. The election board in Maplewood and the police and fire academies in Wellston provide excellent examples of how county offices can operate successfully outside of Clayton. The buildings at 121 and 111 South Meramec may well need to be replaced, but they should be sold by the county to private business interests. Some of the most valuable real estate in the county could then go back on the tax rolls, helping to fund improvements to such needs as the crime lab, which could certainly be redone close to — but not in the heart of — downtown Clayton.

Saint Louis County and this commission must consider the economically harmful aspects of tax increases alongside the infrastructure needs that those increases are proposed to finance. Thank you again for this opportunity to share my thoughts and ideas. Please feel free to contact me if I may be of any further assistance.

Sincerely,

David Stokes
Show-Me Institute

Related Links

The post Testimony for the Saint Louis County Capital Investment Blue Ribbon Commission appeared first on Show-Me Institute.

Frédéric Bastiat, a French economist and legislator who fought for free trade rights in the 1840s, warned his contemporaries of this threat that law can pose, and he also pointed out how easy it is for law to become a powerful weapon against any who disagree with the legislators.

The Show-Me Institute book club, which meets every other Wednesday night at 7:00 (join us at our next meeting on December 1!), discussed Bastiat’s Selected Essays on Political Economy last year. The first essay, “What Is Seen and What Is Not Seen,” outlines a vital concept of economics — and, indeed, of life in general. Bastiat explains that actions have consequences in both the short term and the long term, both seen and unseen, and that often the unseen consequences are far-reaching in their scope. The unseen consequences of new laws can be disastrous when circumstances change. Moreover, a lawmaker may not be in a position to understand the practical consequences for all the people who will be affected by a law. In this way, a law which is intended solely to help people may end up hurting many, for a long time to come.

The Springfield News-Leader ran an article this week in which the author, Dr. John Lilly, explains how Bastiat’s ideas continue to be relevant 150 years after they were written. Lilly examines the origin and purpose of law, explaining that when one person takes another’s property by force, this is the definition of “plunder.” From the article:

Life, liberty and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty and property existed beforehand that caused men to make laws in the first place.

[…] Legal plunder occurs when the law takes from one person, and gives it to another person. Legal plunder benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.

Lilly asserts that law exists in order to serve people and protect their rights, but that law can also be twisted to sanction and enforce plunder. He illustrates this with a quote:

Bastiat stated, “And, in all sincerity, can anything more than the absence of plunder be required of the law? Can the law — which necessarily requires the use of force — rationally be used for anything except protecting the rights of everyone? I defy anyone to extend it beyond this purpose without perverting it and, consequently, turning might against right.”

The post Law Is Not a Band-Aid for Every Problem appeared first on Show-Me Institute.

All told, some 17,000,000 Americans with college degrees are doing jobs that the [Bureau of Labor Statistics] says require less than the skill levels associated with a bachelor’s degree.

The author includes the following chart:

Source: The Chronicle of Higher Education

This strikes me as consistent with the signaling model in education, à la Charles Murray and Bryan Caplan. In short, it says that it is difficult to distinguish between the skill sets of workers initially (i.e., by visual inspection), and having a college degree provides a way for a person to “signal” to potential employers that he or she is a higher quality candidate. Good grades can signal many traits about a person that an employer may find attractive — that he or she is conformist, obedient, smart, dedicated, motivated, hard-working, etc.

Central to the signaling model is the fact that, in most higher-education classes, a student learns no job skills. I have a bachelor’s degree in French, so I have personal experience with this. Although I enjoyed my French classes and found them very challenging and fulfilling, I did not learn any skills that I use professionally — with the possible exception of having the ability to read Frédéric Bastiat in his original French, of course.

Certainly, there are social benefits to education. An educated population is, in general, a very good thing. Even if they don’t use skills that they developed through higher education, it’s probable that these janitors and flight attendants are leading more fulfilled lives as a consequence of their education. Perhaps the time that they spend outside of work, in leisure, is more fulfilling than it would have otherwise been.

On the other hand, there are also negative consequences to having a high number of degree holders. If one person becomes more educated, then he or she has a good chance of making more money. However, when a majority of the population becomes more educated, they compete for the jobs requiring that knowledge. This is the phenomenon that we see in the article — that’s why 29.80 percent of flight attendants have a bachelor’s degree or more. An additional negative consequence is degree inflation. As a greater number of people seek education, it will become increasingly difficult to distinguish between the quality of individuals (i.e., it will mute the signal), and employers will demand even more education, contributing to degree inflation.

Government subsidization of education is one of the biggest reasons why these 17 million degree-holders are in positions that do not require a degree. Despite the aforementioned positive consequences of an educated society, subsidizing education should not be the objective of government. When the government makes something less expensive, individuals will consume more of it than they would otherwise — more than the socially optimal level. The housing market is an analogous example: The government subsidized homeownership, so many individuals over-consumed housing, including those who were poorly suited for homeownership. (The United States experienced a housing bubble; is an education bubble in our future?) Although a particular project may have some social benefits, when that project is subsidized with taxpayer monies, it should be weighed against the costs.

Please don’t mistake my statements as being anti-education; on the contrary, I am a supporter. This post is an argument against current funding mechanisms. The policy of subsidizing education is quite regressive. Public universities, including my own alma mater, are largely funded by tax revenues taken from the general population, not by consumers of education. It would be more efficient if everybody paid for the true cost of their consumption through private means (i.e., private loans, savings, scholarships), just like they do for other goods and services. The government could then devote the tax money that they would save on higher education to other programs instead — on primary and secondary education, perhaps — or return it to taxpayers, to spend in the private sector.

I encourage our readers to watch the video “So You Want To Get a Ph.D. in the Humanities,” which former Show-Me Institute intern Martha King recently posted on her Facebook wall. It’s simultaneously hilarious and depressing.

The post The Subsidization and Consequent Overconsumption of Education appeared first on Show-Me Institute.

[T]he heart of the case against the bailout is that it saps the life-blood of entrepreneurial capitalism. The bailout reinforces the debilitating precedent of protecting firms deemed ‘too big to fail.’ Capital and other resources are thus kept glued by politics to familiar lines of production, thus impeding entrepreneurial initiative that would have otherwise redeployed these resources into newer, more-dynamic, and more productive industries.

The ‘success’ of the bailout is all too easy to engineer and to see. The cost of the bailout – the industries, the jobs, and the outputs that are never created – is impossible to see, but nevertheless real.

This is particularly relevant to Missouri, because the $150,000 tax credit package that Missouri decided to give to Ford is Missouri’s version of the auto bailout, and is also associated with unseen costs. Although it is easy to see the benefits of the policy, it is impossible to see the economic activity that would have otherwise occurred (Merci, Frédéric Bastiat!). When the state government provides financial assistance to specific companies or industries, it crowds out private investment and entrepreneurial initiative. In addition to many other negative consequences, it incites the producers to invest their resources in an activity for which the state does not have a competitive advantage, at the expense of investing in activities that are “newer, more-dynamic, and more productive.”

The post Lost Entrepreneurial Initiative: An Unseen Cost of Auto Bailouts appeared first on Show-Me Institute.

First, I realize that the caller suffers from “make-work bias,” a concept developed by Bryan Caplan, a professor of economics at George Mason University, in his book The Myth of the Rational Voter: Why Democracies Choose Bad Policies. In an excerpt published in Reason, “The 4 Boneheaded Biases of Stupid Voters,” Caplan writes (emphasis mine):

The public often literally believes that labor is better to use than conserve. Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress but as a danger. I call this the make-work bias, a tendency to underestimate the economic benefits of conserving labor. Where noneconomists see the destruction of jobs, economists see the essence of economic growth: the production of more with less.

Second, I failed to point out that the caller focuses on the needs of a select group rather than those of everybody in the economy. This is a common error that people make when evaluating policies, as Frédéric Bastiat discussed in “What Is Seen and What Is Not Seen.” On the subject of subsidizing employment, Bastiat writes (emphasis mine):

[I]t is clear that the taxpayer who will have been taxed one franc will no longer have this franc at his disposal. It is clear that he will be deprived of a satisfaction to the tune of one franc, and that the worker, whoever he is, who would have procured this satisfaction for him, will be deprived of wages in the same amount.

Let us not, then, yield to the childish illusion of believing that [a vote in favor of subsidy] adds anything whatever to national well-being and employment. It reallocates possessions, it reallocates wages, and that is all.

When arguing in favor of tax incentives for the Claycomo plant, the radio caller considered only the benefit to the 3,700 plant workers who will keep their jobs. He doesn’t consider the unseen cost that, if the state legislature approves the proposal to provide $150 million in tax credits, the rest of the tax base (a much larger group) will be $150 million poorer. This policy doesn’t increase income; it merely displaces it. As a related unintended negative consequence, the organizations that may have employed these factory workers, had they been laid off, will be restricted in their growth because they would face a smaller supply of labor.

This brings me to my third point. Subsidizing the Claycomo plant would contribute to a higher level of unemployment in the long run, negatively affecting all of the workers in the Claycomo region. Caplan explains this too:

The hard lesson to learn is that giving people “rights to their jobs” is a drain on productivity—and makes employers think twice about hiring people in the first place.

The fact that Claycomo Ford plant will close if unsubsidized indicates that the area no longer has a comparative advantage in manufacturing Ford cars. The area would be better off if its resources — human and otherwise — were employed in activities that do not require subsidies. As a direct consequence, the region would have the capacity to produce more, and the individuals in the market would be able to keep a greater percentage of their income.

The post Why Closing Ford’s Claycomo Plant Would Be Good for the Economy appeared first on Show-Me Institute.

On April 19, Missouri began a weeklong program of providing $5.6 million in rebates and eliminating the state sales tax on Energy Star appliances. This is a wasteful use of state funds that also entails significant unintended consequences.

Instead of creating new economic activity, programs that offer rebates on specific products like appliances and cars merely distort the market. Such transactions would occur anyway, in the future, independent of a rebate in the present, because consumers naturally upgrade to new machines as their older models begin to wear down or break. Additionally, the promise of increased energy savings is already a significant incentive.

The intended environmental impact of such rebate programs is negated by the way they are usually constructed. The subsidy creates an incentive to destroy operational appliances and build new machines to replace them. This destroys wealth in the Missouri economy, because the resources used to create these new appliances could have been used elsewhere. Acquiring a more fuel-efficient new appliance could also encourage the purchaser to wash dishes and laundry more frequently than before, which means that the overall decrease in energy usage may be much smaller than anticipated — or could even increase. If usage does drop as a result of sanctioned purchases, however, the reduction in overall Missouri energy usage will still be minimal at best unless every Missouri resident purchases a new appliance during the week that rebates are offered.

As a negative unintended consequence of the program, Missouri will lose a significant amount of tax revenue, independent of and in addition to the $5.6 million rebate. First, the state loses sales tax revenue from new appliance purchases. Then, if households do use less energy, the state will lose out on utility tax revenue in the future.

Programs like Missouri’s green tax holiday illustrate the parable of the broken window by economist Frédéric Bastiat. When the government spends money on rebates, it cannot devote this money to other programs that could otherwise benefit, or return it to taxpayers who would spend it in any number of other ways. When the government uses taxpayer money to stimulate one part of the economy, it comes at the expense of those other sectors in the economy.

The tax holiday is undesirable on a fundamental level, as well. It reinforces the flawed idea that individuals should look to the government for approval of which products and services to buy and how to behave. By eliminating state sales taxes on only those appliances that have the Energy Star designation — the Environmental Protection Agency’s stamp of approval — the government favors certain products and behaviors over others. When seeking direction on their buying behavior, consumers would be better off if they consulted third-party sources, such as Consumer Reports, that aren’t as swayed by special interests.

The green sales tax holiday is a wasteful and inefficient program, and Missourians would be better off if the $5.6 million in rebates were either spent in a useful way or returned to taxpayers.

Christine Harbin is a research analyst with the Show-Me Institute, a Missouri-based think tank.

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Beginning Monday, the state will offer $5.6 million in rebates to Missouri residents who buy energy-efficient clothes washers, dishwashers, furnaces, air conditioners and heat pumps.

That’s not all. The state from April 19 to 25 won’t collect its 4.225-percent sales tax on those products, plus energy-efficient refrigerators and freezers.

Contributors to Show-Me Daily have written extensively about how programs like Missouri’s green tax holiday and last year’s Cash for Clunkers program are ineffective. These are examples of government programs that provide an incentive to consumers (i.e., a rebate) to buy certain items (e.g., an appliance or a car) in an attempt to incite economic activity and change individual behavior (which will ostensibly help preserve the environment). The following is a digest of these arguments. If any Show-Me Daily readers know of additional disadvantages to these programs, please add to this post in the comments.

1. Instead of creating new economic activity, programs that offer rebates on products like appliances and cars only distort the market.

In a previous post, Charis Fischer explained that these transactions would have occurred anyway in the future, independent of a rebate in the present:

Using tax dollars to help people buy more energy-efficient machines is likely an inefficient use of funds, because purchases of these machines will become much more common within the next few years anyway, as older machines start to die. The fact that people can save money on energy costs by upgrading their appliances is already a significant incentive.

2. The intended environmental impact is negated through the construction of the program.

The subsidy incentivizes the destruction of operational appliances and the construction of new appliances to replace them. It could also be possible that having an appliance that is more fuel-efficient would encourage a person to wash more dishes and laundry than he did before. Justin Hauke posted previously that, unless each Missouri resident buys a new appliances that week, the Green Tax Holiday would have no impact on overall energy usage in the state.

3. The money that is spent in rebates could be devoted to other programs.

Caitlin Hartsell explained in an earlier post how programs like Missouri’s Green Tax Holiday and Cash for Clunkers illustrate Bastat’s broken window fallacy.

[W]hen the government uses taxpayer money to stimulate one part of the economy, this comes at the expense of those other economic sectors that will no longer benefit from some measure of either consumer spending or invested savings.

4. This cements the idea that individuals should look to the government for approval of which products and services to buy and how to behave, which should not be the role of government.

Sarah Brodsky pointed out that, by eliminating state sales tax on only those appliances that have the Energy Star designation, the government favors certain products and behaviors over others.

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My recent op-ed against film tax credits was published as a guest commentary in the Columbia Missourian today! As regular readers of this blog will know, it was also discussed by Steve Walsh on MissouriNet and by David Nicklaus on Mound City Money last week.

Over the weekend, I thought a lot about the arguments that were raised in favor of the film tax credit program. I’d like to take this opportunity to respond to them.

(1) The debate over the appropriateness of film tax credits is a natural application of the general principle of the parable of “The Broken Window” by Frédéric Bastiat (1850), which was later developed in Economics in One Lesson by Henry Hazlitt (1946).

I am impressed with the sheer amount of commentary generated by my recent blog posts arguing against film tax credits in Missouri. I have heard from people who worked on the Up In the Air set, professors of film, and representatives of the Missouri Film Commission, among others. In his book Economics in One Lesson, Hazlitt explicitly warns that this will happen (emphasis mine):

The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

To paraphrase Bastiat and Hazlitt, government should consider ce qu’il voit et ce qu’il ne voit pas au même temps when it is deciding policy. In plain English, this means that it should consider “the big picture” instead of only one group of people when forming policy that affects everyone. Hazlitt thinks that this concept is so important that this is his “one lesson,” further reduced to a single sentence (emphasis mine):

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Here’s how this relates to the film tax credit program. If we only consider that which we see, ce qu’on voit, then the tax credit programs are considered to benefit everyone. The recipients of the tax credits do assuredly benefit, as they testify in their commentary (Econdiva provided an estimate that the producers of Up in the Air spent nearly $12 million in the state). Bastiat and Hazlitt warn that it is dangerous to ignore the hidden costs, ce qu’il ne voit pas, that affect everybody. Missouri should not focus solely on the benefits of bringing filmmakers to Missouri and ignore the cost of the program to taxpayers.

While certain public policies would in the long run benefit everybody (e.g., eliminating the earnings tax or commercial property tax surcharges), other policies would benefit one group only at the expense of other groups. Film tax credit programs fall into the latter category. When tax revenue is spent on film productions, taxpayers cannot spend that money in alternative ways, such as education or infrastructure; they face an opportunity cost that is equal to the amount of the subsidy.

(2) There is not enough demand in Missouri for the film industry to exist in Missouri without a considerable level of government assistance.

In their comments, both Cat Cacciatore and Dave Rutherford provided proof of this point — they both travel out of state because there isn’t enough demand for film production work in Missouri (even in today’s status quo, in which we offer a $4.5 million tax credit). If an individual decides to live in a location in which there is not enough demand for him to work full-time, why should the taxpayer have to subsidize his employment?

Let’s say that I am a trained lobster farmer and I choose to relocate to Missouri, which is at a competitive disadvantage for lobster farming because it is very far from the ocean. I have two options: (1) I can petition the government to subsidize my employment; or, (2) I can transfer my knowledge, skills, and abilities to an industry for which there is demand. I believe that the second option is better because it does not burden taxpayers.

Most Missourians work in industries that don’t have targeted tax credits. Their jobs exist because there is enough demand for them. The demand for bakers, babysitters, yoga instructors, doctors, lawyers, and free-market research analysts in Missouri is high enough so that their employers choose to pay for their jobs without government assistance.

Furthermore, if the state stops subsidizing these jobs, then it has more workers available to do other kinds of work. In the comments, Josh Smith notes that:

There is not some fixed “pool of jobs” which can only be expanded by spending tax dollars in the right way. There are many different types and amounts of work that can be done to earn a wage, specialization and trade tend to lead to a more efficient economy.

(3) The $4.5 million applies to state tax revenues, not total expenditures.

I realize that there is some confusion here, and I admit that I should have stated this more clearly in my op-ed. State tax revenues and total expenditures are different numbers. To an out-of-state production crew like Reitman’s, Missouri issues a tax credit to for up to 30 percent of the amount that they spend in state. This means that they get $3 million back if they spend $10 million in Missouri (which they can turn around and sell, because these tax credits are fungible). Given the low multiplier for the film industry (described herein), there is no way that the state would be able to recover that amount of money, whether it be through sales taxes (4.225 percent) or personal income taxes.

(4) These programs do not result in permanent economic activity.

As Sarah Brodsky points out, the purchases cited are single-time expenses (e.g., $30,000 for ice, $185,000 for set dressing items). Few permanent jobs, if any, are created when a filmmaker comes in to the state, works on a film for a finite period of time, and then goes back to California.

Additionally, according to “The Economic Impact of the UK Film Industry,” a 2007 study by Oxford Economics, the film industry has a multiplier of only 2.0. This is lower than the multiplier for the economy average, and indicates that the indirect impacts on employment and output from the film industry are not very far-reaching.

(5) Missouri should leave filmmaking to states that have a comparative advantage in it.

Why is it important that Missouri try to compete in the national or global marketplace in filmmaking? I disagree that states like Missouri should focus on developing industries for which they are at a competitive disadvantage. Missouri would be better off if it focused on the products and services that it produces best (e.g., Budweiser beer, hog farming, mining limestone, manufacturing) and then traded with other states. I agree with Josh Smith that the statement “Other states are doing it, so Missouri should too” is an insufficient reason. He observes:

If other states want to spend their residents’ tax dollars to attract filmmakers, and the result is that Missourians (1) are still able to get the benefits of the product by paying to see the movie (perhaps more cheaply if the tax credits are spent in making the film more affordable, whatever that might mean) and (2) don’t have to spend our tax money to entice the film’s production to locate here then we have a few obvious benefits.

Also, the Michigan economy is in terrible shape! Why would Missouri want to model its tax policies after Michigan’s, even when legislators there are already discussing discontinuing the program? Right now, Michigan has a unemployment rate of 15.3 percent, which is the highest in the country. (By comparison, Missouri’s current unemployment rate is 9.5 percent, which is below the national average of 10 percent). Even before the recession sharpened, Michigan had the highest rate; in September 2008, it was 8.9 percent.

As its comparative advantage, California has more sunlight than the Midwest, which allows for longer shooting hours, as well a variety of landscape types within driving distance, which can stand in for locales around the world. (Remember how Austin Powers remarked, “You know what’s remarkable? That England looks in no way like Southern California!” while driving on an “English” country road in Austin Powers: The Spy Who Shagged Me?)

(6) Subsidized industries have difficulty weaning themselves off government assistance.

When a state coddles an industry that does not have a competitive advantage (a so-called “infant industry”), the industry tends to remain dependent on that aid. Industries that are subsidized are not subject to the same competitive pressures as those that are unsubsidized, and they consequently do not have an incentive to innovate. In “The Case For Free Trade,” Milton and Rose Friedman describe some additional negative implications of these infant industries.

The infant industry argument is a smoke screen. The so-called infants never grow up. Once imposed, tariffs are seldom eliminated. Moreover, the argument is seldom used on behalf of true unborn infants that might conceivably be born and survive if given temporary protection; they have no spokesmen. It is used to justify tariffs for rather aged infants that can mount political pressure.

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According to a New York Times article:

Dealers estimated that they sold a quarter-million cars with the rebate money.

And the Transportation Department reported that the average gas mileage of the vehicles being bought was significantly higher than required to qualify for a rebate of $3,500 to $4,500. Of 120,000 rebate applications processed so far, the department said the average gas mileage of cars being bought was 28.3 miles per gallon, for S.U.V.’s, 21.9 miles per gallon, and for trucks, 16.3 miles per gallon.

Are these numbers worth $1 billion in taxpayer subsidy? Probably not. Are they worth the proposed additional funding of $2 billion? Definitely not. These mileage differences are pretty small. The environmental impact is negligible, especially considering that the subsidy leads to a perfectly good car being destroyed and new cars built to replace them. In a CNN article, Harvard economist Jeffrey A. Miron discussed the program’s unintended consequences, pointing out that trading in for more fuel-efficient cars might actually encourage more driving.

The other argument, that the subsidy stimulates the economy by aiding the auto industry, is an example of Frédéric Bastiat’s “broken window” fallacy, which can be explained by a short illustration: A boy broke a baker’s window, and the townspeople said, “Ah, but think of the business the glassmaker will get! It’s good for the economy.” So the baker spent $50 to buy a new pane of glass, which stimulates the glass industry. Had he not done that, though, he would have used that money to buy something else — a new suit from the tailor, perhaps — and he would still have had his window. Real economic growth doesn’t come from an artificial restriction of options, by prompting somebody to spend money on a window rather than on a suit. Similarly, when the government uses taxpayer money to stimulate one part of the economy, this comes at the expense of those other economic sectors that will no longer benefit from some measure of either consumer spending or invested savings. Tax cuts are a more effective way to drive economic growth and job creation.

At any rate, encouraging people to trade in a paid-off car to take on debt for a new car is a bad idea, as economic commentator Peter Schiff mentioned in a recent article:

The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?

This program bears a remarkable resemblance to many ill-fated home subsidy programs, in which people were encouraged to purchase houses they could not afford. Overall, Cash for Clunkers is a wasteful and expensive program that does not need a further subsidy. Missourians would be better served with corporate tax breaks that would help create new jobs instead of artificially aiding the auto industry.

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The past week was an awesome experience. For those of you who don’t know, my fellow intern Dan Grana and I were Bastiat scholars at Cato University, which is a weeklong seminar organized by the Cato Institute that focuses on enhancing freedom and liberty through lectures and discussions. It is a great experience, and I recommend it to any libertarian — or anyone who is just generally interested in promoting freedom. Although the days were somewhat long (9 a.m. to 9 p.m.), it was completely worth it. The days were filled with incredible speakers, ranging from Tom G. Palmer of the Cato Institute to Rejoice Ngwenya, who is a leader against Zimbabwe’s corrupt president, Robert Mugabe. Even after the daily lectures were finished, the conversation continued. We spent most nights at the Veranda Grill discussing liberty and other issues with like-minded individuals.

The entire week was a first-class experience. The food and hotel were awesome, and the speakers were even better. Before I arrived in San Diego, I was a little apprehensive about the trip. I was worried that the speakers would not be entertaining, or the days would be too long, but it turned out that my notions were unwarranted. Again, if anyone ever has the opportunity to go to Cato University, I highly recommend it. I’m even thinking about going again next year.

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The question of the day for the state and federal officials seemed to be how the government could help area farmers as the water begins to recede out of their crop fields.

If this is the question, the mistake has already been made. Disaster relief programs often come with nefarious long-term consequences. When government agencies bail out the victims of a disaster, we all feel good in the short term. It’s easy to see the repairs for the farmer’s damaged barn, for example. But, in the spirit of Bastiat, I have to point out what we can’t immediately see.

By consistently sending relief to disaster-prone areas, the government insulates them from some of the risk of living, working, and operating businesses there. This is essentially the same as a government subsidy for areas that are more likely to experience a disaster. As a result, there is more investment in and migration to these areas than there would be otherwise. Because this shifts people and businesses away from areas that experience relatively fewer disasters, the disaster-prone areas come to contain more stuff that can be damaged — and, thus, the average disaster causes more damage than it would have without the existence of government bailouts.

Paradoxically, disaster relief literally sets us up for catastrophe. Of course, once the catastrophe occurs, it leads to an increased demand for even more disaster relief, which, in turn, sets us up for even worse disasters, which … well, you get the idea. Very quickly, this turns into a rather vicious cycle. Let’s hope Missouri voters and politicians choose not to perpetuate the cycle.

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Here is a case study in priorities.

There are 121,000 kids without health insurance in Missouri.

And Matt Blunt and Peter Kinder are spending $1 million dollars on… a bike race.

Of course, I agree that health care is a critical priority for the Missouri government — even though Fired Up! is unlikely to agree with me that the best way to get people the care they actually need is through providing tax incentives for individual policies and eliminating red tape that gums up the workings of the market.

Fired Up! is right on the money, though, that a bike race is a ridiculous government expenditure. There may be many good reasons for a prominent race in Missouri — prestige, tourism, competition with neighboring states — but, as economist Frédéric Bastiat would have pointed out, every action has both effects that are obvious and effects that are hidden. An exciting race is an effect that we can see, but every dollar taken from taxpayers to spend on a bicycle race is a dollar that can’t go toward filling up a gas tank, buying groceries, taking a child to piano lessons, or, say, buying a bicycle — all effects that we can’t see.

Thanks to the diffuse costs and concentrated benefits of special interest politics, these hidden effects go almost entirely unnoticed by the general public. But a $1 million expenditure that seems measly in political terms is actually a huge aggregate amount, sucked from the economy and redistributed to politically favored recipients. Frankly, a state-sponsored bicycle race is a bad idea for the same reason that HB 327 was a bad idea — government spending on favored economic ventures makes everybody else a little bit poorer.

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