The image below outlines the four spending options and how they all change behavior.

Spending your money on yourself is when you economize (reduce expenses) and seek the highest value, as you are both the one losing the money and receiving the product. The exact opposite is spending someone else’s money on someone else. You don’t economize or seek high value because it is neither your money nor do you receive the product; you have very little invested in the decision.

Unfortunately, that’s the scenario that most closely resembles lawmakers spending stimulus money; it’s someone else’s money that they are spending on someone else. Of course, lawmakers are always spending someone else’s money in the form of tax dollars, but stimulus money is even farther removed because it doesn’t just come from their constituents.

This theory doesn’t paint a promising picture for spending the billions of stimulus dollars that Missouri received. Taxpayers do not want billions of dollars being spent in a way that is inefficient and wasteful. Lawmakers will need to be mindful of this incentive structure when deciding both what to spend these one-time funds on and whether to spend some of these funds at all.

The post Milton Friedman’s Theory Casts Doubt on Responsible Stimulus Spending appeared first on Show-Me Institute.

In one of the more memorable exchanges of the interview, Donahue asks Friedman a question many are still asking today:

When you see around the globe, the maldistribution of wealth, the desperate plight of millions of people in underdeveloped countries. When you see so few “haves” and so many “have-nots.” When you see the greed and the concentration of power. Did you ever have a moment of doubt about capitalism and whether greed is a good idea to run on?

Friedman’s reply has become standard among capitalists like me. “Is there some society you know that doesn’t run on greed?”

Friedman continued:

You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who is greedy. The world runs on individuals pursuing their separate interests.

The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way.

In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade.

If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.

In the years since the Donahue interview, the free enterprise system has continued to improve the lot of ordinary people. Yet today, possibly more than in Friedman’s day, Americans are showing support for socialist policies. Shockingly, a 2019 Gallup poll found that four out of ten Americans supported some form of socialism.

What happened? How can socialism be gaining popularity even as confidence in capitalism wanes? The problem is that a defense of capitalism like Friedman’s satisfies the head but not the heart. When people—especially young people—look around the world today, many of them see it as Donahue described it. As a result, they question the morality of capitalism.

Enter Arthur Brooks.

Brooks is the past president of the American Enterprise Institute, a social scientist, a former university professor, and a former professional French horn player. Yes, you read that right. Brooks has written best-selling books such as The Conservative Heart: How to Build a Fairer, Happier, and More Prosperous America and Love Your Enemies: How Decent People Can Save America from the Culture of Contempt.

Recently, Brooks released a documentary, The Pursuit, which is now available on Netflix.

In it, he asks, “From 1970 until today, the percentage of the world’s population living at starvation’s door has decreased by 80 percent. Two billion people have been pulled out of starvation level poverty. What did that?”

His answer is the same as Friedman’s—free enterprise. Indeed, the messages of Free to Choose and The Pursuit are essentially the same: No other system has succeeded like free enterprise in allowing people to direct their own destiny and pull themselves out of poverty.

The key difference between the two is that when Brooks discusses how to help the most disadvantaged, it’s clear that he’s making not just an intellectual argument but also an emotional appeal. He cares about human flourishing.  From the very beginning, he frames the argument for capitalism as a moral one, saying “the point of the American experience is basically a moral consensus that our society should push opportunity to the people who need it most. This is our pursuit, and it’s predicated on two fundamental moral principles: human dignity and human potential.” Brooks shows us this as he walks the streets of India, once a scene of abject poverty during the days of democratic socialism. Now, after free enterprise has been released, we see progress. Hindol Sengupta, editor-at-large of Fortune India, says it like this, “Capitalism allows human beings to choose an action to fulfill their own destiny. . . . Forget per-capita GDP—we didn’t even have per-capita hope.”  

None of this is to say Friedman did not care about the poor, but his arguments can come across as those of an academic. They are for the head. Through The Pursuit, Brooks provides the answer for the heart.

Add The Pursuit to your list of required viewing. Go watch it . . . after you watch the Friedman interview.

The post Movie Review: The Pursuit appeared first on Show-Me Institute.

And when I say from scratch, I mean, from scratch.

He harvests the vegetables, he kills (fair warning, graphically) the chicken, and he even evaporates his own salt from the ocean! Really, what he did was a millennial-focused version of I, Pencil, the famous free market lesson popularized by Nobel-Prize winning economist Milton Friedman in his Free to Choose television series.

In both videos, the incredible organizing capacity of the free market is brought into stark relief. If we didn’t trade with each other or specialize in raising chickens or harvesting vegetables, most of the modern conveniences we take for granted would be completely impossible.

We often like to talk about the power of the free market in macro terms, using it to explain why Myanmar is rising while Venezuela is falling. But the benefits of the free market are much more prosaic. From the writing utensils we use to the food we eat, the mutual cooperation that the free market enables is on full display, if we choose to see it. 

The post This Sandwich Costs $1,500 and Takes 6 Months to Make appeared first on Show-Me Institute.

Milton Friedman first discussed the idea of educational vouchers in the 1950s, arguing that competition between schools would improve efficiency and drive down costs. The idea became popularized during the 1980 television series Free to Choose.

In voiced-over footage of high school-age children walking through metal detectors before entering an urban school, Friedman said:

Isn’t that awful? What a way for kids to have to go to school through metal detectors and to be searched. What can they conceivably learn under such circumstances? Nobody is happy with this kind of education. The taxpayers surely aren’t. This isn’t cheap education. . . . And what about the broken windows and the torn school books and the smashed school equipment? The teachers who teach here don’t like this situation. The students don’t like to come here to go to school. And most of all the parents. They are the ones with the worst deal. They pay taxes like the rest of us. They are just as concerned about the kind of education their kids get as the rest of us are. They know their kids are getting a bad education, but they feel trapped. Most of them see no alternative but to continue sending their kids to schools like this.

So while lawmakers have looked to improve education through top down policies like No Child Left Behind and Race to the Top, Milton Friedman was the first to acknowledge that parents should be in the driver’s seat of their child’s education.

Today, a majority of Americans support educational choice. The Friedman Foundation recently released the 2015 Schooling in America Survey, which found that 63 percent of school parents support educational vouchers. When asked to rank the actions a state government should take in intervening in low-performing schools, 41 percent ranked supply vouchers/scholarships as number one. Twenty-six percent ranked convert the failing schools to charter schools as the number two solution. Clearly, Americans favor options. Still, many do not know about the man behind the idea.  

This is why the Show-Me Institute is celebrating Friedman Legacy Day on July 31 (register now). Oklahoma State Senator Jabar Shumate will discuss the effects of school choice on urban issues. Unlike Missouri’s legislature, Oklahoma’s policymakers have helped establish two private educational choice programs—a voucher program for students with disabilities and a tax-credit scholarship for low-income students.

Please register for this event now.

The post Friedman’s Legacy appeared first on Show-Me Institute.

So it would be better to not subsidize these programs and allow them to not exist? It’s not worth it to let them become proven while working toward the longer-term goal of eliminating the subsidies?

The writer introduces infant industry argument, which supporters of subsidies commonly use. The argument implies that emerging industries need to be protected temporarily in order to develop the economies of scale that established companies and industries possess.

My answer is an emphatic yes. For reasons that I am about to describe, it would be better if the state did not subsidize these programs.

If these subsidies were eliminated, many groups would be better off. Consumers represent one group that would certainly benefit. Protecting industries hurts consumers because it: (1) restricts new suppliers from entering the market (which restricts supply and increases the price to the consumer); (2) removes the incentive for existing suppliers to innovate (which decreases product quality); and, (3) restricts their access to consume non-protected competitive products. Furthermore, eliminating subsidies to particular industries will not restrict the variety of goods and services available to consumers. When industries focus production according to their comparative advantage and then trade with others, Missourians will still be able to consume in the absence of subsidy.

Taxpayers would be better off in the absence of such subsidies, as well. The subsidies distort relative prices, which consequently distorts the mix of goods and services available for consumption. A firm that receives a subsidy from the government can charge a lower price to consumers, who consequently have an incentive to consume a greater quantity of it. Additionally, if the subsidies were eliminated, taxpayers would be able to keep a greater percentage of their earnings that they can save, invest, and/or spend on the goods and services that they naturally prefer in the private sector, rather than the goods or services that happen to have artificially lower subsidized prices.

Another group that would benefit from the elimination of subsidies is businesses and industries that do not currently receive subsidies. The government places this group at an artificial competitive disadvantage by dispensing political favors to its competitors.

Milton and Rose Friedman disputed the infant industries argument in their book Free to Choose: A Personal Statement. They wrote:

[T]he “infant industry” argument [is] advanced, for example, by Alexander Hamilton in his Report on Manufactures. There is, it is said, a potential industry that, if once established and assisted during its growing pains, could compete on equal terms in the world market. A temporary tariff is said to be justified in order to shelter the potential industry in its infancy and enable it to grow to maturity, when it can stand on its own feet. Even if the industry could compete successfully once established, that does not of itself justify an initial tariff. It is worthwhile for consumers to subsidize the industry initially–which is what they in effect do by levying a tariff–only if they will subsequently get back at least that subsidy in some other way, through prices lower than the world price or through some other advantages of having the industry. But in that case is a subsidy needed? Will it then not pay the original entrants into the industry to suffer initial losses in the expectation of being able to recoup them later? After all, most firms experience losses in their early years, when they are getting established. That is true if they enter a new industry or if they enter an existing one. Perhaps there may be some special reason why the original entrants cannot recoup their initial losses even though it may be worthwhile for the community at large to make the initial investment. But surely the presumption is the other way.

Additionally, subsidized industries have difficulty weaning themselves off government assistance. I have previously discussed this in the context of film tax credits. When a state protects a particular industry and/or provides financial aid, the industry tends to remain dependent on that protection or subsidy. Furthermore, industries that are subsidized do not have an incentive to innovate because they are not subject to the same competitive pressures as those that are unsubsidized.

More often than not, when an industry refers to itself with the “infant” term, it’s simply seeking rent through legislative favoritism. Milton and Rose Friedman also discussed this concept in Free to Choose: A Personal Statement. They wrote:

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.

The post The Case for Eliminating Subsidies to Industries appeared first on Show-Me Institute.

Later this month, Gov. Jay Nixon will travel to Taiwan and South Korea in order to lobby to them to buy Missouri agricultural exports. Previously, I discussed how this would lead to the subsidization of foreign consumers by Missouri taxpayers. From an article in the Kansas City Star:

On Wednesday, Nixon announced that a trade mission planned for Dec. 10-16 was expected to produce a letter of intent with Taiwanese businesses that will agree to buy Missouri corn, soybeans and other products during the next five years.

At a rate of about $120 million of exports a year, the new agreement would outpace the $69.1 million worth of exports Missouri sent to Taiwan in 2009.

The governor is traveling to Taiwan with the intention that it will influence their government’s public policy decisions. My fingers are crossed that the direction of this knowledge transfer will be in the reverse. Policymakers in Missouri can learn much from Taiwan.

Hopefully, this trip will serve as an opportunity to learn that Taiwan has developed rapidly and meets the needs of its citizens well because it enforces public policies that embrace the free market. If the state government in Missouri were to remove itself from arbitrarily picking winners and losers in the market, the economy would achieve a greater rate of growth. As I have commented before, centrally planned economies have not worked historically, and there is little reason to believe that they will work any differently in Missouri.

I encourage the governor to watch Free to Choose, a multipart PBS television series by Milton and Rose Friedman from the early 1980s that communicates how the economy benefits from free-market principles. Perhaps it would make for good viewing on the flight to Taiwan. (And he might be further interested to know that Arnold Schwarzenegger, a governor from another mother, provides a commentary to the updated 1990 version of the series.)

The first episode, in which Dr. Friedman visits Hong Kong, is particularly relevant to this trip to Taiwan. Friedman explains that Hong Kong has experienced success because it has established basic economic policies that are rooted in free market principles — principles that would benefit Missouri as well. From Friedman’s narrative:

This thriving, bustling, dynamic city, has been made possible by the free market — indeed the freest market in the world. The free market enables people to go into any industry that they want; to trade with whomever they want; to buy in the cheapest market around the world; to sell in the dearest around the world. But most important of all, if they fail, they bear the cost. If they succeed, they get the benefit and it’s that atmosphere of incentive that has induced them to work, to adjust, to save, to produce a miracle. This miracle hasn’t been achieved by government action — by someone sitting in one of those tall buildings and telling people what to do. It’s been achieved by allowing the market to work. Walk down any street in Hong Kong and you will see the impersonal forces of the market in operation.

By increasing American imports to countries like Taiwan, China, and India, the rising living standards in those regions will continue, and this will lead to the demand for more American goods. This change does not require the lead of the government, however. It happens spontaneously and incrementally in unrestricted markets. Missouri could achieve a higher annual rate of growth if it stopped subsidizing and protecting favored industries and instead let the free market work.

The post Policymakers in Missouri Have a Lot to Learn From Taiwan appeared first on Show-Me Institute.

Economic development tax incentives, no matter how they are packaged, are not effective. They allow government officials, who have no special knowledge of how to maximize growth, to pick winners and losers in the market. As Show-Me Institute Executive Vice President Joseph Haslag has written before, lowering broad tax rates is a much more efficient method of stimulating the economy than targeted tax credits. This allows everyone to benefit, rather than a few select industries chosen by the state.

Empirically, studies analyzing the benefits that development tax credits deliver in comparison to their costs show that such tax credits have not worked. A recent Missouri state audit report found that tax credits are less effective (and more expensive) than their proponents claim. Yesterday, St. Louis Public Radio broadcast a segment featuring a study that examined another form of tax incentives in Missouri, tax increment financing (TIF). Kenneth Thomas, a political science professor at the University of Missouri–St. Louis, recently coauthored a study that found the use of TIF is not effective in most cases. He noted that the St. Louis area uses TIF more than nearly every other area in the nation. In the interview with St. Louis Public Radio’s Matt Sepic:

Sepic: That’s one longstanding criticism, is that TIF pits communities against one another. A prime example is that tussle between Bridgeton and St. Anne over a Walmart. Is that a bigger problem in the St. Louis area than elsewhere, with this panoply of municipalities that we have here?

Thomas: Oh, yes, certainly having more municipalities makes the competition more intense.

The study argues that, although many economists have found TIF to be ineffective, this method of funding continues to be used because of the competitive nature of tax incentives. When one area offers a tax incentive, other areas nearby often try to “win” a company’s business by offering competitive tax incentives. The result is a bidding war in which the taxpayers lose. This can be seen in the Claycomo Ford tax credit situation, as well — other states, like Kentucky, have offered tax incentives to Ford in an effort to persuade them to relocate their plant. In order to compete, Missouri would have to offer a better deal, while recognizing that this game will be played again the next time the credits run out.

Later in the interview, Thomas notes an important misunderstanding — the idea that tax incentives like TIF “create” jobs:

Thomas: [T]hose estimates never take into account the fact that, well, yes, we are going to create 200 jobs here, but what’s going to happen is we’re going to knock out 180 in the next mall over.

Tax credits and TIF tend to shift economic activity from one area to another, without creating wealth. Missouri’s tax dollars would be much better spent in the hands of individual Missourians than on enticements for companies like Walmart or Ford.

As Milton Friedman pointed out on his PBS TV series “Free to Choose,” even if other nations, states, or localities offer tax incentives to lure businesses, we’re better off if we don’t do the same — because we benefit from the lower prices their subsidy creates. Missouri will experience better economic growth if it unilaterally removes itself from the tax incentive bidding wars.

The post Tax Incentives Are a Game We Can’t Win appeared first on Show-Me Institute.

First, the ban wouldn’t even solve the problem, because all of the Toyotas that were recalled in January for malfunctioning gas pedals weren’t manufactured in Japan. They were manufactured in the United States:

As for banning Japanese-made vehicles: All 2.4 million Toyotas recalled Jan. 21 due to sticky gas pedals, and most of the 5.6 million vehicles recalled because floor mats might jam pedals, were assembled in the USA.

Would this ban have anything to do with the fact that the U.S. government has a large financial stake in GM, a major Toyota competitor?

Banning Toyotas would have many negative consequences. For example, the men and women who work in Toyota dealerships and Toyota manufacturing plants would have to join the ranks of the unemployed. This would have a noticeably negative effect in Missouri, which has a high-enough unemployment rate already — 9.6 percent as of December.

Banning foreign imports like Toyota would hurt consumers because it would limit their choice of cars. When free trade is restricted, a people can only consume what their country is able to produce. In an adapted excerpt from their book Free to Choose: A Personal Statement, Milton and Rose Friedman elucidated what this means to consumers:

We cannot eat, wear, or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports. As Adam Smith saw so clearly, the citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports or, equivalently, from exporting as little as possible to pay for its imports.

The ban would also increase consumer prices on all cars by decreasing the total supply. Domestic car producers do not have the capacity to make up for the shortfall in the short run, which would aggravate this effect. In the aforementioned excerpt, Milton and Rose Friedman explained that “‘Protection’ really means exploiting the consumer” because she has to pay more for goods.

The ban would also decrease the quality of vehicles that are available to American consumers, which is the very problem that this policy is intended to alleviate. When a country attempts to protect certain industries, it removes their incentive to innovate in order to compete in the global market. By banning foreign imports such as Toyota, the United States would do the American car industry and American consumers no favors. GM and Ford have difficulty competing with foreign firms like Toyota and Honda in the status quo world economy because they have “benefited” from American protectionist policies on cars for so long. Furthermore, bans on foreign imports become even more disadvantageous in the future if/when the trade restriction is lifted, because domestic car companies would have lower-tech, lower-quality products than their foreign competitors.

Government intervention in international markets hurts business and discourages economic growth. When a country slaps protective measures on its trade policy, it is probable that other nations will retaliate in kind, leading to increased consumer prices. Impeding free trade is very dangerous policy when international economies are so intertwined. We only have to look to the recent past for evidence of this. Last September, Obama placed a 35-percent tariff on tire imports from China. This was effectively a tax on Americans who drive cars, who were predicted to experience a 20- to 30-percent increase in the cost of tires as a result of the policy. China responded the following Sunday in retaliation by placing its own tariffs on imports of American poultry and automobiles.

I have an alternative suggestion: Instead of banning foreign imports, each U.S. senator should complete a refresher course on macroeconomics before assuming office. Based on Sen. Johanns’ proposal, I see no evidence this the former secretary of agriculture ever took one in the first place.

The post Against the Proposed Toyota Ban appeared first on Show-Me Institute.

The discretionary program offers state tax credits, accompanied by local real property tax abatement, for businesses that meet criteria such as adding jobs. […]

Ipock said state tax credits will only be allowed for qualified businesses and are geared toward industrial development.

Businesses that are ineligible to receive the tax credits include gambling establishments, adult businesses, retail trade, educational services, religious organizations, public administrators, food and drink establishments.

I disagree that the program’s benefits should be for “qualified” businesses. This is the same as the fundamental argument against targeted tax credits, like those to filmmakers. The government should not have the authority to pick and choose which businesses can operate in its borders. These programs create inequality because they force businesses that aren’t “qualified” to compete at a comparative disadvantage. This consequently encourages corruption, because it gives businesses an incentive to solicit the government for special treatment.

Instead, Webster County should focus on creating a favorable tax environment that would benefit all businesses equally, such as reducing commercial property tax surcharges and repealing mandates. If the city of Saint Louis were toying with such an idea, I would recommend that it repeal the earnings tax instead.

I also disagree that the focus of the program should be on job creation. Public works projects, such as Enhanced Enterprise Zones, encourage nonproductive work (e.g., “work for works’ sake”). I think that Milton and Rose Friedman would agree; in Free to Choose: A Personal Statement, they write:

If all we want are jobs, we can create any number—for example, have people dig holes and then fill them up again or perform other useless tasks.

Furthermore, although the program may be successful at attracting the targeted industries, any activity that it generates will be discounted by the amount of the economic incentives that it takes to attract it. As Henry Hazlitt explains in Economics in One Lesson, spending in the private sector destroys jobs in the private sector. This is because public spending is financed by money that is taken from taxpayers, who can’t spend this money on products and services in the private sector that would generate productive economic activity.

When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built the government spenders begin to ask themselves where bridges can be built.

The post Enhanced Enterprise Zone in Webster County appeared first on Show-Me Institute.

Government, preferably local governmental units, would give each child, through his parents, a specified sum to be used solely in paying for his general education; the parents would be free to spend this sum at a school of their own choice, provided it met certain minimum standards laid down by the appropriate governmental unit. Such schools would be conducted under a variety of auspices: by private enterprises operated for profit, non profit institutions established by private endowment, religious bodies, and some even by governmental units.

About a year before his death, Reason interviewed Friedman about the education reform legacy he had instigated:

I want vouchers to be universal, to be available to everyone. They should contain few or no restrictions on how they can be used. We need a system in which the government says to every parent: “Here is a piece of paper you can use for the educational purposes of your child. It will cover the full cost per student at a government school. It is worth X dollars towards the cost of educational services that you purchase from parochial schools, private for-profit schools, private nonprofit schools, or other purveyors of educational services. You may add from your own funds to the voucher if you wish to and can afford to.” (I try to avoid calling government schools public schools because I think that’s a very misleading term.)

As to the benefits of universal vouchers, empowering parents would generate a competitive education market, which would lead to a burst of innovation and improvement, as competition has done in so many other areas. There’s nothing that would do so much to avoid the danger of a two-tiered society, of a class-based society. And there’s nothing that would do so much to ensure a skilled and educated work force.

Friedman also expanded on his arguments in favor of school choice in the 1980s PBS television series “Free to Choose.” The episode of this series dealing with education is available online, broken into six separate video clips. The first is embedded below:

Be sure to watch the rest, too! It’s well worth the time of anybody who cares about improving educational opportunities for all children.

The post Milton Friedman’s Vision for School Choice appeared first on Show-Me Institute.