According to Krugman, the “self-proclaimed libertarians” are either stupidly or maliciously engaged in “projection” – attributing base motives to their political opponents that underlie their own highly prejudicial reasoning.

Kudos to Per Bylund, a research professor at the Hankamer School of Business at Baylor University, for flipping the situation around and pointing out how all you need to do is to replace “libertarian” with any of the words that Krugman might use to describe his own thinking to see a wonderful example of projecting your own intellectual failings onto others of the opposite persuasion.

As Bylund observed in today’s Mises.org: “Keynesiasn/progressives/(whatever) like Krugman deal with the problem of government failure both by pretending that it doesn’t happen and by imagining the market as much worse than it is.”

The post Krugman Upended By His Own Logic appeared first on Show-Me Institute.

The proposal is for BWB Sports to lease the land that now holds the Olivette Community Center and athletic fields around it. (My kids have played many team sports on those fields.) The company wants to build ice rinks, lacrosse fields, and more, and operate it as a private entity. BWB officials do not appear to be asking for a subsidy (I’ll amend this post if they are), which is one of the reasons I support this. However, the fact that they are going to lease this land will likely limit the expansion of the tax base, as the city will still own the land. (There likely will be some tax base expansion from business equipment taxes, concession sales taxes, etc.) Not to mention the fact that the company will pay Olivette to lease the land.

So, basically, you have some residents of Olivette telling me that the park and community center really are not in very good shape and desperately need an upgrade. While others – the ones showing up at the meetings attacking the proposal – are demanding that the park be protected and the land preserved.

There is no doubt about one thing – this is not a half-measure. This is a major change to the property that I think would significantly upgrade the facilities and use of the land. The only thing the proposal is missing is an outright sale of the property, which is politically impossible and legally complicated. So they are just leasing it, but I doubt that means much to the opponents.

I hope that Olivette officials can see the long-term benefits in this proposal. But, unlike other NIMBY situations, I see some merit in the residents’ concerns. This is not like recent disputes in Brentwood, Maryland Heights, or South County. I understand why some neighbors are objecting. As I said in my study about privatization in Missouri, park privatization proposals are very contentious for good reason. Outsourcing the management of existing park facilities is not that controversial, but wholesale changes to parks themselves are.

This is the latter. I hope it passes. I think the long-term benefits are significant for Olivette and Saint Louis County. This plan would increase use of the property, grow the tax base (somewhat), inject private money into Olivette recreation instead of counting on tax dollars, and more. But I am not going to attack the opponents as NIMBY-based obstructionists, even the Keynesians among them.

The post Great Idea Will Be Hard Sell In Olivette appeared first on Show-Me Institute.

But the core of it is getting major cities within two or three hours of each other. So, St. Louis to Chicago within three hours — with completely new infrastructure the entire way, it’s possible you get it down under two.

But you know what? The entire project currently underway in Illinois is based on implementing a 4-hour trip each way (at best). We are spending billions to knock a little more than an hour off of the current Amtrak route, and supporters of it are intentionally downplaying that.

Later in the interview, Harnish gives a great little aside downplaying safety of cars and claiming, by insinuation, that trains are safer.

. . . if you believe that our strength and unique identity is tied to the ability to risk your life everyday in a car . . .

OK, so we risk our lives everyday in a car. Would we not risk them in a train? Now, I am not saying passenger trains are unsafe — they are indeed safe. But if you compare them to cars, there are more fatalities on passenger rail than in motor vehicles per passenger mile. According to the latest data, passenger cars have 0.9 fatalities and 83 injuries per 100 million passenger miles. Passenger rail has 2.9 fatalities and 1,226 injuries per 100 million passenger miles. So they are both safe, but let’s not pretend passenger rail is safer.

High-speed rail is to transportation policy what ethanol is to agriculture policy. They are both high-cost jokes designed to please limited constituent groups (corn farmers, unions, Keynesian economists) which would not exist if markets made these choices instead of politicians. (High-speed rail on the eastern seaboard may pass the market test, and thanks to John Combest for the link.)

The post High-Speed Rail Supporters Are Just Making Things Up appeared first on Show-Me Institute.

Less excusable are the actions of supposedly wise politicians who lay down billions in tax dollars in the vain hope of hitting it big with a stimulus or economic development bill. We are promised that a dollar in government spending will create more than a dollar in economic growth.

This idea, known as the fiscal multiplier, has never been borne out by evidence. When the actual results of government spending on the economy are examined, they show lackluster or even negative returns. However, that has not stopped proponents of greater government spending from using the multiplier to promote everything from the federal stimulus bill to state and local subsidies for warehouse construction around Lambert–St. Louis International Airport.

The multiplier is based largely on the work of economist John Maynard Keynes, who argued that higher government spending combats people’s propensity to hoard money in a recession and puts unemployed people and resources to work. As the spending ripples across the economy, a dollar in government spending should cause substantially more than a dollar in economic activity.

The Barack Obama administration invoked multiplier theory to promote the $787 billion federal stimulus package. The president’s economic advisers assumed every dollar spent by the stimulus would add $1.50 to gross domestic product (GDP). In a March 2 column for the New York Times Economix blog, University of Chicago economist Casey Mulligan showed that stimulus spending did not boost GDP, and may have caused it to shrink.

Nor has stimulus spending delivered the bounty of jobs that its supporters promised. Obama claimed that the stimulus would prevent unemployment from exceeding 8 percent., yet it hit 10 percent and now remains stubbornly stuck at 9 percent.

Others have taken this idea a step further, claiming a still bigger multiplier effect for specific projects — thinking, just as I did in my youth, that it must be easy to toss the ring around the bottle. When final plans for Ballpark Village were announced in 2006, the Saint Louis Regional Chamber and Growth Association (RCGA) estimated that Phase I of the project would cost $387 million, but generate $273 million annually — paying for itself in a year and a half. Of course, this assumed that everything would go as planned. Almost five years later, construction has not started and the investment has been downgraded to $155 million, with at least $57 million of that coming from various levels of government. Furthermore, Ballpark Village is primarily shuffling existing businesses around instead of attracting or creating new ones. Stifel Financial Corp., the village’s largest future tenant, will move all of seven blocks.

Despite these failures, politicians of every stripe recently trotted out the multiplier to support subsidies for warehouses around Lambert, through “Aerotropolis” legislation. Although the precise equation behind it remains shrouded in oracular mystery, an RCGA study predicts that $300 million in public funding will lead to almost $34 billion in private economic activity over 20 years, suggesting a truly absurd return of more than 10,000 percent. Here, the Keynesian multiplier has itself been multiplied by the central planner’s conceit of being able to pick winners successfully — truly a sucker’s game.

The government cannot create resources from thin air. It must take them from taxpayers through taxation or borrowing. Resources used by the government therefore cannot be used by the private sector. Increasing government spending does not in itself increase the country’s capacity to produce — it just shifts existing production away from goods and services that consumers demand, and toward those demanded by politicians.

The multiplier is a lie, but an attractive one, luring the listener like the familiar siren song of my youth: “Ring the bell, win a prize!”

John Payne is a research assistant with the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

The post Development Spending by Government Only Multiplies Madness appeared first on Show-Me Institute.

Williamson summarizes his Kudlow exchange thusly (emphasis added):

Jack up economic growth, Mr. Kudlow argues, and all this budget-balancing stuff gets easier. Not so fast, says I. If we had the ability to know in advance how much growth particular economic policies would produce — or even whether they would produce growth at all — then we would never have a recession. We would always be at the sweet spot of maximum real growth. But we are limited and fallible creatures, and right-wing political macroeconomic management is no more reliable, or predictable in its outcomes, than is Keynesian political macroeconomic management. The economy is not a machine, and any time a politician says, “If we will adopt Policy X, we are sure to achieve Statistical Abstraction Y,” he is talking through his hat. The best government can do is maintain stable rules and liberal institutions and try to stay out of the way.

Williamson is right on. The moment a politician thinks she can plan an economy is probably the moment she should no longer be presiding over it, and when your own politicians start talking up “economic multipliers” and “potential demand,” hold on to your pocketbooks, ’cause you’re about to be brought into a massive and expensive public experiment.

Or, put more succinctly, be very skeptical of the promises of economic growth that politicians make to you. Whether it’s magic unicorns or flying cows, hitching your fiscal destiny to the spirits of animal fiction is a plan for frustration, not a plan for the future.

The post “Hope Is Not a Policy” appeared first on Show-Me Institute.

I recently highlighted how government can get in the way of a person and her pizza slice. A couple of Show-Me Daily commenters said that the food truck wasn’t banned from Edwardsville — its operators simply failed to apply for a permit.

According to a Riverfront Times article about the incident:

Reached for comment, Pi co-owner Chris Sommers forwarded us along to Fond owner and chef Amy Zupanci, who’d invited the pizza truck to park outside her restaurant. In return for her Welcome Wagon treatment, Zupanci received a call from the health department yesterday, and an in-person visit from an Edwardsville police captain.

“The Madison County Health Department says they don’t allow trucks of any kind to serve food,” Zupanci writes in an e-mail. “However, they also have a policy of no inspection necessary as long as you have a health certificate for ‘non-consecutive food events.’ This would include festivals, farmers’ markets, etc., which may happen once a week, but not back-to-back days.”

Reasoning that under that definition the Pi truck is an “event,” Zupanci inquired about a so-called Transient Merchant permit but hit a dead end: The health department directed her to the police department, which informed her that permits involving food must be approved by…the health department.

This doesn’t tell us that the truck is de jure banned, but it can be interpreted as a de facto bureaucratic ban if public officials refuse to award the certificate required to conduct business.

Enforcing food safety is the ostensible goal of requiring permits. Nobody’s arguing against food safety — I’m certainly not. I’ve contracted food poisoning before, and I felt like I was going to die. I wouldn’t wish food poisoning on anyone — not even on a Keynesian.

However, excessive permit requirements can create a barrier to entry in the market, and keeping a number of competitors out of the market may be the unstated goal of the regulation. My friend and colleague Josh Smith explains the negative effects of this in a comment on my previous blog post:

When a local government requires some level of oversight for vendors, can it be called a “ban”? Perhaps not. If it is the case, however, that the Pi truck is not allowed to sell food in Edwardsville without the approval (through a form, or some other process) of the government, this constitutes an infringement on the right of the Pi truck to sell and the Edwardsville pizza customers to buy.

Even if this layer of bureaucracy seems small, it’s often small changes that have unfortunate marginal effects on markets. What seems like a simple matter to some may be not worth it to others.

Reputation capital can serve as an alternative (and perhaps more reliable) means of signaling quality and safety than a certificate from a local health board — a certificate that likely doesn’t signal much of anything in the way of rigorous investigation of potential health hazards. Dan Klein at the Cato Institute has published a good piece on the subject, “How Trust Is Achieved in Free Markets.”

The post Which Is Government Protecting: Consumers From Food Poisoning, or Existing Businesses From Competition? appeared first on Show-Me Institute.

Roberts and Papola are producing another video with the same actors playing Hayek and Keynes, and applying their theories to the present situation. You can catch a preview of the video, along with a short interview with Roberts and Papola from a conference sponsored by The Economist magazine, embedded below.

The post Rapping the Recession appeared first on Show-Me Institute.

The egregious amount of deficit spending is leaving taxpayers with a sizable bill. The federal government would like the “rich” (those that make more than $200,000 in pre-tax income) to pay a higher proportion of that bill, making them the lucky recipients of a tax rate increase. The politics of the tax cuts have already begun. It seems like an impossible task for Washington to divorce the economics from the politics. At this point in history I’m betting that that those individuals and families in the highest tax brackets will certainly see a tax increase come January.

The president recently said, “There will be no more taxpayer-funded bailouts. Period.” But, as Dan Henninger of the Wall Street Journal points out, “Raising taxes to cut the deficit is a bailout for the spenders.”

I’m beginning to think that an effective training regimen for politicians would include an undergraduate degree in linguistics.

Maybe I am missing something. Maybe classical microeconomics has become outdated and doesn’t adequately reflect decisions in the real world anymore. Maybe the nuance of their arguments is too much for me. Or maybe they’re wrong.

Economists have been developing mathematical equations since the days of Adam Smith, attempting to ascribe reality to a system of variables that can be changed and tweaked to more accurately reflect what economists empirically see. The problem with these equations is that they are not reality. That being the case, it is best to avoid needless complication.

Someone best illustrated this to me using the game of billiards as an analogy. Hitting the cue ball into the eight ball in an effort to send the eight ball into a corner-pocket requires skill and accuracy. Ricocheting the cue ball off the rail into the three ball which then will kiss the nine ball on its way into the two ball which will subsequently fall into the pocket is an entirely different problem. The more complex the system gets, the more accuracy is required, and initial mistakes are magnified further down the line.

Intertemporal decision making can be a complex problem to study, but most of the world makes such decisions intuitively — we are all practicing economists. The amount available for future consumption is future income plus savings plus the amount of interest earned on savings. If savings are negative, the person is borrowing and must pay back the amount borrowed plus the interest in the second period. This has the effect of reducing future consumption.

Future Consumption: P₂C₂ = M₂ – M₂t + S + iS

This means that today’s purchases change tomorrow’s parameters.

Current Consumption: P₁C₁ = M₁ – M₁t – S

Reality is an integration of these two equations. We do it constantly, and instantaneously most of the time. Income (M₁ & M₂) is a function of spent spent in leisure and work, and wages. People often decide how much they will work based on how much they plan to consume and how long it will take them to achieve the desired amount of income for that consumption (this also allows income to implicitly represent labor decisions in these micro equations).

Enter government, with a budget constraint that looks very similar. What is different is that the government doesn’t have to make labor decisions; it makes taxing decisions, and consumes through expenditures.

Government Expenditures: p₁E₁ = M_G + S

Government Revenue: M_G = M₁t (this form represents an income tax)

Taking from the income produced by others is the government’s only real source of revenue. This has two very obvious implications: 1) Taxation has an obvious impact on private consumption decisions, because it subtracts from real income (this also affects savings and consumption patterns, both now and later); and, 2) tax rates and government expenditure choices signal to the public the likely outcome of future taxation and expenditure decisions. This model of the aggregate economy suggests that eliminating the tax cuts will have deleterious effects on output and employment.

For some reason, Keynesian economists believe they have the power to affect the M₁ variable in this equation on a massive scale. The government is just adding pool balls to the equation. When the government decides to increase expenditures, it also has to increase revenue, by increasing the tax rate (t) now or in the future (after borrowing). This will have a negative effect on personal income, which translates to a decrease in personal consumption. The government has also decided to implement a progressive income tax structure. This means that, as M₁ increases, so does t. Because people tend to make decisions based on marginal welfare at their original consumption pattern, the last unit of consumption is roughly equal to the leisure that a person gives up to work that extra little bit so they can afford that last bit of consumption. With a progressive income tax, or an increase in the tax rate on any person, production is decreased at a marginal rate. When this happens to 300 million people at the same time, we begin to see problems.

The opponents of tax cuts often ask: What is the difference between swelling the public sector and cutting taxes, in terms of the federal government’s deficit? The answer is that they have different compensation structures and lead to different production decisions. Public money doesn’t force firms (whether they are public firms, or private firms contracted by the government) to make marginal decisions that maximize efficiency. Unfortunately, this means that public money is attached to inefficiency margins for anyone accepting it. Raising taxes therefore has a double whammy effect: Private production slows based on marginal decisions, and when it is converted to public money, it integrates inefficiency into each dollar.

Does this sound like a good prescription for an ailing economy?

The post Expiring Tax Cuts appeared first on Show-Me Institute.

Given the current state of the economy and the deficit, is this the time to pull back on stimulus spending and pay more attention to the deficit, or should Washington worry more about the short term and let the long term take care of itself?

The Paul Krugman camp, consisting of those economists wanting to stimulate the
recovery through expansive government spending, are — like the spending they are advocating — lost in their own arguments.
In the article, Steve Fazzari, a professor of economics at Washington University in St. Louis, states, “One person’s spending is someone else’s income.” I absolutely agree. But then, in a quick turn of events, he goes on to say, “When the government cuts spending, it’s cutting income to someone.” This is also true, strictly speaking, but the implications of his first statement are more important.

I used to mow lawns, and if my employer had told me that he would give my payment to my brother after I finished my work so that my brother could do some weeding, I would have immediately walked away and taken my labor elsewhere.

If that same employer had given me $10 the week before I was supposed to mow the lawn, two things might have resulted: (1) With cash already in hand, my attention to detail would have suffered considerably; and, (2) I would not have been in any hurry to finish the job.

Historically speaking, capital evolved before credit, and for most of the real world, that is how personal finance is understood — you largely only spend what you have. The problem that got us into this recession was egregious spending beyond our means. If mortgage lenders hadn’t been so eager to hand out money — apart from the fact that home loans were implicitly backed by the federal government’s approval — this last recession most likely could have been avoided.

Without the possibility of high default rates at the micro level, the financial instruments that impregnated the system with risk may never have been implemented on such a large scale. Now, after the crisis, we see the world’s top economists trying to formulate a plan to fix the system. In practice so far, that has involved injecting liquidity into the economy through massive government spending. The Krugman camp claims this is more responsible than private investment, because the Fed can print more money to increase the flow of capital rather than bearing the risks of default. There’s no need to worry about the deficit now, they say; we can take care of that later.

Yet few are buying the empty promises of the government. And why should they? With an aging population and massive health care overhauls on the way, everyone can see that entitlement spending is about to skyrocket. Higher taxes are almost certain. Increasingly larger numbers of the American people are holding onto their money in an effort to maintain liquidity in anticipation of the expiring tax cuts at the end of the year. Stimulus money is falling into the same trap; it’s not multiplying the way Keynesians had hoped because investors are wary of the uncertain economic conditions that may be brought about by still more government spending and higher taxes.

We cannot extricate ourselves from the hole we are in until we stop digging. Americans need to see the sunlight before they are willing to buy an expensive ladder to climb out.

The post Capital Before Credit appeared first on Show-Me Institute.

Every dime that the state takes away from an individual or business, through an income tax, is essentially taken out of the productive economy. Consequently, the capital that would have been spent investing in future goods is no longer available to the entity that would have otherwise used it. This, in effect, stifles growth.

Some might argue that public spending pumps that money back into the economy, but the 2009 American Recovery and Reinvestment Act is a perfect example of that kind of Keynesian theory failing in practice. The bill massively increased government spending,but did little to stimulate growth in the economy; unemployment remains around 10 percent. In practice, government spending provides much less of a stimulative effect than comparable tax cuts.

It would be in Missouri’s best interest to lower — or even abolish — the state income tax, thus enabling Missourians to spend and invest more of their own money to grow our stagnant economy. As demonstrated in the table below, which displays average annual growth rates per state between 1997 and 2008, Missouri’s growth ranks seventh-worst in the nation. Abolishing or reducing the state income tax would be a step in the right direction toward positive change.

Source for GDP Numbers: Bureau of Economic Analysis

The post Growth by State appeared first on Show-Me Institute.

It’s perfectly fine with me. In tough budget times, the state has to cut spending somewhere, and assessors deserve the cuts just like everyone else. (I am fully aware of the mistaken Keynesian arguments in favor of increasing government spending at all levels right now.) The assessor in Phelps County is complaining that the cuts to the reimbursement fund — from $6 per parcel to $4 — leave him hanging:

Rasmussen said actual per-parcel, assessment-maintenance expenses amount to $28.48. Assessment maintenance includes the actual assessment, pricing new construction projects, assessing all personal property in the mobile-home count and keeping parcel ownerships current.

I have proposed a perfectly reasonable method of residential assessment, based on very common real estate property indices, that would substantially lower the cost of doing assessments. It would also make the job of the Phelps County assessor easier, and thereby less expensive, if they adopted the certificate of value method, like in St. Louis, but we all know that won’t happen. If the residents of rural Missouri don’t want certificates of value to be filed when homes are sold, that is fine with me, but they have to realize their rejection of that method might increase the local taxes they have to pay for their assessments.

But why do we have to do the assessments? I see no problem with amending the state law to allow for reassessment every three years instead of every two, allowing for some caveats, because you probably do want to do a reassessment after each census when you have the most accurate information available. I really doubt anyone would complain if, after 2011, the next assessment does not take place until 2014. I certainly wouldn’t.

The post Should Missouri Reassess Property Less Often? appeared first on Show-Me Institute.

I’m still trying to understand what are the exact details of how the “green jobs” push translates into specific policies? Is this simply a relabeling of Keynesian public works projects? Is this a justification for a ramp up in basic research funding (I would support this!)?

I vote for the Keynesian public works option, but feel free to convince me otherwise in the comments.

The post Green Economics appeared first on Show-Me Institute.