Economics by the Gallon

As I see it, much of the trouble we have in this country is due to ignorance of basic economics.  It wasn't just the Declaration of Independence that gave us our heritage and prosperity.  It was also Adam Smith's The Wealth of Nations that helped codify the thinking of our Founding Fathers.  For indeed, the historical precedents - feudalism, mercantilism, and of course socialism - are simple in concept, even the bad parts.  Greed was the supposed enemy whose restraint justified their obvious limits on opportunity and personal freedom.

How can a system like capitalism, with greed at its core, possibly succeed?  And yet it does, thanks to the "invisible hand" that Smith coherently identified as a tangible, beneficial force in human endeavor.  Indeed, capitalism - the free market - is the only one consistent with and supportive of liberty, as so many writers and scholars have echoed through the centuries since.

With the fall of communism, many of us had thought the question settled economic science. And yet, it was little more than a "dirge of triumph" as George Gilder called it in Wealth and Poverty.  When the going gets tough, when the situation calls for a return to more capitalism, we somehow wind up with the long debunked thinking of Keynes and Marx.

But on a micro level, we get it.  Take for example how government price fixing in Wisconsin affects our decisions.  Read the reader comments in particular, where one notes "I fill up in Duluth because I know the prices will be 10 cents higher in WI."  This is standard practice in border towns, seeking the cheapest gas, or where clothing is not taxed for example.

Still more interesting was this comment, edited for clarity:

When traveling from Minnesota to South Carolina or Minnesota to Massachusetts I never buy gas in Wisconsin. Gas at the Belvidere Oasis in Illinois is cheaper than any gas in Wisconsin. Furthermore, after midnight you can't find gas in the Madison area.  You have to make it to Janesville which says to me they know folks aren't buying gas in Madison. I fill up when i leave Minnesota or at the last gas in Illinois so i don't have to stop in Wisconsin for gas.

Another commenter says he buys Wisconsin gas to avoid the mandated Ethanol content in Minnesota gas.  It works both ways, everyone making the choices they most value, those permitted by law.

We as consumers are annoyed with specific government interference with products and services we frequently buy.  We readily see and work around the reduced quality and shortages generated, and of course the high prices.  And yet we are somehow comfortable with letting governments run our schools or provide health care.  This is where education is needed, to use these real life small examples to help correct our large scale thinking.

The first thing to correct in my opinion is the perception that socialism or other "collectivist" systems are somehow more sophisticated, even elegant when the proper minds are managing its complexity.  No, quite the reverse is true.  It requires a more educated mind to understand capitalism and its many benefits over the simplistic concepts of a "planned" economy too many of us settle for today.

Comments

[Hiram]

"I fill up in Duluth because I know the prices will be 10 cents higher in WI."

It's characteristic of markets, that fungible items sell for the same price. At Cub, for example, the price on all the Cheerios boxes is the same. That being the case, how is it possible for gallon of gas to sell for different prices in two states?

"We as consumers are annoyed with specific government interference with products and services we frequently buy."

Government regulation of products is in no way inconsistent with the operation of markets. The government, for example, insists that certain products be safe. The fact that products are safe, makes them more attractive in the marketplace and for a more effective market, not less, a fact further supported by the fact that there are generally not black markets for unsafe products.

Markets exist for the trading of products for which the buyer and seller derive mutual benefit. But what happens when both sides can't benefit from the trade? More specifically, what happens when the seller cannot profitably produce a product at a price which potential buyers are willing to pay?

[Speed Gibson]

In capitalism, trades are voluntary, happen only when both sides think they benefit. We might fume about paying $3 a gallon for gasoline but the alternative - no transportation - is far worse.

Plus, in any other system, where at least some transactions are not voluntary, guns are involved somewhere.

[The Big Stink]

"what happens when the seller cannot profitably produce a product at a price which potential buyers are willing to pay?"

They have a bad business plan. They didn't take into consideration the tariffs and regulations which doom them from inception. Is it any wonder entrepreneuers are vanishing from the landscape? Between the lawyers, taxes, the politicians and the regulators, innovation is being choked. The lesson for any enterprising college kid with an idea is this: Get a government job, send every call to voice mail and start counting the days to your pension.

[Hiram]

"They have a bad business plan."

That may be the case, but that isn't something that happens when someone produces a product that can't be sold at a profit. Lots of good and useful products don't ever come into existence because because the profit can't be captured.

[The Big Stink]

Yes, but how many products don't make it to market because of excessive taxes and regulations? The more onerous the govt gets in penalizing commerce, the fewer innovations in the market. Keynes never accounts for this. Wealth is created, not distributed. If you squash the creation of wealth, you have doomed the economy to a static growth (if any).

[Hiram]

"Yes, but how many products don't make it to market because of excessive taxes and regulations?"

Depends on the situation. For one thing I think the negative effects of taxes are overrated and sometimes used an excuse by people with cooling feet. New businesses don't make money, they generate losses, which can often be used to advantage by investors seeking to shelter income. The regulatory environment varies from industry to industry. In the drug industry, it can be quite a burden, because we don't want to allow unsafe or ineffective drugs on the market. But even if you eliminated the regulation, additional liability concerns would take their place.

I am not sure where Keynes fits in with this destruction. In times of economic contraction, he would favor an increase in government expenditures to among other things, stimulate production. I think he would also favor those expenditures to be used as efficiently as possible. It isn't at all clear in the broader scheme of things, that directing that money to new and entrepreneurial businesses, most of which fail, would be efficient. And I don't think Keynes would be any bigger fan of hurrying potentially unsafe drugs, to name one example, to the market than I am.

[Hiram]

We are often told that we should have policies to encourage investment. I have never understood the wisdom in this. Broadly speaking, there are two kinds of investments, good investments and bad investments. Presumably, our policy should be to direct resources to the former, while avoiding the latter. Among the many problems with that, is that no one knows at the outset which investments are good and which are bad. Another thing we know, is that those areas most in need of investment, those entrepreneurs everyone talks about are the riskiest, and the very ones most of us should avoid. Yet the government, through it's tax policies, like lower capital gains tax rates, encourages those investments.

Remember all the talk of an "ownership society" we heard a few years back. Everyone would own a piece of America starting with a house. The government established policies encouraging those investments, effectively giving us investment advice, it wasn't qualified to make and which as it turned out was very bad advice indeed.

[The Big Stink]

There ought to be a balance about what gets regulated and what doesn't, Hiram, but when you begin expanding the bureaucracies of government you have to consider their main objective: growth. What does an 800-pound gorilla eat? Whatever it wants to!

[Hiram]

Product development, by the way, mostly occurs withing existing companies. Since it represents a cost, it's a tax deduction. While companies do have overhead costs associated with governmental regulation and whatnot, product development which expands the corporation benefit from economies of scale.

Within corporations, it's my impression that tax implications don't have a lot to do with R&D decisions which are mostly based on very specific cost considerations. And by far, in the most successful product development I have witnessed up close, cost considerations played virtually no role at all. The company decided that it's future was in a certain direction, and simply committed the resources it thought was necessary to make it happen. The fact that the operation generated losses for years that could be deducted against income was just a happy little side benefit.

[Hiram]

In the last session of the legislature, the DFL proposed a tax increase which would have required a married couple making a quarter of a million dollars a year to pay an additional 600 bucks in taxes. If Republicans were to be believed, and that isn't a tendency to which I am given, that 600 bucks would have resulted in higher income individuals uprooting their homes and lives and moving en masse to the desert wastes of Nevada where quarter of million dollar jobs grow out of the cacti, it seems.

Let's just say, I had my doubts about that.

[The Big Stink]

In Maryland, they imposed a "millionaire's tax" a few years back. About a quarter of the millionaires in the state moved. And, they took their businesses with them. They have since rescinded the tax.

[Hiram]

That factoid came from a Wall Street Journal editorial never a firm foundation for any argument.

To begin with, the WSJ said the number of millionaires had declined, not that they moved anymore. Since millionaire is generally a reference to net worth, not income, and since Maryland millionaires like millionaires elsewhere had just suffered through the collapse in asset values caused by the crashes in the real estate and stock markets during the Bush administration, maybe they didn't move anywhere. Maybe they just stopped being millionaires.

But here in Minnesota, I just don't see a lot of couples making a quarter of a million a year moving out of state to save 600 bucks. For one thing, they probably own a house that's way under water and in selling it now, they would take a huge hit. And if they did, where would they move? Florida is nice, I like Florida, and it doesn't have a state income tax. But to get the same house in Florida that they sold at a loss here, they would have to pay maybe twice the price. Where are they going to get that quarter of a million a year job in this employment market? Florida didn't really have those kinds of jobs when the economy was going well. And while taxes are lower in Florida, not much else is. Here they probably had their kids in a very nice public school. Those are a lot harder to find in Florida, and if you do find one, you pay for it in much higher real estate costs.

And finally, the fact is, even if the holder of that quarter of a million a year job quits and moves elsewhere, there is someone else in line who would just take his place.

[The Big Stink]

Why stop at $600. Why not $600,000. Heck, why not just confiscate all their wealth and be done with the class war?

[Hiram]

Because 600 dollars seems a reasonable amount. Tax rates can be too high, and that's something you want to avoid, but I don't think that was the case or the problem with the DFL proposals in the last legislative session.

This morning I happened to hear proposals from DFL legislators to reduce the corporate tax to zero, perhaps over time, something not too different from what Emmer is proposing, as incidentally Emmer seemed to acknowledge on Monday.

[Speed Gibson]

If that $600 would be the LAST $600, I think many would grin and bear it. But of course, it never ends because liberals will never say how much is enough, like to "fully fund our schools!"