Monday, January 30, 2012

We Are All Deadbeats Now

Newt Gingrich 2009 (h.t. Althouse):
We believe that there should be must carry – that is, everybody should either have health insurance or if you’re an absolute libertarian, we would allow you to post a bond, but we would not allow people to be free riders failing to insure themselves and then showing up at the emergency room with no means of payment.

The assumption behind every effort to socialize health care is that anyone who does not buy health insurance is planning on stiffing the hospital. It's a corrosive and false belief. For example, I don't carry comprehensive insurance on my 15 year old F-250. But is it to be assumed, were the truck damaged in an accident, that I'd skip out on paying the collision shop for fixing it? Of course not.

The problem is that feel-good politicians have made it law that hospitals must treat everybody without regard for their ability to pay and that the bills can then be discharged through bankruptcy. The first may make sense, the second is ridiculous and no excuse for government to force us to do something which may very well be opposed to our own economic self-interest.

Friday, January 20, 2012

"Dems propose 'Reasonable Profits Board' to regulate oil company profits"

The Hill.com:
Six House Democrats, led by Rep. Dennis Kucinich (D-Ohio), want to set up a "Reasonable Profits Board" to control gas profits.

The Democrats, worried about higher gas prices, want to set up a board that would apply a "windfall profit tax" as high as 100 percent on the sale of oil and gas, according to their legislation. The bill provides no specific guidance for how the board would determine what constitutes a reasonable profit.

The Gas Price Spike Act, H.R. 3784, would apply a windfall tax on the sale of oil and gas that ranges from 50 percent to 100 percent on all surplus earnings exceeding "a reasonable profit." It would set up a Reasonable Profits Board made up of three presidential nominees that will serve three-year terms. Unlike other bills setting up advisory boards, the Reasonable Profits Board would not be made up of any nominees from Congress.

The bill would also seem to exclude industry representatives from the board, as it says members "shall have no financial interests in any of the businesses for which reasonable profits are determined by the Board."

According to the bill, a windfall tax of 50 percent would be applied when the sale of oil or gas leads to a profit of between 100 percent and 102 percent of a reasonable profit. The windfall tax would jump to 75 percent when the profit is between 102 and 105 percent of a reasonable profit, and above that, the windfall tax would be 100 percent. The bill also specifies that the oil-and-gas companies, as the seller, would have to pay this tax.

Left out of the bill, of course, is any mention of "reasonable losses." When energy companies lose money (as they often do,) the Democrat peanut gallery goes silent. One could be forgiven for thinking that Kucinich, et al approve of that.

Wednesday, January 18, 2012

Obama: Unemployment Benefits Create More Jobs Than Pipeline

Yes, he really said it.
As Obama called for passage of those bills, he also responded to a recent Republican push to require him to approve the construction of the Keystone XL pipeline from Canada. "However many jobs might be generated by a Keystone pipeline," he said, "they're going to be a lot fewer than the jobs that are created by extending the payroll tax cut and extending unemployment insurance."

He can get away with saying something so obviously wrong because Washington D.C. is in the thrall of the Keynesians: a bunch who mistakenly believe that consumer spending can create jobs. This is a fallacy that was debunked over a century ago by John Stuart Mill.

Demand for commodities is not demand for labor.In buying commodities, one does not receive wages. What one pays and receives in the purchase and sale of commodities is not wages but product sales revenues.

The payroll tax cut and the continued unemployment benefits will almost certainly result in the sale of consumer goods by the same amount. But that spending will not cause a single job to be created -- not one, zip, zero, nada, zilch. Labor is not hired by consumer spending but by capital and capital is formed only by a conscious decision by an entrepreneur to save some of his proceeds and spend it on the operation or expansion of his business.

Though his sales may rise appreciably, he may still, because of doubts about the future, fail to invest in expansion. He may take his profits and invest them elsewhere or spend them on consumer goods himself. The decision by consumers to increase their spending and the decision by entrepreneurs to hire more employees are two completely separate economic processes. Though hiring new employees, whether previously unemployed or whether lured away from another employer by higher wages, will increase consumer spending, it bears repeating that the opposite will not.

The pipeline, on the other hand, is an expenditure of capital. Its construction will undoubtedly create construction and engineering jobs for thousands upon thousands. And the spin-off benefits to suppliers of raw materials, machinery and other capital goods will be substantial. Now, it's transparently obvious that Obama is rejecting the pipeline to placate environmentalists, but that he can announce such foolishness about job creation with a straight face and no questioning from the press is a testament to the low level of economic thinking in the country today.

Sunday, January 15, 2012

Letter to the Editor

My letter published today in the Jamestown Post-Journal and the Dunkirk Observer.
Taxes To Spur Economy Bad Idea

Gov. Cuomo, to much fanfare, has announced a gift of $1 billion to the Buffalo area for the creation of jobs and the growth of the economy. Rubbish. Some 150 years ago, the British economist John Stuart Mill warned us of this policy.

"It is no longer supposed that you benefit the producer by taking his money, provided you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasonings of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow; that the man who steals money out of a shop, provided he expends it all again from the same shop, is a benefactor to the tradesman whom he robs, and that the same operation repeated sufficiently often, would make the tradesman's fortune."

If the governor truly wanted to spur economic growth in New York, he would cut our taxes by that billion dollars and leave the money in our pockets to spend and invest as we think best for ourselves and for our families. The old New York ploy of taxing workers and businesses to create new workers and businesses hasn't worked in the half century it's been tried.

New York businesses continue to close and New Yorkers continue to move away. The taxes we pay to create our fortune are just too high.

Craig Howard

South Dayton

Has CATO Lost Its Mind?

You might be forgiven for thinking so after reading this:
Will Romney End PBS, Public Radio Funding?

Leading Republican presidential candidate Mitt Romney insistently pledges that he will end public funding for NPR and for PBS (the latter partially funds NPR). Other congressional Republicans agree with him.

For decades as a reporter, I have continually found vital information on public radio and television that at first was available nowhere else. A current example that may be of importance to many of you, particularly parents of schoolchildren:

An NPR story ("No, the School Nurse Is Not in," Jan. 3) reveals that, "More than half of American public schools don't have a full-time nurse, and the situation is getting worse as school systems further cut budgets. This year, 51 were laid off in Philadelphia's public schools, 20 in a Houston suburb, 15 in San Diego and dozens more in other school systems nationwide."

That's Nat Hentoff and we all know that NPR does some fine reporting. Of course, they do some terribly biased reporting, too. In that they are like much of the mainstream media, and though we may complain, we do have the choice to turn it off. There is, of course, the fact that NPR receives a not-inconsiderable amount of taxpayer money -- a holdover of Lyndon Johnson's Great Society. And that's exactly the type of subsidy we've come to expect CATO to fight against.

Those of us opposed to public subsidies for NPR, PBS, CPB, ETC., don't particularly want to see the thing go out of business; we just think that if the product is good enough, it can attract advertisers who will support it. Wouldn't CATO agree? Perhaps, not.

If Mitt Romney makes these cuts, he will create a dark hole in our lives that will defy James Madison's warning — which becomes more contemporary every day: "A people who mean to be their own Governors must arm themselves with the power which knowledge gives ... a popular Government without popular information, or the means of acquiring it, is but a Prologue to a Farce or a Tragedy, or perhaps both."

Commercials won't tell us that our public schools no longer have nurses in our neighborhood.

As they say, read the whole thing. It's the weirdest post I've ever seen there.

Saturday, January 14, 2012

"How Liberals Distort Austrian Economics"

Sheldon Richman does a much better job than I did of taking down Matt Yglesias's facile dismissal of Austrianism.

Friday, January 13, 2012

No Agenda Here!

Russian tanker reaches ice-bound Alaskan port
A Russian tanker escorted by the U.S. Coast Guard reached the frozen Alaskan port of Nome with emergency fuel supplies on Friday after a 10-day voyage through ice-choked seas, the Russian company that owns the vessel said.

The mission to Nome is the first mid-winter marine delivery to western Alaska and comes as oil and gas development and climate change increase commercial traffic along trade routes in the Arctic.

"Frozen Alaskan port", "ice-choked seas", "10-day voyage" . . . "climate change?"

Wednesday, January 11, 2012

The Modern American Poor

Victor Davis Hanson:
I went into Save Mart this weekend and purchased $70 worth of groceries. In my state and federal tax bracket, that meant I had to earn about $140 for the tab. The person next to me bought $200 with an EBD card. I don’t think she had much of an income (I’ll spare you the details). Was one really in the food-sense rich, the other really poor? Today’s destitute, as in my youth, are not buying huge thirty-pound bags of rice, beans, and flour.

Please read the whole thing for the full context (and just for the satisfaction of reading anything by VDH), but you know what he's talking about, don't you.

[UPDATE:] A couple years ago, when I was still living on the West Side of Buffalo, I was waiting for my blood pressure prescription to be filled. The woman in line ahead of me was handed her medications, presented her Medicaid card, and the clerk told her there would be a $1 co-pay. The woman airily announced that she didn't have it and the clerk returned to punching keys into the computer cash register. It dawned on me, quick study that I am, that evidently Medicaid patients can receive medication without the co-pay if they say they don't have the money -- but the pharmacy may ask.

The pharmaceutical transaction completed, the woman dropped a pair of sunglasses, fresh off the rack, on the counter to be rung up. The cashier punched some more buttons, asked for $12, the woman handed over a $20 bill and, change in hand, marched [strutted?] off. This woman, you'd have to assume, will forever be poor. But thanks to the dwindling number of New Yorkers who go out and work for a living each day, she will not want for much. In New York, "poor" has a new meaning.

Obama: EPA Regulations Create Jobs

Yeah, he really said it.
In a speech to employees of the Environmental Protection Agency on Tuesday, President Barack Obama said that EPA regulations are good for the economy and create jobs and that the agency "touches" the lives of every American every day.

“We can make sure that we are doing right by our environment and, in fact, putting people back to work all across America,” Obama told the federal workers.

“When we put in place new common-sense rules to reduce air pollution, we create new jobs building and installing all sorts of pollution-control technology,” Obama said.

Of course, it's well-known by now that the only economics Obama has ever absorbed is the false theory of the Keynesians that any spending is good and can be transformed via one of many "multipliers" into jobs. Completely lost on him is the fact that every new pollution-control requirement is a cost to business that diverts capital from increasing production to spending precious dollars merely to stay "legal" and, hopefully, keeping production where it was several thousand dollars ago -- and that's the best-case scenario.

Tuesday, January 10, 2012

"We Are All Occupiers Now"

Jim Geraghty:
If Romney’s opponents embrace the rhetoric and class warfare of the Occupy Wall Street crowd any closer, they’re going to start pooping on police cars.

Heh.

Sunday, January 8, 2012

"Clueless: Headphones-wearing man walks into side of moving train"

In Jersey City.

Of course, the modern logical solution is to ban the wearing of headphones while walking. Or, perhaps, regulations could be created that would require light rail trains to emit loud shrieks periodically -- loud enough to wake the dead or, at least, cut through the noise of Rihanna on headphones. I've started the countdown till some Jersey legislator proposes one or the other. H.T. Althouse

GDP is Gross

No, not the number which is bad enough, the actual equation. It supposedly tells us the health of the national economy but it does no such thing. And even worse is the unfortunate misconception it has created that 70% of the American economy is made up of consumer spending. That's just idiotic. But it has been repeated for so long that it's considered truth and even thick-skulled journalists repeat it back like parrots whenever they report on the economy.

It may also partly explain why so many Americans think we don't make anything here anymore. After all, if 70% of economic activity is consumer spending, there ain't much left. In addition to that, it has probably also led to the widespread condemnation of Americans as greedy, profligate consumers -- evidently raping the world of its treasure since we can't be bothered to make any of our own. It's all very unfortunate and unnecessary.

Left out of the equation is all the production going on to create the stuff that consumers buy. Of course, defenders of the GDP (Keynesians one and all) will tell you that to include production costs would be double-counting as those are wrapped up in the final sales prices of the consumer goods. It must be the case, they insist, because, of necessity, production costs have to be less than sales. No. They. Don't.

That is an example of the fallacy of composition that claims since each profit-making business's revenues exceed costs, the same is necessarily true for the the sum of all businesses. But let's work through a simple example to show just how false that assumption is.

Imagine a small country with a rubber ball industry. It's comprised of two businesses: a ball manufacturer (who, we shall assume, sells his product direct just to save complexity) and a rubber plant that turns out the sheets of rubber used to make the balls. The ball manufacturer buys the entire output of his supplier.

Last year on sales of rubber balls totaling $1 million, the ball factory paid $500,000 for rubber, spent $200,000 on labor, and had other expenses of $100,000. Its profit, therefore, was $200,000.

The rubber plant, which sold its entire output to the ball factory, therefore had sales of $500,000. Its raw materials costs amounted to $200,000. Labor ran $100,000 and capital and other expenses amounted to $100,000 for a profit of $100,000.

So, the rubber ball industry of our imaginary country had $1 million in consumer sales (finished rubber balls), but production costs totaled $1.2 million -- and both companies made a nice profit. It's counter-intuitive, I suppose, to people who have actually never thought about it. But we can see that it's not only likely, but probably necessary that an economy with an advanced division of labor and high ratio of capital to labor would spend more on production than on consumption.

If all the productive expenditures of American businesses were included in the GDP figures, the true composition of the economy would be much clearer. In good times, it would run about 40% for business-to-business (production) spending vs. around 30% for consumer spending. And when times turned bad, we would see much sooner where things were going wrong.

I doubt that our Keynesian-drenched government will soon consider such a simple and sensible suggestion because it would not enhance the mistaken theory that consumer spending drives all economic activity. But it would be the right thing to do if we want to understand how the entire economy is performing.

Saturday, January 7, 2012

Father Goose Grounded

Here's a perfect story about how arcane regulations work to stifle creativity and innovation.
Ten young whooping cranes and the bird-like plane they think is their mother had flown more than halfway to their winter home in Florida when federal regulators stepped in.

Now the birds and the plane are grounded in Alabama while the Federal Aviation Administration investigates whether the journey violates regulations because the pilot was being paid by a conservation group to lead the cranes on their first migration instead of working for free.

Ostensibly, the regulations were put in place to prevent businesses or charities from taking passengers on joyrides in risky planes. Right.

Interestingly, it will be environmentalists most outraged by this bit of governmental overreach, but I doubt the burdensome regulations will change their minds about the goodness of government. They'll only insist that they be better-written next time.

"Gov's State of Denial"

More on Cuomo's "old, failed ideas."

Yglesias Explains Austrianism [and Fails]

Matt Yglesias tries to give Slate's readers a thumbnail sketch of Austrian economics demonstrating only that he's unfamiliar with, um, Austrian economics. Now, it isn't the vicious take-down I expected, but it does contain the usual inaccuracies -- particularly when he tries to refute the theory of booms and busts.
More broadly, the Austrian story of investment booms and busts doesn’t actually explain recessions and unemployment. Spending patterns shift all the time without sparking a recession. People stop buying BlackBerrys and they buy iPhones instead. Or people stop buying boot-cut jeans and buy skinny jeans instead. Across sectors, maybe people go see fewer movies and with the money they save they eat out at nicer restaurants. A business that curtails its investment spending should have extra money to pay out as dividends. Or if they want to horde the cash, it sits in a bank for someone else to lend out.

It may seem “obvious” that the decline in housing activity caused the current recession, in line with the Austrian view, but in fact fixed residential investment turned negative in 2006 [Link in original]. It stayed negative for more than a year before the recession began, and then continued negative for a couple more quarters before it turned severe. People spent less on home-building and renovation and more on other things. If investment spending in general declines, you would expect spending on consumer goods to rise to offset it. In practice, this doesn’t always happen and you get a recession. It’s this anomalous collapse in overall spending that needs explaining, and describing some of the past spending as “malinvestment” doesn’t help you understand it.

First, it isn't the Austrian view at all that the recession was caused by the decline in housing activity; it was caused by the Federal Reserve's monetary expansion policy which allowed the explosive growth in housing. The eventual drop in home building and home sales were merely symptoms of the recession which was triggered by the collapse of the mortgage markets. Much of the housing built during the boom turned out to be malinvestment because the demand for it was artificially created by cheap mortgages and the federal government's insistence that consumers with poor credit and low incomes be granted loans.

But such malinvestments are disguised until the credit that supports them is withdrawn. It is only then that it becomes obvious that a bubble had formed and is now deflating. The theory posits that the inevitable bust is caused by the central bank's hiking of interest rates. Interestingly enough, that was not the case this time. The banks, themselves, raised rates and eventually ceased lending out of fear for their own survival, but the effect was the same.

Homeowners with poor credit histories and/or incomes insufficient to make payments began to default first. The banks tightened their credit requirements which caused homes to remain unsold. Construction companies began laying off employees and curtailing their purchases of raw materials. Housing prices fell as sales slowed causing millions of mortgage-holders to go "upside down." And, as people lost their jobs, even more loans became delinquent. By the first quarter of 2008, not only residential investment was falling, but investment in general followed by consumer spending. It's only natural that consumers spent less; unemployment usually requires it.

Yglesias then makes a very curious statement: "If investment spending in general declines, you would expect spending on consumer goods to rise to offset it."

Why on earth would you expect that? I can only assume Yglesias is speaking of personal investment, but the investment figures in the national accounts refer to business spending. As mentioned above, as credit tightened at the beginning of 2008, businesses found it more difficult to extend lines of credit and obtain funding for expansion. As they cut back their investments (spending), they also began to shed jobs. Since this investing is in the form of purchases from other businesses, those also saw a drop in sales and started shedding labor as well.

It shouldn't be a mystery why, when people are put out of work, their consumption spending drops. This process gathered speed all during 2008, culminating in the September banking panic. Yglesias states that it is this "anomalous collapse in overall spending that needs explaining." Consider it explained.

[UDPATE:] I also want to address one other point Yglesias mentioned: this oft-stated objection to Austrian theory.

But it doesn’t make much logical sense. For one thing, as George Mason University economist Bryan Caplan, who’s ideologically sympathetic to the Austrians, points out, it’s hard to understand why businesspeople would be so easily duped in this way. If Ron Paul and Ludwig von Mises know that cheap money can’t last forever, why don’t private investors? Why wouldn’t firms avoid making the supposedly dumb investments?

I suppose it is fair to say that businessmen are duped by low interest policy, but they are not easily duped. The Fed's artificially low interest rates are not short term deals. In fact, they often last for years. And during that extended period, all sorts of markets become distorted by activity that wouldn't otherwise have occurred. I mean, spurring new business activity is the purpose of Fed operations, isn't it?

As an example, my former employer, a manufacturer of liquefied industrial gases (oxygen, nitrogen, argon, etc.) found a very profitable market supplying liquid nitrogen to the Wyoming shale oil fields starting in around 2003. With the world price of oil soaring, shale oil extraction had become viable and we were running flat-out to supply the quantities of nitrogen demanded. In fact, the amounts were growing so huge that we were trucking product from hundreds and even thousands of miles away at tremendous expense (diesel fuel's price had soared along with oil's).

The company decided to double the capacity of its Denver plant and just as it neared completion in 2008, the bubble popped. Oil prices swiftly crashed below the shale oil's break-even point, the fields shut down and the multi-million dollar plant expansion was mothballed before it had ever even been started up. It had ended up being a malinvestment.

But in 2004-2005, when the decision was being made to expand nitrogen production, it wasn't obvious at all that oil was in a bubble. China's stupendous industrial growth was most often cited as the reason for oil's rising prices. And with India following closely behind along with a booming U.S. economy, there was little reason to think conditions would change. It's perhaps easy now to realize what a foolish assumption that was, but it was near-universal thinking at the time.

So, it isn't simply a matter of businesses embarking on risky ventures they realize wouldn't pay off at a higher cost of capital -- that's almost always taken into account. No, it is the ever-expanding circle of market distortions caused by longer and longer periods of credit expansion that eventually create the atmosphere in which serious business miscalculations can be made. It sounds as if a good dose of capital theory might be in order for both Yglesias and Caplan.

"The Myth of Japan's Failure"

First pointed out by Kel Kelly at the Mises website last April, the idea that Japan is thriving is finally dawning on the mainstream.
Time and again, Americans are told to look to Japan as a warning of what the country might become if the right path is not followed, although there is intense disagreement about what that path might be. Here, for instance, is how the CNN analyst David Gergen has described Japan: “It’s now a very demoralized country and it has really been set back.”

But that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States.

Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.

As Mr. Kelly pointed out (and this author alludes to), the myth of Japanese stagnation is due to a lack of monetary inflation. It is impossible for Keynesian-trained economists to even imagine economic growth if GDP doesn't rise. But Japan's central bank has kept a remarkably tight rein on the nation's base money supply for over a decade resulting in price inflation of near zero. If there's no additional money being supplied, the dollar (or yen) figures cannot increase. Meanwhile, though, the Japanese have continued to invest, produce and prosper.

Now that the cat is gradually crawling out of the bag, instead of holding Japan up as the model of economic failure, perhaps we can begin to point to it as an example of capitalistic success.

Friday, January 6, 2012

Obama Proposes Federal Pay Hike

CNNMoney.com via Yahoo
The White House will propose a 0.5% pay increase for federal workers in its 2013 budget proposal, an official from the Office of Management and Budget said Friday.

Federal pay has been frozen since December 2010, when Congress signed off on an Obama administration proposal to freeze federal worker pay for two years in the name of deficit reduction.

Contrary to popular opinion, wage rate increases in the private sector are a result of productivity improvements -- fewer employees bringing in more revenue. Public employees must be subject to the same criteria. Lay off, say 0.5% of federal workers and grant the rest a 0.5% pay increase. Raises are not just rewards for "loyalty" and hanging around long enough to qualify.

Krugman Would Approve

Tiger Wood's ex-wife has embarked on a little Keynesian-style economic stimulus in Palm Beach.
Nordegren has just demolished the $11.7 million pad - so she can build a better home on the same plot, TMZ reports.

Nordegren bought the North Palm Beach home in March, eight months after she finalised her divorce from her cheating husband and received a whopping $97.5 million settlement.

It was thought that the Swedish former model would move into the sprawling six-bedroom, eight-bathroom property with her two children by Woods, but instead she knocked the whole place down.

She has hired a top architect to help build her a new dream home, and every worker involved in the project is required to sign a confidentiality agreement, according to TMZ.

Talk about digging holes and filling them back in.

Wednesday, January 4, 2012

New York: The State of the Welfare State

Two articles in today's Buffalo News sum up the economy of upstate New York.
Cuomo commits $1 billion to development targeting Buffalo

ALBANY — Joining a long line of governors placing an economic interest in Buffalo, Gov. Andrew M. Cuomo said today he will give companies $1 billion in the coming years to expand or locate in the region.

Keep pushing project

The Niagara Experience Center, on the drawing boards for years in Niagara Falls, was left out of the first round of awards given under Gov. Andrew M. Cuomo's regional economic development competition, even though Western New York performed very well against other regions of the state. That missed opportunity was a disappointment, because the proposed center -- a high-tech interpretive "experience museum" -- could be a key to bringing a greater share of tourism dollars to the New York side of the falls.

New York State is dying for lack of business investment. The economic climate has been so bad here for so long that several million New Yorkers have simply given up and moved away. Other than suburban strip malls, virtually no businesses are started here or locate here unless the state gives them some payola. And, even in the case of those strip malls, since the population is shrinking, they only replace older businesses with new businesses.

The billion dollars of payola mentioned in the first article will be directed at some targeted projects in Buffalo (most likely in the medical corridor) but will have been taxed away from thousands of existing business-owners who increasingly cannot bear the state's financial burden. Their closings or stagnation will be unseen by the paper, but the eventual hundred or so high-profile bio-tech jobs will get front-page mention and another visit from the Governor to humbly take credit.

The Niagara Falls project, if it ever comes about, will likely turn into a multi-decade, construction boondoggle with huge cost overruns and union scandals that will keep the court dockets full for years. This in a city that sits by one of the natural wonders of the world but cannot figure out how to capitalize on it. Meanwhile, the other Niagara Falls across the border will continue to pack the tourists in.

In a state where business has been suffocated by taxes and regulations, the only bright spots are the gifts bestowed upon us by the state when it so deigns. And over time, New Yorkers have been reduced to jumping like dogs competing for a bone from their owner when economic development grants are on offer. The concept that we are masters of our economic fate has been lost. It's really been a sad thing to watch.

[UPDATE:] Related: Portugal’s Prime Minister Tells Citizens to Emigrate

Tuesday, January 3, 2012

Consumer Spending Does Not Create Jobs

In 2007, before the recession started, combined personal and government consumption expenditures were $11,697,000,000. By the end of 2010, they'd risen to $11,777,000,000 (both figures are in 2005 dollars). Now, the Keynesians tell us that recessions are caused by a drop in consumer spending and can be ended by government's spending money to make up for the shortfall of the newly-stingy consumers. But here we are -- spending has returned to and exceeded pre-recession levels yet employment is at its lowest level in three decades. How can this be?

The answer, little understood at the time and almost completely ignored now, was clearly laid out over a century ago by John Stuart Mill.

We pass now to a fourth fundamental theorem respecting Capital, which is, perhaps, oftener overlooked or misconceived than even any of the foregoing. What supports and employs productive labor, is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when completed. Demand for commodities is not demand for labour. The demand for commodities determines in what particular branch of production the labour and capital shall be employed; it determines the direction of the labour; but not the more or less of the labour itself, or of the maintenance or payment of the labour. These depend on the amount of the capital, or other funds directly devoted to the sustenance and remuneration of labour. . . .

This theorem, that to purchase produce is not to employ labour; that the demand for labour is constituted by the wages which precede the production, and not by the demand which may exist for the commodities resulting from the production; is a proposition which greatly needs all the illustration it can receive. It is, to common apprehension, a paradox; and even among political economists of reputation, I can hardly point to any, except Mr. Ricardo and M. Say, who have kept it constantly and steadily in view. Almost all others occasionally express themselves as if a person who buys commodities, the produce of labour, was an employer of labour, and created a demand for it as really, and in the same sense, as if he had bought the labour itself directly, by the payment of wages. It is no wonder that political economy advances slowly, when such a question as this still remains open at its very threshold. I apprehend, that if by demand for labour be meant the demand by which wages are raised, or the number of labourers in employment increased, demand for commodities does not constitute demand for labour. I conceive that a person who buys commodities and consumes them himself, does no good to the labouring classes; and that it is only by what he abstains from consuming, and expends in direct payments to labourers in exchange for labour, that he benefits the labouring classes, or adds any thing to the amount of their employment.

-- John Stuart Mill, Principles of Political Economy

When I buy, say, a new snow shovel (we had a foot of lake effect snow here yesterday and today, so shoveling is on my mind), I buy only a shovel. I do not also purchase the steel that went into the blade, the wood in the handle, or the work that went into its creation. Just a shovel.

The raw materials and the labor involved in the manufacture of the shovel were paid for out of the capital of an entrepreneur months or even years before I even thought about needing one. He was required to save or to borrow someone else's capital to fund his operations because none of his suppliers or his employees would have consented to waiting for their payments and wages until Craig went out and bought a shovel some months in the future. The purchase of consumer goods and the creation and deployment of capital are entirely separate transactions.

As George Reisman wrote in Capitalism:

If it really is the consumers rather than businessmen who pay for factors of production, then why can't a prospective entrant into any line of business simply tell the workers he wants to hire and his prospective suppliers that they will be paid by the consumers of the products he will ultimately make possible, and thus should not bother him with their claims?

Capital formation is the result of saving, not spending. Entrepreneurs withhold a portion of their revenues from their own consumption to fund future operations and potential expansion based on their own assessments of the future market and profitability of the products they produce. The owner of the shovel plant may, for example, be a believer in global warming alarmism and make the decision that there is no future in the production of snow shovels. Therefore, he takes the proceeds of his shovel sales and retire to Churchilll Bay. Ultimately, my purchase had no bearing on his determination.

All of which explains why the government's extraordinary spending spree has not increased employment but has actually driven the labor force participation rate down. No amount of spending on goods will create a single job. If the Keynesians want to create jobs through government spending, they'll have to take Mr. Mill's advice and hire them themselves.