Even in a Crisis Reality Is Not Optional

Russell Roberts has a great article here. Some excerpts:
“Understanding the emergent phenomena economists call a market is the essence of the economic way of thinking. In contrast, the human brain seems more accustomed to what might be called the engineering way of thinking where human action and human design work together. If I’m dissatisfied with the size of my kitchen, I make a plan and by following the plan, if it’s a good plan, the result is a bigger kitchen. A person who sits around hoping for a new kitchen without design or action is going to be disappointed. Or if I notice the leaves falling from the trees, I don’t hope that they’re going to clean themselves up. I have to plan to rake them and then do the actual raking. Changing my thermostat to alter the temperature inside my house is another such example.
But the engineering way of thinking doesn’t work with emergent phenomena. Trying to change emergent results is inherently more complex than building a bridge or expanding your kitchen or even putting a man on the moon. Understanding the challenge involved is to begin to answer the old question that asks why we can put a man on the moon but we can’t eliminate poverty. Putting a man on the moon is an engineering problem. It yields to a sufficient application of reason and resources. Eliminating poverty is an economic problem (and by the word “economic” I do not mean financial or related to money), a challenge that involves emergent results. In such a setting, money alone—in the amounts that a non-economic approach might suggest, one that ignores the impact of incentives and markets—is unlikely to be successful.
Thomas Sowell likes to say that reality is not optional. But we oh so want it to be. We want to change outcomes without consequences with the ease of adjusting the thermostat on the wall of our house. We want to dial incomes upward and gasoline prices downward. We want to blame Wal-Mart for the fact that its employees earn below the national average. We want to blame China (or Mexico or Japan or India) for our trade deficit. We want to blame or honor the occupant of the White House for whether new jobs are high-paying or low-paying. This worldview that flies in the face of reality and that ignores the inherent complexity of the real world is the bread-and-butter of journalism and the breeding ground for unintended consequences.”
Following a cogent explanation of the confusion of well-meaning opponents of Wal-Mart (that you should read), Roberts goes on:
“As I write these words, New Orleans is in chaos. A number of oil refineries have been knocked out of commission by Hurricane Katrina. Gas prices have spiked upward. Politicians are threatening suppliers with legal action for “price gouging,” raising prices at a time of crisis. Politicians from President Bush on down are asking drivers to drive less or “only when necessary” as if that phrase had meaning. These politicians evidently believe that begging and lecturing citizens can perform the role that prices do in creating and sustaining order, an order where I never have to think twice or even once about whether gasoline will be available at the corner for my vacation or drive to work or to take an emergency trip to the hospital.
But reality is not optional. You cannot have a sudden reduction is gasoline available to the market and low prices at the same time. There is no dial for gasoline prices. The result of these threats is easily predicted—suppliers are already rationing. Drivers are worried about shortages and in the face of threats to punish ‘gougers.’ They are right to worry. As a result, lines are forming in some cities, and gasoline retailers are closing early in the day, out of gasoline, the same results we saw when explicit rather than implicit price controls were put in place in the 1970s.
Friedrich A. Hayek, in The Fatal Conceit, wrote that “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Unfortunately, when politicians try to dial down prices to preserve order, they only worsen the problem. We would do well to remember the emergent nature of prices, especially in times of crisis.”
I recommend you read the entire article.

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Grand Old Profligates

I am not surprised that Steve Moore shares (subscription) my view of the already profligate GOP’s response to the New Orleans tragedy:
“There’s an old adage that no one in Washington can tell the difference between $1 million and $1 billion. Seldom has that Beltway learning disability been more vividly demonstrated than in the weeks since Katrina.
When President Bush announced last Thursday that the feds would take a lead role in the reconstruction of New Orleans, he in effect established a new $200 billion federal line of credit. To put that $200 billion in perspective, we could give every one of the 500,000 families displaced by Katrina a check for $400,000, and they could each build a beach front home virtually anywhere in America.
This flood of money comes on the heels of a massive domestic spending build-up in progress well before Katrina traveled its ruinous path. Federal spending, not counting the war in Iraq, was growing by 7% this year, which came atop the 30% hike over Mr. Bush’s first term.”
It gets even worse:
“Rapacious trial lawyers are already on the hunt rounding up Katrina’s victims to unleash a barrage of multimillion dollar lawsuits. Now they have been empowered by Congress to finance these lawsuits against taxpayers … with taxpayer dollars.”

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Wasting Energy in New Mexico II

The Governor also wants to form a “task force” to investigate price “gouging.” No such task force that I know of has ever successfully found a problem. The reason that “gouging” cannot exist is that consumers have alternatives. But we don’t have alternatives to the coercive, idiotic, wasteful policy of our government. Isn’t it time for a task force on government gouging?
Winthrop Quigley had a good article recently on so-called price “gouging.”

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Wasting Energy in New Mexico I

I am all for reducing the state’s tax burden. That should be our highest priority. But the latest proposal to help consumers of gasoline will do very little. In fact, it is likely to be counterproductive in the long run. Here is what I know about the proposal according to the Albuquerque Journal (subscription):
“The next regular session of the Legislature won’t come until January. Richardson said he wants state lawmakers to consider even sooner the possibility of giving taxpayers a one-time tax rebate and whether to temporarily suspend the state’s 17-cents-per-gallon gasoline tax.”

Here is roughly the current situation pictured in supply and demand terms
:
gasoline tax suspension.jpg
The lines S and D represent supply and demand. The price P of gasoline is on the vertical axis, quantity Q is on the horizontal axis. The supply curve S is shifted upward to S+T because of the tax T (17¢ per gallon). Firms sell quantity Qo at price Po (currently about $2.71 per gallon). Firms actually receive Po-T per gallon of gas sold (currently about $2.54 per gallon less any other taxes). The revenue collected by the state can be represented by the area of the rectangle enclosed in red. Notice that the quantity supplied (the S line schedule) is much less responsive to a change in price than is the quantity demanded (the D line schedule). Economists agree that this is roughly the situation.
Here will be roughly the situation after the tax is suspended temporarily:
gasoline tax suspension1.jpg
The price will fall slightly to P1 (about $2.69 per gallon) and the quantity sold will increase slightly to Q1. The yellow area represents the trifling gain to gasoline consumers; it is much less than the gain enjoyed by firms (the green area).
Why will the temporary tax suspension likely be harmful to consumers beyond the suspension? It sends the wrong signal to firms in the gasoline business. They know the tax reduction is temporary, so it will not affect their decision making. More uncertainty is introduced, however: Thanks to government intrusion and activism firms do not have a stable policy environment in which to make decisions. They are less likely to take action to supply more gasoline. Less supply will mean higher prices for consumers.
By the way, the harmful effects of rising gasoline prices have been blown way out of proportion by the main stream media and their political brethren.

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Down with the fair-weather constitutionalists

We’ve heard a lot of platitudes about the Constitution this week. My personal favorite was Joe Biden’s description of the document as “our civic bible.” Most politicians treat the Constitution as some sort of flag: An iconic and patriotic symbol to be revered. It is a convenient symbol for them, easily worked into speeches as a substitute for apple pie, eagles soaring and other American metaphors.
Unfortunately, I believe that few politicians actually think about the Constitution. Few know its purpose, its meaning and what “respecting” it actually means. Far too often, politicians are opportunistic about constitutionalism. They proudly don the language of strict constructionism when doing so will promote their pet cause only to turn around and praise the benefits of a looser interpretation when the Constitution seems to stand in the way of their goals. They are fair-weather constitutionalists.
Think, for example, of Al Gore who complains regularly that the Justice Department’s prosecution of the war on terror has jeopardized important constitutionally-guaranteed rights. Personally, I think the former VP has a good point. Unfortunately, it is vitiated when we consider that just a few years earlier it was Gore who said that the Constitution was “a living, breathing document.” It was he who claimed that we should not strictly interpret the Constitution so as to limit government’s ability to do what seems right. His philosophy might be described as something like this: The Constitution permits policies which I feel are right but prohibits policies I feel are wrong.
Lest you think I am picking on Mr. Gore, the conservatives are just as bad. A few months back the Supreme Court struck down the national “do not call list” because it was erroneously put under the purview of the Federal Trade Commission, an agency which lacks the statutory authority to oversee such a program. The President argued that two popularly elected branches of government had made a decision and that the third should respect that decision. This is exactly the wrong way to think about our constitutional system.
We have a constitution because we DON’T think that the popular majority should always get what it wants. What if a majority of people want to disarm a minority? What if a majority wants to establish a national religion? Put someone in jeopardy of life or limb without due process? Tough. They can’t. And it is the Constitution which ensures that they can’t. As John Adams put it, ours is a nation of laws and not men.
This may mean that we have to inconvenience ourselves and do things by the book. It may even mean that policies like the “do not call list” will be delayed while we find the Constitutionally-permitted solution (which, by the way, we have in the case of the list).
Why should we inconvenience ourselves? What is the virtue of a society based on the rule of law? What if the law is bad? What if it seems like you can achieve more good in the short run by breaking the law?
To answer these questions, we must first appreciate that government has a monopoly on force. It has the legal authority to take property, arrest citizens, order certain conduct and even put someone to death. We need government to have these powers because we need it to protect us from others. But we must recognize that government’s authority might be very dangerous. As Washington put it, “Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.” Recognizing this, it is important that government’s power be carefully circumscribed by a strictly adhered-to constitution. It is necessary that the constitution explicitly state the powers delegated to the government so that those with a monopoly on force are not permitted to use force arbitrarily. It may even be necessary to explicitly say what powers are not given as in the prohibition on establishing religion or infringing on the right to keep and bear arms.
But notice something very important: One need not agree with everything in the Constitution to believe that the Constitution should be obeyed! I, for one, do not care for the 16th Amendment’s legalization of the income tax. Nor do I like the fact that the Constitution permits capital punishment. While my opposition to these provisions might make me support amendments to change them, they do not make me change my interpretation of the Constitution. Clearly, the Constitution permits income taxation and capital punishment (the latter is mentioned a number of times in the document). To argue otherwise is to misuse the Constitution. It is to weaken the document by finding provisions in it which are simply not there.
Today the Constitution has been severely weakened. The government no longer bothers to follow the Constitutional requirement that Congress declare war when it sends troops into combat. Since 1936, Congress has regulated labor contracts despite the fact that no such power exists in the Constitution. Since 1942, Congress has regulated commerce even when that commerce is not interstate as the Constitution requires. More recently, it has been declared Constitutional for local governments to take private property and give it to other private citizens. And the latest: An American citizen can be detained indefinitely without honoring the 5th Amendment requirement that no one be deprived of life, liberty or property without due process.
Any justice willing to stand up to this slow but ever-advancing erosion of constitutionalism would be a welcome addition to the Supreme Court. Let us hope that Judge Roberts is such a judge.

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Constitutionalism and the Supreme Court

Readers of this page will know that constitutionalism is very near and dear to our hearts. Both Harry and I are products of George Mason University, an institution made famous by the pioneering work of Nobel Laureate James Buchanan on the political economy of constitutions. Buchanan’s life-long career might be described as an intellectual defense of James Madison’s project, that is, a defense of constitutionalism. With two vacancies on the Supreme Court, now seems an appropriate time to muse over some Constitutional issues. Stand by for a number of posts on the subject.

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So Much for Hope of Progress Toward Limited Government this Term

Bush’s proposal to throw money on New Orleans raises a bunch of initial comments and questions:
1. This will cost the average taxpayer (those who actually pay taxes) about $2,000 each. Harry to W: Yes, it is taxpayers who will foot this bill, not “government.”
2. Because of 1. I wonder how much private giving will be crowded out? Are you going to give generously knowing that you the taxpayer will be coerced into sending an average of $2,000 for “government” help? I’d like to know.
3. New Orleans residents will receive an average of roughly $100,000 each of government spending. Wouldn’t it be better to give them some direct financial aid and let them decide how to use it to rebuild their lives?
4. Shouldn’t local citizens, businesses and government determine their own risks and benefits for rebuilding? Why is it our responsibility to totally rebuild a below-sea-level city in a hurricane zone? They rolled the dice and lost; now the rest of us pay up.
5. Economic freedom, not big government, is what works. Bush was already moving us quickly in the opposite direction by his unprecedented spending binge. That being said, I wonder what kind of sea change this may cause in political loyalties? Those of us (and there are many) who are enthusiastic about the joys of liberty are not going away.

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Price “Gouging” and Political Opportunism

Kudos to Winthrop Quigley for his ABQ Journal article (subscription) about price “gouging.” I often complain about the economic ignorance of journalists, so now I am delighted to see one get it right. Well worth reading the whole thing.
Excerpt:
“While price gouging makes a great sound bite, it has virtually no economic meaning. As with most attempts to control prices, however well intentioned they might be, most economists will tell you pricing laws do little except create shortages.”
Quoting economists Walter Williams and Thomas Sowell, Quigley even gives us good insight into the misunderstood and under appreciatied roll of price as a coordinating mechanism: “if the legislature decides what the price of gasoline should be, two things will happen. Gasoline will flow out of the state to people willing to pay the market price, and the only people who get gasoline in New Mexico will be those who happen to be at the pumps before the fuel runs out.”
As far as political opportunism goes, Quigley points out that prominent federal and state politicians on both sides of the aisle are calling for investigations and possible control of the so-called “gouging.”

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