Category: Economics

Bumper Sticker Logic

I saw this on a bumper sticker not long ago:

“The Bigger the Government, the Smaller the Citizen.”

I didn’t get a chance to talk to the driver to find out what he thought it meant, but my presumption is that it in line with the conservative idea of limited government. The more limited the government, the more rights for the citizens; and conversely the larger and more pervasive the government, the fewer rights of the citizens. Hence: the bigger the government, the smaller the citizen.

But let’s think about that in the real world. First, let’s think about those countries with little or no government, places like Somalia or Mali. Where there is no government there is not maximum freedom for the citizens, but chaos.

Second, let’s think about those countries that are rich and have high standards of living.  The United Nations has what they call the Human Development Index, which ranks countries according to a number of factors, including life expectancy, education, and wealth as measured by the gross domestic product per capital. (This is published annually in the UN Human Development Report.) [http://hdr.undp.org/en/reports/]

The list for 2011 is here. 

The top five countries are Norway, Australia, Netherlands, US, and New Zealand. All of the top countries are nations with modern regulatory governments with strong social welfare programs. If you go to the bottom of the report you will notice that all of the counties at the bottom, which the UN says are nations with “Low Human Development”, are countries with minimal or failing governments, like Afghanistan and Sierra Leone.

But overall wealth and a high standard of living doesn’t necessarily equate to “liberty” and “freedom.” Perhaps the people of Mali are more free than the citizens of Norway.

Of course one argument is that the people of Mali live in endemic poverty, and so even if they are less burdened by the heavy hand of government, they don’t have the financial wherewithal to exercise those freedoms.

So let’s look at the other side, and consider Norway. Norway is a near socialistic state, with universal health care, a strong welfare system, and a high degree of government regulation of the economy. So are the citizens of Norway veritable serfs? Actually they seem pretty free to me. They seem able to do almost anything they want. In fact we in the US might consider their society rather licentious.

In fact, if you look at the countries on the top of the list (which includes the US, Canada, Australia, New Zealand, Japan and most of Europe) you see countries with a relatively high degree of government regulation of the economy, and countries with pretty generous welfare programs. And are the citizens of these wealthy nations serfs? In any real sense they are the freest in the world. They have open cultures and successful liberal democracies. They have strong economies (as compared to the rest of the world, even considering the recent world-wide recession) and their citizens are generally fairly wealthy and have a very good standard of living. As a result they have the financial ability to pursue a wide variety of educational and leisure options. They are what is commonly referred to as free.

So if one was to consider the real world, and not the logic of a bumper sticker, one would conclude that the reality is that the smaller the government, the poorer the citizen. And since poverty can stunt your growth: the smaller the government, the smaller the citizen.

Science and the Foundation of the Economy

In case you need more proof that science is the foundation of the modern economy you can read this story from Forbes:

Beyond The Fiscal Cliff, Pharmaceutical Innovation Is The Key To Long-Term Fiscal Health

Medicine is one of the fastest growing segments of the economy, and one of the key components of that growth is the development of new medicines and new medical technology. And both are based, in large measure, on science at the cutting edge. The United States has long dominated the field of medical research.  And it will continue to dominate only so long as we as a nation take science seriously. That means supporting it in education, and where necessary, funding it through government programs.

The World Keeps Spinning ‘round

I just saw Les Miserables. It was quite the epic. I’m not much for musicals, and there were quite a few scenes where I wondered why they were singing. But all in all an excellent movie.

Oddly enough we watched “The Grapes of Wrath” last night, so it was a weekend of social change and the depravations of poverty. And that got me thinking about our current economic situation. Les Mis occurred against the backdrop of a dramatically changing French society, and that change was a by-product of the Industrial Revolution and the effect that had on the French economy and society.

I think that today we are in the middle of a changing world economy, brought about by computers and information technology, and impacted by globalization and the growth of countries like China and India. We may be in the midst of changes that rival those caused by the Industrial Revolution. It is difficult to tell when you are in the middle of it. It might be as monumental, or it might be of trifling importance. But in any event, changed in the world economy are having a significant impact on this country. Manufacturing is effected by the rise of industrial China and the spread of industrialization and factories around the world. That is reverberating throughout the nation’s economy.

We are in the middle of dramatically changing times. And our politicians are arguing not about how to deal with this new world, but about the tax rate on high wage earners. This disconnect is bizarre.

Princes Among Men

In the last few weeks a number of banks have paid huge fines for various malfeasance. The news today was that UBS will pay $1.5 billion to US regulators for rigging the LIBOR interest rate. The British bank Barclays paid a $450 million fine in June as part of the LIBOR scandal, and both Royal Bank of Scotland and Deutsche Bank are negotiating fines with American and British bank regulators. Just a few weeks ago, HSBC was fined $1.92 billion for laundering Mexican drug cartel money. Standard Chartered Bank was fined $327 million for money laundering in Africa and Asia. And this summer ING Bank agreed to pay $619 million to settle charges that they traded with foreign countries in violations of US trade sanctions.

When conservatives argue against regulating banks and financial institutions they imply, if not outright suggest, that bankers are a particularly noble group of people. They are princes among men. Indeed they are, if he princes we are talking about are from the Italian City states of the Renaissance. They are as greedy and rapacious as the Borgia, as malevolent and malicious as the Medici.   

Andy Barr and Community Banking

Newly elected Representative Any Barr was appointed to sit on the House Financial Services Committee. Barr said that “Serving on the Financial Services Committee will enable me to immediately go to work on solving Kentucky’s jobs crisis. … We must return to the day when a local banker and a small businessperson could meet face-to-face and arrange a loan based on trust and accountability.” [Read more here: http://www.kentucky.com/2012/12/13/2442457/andy-barr-gets-seat-on-house-financial.html#storylink=misearch#storylink=cpy]

There are serious concerns about some of the provisions of the Dodd-Frank Reform Bill, particularly provisions that tighten lending requirements. Some have suggested that the lending requirements are too tight, and this is an issue that must be addressed, and hopefully Representative Barr will work on the issue.

But the problems with community banks goes far beyond Dodd-Frank. There has been a dramatic decline in the number of community banks over the recent decade, and the cause is not Washington regulation. The cause is the free market and the fact that large banks are just more efficient than small banks. According to a report from Celent, which is a research firm that advises financial instates, there has been an “unprecedented concentration” in banking, and much of it has come at the expense of community banks. A link to the Report is here: The Decline of the Community Bank.

 If Representative Barr wants to truly address the problems facing community banks, he needs to look at all of the issues facing community banks. That includes over regulation, but it also includes the effects of consolidation. The problem is that consolidation is a product of the operation of the free market, and that means that there are, on occasion, negative effects from the free market. I wonder how Rep. Barr will address that.

Even FOX agrees: the stock market does better under Democrats

I was doing some research on GDP growth per administration and I came across the following news report from Fox Business News. I’m not sure if it made it onto FOX Television or not. My guess is not, but I could be wrong.

Anyway, the headline (which is also the link) says it all:

 

History Shows Stocks, GDP Outperform Under Democrats

Income Inequality and Economic Growth

Turns out that excess income inequality can hamper growth. That, at least, is the claim of a recent book from the Brookings Institute. Here is an Opinion piece by one of the authors in Reuters. Income Inequality. 

This is a topic that deserves much more discussion, and I’ll get to it soon, I promise.

I think the idea is that when fewer consumers have fewer dollars, because more is accumulated at the top, there is lower economic demand. That seems obvious, but will require more analysis.

Obamacare, Irony and the GOP

In the wake of Obama’s reelection, a number of states have announced that they will not implement a number of state required provisions of the new law. See, “Kansas, Missouri Won’t Set up Obamacare’s State-Run Health Insurance Exchanges “

The specific provision that a number of states object to is the requirement to set up an “Insurance Exchange.”  The Insurance Exchange is basically a marketplace where consumers can go to price and purchase insurance.

The rejection of this provision by conservatives is ironic for two reasons: federalism and the free market.

It is odd that states’ rights conservatives are refusing to implement a state program and allowing the federal government to create and run the program for the state. This directly contradicts the basic idea of federalism, which is that states are better able to create and run programs that affect the state. While it is certainly understandable that state politicians don’t like the federal government telling them what to do – in this case establish an “insurance exchange” – any federalist worth his salt would say that even if the program is mandated the states are better able to create the specifics of the program for the state. I know that these politicians are refusing to act simply out of spite, but the irony of their behavior is laughable.  

But the clear rejection of federalism is only one of the ironies. The other is the rejection of free market principles. The Insurance Exchange is a one stop market for health insurance. It is essentially an Amazon for health insurance. Currently a person shopping for insurance can go to different insurance companies and try to interpret their policies, and then must go to an insurance agent to actually purchase the insurance. As someone who has purchased health insurance as an individual I can tell you that this is a difficult process.

One principle that is supposed to be the foundation of the free market is the free availability of information. A free market only works if purchasers have access to all pertinent information about the product they wish to buy. A consumer can only make an informed choice in the free market if they have all the information they need about the desired product: the price, the quantity, the quality, the selection, the availability of alternatives. Theoretically the free market works best when consumers know the most about the products they want. It is only through that knowledge that consumers can buy the least expensive, or highest quality products, and thus, through the magic of supply and demand, drive costs down.

The purpose of the Insurance Exchange is for each state to provide a comprehensive list of all the available insurance options within the state. This allows the consumer to make an informed choice, and select the insurance policy that best meets their needs. It is a marketplace out of Adam Smith’s dreams. And yet conservatives reject it. It kind of makes me wonder if they think through their policy choices, or if every choice is a simple, and thoughtless, knee jerk reaction.