four options

Joachim Voth, professor of economics at Pompeu Fabra in Barcelona, describes and discusses four scenarios for the Euro’s future:

We are destroying a huge amount of the good work created by the European Union, almost over night as a result of the current policy mix.

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free enterprise system

Decades ago, Nobel laureate Milton Friedman discussed the impact of intellectuals and businessmen on the free enterprise system:

You must separate out being pro free enterprise from being pro business.

The two greatest enemies of the free enterprise system have been on the one hand my fellow intellectuals and on the other the big businessmen. For opposite reasons:

The intellectual is all in favor of freedom for himself and all opposed to it for everybody else.

Almost every businessman is in favor of free enterprise for everybody else but special privileges for himself.

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hopes vs reality

It is often said that the welfare state would work in theory but fails in practice. Here is Thomas Sowell‘s response:

You mean separating the hopes from the reality.

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misleading words

Words are probably the most important tools that politicians can use. Indeed, rhetoric is far more important in becoming a ‘successful’ politician than actual knowledge. More than a year ago, I found this wonderful sentence that ‘style often outweighs substance’ in political debates. It is basically a summary of decades of failed political crusades.

Thomas Sowell has followed and commentated on these crusades. He describes the sharp difference between words and realities in one of his articles on blacks and the housing market:

Misleading Words

It was one of the most valuable lessons, that words do not necessarily reflect reality.

Now the statistics tell us, belatedly, that blacks lost out, big time, from this “favor” done for them by politicians.

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abortion

It was big news when Democratic Sen. Wendy Davis held a filibuster to block new abortion regulations in Texas. The Washington Post writes that “a woman living along the Mexico border or in West Texas would have to drive hundreds of miles to obtain an abortion if the law passes”.

This kind of raises a question:

What extent of a decline in values does it take for some people to make a decision about whether or not to have an abortion based on whether or not they have to spend a few hours in the car?

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what if jefferson was right

Similar to the famous ‘what if’ speech by Ron Paul, two years ago Andrew Napolitano raised some ‘what if’ questions:

What if Jefferson was right? What if that government is best which governs the least?

What if you could love your country but hate what the government has done to it?

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pay the price

The other day I came across yet another great quote by Thomas Sowell:

I don’t want people making decisions who don’t pay the price of their decisions. And that’s what politics is all about: you don’t pay the price of the decisions.

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defending the one percent

As unpopular as it may seem, professor of economics Greg Mankiw published an article that is now forthcoming in the Journal of Economic Perspectives:

Defending the One Percent

If you take from a theory only the conclusions you like and discard the rest, you are using the theory as a drunkard uses a lamp post – for support rather than illumination.

The key issue is the extent to which the high incomes of the top 1 percent reflect high productivity rather than some market imperfection.

The most natural explanation of high CEO pay is that the value of a good CEO is extraordinarily high.

In the end, the left’s arguments for increased redistribution are valid in principle but dubious in practice.

The same logic of social insurance that justifies income redistribution similarly justifies government-mandated kidney donation. No doubt, if such a policy were ever seriously considered, most people would oppose it.

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the next paul

Senator Rand Paul, son of former Republican Presidential candidate Ron Paul, discusses his political ideas with Peter Robinson for Uncommon Knowledge:

There is a route to victory for Republicans nationally without diluting our message.

If you care about small government, there is almost a requirement of care about supporting the family.

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stimulus revisited

More than four years have passed since President Obama signed into law the American Recovery and Reinvestment Act (ARRA) of 2009. The stimulus package came at a cost of more than $830 billion, or about 22 percent of annual federal spending. It was supported by many Keynesian economists although criticized for being ‘too small’.

Although it seems unpopular to look back and ask whether policies of the past have actually worked, let us have look at the effects of the ARRA.

In a 2010 study, John Cogan and John Taylor have found little evidence in favor of the stimulus package:

The implication is not that ARRA has been too small, but rather that it failed to increase government consumption expenditures and infrastructure spending as many had predicted from such a large package. A consideration of the counterfactual event that there had not been an ARRA supports the hypothesis that state and local government borrowing would have been higher and purchases would have been about the same in the absence of ARRA.

Atif Mian and Amir Sufi have published another study in the prestigious Quarterly Journal of Economics in 2012. They estimate the effect of the Cash for Clunkers Program and exploit variation across U.S. cities in exposure to the program. They conclude:

We find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

James Feyrer and Bruce Sacerdote also examine the effect of the ARRA in their 2011 NBER Working Paper. They use state and county level variation and find that each job created came at a humongous cost:

A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000.

This finding is in line with a paper by Daniel Wilson published in the American Economic Journal in 2012:

Cross-state IV results indicate that ARRA spending in its first year yielded about eight jobs per million dollars spent, or $125,000 per job.

It is also in line with much of the previous research, as documented by Valerie Ramey in a meta study published in the Journal of Economic Literature in 2011:

I assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate: a temporary, deficit-financed increase in government purchases. I conclude that the multiplier for this type of spending is probably between 0.8 and 1.5.

This would translate into something like $120’000 to $200’000 per job created.

By the way, these figures are not surprising since most economists estimated the ARRA to ‘save’ about three million jobs at most. At a cost of $831 billion, this suggests about $300’000 per job. I wonder whether the public support would have been large had Obama sold the program with this price tag.

Greg Mankiw has also been following the so-called recovery ever since the financial crisis. Instead of focusing on unemployment his focus is on the share of the population which is working. This takes into account that some people have simply stopped looking for work. During Bush’s presidency, the employment-population ratio increased slowly from 62 to 63 percent. In the recession of 2008-09, this ratio dropped to 58.5 percent. And ever since then, it has stagnated at this low level. (see figure here)

Finally, it is also worthwhile to reconsider Econ Stories’ 2011 video featuring Keynes and Hayek:

Spending is not free, that is the heart of the matter. Too much is wasted as cronies get fatter. The economy is not a car, there is no engine to start. No expert can fix it, there is no ‘it’ at all.

The question, I ponder, is who plans for who. Do I plan for myself or do I leave it to you? I want plans by the many, not by the few.

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