Max Freedom

Home for a group of disparate individuals with something to say about the world, united by the strong conviction that maximizing the freedom of the citizenry is the best means of promoting peace, justice and prosperity. We may not always agree on how to achieve this, but the goal will never change.

Tuesday, June 13, 2006

And Sometimes Life Intrudes...

It was never my intention to go on a 9 month hiatus but the crisis is past and more content will be coming shortly.

-- Fletch

Friday, September 23, 2005

Is Socialism Against Human Nature? - Part 3

Part 3 (of 3)

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SOCIALISM IN THE REAL WORLD

While no society has ever existed in the form advocated by Marx (and that, in and of itself, is ample evidence of its viability), there have been historical examples of socialistic systems colliding with self-interest.

In 1620, the Plymouth Colony, under a contract set up with their sponsors before leaving England, attempted to create a communal living structure for the new colonists in which the produce of everyone was made available to all. But after that first deadly winter, when the whole of the colony nearly starved, William Bradford, leader of the expedition, abandoned this concept:

“The experience that was had in this common course and condition, tried sundry years and that amongst godly and sober men … that the taking away of property and bringing in community into a commonwealth would make them happy and flourishing; as if they were wiser than God. For this community … was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. For the young men, that were most able and fit for labour and service, did repine that they should spend their time and strength to work for other men's wives and children without any recompense. The strong, or man of parts, had no more in division of victuals and clothes than he that was weak and not able to do a quarter the other could; this was thought injustice…. And for men's wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it. Upon the point all being to have alike, and all to do alike, they thought themselves in the like condition, and one as good as another; and so, if it did not cut off those relations that God hath set amongst men, yet it did at least much diminish and take off the mutual respects that should be preserved amongst them…. Let none object this is men's corruption, and nothing to the course itself. I answer, seeing all men have this corruption in them, God in His wisdom saw another course fitter for them.”

The colony flourished in the absence of the imposed social construct. But one needn’t go back nearly that far.

While the Soviet Union never even approached the socialist ideal that Marx envisioned, it did implement socialist economic control of industry. Farmers worked for the collective whole rather than for themselves. This program was so effective that the Soviet Union, whose steppes contain some of the best land for growing grain in the world, became an importer of wheat. In an attempt to address the shortfall, the Soviet Union allowed farmers to set aside some ten percent of their land for personal use. In the wake of this change, the amount of produce generated on these parcels of land nearly equaled and sometimes exceeded the total output from the rest of the land.

In the words of renowned economist Ludwig von Mises (from the book “Planned Chaos”, 1947), the Soviet model was but one pattern for the realization of socialism in recent history. The other is even more sinister:

“[T]he Marxian or Russian pattern -- is purely bureaucratic. All economic enterprises are departments of the government just as the administration of the army and the navy or the postal system. Every single plant, shop, or farm, stands in the same relation to the superior central organization as does a post office to the office of the Postmaster General. The whole nation forms one single labor army with compulsory service; the commander of this army is the chief of state.”

“The second pattern … differs from the first one in that it, seemingly and nominally, maintains private ownership of the means of production, entrepreneurship, and market exchange. So-called entrepreneurs do the buying and selling, pay the workers, contract debts and pay interest and amortization. But they are no longer entrepreneurs. In Nazi Germany they were called shop managers or Betriebsfuhrer. The government tells these seeming entrepreneurs what and how to produce, at what prices and from whom to buy, at what prices and to whom to sell. The government decrees at what wages laborers should work and to whom and under what terms the capitalists should entrust their funds. Market exchange is but a sham. As all prices, wages, and interest rates are fixed by the authority, they are prices, wages, and interest rates in appearance only; in fact they are merely quantitative terms in the authoritarian orders determining each citizen's income, consumption, and standard of living. The authority, not the consumers, directs production. The central board of production management is supreme; all citizens are nothing else but civil servants. This is socialism, with the outward appearance of capitalism. Some labels of the capitalistic market economy are retained, but they signify here something entirely different from what they mean in the market economy.”

In modern Israel, collective living arrangements are more common than perhaps anywhere else in the modern world. The kibbutzim are mainly agricultural cooperatives in which all property is owned by the community. There is no private wealth; all assets belong to the kibbutz which must look after the needs of its members. The kibbutz is responsible for the care of its members from cradle to grave and is expected to bring up the children (communally), provide education and even social security. They operate under Lenin’s shorthand for socialism, “from each according to their ability, to each according to their need”. About 125,000 people live in the Israeli kibbutzim. And they are an abject failure.

The kibbutzim survive at the sufferance of the rest of Israeli society. They could not survive without the heavy subsidization provided by the Israeli government. The initial subsidies were huge coupled with government loans at rates well below inflation with a 50 year payback period and a 20 year grace period before the first installment was due. Some kibbutzim cashed in on that gravy train and immediately began engaging in capitalistic behavior – even hiring outside labor – all on the tab of the taxpayers. In many cases, members of the kibbutz can retain private property and are paid based on the market value of their work rather than the determination of “need”. The second-largest Israeli kibbutz (Afikim – 1,400 members strong) even has factories that, in the words of the BBC, are “run on purely capitalistic lines by boards of directors, mostly outside experts appointed for their business or technical acumen.” In these cases, cooperative ideology has been completely replaced by self interest.

Those who attempted to adhere to the socialist ideal, however, fair considerably less well. People in those kibbutzim tend to lag economically behind the rest of Israeli society even with the subsidies. Children there have significantly more mental and emotional problems than the rest of society. And a number of individual kibbutzim have collapsed because young people, disillusioned with kibbutz life, have left for more rewarding and satisfying lives outside of the collective. It is impossible to describe any system as successful if it is neither self-sufficient nor self-sustaining unless it abandons the principles on which it was founded to embrace an entirely different set of values.

CONCLUSION

When Biologist Stephen Jay Gould said “our biological inheritance leaves open an enormous range of possible behaviors” he is not arguing that any of those behaviors would ever violate the simple concept of self-interest. Human beings have the capacity to be “aggressive or peaceful, dominant or submissive, spiteful or generous”, but invariably engage in those behaviors when it is perceived that they are in the interests of the person involved. Put simply, Edward O. Wilson was correct when he said of Marxism, “Wonderful theory. Wrong species.”

There’s no question that human beings have basic physical and emotional needs (food, clothing, shelter, social contact, affection, even self-determination). In an imperfect world, there will always be those whose needs are not met regardless of which societal structure is put in place to address societal needs. But attempting to implement a solution that is inherently unworkable because it flies in the face of basic human nature is counterproductive at best and suicidal at worst. [That the implementation of socialist policies actually do more harm to those they are ostensibly designed to help than the capitalistic policies that they are designed to “correct” is demonstrable but beyond the scope of this particular essay.]

When socialists acknowledge that the societal structure they would embrace is more than merely a different – and to their thinking, superior – form of governance, but a “new form of human consciousness”, they are conceding the problem. It isn’t merely that such a consciousness is without precedent, but rather that it is contrary to all precedent. The evidence that self-interest is at the very core of human behavior is indelibly stamped on every facet of every moment of human history. Any rational exercise to determine solutions for the problems of society must be able to function in the society as it exists; not what we would like it to be if only everyone in society would listen to “the better angels of their nature”. For that matter, expecting the whole of society to agree on what constitutes “the better angels of our nature” is clearly an impossible task. To envision a new consciousness that subsumes self-interest in favor of cooperative action and collective self-determination – a concept which is, arguably, contradictory – in a real world environment that has so far presented a complete absence of any evidence of its viability, is to engage in nothing more than utopian sophistry.

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Thursday, September 22, 2005

Is Socialism Against Human Nature? - Part 2

Part 2 (of 3)

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SELF INTEREST VS. “GREED”

Self interest is not “greed”. These concepts are distinct. Self interest is a basic survival mechanism. It is behind the desire to meet the daily needs of life – to obtain food, clothing and shelter; to get a job to support one’s family; to improve oneself and to succeed. No one would characterize these basic activities as being motivated by greed, with all of the associated negative consequences. And it is behind the desire not to have that which you have worked for taken away. It makes no difference whether your property is being stolen by a common thief, lost to an unscrupulous confidence man or appropriated by the state to be given to someone “more deserving” – the nature of the interest is identical, so, logically, either they are all examples of greed or none of them are.

Greed is defined as wanting more than one “needs or deserves”. But who is to make that determination? There can be no objective measure of what one “needs or deserves” based solely upon the amount of wealth accumulated, so some other criterion must apply. The simplest distinction is to say that someone acting out of greed is interested in acquiring something without regard for whether that acquisition infringes on the rights of others. Thus, if you can make clay pots and sell them for a given price, without resorting to fraud or coercion, then engaging in that practice is not greed regardless of whether you earn $50 for engaging in that activity or $50 billion. But it is always greed if I acquire even a mere pittance by rolling a passed out drunk on the street or if I sell you a car while concealing the problems with it. By the same token, it is not greed to hire someone at an agreed upon wage to make those pots (or engage in any other activity) so that I can earn even more, provided that the individual was hired in the absence of fraud or coercion. And it is always greed if I agree to perform some task for a given wage and then demand more than the agreed upon amount to perform the task.

In this context, greed is determined by the nature of the means of acquiring wealth rather than the amount involved. The reason that this context is valuable is because the legitimacy of the method of acquiring wealth can be assessed with at least some measure of objectivity. Certain methods can easily be recognized as legitimate and others can be recognized as illegitimate. While some activities may still be subject to debate in this regard, so there is still some subjectivity involved, this context is clearly superior to an assessment of “deserved” amounts, which is subjective in its entirety.

PERCEPTIONS AT WORK

What about charity? What about self-sacrifice? What about acting in the self-interest of another when that action is in conflict with your own? The answer is simple really. People perform charity work because it is perceived to be in their best interest to do so – the benefit outweighs the cost. The individual engaging in charitable or “self-sacrificial” activities does so because there is perceived to be a benefit to the giver - the emotional payoff of doing good, ensuring that such charitable avenues are available in case the individual is in need in the future, having a “clean conscience”, not wanting to live in a world without charity. There are as many answers as there are people. And this benefit is perceived to outweigh the cost. Even the ultimate sacrifice falls into this category. Personally, I wouldn’t want to live in a world where I stood idly by while an innocent was killed if there was something I could do about it – even at risk to my own life.

Many parents have long expressed the belief that there is little more tragic than outliving their children and would gladly give their lives to save them. At the same time, very few people demonstrate a willingness to sacrifice their lives for people whose very existence is remote to them – the Sudan, Rwanda, etc. It all fits within the same dynamic.

What about lawbreaking? Why do some do it and others do not? What about addiction and other self-destructive behaviors? The answer is exactly the same. People’s perceptions vary. For some, the power of conscience or, more specifically, the emotional cost of failing to heed it, is far greater than in others. Thus one person may not cheat even if there is virtually no chance of getting caught and another person is driven primarily by the likelihood of detection. Likewise, some will perceive the long-term effects of addiction to far outweigh the benefits of a short-term euphoria, while others find the long-term consequences to be too remote to dissuade them in their own cost-benefit analysis. Physical addiction even adds the element of potentially severe short-term physical consequences (withdrawal).

Perception is a powerful and extremely varied phenomenon. It is unique to each individual. To one, the perception of the value of an orange may be quite high. To another, it may be quite low. The aggregation of these varying perceptions is commonly undertaken in the field of economics. The supply and demand curves are merely graphical representations of these aggregated phenomena.

But, while it is possible to examine perception and self interest in the aggregate, it must always be remembered that perception and self interest are never collective concepts. While it is possible to come to reasonable conclusions about group behavior based on the aggregation of self interest because, frequently, the interests of many individuals are in concert, it is NOT possible to assume that the individuals in a group share the same view of self-interest or to impose the aggregated group interest upon the individual.

SELF INTEREST AND SOCIALISM

How then does human nature render socialism impossible? After all, is it not possible that working collectively in a classless society is in everyone’s best interests? Is it not possible that that people are willing to work for the good of the collective whole rather than simply for themselves? Isn’t cooperation frequently better than competition? Haven’t communal arrangements already been implemented successfully?

The issue here is the problem of aggregating interest just mentioned. Certainly, some people will accept that working collectively is in everyone’s best interests and some will even act on those beliefs and create communal living arrangements. But there will always be those who believe that their best interests lie elsewhere and socialism as a societal structure (again, as envisioned by Marx) requires that the whole of society accept that premise or, at minimum, be unwilling to act in a manner contrary to that belief. A society based on the premise that all of its members will act for the benefit of the whole can only fail if any of its members choose instead to work in what they perceive to be their own self-interest when those interests conflict with those of the whole.

The individual who believes it is in his own self interest to spend time working solely for himself, deprives the whole of the benefits of his labors. The individual who works in his own interests when those interests conflict with the collective whole does direct harm to his fellows as when any member of the collective consumes more than his fellows. The individual who believes that there is a benefit to the acquisition and retention of private property - as the overwhelming majority of human beings do - is abhorrent to the socialist system.

End Part 2

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Wednesday, September 21, 2005

Is Socialism Against Human Nature? Part 1

This essay has been written as a response to a similar essay from the socialist perspective that has been widely circulated and can be found at:



In the interests of space, I will be presenting it in three parts.

**

Is socialism against human nature? There’s only one possible answer to this: “Without question!”

WHAT IS HUMAN NATURE?

The fundamental basis for socialism as envisioned by Marx, Engels, et al (the purpose of this essay is to discuss this specific form of socialism unless stated otherwise - whether the reader wishes to refer to it as total socialism, communism – distinct from those regimes that have adopted the term - or historical structuralism makes no difference) conflicts with the most basic aspect of human nature. I’ll get to the specific momentarily, but it is necessary to address the meaning of the term “human nature” before proceeding. This is because recent attempts to argue that socialism does not create such a conflict have misapplied the term in order to either deal with certain symptoms (i.e. war, “greed”, racism, misogyny, etc.) or have skirted the issue entirely.

The nature of anything is that which is inherent in the subject which does not change. The nature of lead for example is that it is a metal with a given set of chemical properties. You can change its state by melting it or manipulate it into different shapes but these aspects do not change – hence they are part of its nature. Human beings obviously are subject to far more variables than lead – radically diverse beliefs, abilities, limitations, behaviors, etc., but there are certain aspects of humanity that do not change. We are all mortal; we share certain vulnerabilities; and there are certain behaviors/motivations that in their essence are common to all human beings. These are the things that comprise “human nature”. It matters little whether or not these behaviors are genetic, as socio-biologists might argue, or “part of our design” as evolutionary psychologists might argue or some other explanation. All that is necessary for the definition to be met is that it describes an aspect of humanity that can be shown to be universal or that, after thousands of years of human history, cannot be undermined.

A common counterargument to the assertion that socialism is against human nature attempts to make its point with straw men: “War? It's human nature to fight. Racism? It's human nature to fear ‘outsiders.’ Women's oppression? Men and women are ‘naturally different.’” The problem, of course, is that these are not aspects of human nature. War occurs BECAUSE of human nature, but it is a symptom rather than the nature itself. It is an aspect of human nature (a survival mechanism engrained in the species) to view that which is “different” with more suspicion than that which is familiar, but that is a far cry from a need to “fear outsiders”. And while it is an inescapable fact that there are inherent differences between men and women both physically and behaviorally, it does not naturally follow that women must be “oppressed”. But beyond that, these are not merely straw man arguments because they attempt to classify human nature as something other than it really is, but, in the context of whether or not socialism is viable, the assumption is that the underlying causes of these behaviors can be suddenly ignored so that socialism can effectively take root as if they are the result of the aspects of a non-socialist society rather than something much more basic. This assumption is absurd on its face.

So what is the nature of humans that has led to warfare and distrust of that which is different and the adoption of different roles for the sexes? What, for that matter is the nature of humans that has resulted in entrepreneurship, competition, conformity, avarice and charity? What can be said about the underlying behavior that explains these activities? Put simply:

Human beings invariably act in what they perceive to be their own self interest.

That would seem to be a sufficiently straightforward proposition but, because its implications conflict with what some people would like to be reality (rather than what it is) and this would include socialists, there have been a number of unsubstantiated attacks upon it. Let’s examine each of them in turn.

HISORICAL AND SOCIETAL CIRCUMSTANCES

The Marxist theory of human nature argues that human behavior depends on the historical and social circumstances in which people live. The problem is that this is not an expression of human nature, but of human adaptability. Certainly, it is true that human behavior depends on the circumstances present at any given time, but that is beside the point. Consider the example of lead again. While its shape and state may change radically depending upon the temperature and the nature of the forces exerted upon it, it will always be a metal with a given set of chemical properties. Likewise, human beings may behave radically different depending upon the nature of the forces exerted upon them, but they will still be human beings with certain definable characteristics – including the response to perceived self interest.

The nature of those societal and environmental forces has changed radically over time. In an effort to undermine the assertion that warfare is a function of that self interest in action, recent socialists have referred to the work of Rutgers anthropologist R. Brian Ferguson to argue that warfare, as we know it, has not existed for as long there have been modern humans (a period of as much as 100,000 years), but “is largely a development of the past 10,000 years.” Set aside for a moment, the obvious point that finding evidence of warfare with Neolithic implements is easier by several orders of magnitude if there is a permanent settlement around which to search, this conclusion is completely consistent with the concept of human nature being constant and that self-interest is an aspect of that nature.

The entire human population at the time was approximately 1 million people (some estimates go as high as 5 million). And, as Ferguson notes, this was the period during which human beings began creating the first permanent human settlements (the oldest date back no more than 12,000 years). It isn’t that the nature of self interest changed, but rather that the interests themselves changed radically. A population that is both relatively small (about 0.02% of the current population) – thus considerably less likely to need to compete with others for resources - and nomadic in nature – thus without need to defend any given location - has little reason to engage in warfare. It wasn’t until the formation of permanent settlements that the interests of the group were in concert to defend the resources that they had accumulated. Warfare is the violent clash between large groups. In order to exist, therefore, there must be sufficiently large groups with sufficiently common interests for it to take place. Even Ferguson does not argue that examples of smaller clashes, banditry, selfishness, etc. did not exist previously – only warfare.

Some socialists argue that the creation of a social hierarchy, an “elite” if you will, that pressed its own agenda at the expense of the rest of society. But, of course, there is no evidence to support this conclusion – no indication that warfare was not deemed to be in the interests of the group as a whole. And hierarchical structures are not a new phenomenon linked to the creation of such permanent settlements as an examination of nomadic societies both historical and contemporary demonstrates. There is evidence of societal and possibly religious hierarchies at least as early as the late Pleistocene.

End Part 1

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Thursday, September 15, 2005

Katrina and the State

The tales of government blunders in the wake of Hurricane Katrina just keep pouring in. First it was the delays in getting help to the region. Then it was the unwillingness of FEMA rescuers to take pets, highlighted by a story about a little boy whose dog was taken from him while he waited to board a bus and who cried inconsolably for “Snowball” until he vomited. We found out that FEMA “forgot” to have the military airlift food and water to survivors. Then we learned that Navy pilots were reprimanded for rescuing stranded civilians on the way back from a supply run because it was not part of their mission. And, by now, everyone has heard how New Orleans mayor Ray Nagin delayed implementing the city’s evacuation plan – leaving the bus fleet idle - out of a fear of lawsuits.

Of greater concern are the blunders made by government that hampered the efforts of private companies and individuals to provide needed help such as when a Wal-Mart employee with a truckload of bottled water was turned away at the outset of relief efforts because FEMA officials told him it was “not needed”. An offer of help from Chicago was reportedly “snubbed” by FEMA. A group of Indiana firefighters who volunteered to help were sent to a course on community relations and sexual harassment and told that their job would be to hand out fliers. Amtrak offered to evacuate people from New Orleans, but city officials turned them down and the last train pulled out without a passenger on board. And, initially, Louisiana’s department of homeland security denied the Red Cross entry to the Superdome with food, water and sanitary facilities.

One of the more disturbing tales comes from two EMTs, whose story has been circulating via e-mail and has been confirmed by other sources, who were attending a conference in New Orleans when Katrina struck. When it became apparent that no rescue was imminent for them or hundreds of others stranded at their hotel, they decided to save themselves, pooling their funds to hire ten buses to pick them up. They waited for two days for the buses to arrive unaware that, upon arriving at the outskirts of the city, they had been commandeered by the military. Later, as the desperate group, having gone without food or water for some time, attempted to walk out together, they were met at the Mississippi border by armed Gretna sheriffs who blocked the roadway, fired over the heads of the beleagered walkers and refused them entry because they didn’t want any Superdomes in their city.

Meanwhile, real heroes were bypassing government channels in order to offer assistance. Warren Evans, sheriff of Wayne County, Michigan, refused to wait for a formal request and took 33 deputies to Louisiana while other law enforcement volunteers spent days filling out preliminary paperwork. Richard Zucschlag, head of southern Louisiana's largest private ambulance transport company, Acadian Ambulance, without waiting for authorization, sent seven helicopters and 40 ambulances into New Orleans to perform rescue work and sent another ten medics to the Superdome, where they were the only treatment unit for more than a day-and-a-half. Dr. Angelo Salvucci, Santa Barbara’s director of emergency services, hitched a ride to the region with a private group taking in medical supplies. He had tried to volunteer his services through channels but was told by the Department of Health and Human Services (HHS) to call the Medical Reserve Corp … who told him to contact his home state of California … who told him to call HHS.

It was the private sector that really stepped up. Zucschlag’s wasn’t the only private ambulance service to answer the call. Many, like Med-Ex, a member of the Chicago Ambulance Alliance, came from across the country and are still serving needs in the region.

The Red Cross was on the scene providing food, water, supplies and necessary care almost universally before public resources were brought to bear, but was prevented from entering the city itself by the National Guard and local authorities whose first concern was not rescue but securing the area. Still, the organization quickly set up shelters and provided assistance to almost 93,000 people.

The Red Cross even provided financial assistance and even debit cards while a similar program run by FEMA was falling apart. While FEMA was telling people who’d lost everything that they needed a valid phone number or e-mail address, Red Cross volunteers signed 2,200 relief checks in a single day at a single location. In short order, private relief efforts collected as much as $1 billion including more than three-quarters of a billion in monetary assistance and untold amounts of in-kind assistance.

Even before the storm made landfall, companies like Wal-Mart and Federal Express were moving hundreds of tons of supplies into place so that they could be available to meet the coming need. Of course, they didn’t expect their trucks to be turned back. State Farm and other insurance companies sent in thousands of claims agents to expedite disaster claims and provide relief where it was needed. Oil companies, admittedly sensitive to the public perception of price hikes, set up temporary shelters for employees and their families so that the facilities could be reopened as quickly as possible and service to the region could be restored.

And while local, state and federal officials spent time jawboning before television cameras, private individuals and local churches, quietly and without fanfare, took up the burden of helping those truly in need.

Is there really any doubt that the unbridled faith in the government is misplaced?

Perhaps the best evidence that the government does the job poorly are two things that have been incorrectly laid at the feet of the current administration: the failure of the levees and the lawlessness that ensued. Don’t get me wrong. The administration has done more than enough to warrant criticism, some of which has already been mentioned, but in these two cases, the blame can be spread around much more than to a single individual or even a single administration. The whole point is that government fails to meet such needs regardless of who is at the helm.

That the levees broke when they did should come as no surprise to anyone. The administration shot itself in the foot by stating that no one could have predicted the occurrence when it had been the subject of an article in National Geographic less than a year before and the most recent report on the potential losses of a hurricane in the region specifically mentioned the failure of the levees.

But the fact is that the inadequacy of the levees has been known for more than a generation. According to the Los Angeles Times, plans to build a hurricane barrier to protect New Orleans were scrapped in the face of a lawsuit filed by Save the Wetlands (an organization not harmed by inadequate levees) in 1977. It has also been reported that a plan by the Army Corps of Engineers to raise and strengthen the levees around New Orleans was halted in 1996 by a lawsuit filed by the Sierra Club (another organization not harmed by inadequate levees). And it’s not exactly like the people of Louisiana were abandoned by the holders of federal money. While efforts to strengthen the levees were halted, Louisiana has received more federal money for projects by the Army Corps of Engineers ($1.9 billion) over the last five years than any other state. The levees protecting the safety of the people of New Orleans were not at the top of the government’s priority list because the negative incentive of environmental lawsuits was greater than any concerns about safety.

Of course, if it weren’t for the warped incentives provided by a flood insurance program, heavily subsidized by taxpayers, that grossly undercharges for the flood risk in a city resting several feet below sea level, particularly given the inadequacy of the levees, perhaps there would have been greater insistence on the part of the residents that the need be addressed. Or, perhaps, fewer people would have chosen to live and work in such an at-risk location in the first place.

And then there’s the lawlessness, which got so bad that Louisiana Gov. Kathleen Blanco sent in the National Guard happy that they knew how to “shoot to kill”. It must be remembered that the lawlessness in New Orleans did not suddenly appear in the wake of the hurricane. New Orleans has been one of the most crime riddled cities, consistently among the most dangerous cities in America (most recently ranked twelfth) for several years. As snipers fired on rescuers, a cable repairman who had evacuated the city noted that he frequently needed a police escort to do his job and one of his most common repairs was to fix cable boxes that had been damaged by gunfire. The failure to protect the citizens of New Orleans from violence and crime predates the hurricane by decades.

Here, again, don’t make the mistake of thinking that this was a failure of government to simply “give” enough to the people of New Orleans to address poverty there. It is the reliance upon such measures that is simply another failure laid squarely at the feet of government. The federal government has flooded (pun intended) Louisiana and New Orleans with money. The current administration alone has spent more than $10 billion in welfare assistance in Louisiana in cash, food stamps, public housing, Medicaid and literally dozens of other anti-poverty programs, largely in urban areas like New Orleans. Yet New Orleans continued to have one of the highest poverty rates in the country and, for the most part, it was the recipients of this government largesse who failed to escape the city before disaster struck.

The whole tragic episode is a case study on the inability of the government to protect people. So what does the government propose to address the issues now? The response has been entirely predictable. To date, only three remedies have been proposed: 1) set up a commission to study the problem and affix blame, 2) rapidly throw money (estimates run to $200 billion, nearly $400,000 per New Orleans resident) at the problem in an effort to appear sufficiently caring, and 3) consider “wider powers” for the U.S. military in the wake of natural disasters. If any of this instills in you a sense of confidence or comfort…

…you haven’t been paying attention.

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Wednesday, September 14, 2005

Ceilings and Floors - Part 2

Once again, like a bad penny, the call for a higher minimum wage has come up – this time from Pennsylvania Gov. Ed Rendell. The initial trial balloon was floated a few months back, but now he has begun pushing for the measure based on faulty logic and class rhetoric. In his announcement on September 12, Rendell said, “We have not raised the minimum wage in this country in eight years and everyone knows and has seen other increases -- business profits have risen, worker productivity has increased, and the cost of food, clothing and basic necessities along with fuel prices, have climbed.”

The statement is true enough, but the implications are misleading. While inflation has resulted in higher prices for many goods, so, too, have wages. Average total compensation, including benefits, has risen at a pace greater than inflation over that same period. Moreover, because individuals rarely work year after year for the same wages, few who were making the minimum wage eight years ago are still doing so now. Attempting to compare changes in average prices to a fixed number not indicative of what typical workers are making is, at best, disingenuous.

Rendell goes on to say, “Pennsylvania cannot continue to increase the skill of our workers and not raise their salary base. Improving the income of our working men and women does not need to put our businesses at a competitive disadvantage, but it does need to help our working families get beyond the poverty line.”

At first blush, this seems merely to repeat the same canard that the salary base has been static and that it has fallen behind the cost of living. But a new wrinkle has been added: the tried and true call for justice for “working families” living below the poverty line. This stance is also horribly misleading.

At present, less than 90,000 Pennsylvanians are making the legal minimum, les than 1.6% of the working population (approximately 5.7 million) and it is to be expected that, consistent with minimum wage workers throughout the United States, the vast majority of the recipients are teenagers and young adults who are single and, frequently, living with parents, or are secondary wage earners in the household bringing in supplemental funds. At the time of the last minimum wage hike it was determined that heads of households trying to make ends meet accounted for about 10% of minimum wage earners (some studies have found the percentage to be even lower). Of that number, less than 3% were single parents. The great mass of poor families trying to make ends meet while making the minimum wage is nothing more than a persistent myth.

The minimum wage is neither more nor less than a price floor. Basic economics tells us that the institution of a price floor above the market level inevitably results in reduced supply. It matters not whether the product is sugar, SUVs or labor. If wages are artificially inflated, jobs dry up - period. Studies confirm this, as you might expect since it is the only outcome consistent with economic theory. There has, to date, been only one study to dispute this - in New Jersey - but the sample size was so small and its methodology so debatable that its conclusions are easily dismissed. And a subsequent re-evaluation of the data did show employment decreases.

This is not to say that as soon as wages are increased, there are mass firings, though, in a few cases, job loss has been immediate in small businesses already on the edge. The data, instead, indicate that there is a rapid contraction in job growth until equilibrium is once again achieved, either through structural unemployment (normal job changes) coupled with unfilled vacancies, job exportation (using cheaper foreign labor), or inflation. Inflation isn't affected tremendously, but an increase in wages at the lowest level tends to have a ripple effect through the rest of the labor market.

Which jobs are most affected? Often they are jobs in small businesses, and, since small business has always been the greatest job creator in the economy, this is a very bad thing. And they're not "McJobs", either. In the majority of markets, jobs at fast food joints are comfortably above the minimum. Those affected are low-skilled and entry level jobs most often filled by entry-level teens in urban areas (specifically young black males - the group with the highest unemployment) and … the working poor. Raising the minimum wage in order to give these groups a "living wage" actually reduces their job opportunities. And the elimination of entry-level positions can have a cascade effect as the people who would otherwise have taken those positions find it that much more difficult to obtain work experience in the first place.

The jobs lost are often those most easily transplanted outside of the country to take advantage of a cheaper labor force. Ironically, those most vocally opposed to “outsourcing” are the very ones most insistent that the minimum wage be raised.

But, the argument goes, the minimum wage prevents businesses (those "evil capitalists") from colluding to pay something less than a "living wage" - a mere pittance designed to keep a large segment of the workforce in poverty. Ridiculous! If that were true, then wages for the majority of jobs (and certainly for all entry-level ones) would be permanently stuck at or near the legal minimum. And such is clearly not the case.

Employers are scrambling to get people to work for them in entry-level jobs at well above the minimum. Why? Because workers can go somewhere else. High turnover is a problem for businesses. Why? Because workers do frequently go somewhere else - for better pay, for better benefits, maybe even a shorter commute. Even if the minimum were eliminated, wages for these jobs would not suddenly drop. Why? Workers tend to look unfavorably on pay cuts. And, historically, wages have never been forced downward, not even during the Great Depression (they may become devalued through inflation, but that is not the same thing). None of these wide-spread and easily identified realities could ever happen in a system controlled by such collusion.

Further, if widespread employer collusion were taking place, unions could not exist, because companies would decide, en masse, not to hire union workers. Instead union membership has been declining for reasons that further undermine the collusion argument: workers have been getting acceptable wages and working conditions without having to pay dues and union leadership has become disconnected from the needs of the membership. If, and only if, workers find that employers are not meeting their needs, union membership will climb again. When the union movement began, employers had the right to hire who they wished and replace striking workers at will. Unions flourished anyway because employers were not meeting workers' needs. That has changed.

The unchangeable reality of the job market is that job-seekers cannot find jobs at rates higher than employers are willing to pay and, at the same time, employers cannot find employees at rates lower than people are willing to work for. This is called equilibrium. Employers will, inevitably, attempt to fill positions as cheaply as possible in their own interests. But, if they do not offer enough to attract enough competent workers, the business will, just as inevitably, fail.

And the "living wage" is a myth. The market will not allow that kind of manipulation and will continue to adjust accordingly. Some jobs, by themselves, simply will never be of sufficient value (in sufficient demand) in society to warrant enough compensation to provide an adequate standard of living. Raising the minimum wage does not alter the value of these jobs, it simply eliminates them.

It isn't a matter of morality or social justice, it is simply recognizing the inevitable consequences of a specific course of action. The market mechanism is oblivious to class distinctions so it matters not at all whether there are groups of people characterized as either poor, middle class, or rich. The market will set wage rates in exactly the same way that it sets prices for any other goods available in the marketplace.

Government intervention increases the inefficiencies in the market mechanism and consequently increases unemployment. In fact, one of the reasons that unemployment levels have fallen to near-record lows (4.9% pre-Katrina), is because the minimum wage has not been increased and has become devalued by inflation.

It's not that raising the minimum wage in order to "help American workers" is a bad idea because the intentions behind it are immoral. It's a bad idea because it doesn't accomplish the stated goal and, in fact, makes matters worse. It reduces job opportunities for those it seeks to help and, ultimately, increases the gap between rich and poor as those who can't find work are left behind.

By way of analogy, consider a suspended ladder, such as you can find at the bottom of a fire escape. It does not reach the ground. If you raise the ladder, those who can reach the bottom rung are lifted higher. A few on the ladder may fall off when it's raised, but not many. The real problem is that, at the ladder's new height, the bottom rung is now out of reach for far more people.

Those still on the "bottom rung" experience an increase in discretionary income, but only in the short term, and it doesn't translate to the economy as a whole. Since job opportunities are eliminated by the artificial wage hike, the benefit of any increase in discretionary income is offset by the effects of higher unemployment. Until it is affected by other external forces (productivity, business investment, technology - not individual wage levels), the pool of capital available for labor stays relatively unchanged.

Reality is a bitch - and she doesn't care if a minimum wage sounds good, it just doesn't work. It harms the very people it is ostensibly designed to help.

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Tuesday, September 13, 2005

Ceilings and Floors – Part 1

Recent news items have been overflowing with proposals by politicians to intervene in the markets to “help” people. Across the country, cries for relief from “excessive” gas prices in the form of price caps have dominated discussions not explicitly dealing with the aftermath of Hurricane Katrina. Hawaii has already gone down this ill-advised road, presuming that their gas should cost no more than it does on the mainland, the transportation costs to the mid-Pacific not deemed to be a factor by their all-wise leaders. And yesterday, Pennsylvania Gov. Ed Rendell has dusted off an old standby – a hike in the minimum wage. The problem, of course, is that such measures invariably address “problems” that don’t really exist and provide “solutions” that create more problems than they solve. Today, I’ll address the misguided calls for the first type of intervention.

In the wake of Hurricane Katrina, gulf pumping capacity was somewhat curtailed, but refining and transportation of gasoline was severely impacted, dropping available supplies by between 1.5 and 2 million barrels a day. Several refineries were knocked offline, major pipelines providing gasoline to the south and east were damaged and functioning well below capacity. This drastic, albeit short-term, constriction of supply caused gas prices to spike to near record levels, though not to the levels experienced in the early 80s. Last week, the average cost of gasoline topped the inflation adjusted price from that period by a single cent, but that isn’t a comparison of apples to apples. The gas available in the 80s included leaded fuels, did not contain additives that are now ubiquitous and was subject to less stringent environmental regulations that stipulate mixtures to be used in each of the several states. The available product is sufficiently improved over what it was a quarter century ago, that the new “record” gas prices are really nothing of the kind. In the following week, gas prices have fallen by more than a dime a gallon.

What we did not experience in the wake of this shortfall were long gas lines, odd and even pumping days, and severe gas shortages. Why? - Because the natural reaction to such rising gas prices is a falloff in demand; because people would rather pay $3.50/gal for gas that they can get than $2.50/gal for gas that isn’t available anywhere; because, simply, the market works.

Price ceilings create shortages. The folly of price manipulation in the 1970s is a tale of economic disaster. When Reagan deregulated energy prices upon taking office in 1981, predictions of skyrocketing prices filled the pages and airwaves of the major media. Instead, prices fell for more than a decade (in inflation-adjusted dollars) and only approached comparable levels a quarter century later (today) due to a natural disaster. Price ceilings within individual states rapidly create shortages along the borders as consumers have a huge incentive to cross the line to buy gas at the cheaper price. The likely proposed solution to this new problem might be patrolling the border to prevent out-of state sales, much as some states have done when their high tobacco taxes have sent smokers across the border to buy at a cheaper price.

But, we are told, “something must be done” to prevent oil companies from raking in “obscene” profits at the expense of everyone else. Really? Consider: the rise in the price of gasoline forestalled a widely-predicted shortage during the Labor Day weekend, making it possible for supplies to be available to those demonstrating the greatest need – and, therefore, a willingness to pay. Is this not a societal benefit? Absolutely. And who is to say what is “obscene”?

Some have even dusted off the urban myth (rampant in the 1970s) that oil companies have been disposing of their own fuel to increase the price. Such silliness is easily dispensed with. Consider: you and a dozen of your friends are given a six-pack of soda to sell on a hot day – and you get to keep what you make. If you decide to dump out a couple of your sodas to restrict supply, it might well increase the average price that can be realized on those sales, but, while other sellers may benefit from higher prices, you have fewer sodas to sell. This is far more costly to you than you can recoup from any price increase. The “conspiracy” is wholly illogical.

Perhaps the real cause of the shortage is a bit more easily identified. In the last couple of weeks, oil prices didn’t spike in nearly the fashion that gasoline prices did. Crude prices even fell slightly while gasoline prices continued to climb. This is because the problem was not so much an oil shortage, though pumping in the Gulf was clearly affected, but a shortage of refining capabilities. Perhaps the fact that no oil refineries have been built in the US in nearly 30 years has something to do with the ability of the existing capacity to deal with the shock of an event like Hurricane Katrina. No one’s even attempted to build a new refinery in the US since plans for one in Portsmouth, Virginia, were abandoned in 1984. The costs of fighting environmental lawsuits and obtaining as many as 800 different permits have made such endeavors something less than cost-effective.

Meanwhile, amid all the accusations and the teeth-gnashing and the demands that something be done, the price at the pump is already falling as capacity is restored and as seasonal demand abates. Implementing price caps is the wrong medicine for a disease that doesn’t exist.

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