Empty-Headed Protest

The Occupy Wall Street protesters carrying “Down with Capitalism” signs have been asked by reporters what they would put in its place. Silence and a deer-in-the-headlights look is the typical response. They’re not the first critics of capitalism who know far more about what they don’t want than what they do want.

The protesters’ predicament reflects a long tradition of the left, and illustrates a major difference between liberalism and conservatism. Conservatives provide details of what their objectives are; liberals provide virtually none.

Conservatives have a strong preference for a market-based economy. Virtually the entire vast body of microeconomics is about how a market economy works.

A market economy is a system, a system of “spontaneous order” (in the words of Friedrich Hayek). The order, however, is not magical. It has a well-known much analyzed structure and logic. It results from the interaction of elements such as the price system, the profit mechanism, competition, and self-interest. The interplay of these ingredients is how choices are made, how resources get allocated, and how economic growth occurs.

Starting with the publication of Adam Smith’s Wealth of Nations in 1776 there has been a long line of brilliant economists who have built on the intellectual foundation he established—David Ricardo, John Stuart Mill, Alfred Marshall, Friedrich Hayek, and Milton Friedman, among countless others.

The closest socialist equivalent to the Wealth of Nations is Karl Marx’s Das Kapital, published in 1867. Das Kapital, however, in no way addresses how a socialist or communist economy is supposed to work. The purpose of the book, and many since, is to describe the supposed flaws in capitalism and why capitalism is inevitably doomed. Many of the books since Das Kapital have been attempts to explain the interminable delay in capitalism’s collapse, the most famous being Lenin’s Imperialism, the Highest Stage of Capitalism. Like Marx, Lenin, and numerous others, the Wall Street protesters dearly long for the demise of capitalism, but somehow it keeps on ticking.

A primary theme of liberal economic theory, insofar as it exists, is “market failure.” The emphasis again is negative, not positive, reactive rather than proactive. Its purpose is to explain why the market can’t work, not why socialism can. It explains problems with the existing structure, but offers not even a vague outline of an alternative.

“Market failure” is a multi-purpose excuse for all manner of “government interventions.” It’s always automatically assumed, usually wrongly, that the intervention will solve some problem rather than making it worse.

In any economy choices must be made. Choice is necessary because human wants exceed available resources. That fact is what economists refer to when we talk about “scarcity.” Dealing with the implications of scarcity is the basic purpose of economic science.

If we decide to reject market choices, choices will nevertheless be necessary. Economic scarcity will still be very much with us. When you reject the features of the market there is not something that will automatically take its place.

What is the alternative to a market economy? The not-market? What exactly is that? How do they plan to allocate resources? Who or what will determine prices? How will incomes be determined?

No one has ever conceived of anything that works remotely as well in generating wealth as does the market. To date the only real-world alternative is an inferior and inefficient system of politicians and bureaucrats.

In a market economy the price system is the most important mechanism for dealing with scarcity. It signals to decision makers (consumers and producers) the relative scarcities of resources, goods, and services. Prices provide the essential information and the incentives needed to make efficient choices. If you reject the price system, some other mechanism will be needed to accomplish these crucial functions.

If we don’t allow supply and demand to determine relative prices, how will they be determined? You can’t just say, “From now on everything’s a dollar!”

Is there any underlying logic as to how resource allocation choices are made in Cuba or North Korea? They more or less take the attitude “Our policy is we reject capitalism!” The results, not surprisingly, are disastrous.

It is no accident that liberalism and socialism have no theoretical foundations. There are good reasons why no clearly articulated alternatives have been offered. The main one being it’s simply not that easy. If there were good alternatives available, or at least conceivable, we would certainly know about them.

Liberals apparently have the attitude, “We don’t need no stinkin’ theory!” Socialism and liberalism are fundamentally utopian in character. In utopia everything is attainable. It is based on an “unbounded” vision of the world in contrast to a world of limits and trade-offs. Issues such as efficiency are not a concern in utopia. Consequently, utopia needs no theory.

There are other reasons it could be argued that liberalism needs no intellectual foundation. For liberals choices are based almost exclusively on intentions. Intentions don’t really require a theory or structure. Intentions are self-contained — they are the starting point and end point. It is impossible to collect evidence about intentions. You would have to be a mind reader to do so.

The protesters are certainly free to express their dislike for capitalism. They should not be surprised, however, if others are reluctant to throw capitalism overboard before they’ve been offered a well-defined alternative.

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◼ Empty-Headed Protest October 20, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Friedman’s Four Ways

Sometimes the explanation for vexing problems is clear as can be after you see it. A perfect example is an observation made by the late Milton Friedman in a 2004 interview with Fox News:

There are four ways to spend money. You can spend your own money on yourself. When you do that, why you really watch out for what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well then, I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it costs, and I’m not concerned about what I get. And that’s government. And that’s close to 40 percent of our national income.

It would be nearly impossible to exaggerate how many of our current economic problems are explained by Friedman’s four ways of spending money. Think of the four ways in the order they’re presented as S1, S2, S3, and S4. As Friedman explains, the effectiveness of how money is spent declines inexorably as you move from S1 to S4.

The important demarcation line in ways money can be spent is between S2 and S3. In other words, the issue that matters most is your money versus someone else’s money. If you’re spending your own money on someone else, your spouse or children, for example, you still take the expenditure seriously. You still pay a price if you don’t look for bargains.

A new Gallup survey finds that “Americans believe, on average, that the federal government wastes 51 cents of every tax dollar, similar to a year ago, but up significantly from 46 cents a decade ago and from an average 43 cents three decades ago.” This is a good example of “the wisdom of crowds.” The trend shows that the crowd is wising up regarding the implications of gargantuan government.

The survey respondents are correct in their assessment of how government spends money, and you need go no further than Friedman’s distinctions of how to spend money in understanding the source of the problem.

My guess would be that many of the respondents would think the government doesn’t necessarily need to waste half the public’s money. The problem, however, is it’s the nature of the beast. Because of the realities Friedman refers to, the government will never be able to spend money as effectively as the private sector.

The problems associated with how the government spends money are not the result of who’s running the government. The problems are systemic. Unless government is seriously downsized, waste and inefficiency will remain problems no matter which party is in power.

The source of the problem can be further clarified by keeping in mind the observations of another economist, Steven Landsburg: “Most of economics can be summarized in four words: People respond to incentives.” (That’s the first sentence in his excellent book, The Armchair Economist.)

The incentives for spending money wisely and efficiently are simply too weak when it’s not your own money. It’s no skin off your nose if the benefits of the expenditure are a small fraction of the costs. When it’s your own funds being used, you will not only restrict your expenditures to things having more benefits than costs, you will choose the ones you think will have the highest ratio of benefits to costs.

When it’s your own money you’re spending, it costs you something when you spend it foolishly. That’s not to say that we never spend our own money foolishly, but it comes out of our own hides when we do. When we spend our own money foolishly, we’re left with less money to spend well. It’s a self-policing structure. Of course, your incentives are even stronger when you worked hard for the money in question.

When a politician or bureaucrat spends taxpayer money it’s treated essentially a freebie. It’s only natural that taxpayer money gets treated like monopoly money. Politicians and bureaucrats have virtually no incentive to care about the value of an expenditure or its cost. This is a profound disadvantage of public spending that will never, ever go away.

Contrary to the straw-man accusations of some liberals, conservatives do not advocate zero government expenditures. Conservatives definitely are not anarchists. Nevertheless, the inherent and inescapable inferiority of spending someone else’s money on someone else is a strong argument for minimizing the size of government. The public’s opinion that the amount of government waste has been increasing parallels the exponential growth of government.

The Solyndra fiasco is another recent confirmation of Friedman’s observations. Despite alarm bells going off, the Obama administration pushed the doomed endeavor forward. Why not? It wasn’t their money, after all. Because it has now becoming so notorious, it appears the administration may pay a political price. Nevertheless, half a billion dollars of taxpayer money has gone down a rat hole. Unfortunately, Solyndra is the rule, not the exception. Absurdly generous public employee pension plans are another predictable result of spending someone else’s money.

Friedman said that the fourth spending alternative is how we spend forty percent of GDP. He was, I think, referring only to budgetary expenditures. Forty percent is a lot. Unfortunately, it understates the full extent of the problem.

The vast regulatory apparatus of the government is basically a system of spending someone else’s money on someone else. It is estimated that government regulations currently cost the economy $1.7 trillion a year. For example, requiring a private business owner to spend hundreds of thousands of dollars to comply with the American with Disabilities Act is a clear case of spending someone else’s money on someone else. Requiring a private business to spend a million dollars doing an “environmental impact report” is a clear example of spending someone else’s money on someone else. Spending a million dollars or more on an EIR, in fact, is an example of spending someone else’s money for no one and for nothing. Minimum wage laws likewise are a case of spending someone else’s money on someone else.

The billions of hours Americans spend each year preparing their tax returns is a case of spending someone else’s time on someone else. Time is money, as they say, and most people I know complain a lot more about a scarcity of time than they do of money.

When you spend your own money (or time) on yourself, or for your loved ones, the process is essentially self-regulating. The incentives are automatically aligned with waste minimization. When such incentives are not present, elaborate and complex systems of rules and artificial punishments must be put in their place. There can never be enough rules and regulations to match the effectiveness and elegance of the self-regulating market.

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◼ Friedman’s Four Ways October 5, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

The Democrats’ Chronic Leadership Shortage

It has to be depressing to be a Democrat right now. They are extremely disappointed with Obama but they have no obvious replacement.

Consider some possible scenarios. What if months from now Barack Obama is in the same or worse condition than he is now? What if he and everyone else realize that he is dead-candidate walking? One option would be to do an LBJ and announce that he’s not going to run for reelection. Another would be for some other Democrat to successfully challenge him in primaries.

The Democrats will not want to abandon Obama, but they want even less to lose the White House along with several House and Senate seats. A lopsided loss would do long-term damage to the party and liberalism. If the S.S. Obama is headed to the bottom of the sea, they will be jumping ship.

Their dilemma is, however, who do they have to replace him? Hillary Clinton is the name mentioned most often, but even Democrats have serious doubts about her as demonstrated by her 2008 primary loss to Obama. New York governor Andrew Cuomo has also been mentioned as a possible alternative. Besides those two choices their menu is not very appetizing — Joe Biden, Harry Reid, Nancy Pelosi, or Debbie Wasserman Shultz. I can’t imagine any of those possibilities exciting even Democrats.

Now compare that situation to what’s going on among Republicans. If anything, the Republicans have too large a selection of attractive alternatives. It frustrates me that there can be only one nominee. I like most of the announced candidates as well as several others — Marco Rubio, Sarah Palin, Chris Christie, Rudy Giuliani, and Paul Ryan, for example. The difference in bench strength between the two parties is like night and day.

This is not a new problem for Democrats. Although they have managed to win presidential elections over the past few decades there is usually something off kilter with their candidates. For example, there is something a bit weird about Jimmy Carter, Bill Clinton, Al Gore, John Kerry, Howard Dean, John Edwards, and Barack Obama. They are not what most people would consider normal. Each in his own way has at least a borderline personality disorder. All of them have difficulty being up front and honest about who they are and about their true objectives.

Now contrast those Democrats to Ronald Reagan, Gerald Ford, Bush 41, Bob Dole, and Bush 43. There is a genuineness about most all the leaders of the Republican Party. They tend to be people who are comfortable in their own skins.

John Edwards was John Kerry’s running mate in the 2004 presidential election. It would be hard now to find a Democrat who would say anything positive about Edwards. He was obviously an extremely flawed choice and most non-Democrats could see that from the outset. Howard Dean had significant support in the 2004 Democrat primaries until his “I have a scream” speech, and it became obvious that the guy is not all there. Nevertheless, Dean was later appointed head of the Democratic National Committee and served in that capacity for four years. Anthony Weiner was a popular rising star in the party until some Internet missteps revealed his serious character flaws.

Why do the Democrats have a propensity to support weirdos? What is it about the Democrat party that prevents normal, well-adjusted people from rising to the top of the party? What does their rogues’ gallery of leaders say about the Democrat base? I don’t have good answers to those questions, but there is obviously something going on and it demonstrates a striking difference between the two parties.

However someone rises to the upper echelons of the Democrat party, the process is not very productive. Whatever kind of farm team they use, it simply isn’t sending many qualified players to the majors.

Democrats love to fall in love with their leaders. Although love is the most wonderful thing in the world, it can be brutal when it comes to judgment. A wise friend of mine once told me, “When love walks in the door, judgment crawls out the window.”

Democrats clearly fell head over heels for Barack Obama. A lot of them have now fallen out of love with him and are scratching their heads wondering, “What were we thinking? This guy is not who we thought he was.” The answer, of course, is that they were not thinking. They were love-struck. Especially when love is new you do not want to hear anything negative about your sweetheart. That might explain why Democrats so often make choices they subsequently regret.

The Democrat dearth of viable leaders is not likely to disappear anytime soon. The Republican Party is certainly not problem-free, but a shortage of strong candidates is not one of them. That should give them a valuable advantage for years to come.

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◼ The Democrats’ Chronic Leadership Shortage September 15, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

The Liberals’ Reality Problem

A basic problem for liberals is their rejection of and discomfort with reality. That attitude, unfortunately, creates a number of problems for them as well as for the rest of us.

There is, for example, much about human nature that bothers liberals. They do not like the fact that self-interest is the prime motivator in human decision making. This is at the root of why they speak so disdainfully of profits. The profit motive makes them cringe. For liberals “profits” is a four letter word. They would prefer people to be motivated strictly by charitable impulses and altruism. Rather than recognizing that being motivated by self-interest is a necessary survival tool, liberals conflate self-interest with greed and then blame greed for many of society’s ills.

Part of the genius of Adam Smith was his non-judgmental acceptance of human nature. He recognized that self-interest is the primary motivator in human behavior. Rather than wasting his time denying or lamenting that, he explained how a market economy does the best job of bridling that force and can actually lead to beneficial outcomes for society in general. He wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

There are a number of features of a market economy liberals do not like, and they do everything they can to suppress or eliminate them. In their minds a market economy leads to an unacceptable level of inequality. In a market economy, some people get extremely wealthy. Liberals simply cannot abide that. It irritates them beyond belief. Because it results in an unequal distribution of wealth, liberals are willing to essentially scuttle the entire market economy. Their attitude is essentially, “Stop the economy! I want to get off.”

A critical component of the market is competition. Competition results in winners and losers, but liberals don’t want anyone to lose. Of course, competition isn’t unique to the market; it occurs almost everywhere and bestows profound benefits. Competition is quite literally a fact of life. As Darwin made clear, it’s a key component in the process of evolution. The late economist George Stigler called competition “the patron saint of consumers.” It’s difficult, perhaps impossible, to like reality if you don’t like competition.

Because intentions govern their policies, liberals show no interest in looking at evidence. Their denial and disregard of evidence is another reflection of their dislike of reality. Evidence is about reality; intentions are about fantasizing and self-indulgence.

Another clear example of the liberal rejection of reality is their absolute dislike of budgets. Budgets are one of the clearest instances where reality meets the road. Living within a budget is a form of living in reality. Liberal Democrats in Washington and various state capitals do everything they can to delay passing budgets or living within them once they’re passed. Deficits as far as the eye can see are the unfortunate result.

Humanity is another part of reality that liberals aren’t particularly happy about. They’re convinced that humans should be far less plentiful. In terms of global population, the smaller the better. Many of them feel that in most instances an abortion is preferable to a live birth. A variation of liberalism is environmentalism. Environmentalists consider humans to be much more a curse than a blessing.

The problem with the liberal dislike of reality is how it’s affecting the rest of us. If you don’t like reality one response is to deny that it exists. Denial is a frequent cause of individual and societal problems. From a practical standpoint, this means behaving as if consequences don’t exist or don’t matter. We will be dealing with the damage done by their ill-considered good intentions for many years to come.

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◼ The Liberals’ Reality Problem August 23, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Why President Obama Is Painful to Watch

If someone looked at your face while watching President Obama make a speech or hold a press conference, I’ll bet it would reflect pain and discomfort. Your facial expression might be described as a grimace. There are a number of reasons for that kind of reaction. It might not even matter whether you are liberal or conservative. There is much about Mr. Obama’s style and content that repels rather than attracts.

For example, the man is tiresomely repetitive. How many times has he used the terms “millionaires and billionaires,” “shared sacrifice,” and “corporate jet owners”? He gives new meaning to the term ad nauseam. Most of what he repeats wasn’t worth saying the first time. You’re left wondering, “Is that all you’ve got?”

Saying the same thing over and over makes you totally predictable and uninteresting. Mr. Obama has become tedious and boring.

How many times has he told us that creating jobs is going to be his number one priority? Has it ever happened? His “credibility gap” is growing wider than LBJ’s.

A particularly annoying aspect of Mr. Obama’s personality is that he has virtually no sense of humor. There are very good reasons why humor is categorized as a “sense.” Humor is akin to a sense of taste or sense of balance. Individuals vary widely in regard to these characteristics. Successful comedians have inherent and highly developed senses of what’s funny and what’s not. They are “naturals.” Of course, there are people on the other end of the spectrum, such as Mr. Obama.

It’s painful when people with no sense of humor attempt to be funny. Mr. Obama frequently makes lame attempts at being funny, and people in the room usually laugh, particularly members of the press. If you listen, however, what you hear is an uncomfortable, polite, and brief kind of laugh.

Mr. Obama makes use of awkward and unusual figures of speech. One glaring example that I’ve never figured out is the title of his second book, The Audacity of Hope. I realize it is a phrase he took from his mentor and long-time pastor, Jeremiah Wright. Wherever it came from, what in the world does it mean? It is typical of most of what Mr. Obama says. I suppose that it was meant to sound profound, but if you think about it, it’s anything but.

In the midst of the health care debate Mr. Obama said, “There’s something about August going into September where everybody in Washington get’s all wee-weed up. I don’t know what it is, but that’s what happens.” So far as anyone could determine, no one had ever used the term “all wee-weed up” previously. Later the White House explained that it meant wetting the bed. That still doesn’t make any sense. Let’s just say, the man is not a great communicator. Articulate he is not.

Recently in the debt limit negotiations Mr. Obama warned the Republicans, “don’t call my bluff.” That’s just weird. Anyone with half a brain knows that a basic requirement of a bluff is that you don’t let it be known that you’re bluffing. Admitting that you’re bluffing cancels its effect. If you admit that you’re bluffing, you are sure to be called on it.

Mr. Obama is often cloyingly folksy. One obvious example is his insincere and frequent use of the word “folks.” A similar lame attempt at sounding like a down-home good-old-boy is the dropping of the g in words like going, doing, etc. It just makes him sound phony. Mr. Obama is attempting to act a part, but he’s not a very good actor. Watching bad acting is no fun.

The odds are looking better all the time that Mr. Obama will be a one-term president. There’s a good chance we will only be burdened with his tiresome style for another eighteen months.

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◼ Why President Obama Is Painful to Watch August 12, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Fatal Flaws of Keynesian Economics

It’s now clear that the federal government’s massive stimulus spending has not achieved its objectives. Why hasn’t it? It’s important that we have answers to that question.

The stimulus was premised on the economic model known as Keynesianism: the intellectual legacy of the late English economist John Maynard Keynes. Keynesianism doesn’t work, never has worked, and never will work. Without a clear understanding of why Keynesianism cannot work we will be forever doomed to pursuing the impossible.

There’s no real mystery about why Keynesianism fails. There are numerous reasons why and they’ve been known for decades. Keynesians have an unrealistic and unsupportable view of how the economy works and how people make decisions.

Short-Run Focus

Keynesian policy advocates focus primarily on the short run — with no regard for the future implications of current events — and they assume that all economic decision-makers do the same. Consider the following quote by John Maynard Keynes: “But the long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat again.” After passage of the stimulus package, Lawrence Summers, Obama’s chief economic advisor at the time, often said that the spending should be “timely, targeted, and temporary.” Although those sound like desirable objectives, they illustrate the Keynesian focus on the short term. Sure it would be convenient if you could just spend a bunch of money and make the economy get well, but it’s not that simple.

The implication of a Keynesian perspective is that you can hit the economy a few times with a cattle prod and get society back to full employment. Remember that so-called “cash-for-clunkers” program? Maybe it accelerated some new car sales by a month or two, but it had no lasting impact.

The “Chicago School” is the primary source of serious research and analysis related to the Keynesian model. Two Chicago School conclusions, in particular, make it clear where Keynesian policies run aground. The two theories are the “permanent income hypothesis” and the theory of “rational expectations.”

The “permanent income hypothesis” was how Milton Friedman termed the findings of his research on the spending behavior of consumers. The MIT Dictionary of Economics defines the permanent income hypothesis as “The hypothesis that the consumption of the individual (or household) depends on his (or its) permanent income. Permanent income may be thought of as the income an individual expects to derive from his work and holdings of wealth during his lifetime.”

Whether consumers and investors focus mostly on the short run or the long run is basically an “empirical question.” A convincing theoretical case can be made either way. To find out which focus actually conforms closer to reality, you have to gather evidence.

Not Evidence-Based

Much of the difference between the two schools of thought can be explained by differences in their methodologies. Keynes was not known for his research or empirical efforts. Keynesianism is definitely not an evidence-based model of how the economy works. So far as I know, Keynes did no empirical studies. Friedman was a far more diligent researcher and data collector than was Keynes. Friedman fit the theory to the data, rather than vice versa.

The Keynesian disregard for evidence is reflected in their advocacy for more stimulus spending even in the face of the obvious failure of the what’s already been spent. At a minimum, we are due an explanation of why it hasn’t worked. (Don’t expect that to be forthcoming, however).

Failure to Consider Incentives

Another of the Chicago School’s broadsides against Keynesianism is the theory of “rational expectations.” It’s a theory for which the 1995 Nobel Prize for Economics was awarded to Robert Lucas of the University of Chicago. As economic theories go, it is relatively straightforward. It essentially states that “individuals use all the available and relevant information when taking a view about the future.” (MIT Dictionary of Modern Economics) The rational expectations hypothesis is the simple assertion that individuals take into account their best guesses about the future when they make decisions. That seemingly simple concept has profound implications.

The Chicago School’s research led them to conclude that individuals are relatively deliberate and sophisticated in how they make economic choices. Keynesians and their liberal followers apparently think individuals are short-sighted and simple-minded.

An elemental but too often overlooked reality about our economy is that it is based on voluntary exchange. Voluntary exchange is an even more fundamental feature of our economy than is the market. A market is any arrangement that brings buyers and sellers together. In other words, the primary purpose of a market is to make voluntary exchange possible.

Voluntary exchange leaves large amounts of control in the hands of private individuals and businesses. The market relies on carrots rather than sticks, rewards rather than punishment. The actors, therefore, need to be induced to move in certain desired directions rather than simply commanded to do so. This is the basic reason why incentives are such an important part of economics. If not for voluntary exchange, incentives wouldn’t much matter.

In designing economic policy in the context of a market economy it becomes important to take into account what actually motivates people and how they make choices. If you want to change behavior in a voluntary exchange economy, you have to change incentives. Keynesian policies do not take that essential step.

The federal government’s share of GDP has gone from 19 percent to 24 percent during Obama’s time in the White House. A larger government share of GDP ultimately necessitates higher taxes or more debt. In and of themselves, higher taxes retard economic growth because of their impact on incentives. The disincentive effect of higher taxes illustrates why big government is far costlier than it first appears.

It’s no accident that Keynesianism is so popular with liberals. It blends well with their unquenchable thirst for expansive government. It doesn’t work for the economy but it works for them. The obvious failure of Keynesianism is further evidence of the bankruptcy of liberalism.

Keynesianism is essentially all the Democrats have. It’s a one-trick pony. That one trick hasn’t worked and now Dems are floundering with nothing more to offer.

All but one member of the president’s original economic team has exited. According to liberal columnist Ezra Klein, “Lawrence Summers and Christina Romer were two of the most influential Keynesians in the country. Obama didn’t just have a team of Keynesians. He had a Keynesian all-star team.”

Now the president has a Keynesian all-gone team. It will be a brighter day for the country when Keynesianism itself is gone for good.

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◼ Fatal Flaws of Keynesian Economics July 22, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Two Different Worlds: The Public and Private Sectors

Most everyone realizes there are differences between the economy’s public and private sectors. However, they may not appreciate just how great the difference is.

We have an ongoing debate about the size of government, and by implication the size of the private sector. When choices are made about what responsibilities and functions to assign to the government, a crucial consideration should be the relative competencies of the private vs. the public sectors.

Consider, for example, differences in how the two sectors take advantage of advances in technology. In the private sector old products become better and cheaper, and new products flow with increasing frequency.

My 2009 car is the same make and body style of a 1990 one I owned years ago. It is significantly better in every way — more powerful, 25 percent better gas mileage, better brakes, more safety features, better handling, and more fun. The application of numerous breakthroughs in technology would be too numerous to count. The inflation-adjusted sticker price has actually declined. I have seen similar improvements in virtually every consumer product I buy and use.

The private sector’s products all around us — food, shelter, clothing, automobiles, home appliances, entertainment, for example. The public sector’s products include defense, the justice system, roads and highways, public schools, income redistribution (welfare), laws, and regulations.

Many of the government sector’s outputs are more like anti-products than products. Regulations stifle innovation, decrease productivity, increase costs, and generally drive people crazy. Rather than wealth creation, regulations result in wealth prevention.

In the private sector virtually every product and every service has been profoundly affected by the technological revolution. The government sector, on the other hand, seems to have no learning mechanism. The private sector is responsive and dynamic; the public sector is almost catatonic. In the private sector new products are introduced at a dizzying rate of speed.

The private sector provides ideal growing conditions for creativity. A striking example of this is the explosion of “apps” (applications) for “smart phones.” (A smart phone is a cell phone that connects to the internet.) The two leading providers of apps are Apple and Google. The current population of available apps is over 350,000 and still growing. Many of the apps are free or cost only one or two dollars.

What these apps can do for you is absolutely mind boggling. The proliferation of the apps is a dramatic example of R.W. Emerson’s observation, “Invention breeds invention.” The apps’ universe has provided creative opportunities for thousands of widely dispersed innovators and entrepreneurs. Hundreds of thousands of innovative people are diligently “finding a need and filling it.”

The government sector is “so yesterday.” Is there any example of technology noticeably increasing the efficiency of government? Does government productivity ever increase? We have expended trillions of dollars on the “war on poverty” and the incidence of poverty is as basically unchanged. Public schools consume a large fraction of state and local budgets. Public schools have grown progressively more dysfunctional over the past several decades.

One of the public “products” most of us are forced to “consume” is the Internal Revenue Code. During the almost hundred years of its existence its efficiency has consistently grown worse. Its birth coincided with that of the Model T Ford. Automobiles are vastly superior to those of the early 20th century, the IRC has evolved backwards. In terms of resources consumed and the burden on the economy, the costs of collecting a dollar of revenue has increased dramatically over the life span of the Internal Revenue Service. The Model T is a museum piece. The IRC should be.

The relative shares and importance of the public and private sectors are only partially a political decision. It isn’t simply about spending money and passing new laws and regulations. The public sector is certainly doing enough of that.

There is in effect an undeclared race between the public and private sectors in regard to satisfying human wants. Who’s winning that race? Which sector is doing a better job of affecting peoples’ lives in a positive way? In fulfilling human wants the private sector is leaving the public sector in the dust. People get more and more value from the private sector and the same or less value from government activity even though the cost of government has increased at an exponential rate.

Why is there so much difference in how the two sectors function? Two important reasons are incentives and competition.

The University of Rochester economist, Steven Landsburg, says, “Most of economics can be summarized in four words: ‘People respond to incentives.’ The rest is commentary.” Although I think that’s an exaggeration, there is much truth in it. The private sector is vastly more effective and efficient than the government mostly because of the differences in the incentive structures. In the private sector you can get rich filling needs and solving problems. The public sector’s incentive structure is totally dysfunctional.

In a competitive environment, innovation, efficiency, and product improvement become matters of survival. Apple and Microsoft spend billions of dollars annually on research and development. They spend those vast amounts more out of necessity than choice. If they did not they would fall behind and lose market share.

President Obama complained recently about the White House’s obsolete phone system. He said that the White House phones are “30 years behind,” and “we can’t get our phones to work.” He said that he was disappointed by the lack of “really cool phones and stuff.” Does he ever wonder why this happens? I doubt that he does. I’m pretty sure no major corporation has an obsolete phone system.

Mr. Obama’s campaign themes were “hope and change.” Ironically, he is intent on increasing the role of government, the entity most resistant to and even incapable of change and innovation, and there is little reason to hope that will change any time soon.

In light of the stark difference in the effectiveness and competence between the private and public sectors, it totally mystifies me that any sentient person would want to transfer more power and money to the government.

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◼ Two Different Worlds: The Public and Private Sectors June 1, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.