Thursday, July 23, 2009

Adam Smith explains government run health care

From The Wealth of nations, 1776

The trade of a joint stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of those proprietors seldom pretend to understand any thing of the business of the company; . . . give themselves no trouble about it, but receive contentedly such half year or yearly dividend, as the directors think proper to make to them. This total exemption from trouble and from risk, . . encourages many people to become adventurers . . . who would, upon no account, hazard their fortunes in any private company.

The directors of such companies, however, being the managers rather of other people╩╣s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. . . Negligence and profusion therefore, must always prevail, more or less, in the management of the affairs of such a company.

Wednesday, July 22, 2009

Government health care: The effects of price controls

From Practical Economics

Price controls give government a more dominant role in the operation of the economy. The premise behind price controls is to either place a cap, or top price, a producer can charge for their product thus protecting the consumer, or place a minimum price consumers have to pay for a product thus helping the producer. In each and every case, price controls seem to offer valid solutions to market realities that seem troubling. Unfortunately, the good intentions of price controls create the opposite of the desired results.

Price controls are simply a game of economic slight-of-hand where costs are shifted to unsuspecting victims. Thomas Sowell said:
Misconceptions about the economic function of prices lead not only to price controls, with all their counterproductive consequences, but also to organized attempts by various institutions, laws and policies to get those prices paid by somebody else. For society as a whole, there is no somebody else. Yet few of those in politics seem prepared to face the fact. Economists may say that there is no such thing as a free lunch but politicians get elected by promising free lunches.

The following is a list of problems that arise by placing price controls in the market. As you will see, all of the ramifications of price controls create inefficiencies, lower the standard of living and inhibit economic growth.

-Create shortages and surpluses of goods
-Lower the quality of products

-Remove the incentives to be productive
-Worsen the problems that gave rise to the price control policy in the first place
-Expanded bureaucracy
-Lose individual economic freedom
-Increase economic engineering by government decree
-Decrease voluntary exchange
-Decrease efficiency

-Slows economic growth
-Fail to economize scarce resources
-Create powerful incentives that persuade normally law abiding people to break the law by forming black markets
-The ineffectiveness of the control will result
in calls for even tougher controls

Tuesday, July 21, 2009

Class warfare

From Practical Economics

The art of government or politics must be factored into the incentives and behaviors of politicians. Class warfare is the tool of choice used to promote the ideology of income redistribution. By pitting one social group against another, politicians divide and conquer not only a peoples unity but also their wealth. Instead of creating a community of purpose and shared economic understandings, politicians tell the poor or the "have-nots"they are looking out for their concerns against the greedy and wealthy "haves."

At the same time, guilt is either self-inflicted or placed on the part of the wealthy that further promotes the rift. By playing on the less fortunates sense of emotions, unfairness, and entitlement, a symbolic divide is created so the politician can extort votes based on the very warfare they created. Sadly, none of this has anything to do with economic efficiency and everything to do with power, control, and utopian visions of social engineering.

A quote often attributed to Alexander Fraser Tytler, sums up the dangers of class warfare. "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy followed by dictatorship."

Thursday, July 16, 2009

How much do American's make?

From Practical Economics

According to the table below, 91.669% of Americans make less than $100,000 a year. Only 1.856% makes over $200,000 a year. Only 13/100ths of 1% (.13%) earn over $1,000,000 a year.

Gross income # of Americans % of population

$0 - $50,000 92,594,960 71.185%

$50,000 - $75,000 17,396,916 13.374%

$75,000 - $100,000 9,247,839 7.110%

$100,000 - $200,000 8,422,603 6.475%

$200,000 - $500,000 1,908,466 1.467%

$500,000 - $1,000,000 336,684 0.259%

$1,000,000 - $1,500,000 78,121 0.060%

$1,500,000 - $2,000,000 31,316 0.024%

$2,000,000 - $5,000,000 44,205 0.034%

$5,000,000 - $10,000,000 10,026 0.008%

$10,000,000+ 5,309 0.004%

Source: Glen Lipka; 2002 IRS Income Tax Statistics.

Laissez faire in America?

From Practical Economics

Adam Smith is remembered for promoting the concept of laissez faire. This is a French term used when describing government actions over a market economy. Laissez faire literally is defined as "let do" but its applied meaning is 'let (it) be" or take a hands-off approach and allow the market economy to function without government interference in its industry or business.

This pure form of capitalism is the most beneficial because the free flow of economic decisions creates the greatest degree of efficiency. Anything that interferes with freedom in economic affairs, like the government commanding the economy, will retard the system overall and inhibit growth.

Some will argue the U.S. economy functions under laissez faire principles but Walter Williams, the John M. Olin Distinguished Professor of Economics at George Mason University points out, "There are 15 cabinet departments, nine of which control various aspects of the U.S. economy. They are the Departments of: Transportation, Housing and Urban Development, Health and Human Services, Education, Energy, Labor, Agriculture, Commerce, and Interior. In addition, there is the alphabet soup cluster of federal agencies such as: the IRS, the FRB and FDIC, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA."

This alphabet soup of government involvement in the American economy would make Adam Smith‘s head spin like a top as he rolls over in his grave. The important role of government in the economy will be discussed in chapter 19, but the idea that free markets need to actually function free of outside mandates and commands should seem painfully obvious at this point

Wednesday, July 15, 2009

Economic quote to note

A Fool can put on his coat better than a wise man can put it on for him.-proverb

Monday, July 13, 2009

How much does the government need?

Taxation to pay for government is a necessity; the key question is: how much is enough?

U.S. federal spending as a percentage of GDP A look at historical trends offers some answers to the question of how much taxation is sufficient for government to accomplish its necessary functions efficiently. Research has shown that for America‘s first 130 years, federal spending as a percentage of GDP averaged around 2.5%. Since 1915, or for the next 75 years, spending consistently rose as a percentage of GDP and averaged around 16.6%. Current spending is approximately 19% of GDP.

Year Government spending as a percentage of GDP

1787-1849 1.7%* (63 year period)
1850-1900 3.1%* (51 year period)
1901 2.5%
1905 2.1%
1910 2.2%
1915 2.0%
1920 7.3%
1925 3.3%
1930 3.4%
1932 6.9%
1933 8.0%
1934 10.7%
1935 9.2%
1939 10.3%
1941 12.0%
1944 43.6%
1945 41.5%
1947 14.8%
1948 11.6%
1950 15.6%
1955 17.3%
1960 17.8%
1965 17.2%
1967 19.6%
1970 19.3%
1975 21.3%
1980 21.7%
1985 22.9%
1990 21.8%
1995 20.7%
2000 18.4%
2003 19.9%
2008 21.0%
2009 28-31% estimated
2050 38% estimated
2075 40% estimated

* Total combined federal spending as a % of total combined GDP
Sources: Historical Tables. ―Budget of the United States Government.‖ fiscal year 2006. Johnson, Louis D. ―Source note for US GDP, 1790-Present.‖ Economic History Services (1997) Congressional Budget Office, Long range fiscal policy brief, July 3, 2002

Monday, July 6, 2009


From Practical Economics

Before we can understand economics with any degree of expertise, there needs to be agreement that:

 We live on an Earth that is finite and limited.
 Humans are not perfectible and have insatiable desires as a part of their nature.

Putting these two factors together, basic reasoning tells us that:

 Since we live with scarcity we can‘t meet every desire.
 We will have to make choices; taking into consideration trade-offs or costs in making decisions.

The choices that are made will either increase or decrease our efficiency to the betterment or detriment of the entire society. The quest is to increase the number of desires reached while decreasing the resources used to reach them as effectively as possible.

When scarcity is ignored in the decision making process, ideals that can only come true in a world of unlimited abundance are embraced without the worry of the devastating affects of such utopian dreams. In other words, acting upon what might sound like a glorious and noble idea can, and often does, have the opposite affect on the health and standard of living for everyone.

Because of scarcity, we can only hope for a best case scenario between a myriad of choices, each having an associated cost. Wasting time with theoretical "what ifs" may make those with the time to fantasize about perfection smug, but it does little to raise the standard of living and quality of life for everyone