Category: Economics

Blog author: jcarter
Tuesday, February 23, 2016

Here on the Acton PowerBlog we talk a lot about crony capitalism. But what exactly does the term mean? And why is it so bad?

In this short video from Prager University, Jay Cost, a staff writer at The Weekly Standard, explains what it is, why it’s wrong, and proposes a solution that every society could benefit from.


See also: What Christians Should Know About Crony Capitalism

sanderstrumpImagine that a presidential candidate promised to raise taxes on everyone. Under the new proposal, both the wealthy and middle classes would pay more. But as a percentage of a person’s income, the tax increase would disproportionately affect the poor and working class.

Now imagine that when many blue collar and working poor hear about this tax proposal they have a strange reaction: they cheer and consider it one of the primary reasons to support the candidate. They believe this deeply regressive tax that takes a large portion of their weekly paycheck is just what the American economy needs.

While this scenario may seem too absurd even for the bizarre 2016 election, it is actually happening. In fact, such a proposal has been made by both Bernie Sander and Donald Trump.

The continent of Africa has so much space that you could fit most of the United States, China, India, and a lot of Europe onto it. But if you compare Africa to Europe, Europe has two to three times the length of coastline that Africa has.

Why does that matter? Because, as this fascinating video by Marginal Revolution University explains, coasts mean access to water which makes trade easier and increases economic growth.

As the video explains, economic growth is not only affected by a country’s rules and institutions, but by a country’s natural blessings and natural hindrances.

The headline at CNN was surprising: “Under Sanders, income and jobs would soar, economist says”; the opening paragraph of their article even more so:

Median income would soar by more than $22,000. Nearly 26 million jobs would be created. The unemployment rate would fall to 3.8%.

Those are just a few of the things that would happen if Bernie Sanders became president and his ambitious economic program were put into effect, according to an analysis given exclusively to CNNMoney. The first comprehensive look at the impact of all of Sanders’ spending and tax proposals on the economy was done by Gerald Friedman, a University of Massachusetts Amherst economics professor.

Like Sanders, Friedman believes in democratic socialism. He also believes an unlikely series of events could happen: Sanders becomes president (very unlikely), President Sanders is able to push his plan through a GOP-controlled Congress (politically impossible), and then median household income magically rises to $82,200 by 2026 (the current projection by the Congressional Budget Office is that it’ll be around $59,300).

You would expect Republicans and conservatives to mock this type of wishful thinking. But some of the strongest criticism has come from a seemingly unlikely source: liberal economists who once chaired the President’s Council of Economic Advisers.

Alan Krueger of Princeton University, Austan Goolsbee of the University of Chicago Booth School, and Christina Romer of the University of California at Berkeley all chaired President Obama’s Council of Economic Advisers at different times during his administration, while Laura D’Andrea Tyson of the University of California’s Haas School of Business was the chair under President Clinton. The four published a rather scathing open letter to both Sanders and Friedman. Here is the full text of the letter:

“The twin tracks of work and wage do not meet, and cannot be scientifically related. They are bridged by morality, not by mathematics.” -Lester DeKoster

executiveLow-wage workers continue to picket and protest around the country, demanding an increased minimum wage, improved access to benefits, and better working conditions. The political rhetoric has followed accordingly, with Bernie Sanders calling for an increase in the minimum wage to $15 per hour, and Hillary Clinton arguing for $12 (due to differing magic potions, no doubt). Simultaneously, widespread angst over “excessive” executive compensation continues to fester.

But alas, prices are not play things, and we do society no favors by trying to distort market signals according to our own arbitrary whims (whether $12, $15, $100, or otherwise). Given the history and trajectory of the American economy, we ought not be stuck in the mire of such minimum-mindedness, seeking to control and micro-manage our way to peace and prosperity through top-down mechanistic means. The path to prosperity is one of creation and contribution, planted with seeds of service and opportunity, where new wealth is a natural byproduct of access to the pond.

Yet throughout all this, “market signals” are simply signals, the discernment of which requires human conscience before and after and throughout. When we think about the intersection of work and wages, “listening to the market” is not where it stops, as critics of the free market wrongly assume. The baseline of actual prices in a complex economy is where things begin, and the Christian wage-setter must be careful and attentive to how things ought to proceed.

In Work: The Meaning of Your Life, Lester DeKoster explores these “twin tracks” of work and wage, noting that the proper bridge will not be built by arbitrary government edict, but by the art of “executive stewardship,” driven by God-given responsibility and God-directed conscience. “Work and wage draw together at the point where conscience functions,” he writes, “that is to say, work and wage tracks coalesce in persons making executive decisions.” When we inhibit the freedom of the human conscience, an inhibition of the economic order is sure to follow.

DeKoster devotes an entire chapter to this topic, an excerpt of which is available at the Oikonomia blog. Those who set wages have an “awesome obligation,” DeKoster writes, and their conscience must balance a host of factors, all pushing toward a variety of goals, including (1) the best product, (2) the best working conditions, (3) the best wage for everyone involved, and (4) “reflecting the best efforts at every job, to be sold at the lowest price compatible with the requirements.” In balancing all of this, the executive also heeds transcendent signals, whether through ethics or spiritual discernment. (more…)

Rich-Businessman-Lighting-Cigar-With-100-Dollar-Bill-ShutterstockMichael Bloomberg and Donald Trump are both businessmen, both are politicians, and both are billionaires. Obviously, then, they must know a lot about economics, right?

Not necessarily. As Don Boudreaux — a man who does know a lot about economics — correctly points out, success at business does not imply knowledge of economics:

Knowing how to run a business is not the same thing as knowing economics.  To assume that the two domains of knowledge and expertise are the same is an error equivalent to assuming that a successful NASCAR driver is thereby an expert automotive engineer.  Of course, it’s possible for a successful NASCAR driver to know something about automotive engineering, just as it’s possible for a successful business person to know something about economics.  But success at each of the former tasks (driving a race car and managing a business) is not the same thing as, and requires very little familiarity with, the latter domains of knowledge (automotive engineering and economics).

Strong evidence – indeed, virtual proof – that knowing how to run a business successfully does not imply knowledge of economics is supplied by the great economics-policy differences that separate successful business people.  Charles Koch, for example, is a far more successful business person than is Donald Trump, yet Mr. Koch’s understanding of economics differs markedly from Mr. Trump’s.  If success at business were a sufficient indicator of deep and expert knowledge of economics, it would be nearly impossible to explain the deep differences that separate Mr. Koch’s professed understanding of economics from Mr. Trump’s professed understanding of economics.

I would go even further than Boudreaux and say that being a successful businessperson doesn’t even mean that a person knows much about business. Of course there are some business people who, if they had to start over from scratch, could become successful again. But many more — perhaps even the majority — achieved their status because they relied on variables, ranging from ideal market conditions to just plain dumb luck, that cannot be replicated.

This is also why businesspeople rarely make effective politicians: they tend to overestimate their knowledge of macroeconomics and end up falling for dumb economic policies (e.g., trade protectionism).

drug-pricesIf you suffer from acid reflux, your doctor may prescribe Nexium. But at $9 a pill, the price is enough to give you a worse case of heartburn.

That’s the price in the U.S. If you live in Canada, though, you can get the drug for less than a $1 a pill.

This price disparity leads many politicians to think the solution is obvious: Americans should just buy drugs from Canada or other countries where they are cheaper.

Amy Klobuchar (D-Minn.) and John McCain (R-Az.) have twice introduced legislation to allow Americans to order up to a 90-day supply of medicines from a licensed Canadian pharmacy. And Hillary Clinton and Bernie Sanders have made importing drugs from Canada part of their platform for reducing the cost of healthcare.

If this seems too easy, it’s because it’s an economically ignorant idea. Writing in the Harvard Business Review, Rafi Mohammed explains why this strategy won’t work: