Posts tagged with: economics

Blog author: jcouretas
posted by on Thursday, August 25, 2011

“More and more, I find Catholics dividing themselves into capitalist and distributist camps,” writes Bernardo Aparicio García, president of the Catholic journal Dappled Things. To help readers establish “a firm foundation” for thinking about economic questions, García opened up the pages of his journal to Robert T. Miller, for capitalism, and John C. Médaille, for distributism. The result is a lengthy exchange “On Truth and Trade: Economics and the Catholic Vision of the Good Life.”

Miller is a professor of law at the Villanova University School of Law and writes for First Things. Médaille is an adjunct instructor of Theology at the University of Dallas, and a businessman in Irving, Texas. He writes for the Distributist Review. Here are some snippets from the debate:

Miller:

… I will defend a more modest proposition, namely, that, for people like us in a society like ours, capitalism is the most reasonable choice among the various economic systems we might adopt. To defend this more modest proposition, I start with some deep assumptions about human life.

Among these, the deepest is that human beings, being physical beings, have material needs and so must organize the world’s material resources to meet them. Another deep assumption is that even modestly complex manipulations of material resources—let alone sophisticated projects like building transcontinental railroads, designing computers and their software, or refining petroleum products—require the cooperation of very large numbers of human beings. This point is vastly under-appreciated. In 1958 Leonard Read famously estimated that the number of human beings involved in producing an ordinary wooden pencil from raw materials to final product exceeds one million; nowadays, in a more complex economy, that’s probably a gross underestimate. Yet another assumption is that information about the various possible uses of resources is difficult to obtain and analyze and, moreover, changes very rapidly.

From a moral point of view, what we want from an economic system is that it generate and distribute resources in a way that maximizes the long-run probability that all members of society have enough goods and services to lead decent lives. One way to do this would be to appoint a central body authorized to allocate resources and charged with responsibility to ensure that everyone receives a fair share. This is socialism, and it has proved a very poor solution to the economic problem. There are two main reasons for this. The first concerns information: the central authority cannot acquire enough reliable information, much less process it fast enough, to allocate resources efficiently. This results in tremendous waste. Thus, in the former Soviet Union, warehouses full of unneeded machine parts sat and rusted while consumers found no toilet paper on the store shelves.

Médaille:

Clearly, the standard model of economics has failed us. Not only has it failed to bring a stable economic order, but it has destabilized the family and the community as well, and grown the government past any reasonable bounds. Clearly, a different model is needed. Note that I said “different” rather than “new.” It is not a question of inventing new systems, but of examining existing systems to see what works and what doesn’t. Economics—or rather political economy—is preeminently a practical science. We need to find out what works, and adapt it to our own circumstances. Inventing models is easy; getting them to work is hard. And if a system has no existing implementations, we are permitted to assume that it can’t be implemented. So, can we find a system on the ground and working that will address our questions of political economy?

I believe we can, and that system is distributism. This system seeks to restore distributive justice to its proper place in the economic order; its main tenet is that without a proper distribution of the rewards of production, markets cannot be cleared, family life will be disturbed, and the markets will become more dependent on government and consumer finance to clear.

Now the major difference between distributism and conventional economics has to do with property and a just wage; that is, with the things the Catholic Church teaches as essential to economic order. Standard economics justifies the wage on the basis of “free contract,” that is, if there is no government coercion which forces someone to accept a given wage, then the wage must be considered “just.” Further, through free bargaining, both sides, capital and labor, will get what they actually produce and productivity will be properly rewarded.

Also see Beyond Distributism by Thomas E. Woods Jr., available in the Acton Bookshoppe.

Blog author: kspence
posted by on Wednesday, August 24, 2011

Director of Research Samuel Gregg has a piece in Public Discourse today as part of a series on the 2012 presidential election. “Fix America’s Economy: Two Principles for Reform” explains why limited government is better government, and how the principle of subsidiarity can guide regulation that governments undertake. From the essay:

The economist Arthur Brooks is exactly right when he notes that the end-game of America’s free enterprise culture is not the endless acquisition of wealth. The goal is human flourishing.

In much of Europe, a contrary attitude has long been characteristic of its economic culture: that if people are to lead fulfilling lives, they need to be given things and protected from risk. In policy and institutional terms, this translates squarely into the European social model, which is presently collapsing before our very eyes throughout the Old Continent.

Ironically, however, there is a scarcity of evidence that such policies actually help make people happy. Why? Because people who are always given things know that they have not earned what they have. As evidence, Brooks points to studies that underscore correlations between unearned income and dissatisfaction with life. These illustrate, for example, that welfare recipients are generally less happy than those who earn the same income through employment.

Still, there is a need for governmental regulation of free economic activity—for exceptions to the rule of non-intervention:

But how do we prevent the exceptions from becoming the rule and thus a rationalization for endless economic intervention by the government? Part of the answer lies in a second principle: the much-misunderstood idea of subsidiarity.

Subsidiarity may be summarized in the idea that “higher” organizations (such as governments) should normally not directly intervene in the life of “lower” communities (such as families, businesses, and churches).  Intervention by higher bodies is permitted, however, when (1) a “lower” community has proved itself manifestly incapable of addressing problems that properly fall within its sphere of responsibility; and (2) other communities closer to the problem are unable to resolve the difficulty.

Subsidiarity consequently tells us that in normal circumstances, the function of child-raising is properly performed by families. It also tells us that when a family proves incapable of addressing particular problems associated with child-raising, non-governmental actors such as churches should usually be the first to render assistance.

As Gregg writes in his conclusion, because the principles of economic freedom and subsidiarity both stem from our human nature, successful government cannot ignore them.

If the economy features as the biggest single issue in the 2012 election, defenders of the market should be willing to supplement empirical economic arguments with full-bodied contentions about the nature of human happiness and how we realize it. To do so would not only be consistent with the very best of the American Founders’ vision; it would also breathe new life into America’s great and ongoing experiment of ordered liberty.

Blog author: kjayabalan
posted by on Wednesday, August 24, 2011

Noted NYU law professor and free-market advocate Richard Epstein has written a provocative piece titled “How is Warren Buffett like the Pope? They are both dead wrong on economics.” Here’s the money quote:

The great advantage of competition in markets is that it exhausts all gains from trade, which thus allows individuals to attain higher levels of welfare. These win/win propositions may not reach the perfect endpoint, but they will avoid the woes that are now consuming once prosperous economies. Understanding the win/win concept would have taken the Pope away from his false condemnation of markets. It might have led him to examine more closely Spain’s profligate policies, where high guaranteed public benefits and extensive workplace regulation have led to an unholy mix of soaring public debt and an unemployment rate of 20 percent. It is a tragic irony that papal economics mimic those of the Church’s socialist opponents. The Pope’s powerful but misdirected words will only complicate the task of meaningful fiscal and regulatory reform in Spain and the rest of Europe. False claims for social justice come at a very high price.

I blogged about Pope Benedict’s comments last week, and while I don’t disagree with Epstein’s main point, I wonder if he actually means to deny the importance of ethics in economics. The Pope wasn’t saying that there should be no fiscal or regulatory reform, but that such reform must consider future, and not merely present, well-being, which is actually the impetus for policies such as liberalizing labor markets. And unlike Warren Buffett, the Pope wasn’t calling for higher taxes on the rich.

In short, the Pope was making a larger ethical argument that can certainly include the much-needed reforms Epstein cites. Since the Pope isn’t an economist and doesn’t pretend to be one, we should listen to his moral teachings and try to incorporate them with sound economics, rather than disparage them as economically damaging. It is true that while Catholic social teaching stresses the importance and necessity of profits, far too many Catholic and other religious leaders neglect how profits are actually made and distributed – which Epstein briefly and usefully describes – and in this sense, it is far too easy for moralists to pit profits versus people. It would make more sense to try to relate how profit maximization can and often does contribute to the common good, but it can’t do so without ethical men and women who won’t lie, cheat and steal.

I’d like to think that both the Pope and Richard Epstein are right.

Blog author: jcouretas
posted by on Wednesday, August 10, 2011

My contribution to today’s Acton News & Commentary. Sign up for the free weekly Acton email newsletter here.

Protect the Poor, Not Poverty Programs

By John Couretas

One of the disturbing aspects of the liberal/progressive faith campaign known as the Circle of Protection is that its organizers have such little regard – indeed are blind to — the innate freedom of the human person.

Their campaign, which has published “A Statement on Why We Need to Protect Programs for the Poor,” equates the welfare of the “least of these” in American society to the amount of assistance they receive from the government — a bizarre view from a community that trades in spiritual verities. Circle of Protection supporters see people locked into their circumstances, stratified into masses permanently in a one-down position, thrown into a class struggle where the life saving protection of “powerful lobbies” is nowhere to be found. And while they argue that budgets are moral documents, their metrics for this fiscal morality are all in dollars and cents.

Not only does the Circle of Protection group appear to be oblivious to the power of private charity and church-based outreach to the needy, but they seem to have no hope for the poor outside of bureaucratic remedies. This is a view of the human person not as a composite of flesh and spirit, but as a case number, a statistic and a passive victim of the daily challenges and troubles that life brings.

In response to the Circle of Protection campaign, another faith group has formed with a very different outlook on the budget and debt debates that will consume the political energy of the country in the months ahead. Christians for a Sustainable Economy (CASE) argue for policies that are focused less on protecting poverty programs and more on protecting the poor (I am a supporter). In a letter to President Obama, CASE wrote:

We need to protect the poor themselves. Indeed, sometimes we need to protect them from the very programs that ostensibly serve the poor, but actually demean the poor, undermine their family structures and trap them in poverty, dependency and despair for generations. Such programs are unwise, uncompassionate, and unjust.

This is what Fr. Peter-Michael Preble was getting at when he observed that “… the present government programs do nothing but enslave the poor of this country to the programs and do nothing to break the cycle of poverty in this country.” This is not, he added, an argument to eliminate all government assistance but rather for “a safety net and not a lifestyle.”

In discussing the relative merits of the Circle of Protection and the Christians for a Sustainable Economy campaign, Michael Gerson wrote that “the Circle’s approach is more urgent.” Arguing against “disproportionate sacrifices of the most vulnerable,” he asserted that “public spending on poverty and global health programs is a sliver of discretionary spending and essentially irrelevant to America’s long-term debt.”

It’s a big and growing “sliver.” According to a Heritage Foundation study of welfare spending, of the 70-odd means-tested programs run by the federal government, “almost all of them have received generous increases in their funding since President Obama took office.” The president’s 2011 budget will increase spending on welfare programs by 42 percent over President Bush’s last year in office. Analyst Katherine Bradley observed that “total spending on the welfare state (including state spending) will rise to $953 billion in 2011.”

Instead of more billions for failed poverty programs, CASE argues that “all Americans – especially the poor – are best served by sustainable economic policies for a free and flourishing society. When creativity and entrepreneurship are rewarded, the yield is an increase of productivity and generosity.” Underlying this is a belief that the human person is able to freely and creatively anticipate what life may bring, rather than wait around for a caseworker or a Washington lobbyist to intervene.

That freedom explains why some people, even in difficult economic times, can move up the income scale despite assertions that they are among the “most vulnerable.” A U.S. Treasury study showed that “nearly 58 percent of the households that were in the lowest income quintile (the lowest 20 percent) in 1996 moved to a higher income quintile by 2005. Similarly, nearly 50 percent of the households in the second-lowest quintile in 1996 moved to a higher income quintile by 2005.” In an analysis of income inequality and social mobility, economist Thomas Sowell wrote that there is a confusion “between what is happening to statistical categories over time and what is happening to flesh-and-blood individuals over time, as they move from one statistical category to another.”

Income mobility is debated endlessly by economists, but it is the existential reality for countless Americans who have ever strived for something better — or suffered a setback in their hopes. Yet the one sure thing that will stifle this mobility is an economy in decline, with job creation slowed, and encumbered by ever higher federal budget deficits and debt. And that’s what we’ll get more of if the Circle of Protection’s prescriptions for a “moral budget” hold sway.

When economic systems break down, as they are now unraveling in some European welfare states, those who will be hurt first and hardest will be the poor, the working family living from paycheck to paycheck, the pensioner – those operating at the margins. If we fail to come to grips with the reality of our potentially ruinous fiscal trajectory, we will all learn, as other countries are now learning, what “truly vulnerable” means.

Is Islam a religion of extremes? It certainly can appear to be. Muslim women in certain areas of the world cannot appear in public uncovered or without male escort nor are they are not permitted to drive a car. Just last fall, we saw a Christian Pakistani woman sentenced to death by stoning for allegedly blaspheming the prophet Muhammad. Throw in terrorist factions like Al-Qaeda who have hijacked the name of Islam and an understandable wariness sets in. The question arises: can a religion connected with such extremism be reconciled with the principles of human freedom, justice, and liberty? In his book, Islam Without Extremes, Turkish journalist and devout Muslim Mustafa Akyol earnestly addresses this pointed question that has undoubtedly become one of the central issues of the modern world.

Akyol believes Islam without extremes is not only possible, but vital to the future of the faith and the global economy.  He also clearly believes that Islam without extremes does not require the compromise of one’s faith. Akyol’s aim in this book is to show that Islam is relevant in today’s world, and is not only NOT a threat to liberty, but a religion that has much to offer the world in terms of stabilizing economies and governments.  For instance, the earliest days of Islam showed that it was a “business-friendly” faith.  The Prophet himself was married to a well-to-do businesswoman, and property rights, inheritance laws and fairness in trade were all strengthened by Islamic teaching.

In the book, Akyol lays out a concise history of Islam (necessary for those who may be unfamiliar with the origins of the faith), and then delves into the intriguing areas of interpretation and application of not only the Qur’an, but the Hadiths, a collection of the “example” (Sunna) of the Prophet Muhammad (considered by some Muslims to be nearly “on par” with the Qur’an).

The Hadiths, no Muslim would dispute, were compiled by men, unlike the Qur’an, which Muslims (by and large) believe was “received” in recitation by the Prophet Muhammad from God via an angel.  However, the Qur’an is a pretty short book; it doesn’t cover a lot of territory.  In order for Muslims to apply the Qur’an, there are few choices.  Either each person decides how the Qur’an applies, or a tradition of application had to come about.  Thus, the Hadiths were born, in order to answer the question (perhaps crudely), “What would Muhammad do?”

Akyol’s contention is that the Hadiths, while borne out of necessity, were often not infused with reason.  In fact, as the author points out, in early Islamic history, there were two basic schools of thought:  the People of Reason and the People of Tradition, and that Tradition won out, at least in terms of the creation of the Hadiths  Akyol presents one anecdote where a man refused to ever eat watermelon because he could find no record of the Prophet Muhammad doing so.

The challenge of any book-based religion, bound in history, is to meet modern challenges and remain relevant in any time and place.  For instance, how does a Catholic deal with in-vitro fertilization when the Bible says nothing about it?  Is a Jew bound to each and every law prescribed in Scripture?  Akyol’s contention is that much of the Hadiths and Shariah law were formed in a particular time and place (based on political and not religious convictions) and often are not Qur’anically based, or rooted in any actual example of Muhammad’s.   They are, Akyol argues, apocryphal at best, politically- and personally-motivated at worst. Therefore, they lose their relevancy to the modern Muslim believer.

However, shortly after the death of the Prophet, Akyol proposes that the School of Tradition cut off the young Islamic community from the economic mainstream that was flowing through the Arabian Peninsula, effectively isolating Muslims from doing trade with non-believers.  This type of isolation affected not only economy, but art, language, science and many resources.  It was not until the Ottoman Empire (beginning in the late 13th century and stretching into the 20th) that Islam began to regain its economic footing.  The Ottoman Empire, of course, was a “Renaissance age”, if you will, for Islam:  a time of great innovation in many areas of thought, art, philosophy and culture.  However, there has remained skepticism of free-market enterprise within Islam and many Islamic nations.

It is here the author directs his focus on Turkey (and stays there for most of the remainder of the book).  Turkey’s unique political history (its sympathy for the West, for example, and its governmental roots in both constitutional and parliamentary rule) certainly made for a sound basis for a free-market economy.  Akyol credits men like Said Nursi and especially Turgut Ozal with creating not only a far-more stable political situation than most Muslim-majority countries enjoy, but with liberalizing the nation’s understanding of what it took to compete financially on a global scale.

Ozal’s policies were based on the freedom of ideas, religion and enterprise.  Ozal believed, according to Akyol, that a planned economy built on free trade would lay the foundation for a robust Turkish economy.  His era, ending with an untimely (natural) death, is known as the Ozal Revolution.

Of course, economic freedom does not occur in a vacuum.  Free trade brings with it exposure to travel, communication with people from all over the world, information, money to buy luxury items, and the experience of other cultural norms, fashions, mores and ways of life.  Whether one experiences such exposures as “good” or “bad” is based on many things, but the exposure is there nonetheless.  Islam, if it is to be open to the free-market economy in other places in the world, will also have to learn to deal with all of these.  Islam, Akyol asserts, must embrace democracy.

 

Once we start looking for “a state for Muslims”, we will soon end

            up with a commonsense solution.  Since no particular Muslim

            can claim to have theocratic authority, and since there are all

            sorts of Muslims with diverse views, ideas, and aspirations, the

            only system that will be fair to all would be one that would include

            all of them in the political process:  a democracy….

Akyol very clearly states that democracy cannot be based on Shariah law, as that would be a theocracy.  And, he strenuously makes the point that a secular state and a secularist state are two different things:  a secular state remains neutral to religion, while a secularist state is hostile to religion.  It is the secular state, Akyol contends, that will allow every Muslim true freedom: the freedom to pray as he or she ought, to follow the example of Muhammad as he or she sees fit, the freedom to submit to the will of God as he or she understands that.  It is also this secular state, this democratic state, that will allow Muslim men and women – so inclined – to be entrepreneurs in business, to compete fairly in the global marketplace and to bring the commandment to do good and avoid evil with them into that market.  It would also considerably strengthen the Muslim ability to bring charity to those less fortunate – a strong enjoinder in the Muslim faith.

Mustafa Akyol does a thorough job of illustrating that Islam is not a religion of extremes, but a religion of personal goodness, provided that goodness is a free choice.  The book is accessible to anyone with even the slightest knowledge of Islam, as Akyol provides a succinct history lesson.  It is clear that his point of view is Turkish, and moderate in terms of politics and faith, but that moderate view is the view that leads one to conclude that Islam and its adherents can become profound contributors to the realm of free-trade and global economics.  Akyol’s book is highly recommended for anyone who wants to answer the question of whether or not Islam is an “extreme” or viable option when examining issues of liberty, freedom and justice.  Akyol’s answer is that Islam offers a coherent and vibrant addition to this global dialogue.

Blog author: eamyx
posted by on Tuesday, August 2, 2011

In a recent Reuters opinion column, Mark Thoma faults academic economists for their failure to predict the housing crash. He says their failure can be attributed to the disconnect between academia and economic forecasters. I don’t agree with Thoma, but I do think he gets it right when he says the failure of modern day economics,

May have something to do with the desire among economists to become more of a science – a heavy focus on theory and math is the result.

During the classical period, economics was closely linked to psychology. In the early 20th century, neoclassical economics veered from the study of psychology as economists sought to reshape the discipline as a natural science.

Modern neoclassical economics draws influence dating back to René Descartes. According to Dr. Robert Nelson’s review of Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street by Tomas Sedlack, Cartesian thought encouraged a belief that mathematical equations are equivalent to religious truths. The economic man is seen as,

 ‘A mechanical construct that works on infallible mathematical principles, … and economists are [therefore] capable of explaining even his innermost motives’ through mathematical methods.

Philosophical implications suggest modern economics is essentially attempting to reduce individuals to numbers. Economic models that operate in a perfect abstract framework with absolute assumptions conflict with the unpredictable and sometimes irrational behavior of human nature. This may explain why data forecasting without a full picture of the human person is not sufficient in predicting major market failures like the housing crash.

Karen Ho takes an anthropological approach to the financial crisis in her 2008 book  Liquidated: An Ethnography of Wall Street. As an anthropology graduate from Princeton, Ho is hired to work at an investment bank and writes about the corporate culture on Wall Street prior to the housing collapse. Homogenous recruitment, constant downsizing, high risk/high reward job liquidity, short-sighted bonuses, and deception of shareholder value were among many behaviors she observed. Such irrational and risky behavior should have been a red flag for any economist, shedding light on a major incentive problem.

Though it can be argued that the separation between modern economics and behavioral economics is necessary for empirical data and analysis, some economists want to see the gap close. According to Sedlack, modern economics should deemphasize the role of mathematics. Math is only the tip of the ice berg; it is vital, but not sufficient in economics. Nelson quoted him saying,

‘Below the mathematics lie much more fundamental issues’ of institutions, culture, and basic belief — even of religion. These issues do not readily lend themselves to mathematical methods.

Some human desires simply cannot be fulfilled by economic objects. A price value cannot be placed on the community, family, knowledge of God and so on. It is impossible to commodify or quantify these desires into an economic model. Richard Neuhaus famously said,

To attribute everything to the economic factor is to perpetuate the terrible lie of the Marxists. In addition to the economic is the political and, most important, the cultural. At the heart of the cultural is the moral and spiritual.

The number one failure of modern economics is an understanding of the human person that is incomplete. Economists must draw on anthropology, sociology, psychology, philosophy, and theology to better understand what drives human behavior and decision making. Forecasters will never be able to predict the future the way they would like, but social studies coupled with empirical economic analysis may help economists better understand the why questions that numbers cannot explain.

Blog author: eamyx
posted by on Wednesday, July 27, 2011

Here’s the piece I contributed to today’s Acton News & Commentary:

Fertile Ground for Farm Subsidy Cuts

By Elise Amyx

With debt and budget negotiations in gridlock, and a growing consensus that federal spending at current levels is unsustainable, political support for farm subsidies is waning fast. What’s more, high crop prices and clear injustices are building bipartisan support for significantly cutting agricultural subsidies in the 2012 Farm Bill.

The New Deal introduced an enormous number of agriculture subsidy programs paved with good intentions to help struggling farmers, create a stable food market and alleviate poverty. While many other industries have been deregulated since the Depression-era reforms, agricultural subsidies have grown. Now considered by some to be America’s largest corporate welfare program, it is obvious that the government has failed to meet its original goals.

The glaring injustices built into farm subsidy policies explain why so many on both the political right and left routinely describe them as immoral. Subsidies reward large commercial enterprises — in good times and bad — and shut out small farmers. Developing countries that desperately need to boost agricultural exports cannot compete with subsidized, over-produced crops from wealthy nations. Subsidies also drive up the cost of food for the poor and working families.

Iowa farmer Mark W. Leonard, in a 2006 Wall Street Journal interview, described how he brought a farmer from Mali to talk to local church gatherings about the adverse effects of subsidies. “From a Christian standpoint, what it is doing to Africa tugs at your heartstrings,” he said. The bottom line is that the large, commercial farmers win and everyone else loses.

Rural communities dependent on farming seem to have the long end of the stick, but this isn’t true. According to an Iowa State University study, the most highly subsidized areas in the United States are seeing little to no economic growth. In counties where farm payments are the biggest share of income, job creation is very weak. This can possibly be attributed to highly subsidized agribusiness buy outs of family farms. It is ironic that farm payments are intended to foster growth but instead they appear to be linked with subpar economic performance.

Though meant to support the incomes of farmers and promote rural economic growth, subsidies are making rich farmers richer. Subsidies don’t usually end up where they are most needed because the top 10 percent of recipients receives 74 percent of the payments. Instead of helping those most in need, farm payments are just another failed government welfare program.

Agricultural subsidy programs are funded by taxpayers’ dollars and end up raising the cost of food for the domestic consumer. In other words, we are paying for subsidies twice over. Even though price supports are intended to stabilize food production and thus prevent wild price swings, a Heritage Foundation research report found that consumers actually end up spending more on food in the long run when all price distorting effects are considered. Commodity subsidies encourage overproduction and lower prices, but the Conservation Reserve Program encourages underproduction and raises prices. Tariffs raise the price of imported food. For example, the sugar program operates as a cartel by controlling prices and limiting imports, which significantly raises the cost of sugar.

It is poor budgetary stewardship on the government’s behalf to fund a program with taxpayer dollars that makes food more expensive for consumers. According to the Heritage Foundation, the Organisation for Economic Co-operation and Development estimates the average household spent “$216 in annual taxes in addition to $104 in higher food prices.”

Subsidy payments are commodity specific, so unless you’re growing corn, wheat, soybeans, or another subsidized crop, you’re on your own. Jack Thurston, co-founder of FarmSubsidy.org told Time Business, “The bigger you are, the more subsidies you get. It is the reverse of what you think a subsidy is.”

Because farm payments often encourage overproduction and consolidation of agribusinesses, the price of land is inflated, which makes it very difficult for would-be farmers to enter the market. Rather than giving them a fair opportunity, subsidies undermine the entrepreneurial spirit of young domestic farmers.

Commodity price supports, export subsidies and tariffs drive commodity prices below the world price, which makes it difficult for foreign countries to compete. Surpluses of overproduced U.S. crops are dumped on the international market at prices well below the cost of production, creating even more price volatility. Many poor nations have few other options outside of subsistence farming. Subsidies keep poor nations poor and dependent on developed countries.

There is no doubt that farming is a difficult, volatile business filled with risk and uncertainty — and so are many other successful industries that do not receive any government hand outs. Farmers receiving payments should be careful not to view the government as a savior, who will reduce risk, create certainty and save the day if something bad happens. This is a dangerously dependent position to be in, and it is morally problematic when it comes at the expense of everyone else.

A farmer from Mississippi by the name of Lanier, in a recent call in to NPR, said he doesn’t need the government to help him run his business: “I’m not going to be very popular with this comment, but my family has farmed [6,000] to 8,000 acres every year. We own about five of that and lease the rest depending on what we think the market conditions will be. But, quite frankly, we don’t need these subsidies … we being the larger farmers; we’re getting paid seven digits to not farm areas of our farm. That’s ludicrous. […] We cry, hey, it’s a risk. But tell me what business there is out there that doesn’t have a risk.”

Agricultural subsidies make little economic sense and they display many of the problems that characterize other large welfare programs: injustice, dependency and a slew of unintended consequences.

But, good news might be just around the corner. Recent reports suggest agricultural subsidies will see drastic cuts in the upcoming farm bill due to high commodity prices and the budget crisis. Americans should be cautiously optimistic that America’s largest corporate welfare program will take a big hit in 2012.

We live in the information age, or more accurately referred to as the age of “information overload.” Anyone who has a Twitter account knows what I’m talking about. You may feel like you’re drowning in a flood of Facebook statuses, emails and YouTube videos. With information coming at us every which way, how can we process it all? How do we even know it’s true?

Neoclassical economics assumes people act on the basis of perfect information. With all the information that’s out there, this might seem like a good assumption. Dr. Robert Nelson, a professor of environmental policy at the School of Public Policy at the University of Maryland, does not agree with this theory. In his critique of neoclassical economics at Acton University, he said,

Perfect ignorance is a better starting assumption than perfect information.

Rather than perfect information, perhaps we only need “good enough” information. Economist Vernon Smith claims markets converge toward equilibrium by trial and error. Experiments outlined in his book Rationality in Economics show equilibrium can be reached with a limited amount of information. Similarly, Austrian economist Friedrich Hayek argues that prices are sufficient in signaling value and enabling efficient economic decision making.

An experiment conducted by Paul Andreassen in the late 1980s tested two groups of MIT business students to see how information affects stock investments. One group could only see changes in prices while the second group was allowed to read The Wall Street Journal, watch CNBC and consult experts on market trends. Unexpectedly, the group with less information earned twice as much as the well informed group. His analysis suggests the high-informed group was distracted by the rumors and insider gossip from the extra information. The excess information encouraged them to engage in much more buying and selling than the low-informed group because they were confident their knowledge allowed them to operate more efficiently in the market. In this case, price signals and the invisible hand of the market proved more efficient than an overload of information.

In a world that seems to have all the technology and science to answer life’s greatest questions, we realize it is still imperfect and demand more. For example, many believe that overwhelming forensic evidence was enough to convict Casey Anthony of the murder of her daughter Caylee, but the verdict proved otherwise. The jury demanded more than just DNA; they wanted the exact time of death and a stronger motive.  

Information is a necessary prerequisite for belief, but we must be careful not to fall into the trap of doubting Thomas (though we have all been there). Always demanding personal evidence and more proof in order to believe something will only lead to skepticism. A skeptic says he will only believe it if he sees it, but rarely do we ever experience information from a primary source. Should we believe the facts we read in our textbooks? Should we believe what the experts say on the news? Belief always takes a step of faith.

In his encyclical letter Fides et Ratio, Pope John Paul II asks,

Who, for instance, could assess critically the countless scientific findings upon which modern life is based? Who could personally examine the flow of information which comes day after day from all parts of the world and which is generally accepted as true? Who in the end could forge anew the paths of experience and thought which have yielded the treasures of human wisdom and religion? This means that the human being—the one who seeks the truth—is also the one who lives by belief.

In the age of technology and information overload, we should be humbled in our human limitations. Because information is imperfect, it takes a little faith in the invisible hand to reach equilibrium in the free market. But we should not center our faith in free markets because markets are imperfect and will fail as everything else in the world. Information, which is necessarily imperfect, and faith is required in the human pursuit of truth. Whoever knew markets could teach us so much about faith?

Blog author: jballor
posted by on Monday, July 25, 2011

I had the pleasure of appearing on Relevant Radio last Friday to talk to Sheila Liaugminas on her show, “A Closer Look.” I discussed the idea of “intergenerational justice,” a term favored by evangelicals (Roman Catholics tend to talk about “intergenerational solidarity”), and how that concept relates to much of today’s discussion about the federal budget.

One thing you hear from many is that we need a “both/and” solution: we need to both cut spending and raise revenue in order to close the annual deficits. I’m not really convinced of this, in part because the federal government has historically shown that increased revenue always results in increased spending. The government spends what it takes in, with a little bit more to boot. There has to be something structural and meaningful to stop this from continuing to happen, especially since we can’t count on the political culture to do so itself. Whether that structural obstacle is a balanced budget amendment or some other kind of binding agreement, something like that has to be put in place.

I don’t think it’s fair on the other side, though, to say that closing some tax loopholes, making tax avoidance more difficult, and simplifying the tax code is tantamount to “raising taxes” either. So in that sense there might be a case for raising revenues in this limited sense if it gets the tax system focused on what it is supposed to do (raise revenues) rather than using it as a tool for rent-seeking, social engineering, and pandering to special interests.

What’s more important than the question of revenues vs. cuts, however, is recognizing that the size of the federal government has stayed about roughly constant when you look at it in terms of tax receipts relative to GDP. Anthony Davies does a nice job illustrating this. He points out that the government basically takes in amounts roughly equal to 18% of GDP (+/- 2%). So that’s essentially what the government needs to learn to live on. By contrast, we’re spending about 24% of GDP this year, and that number only goes higher as entitlement promises come due.

So how about this for a both/and solution: we cut spending to get within a couple of percentage points of 18% of GDP and we focus on tax policies that will grow GDP in a sustainable way in the longer term.

Blog author: eamyx
posted by on Thursday, July 14, 2011

Back in February 2008, then candidate for president Barack Obama addressed a crowd at a General Motors Assembly Plant in Janesville, Wis. He said,

…I am my brother’s keeper; I am my sister’s keeper– that makes this country work. It’s what allows us to pursue out individual dreams, yet still come together as a single American family. E pluribus Unum. Out of many, one.

It is ironic that Obama preached a “we’re-in-this-together” economic philosophy yet three years later, Main Street is carrying Washington’s debt burden.

Debt negotiations are currently at a deadlock in Washington over taxes. President Obama doesn’t want to follow through with $4 trillion in spending cuts without a $1 trillion tax increase, while Senate Democrats are asking for a whopping $2 trillion in new taxes. Democrats also do not want to sacrifice entitlement programs. Top leaders worry they will not be able to reach a deal in time to avoid a government default. With the predicted default deadline of August 2 creeping around the corner and unemployment on the rise at 9.2 percent, citizens feel a sense of urgency about the debt crisis.

When Obama said “I am my brother’s keeper,” what did he really mean? If the government is to act as our brother’s keeper, this means it should be accepting responsibility for the welfare of all citizens. Raising taxes to cover up Washington’s nasty spending habits is certainly not accepting any responsibility.

If the government was really acting in the best interest of its citizens, it would stop raising taxes. According to the Tax Foundation, Americans will need to work from January 1 to April 12 before they have earned enough to pay off their taxes. Tax increases may seem like a quick way to reduce the deficit as opposed to spending cuts alone, but the bottom line is that Washington has a spending problem, not a revenue problem. A Goldman Sachs report found that tax increases usually fail to correct fiscal imbalances and are damaging to economic growth while spending cuts correct fiscal imbalances and boost growth. Milton Friedman explains in his essay titled Fallacy: Government Spending and Deficits Stimulate the Economy why government spending does not mean “stimulus”:

Getting the extra taxes, however, requires raising the rate of taxation. As a result, the taxpayer gets to keep less of each dollar earned or received as a return on investment, which reduces his or her incentive to work and to save. The resulting reduction in effort or in savings is a hidden cost of the extra spending. Far from being a stimulus to the economy, extra spending financed through higher taxes is a drag on the economy.

The $2 trillion tax increase Senate Democrats are pushing has the potential to suffocate economic growth and job creation, which would not be good news for 14 million unemployed Americans. Today, the Great Recession now has more idle workers than the Great Depression. An article in The Fiscal Times claims the employment level is nowhere near where it should be for a typical recovery:

In a typical recovery, we would have had several hundred thousand more hires per month than we are seeing now—this despite unprecedented fiscal and monetary stimulus (including the rescue of the automobile industry, whose collapse would likely have lost a million jobs).

If spending binges don’t work for a family, why would they work for a government? When a family spends more than they are making, the only sensible solution would be to cut spending. Bureaucrats should take House Minority Leader Eric Cantor’s advice and be willing to share the sacrifice:

Everyone understands that Washington has been on a spending binge of late and we’ve got to start spending money the way taxpayers are right now and that’s learning how to do more with less.

The debt crisis is not just an economic hazard but a prodigious moral issue of poor stewardship as explained in an Acton commentary by Jordan Ballor and Ray Nothstine titled The Fiscal Responsibility of Mall Rats and Bureaucrats:

Responsible stewardship of one’s material resources is a consistent and recurring biblical theme. At the conclusion of a parable on stewardship, Jesus said, “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much” (Luke 16:10 NIV). We shouldn’t be duped into granting the use of greater and greater portions of our paychecks to a federal government that has been unfaithful with what it has already claimed.

Our economy will continue to hobble along until Washington is willing to truly act as a brother’s keeper in showing that it too can share the sacrifices necessary for getting spending under control. Until then, we will pay the price for Washington’s fiscal irresponsibility and millions of Americans will continue to struggle.