Sunday, November 29, 2009

Cap and Command

Often laws passed by Congress contain much more than what appears in the title of the legislation. That is the case with the “cap and trade” law passed by the House of Representatives. That law also contains command-and-control regulations that affect owners of dwellings. It should be called “cap and command.”

The law would include a requirement for an energy audit when a building is purchased, before the transaction is closed. If a house did not pass some requirements, the seller would have to install insulation and other retrofitting. Perhaps the windows would need to be replaced, or the buyer would have to alter the furnace. The seller might have to install a timed shower governor that stops the water after a few minutes of use, forcing people to take quick or cold showers. The costs of the replacements would usually be passed on to the buyer. The extra expense would include the inspection of the house, which could cost $400 or more.

The timing for this mandate is terrible, since the housing market is just starting to turn around. Just when prices are no longer falling and buyers are responding to tax credits, wham! The cost of buying houses in many older neighborhoods will zoom up, and properties will linger in the market unsold once again.

Because old houses compete with new houses, and there are still many houses sitting unsold, the selling price of many older houses will fall. The cost of installing new appliances and replacing fixtures will be passed on from a lower market price of the building so that the purchase price to the buyer is not so high. So the burden of cap-and-command will be split between the buyer and seller, depending on the alternatives in that neighborhood.

Such commands and controls is why the proposed law contains 1400 pages. Any law that thick is most likely bad legislation. Most Congress personae do not read laws that long, since there are not just a lot of pages, but the wording is in thick legalese, making it a torture for ordinary folks to slog through.

The costs of such government mandates are in effect a tax. The government could instead just levy taxes and use the revenues to pay for these costs. By making it command and control, the regulation cost does not show up in the government budget.

The efficient way to reduce pollution is with a periodic charge. Make the polluter pay for the social costs when he pollutes, not when a particular transaction takes place. With pollution charges, the polluter will respond according to his own costs and benefits. Instead of dictating how long you should shower, and at what temperature, the resident would decide whether the benefit of using more energy and polluting more is worth the cost. People would do whatever has the lowest net cost, paying the charge or avoiding it by reducing pollution.

Moreover, the focus of policy should not be on energy use, but directly on what is bad, the pollution. It should be none of government’s business how much energy one uses. Energy is just another product, like bananas and haircuts. If one is willing to pay to use more energy, it does not harm anyone else. What harms is the pollution, and much of pollution does come from heating and cooling buildings. But all that is needed is a monthly payment when one pollutes. A buyer of a building could voluntarily pay for an inspection to see what the energy costs are, and he would also know how much is being paid in pollution charges.

There is also a health danger in internal pollution. A house might be fully insulated and not be emitting any pollution to the outside, yet trap the pollution inside and endanger the dwellers..

The bill passed by the house also mandates changes to building codes that would increase the costs of construction. Building codes have been under the jurisdiction of local governments, which can be adapted to local climates and local materials. But now the federal government would intrude into local governance with one-size-fits-all regulations.

Congress is imposing a huge deadweight loss on the economy with this legislation, as a waste of resources and a reduction in social well being. This legislation is one more reduction in liberty and a steep increase in big federal government. And in the end, this legislation is bad for the environment, because when folks rebel against being forced to take cold showers, they will not replace tyrant commands with a green tax shift, but will be disgusted with the entire green agenda, and so pollution will continue to poison and plunder the planet.

Wednesday, November 25, 2009

The Jobs Summit

President Barack Obama will be hosting a White House forum on jobs in December 2009. Unemployment continued to rise during 2009, and the president seeks to stoke the economy to create more jobs, jobs, jobs.

The summit will gather together people from diverse fields: economist gurus, the small-business bourgeoisie, grand poobahs of big business, financial fat cats, and union bosses. Evidently, Obama forgot to also invite some actually unemployed workers. He also left out psychologists, priests, community organizers, political pundits, and plumbers. Despite this lack of full diversity, the gathered will discuss how to accelerate job creation. The federal government has put the unemployment rate at 10.2 percent as of November 2009, but if one includes those who would like to work but have forsaken job search, and those who are underemployed, the jobless amount to about a fifth of the labor force. Thus there is political pressure for the president to appear to be doing something. A gathering to discuss the problem will be splashed in the media and crate buzz.

But asking how to create jobs has it backwards. The fundamental question is not how to create more jobs, but how to stop government from destroying jobs. It is like hunters who go into a field and shoot every deer in sight, and then hold a meeting on why the deer have disappeared.

Henry George had a parable about the unbounded savannah. Suppose there is an infinite field of free land in which farmers could apply their labor to grow corn. Would there be any unemployment? Of course not, since anybody could get some land and employ himself to grow corn. When there is unrestricted access to natural resources, there is no unemployment.

In primal human society, villagers could go into the fields to hunt and gather. Sometimes they might not find enough food, but there was no lack of work, since one could keep on searching, digging, and foraging, and then do some crafting and trading.

Now, in the 21st century, employment should be much better, but instead, it is worse. It is illegal to pick the berries. Suppose a man goes down the street peddling goods to the public. A police officer arrests him, because this is illegal. The jobless man offers to pull weeds in the gardens of folks too busy to do it, and he would do it for a few dollars per hour, but it is illegal to hire workers at that low wage. He can’t go into the fields, he can’t freely offer his labor, and if he does work, he is poor because he can’t keep his full wage.

Primal man could get housing by going into the field to gather some sticks and fronds and build a house at the edge of the village on free land. The 21st-century homeless unemployed man gets some cardboard out of a garbage bin and builds himself a little house in a vacant lot, but is then fined for trespassing and for violating the building code.

Humanity has advanced from primal times when there was full employment and unlimited housing to the 21st century world of high technology where over a tenth of the population has been locked out of employment and can’t find a place to live. The modern world has more natural resources than the ancient world, because modern technology can make greater use of natural materials. Employers should be screaming for more labor. Instead, we have workers crying because they can’t get job, even while factories languish. Folks can’t find housing, while millions of homes sit empty.

There is in nature no reason for unemployment. Human desires are unlimited, so there is always a demand for something. The only reason an unemployed carpenter cannot trade with an unemployed tomato grower is that some force has imposed a barrier preventing them from trading tomatoes for chairs. The only agent that has the power to prevent trade is government.

Government imposes restrictions and costs on enterprise and labor, requiring expensive permits, licenses, badges, and taxes. Primal man had access to communal land, but modern man has lost free access. It goes back to conquest, as the land was taken by the war chiefs and then the peasants had to pay rent plus taxes.

The land title holder exclaims that he bought the land with his own money, so why should he not have exclusive access? In olden days the slave owner too claimed that he bought the slaves with his own money, so he is entitled to the gains from their labor. Religious folks go to church clutching their Bibles, in which it is written in Ecclesiastes 5:9, “the profit of the earth is for all,” but when this is pointed out, they instantly become atheists.

The role of the economist gurus in the summit is to declare to the media, “The issue is complex. There are no easy answers.” That leaves the government blameless.

But the economic answer is clearly evident. We can restore full employment by going back to the rules of primal economies. Let anyone go into the field and apply his labor freely. We cannot now have unlimited access to natural resources, but we can have the possessors compensate the rest of society for exclusive access. The righteous market, with unchained labor and an equal sharing of nature’s bounty, will eliminate unemployment.

Subsidies to landowners, including cheap credit, generated the real estate bubble that burst and made workers lose their jobs. Instead of preventing the next boom and bust by shifting taxes from wages to land rent, the jobs summit will propose low-interest loans to business, and limited tax credits. But land rent will rise to absorb the gains, and there will still be imposed costs in hiring labor, so in the end, the proposals of the jobs summit will fail.

Sunday, November 08, 2009

US GDP 3rd Quarter 2009

The U.S. GDP, measuring the output of the economy, was reported at $14.3 trillion as of October 31, 2009. In the third quarter of 2009 (July, August, September), the annualized growth rate was 3.5 percent, in contrast to a .7% decline in the second quarter.

The recession has ended for the U.S. economy. A recession is a substantial fall in output. The economy is still depressed, but no longer receding. On April 30, 2009, my article “The Second Derivative Turns Positive” stated that the rate of economic decline was decreasing, which would later end the recession. So it has come to be. The big rise in the stock market after March 2009 reflected the coming end of the recession.

Let’s examine the GDP data to see the particulars. Consumption increased by 3.4 percent, with the durable goods expanding by a whopping 22.3 percent. People were buying many more cars and home furnishings, but much of this growth was artificial, due to the credits offered by government to buy cars and houses. To some extent, this just accelerated some purchases by those who would have bought later.

In the long run, paying people to buy new cars and then destroying the old ones is a big waste of resources. Sure, GDP goes up, but it would be better just to give people money than to destroy valued resources. The “cash for clunkers” program is like breaking windows so that we can make work producing new windows. The French economist Federic Bastiat famously wrote about the “broken window” fallacy that still seems to fool the public.

Private investment increased by 11.5 percent. This refers to economic investment, an increase in the stock of capital goods, not financial investment in shares of stocks and bonds. There was an especially large increase of 23.4 percent in the construction of residential real estate, after having fallen each quarter from 2007 until 3rd quarter 2009. But that too is somewhat artificial, as the federal and state governments have propped up real estate with tax credits and other benefits.

Exports also contributed to growth, after declining in the previous four quarters. Expansion in foreign countries created a greater demand for U.S. goods and services. Not surprisingly, federal spending increased also, by 7.9 percent. National defense spending increased by 8.4 percent, after having also risen in the second quarter. This increase in federal spending comes from borrowed money, and will cause problems in the future. The U.S. dollar has been sinking while gold rose to new heights as measured in current dollars.

The big question now is whether the expansion will continue, or else whether output will again decline, creating a W-shaped double recession. W-recessions are uncommon, but the government could push the economy back down if it enacts steep increases in income taxes. There is already legislation to impose a “surtax,” an increase in the top income tax rate, of 5.4 percent to pay for expanded federal medical care. In addition, the tax cuts enacted at the beginning of the decade are scheduled to expire in January 2011.

The “cap and trade” proposal for pollution is in effect a tax on production, and the minimum wage increase of July 2009 was in effect a tax increase on employers. The higher minimum wage raised the teenage unemployment rate from 24 to 26 percent, and for black teen males, the unemployment rate went up from 39 to over 50 percent.

Instead of “cap and trade,” Congress could enact a revenue-neutral “green tax shift,” a tax on pollution offset by lower taxes on income. Industry prefers the permits, which would trade in a market that could be manipulated as holders game the system. It’s a great way for the big firms to stifle competition from new small start-up firms that would have to buy permits from the established big firms, the permit cartel, at inflated prices.

There would be futures markets, options, guarantees, and other derivatives on the pollution permits, and speculation that would pull the permit prices up. Loans to buy permits, followed by a crash in the prices of permits, would bankrupt banks and insurance companies. But don’t worry, the government would bail out the big players.

The wealthiest few percent of the population already pay a great portion of the taxes, and this becomes a narrow tax base that can flee, hide, and shrink. Already wealthy individuals are looking at exit options. Latin America, for all its problems, becomes more attractive as the state and federal governments increasingly prey on the rich.

Most people, and even most economists, have not realized that the rich get much of their tax payments back in the form of higher rent and land value of their real estate holdings. But if taxes rise too much and the funds are spent for transfers that make the economy less productive, the rich will no longer get back more than they paid in, and we can then watch as economic investment and production flee and hide from the tax man.

If we gave people an explicit choice between shifting taxes to land value and pollution, or an even worse economic collapse years hence, would folks choose the collapse? Because by not doing the tax shift, in effect they are choosing disaster.