Monday, July 30, 2012

Visions of the Economy

Several decades ago, Leonard Reed developed a brochure called I, Pencil - which made the point that as a result of the marvelous coordination in free markets - no one is responsible for creating a pencil but everyone benefits from all those different steps.  I recently found the updated version of the piece called I, Smartphone.

The piece takes on more importance because of a couple of recent speeches that the President gave; for example  in Roanoke he commented "Look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there.
If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen..."

In another he claimed the private sector is doing "fine."  In that speech he argued "Keep in mind that the private sector has been hiring at a solid pace over the last 27 months. But one of the biggest weaknesses has been state and local governments, which have laid off 450,000 Americans. These are teachers and cops and firefighters. Congress should pass a bill putting them back to work right now, giving help to the states so that those layoffs are not occurring."   In both speeches two things happened.  First, the GOP pounced on the remarks.   But second the President's defenders pounced to suggest that his remarks were being taken out of context.  (I offered the extended remarks in both cases to show that the import of what he said was correctly interpreted.) 

This line of reasoning is quite consistent with the statements of a number of other left of center pundits and officials who have taken the original notion of Leonard Reed and turned it on its head.   You can hear it from Massachusetts Senate candidate Elizabeth Warren or even in the thoroughly forgettable book that Hillary Clinton wrote called It Takes a Village.

Ultimately if you take the logic to its conclusion, these figures are arguing that government, not individuals create prosperity and we as individuals benefit from the wonderful things that government does for us..  In the first quote, he seems to be arguing that hard work and individual determination are not enough; that individuals only prosper when government does.    In the second he seems to ignore the labor market participation rate, the 8%+ unemployment rate and the meager GDP growth and suggest that our economic doldrums are caused because we are not hiring enough public officials.   He ignores that a lot of those people were hired with the false promises of the original "stimulus" bill.

One of the key concepts when you begin to study economics is "market failure"  - the concept that in some exchange, benefits from markets will not be realized.  In those cases, it is sometimes appropriate to have the government intervene.  (In many cases market failure is corrected by itself - when entrepreneurs step in to force a different result.)   What should concern voters in this election is that the President and his allies seem to ignore that if there is the possibility for market failure there is, as Gordon Tullock once pointed out, an equally strong possibility for government failure.   Ultimately, the strength of the system which Obama and his supporters would like to change is its flexibility.   The market system offers both benefits and risks.   What the President and his supporters fail to grasp is that a lot of us believe that the government directed alternative includes equal or greater risks and lower rewards - that seems like a bad bargain.

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