Recently in the news: Europeans may have to scale back their generous welfare state benefits which have included six weeks of vacation per year, retirement often at age 60 etc. France is seriously considering raising the retirement age. As a result, the Greeks are rioting and many French are preparing their standard response of major demonstrations and strikes.
That is a sad situation for the Europeans, predictable though it was. They are having to give up what they consider their entitlements. It is human nature to think that we are entitled to what we have. Nobody likes to accept a lower salary, shorter vacations, or a delay in planned retirement. However the laws of economics neither know nor care about our preferences. Those laws just apply the consequences of our actions (and often of luck) – and they apply to the U.S as well as to Europe.
The situation is simple in concept. People think they are entitled to a certain standard of living and that they are entitled not to have to work very hard to maintain that standard. However the benefits of all those entitlement programs now exceed the resources being used to provide said benefits. Though the concept is simple, people resist understanding that concept. After all, understanding why they must cut back implies that they will accept the cut-backs.
The fact is that we cannot generate entitlements without some means to provide for them, at least if we expect to deliver on those entitlements. In nearly all cases that means that someone has to work to produce what people are “entitled” to. Europe is now seeing the results of having created entitlements to goods and services while at the same time creating entitlements to leisure time and early retirement. That essentially means that they consider themselves entitled to not to have to work very hard to provide those entitlements.
We are on the same road in the U.S. though we have not traveled as far down that road. Many think they are entitled to decent living quarters, good food, medical care etc. but they fail to think of where those “entitlements” come from. Who will build the housing? Who will raise and transport the food? Who will provide the medical care? Who will pay the people who do all that? If you say “government,” you get a zero on the test. Government is not some magic creator of goods and services, though some seem to think it is. Government can dispense nothing without first taking it from the citizens.
That is the important point many Europeans and even some in the U.S. are overlooking. Government cannot magically create goods or services; it must get them from the people. When the Greeks or French riot to protest the need to cut back on benefits, they are simply ignoring fundamental laws of Nature. Goods and services must be produced, they are not created by a wave of a magic wand or by government decreeing that they shall exist.
If we want early retirement we must either work more effectively while young or accept fewer benefits in retirement.
If we want medical care, someone must work to train medical personnel and to provide them with the tools of their trade plus what they need to live.
If we want decent housing, someone must work to provide the building materials and to build that housing, then to maintain it in good condition.
Any “entitlement” requires production. The reasonable conclusion is that we are entitled only to what we earn by honest work. As I wrote earlier, we have a right to nothing. (http://hallillywhite.blogspot.com/2009/08/you-have-right-to-nothing.html)
We must realize that in general entitlements are nonsense. We are not entitled to the fruits of someone else’s labor, any more than a slave owner is entitled to the fruits of the labor of the slave.
Wednesday, May 26, 2010
Wednesday, May 19, 2010
A Good (Economic) Doctor?
Suppose you’re sick and have had a mild fever for a couple of days. A friend tells you about a wonderful new doctor. This physician has a great personality and wonderful bedside manner. His credentials sound good and he promises the most effective treatment. You set up an appointment. The doctor examines you and prescribes the latest medication, one reputed to solve your problem quickly. Very nice – except that your temperature goes up and you feel worse for a week. However the doctor is so nice and has such a good personality that he is able to comfort you.
Now next year you get the same sickness but that doctor is not available so you go to a different one. This guy is not nearly as personable. Worse yet, he refuses to prescribe any medication saying that your illness will clear up on its own in a few days. You argue that you need treatment but he continues to refuse so you go away angry. However within two days you are again well.
Which of those doctors is really competent? Which should you trust next time you get a similar disease? If you answered the second, go to the head of the class – and be prepared to endure criticism for that choice.
“What's that?” you say. Nobody would continue to trust a doctor who makes things worse. Are you sure about that? Some actually prefer a physician who provides emotional support to one with less personality but better medical skills.
Now change the situation a bit. This time the patient is the national economy, disrupted by business failures and unemployment. Shouldn't we prefer an economic “physician” who refuses to provide ineffective treatment? Isn’t that better than comforting words accompanied by counterproductive solutions? Yet it is nearly an article of faith today that the measures that have failed repeatedly are the only solution to our economic woes and that the “do-nothing physician” is either incompetent or uncaring, probably both.
Our history has several examples of economic problems, both with and without federal intervention to fix those problems. That intervention has a terrible track record, yet most people assume it is necessary. That track record began with the intervention leading up to and during the Great Depression. Prior to that time we had suffered many economic downturns, all short-lived. Then Hoover and congress reacted to the stock market crash of 1929 with punitive tariffs, wage controls, and other intervention. Roosevelt increased the government controls. Interestingly, unemployment was trending downward when the Smoot-Hawley tariffs were imposed which means that the treatment was not applied until the patient was already improving.
In fact unemployment was never higher than 10% before those government measures. However by a year after that intervention unemployment rose to nearly 30% - and remained above 20% for nearly three years thereafter. The patient was worse but the doctor claimed his treatment was working. In fact the depression did not end until World War II intervened.
Contrast this with Reagan’s action (or lack thereof) after the 1987 stock market crash. Reagan refused to intervene and as might be expected was excoriated for that. Politicians and the news media publicly called him everything from inept to uncaring. We can only imagine the unprintable words they used in private. A lesser man would have caved to the pressure but Reagan held firm. His stubbornness was followed by sustained growth and low unemployment.*
What is hard to believe is how effectively the proponents of government economic intervention have sold their bill of good. Today it is considered axiomatic that government should manage the economy although there is essentially no evidence that government has ever done so effectively. We keep insisting that the doctor should act, even after his treatment repeatedly worsens the illness.
Only when voters demand that government cease meddling will our economy recover quickly from the normal ups and downs of this natural world.
(For more information on the benefits of avoiding inappropriate action, see
http://hallillywhite.blogspot.com/2009/06/dont-just-do-something-stand-there.html)
*The intervention by Hoover, Roosevelt and congress, and Reagan’s different approach are documented on pp 70-74 of Thomas Sowell’s book, Intellectuals and Society. Contrary to popular belief, Hoover did intervene and was in fact rather proud that he considered himself the first president to deal with a deteriorating economy.
Now next year you get the same sickness but that doctor is not available so you go to a different one. This guy is not nearly as personable. Worse yet, he refuses to prescribe any medication saying that your illness will clear up on its own in a few days. You argue that you need treatment but he continues to refuse so you go away angry. However within two days you are again well.
Which of those doctors is really competent? Which should you trust next time you get a similar disease? If you answered the second, go to the head of the class – and be prepared to endure criticism for that choice.
“What's that?” you say. Nobody would continue to trust a doctor who makes things worse. Are you sure about that? Some actually prefer a physician who provides emotional support to one with less personality but better medical skills.
Now change the situation a bit. This time the patient is the national economy, disrupted by business failures and unemployment. Shouldn't we prefer an economic “physician” who refuses to provide ineffective treatment? Isn’t that better than comforting words accompanied by counterproductive solutions? Yet it is nearly an article of faith today that the measures that have failed repeatedly are the only solution to our economic woes and that the “do-nothing physician” is either incompetent or uncaring, probably both.
Our history has several examples of economic problems, both with and without federal intervention to fix those problems. That intervention has a terrible track record, yet most people assume it is necessary. That track record began with the intervention leading up to and during the Great Depression. Prior to that time we had suffered many economic downturns, all short-lived. Then Hoover and congress reacted to the stock market crash of 1929 with punitive tariffs, wage controls, and other intervention. Roosevelt increased the government controls. Interestingly, unemployment was trending downward when the Smoot-Hawley tariffs were imposed which means that the treatment was not applied until the patient was already improving.
In fact unemployment was never higher than 10% before those government measures. However by a year after that intervention unemployment rose to nearly 30% - and remained above 20% for nearly three years thereafter. The patient was worse but the doctor claimed his treatment was working. In fact the depression did not end until World War II intervened.
Contrast this with Reagan’s action (or lack thereof) after the 1987 stock market crash. Reagan refused to intervene and as might be expected was excoriated for that. Politicians and the news media publicly called him everything from inept to uncaring. We can only imagine the unprintable words they used in private. A lesser man would have caved to the pressure but Reagan held firm. His stubbornness was followed by sustained growth and low unemployment.*
What is hard to believe is how effectively the proponents of government economic intervention have sold their bill of good. Today it is considered axiomatic that government should manage the economy although there is essentially no evidence that government has ever done so effectively. We keep insisting that the doctor should act, even after his treatment repeatedly worsens the illness.
Only when voters demand that government cease meddling will our economy recover quickly from the normal ups and downs of this natural world.
(For more information on the benefits of avoiding inappropriate action, see
http://hallillywhite.blogspot.com/2009/06/dont-just-do-something-stand-there.html)
*The intervention by Hoover, Roosevelt and congress, and Reagan’s different approach are documented on pp 70-74 of Thomas Sowell’s book, Intellectuals and Society. Contrary to popular belief, Hoover did intervene and was in fact rather proud that he considered himself the first president to deal with a deteriorating economy.
Friday, May 7, 2010
Giving Orders to Nature
The Indiana legislature once nearly passed a bill that would have made the value of pi to be 3.2.* Now it would be nice if they could really change the ratio of circumference to diameter of a circle to something so simple. It would be much easier to work with than the actual irrational number whose digits extend indefinitely. School work would be easier as would many endeavors in science and engineering. The problem of course is that Nature pays no attention to laws decreed by mere humans.
We might pass laws about the value of pi, about what we will allow gravity to do, about how nasty germs are not allowed to infect us. We could print those laws in books and distribute the books widely. Nature, however, would ignore those laws and we have not the slightest ability to enforce them. The effect of such laws on Nature would be exactly zero.
However any such laws would have an effect on us. Buildings constructed with the incorrect value of pi would not be reliable. Anyone trusting gravity to obey human law might take a nasty fall. Those who trust human law instead of good health practices would get sick.
Human law cannot overrule Nature. However attempts to overrule Nature can harm us.
Now all that is too obvious. Why should you worry about such things when there are no proposals to pass such laws today?
Are you sure there are no attempts to legislate Nature today? Actually there are, though the laws to be changed are laws of economics and human behavior rather than of science. The most flagrant current example is in Greece but there are attempts all over the world to legislate Nature.
The Greek problem is that many voters and public employees seem to think that their government can just give them what they want, ignoring where that comes from. Over half of the Greeks employed are on the government payroll. Their contracts call for great pay, benefits, and retirement packages. Furthermore they cannot be fired. More and more of them are becoming eligible to retire, plus the number of government employees who must be paid has grown. Those “entitlements” now exceed what the government can afford. The results are predictable.
Greece is so deeply in trouble that the European Union has to bail it out. Of course the EU doesn't want an indefinite commitment to pay for Greek ineptitude so the bail-out comes with strings attached. Greece must get its financial house in order, cutting back expenses to match resources. That is quite a reasonable demand. Without such measures the Greek expenses will just continue to grow and consume more and more EU resources.
How are those people reacting? Are they facing the fact that somebody has to produce the compensation they claim they should receive? Of course not, they are rioting and demanding a continuation of their benefits. They are demanding a change to economic law quite as impossible as the Indiana legislature's change to the value of pi.
What the Greek rioters ignore is the fact that economics is not about money, it is about goods and services. Governments may be able to create money by decree but they cannot do the same with goods and services. No human law will cause wheat to grow faster, clothing or housing to magically appear, or medical facilities and personnel to become available without cost to somebody.
The fact is that neither Greece nor any other country can long spend beyond its means. Spending on credit can be fun for a while but when the bill comes due the fun ends.
Nor is Greece the only country guilty of such profligacy. In fact the US has been borrowing and spending for years, mortgaging our future to China and the oil sheiks. Our creditors loan us money only because they see the probability of a good return on their investment. In general they do not like us and will happily sink us if it appears to be to their benefit to do so. Is this the kind of people we want to trust with our future?
Sadly the U.S. is following the same path as did Greece, they are just a bit farther down that path than we are. We've funded everything that seems like a good idea, without regard to ability to pay the entire bill. What will happen when the chickens of our excessive spending come home to roost? Will we continue to demand that the government ignore the laws of economics?
Or is there a better way? What if we started now to recognize the laws of Nature? To realize that economic laws are just as immutable as the laws of physics? To live within our means, even when we cannot fund everything we want to do?
The choice is ours. So are the consequences.
*The actual bill is somewhat more complicated and in fact intended for a different end. However even the simplified version here described is adequate for my purpose.
We might pass laws about the value of pi, about what we will allow gravity to do, about how nasty germs are not allowed to infect us. We could print those laws in books and distribute the books widely. Nature, however, would ignore those laws and we have not the slightest ability to enforce them. The effect of such laws on Nature would be exactly zero.
However any such laws would have an effect on us. Buildings constructed with the incorrect value of pi would not be reliable. Anyone trusting gravity to obey human law might take a nasty fall. Those who trust human law instead of good health practices would get sick.
Human law cannot overrule Nature. However attempts to overrule Nature can harm us.
Now all that is too obvious. Why should you worry about such things when there are no proposals to pass such laws today?
Are you sure there are no attempts to legislate Nature today? Actually there are, though the laws to be changed are laws of economics and human behavior rather than of science. The most flagrant current example is in Greece but there are attempts all over the world to legislate Nature.
The Greek problem is that many voters and public employees seem to think that their government can just give them what they want, ignoring where that comes from. Over half of the Greeks employed are on the government payroll. Their contracts call for great pay, benefits, and retirement packages. Furthermore they cannot be fired. More and more of them are becoming eligible to retire, plus the number of government employees who must be paid has grown. Those “entitlements” now exceed what the government can afford. The results are predictable.
Greece is so deeply in trouble that the European Union has to bail it out. Of course the EU doesn't want an indefinite commitment to pay for Greek ineptitude so the bail-out comes with strings attached. Greece must get its financial house in order, cutting back expenses to match resources. That is quite a reasonable demand. Without such measures the Greek expenses will just continue to grow and consume more and more EU resources.
How are those people reacting? Are they facing the fact that somebody has to produce the compensation they claim they should receive? Of course not, they are rioting and demanding a continuation of their benefits. They are demanding a change to economic law quite as impossible as the Indiana legislature's change to the value of pi.
What the Greek rioters ignore is the fact that economics is not about money, it is about goods and services. Governments may be able to create money by decree but they cannot do the same with goods and services. No human law will cause wheat to grow faster, clothing or housing to magically appear, or medical facilities and personnel to become available without cost to somebody.
The fact is that neither Greece nor any other country can long spend beyond its means. Spending on credit can be fun for a while but when the bill comes due the fun ends.
Nor is Greece the only country guilty of such profligacy. In fact the US has been borrowing and spending for years, mortgaging our future to China and the oil sheiks. Our creditors loan us money only because they see the probability of a good return on their investment. In general they do not like us and will happily sink us if it appears to be to their benefit to do so. Is this the kind of people we want to trust with our future?
Sadly the U.S. is following the same path as did Greece, they are just a bit farther down that path than we are. We've funded everything that seems like a good idea, without regard to ability to pay the entire bill. What will happen when the chickens of our excessive spending come home to roost? Will we continue to demand that the government ignore the laws of economics?
Or is there a better way? What if we started now to recognize the laws of Nature? To realize that economic laws are just as immutable as the laws of physics? To live within our means, even when we cannot fund everything we want to do?
The choice is ours. So are the consequences.
*The actual bill is somewhat more complicated and in fact intended for a different end. However even the simplified version here described is adequate for my purpose.
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