Is the Pink Slime Issue Just A Matter of Consumer Preferences?

Previously I made a post entitled ‘Pink Slime: What is Seen and Unseen.’ Having made its way through some social media channels, it has received some interesting comments. A couple common arguments that seem to stand out, not only in my posts, but also in other articles could be generalized as follows:

"This is how the free market works. Supply chains will adjust. This isn't a unique situation that requires any further analysis. It doesn't stand out among the millions of other choices consumers make on a regular basis between numerous other products."

"Why even mention it. So what if consumers are uninformed. Education and evidence are really irrelevant to this issue (or any issue for that matter) because people are irrational. "

These comments really help to clarify the real issue here. The supply chain is really at the heart of the issue for many of those slamming pink slime. Its not pink slime in and of itself that is their only problem. They don't like modern food supply chains (think ADM, Monsanto, Wal-Mart), and if they get their way, our food supply chains would more closely resemble the balkanized gasoline market, with all of the restrictions and the required bottlenecking boutique of gasoline blends etc. and of course the high prices.

If I thought this were simply about food preferences, food choices, and consumers making decisions based on those preferences, and the markets  responding, then of course this would all be a moot discussion. Those that simply choose to avoid finely textured lean beef, are not necessarily the problem. The goal of the purveyors of the pink slime propaganda isn't simply to persuade consumers to choose alternative products, but to build the sentiment that will support coercive government intervention in the market place. (as has happened in other states with laws regarding 'child labor', ‘dust’ regulation, 'CDL  requirements for operating farm machinery', 'battery cages' in egg  production, 'gestation crates' in pork production, fat taxes, sugar taxes, salt  taxes, hormones, antibiotics, biotechnology...pick your technology,  ingredient, and regulation).

From fiction to reality, biotechnology, 'pink slime', pharmaceuticals, modern  food supply chains and processing, (name your villain) are all contemporary  analogs to 'Rearden Metal' from the book Atlas Shrugged. When Dagney had to go out on her own and  start the 'John Galt Line' it was in fact largely in part a response to the loss in demand as a result of the dynamics of public opinion regarding Rearden Metal, penalized for being virtue. Given the negative public perception and the heavy burden of the regulatory environment for the railroads, Taggert Transcontinental stock was plummeting.

Recognizing this dynamic between public opinion, market forces, and the regulatory apparatus and making it known is essential to the  perpetuation of a free society. As Don Boudreaux of George Mason  University states so well:

"What matters mostly – overwhelmingly – is the climate of opinion. And so affecting the climate of opinion for the better seems to me to be, by far, the only long-term means of ensuring the stability of a free society."

But, can we really affect public opinion for the better? Are people obstinate and irrational in their views?  Is evidence irrelevant?

 "Reason, my dear fellow is the most naive of all superstitions...logic is a primitive vulgarity" -Dr. Pritchett, Atlas Shrugged.

 Is evidence always and everywhere irrelevant, or is it just minimized by propaganda and undervalued in general?  Does the assumption of perfectly rational behavior have to hold to make these arguments, or to approach these issues utilizing the analytical way of thinking that economics teaches?  Should we just assume that all behavior is mindless and throw in the towel?  That would certainly relieve many of us a lot of stress and of course, that's what the interventionists like Dr. Pritchett in Atlas Shrugged wanted people to think. They desire a public that has grown disdainful of facts and evidence, looking to intellectuals and politicians to make things right.

But, as Steve Horowitz points out in his textbook 'Lessons for the Young Economist':

“When we look at the world and try to make some sense of it, one of the most basic and crucial distinctions we all make—usually without even realizing it—is the difference between purposeful action versus mindless behavior...The lessons in this book apply to purposeful actions performed by

conscious people who have goals in mind.”

As Dr. Horowitz goes on to explain, even if people often 'miscalculate' or aren't "perfectly rational people" the logic of economic thinking holds. As Economist Peter Boettke states:

"The great free market economic thinkers from Adam Smith to F. A. Hayek never argued that individuals were hyper-rational actors possessed with full and complete information, operating in perfectly competitive markets.... Efficient markets are an outcome of a process of discovery, learning, and adjustment, not an assumption going into the analysis."

And in fact, blogs, even 'micro bloggers' with just a few thousand imprints or less, all have a role to play in adding to this pool of knowledge. Even if they are preaching to the choir (i.e. read mostly by like minded individuals) they provide an arsenal of ideas that help everyone to better structure their thoughts, and share them with others, and occasionally someone that may actually change their mind.  Not everyone is a general like Bodreaux and Roberts at Cafe Hayek,  but given this war of ideas and the role they play in a free society, every soldier counts. Post by post, line by line. While its origins are disputed, the quote often attributed to Thomas Jefferson is no less true:

"The condition upon which God hath given liberty to man is eternal vigilance; which condition if he break, servitude is at once the consequence of his crime and the punishment of his guilt."

PINK SLIME: WHAT IS SEEN AND WHAT IS UNSEEN

"But you don't want to have public opinion against you. Public opinion, you know, it can mean a lot."
"...I saw the whole industrial establishment of the world...all of it was run, not by bankers and boards of directors...all of it was run by any unshaved humanitarian in any basement beer joint, by any face pudgy with malice, who preached that virtue must be penalized for being virtue." - Atlas Shrugged.
"Cargill cuts 'pink slime' output, sees hamburger price rise' (Reuters)

http://www.reuters.com/article/2012/03/28/us-food-slime-idUSBRE82R1LP20120328
 
Consumers say they want healthy sustainable food. They want it to be safe. They want it to be affordable. The market delivered with finely textured lean beef. Now in a classic illustration of group think, lead by celebrities, anti-farm activists, and advocates of big government, these same producers are being punished for catering to the expressed desires of their harshest critics. Some extremists are even peddling petitions and calling for government bans and regulations to 'label' or remove this product from stores and schools. Companies are shutting down operations and laying people off. Beef prices are taking a hit.

This summer, many of these same people will go to their Farmer's Market and feel good about themselves for doing their part to support local farmers, their community, and perhaps even bettering the environment. Certainly a laudable gesture. Others will just go to the nearest big box retailer and feel more comfortable that this product may have been taken off of the shelf or out of their school.  That is what is seen.

What remains unseen is the negative impact that this self-righteous orthorexic food fetish condeming so called pink slime will have on the rest of us. Particularly what is unseen is the loss of value that thousands of family farmers and local producers will have to absorb, while continiung to strive to feed the rest of us in a manner that modern agriculture makes efficient and sustainable.

Is Corn a Greater Threat Than Al-Queda? Ask Joe Biden.

Last Friday a caller into the Rush Limbaugh show makes the following statements:

"I am a student a Murray State University as a biology major, and I was in biochemistry this morning, and there was an emphasis on discussing the regulation by the government of sugar, and particularly fructose. So he had us read an article, and I'll read you a quote from the article.  It said, "If international bodies are truly concerned about public health, they must consider limiting fructose ... to individuals and to society as a whole." They had five suggestions how to do this.  They said we need to reduce the hours retailers are open, control the location of retail markets, tighten the licensing requirements on vending machines in schools and workplaces, designate an age limit on who can buy the fructose (they suggest age of 17), and then their last suggestion is the doubling of the price through taxation.  And, you know, I just sat there in class thinking: "My goodness, you know, how brainwashed do people have to get to push this?"


This is a prime example of the phenomena that I have dubbed 'ose' gate.(http://ageconomist.blogspot.com/2010/09/osegate.html) This has almost reached the levels of a consipiracy theory that modern family corn farmers are producing unhealthy, toxic food additives, and in the process, destroying the planet.  I would agree with the student, it appears that they were potentially on the receiving end of brainwashing and propaganda, probably in the name of infusing sustainability into the curriculum by a professor coming down with a case of Dunning Kreuger. It could be, perhaps, that the professor thought what they were doing was an innocent and innovative attempt to get students interested in biochemistry by presenting an application of what's going on in the classroom. However, I would think that they could have provided additional references or students to weigh in comparison to such extreme policy proposals presented in the article.

What's even more shocking are these words from vice president Joe Biden: 

 I think its just a symptom of general ignorance about where food comes from and how it is produced. The locavore movement and writers like Michael Pollan both seem to be bringing food to the forefront of people's minds. But reading his books or buying from the local farmers market isn't getting the job done. In fact, these venues could at times also be dens of ignorance and misconception as much as a place to educate consumers. Its important that producers of all types and scale as well as all other industry affiliates do their part to clearly communicate what's going on in the industry from gate to plate.

References:

The Rush Limbaugh Show. Friday March 2, 2012.

Sun SZ, Flickinger BD, Williamson-Hughes PS, Empie MW. 2010. Lack of association between dietary fructose and hyperuricemia risk in adults. Nutr Metab (Lond). 2010 Mar 1; 7:16. Free access to full article.

White JS. 2009. Misconceptions about High-Fructose Corn Syrup: Is It Uniquely Responsible for Obesity, Reactive Dicarbonyl Compounds, and Advanced Glycation Endproducts? J Nutr 139(6): 1219S-1227S. Free access to full article.

Fulgoni V. 2008. High-fructose corn syrup: everything you wanted to know, but were afraid to ask. Am J Clin Nutr 88(6):1715S. Free access to full article.

White JS. 2008. Straight talk about high-fructose corn syrup: what it is and what it ain't. Am J Clin Nutr 88(6):1716S-1721S. Free access to full article.

Melanson KJ, Angelopoulos TJ, Nguyen V, Zukley L, Lowndes J, Rippe JM. 2008. High-fructose corn syrup, energy intake, and appetite regulation. Am J Clin Nutr88(6):1738S-1744S. Free access to full article.

Soenen S and Westerterp-Plantenga MS. 2007. No differences in satiety or energy intake after high-fructose corn syrup, sucrose, or milk preloads. Am J Clin Nutr86(6):1586-1594. Free access to full article.

Akhavan T. and Anderson GH. 2007. Effects of glucose-to-fructose ratios in solutions on subjective satiety, food intake, and satiety hormones in young men. Am J Clin Nut 86(5) 1354-1363. Free access to full article.

Forshee RA, Storey ML, Allison DB, Glinsmann WH, Hein GL, Lineback DR, Miller SA, Nicklas TA, Weaver GA, White JS. 2007. A Critical Examination of the Evidence Relating High Fructose Corn Syrup and Weight Gain. Critical Reviews in Food Science and Nutrition. 47(6):561-582. Free access to full article.

Sun SZ, Empie MW. 2007. Lack of findings for the association between obesity risk and usual sugar-sweetened beverage consumption in adults - A primary analysis of databases of CSFII-1989-1991, CSFII-1994-1998, NHANES III, and combined

NHANES 1999-2002. Food Chem Toxicol 45(8):1523-1536. Free access to full article.

Monsivais P, Perrigue MM, Drewnowski A. 2007. Sugars and satiety: does the type of sweetener make a difference? Am J Clin Nutr 86(1):116-123. Free access to full article.

Lowndes J, et al. June 2007. The Effect of High-Fructose Corn Syrup on Uric Acid Levels in Normal Weight Women. Presented at the June 2007 meeting of The Endocrine Society. Program Abstract #P2-45. Abstract available.

Zukley L, et al. June 2007. The Effect of High Fructose Corn Syrup on Post-Prandial Lipemia in Normal Weight Females. Presented at the June 2007 meeting of The Endocrine Society. Program Abstract #P2-46. Abstract available.

Public Choice Theory for Agvocates

For aggies, agvocates, and otherwise 'agnerds' that are particularly interested in ag policy, if you are not familiar with public choice theory, I think you might find it as interesting as I have. For all of the regulatory issues facing the ag industry, (dust regulation, GIPSA, child labor laws, biotech and GMO issues, taxes, etc.) public choice offers a powerful analytical framework for policy analysis.

 The moral of the public choice story is that democracy and governments are not perfect. When we have issues with market outcomes and we are thinking about new regulations or government spending to correct those problems, public choice analysis offers a guide. Public choice analysis implies that we have to question which system will provide the best information and incentives to act on that information to achieve the results that we want. The democratic process itself offers no guarantee that the decision will be the best solution to our problems.

Below is a list of topics related to public choice with simple short descriptions as well as links to more detailed discussions. Following that, I've provided some links to some applications of the theory and tools, including many related to issues important to the agriculture industry.  For another good primer, I also recommend the article 'The Public Choice Revolution', Regulation Fall 2004. ( link ).

Concepts related to public choice theory include the following:

RENT SEEKING -  the act of seeking special privileges or protections form the government.

TYPE TWO ERROR BIAS - overcautious behavior, ex: FDA drug approval, response to Hurricane Katrina

VOTING PARADOXES- randomness of election outcomes

MEDIAN VOTER THEOREM- leads to exploitation of minority by majority

TRAGEDY OF THE COMMONS – lack of property rights and pollution

COASE THEOREM – symmetry of environmental pollution, internalizing effect of property rights and markets

TRAGEDY OF THE ANTICOMMONS – underutilized resources due to excessive checks on power, bureaucracy. Ex: response to hurricane Katrina

KNOWLEDGE PROBLEM- government relies on a ‘shrunken’ pool of knowledge vs. markets

My applications of public choice theory:

Biotech Alfalfa: Who may harm whom? An Application of the Coase Theorem

The Constitution, Democracy, and Public Choice

Biotech and Rent Seeking

Rent Seeking and Biotechnology

Homeland Security, The Knowledge Problem, and Rent Seeking

Cap and Trade: Can we really price carbon?

More on biotech and rent seeking...NYT


Rent Seeking, Economic Growth, Corporate Power, and Inequality

Politics and Science

Government and Capitalism - the knowledge problem

The Right and the Left from a public choice perspective

When should personal decisions become government decisions?

Regulating Commerce

For newer or additional posts related to these issues, follow my public choice tags on this blog here or my companion economics principles and applications blog here.

Occupy Cargill. What?

From:

http://understory.ran.org/2012/01/21/breaking-%E2%80%9Coccupy-cargill%E2%80%9D-activists-stage-citizen%E2%80%99s-arrest-on-cargill-inc/

"Multiple speakers at the rally railed against Cargill's corporate personhood and its extensive lobbying of governments for free trade policies that benefit its profits at the expense of people and planet."

We know that modern supply chains made possible by companies like Cargill actually help reduce our carbon footprint and in many cases outperform more energy intense 'local' supply chains. ( http://economicsprinciplesandapplications.blogspot.com/2011/05/food-miles-kowalskis-and-that-steak-on.html ) . One thing that Cargill excels at is making markets, matching U.S. agricultural products to overseas markets. This is incredibly valuable considering the importance of international trade to the 98% of all U.S. farms that are family farms. According to the USDA:

• U.S. agriculture looks overseas to expand sales and boost incomes. Exports also generate additional economic activity that ripples through the domestic economy.
   
• Expanding existing market access and opening new markets under future trade agreements will significantly boost U.S. agricultural export sales. 
   
• The President's FY2011 budget provides increased discretionary spending of $54 million to enhance USDA's export promotion activities. 
   
• Compared to the overall economy, U.S. agriculture is twice as reliant on overseas markets.
   
• USDA estimates that anywhere from 26 to 30 percent of farm cash receipts in any one year comes from exports. 
   
• Every dollar of exports creates another $1.40 in supporting activities to process, package, finance and ship agricultural products.
   
• U.S. agricultural exports, which in FY 2009 reached $96.6 billion, generated an additional$135 billion in supporting business activity in transportation, distribution, food processing and manufacturing. 
   
• These exports support approximately 1 million U.S. jobs both on and off the farm. 
   
• Some agricultural commodities benefit dramatically from sales in overseas markets.  For example:
  
  1.  64 percent of our almond crop is shipped overseas. 
  2.  74 percent of cotton is exported.  
  3.  49 percent of U.S. rice goes to international markets.   
  4.  50 percent of U.S. wheat   goes into the export market. 
  5.  34 percent of our soybeans are exported.
   
• 96 percent of the world's consumers live outside the United States. 
   
• U.S. agricultural export growth is led by the NAFTA countries of Canada and Mexico andnon-Japan Asia.    

(source: http://www.fas.usda.gov/info/factsheets/tradevalue.asp )

Cargill's efforts to promote free trade should be applauded, as it opens up markets for the many commodities produced sustainably by U.S. family farmers employing the latest technologies. Of course this leads to profits, but contrary to the claims made in the article, true profits exist only at the BENEFIT of all people involved, and never at their expense (other wise trades would not take place and no profits would be realized). The economic definition of profit is the net contribution a firm makes to society. 

Of course, if firms are accumulating cash at the EXPENSE of others, they are not making true profits, but are either committing fraud or theft or extracting rents through subsidies, special priviledges, or regulatory protections (like restrictions on trade). This behavior can be described in terms of game theory as a Nash Equilibrium, particularly a prisoner's dilemma. When government is permitted to engage in excessive regulation and is granted the power to use the regulatory apparatus to benefit special interests, it pays for (more like forces) everyone to play the game. 

This is the sort of corporate abuse of power that the occupy people should be focused on. The lamenting over Citizens United would be a moot point if the occupiers would actually address the problem of excessive corporate power and abuse at its core- the out of control progessive policy agenda and regulatory apparatus of the federal government. I've yet to get the idea from any in the movement that this is their focus. A corporation is NOT a person. However, taxes and regulations on corporations are taxes and regulations on PEOPLE. Lots of PEOPLE, not just CEO's and shareholders, but the millions of consumers, workers, farmers, and small business owners that depend on the mutually beneficial exchanges for their livelihood and day to day life made possible by companies like Cargill. PEOPLE are most empowered, not by government or progressive policies, but by the ability to engage in socially cooperative exchanges and forming socially cooperative relationships. They have a right to organize and use speach to advance their views and causes through whatever corporate or non corporate vehicle they feel is most effective. However, there is nothing noble about PEOPLE using speach to advance an agenda to restrict the free trade and the social cooperation of others, through any vehicle corporate or noncorporate.  As stated in the article, these occupiers actually seem to be (through their castigation of Cargill's pro trade efforts) supporting policies that enrich and empower corporate interests at the expense of family farmers and the 99% of PEOPLE they claim or think they are advocating for. 

Occupy Wall Street: Farmers March

At the following link, you will find an article and youtube video covering a farmer's march
as part of the Occupy Wall Street movement.
http://www.care2.com/causes/occupy-wall-street-farmers-march-celebrates-community-power.html
I'm not sure that 'corporate America' is the demise of the family farmer, given that today some 96% or more farms are actually family farms, practicing modern, sustainable agricultire (see: http://youtu.be/D4ZL7w9q9Jc )
In just this past year we've seen everything from trumped up lawsuits attacking biotech alfalfa, attempts by congress to tell farmers how to market their livestock, threats of requiring CDL liscenses, threats of dust regulation, and now threats of using child labor laws to prevent young people from getting valuable training in agriculture that could encourage their own entreprenuerial ventures in ag, or lead to high paying jobs in science and technology (as many find their way to the lab via the hayfield or corn crop). Regulatory threats and regulatory uncertainty certainly tax the American farmer (and future farmers and agriculturalsts) as much if not more than any other alleged source.
I've written before about how economies of scale in compliance have lead to increased market concentration in agriculture ( http://works.bepress.com/matt_bogard/13/ ) and I urge the OWS people to be careful that they not find themselves tools for more progressive policies that may threaten modern agriculture's ability to sustainably feed the world.

USDA Research: Food Miles & Local Beef

Comparing the Structure, Size, and Performance of Local and Mainstream Food
Supply Chains

USDA Economic
Research
Report
Number 99
June 2010

"Transportation fuel use is more closely related to supply chain structure and size than to the distance food products travel. Products in local supply chains travel fewer miles from farms to consumers, but fuel use per unit of product in local chains can be greater than in the corresponding mainstream chains. In these cases, greater fuel efficiency per unit of product is achieved with larger loads and
logistical efficiencies that outweigh longer distances."

This research compared 3 beef supply chains, one that markets local sourced beef via farmer's markets and community supported agriculture (CSA), one that is intermediately sourced to restaurants, supermarkets, and food cooperatives, and one that has a traditional supply chain that utilizes beef finished in the feedlot, slaughtered, processed, shipped, and sourced to restaurants. In terms of food miles, the local supply chain averaged 75 miles, intermediate 300, and mainstream 1645. However due to efficency and economies of scale,  it turns out that the most fossil fuel and energy intensive supply chain is local, averaging 2.18 gallons of fuel per cwt, vs. 1.92 for the mainstream feedlot finished supply chain.  In terms of carbon footprint, we should note that both the intermediate and local supply chains utilize grass fed beef, which would add even more to their environmental foot print in terms of global warming potential.

The New Deal and Enterprising Americans

One central theme behind Roosevelt's stimulus policies, like today, was that business was sitting on their hands and the government had to tax and spend to get things going and regulate to keep them going and prevent the next downturn. But as Chamberlain pointed out in his book Enterprising Americans: A Business History of the United States-

"the magnitude of the response of U.S. business to the war is in itself refutation of the thesis that in the thirties businessmen simply sat on thier hands…it simply would not have been able to produce the new type of goods when the war button was pressed"

While it was true that total investment was low, investment opportunities were proliferant. He points out the infinite number of industries ready to bust out with thier innovations, including such leaders as du Pont, Dow Chemical, American Cyanamid, and Monsanto that many in the ag industry would be familiar with. During this time GE was ready to go with flourescent lighting and Kodak with color photography and commercial air travel was in the making.

But these great ideas were suppressed and kept on the back burner under the massive interventions of Roosevelt's expanding government.

"Businessmen came to ask themseleves whether Roosevelt really understood a system where the hope of profit sparks expansion and investment. Or did he believe simply in centralizing decision and authority in boards and "planners" along the Potomac?"

Reference

The Enterprising Americans: A Business History of the United States
BY JOHN CHAMBERLAIN 1963

http://www.entrewave.com/freebooks/docs/a_pdfs/jcea.pdf

Occupy Wall Street: Fighting the Right Fight?

Previously I had said “Time will tell if those occupying Wall Street calling for ending the Fed and crony capitalism are the true voice of the movement, or if they will ultimately find themselves tools for more interventionism through a progressive policy agenda.” With a recent article in the Washington Post, I think I’m starting to piece together an answer, at least from one protestor.

See:  Why occupy wallstreet will keep up the fight

Take for instance the following quote:

"Only a soft regime change can end the pervasive corruption at the heart of our political system, in which corporate money wins elections, drafts laws and trumps citizen desires.”

How is it that corporate money wins elections, drafts laws, and trumps citizen desires? I've discussed previously the issue of disproportionate political power and abuse as it relates to extreme wealth and corporate influence. In short, its the nature of unrestrained democracy, not unrestrained capitalism. By granting government powers beyond those specifically enumerated in the constitution, progressive policies have represented bounty to be won by whoever can exert the most political muscle, as put by Public Choice Economist Dennis Mueller. If we are going to be concerned with the outlier that is the 1% of wealthiest Americans, our concern should be with those that achieved their wealth via progressive coercive political means as opposed to those that achieved it through socially cooperative means enriching the lives of multitudes. The ignorant short sighted prejudiced view of the 1% as being a homogenous group of thieves and manipulators is not enlightening.

The writer goes on:

" Only the plural voices of everyday Americans, the 99 percent, have the capacity to wake up the 1 percent to their greedy, self-serving ways, and to dismantle the global casino in which $1.3 trillion worth of derivatives, credit default swaps and other financial instruments slosh around every day without a hint of concern or regard for the millions of lives that such speculation can destroy."…And we will see clearly articulated demands emerging, among them … a move toward a “true cost” market regime in which the price of every product reflects the ecological cost of its production, distribution and use; and with a bit of luck, perhaps even the birth of a new, left-right hybrid political party that moves America beyond the Coke vs. Pepsi choices of the past."

While financial instruments may be difficult to understand, they are not bets made at the track or in a casino, they are tools for managing risk and directing capital to fill the most urgent needs of society based on the knowledge and preferences of multitudes of individuals, all giving their input via the price system. While not perfect, as the great economist Frederick Hayek put it, I would prefer imperfect prices over the pretense of knowledge. It was through the pretense of knowledge that the Federal Reserve’s actions in the social planning of money, interest, and housing ( ‘without a hint of concern or regard for the millions of lives that such speculation can destroy.’) that we got the financial crisis and the current recession. The idea of a ‘true cost market regime’ is an even more futile exercise in the pretense of knowledge. As I mentioned in a previous article, when we as a society fail to have the knowledge to determine the correct price and quantity of ice cream for our community or nation, how can we determine the correct price or quantity of carbon (or the ecological cost of any good for that matter)? Aren’t those sorts of calculations what would be necessary to implement a ‘true cost’ market regime? The command and control structure necessary to implement this (without a hint of concern or regard for the millions of lives that such speculation can destroy) would be demeaning to the millions in the 99% and empowering to the wealthiest and politically connected in the 1%. We’ve seen the effects of economics of scale in compliance in agriculture before. We saw how empowering the Markey-Waxman attempt to ecologically price carbon was to the worlds largest corporations.

I think through all of their rhetoric and their own model of direct democracy, many of the OWS crowd may confuse the virtues of the market with democracy. Unfortunately people think that there is something mystical and blessed about the end result of tallying votes. They fail to see how arbitrary this can be, and how poorly voting can work as a means to express and represent individual preferences about very specific issues that deal with the minute details of every day life and work. They confuse voting with the role and social function of the price system. What we need isn’t more democracy, or fascist price fixing regimes. What we actually need is more of the Coke vs. Pepsi choices of the past. I know the author was probably analogizing the little difference between political parties, but Coke vs. Pepsi is a great example of how empowering the price system is compared to the democratic decision making by two barely indistinguishable parties.  Anyone recall how empowering markets were to the 99% with regards to New Coke? How about more recently Netflix’s change in pricing structure? Agvocates are well aware of how empowering markets and social media were when it came to the corporate policies of Yellowtail and Pilot Travel Centers. Could you imagine having to implement these types of changes and  getting these responses through our political system or any number political parties? Of course not. Voting  is too blunt an instrument to do this.When we try to democratize these types of choices, votes are not empowering tools of democracy for the masses, they are empowering instruments for the politically connected 1%.  The answer isn't more voting or additional choices in political parties. The answer is as our founders put it, a republic if we can keep it, restrained from interfering with the minute details and choices of our every day lives.

So I conclude by asking, is the OWS movement really about empowering the masses, or will they ultimately find themselves tools for more interventionism through a progressive policy agenda? If the movement is more concerned about wealth redistribution and things like ‘true cost’ market regimes, they are fighting the wrong fight.

Occupy Wall Street: Hitching a Ride on the Tea Party Express?

The #occupywallstreet movement seems to be a pretty diverse group. From ‘trolling’ the occupywallstreet forums , there seems to be a big concern with corporatism, what economists would consider rent seeking- which is using the political apparatus to gain special favors (in terms of taxes, subsidies, or regulations) . There are also many concerned about the role of the Federal Reserve, which through the social planning of money and interest played a significant role in the financial crisis . And of course, many are rightfully upset over the bailouts. On most of these issues, if they are serious about their concerns, they find themselves practically standing hand-to-hand with the Tea Party. Then, on occasion you will find some listing demands for things like living wages, tariffs, and increased regulation, a Buffet style tax and other progressive end policies. So, you’ve got people within the same movement coming from entirely polar extremes, all converging on Wall-Street with a beef.  While nothing seems official, you can’t help but notice two major themes- 1) a call for getting the money out of politics and 2) class warfare between the top 1% (in income or wealth) and the other 99%. 

Last week, I presented an exhaustive look at the facts related to the distribution of income and taxes paid by the highest income earners. The facts showed that that the wealthy actually do pay more in taxes than their ‘secretaries’ and that the income gains over the last few decades have not gone mostly to the rich. (I have actually added even more to the evidence on my principles of economics blog here). But what about the top 1%?

First off, the top concern should not be the disparity of income or wealth in any society, but the process that generates that outcome. As the data I presented last week indicates, the process in the U.S. allows lots of movement and economic mobility. We want to be careful not to destroy a process that improves the lives of the countless Americans to achieve some idealistic imaginary snapshot of the wealth or income distribution.  Any coercive action by government to impose such a vision on society comes at great costs, borne most heavily by the very people we intend to help. (take for instance,  the minimum wage). So based on the facts and evidence alone, wealth concentration in a free society is a moot point. In fact, a free society that produces unequal shares of income and wealth (including people like Bill Gates, the late Steve Jobs, and the numerous unspoken entrepreneurs) is the kind of society able to deliver a lifestyle and opportunities to the masses.

But, if class warfare is the end in itself, it is interesting to ask, just how much wealth do the top 1% of wealthiest Americans control? Depending on your source you can get different results. According to one source, the top 1 % of Americans (in terms of wealth)  ‘control’ about 20-25% of the nation’s wealth. Another source indicates that they ‘control’ closer to 40%.   But, again, when we look back over the last century, we don’t observe any drastic increase in the concentration of wealth. Whatever the correct number, the idea that the wealthiest Americans control any proportion of the nations wealth is a bit elusive. It might be better to state that the top 1% of wealthiest Americans are connected to 40% of the nations wealth. 

Of course, if we were talking about King Henry the VIII, or Adolph Hitler, or Joseph Stalin, we might correctly say that these people controlled vast amounts of resources vital to the well being of millions of their citizens. However, if you are a wealthy individual that owns as part of your vast wealth a large amount of Netfilix’ stock, what would you say you are in control of? Given the recent drastic plunge in its value, wouldn’t you say that although you were connected to that vast wealth, it is subject to the individual decisions of multitudes of consumers and other investors? The simple fact is, no matter what the asset, owning an asset (be it stocks, collectible sports cars, beach homes, yachts, or Scrooge McDuck’s Money Bin) entails opportunity costs.  Those opportunity costs arise as a direct result of other people’s desires and interest in owning or having access to those resources.  Maybe you own a ton of real estate in shopping centers. That is meaningful only as long as the rest of society values shopping centers. (Again, just ask Coca Cola when they changed their formula, Netflix when they changed their pricing structure, or Blockbuster before them). This is in fact why we have so much mobility in the income and wealth distribution as shown in the data! As my economics professor taught long ago, we the poor college students, were able to outbid wealthy people every day in the ordinary transactions of buying and selling.  One of the most basic principles of economics is that prices force you to consider the impacts of your choices on others. When it comes to allocating resources in society, the market is the great equalizer. Appealing to class warfare by dividing society into fractions of 1 & 99 really gets us nowhere.

Of course, we may agree that when the top 1% (along with corporations and special interests) use their wealth to influence politics the free society paradigm breaks down. In fact, many of the protestors on Wall Street agree with the idea that ‘a democratic government derives its just power from the people… and that no true democracy is attainable when the process is determined by economic power. ‘  

As public choice economist Dennis Mueller is quoted in the article Public Choice Revolution:

"Interest groups will engage in what public choice theorists call “rent seeking,” i.e., the search for redistributive benefits at the expense of others. The larger the state and the more benefits it can confer, the more rent-seeking will occur. The entire federal budget...can be viewed as a gigantic rent up for grabs for those who can exert the most political muscle.”

 Our founders were well aware of these issues as stated in Federalist #10:

"From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties."

-like the 1% and the 99%?

In Federalist #10 they also warned us about the populist appeals and uprisings that may result, but proposed a solution:

“A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project…we behold a republican remedy for the diseases most incident to republican government.”

But the solution is not more government control through regulation of redistributive Buffet taxes. The problem of money in politics is excessive democracy, not lack of democracy.  The remedy proposed by the founders is embodied in a constitution, with specifically enumerated powers, not true democracy as quoted by the occupiers on Wall Street. If we look at the many powers of government today, how many were transfers of power away from the people by avoiding the amendment process or via crazy court decisions (like Helvering vs. Davis or  Wickard v. Filburn)  The purpose of the constitution was to ensure that the government did very little without the consent of the governed.  For the most part, that was achieved through legislation held in the strict bounds of enumerated powers, with expanded powers of government coming through the amendment process.  This strict adherence to constitutional principles was the foundation for a workable democratic constitutional republic, as stated by Economist Thomas Sowell in  Judicial Activism Reconsidered,

“The federal Constitution is "the supreme law of the land," not because it is more moral than state constitutions or state or federal legislative enactments, but because it represents a larger and more enduring majority. Minorities receive their constitutional rights from that enduring majority to which transient majorities bow, not from whatever abstract moral rights are imagined to exist as a brooding omnipresence in the sky.”

Democracy, limited by strict adherence to constitutional principles meant that government would have few powers and resources to spend on corporate interests, or progressive objects of benevolence.   As Thomas Jefferson stated:

“in questions of power then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the constitution”

 If the occupiers are seriously concerned about money in politics, then, once again, they should find themselves in lockstep with the Tea Party in calling for a return to constitutional principles and limited government.  Time will tell if those occupying Wall Street calling for ending the Fed and crony capitalism are the true voice of the movement, or if they will ultimately find themselves tools for more interventionism through a progressive policy agenda.

The CPI Couldn't Keep Up With Steve Jobs

From basic principles of economics, we know that measures of inflation based on the CPI are biased because of substitution effects, the introduction of new goods and services, and unmeasured quality changes.

Here is some related insight from Russ Roberts post Stagnation or Mismeasurement at Cafe Hayek: (this was in 2007)

 It is not just a question of the number of new goods and services–it is the pace of innovation  within product categories and how much each of these makes it hard to measure prices with any accuracy....The iPod will be six years old next month. The newly released iPod Classic with 160 GB of memory is $50 cheaper than the original iPod, holds 40 TIMES more songs and also plays color videos and displays photos. It is smaller, lighter and has a better battery.

What You Mean By Big Ag

Are you confusing 'big ag', 'factory farming' or 'industrial agriculture' with the complex network of modern family farms, biotechnology companies, food processors, and retailers that cooperate to bring healthy and sustainable food to your table?

The Buffet Tax Deception

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." - Murray Rothbard Making Economic Sense (1995)

Should we really be talking about national tax policies based on the random, anecdotal observations of a celebrity businessman? Recently there has been a lot of talk from the media, politicians, and other commentators about a ‘Buffet Tax’ to ensure that billionaires pay their fair share of taxes. The battle cry comes from comments by very successful businessman and investor Warren Buffet, who claims that his secretary pays more in taxes (as a percent of income) than he does.  There are also claims that income for middle Americans has stagnated, while the wealthiest Americans have enjoyed most of the gains in income growth over the last decade. This is a long post, but the short of it is that these claims may sound good politically, and make great headlines for the media, but they don’t stand squarely with the facts.

Let’s look at the first claim. Do billionaires really pay less in taxes as a percent of income than their secretaries? 

Source: http://www.cbo.gov/ftpdocs/88xx/doc8885/EffectiveTaxRates.shtml  Historical Effective Federal Tax Rates: 1979 to 2005 Congressional Budget Office

Since these rates have not changed in the last 5 years, these numbers are still relevant, and show that historically the rich (like Warren Buffet) have always paid more. In fact, when it comes to ‘fairness’, the U.S. has one of the most progressive (meaning the rich pay more) tax systems in the world (see the data here at the Tax Foundation).  Sure it is possible that with the correct shelters/loopholes/wealth management, a wealthy person like Buffet could actually end up paying lower overall rates than their secretary. However, what the data shows is that overall, on average, the rich do pay more, with only a few rare and random cases like Buffet paying rates similar to or less than working class Americans. This brings up many questions. Why make major changes in the tax code that will affect millions to address the very few Warren Buffets of the world? Some would say to be ‘fair’ but as noted above, we already lead the world in terms of tax fairness based on income and the rich are already paying more. In terms of all income taxes collected by government, the wealthiest Americans pay most of the taxes.

The top 10% of earners make up about 10% of all households earn about 40% of all income, but pay 55% of all taxes (way more than their proportional share of income). The top 1% of earners make up only about 1% of households, earn about 18% of all income, but pay almost 30% of all taxes, again more than their share of national income.

Source: http://www.cbo.gov/ftpdocs/88xx/doc8885/EffectiveTaxRates.shtml  Historical Effective Federal Tax Rates: 1979 to 2005 Congressional Budget Office

No matter how you slice the data, there is no way you can claim that the rich are not paying ‘their fair share’ of taxes. (Note this is even after the tax cuts in the early this decade)

Another myth related to this, is that income for middle Americans has stagnated, while the wealthiest Americans have enjoyed most of the gains in income growth over the last decade. Again, this is not supported by the data. The first problem is that commentators and politicians with axes to grind typically refer to the ‘median household income’ to represent ‘middle class.’   While using the median is statistically more robust (less biased) than just the average when it comes to skewed income data, using median household income is still inappropriate. As economists Thomas Sowell and Russ Roberts explain clearly here (video) and here, households have changed tremendously over time, and really aren’t comparable over time. But there are even more reasons why median household income can be misleading.  Researcher Steve Conover points out in a recent article at the American Enterprise Institute’s American magazine, just looking at the median to define middle class is a very restrictive definition. After assembling data on income over the last decade based on data from the US Census Bureau and the Bureau of Labor Statistics, Conover developed several definitions of ‘middle class.’  No matter how many different ways we could define ‘middle class’ when we actually look at data on income gains over the last few years, we find in fact that the middle class income gained much more than the top 20% of earners, while the top 5% actually lost.

 

  Source: The Myth of Middle-Class Stagnation, Steve Conover

Of course, if we are concerned about the distribution of income in society, the important thing isn’t so much who’s gaining in which category, but instead its how often people move up and improve their standard of living.  After all, the American dream is not based on how much the rich pay in taxes vs the poor, or who gets the biggest piece of the pie. The American dream is about going out and getting your own piece of pie, or in other words, income mobility.  As economist Steve Horowitz explains in this video, even if you insist on looking at ‘median’ income earned by ‘households’ vs. individuals, when we look at the data, and follow these people over time, we see lots of income mobility as they move from one part of the income distribution to another.  The data shows that income mobility in the U.S. has been very robust.    As reported in the U.S. Treasury report Income Mobility in the U.S. from 1996 to 2005:

"Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups. The degree of mobility in the overall population and movement out of the bottom quintile in this study are similar to the findings of prior research on income mobility."

So, we’ve debunked the myth that the wealthiest Americans aren’t paying there fair share, we’ve shown that middle class Americans have received significant gains in income over the last decade, and that income mobility in the U.S. is a reality. What other excuses can we/they come up with to raise taxes? One might claim that this is necessary to increase revenues, or reduce the budget deficit. In a previous post I’ve already shown how revenues actually increased while the budget deficit drastically dropped after the Bush tax cuts.  Quite a bit of additional research actually shows that higher income individuals are extremely sensitive to tax increases, and that tax increases can contribute to decreased job creation and investment. 

Were it not for the recession, the data shows that the middle class and the American dream was thriving. Instead of focusing on class warfare inspired non-issues (at least when it comes to real data), the media, commentators and our law makers should focus on the real issues at hand, chiefly the regulatory climate and the uncertainty  (as mentioned last month) that it is creating. Besides being based on bad evidence and false perceptions, a ‘Buffet’ tax could also be detrimental to the economy and such talk only adds to the cloud of uncertainty preventing us from getting out of the current economic rut.

Homeland Security, The Knowledge Problem & Constitution Week

Below are excerpts from two economists (David Henderson and Sam Clovis) on faculty at the Naval Post Graduate School. Note, Henderson will be speakingat WKU this year during Constitution Week. (special thanks to the BB&T Center For the Study of Capitalism at WKU).

"Central economic planning can't work, explained Hayek, because no small number of people at the top, however brilliant or informed, can aggregate all the trillions of pieces of data needed to plan an economy well. The main information that matters in real time is what Hayek called "knowledge of particular circumstances of time and place" and this information is necessarily decentralized: it exists only fleetingly in the minds of millions of people.....Hayek's argument applies whether the good being produced is food, steel, or internal security. In fact, in her testimony before the 9/11Commission, Dr. Rice explained the problems with centralization eloquently;

 

                  You have thousands of pieces of information . . . and you have to depend to a certain degree on the intelligence agencies to tell you what is actually relevant,

                 what is actually based on sound sources, what is speculative. 

The lesson of September 11 is not that government should plan better and not that a Republican president plans better or worse than a Democrat president. The lesson of 9/11 is that central planning doesn't work and that government should not get in the way of our planning. "  LINK

 

In addition to the  'knowledge problem' discussed above, Sobel and Leeson have identified several other issues with the top down approaches in homeland security regarding incentives, the tragedy of the anticommons, and type II error policy bias. Absent market prices, how do we deal with these issues? Attempts to address these problems, to some extent, can be found in scholarship related to homeland security and federalism:

 

"an agency that forms partnerships with state and local governments instead of coercive top-down regulation-heavy regimes is an appropriate response on the part of the national government to deal with the particular needs of all the other governments in this country. Further, this agency should work at giving state and local governments as much flexibility as possible in dealing with own-source challenges. By facilitating cooperative networks of communities/jurisdictions a far more realistic and pragmatic approach to all hazards preparedness is a logical outcome. The national government should provide the organization around which such networking might take place." –Homeland Security Affairs VI, no. 2 (May 2010) – Sam Clovis

Efficient Markets and Prices

‎"I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge" - F.A. Hayek

"The financial crisis invalidated a naïve notion of "efficient markets," but the most sophisticated version is still viable. Whereas the invalidated version holds that markets never err and always adjust instantaneously, the sophisticated version, associated with the ideas of Adam Smith and F. A. Hayek, holds that markets mobilize individuals to realize gains from trade and to innovate and thereby produce generalized prosperity."
"In the 1940s, Hayek warned his fellow economists of the misleading standards of perfect competition and static efficiency in assessing the market economy. As he wrote in Individualism and Economic Order, "[T]hese adjustments are probably never 'perfect' in the sense which the economist conceives them in his equilibrium analysis. But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency" (1948, 87)"

http://www.independent.org/publications/tir/article.asp?a=762

"The great free market economic thinkers from Adam Smith to F. A. Hayek never argued that individuals were hyper-rational actors possessed with full and complete information, operating in perfectly competitive markets.... Efficient markets are an outcome of a process of discovery, learning, and adjustment, not an assumption going into the analysis."

http://theeuropean-magazine.com/348-boettke-peter/349-the-legacy-of-smith-and-hayek