Corruption and Communism

            Mancur Olson’s book, Power and Prosperity would predict that communist countries are at a much greater risk for corruption than are democratic societies with a free market.  It then comes as no surprise that when Mr. Xi, the new leader of the communist party in China, made his first speech he pointed out that corruption is one of the main concerns surrounding the success of his party.  This corruption comes as a result of market contrary policy.  Everyone inside a communist country will at some point see a reason to break the laws, even those who help to lead the country.   It should not be surprising then that the last leader of the communist party is accused of wide spread corruption.  The final straw for him was actually an accusation of involvement in a murder.  This may be a little outside of what Olson predicted would happen in a communist party, but we can see how corruption such as skimming off the top could lead to a crime as serious as murder.  It could very easily happen in an attempt to conceal the initial crime of stealing from the regime.

            Respondents to Mr. Xi’s speech pointed out that nearly every new leader of the communist party has mentioned combating corruption, but non have been able to limit it.  This would be inline with what Olson would predict, the system of communism fosters corruption so it will be impossible, or nearly impossible, to get rid of.  If what Olson says about corruption and communism is true, and so far all evidence what point to it is, then communist China will continue to have problems with corruption until they become so sclerotic that they eventually can no longer “pay the bills.”

Source Article Link:

http://www.nytimes.com/2012/11/20/world/asia/new-communist-party-chief-in-china-denounces-corruption.html?_r=0

Sharing Stationary Banditry Between Countries

            Enrique Pea Nieto from the Washing Post claims that the U.S. and Mexico can prosper as partners; this last U.S. presidential election demonstrated to him the growing demographic bonds between the U.S. and Mexico that connects the two counties’ prosperous futures.  “To build a more prosperous future for our two countries, we must continue strengthening and expanding our deep economic, social and cultural ties.  It is a mistake to limit our bilateral relationship to drugs and security concerns.  Our mutual interests are too vast and complex to be restricted in the shortsighted way…. I want to discuss the best way to rearrange our common priorities.  After all, our agenda affects millions of citizens.”  I think what he is implying is that Mexico may understand the logic of force and exchange and would like to become a stationary bandit with the U.S. government.  Mexico seems to want a larger population to steal from; they see that the net benefit for trade outweighs the net benefit for force.  “Perhaps the most important issue is finding new ways to bolster our economic and trade relationship to attain common prosperity in our nations.”  Clearly Mexico wants to enhance their stationary banditry power through the U.S. understanding of Diplomacy.  Mexico needs more people to prosper under them in order for them to see increased revenue in their country.  “Consequently, in NAFTA we have a solid foundation to further integrate our economies through greater investments in finance, infrastructure, manufacturing and energy.  Together, we must build a more competitive and productive region.”  For Mexico to become a successful bandit, they need the help of the United States power and a growing population that is more prosperous.  Right now it seems to me that the Mexican government is stealing too much and the country has become corrupt.  Thus,  “Above all, our mutual interest lies in our intertwined peoples.  More than 1 million U.S. citizens live in Mexico, and my country remains the largest source of immigrants to the United States.  Some analysts detect new momentum for comprehensive immigration reform since the U.S. presidential election.  All Mexican would welcome such a development.”  It’s obvious that Mexicans would be open to higher immigration rates into their country.  Again, for their government the be better off they need to protect their own property rights and play less of a predator role on their society.  Mexico needs more people to steal from, but first they need to understand the logic of force, exchange and diplomacy in order to become a successful stationary banditry. 

http://www.heraldonline.com/2012/11/25/4438329/us-mexico-can-prosper-as-partners.html

Soft Budget Constraint

I was unable to find a good publication that related to something that caught my attention in chapter eight of Power and Prosperity so I figured it best to just discuss it.

The subject is the emergence and implications of a “soft budget constraint” within an autocracy in which the government owns the means to production, and therefore, allocates resources to producers (Olson, pp. 147-148). The basic idea is that a firm’s actual productivity does not have an effect on the resources it receives. Whether or not a firm is successful enough to cover its costs, it will continue to receive the same amount of resources. It is easy to see the major failure of a system that works in this way: in a free market system, a firm that is unable to cover its costs will eventually fail. By not allowing this natural outcome to occur, weak players are given an advantage while strong players are faced with a disadvantage.

Although in a free market economy within a democratic system of government (like that of the U.S), firms are not simply given a stock of resources with which to work, similar types of inefficiencies have been observed throughout history when government has stepped in to offer a helping hand to businesses that have proven to be negligent enough to have a severely imbalanced budget. The mere existence of government bailouts gives an advantage to the weak and a disadvantage to the strong, resulting in the same distortion referred to in the book: firms that do not cover their costs are not required to stop using resources.

When the government itself is the source of huge quantities of deficits, meaning that it has done a very poor job of balancing its budget, not allowing it to fail almost seems to be another violation of the natural order of success and failure. I was listening to 740AM here in Colorado Springs and a caller (probably a Liberal) asked the host why Republicans are so opposed to letting us go over the fiscal cliff, given that it would essentially force the government to fix its spending problems. The host’s response was that he personally is not okay with the idea that we go over the fiscal cliff, because it was designed as a punishment for not coming up with a solution and absolutely everyone suffers from this punishment. Although the consequences of going over the highest level of the fiscal cliff are sickening to think about, I think the caller had a good point, especially if you take into consideration not only the self-correcting philosophies of a free market system, but also Thomas Jefferson’s argument that governments occasionally need to be refreshed, mentioned in another of Olson’s books The Rise and Decline of Nations. It seems that if the country goes over this cliff in the worst possible way it may bring about the threat of a revolution in the most general sense of the word. Letting our government come severely close to failure or even actually failing may allow for a sort of “mini-revolution”. Don’t get me wrong, I do not enjoy the idea of this country being taken over by another, but if there was a real threat that it may happen, because our own government got itself into so much fiscal trouble that we are no longer able to finance spending through borrowing from other countries, essentially leading to bankruptcy, it just may be enough to slap some sense into the people we elect to run this country. Then again, given the logic of collective action, it might not work out that way. Either way, I think from the angle of market efficiency, that caller had a good point, despite the fact that he is likely an advocate of ObamaCare.

Works Cited

Olson, M. (2000). Power and Prosperity. New York: Basic Books.

The Chevrolet Volt

In 2009 President Obama ordered the bailout of the American auto industry GM because they were going bankrupt. With the promise of the bailout, GM was required to produce the new energy efficient Chevrolet Volt. This vehicle reportedly gets 60 miles a gallon and can save the environment from greedy American consumers. The government will subsidize each one of these cars sold to encourage cleaner energy. Is the Volt going to solve our problems as the largest contributor to "man made global warming"?

If we take a look at the numbers behind the scene for this vehicle, it is economically a disaster. According to Investor's Business Daily "Volt is a problem for GM: With Chevrolet falling well off the pace to sell its target of 40,000 cars this year — only about 13,500 have been sold — GM has shut down Volt production for the second time this year." The Volt is not as profitable or affordable/consumable as the Toyota Prius. The volt "costs about $89,000 to build" and GM is in the range of " losing nearly $50,000 on each Volt it makes." How much can American tax payers put up with before the bottom falls out of this government endeavor. Lets not forget that Volt owners are required to plug their car into the wall every so often to re-charge it. However the better part of all electricity consumed in America comes from coal, which is far from clean energy.

Because GM accepted a large amount of funds from the government, i.e. they touched the force, they are required to do what they are told. If the Volt does not pick up sales, more people may be out of work, and GM may have to drop the fuel efficient program required by the government in order to survive. Just because GM made a capital mistake and needed the government to bail them out,       "[t]axpayers shouldn't be required to finance another moment of the left's green fantasy."

 http://news.investors.com/ibd-editorials/091012-625256-taxpayers-should-not-be-saddled-with-gm-volt-losses.htm#ixzz2Dk1qkthJ

Groundwork...?

Power and Prosperity started with a question about the Soviet Union: whether or not a dictatorship, to enforce free market policies, would be necessary to restore that country's well being.  Olsen looks at that question all throughout the book, bringing forward the system that was used to create a powerful Soviet economy, and how it started to fall when groups of people started acting in their own welfare-maximizing interests.

China, for a time, emulated the Soviet system of state owned enterprises (SOEs), before famously moving in the direction of a more capitalist system.  That being said, they still retain some SOEs.  I know this because of a Reuters article, "Chinese state-owned enterprises defend further growth," by Charlie Zhu and Lucy Hornby.  The article presents arguments concerning the limitation of the remaining SOEs, how, unless they expand, they could hamper China's continued growth.  Furthermore, the article is heavily weighted with the conclusions of experts that it needs to expand for this reason, while still noting that the employment growth comes from the private enterprises.

The question is interesting.  China's stability and growth in recent decades clearly indicates that they were well within their production possibility frontier, to borrow a neoclassical phrase.  Yet, China has also had a managed currency for a long time, and I have heard analysis to the effect that it is the steady backbone of SOEs that have kept China more stable than the rest of the world in recent years.  I honestly don't know what this data is telling me: is control to this degree good or bad?  Moreover, how much does it depend on the nation's cultural expectations?

Shah Jahan's Stationary Banditry

http://www.johnkay.com/2012/11/21/the-monumental-folly-of-rent-seeking

In this article, John Kay attempts to draw conclusions about the Mogul empire based on observations from his recent visit to India. According to Kay, Shah Jahan "may have appropriated as much as 40 per cent of what we now call gross domestic product to support a lifestyle of exceptional ostentation and self-indulgence." He makes this statement after explaining how he was in awe after seeing the extravagant Taj Mahal and the other vast expenditures of Shah Jahan and his son, "who was exasperated by his father’s penchant for monumental building, anxious to maximise his own share of the loot and concerned by the scale of the levies on the population."

The actions of Jahan and his son, according to Kay, "epitomize rent-seeking." However, what Kay calls rent-seeking, I (and Olson) would call banditry, and a failure at that (if one accepts that a successful bandit leaves conditions favorable to his heir). As Olson would suggest, a stationary bandit collecting even close to 40% of GDP would surely lead himself to his own demise, as it did with Jahan and his son. I don't know much of the details of the Mogul empire, but I would guess that Jahan the first was successfully overthrown because the citizens saw reduced incentives to produce, which lowers the standard of living. History shows that if people are not satisfied with the standard of living their government fosters, the regime will eventually change. Although Jahan was overthrown by his son, I would guess that the people of India at the time were more tolerant of this change than they would be had Jahan I not taken so much. 

The second half of Kay's post is completely consistent with Olson's ideas in Rise and Decline regarding widespread rent seeking.  He even acknowledges the problem in the US, "The US demonstrates an unhealthy affinity between politicians and leaders of finance and business, facilitated by lobbyists and lubricated with campaign finance."

However, he got it wrong in one of his final statements, "The success of market economies is not achieved by policies that encourage people to be greedy and imposing as few restrictions as possible on what the greediest of them do. That was the world of Shah Jahan and it produced very little in the way of economic advance." I agree that public policies should prevent people from being greedy when it comes to their demand for rent or force (what that statement seems to be talking about), but the conditions in India at the time did not allow the Shah to rent-seek. He was government, and therefore the source of rent. A successful bandit leaves his society with enough resources to be productive, so he can have a continuous growing source of capital himself. As Kay stated, the Mogul empire ended after only two generations, which to me suggests that they were taking far too much to effectively maintain their force. 

Mail going the way of the Twinkies?

  Twinkies may not have been such a burden on the U.S. economy but what about the U.S. Postal Service?  The Postmaster General quoted that there are many similarities between Hostess and the U.S. Postal Service.  The Postal Service is 28 times the workforce of Hostess and the Postal Service only squeezes by on labor costs and a service on the brink of extinction.  
  Unlike a private enterprise, the Postal Service can’t close most locations even if they’re unprofitable. It can’t raise prices on its primary product by more than the inflation rate or change its pension or health benefits. And as of Sept. 28, when it exhausted its $15 billion borrowing limit with the U.S. Treasury, it can’t borrow any more money.  The U.S. Postal Service is running with no more than four days of operating cash on hand.  Labor costs have grown to 80 percent of expenses, even after 280,000 jobs were cut since 2000, as mail volume has dropped 26 percent from its peak six years ago.  
  In 2011, with mail volume and revenue well past its peak, the service signed a contract with its largest union that prohibits most employees from being fired if the service wants to downsize. The service is now offering its second round of early-retirement incentives, giving as many as 114,000 American Postal Workers Union members $15,000 apiece to retire. 
  Applying what we know of group theory, the U.S. Postal Service is in deep trouble because the demand for the goods and services they provide are almost no existent anymore.  They are a large government agency that can barely run anymore because of the loss of demand.  There are too many people to provide for and the unions won't allow the post workers to be fired.  Because of this the government has to bail out one of its own agencies to keep them going but with the fall out of Hostess, the Postmaster General sees too many similarities between them.  The postal service is barely running on a weeks worth of pay because of the loss of demand and they are at there limit of borrowing from the treasury.  So where do we draw the line for another business as important as the P.S. when it puts a strain on economy?   

Respect States' And Citizens' Rights Act

I want to talk about Amendment 64. Whether you are for or against the amendment is now no longer of concern for it is a part of Colorado’s Legislature. The pros and cons of the amendment are widely known and argued. I wish not to discuss these views but rather talk about an act that Colorado Representative Diana DeGette has introduced that, if passed, would exempt states from federal laws of which ban the sale, possession and use of small amounts of marijuana by adults. The bill is known as the “Respect States’ and Citizens’ Rights Act” and it so far has support and sponsorship from both Liberal and Conservative representatives within the state of Colorado. Basically the act would nullify certain sections of the Controlled Substances Act for states that have passed their own laws pertaining to the governance of marijuana – which we know is only two states; Colorado and Washington.

I am not writing this to bash Amendment 64 or to praise it. My position on the issue is not for this discussion. I simply feel it to be an important issue to talk about – specifically in regards to my feelings that the Federal Government should respect a state’s laws and allow for implementation of said laws. Like it or not, the people have spoken. The majority of voters want marijuana to be treated like that of alcohol and I for one feel the Feds should not interfere. In any case, it will be fascinating to see what the Feds do about this unprecedented situation. According to a Huffington Post article, “In Colorado, the governor, the attorney general and both U.S. senators say they need guidance from the federal government before deciding how to proceed on implementation of the law.” It should not have to be this way. The Feds should tell Governor Hickenlooper that they will stay out the way and allow the law to be fully implemented. By interfering, the Federal Government will be denying great sums of money that would otherwise be injected into Colorado’s economy. In fact, the benefits to the economy are perhaps the chief reason the amendment passed in the first place. Look at it this way: 55 percent of voters voted in favor of the amendment – does that mean that all 55 percent partake in the use of marijuana? Of course not! There had to be other motivations at stake and I believe those motivations were economically driven. Coloradans want this law to be enacted and the Feds should stay out of it. There is simply too much money to be made and too many jobs to be created for the Federal Government to come in and shut it all down. There are certain Colorado Representatives that feel the same way I do. For instance Mike Coffman, the US Representative for Colorado’s 6^th congressional district, had this to say about the proposed act. “I voted against Amendment 64 and I strongly oppose the legalization of marijuana, but I also have an obligation to respect the will of the voters, given the passage of this initiative, and so I feel obligated to support this legislation.” At this point it has little to do with whether one supports or opposes the law – it should rather be of concern in fighting for our state’s rights to implement their own laws without the interference of the Federal Government.   

Yet these sentiments are probably too idealistic. In reality, the Feds will most likely do their damndest to interfere with what should otherwise be a completely isolated agenda for the states of Colorado and Washington. Only time will tell. With that said, it will certainly be fun to sit back and watch how it all plays out.         

Government Intervention?

WARNING: The following is uncomfortable for me to talk about and may offend others…

After reading another article in The Economist, I am once again, reminded of Prof. Eubanks saying that “a good government is one with which its people prosper”. In this case, however, the author of the article is not talking about protecting private property rights. I am typically one to criticize a government for getting in the way of the private sector by taking on the role of job creator, but as the article reminds its readers, timing is everything and sometimes government spending can actually do more good to help the economy to recover than just sitting back and letting things work themselves out. The severity of the Great Depression as a result of laissez-faire economic tactics is really the only evidence needed to support the idea that sometimes it may actually be better for a government to act. Although I am one to argue that it is usually better in the long run to let things run their course, I have to consider that without government intervention, there may come a time that the economic state of the U.S. becomes so beaten down that there is no way to recover and “The Land of Opportunity” will crumble.

I realize that advocating for government intervention is uncomfortable for many of us. Perhaps, it will help to stress that there is a “tipping point”, where the amount of government spending used to stimulate the economy causes the net result to be extremely negative. Particularly in recent times, it seems the amount that has been thrown at the current situation (combined with policies that have largely disincentivized private sector job creation) may be considered something that has kept us “afloat”, but that has severely worsened the near and long-term economic forecasts. So alongside timing, balance is also key, meaning that when it is clear one government stimulus tactic is not working, doing more of the same thing is not going to make things any better. We are seeing the consequences of ignoring this very simple rule right now. The increased spending and debt accumulation that the U.S. government has acquired is not sustainable; it must be reduced. This means that many of the jobs kept or created with government “aid” will be lost in the near future, adding to the already millions of unemployed individuals.

So, even though it is uncomfortable for me to admit, in the face of severe economic decline it seems better for the government to act than not to act. It is, however, even more important that the correct tactics are used, in able to avoid situations like the one we are currently dealing with.

http://www.economist.com/news/finance-and-economics/21565150-short-term-austerity-aftermath-severe-crisis-may-prove-more-painful

The Logical UN

Over the past month, our class has been learning about the implications of Olson’s logic when applied to extremely large groups (i.e. nations). We learned that as long as a nation remains stable, special interest groups proliferate and increase in size. Eventually, these groups begin to lobby the nation’s government for special treatment, leading to increases in bureaucracy and decreases in the effectiveness of the government as a whole. Thinking on this process, I began to wonder: if a nation’s government is tends to become more ineffective over time, how effective could the United Nations, a group made of nations, possibly be?

                If we look at Olson’s implications, the outcome seems fairly predictable. A group of the same magnitude as the UN would surely be a bureaucratic juggernaut, with little, if anything, ever actually being accomplished. Special interest groups from all over the world ranging in size from small cartels to entire nations would flock to the Council, each trying to get a political leg up on their competitions. Lastly, in a group this size, the average citizen of any member nation has even less say in United Nations policy than in their own country’s policy, which would imply that the leaders could pass any legislation that they wanted, regardless of how unpopular it may be.

                Interestingly enough, these issues and more comprise the primary criticisms of the UN today. Many complain that UN policies are ineffective, and that the UN "only addresses the strategic interests and political motives of the permanent members, especially in humanitarian interventions." Just recently, the Canadian foreign minister criticized the UN, stating that “The preoccupation with procedure and process must yield to results.” It seems that, once again, Olson isn't too far off the mark. 

http://www.cbc.ca/news/canada/story/2012/10/01/pol-baird-united-nations-monday.html

http://en.wikipedia.org/wiki/Criticism_of_the_United_Nations

Obamacare and Job Growth

This election will have a major impact on what the future of Healthcare in the United States will look like. If President Obama is re-elected he will most likely carry out the plans to enact the controversial issue we refer to as "Obamacare." If challenger Mitt Romney wins the presidency he is likely to either reform or attempt to repeal it. Of course all of this will take the cooperation of the senate and house to decide what is best for the country and/or their given state.

What does Obamacare really incentivize however? Occording to David Gamage in the Wall Street Journal "ObamaCare's Cost to the Working Class" it will do harm to middle income families and what type of insurance they can afford. Gamage seems to have done a fair amount of research on the subject and explains "a worker supporting a family of four deciding between a job paying $54,000 a year without health insurance and a job paying $72,000 a year with insurance would lose only about $7,000 in annual subsidies by accepting the higher-paying job. And a single employee deciding between those two jobs wouldn't lose any subsidies by accepting the higher-paying job" (Gamage 1). This shows us that people that have to support more people in a family are going to have to spend more to support not only themselves, but the single people that will be accepting the free healthcare.

This may also incentivize employers to hire employees on as part time employees so that there is no need for them to provide any healthcare to the employee and they will have to cover it themselves. Another piece of blowback that may be unforseen is the incentive for people not to get married or in some cases to get divorced to save money on not having to buy health insurace and have employers provide it. People respond to incentives, and when the incentive is to save money and choose a cheaper health provider we will see interesting things with marriage rates.

http://online.wsj.com/article/SB10001424052970203335504578086702676417058.html?mod=WSJ_Opinion_LEADTop

Does Romney Understand The Logic?

http://www.huffingtonpost.com/2012/07/31/mitt-romney-poland_n_1723013.html

In Warsaw, Poland Mitt Romney was cited as praising the communities of Poland for progressing towards “economic liberty and smaller government rather than heeding the false promise of a government-dominated economy.”  We see the opposite problem here in the United States where we have our Congress spending all of there time figuring out how to hand out different forms of rent seeking to companies, organizations and individuals.  Through RADON, we have learned that this emplaces a sclerotic effect on our economy, slugged down from government backing resulting in a decline of our nation.  Romney goes on to praise Poland for their higher living standards and strong military.  What we are talking about in class and Romney’s comments coincide with this year’s main theme of smaller government, reduced spending and fewer regulations for small business.  Romney claims Poland is prospering because it has set out to “stimulate innovation, attract investment, expand trade and live with in their means.”  He goes on to say Poland’s success is a reminder that “free enterprise can propel an economy and transform a society.”  What Romney is saying supports what we have read in RADON by Mancur Olson.  Could it be that Romney understands the logic of collective action and the necessity to reduce the role of government?  It seems as if he does understand our system of political economy and the role special interest groups play in the growth/sclerosis of our nation.

In our system of political economy, the more special interest groups we have within our nation the slower we will grow; which is the main concern many Americans have.  The slow growth is a result of a large flux in rent seeking from the government; another words a giant reform in our government’s role within our economy.  Therefore, our government has to devote more time (opportunity cost) to rent seekers and not towards productive factors for the slugged economy.  When we talk about growth, most people would measure it by the dollar even though we call it product.  What GDP really measures is the shift in our production possibilities frontier.  We use the PPF to measure the growth of our economy, if we expect growth then we should expect an outward shift in the PPF curve; how far are we shifting out per unit of time.  What we are witnessing is stagflation during the downturn of our economy, that is inflation and unemployment and when it is sclerotic we slow down and start to decline.  As we learned in class, people thought it would take forever for France, Japan and Britain to recover after the wars.  In fact, they prospered quickly because all of the special interest groups were cleared out (like having your arteries cleared) so the natural economy could grow again at a rapid pace.  Then as we read about in RADON, once these countries became stable and prosperous again they began the sclerotic effect again, experienced stagflation and slowed down from the slug of special interest groups.  I still am undecided about what candidate I will vote for because I have asymmetric information on where there values sit.  I think we need a president like Regan who viewed his campaign through economic liberty where he prioritized protecting property rights.  It’s arithmetic, if capital is whipped out then you will see a lot of growth; we need a president that understands economic liberty and protects our property right.  I think Romney shows signs of it, but I’ve never felt so uncertain about our presidential candidates.

Unemployment rise to record in Euro-Area

  With the problems suffered in Greece, the rest of the EU is suffering its fair share of problems as well.  
  We complain about the unemployment rate being around 7.8 - 8 % while other modernized nations like the EU have unemployment rates of above 11% with Spain and Ireland leading them with 25.8% in Spain and Ireland at 15.1%.  The debt crisis in Greece has pulled many of the nations of the EU into recessions and erode investor and business confidence.  Many big companies in Europe are also downsizing because of the recession creating the unemployment rate to grow.  Joseph Stieglitz, a Nobel-Prize winning economist and professor at Columbia University, said in an interview on Bloomberg Television on Oct. 30 that he’s “very pessimistic” about the prospects of a European recovery.  “Basically Europe has put in place austerity packages that almost inevitably will lead the economy to become weaker, they haven’t put in place anything that will promote economic growth,” he said. “It’s difficult to see what the impetus for real growth in Europe will be.”  Should the EU or more over the nations who have been suffering because of unemployment look to restructure how things are run in the country?  According to the Rise and Decline of Nations, I think so.  Over time, there must have been coalitions that have grown to the point where it has become inefficient and hinders progress.  So if the nations of the EU want the unemployment rate to go down then they have to figure out what is going on and fix what is happening before they fall into a deeper recession or depression.  

Resources: 
http://www.bloomberg.com/news/2012-10-31/euro-area-unemployment-climbs-to-record-inflation-slows-1-.html