I, Pencil

Not many short stories can claim an introduction written by Milton Friedman that mentions both Adam Smith's thoughts on the invisible hand and Friedrich Hayek's thoughts on the importance of dispersed knowledge, but Leonard E. Read's short story I, Pencil is able too claim just that. Few other authors can bring the making of a pencil and the free market together in such a basic and understandable way.

~Leave all creative energies uninhibited

Globe publishes BHI Op-Ed on prevailing wages

Taking on the canard raised by police unions and paid details, we take a look at the prevailing wage.

GOVERNOR DEVAL PATRICK'S announcement that the state will substitute civilian flaggers for police details on public-works projects represents a watershed in Massachusetts politics. A Democratic, pro-labor governor taking on one of the state's most powerful unions - who knows where this could
lead?

Skeptics characterize the action as more form than substance. The Legislature put locally authorized construction projects (as opposed to state projects) temporarily off limits for civilian flaggers. And the unions ceaselessly argue that the state prevailing wage law will prevent any real savings from being captured.

In fact, the governor has shaken up the status quo. Intentionally or not, he also exposed the much deeper flaws that run through state labor policy.

Consider the unions' argument about the prevailing wage. They point out that the prevailing wage for civilian flaggers is about the same as the cost of hiring police details - an amount approaching $40 per hour. Because contractors have to pay the prevailing wage on public works projects, the state won't save any money by substituting civilian flaggers for police details - or so they argue.

By making this argument, the unions have done us a service. If a law compels the state to spend the equivalent of $80,000 a year for someone to flag down oncoming traffic, then it's time to rethink the law.

Read the whole Op-Ed.

A Crack in the Dam

Today's Boston Globe, citing sources close to the new regulation, hopefully proves my prior judgment of D. Patrick might have come a bit early and been incorrect.

It seems that Patrick is indeed willing to stand up to rent seekers and has taken the first steps to opening up the flagger labor market. Based on the unnamed sources, the "plan, which will be developed by the Massachusetts Highway Department, will delineate when police details should be used and when civilians in bright vests with flags will suffice."

This does not seem to change how municipalities current operate, but as David Tuerck, Director here at BHI states"There's a crack in the dam now... the governor has shown a great deal of political courage in taking this step."

Hopefully this injection of competition will reduce the number of cops that I typically witness on my walk to work who could be put to use preventing crime instead of adding thousands to their annual salary and inflating the state budget.

Police Details and the Road to Serfdom

See this letter to the Boston Herald:
(http://www.bostonherald.com/news/opinion/letters/view.bg?articleid=1111714&format=comments&cnum=2)

It provides a good illustration of what I have long seen as the key implication of Friedrich Hayek's argument in his best known book, The Road to Serfdom: that the restrictions on personal freedom imposed on ordinary citizens by the looting class beget further restrictions, which beget still further restrictions until there is no one left for the looters to loot. At some point, the motto, "We are all looters now," becomes apropos.

Massachusetts is the only state that requires public utilities and public works contractors to use paid uniformed police officers at work sites along public roads. Other states use civilian flaggers, who are paid far less.

The pay for the Massachusetts-style "police details" is almost $40 per hour, and the practice of using them is characterized by rampant featherbedding. Massachusetts drivers commonly see detail police ignoring the traffic they are supposed to direct while talking away on their cell phones or chatting with construction workers. The Beacon Hill Institute just conducted a poll showing that 86% of Massachusetts voters want to end this expensive perk.

The letter to which I provide a link here comes from a police union official who is trying to preserve the union monopoly that presides over the hiring of police details. The Governor of Massachusetts, thanks in large part to revelations from the Beacon Hill Institute, is considering a proposal to end this monopoly and to introduce the use of civilian flaggers on a limited basis.

I urge readers to take a number of lessons from this letter and from the comments that follow (of which I offer one). The first lesson is that no claim is too absurd to make when it might serve the goal of permitting the person making the claim to pick the pocket of someone else. Consider the claim that the state could not save money by hiring civilian flaggers since state laws would require the payment of a "prevailing wage" that is no less than the wage paid the police. That implies that state taxpayers and rate payers should have to pay something approaching $80,000 a year to do a job that could be performed by any functioning human being after a few hours of training. Suffolk University hires PhDs for less than that.

The second lesson goes back to my point that one form of looting begets another. Consider the argument that police details are a bargain because they don't require the health and pension benefits to which civilian flaggers would be "entitled." But, of course, there is no entitlement to such benefits traceable to the Constitution or any other founding document. What we have is a society in which entitlements of this kind are being imposed involuntarily on employers and, to a degree, the workers themselves. Suppose a retired police officer, who already has health and pension benefits wants to work as a civilian flagger -- a job for which he would be, by the union's own logic, supremely qualified. Under this logic he would be entitled to benefits he doesn't need and that he would happily forgo in order to make his services more competitive. Nevertheless, the union bosses use laws aimed at looting those employers who would prefer not to pay health and pension benefits as an argument for looting taxpayers who would prefer not to use grossly expensive police details.

And that isn't the end of it. An argument frequently used by the union bosses is that police details are important because police can make arrests and even respond opportunistically to crimes taking place near the work sites they are hired to work. By that logic, we should have a cop at every corner, inasmuch as the probabily of a crime taking place at a work site is immeasurably different from a crime taking place at any other point where traffic is flowing. For that matter, we should use cops everywhere that crimes can happen. No more mall cops or university cops. After all, they can't make arrests but can only detain suspects till the real cops arrive. Put a real cop everywhere, since the cost of doing that pales in comparison to the benefit.

This is but a small saga in the history of union looting, Massachusetts style. The prevailing wage law, the practice of using project labor agreements and others loom larger. But this one is worth following since it plays so heavily on our emotions. Some of us -- this writer included -- are "law and order" types who want to love the police. It saddens us to see people called to such an honorable profession embarrass themselves in this way by perpetuating a scam aimed only at fattening their wallets.

Update! The Herald published my letter this morning.

Solution Lies in the Free Market System

On Monday, John P. Holdren criticized global warming skeptics for challenging the scientific "consensus" around global warming. He also accused skeptics of stalling the political process necessary to combat global warming:

The extent of unfounded skepticism about the disruption of global climate by human-produced greenhouse gases is not just regrettable, it is dangerous. It has delayed - and continues to delay - the development of the political consensus that will be needed if society is to embrace remedies commensurate with the challenge. The science of climate change is telling us that we need to get going. Those who still think this is all a mistake or a hoax need to think again.

The Boston Globe printed my response today.

SKEPTICS OF climate change not only doubt the "scientific consensus" behind global warming but the proposed mechanism to combat global warming.

Supporters of decisive action on climate change assume that the federal government must step in and solve the global warming crisis using a "cap and trade" or carbon tax program. Advocates of these programs do not realize that both these mechanisms will severely hamper economic growth, and neither plan will slow global warming.

The only way to slow global warming is to allow entrepreneurs to create more energy-efficient products and technologies. As the demand for these products grows, entrepreneurs will naturally react to market forces and direct their energies to producing more energy-efficient products at a cheaper cost. Government intervention is not the solution to this problem, the free market is.

Another Failed Government Stimulus Program

Martin Feldstein says the last federal stimulus plan didn't work nor will a future stimulus plan or tax rate increase:

The small rise in spending in response to these tax rebates is similar to what previous studies of one-time tax cuts found. It also corresponds to what both basic economic theory and common experience imply. Although someone who receives a permanent annual salary increase of $1,000 typically would increase his annual spending by an almost equally large amount, a $1,000 rise in wealth caused by a share price increase or a tax rebate would raise spending only gradually over a number of years.

All of the evidence on one-time tax rebates implies that the Obama plan to send $1,000 rebate checks would do little to raise consumer spending and stop the decline in employment. If the past is an indicator of what would happen, the $65 billion he proposes to spend on this plan would raise consumer spending by only about $10 billion, or less than one-tenth of 1% of GDP.

The distinction between one-time tax rebates and permanent changes in net income is also important for the debate about Mr. Obama's proposal to raise income and payroll taxes. Because those tax increases would be permanent, they would cause a substantial reduction in consumer spending and aggregate demand. Moreover, as taxpayers begin to focus on the possibility of such a future tax hike, they will reduce spending without waiting for such legislation to be enacted. If Mr. Obama is looking for a way to stimulate the economy, he could begin by discarding his proposal to increase future taxes.

Here is more on Senator Obama's tax plans.

HT: Greg Mankiw

Bailouts and Moral Hazard III

First it was Bear Stearns, Fannie Mae, and Freddie Mac.

Then it was the Massachusetts Turnpike Authority.

Now it's the MBTA.

Given the nature of moral hazard, this could be quite a long series of blog posts.

Patrick Unwilling to Follow Through?

In its lead editorial today, "No Public Interest In Police Details," the Boston Herald cited a recent poll by the Political Research Center and the Beacon Hill Institute, both part of Suffolk University. The poll found that a full 86% of registered voters would prefer civilian flaggers to police details at public work sites.

In 2004, Police Details: Protection or Perk, the institute completed a study which concluded that the local police detail system is costly and doesn't improve public safety.

Unfortunately for the '09 fiscal year budget, Patrick is unwilling to stand up to the police unions, and opting instead to “coordinate with all of the interest groups.” Read this as a move to put off the issue that the Governor and the police unions hope the public forgets. But the governor ought to read the poll results a lot more closely. The show of support for reform by is coming from registered voters, voters who put Patrick in office, which ought to force his hand.

Gimmicks vs. Economics

Cities and towns have come up with the most ingenious ways to increase their rates of recycling. Framingham is a perfect example of this:

Framingham has started a new recycling program with monthly themes tied to environmentally friendly practices, a move that is apparently unique among area communities even as it reflects a trend of municipalities going green, say organizers.

The town started its program in June but had its first real event July 24, when the theme was recycling electronics. On Aug. 16, the town will host a "Shred Fest," whereby residents can take unwanted documents to the recycling center for shredding. Next month's theme is recycling at home, school, and work, with a focus on green purchasing, Framingham officials say.

"We're looking at trying to have an event that will create a buzz," said Mike Lavin, operations manager for the town's Solid Waste Division. "We want people to recycle more."

It sounds like a lot of fun, but there's a much easier way. Currently Framingham pays for it's trash collection program through taxes. As I have posted previously, a move to pay-as-you-throw (PAYT) would increase the rate of recycling without much effort from the city. It doesn't rely on people caring about Framingham pride or the environment, but their own self interest.

With PAYT, it pays to recycle.

Anti-Business Climates and State Budget Deficits

States that have unfavorable business climates generally tend to have high taxes that attempt to redistribute income across the state. Not surprisingly, states that try to redistribute income overextend themselves and run large deficits. Steve Malanga, an editor of the excellent RealClearMarkets.com, found that the top five anti-business states are running combined deficits of $33 billion! That amounts to 2/3 of all projected state budget deficits (twenty-nine states are projected to run deficits).

Development Counsellors International surveyed business executives to find out what states they thought were too hard to do business in. Executives named New York, California, New Jersey, Michigan and Massachusetts as the most anti-business states. Executives complained that these states had high taxes and too many regulations. As Malanga writes:

But any look at the states with the biggest deficits reminds us that governors and legislatures are largely the authors of their own problems, and that the biggest trouble some of them seem to have is that their taxing and chronic overspending have made them toxic to the business community.

This survey is interesting in comparison to BHI's 2007 State competitiveness Report. BHI found that the five states mentioned above had terrible fiscal policies for business competitiveness. The best fiscal situation was Massachusetts at 34th, while Michigan was 37th, New Jersey 46th, California 49th and New York finished last. However, it terms of overall competitiveness, Massachusetts finished 2nd, California 24th, New York 38th, Michigan 41st, and New Jersey 43. While state fiscal policies might have an effect on business climates, human capital, technology and security play important roles in state competitiveness.

Three Years Later: Still No Eminent Doman Reform

It was over 40 years ago that Herbert Gans chronicled the destruction of Boston's West End through so-called "urban renewal" in The Urban Villagers. The neighborhood had been home to thousands of working class Italian families when it was declared "blighted," taken by eminent domain and razed by the city. It is now home to luxury condos.

In 2005, the Supreme Court took up its first eminent domain case in decades with Kelo v. New London. The court ruled that the government can take people's land and hand it over to private developers just with the vague promise of "economic development" for the area. States across the country quickly reacted in horror and passed their own legislation limiting eminent domain.

Massachusetts was not one of those states. State Representative Marty Walz is now attempting to get legislation passed, but it looks like it is being stalled in the Senate. Local politicians predict doom and gloom if the legislation is passed, but studies have shown that just ain't so. In fact, another studied has shown that poor minorities are most likely to be victims of these land grabs.

So where exactly is the "public good" here? Is there someone out there who can explain and defend the use of eminent domain for me?

Broadband Internet as a Public Good

The governor is signing a bill today that would spend $25 million in taxpayer money to bring high-speed broadband internet to communities that do not currently have it.

I must have been out that day in economics class when the professor explained how "really fast internet" was a public good.

As federal judge Janice Rogers Brown once asked "When did government cease to be a necessary evil and become a goody bag to solve our private problems?"

On the brightside, the BHI blog will load much faster in western Massachusetts and the good people out there can more quickly download studies detailing how lower telecommunications taxes lead to more access.

Happy Birthday Milton Friedman

Were he still alive, Milton Friedman would have turned 96 yesterday. Friedman was one of the leading post-war free market economists, encouraging less government intervention and more responsibility for the individual. Friedman's success rest of his relentless ability to do what economists, almost by nature, are unable to do: speak about complicated issues in understandable terms. While most of his academic work centered around price-theory, he earned the 1976 Nobel Prize in Economics for his work on monetary policy.

Two quotes from Friedman sum up his thoughts on price theory quite well.

"Governments never learn. Only people learn."

"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."

Price signals and gas prices

Ed Glaeser has a great op-ed over at The Boston Globe on "the folly of 'fixing' energy price hikes". Nothing revolutionary, but he does a nice job of discussing how the high gas prices encourage people to use less gas/conserve energy and any attempt at lowering gas prices will only cause further problems. Prices act as a signal and the signal now is to use less.

But politicians sometimes react to high oil prices as if the Bill of Rights had bestowed on Americans the inalienable right to cheap fuel. Elected solons are now considering a Home Energy Affordability Tax Relief Act, which promises households a tax credit equal to one third of a home's energy costs up to $500. Some congressmen have called for restricting energy markets in an attempt to curb "speculation." Earlier in the election season, two presidential candidates came out for a temporary summer holiday for gas taxes.
Politicians seem to have an irresistible urge to intervene whenever voters start suffering from higher prices, but usually those interventions do more harm than good. Energy price controls were the clever idea of the 1970s, which only managed to give economists more evidence that you can't repeal the laws of supply and demand. Fixing prices below the market level, whether on oil or apartments, only produces shortages and long lines.