Is There Such A Thing As A Free Lunch?

It seems like everyone wants stuff for free now-a-days.  Aly and I use "buy one, get one free" coupons all the time.  When I go to Costco, I like to enjoy the free samples available.  Sometimes I find myself doing or eating things that I don't like, just because they are free.

Liberals seem to want the government to provide free health care, free food, a "free" salary to the unemployed, free homes, free birth control, or even free diapers.  But is anything truly free?  There are 2 unseen problems for getting stuff for "free".

1. Nothing is free.  Everything has a cost associated to it.  Someone is always paying.  Those samples at Costco?  Someone paid a worker to produce that sample, the food itself cost something, someone paid to ship it to Costco, and Costco is paying the employee to distribute it.  Free health care?  Someone has to pay the doctor's salary, and if no one repays the doctor for his work, then it comes out of the doctor's pocket.  The doctor pays.  Free salary to the unemployed?  Where does the money come from?  It may be free to someone, but it is costly for someone else.

2. Things that come from the government, don't actually come from the government.  The government is simply an entity that survives on OUR tax dollars.  They have absolutely no income except that which is given to them from its fruitful citizens.  You may think that the government can print money, so it is free money.  Does that sound right?  If the government actually could print unlimited amounts of free money without a reciprocal affect, don't you think we would have already solved the problem of world hunger along with any other problem in our world?  The truth is, every dollar that is printed makes everyone else's dollar less valuable.  It's kind of like cutting a pizza.  If you have a 16" pizza sliced into 8 pieces but there are 12 people, does cutting the pizza more and more make the pizza bigger?

Next time you hear someone say they think health care should be free for everyone, ask yourself, "but who would pay for it?"

Creative Destruction

Creative destruction is the term economists use to describe industries that die due to better technology.  The classic example is the typewriter.  Before people used computers and after people wrote by hand, people used typewriters.  These machines were so great!  The type came out neatly, and people could write much faster with a typewriter than by hand.  Because of the wonderful invention, sellers of typewriters sprung up across the nation - creating thousands of jobs.  Then the computer came along.  Typewriter shops across the nation and world went out of business.  Thousands of jobs were lost.  People demonized the computer industry and labeled it as a job destroying industry.

Laughable, right?  Computers destroying jobs...  Believe it or not, people are making the same argument today.  Newspaper companies complain that news comes free online.  And the President of the United States demonizes ATM machines for taking the place of bank tellers.  Ignorantly he said, "there are some structural issues with our economy where a lot business have learned to become much more efficient with a lot fewer workers."
  

This argument has been made for centuries and will always be made by the people who don't understand the concept of creative destruction.  When industries are replaced by better or more efficient methods because of changing demands of the customers, the jobs seem to disappear.  The fact is though is that it is an ever-revolving cycle.  The jobs don't disappear, they change hands.  And society is better off.  Any product you can imagine probably destroyed an industry, but made the world better.

This post was inspired by George Will's blog post today.

Minimum Wage

You may have heard of supply and demand.  In the labor market, the suppliers of labor (employees) are represented by the "S" curve, and the employers (McDonalds) represent the "D" curve.  The market will naturally, via Smith's "invisible hand", determine the correct wage for the amount of labor being offered in the economy.  This wage is represented by the intersection of the S and D curves (P1 below), or when Supply = Demand.  When the government decides that this wage is not "fair", they mandate a minimum wage that employers must pay.  This sounds great, right!  Now the little guy gets more money!  Not so fast.  Lets say the equilibrium wage represented by P1 is $6.00.  When the government steps in and requires employers to pay $8 (P2), look at where P2 intersects with the supply curve and the demand curve.  Who is willing to supply labor at $8/hour?  A lot more people, right?  But how many employers demand labor at $8/hour?  Quite a bit less (Q2).  What ends up happening is employers become more efficient with the laborers they already employ.  They do this by laying some of their workers off and increasing the productivity of the workers left over, or by employing machines - which don't require wages.  The government's intent was to raise the quality of living for the equilibrium number of workers (Q1), but the effect is that people get laid off, and the people left with the jobs in the end most likely are not the people that the mandate was trying to help.  

You may be saying, "Sure, that's what the graph says, but that's not what really happens."  There are actually many example of this effect.  Walter Williams describes multiple scenarios on his blog, and here, and proves that the law of supply and demand actually does hold even in this scenario.  The law being: The higher the price of something, the less people will take of it; and the lower its price, the more people will take of it.

More from Walter Williams: First here, Second there, Third somewhere.

Presidential Profile: Rick Santorum

Rick Santorum has a lot of problems when it comes to Economics.  He has the most baggage in his voting record, or at least as much as Newt Gingrich.  Rick Santorum has been an "active duty" politician for 16 years, first serving in the House of Representatives and then a Senator for Pennsylvania for 12 years straight.  During this time, he cast a lot of votes.  His voting record can be found here (via votesmart.org). 

He made a few bad Economics votes, such as voting to raise the minimum wage which seems like a good thing for lower-income workers, but in fact has been proven to hurt more people than it helps by forcing employers to lay their workers off instead of increase their wage.  Employers then either double the work load of the remaining workers, replace workers with wage-free machines, or produce things in China where they can pay remarkably low wages.  

Rick Santorum voted for No Child Left Behind.  There are arguments as to whether this program is successful or not, but regardless, it is bad policy.  It has huge expenses and gives more power to the Department of Education.  This federal department should not exist - it creates too much waste and inefficiencies.  The responsibility to educate should lie with the States and local government.  Let the states come up with their own programs, and let the people migrate to the state with the best program.  Competition between the states will improve education while decreasing cost and inefficiencies.  

Rick Santorum has voted to increase military spending every single time that he has had the chance, and he has voiced that he will continue to do so (to be fair, so has every other candidate but Ron Paul).  But Rick seems to be the one who is most emotionally and religiously attached to protecting our allies and destroying our enemies.  Emotion and religion should not play a part in defense spending and military action.  Keep in mind, that defense spending is our 2nd largest budget item leading to our $15,300,000,000,000 debt.

Rick Santorum has increased the debt limit 5 times since he has been in office.  The debt limit increases allow Congress to spend more and more and more and more.  We need someone with the courage to vote against these debt increases, forcing us to default on our payments to our debtors, causing them to downgrade our credit, thus causing us to cut our welfare and military spending.  Rick Santorum could not make this tough decision, so how can he make tougher decisions as President?

These are a few reasons why Rick will not win my vote.  

Presidential Profile: Ron Paul

Ron Paul is running as a Republican, but is known mostly as a Libertarian.  He believes in following the American Constitution in determining the role of government.

This means that drastic changes would occur with President Paul, and they would pretty much all represent free-market philosophy.

President Paul would phase out Medicaid, Medicare, Social Security, Food Stamps, Unemployment insurance, and almost any other federal program that you can think of.  If it's not in the Constitution, he is not for it.

The real effect of these positions is not that any of these programs would be abolished.  As President, you don't have the authority to do that.  The greatest power given to a President is his power to veto.  This power allows him to nullify bills that pass through congress.  Using this power, Paul would not pass any increase in growth to these programs, thus forcing congress to pass budgets that would keep these programs from growing any more.  Then he would advocate slowly decreasing these benefits until they are gone (over a huge generational time span).  These social programs are the largest budget item and are the culprit of our ever-increasing federal deficit.  They must be reformed, and if you're a believer in the Constitution, these government dependency programs must be phased out.

President Paul would decrease military spending to Constitutional levels.  He would close down the hundreds of bases that we have spread out across the world.  This "defense" spending is currently the second largest culprit to our federal deficit.  President Paul would follow the Constitution and only spread our military power when we declare a war - something that hasn't been done since World War II.

President Paul wants to get rid of the Federal Reserve (blog post forthcoming).  This is the private company who controls the supply of the dollar.  Currently our dollars are backed by nothing but the "full faith and credit" of the United States government.  Paul would advocate that a resource (such as gold) backs our currency.

Economically and constitutionally, Paul is the best choice for the Presidency.  He would balance our budget and get rid of unconstitutional social programs.  He would have no interest in subsidies or special interest spending.  Paul is my man.

Presidential Profile: Mitt Romney

Mitt Romney is a moderate or middle-right conservative.  This means that, although he represents a lot of the Republican views, he is able to attract some Democrats - especially the ones that believe in a balanced budget.

Mitt Romney believes in balancing the budget.  His work in the private sector has helped him to do that.  Since you can't survive in the business world without making profits, he has been forced for most of his life to do it.  Mitt Romney is the only candidate that has more experience in the private sector than in politics.

Mitt Romney "saved" the Olympics.  The Salt Lake City Olympics had a projected budget shortfall of almost $400 Million.  We came out of it with a $50 Million surplus.

I learned from reading his book, "No Apology" that Mitt Romney believes in "free-market" economic interactions.  He knows how the "invisible hand" helps control the supply and demand of products and services, and he believes that government intervention in these markets creates inefficiencies.

He is attractive to some Democrats because he doesn't talk much about slashing huge government programs.  He has said that he will help make Medicaid, Medicare and Social Security "more solvent", meaning he will balance their budgets.  Right now, we are paying out trillions more in these programs than we are receiving from tax revenues.  We are able to do this by printing money and borrowing money from China.  To balance these budgets would require a tax hike, which I don't think Romney would propose, or a change to the program that will make it more expensive for people dependent on these programs.

I think Mitt Romney would be a good President because he would stop the current outrageous trend set by Obama of spending twice as much as we take in.  He would encourage the markets to interact without much government intervention.  However, I don't think he would make the difficult decisions that our country needs to make eventually (like abolishing Medicare, Medicaid, and Social Security - SLOWLY) in order to bring the American government back to its small Constitutional size.

Election 2012

Before 2007, I voted for whoever and whatever my mom told me to vote for.  Turns out she was always right, but I decided then that I wanted to study the issues myself and make my own decisions when it comes to elections.  I think that everyone has a responsibility to be somewhat informed of the issues each election cycle.  But it's time-consuming!  And you don't know who to listen to!  Well, the next couple of posts will be 60-second bios on each of the Presidential candidates.  Let it be known that I WILL show some bias, but I'll stick to economic issues.  Hopefully it will be semi-informative.  A great place to go for unbiased direction is votesmart.org.  Go to their vote easy page to find the candidate that best represents your views.