A Fair Wage

As the private sector faces an uncertain future, it's time to revisit of an old post of mine from the blog at Mises.org.

Keep in mind that there is no demand for teachers with a masters degree plus 45 hours, anywhere. Even public schools are not in the market looking for such highly-paid employees. Why not?

What is fair about a salary that the market will not bear. That statement sounds harsh, but its true.

But, for some reason, folks want to remove public educators from market forces.

-- Jim

By Jim Fedako
Posted on 11/16/2007
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by Jim Fedako

You hear it from them all the time; teachers just want a fair wage. Well who doesn't? This line of thought leads to two questions: How are wage rates established in a free market? And, are market wage rates fair?

How are wage rates established in a free market? The insights from the Austrian School of Economics show that workers earn their discounted marginal value product. In simple terms, workers earn now the current value of what they add to the production of future goods. That explanation easily fits those who produce consumer goods or factors of production, but what about those in the service sector? How, for example, is the wage rate of barbers established?

In order to understand the service sector we have to consider the alternate cost of employment. The marginal worker, one who can either work in the factory or cut hair, decides which employment to pursue based on relative wages and costs. The cost for working in one field is the wage of the best alternate form of employment in another field. If the cost of working exceeds the benefit, it behooves the worker to seek the alternate field of employment.

If the factory offers better wages, the worker takes the factory job. If cutting hair offers better wages, the worker becomes a barber. If the relative wage rate of barbers begins to exceed the relative wage rate of factory workers, the marginal factory worker switches professions and enters the barber market. By doing this, the wages of barbers would fall as the wages of factory workers rise.

Had the worker stayed in the factory, he would have lost potential earnings. It is the alternate cost of employment, the foregone potential earnings, which guides acting man into the most remunerative employment. And it is this voluntary movement, the change of professions, which tends to guide the labor market toward equilibrium. [1]

This simplistic example shows that service sector employee wages are tied to the discounted marginal value product of labor in general.

Are market wage rates fair? As detailed above, workers earn either their discounted marginal value product or the equivalent wage of their best alternate employment. To say that one wage rate is unfair is to say that the worker earning that rate deserves a premium wage over a similarly productive worker in another sector of the economy. To say that a math teacher is underpaid in a free market is to say that the math teacher deserves to be paid more than the value product of teaching relative to (say) engineering.

In a free market, wages cannot be unfair as they are set by the direction of the consumer. When the alternate cost of employment rises above the wage rate, workers shift sectors and set the labor market back toward equilibrium. [2]

In order to gain a wage premium, government interventions must occur. These interventions can take the form of field or general minimum wages, granting unions legal right to control sectors of the economy, government wage supports, or the creation of a government monopoly or quasi-monopoly in a sector of the economy – the school system for example.

In a free market teachers would also earn the equivalent of their discounted wage in the productive sector of the economy. A math teacher would earn the equivalent wage of a similarly productive worker in (say) the software industry – who earns the equivalent wage of a similarly productive worker in the engineering industry, and so on. If the math teacher was underpaid relative to his best alternate employment, this would be a signal there is an excess of math teachers, and that math teachers are being underutilized in their current employment.

But the teacher market is not free; it is a quasi-monopoly where the vast majority of employees are unionized under a government-run system. Unlike the Soviet Union, which used the free markets of the world to establish some sort of price level, public schools do not look to private schools for wage guidance. Private schools pay their workers a much lower wage, but as above, they must pay a wage that exceeds the alternate costs of employment. [3]

Are public school teachers overpaid? Since there is no way to discern the true alternate cost of employment for all public school teachers in a free market – because no free market for teachers exists – we must rely on the available market data provided by private schools. This shows that teachers are, in general, overpaid.

In addition, and more importantly, we know a priori that governments are inefficient and over-pay and over-employ factors of production. Also, government teaching licensure rules create barriers to entry for those wishing to seek out a teaching career, thus driving wage rates higher. Then, of course, there are the government-backed unions who rule the roost through strikes and threats of strikes. [4]

Are public teacher salaries unfair? Certainly. They are unfair to the taxpayer who is forced to pay the tax bill that supports the premium wage of public school teachers. In a free labor market a teacher's real salary can only increase with the marginal value product of employees in the next best alternate employment. In the quasi-monopoly that currently exists, teachers have realized salary increases that are not tied to the labor market; the salary increases are simply the result of political pressure.

The next time you hear teachers claim that they need a fair wage, tell them to drop the union banners and open education to the free market; the one market where everyone earns their fair wage.



[1] Of course the opposite holds if the factory worker made relatively more than the barber. Professions would switch and wages would tend toward equilibrium.

[2] Equilibrium is the direction of the movement, not reality. Equilibrium is the infinite endpoint on the continuum that is never reached though the actions of individuals tend to keep the economy moving in that direction. As consumer preferences change, the economy is rocked away from the direction of equilibrium, but the vast numbers of astute entrepreneurs act quickly to satisfy these new preferences and bring the economy back on course – well, in an unhampered market anyway. Government likes to damage the rudder in such a manner that even the most astute entrepreneur cannot set a new course.

[3] Certainly there is an additional psychic income earned due to the rewards of teaching, but the psychic income exists in both the private and public school market. In fact, every job has its own form of psychic income that is based purely on the subjective valuation of the employee.

[4] Everyone has a study that shows teachers are either overpaid or underpaid based on salary and benefits per number of hours worked in a given year. Conflicting studies are the product of the current empiricist/positivist paradigm. The only way to read through the data and understand economics and the impact of policies is to use the a priori approach to understanding of the Austrian School.

Is High School Football a Public Good?

It's that time of year again ... time to consider who should pay for private goods ... because the community doesn't pay, your neighbors do ... Jim


Article published at Mises.org

Is High School Football a Public Good?
By Jim Fedako

Most of us would never think of asking our neighbors to foot a personal bill. We accept responsibility for car and roof repairs as ours alone. In addition, we don't bang on the door across the street in order to demand a contribution towards our children's figure skating lessons, taekwondo classes, etc. That which is consumed or used by our families is to be paid from our pockets — the definition of personal responsibility.


Now let's change the situation slightly. Instead of a figure skating lesson — the realm of the private good, consider the local public high school football team — the realm of the supposed public good.[1] The technical definition of a public good — a good that is nonexcludable, nonrivalrous, subject to free riders, and hence will only be provided by government through coerced tax dollars — has been corrupted in the modern lexicon to mean anything that is perceived to benefit society in general, no matter how specious the benefit argument.

Based on the technical definition, football is not a public good as teams are excludable and rivalrous since each team is limited to 11 players on the field without penalty. But no one really applies the technical definition to derive public goods. For if they did, the concept of public goods would disappear from economic textbooks and from debates over the need for government interventions in the market.

Instead, the collectivist definition — the vacuous, yet now standard, definition — applies the general welfare argument to elevate football from a private activity to that of a public good. The argument goes something along these lines: football is beneficial because it prepares boys for adulthood, keeps them off the streets after school, and provides them with a place where they can excel.

continue reading ...

The Market: turning waste into a resource

Latest post of mine over at the Blog at Mises.org.

The Market: turning waste into a resource

It's the market that turns waste into a resource, not government-mandated recycling.

According to TwinCities.com:

Jimmy Robbins II of Robbins Lumber in Searsmont said it's gotten to the point where wood shavings, which are popular with horse farms, are worth more than the lumber.

"We use every part of the tree. Everything is consumed," Robbins said. "It's become so valuable you can't afford to not sell everything."

Oh, and it's the market that enforces conservation of value, whether the item is gold or sawdust.

Is Christian Social Justice Christian?

Of course not. But, I'll let Laurence M. Vance explain.

The Myth of the Just Price
Laurence M. Vance
3/31/2008

But here is Robert L. White, a Christian, in Biblical Economics: Economic Myths versus Biblical Values, published just a couple of years ago:

The working of the market economy over the last 20 years has resulted in increasing inequalities, persistent poverty, chronic unemployment, and more persons without health insurance.[49]

These increasing inequalities are "far beyond what could be considered fair and just according to historical standards."[50]White holds master's degrees in economics and divinity, and has worked as both a pastor and an economist. He was actually one of those 4,800 government economists I mentioned previously. I hope that White's Gospel preaching was more biblical
than his economic pronouncements. Here is some more of White's "biblical economics":

If some have too much and others have too little, the answer from the Bible is that nobody should have too much and nobody should have too little. Everyone should have enough.[51]

There is enough to go around so long as each of us takes only what each person needs.[52]

The concept of fairness is that people are obligated to give back in proportion to what they have received.[53]

Social justice requires that a just society be characterized by a continual improvement in the prospects of the least advantaged.[54]

There is no theoretical or empirical reason to expect all of society's economic objectives to be met systematically by the market. In other words, justice, equity, and fairness cannot be assumed to occur automatically, and therefore need to be intentional goals and objectives in the realm of public policy.[55]

According to White, the free-market economy is an "idol."[56] There is a cultural war waging "between the prevailing 'free-market' ideology and biblical values."[57] Today's "prevailing economic ideology" promotes "greed and consumerism over the common good."[58] The lesson we are supposed to receive from Jesus' feeding of the multitudes is that "if bread is broken and shared, there will be enough for all."[59] Because he believes that "the rich have been getting richer and the poor poorer,"[60] White deplores reductions in tax rates.[61] He rightly decries increased defense spending, but only because it diverts the funding of social programs.[62] He favors national health care and environmentalism.[63] He is also very concerned about global warming and greenhouse gas emissions.[64] In short, he rejects laissez-faire in favor of government intervention.

White, of course, is not alone. When noted Christian economist Donald Hay proposed eight biblical principles relating to contemporary economic life, he not only specifically excluded private property rights,[65] he also stated that "the government should not hesitate to use the traditional tax and transfer mechanisms to ensure that those without the means to acquire the basic necessities of life are provided for."[66] But White is typical. His trinity is the state, the earth, and social justice. He is a statist through and through.

read the whole article here.

Zoning is Theft

Another older article published by The Ludwig von Mises Institute:

Zoning is Theft
by Jim Fedako


Zoning is theft, pure and simple. In his fantastic introduction to the Austrian School, Economics for Real People, Gene Callahan correctly identifies eminent domain as a form of property theft, especially noting the use of government condemnation in order to secure rightfully owned property for commercial development.

It is easy to see government as the crowbar that influence-seekers use to jimmy locks and force private property owners from their land. Here we have the clear picture of Ma and Pa Kettle and clan fighting the law and "progress" armed only with shotguns, corn squeezing, chewing tobacco and shear grit. The flip side to eminent domain, zoning, is not so easily seen. But as Bastiat revealed, the unseen is as important as the seen.

Zoning is typically defined along the lines of a government-regulated system of land-usage imposed in order to ensure orderly development. Zoning is usually a component of the larger conceptual ideal called regional planning. Of course, planned development is really the name of the road toward planned chaos.

Zoning uses all the standard interventionist lines of thought, most notably the concepts of externalities and utility. Those who advocate zoning really believe that acting man does not have the ability to create communities that are functional and prosperous. Without plans and maps drafted and drawn by the local elected elite, developers with knowledge and foresight, and a whole lot of money to gain or lose, would purposively layout communities that are sterile and functionless. Only the marginal vote-getters — those elected — and their appointed allies are omniscient enough to peer into the crystal ball and define the perfect setting for future life and leisure. The rest of us can only marvel at their visions.

Just as the developer can use government to roll over the rights of property owners, property owners — community members — can use government to roll over the rights of developers and fellow property owners.

In Ohio, townships create zoning maps and comprehensive plans that overlay development regulations on top of current properties. Prior to the establishment of zoning regulations, a farmer could simply sell his land to the highest bidder. No one had a voice in the proposed use of the exchanged land. The sale to a new property owner incorporated full development rights, including continued farming, residential and commercial development, or parceling off pieces for home sites. Land was a commodity similar to the crops grown on it. Just as no one had a right to control the final use of the corn and soybeans reaped from the soil, no one had the right to control the next use of the land. Property rights were secure.

Zoning changed everything. The future use of existing farmland will, with the stroke of a pen, be limited in some manner by zoning regulations. The regulations could restrict future land usage to its current use — farming in this instance — or it could restrict land usage to some other form of activity.

The free market has a tool that allows a property owner to align the future use of his property with his vision, the restrictive covenant. A property owner could, for example, create a legacy by selling his land contingent on the development carrying his family name. Should the property owner be too restrictive, the value of his property will fall. He will be exchanging a psychic good, a family legacy, for cash.

Zoning is another matter altogether. Zoning restricts current landowners based on the local power brokers. In the zoning process, someone gets hurt. Had the farmers of a township wanted to keep the area as farmland, they could have signed restrictive covenants guaranteeing crops instead of homes. Property rights, and the laws that purport to protect those rights, allow individuals to act in their own best interest. Zoning, collective decision-making, use the coercive power of government to restrict usage based on the whims of those in power.

The farmer who owns this land now has his potential property rights bounded within a specific range; future use is restricted to residential developments that have no more than one house per acre. The farmer may vote, and may have voted for some of those elected, but he never agreed to the change in proposed land usage. He was robbed, and there is no means for him to restore his rights and land value; they are gone with the stroke of a pen.

I know some of those in the Chicago School will claim that the farmer implicitly agreed to the loss of land-usage rights by being born in the United States, or of naturalized American parents, or by becoming a citizen through oath. By owning property in the United States, the farmer granted majority ownership in his property to those elected and appointed, the omniscient and omnipotent. This is no way to build and run a system of secure property rights, and no way to create a free market. Rothbard is correct when he constructs his political economy on secure rights to property; anything less is the beginning of the Hayek's Road to Serfdom.

Now we have a developer who is trying to satisfy the urgent wants of consumers, his development could include new homes, new stores, new factories, etc. The developer is a keen entrepreneur who sees a chance to turn a profit by creating a development that will be desired, and therefore profitable to him. The developer settles on a residential development and approaches the farmer from above offering to purchase his land, contingent on final zoning approval of course.

You see, the developer has been here before. He knows the ways of the local officials who approve and disapprove zoning changes on whim and fancy — or even the smallest of political pressure. The developer is not going to consummate the deal with the farmer until he knows that his proposed development is a go.

The farmer, old and worn-out, wants to retire and enjoy, along with his wife, his remaining years in leisure and comfort. This is certainly a reasonable request from someone who has worked the dirt in snow, rain, and blistering heat for decades. Who could reasonably question his desire? Commissioners and board members; those omniscient by vote and omnipotent by law.

Remember that the land was designated to be developed at only one home per acre, but the developer does not think he can make a go of it at that yield. Given the market in the area, there is no way for him to turn a profit due to the myriad of other regulatory hoops he will have to jump through in order to get approval for his development. A host of green-eyed bureaucrats see the proposed development as a tax revenue generator. The developer will have to build off-site roads and sewer improvements, donate a park or school site, and give away money to all those governments with their hands out. In addition, regional officials will balk at the proposal since it does not agree with their vision of the future.

So the developer, a Don Quixote at heart, decides to take on the zoning commission by proposing a variance to the zoning code and comprehensive plan. Mr. Developer needs to build one and a half homes per acre, a change that will require months of hearings where he will be badgered and attacked from the zoning commission and community members alike. The commissioners will request petty changes to the development's conceptual plan based on vague building standards that they most likely do not understand. Is stucco created from natural and man-made materials a natural or artificial exterior? Does 50 microns of aluminum create a better look than 49 microns? Should sidewalks be required? How high should the entrance sign stand? Is fire-red a natural color? Is a 30-foot setback sufficient for future property values? The answers depend on which commissioner has the mike at the time.

Residents with property adjoining the development will complain loudly of supposed lost property values, traffic, and crime. In addition, they will attack the developer as evil incarnate bent on destroying the community. But those same voices will lose the rhetoric as soon as the developer offers all adjacent homeowners landscaping allowances. A few thousand in new trees planted in their backyard is enough to forgive any supposed loss in value, additional traffic, and hypothetical break-in.


So the developer now agrees to build roads, upgrade sewer lines, donate parks with equipment, set aside a school site, and improve residential landscape. What is gently termed exaction is really extortion by another name. After zoning comes township trustees meetings and the process begins all over again. More exactions and more regulations, but trustee approval can be had if the developer does the dollar-dance long enough. Had the developer simply slid a rumpled paper bag of twenty's across the table, a law would have been broken. Instead, the process occurs in the sunshine for all to see, and all to agree that more should have been given — or taken.

All agreed, with the exception of the developer and the forgotten farmer. You see, lost in all this is the simple desire of a farmer and his wife to retire and enjoy life, and maybe leave a little for their grandchildren. Every hand looking for a piece of the development pie is not robbing the developer and redistributing supposed unearned profits; those hands are robbing the farmer and his wife of their property value.

The risk of not passing zoning, the exactions, and readily available alternatives for investment are all reductions to the value the farmer could have obtained for his land absent zoning. The loss of value is recognized at the time the developer makes an offer for the land; the theft, on the other hand, occurs in front of the community that the farm family lived in for generations. It shows what damage a little money and power can cause in a community. Zoning is indeed theft.

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Jim Fedako is a former professional cyclist who lives in Lewis Center, OH. jfedako@aol.com. Comment on the blog.

Positivism

New readers of this blog may be wondering about the meaning of anti-positivist. Simply put, an anti-positivist is one who does not subscribe to positivism. OK, so what's positivism. According Ludwig von Mises:

Positivism. A doctrine taught by Auguste Comte (1798-1857). It holds that man's knowledge of all subjects passes through three stages (theological, metaphysical and positive). Contemporary positivism seeks to apply the experimental methods of the natural sciences (q.v.) to the study of the problems of human action (q.v.). The maxim of positivists is that science is measurement. (from Mises.org)

Note: Auguste Comte was both the founder of sociology and an intellectual father of Marxism (the relationship between the evil ideas and ideals of sociology and Marxism is quite obvious -- the siblings have an uncanny resemblance).

In short, positivism is the belief that one must use observation and correlation in order to study human action. In practice, it looks any of the host of useless studies produced by the National Bureau of Economic Research. The positivist belief is that if one can correlate two sets of data, they are related.

What you end up with is sheer nuttiness, studies such as those below. Rest assured, in the end, its your tax dollars that paid for most of these studies. Enjoy them. Just do not think that these studies can impart any real knowledge.

This subject to be continued ...


THE LATEST WORKING PAPERS
National Bureau of Economic Research
Week of March 3, 2008

The following NBER Working Papers that match your selections
were released in electronic format this week. Abbreviations
in parentheses refer to NBER Research Programs. (visit
http://www.nber.org/programs.html for Program information.)

----------------------------------------------------------------------

1. Caste, Kinship and Sex Ratios in India
by Tanika Chakraborty, Sukkoo Kim #13828 (DAE)
http://papers.nber.org/papers/W13828

2. Reference Prices and Nominal Rigidities
by Martin Eichenbaum, Nir Jaimovich, Sergio Rebelo #13829 (EFG ME)
http://papers.nber.org/papers/W13829

3. Political Entry, Public Policies, and the Economy
by Casey B. Mulligan, Kevin K. Tsui #13830 (IO PE POL)
http://papers.nber.org/papers/W13830

4. International Economic Policy: Was There a Bush Doctrine?
by Barry Eichengreen, Douglas A. Irwin #13831 (IFM ITI)
http://papers.nber.org/papers/W13831

5. Social Learning and Peer Effects in Consumption: Evidence from Movie Sales
by Enrico Moretti #13832 (IO LS)
http://papers.nber.org/papers/W13832

6. Identifying Agglomeration Spillovers: Evidence from Million Dollar Plants
by Michael Greenstone, Richard Hornbeck, Enrico Moretti #13833 (LS PR)
http://papers.nber.org/papers/W13833

7. Intermediate Goods, Weak Links, and Superstars: A Theory of Economic Development
by Charles I. Jones #13834 (EFG)
http://papers.nber.org/papers/W13834

8. Evaluating the Impact of Technology Development Funds in Emerging Economies: Evidence from Latin America
by Bronwyn H. Hall, Alessandro Maffioli #13835 (PR)
http://papers.nber.org/papers/W13835

9. Testing for the Economic Impact of the U.S. Constitution: Purchasing Power Parity across the Colonies versus across the States, 1748-1811
by Farley Grubb #13836 (DAE)
http://papers.nber.org/papers/W13836

10. The Increase in Leisure Inequality
by Mark Aguiar, Erik Hurst #13837 (EFG LS PE)
http://papers.nber.org/papers/W13837

11. The Cognitive Link Between Geography and Development: Iodine Deficiency and Schooling Attainment in Tanzania
by Erica M. Field, Omar Robles, Maximo Torero #13838 (HE LS)
http://papers.nber.org/papers/W13838

12. Is There an "Emboldenment" Effect? Evidence from the Insurgency in Iraq
by Radha Iyengar, Jonathan Monten #13839 ( POL)
http://papers.nber.org/papers/W13839

13. The Role of Labor Market Changes in the Slowdown of European Productivity Growth
by Ian Dew-Becker, Robert J. Gordon #13840 (EFG LS PR)
http://papers.nber.org/papers/W13840

14. Globalization and the Great Divergence: Terms of Trade Booms and Volatility in the Poor Periphery 1782-1913
by Jeffrey G. Williamson #13841 (DAE)
http://papers.nber.org/papers/W13841

15. Capital Inflows and Reserve Accumulation: The Recent Evidence
by Carmen M. Reinhart, Vincent R. Reinhart #13842 (IFM)
http://papers.nber.org/papers/W13842

16. Does Temporary Help Work Provide a Stepping Stone to Regular Employment?
by Michael Kvasnicka #13843 (LS)
http://papers.nber.org/papers/W13843

17. Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance
by Raj Chetty #13844 (LS PE)
http://papers.nber.org/papers/W13844

18. Language in Visual Art: The Twentieth Century
by David Galenson #13845 (LS)
http://papers.nber.org/papers/W13845

19. Global Rebalancing with Gravity: Measuring the Burden of Adjustment
by Robert Dekle, Jonathan Eaton, Samuel Kortum #13846 (IFM ITI)
http://papers.nber.org/papers/W13846

20. Education and Labor Market Consequences of Teenage Childbearing: Evidence Using the Timing of Pregnancy Outcomes and Community Fixed Effects
by Jason M. Fletcher, Barbara L. Wolfe #13847 (CH HC)
http://papers.nber.org/papers/W13847

From Legotown to Communist Utopia: A tale of indoctrination

Public educators condemning the source of their wealth -- the productive private sector. Oh, and don't think such nonsense doesn't happen here. -- Jim

note: I know, I know, there he goes again, picking on public educators. But, I ask, why do they make it so easy?

From Legotown to Communist Utopia
Jeffrey Tucker

A commentator on this blog draws our attention to this piece on the site Rethinking Schools. It is called "Why We Banned Legos." It is indeed an amazing piece of work, a perfect distillation of the romantic attachment that bourgeois educators in a prosperous society have for a communist ideal they have never experienced or seen or, apparently, read about.

In the short version, the teachers allowed the children in an after-school program to build a massive and growing Legotown. As kids will do, they students tended to homestead certain pieces and structures, and then barter them. Eventually resentments over who owns what emerge, and, after some inadvertent destruction of some buildings took place, conflicts arose.

The teachers then used the occasion to teach a lesson straight from old-time communist ideology, bringing the kids around to the view that all structures must be public structures, that nothing can be owned but by groups, and that all structures will be standard sizes.

It is an engaging if very alarming read! I would be curious to know to what extent the kids absorb the "lesson" they were given, or, if their heart of hearts, they really do miss the excitement and beauty of the real Legotown.

In any case, reading this piece, you can understand how it is that Castro's resignation has unleashed mind-boggling statements about the glories of the society he created, and its "immense achievements in terms of healthcare, poverty reduction and education."

Money for Nothing

My latest article published by the Ludwig von Mises Institute (Mises.org).


Money for Nothing

By Jim Fedako
Posted on 11/16/2007
[Subscribe or Tell Others]

digg it


If you want to expose the absurdity of the state, think governmental accounting. Really, there is no better way to show the impossibility of a government solution to scarcity than by reading the annual audit of any governmental entity.

Goethe considered double-entry bookkeeping — the essence of accounting — to be "one of the finest inventions of the human mind." For without accounting, we lose the ability to calculate, and without the ability to calculate, modern civilization is impossible.

Accounting lets the entrepreneur know whether he earned a profit, utilizing scarce resources in order to produce something of greater value. Accounting also lets the entrepreneur know whether activities he performs are better outsourced, or, conversely, whether he should expand into new orders of production. In essence, accounting directs the entrepreneur toward activities that satisfy the wants of the consumer.[1]

Government accounting is a true oxymoron. We can determine the cost of government, but what about the value produced? What is the product? What is its value? What is the bottom line? Of course, these unanswered questions do not stop government from playing business, pretending to create value and profit for society.

Governmental entities operate under the cash basis of accounting, tracking cash in and cash out. To direct their activities, these entities create budgets that list revenue and expenditures. Accounting then is simply the recording of cash flows against the budget. In this world, the cheered concept of fiscal accountability is the process of reporting how close the entity's final revenue and expenditures matched its approved budget. And nothing more.

This is an important point to note: whenever government officials speak of fiscal accountability, they are only considering approved budget versus actual spending. They are not referring to worthiness of expenditures, only whether or not they spent revenue according to the budget, with no outright theft of money. Oh, sure, the officials will claim that fiscal accountability means that money was spent on productive activities since, as expected, it is assumed by the governmental entity that only productive activities were approved in the budget. Circular reasoning.

With cash accounting, the cost of infrastructure investments — roads, bridges, buildings, etc. — is reported in the year it occurs, though the capital assets continue to have value or usefulness for years. Reporting cash flow misses the complete financial picture of the government entity, leaving this question unanswered: is it in a better financial position than the year before?

To answer that question, the Government Accounting Standards Board issued its Statement 34 in 1999. Annual reports that satisfy this statement supposedly detail the financial health of governmental entities as if these entities were profit-oriented businesses. Reporting is now done on the accrual basis of accounting, and assets are depreciated over their lifetime. This change provides a bottom line: net assets. With a view of either increasing or decreasing assets over liabilities, we can now determine a profit or loss of sorts.

Under this logic, when a governmental entity has more net assets this year than the prior year, it is in a better financial state — it has achieved a profit. Government can now report to its constituents whether or not it was able to take scarce resources and turn them into something of greater value. Socialism, here we come.

But not so fast. Government assets are the product of theft, not the result of satisfying the wants of consumers. A governmental entity with increasing assets is simply stealing more from taxpayers year after year. Ironically, the same holds true for a governmental entity that has decreasing assets. In either situation, more is being thieved, with nothing of value being created.

The implication is that a governmental entity that increases its tax revenue faster than its expenditures is performing a service for its constituents; the entity is achieving a profit for the taxpayers. Conversely, a governmental entity in a deficit cycle is creating a loss for its taxpayers. So, the more a government confiscates, the better off the taxpayers. Does that make sense? Down is up, and up is down. Somewhere, somehow, we ventured down the rabbit hole.

It is as if we are to cheer a government that taxes and builds since increasing assets count as profit, not waste. The public school district that builds a $50 million high school is bettering its financial position. Whether or not the high school produces anything of value is of no consideration. In government accounting, the cost itself is a benefit.[2] Of course, that is not how businesses serve the consumer, but, with government, we are through the looking glass.

The difference between government and business is the chain of taxation versus the dollar vote. The public school district taxes regardless of value produced. Once the bond issue passes the voters, the bill must be paid, to be enforced by the long, strong arm of government. On the other hand, the entrepreneur must face the consumer every day, product in hand, hoping to make a sale. The consumer can as easily bypass as enter his store, based on a whim if he so chooses. The taxpayer? Well, just try to hide.

If government is of the people, and I am one of the people, shouldn't I include changes in the net assets of my local school district in my financial portfolio? Since the local schools are my schools — or so the mantra goes — don't those changes have an impact on my finances? Shouldn't I record changes of district assets in my ledger?

Moreover, shouldn't I be able to sell my shares of the supposed public good and use the resulting proceeds for my benefit? Yes, I should. But, as I learned growing up in Allegheny County in southwestern Pennsylvania, the sign that reads, "Keep out, Property of Allegheny County," does not refer only to those who live outside the county; it means that even the taxpayers of Allegheny County have no right to that property.

The bottom line — increasing government net assets — is not my property; never was; never will be.


Jim Fedako, a homeschooling father of five who lives in Lewis Center, OH, maintains a blog: Anti-Positivist. Send him mail. See his archive. Comment on the blog.

Notes
[1] Of course, accounting has changed as taxation creates financial incentives to beat the taxman by showing as little profit as possible, but that is another article.
[2] During the Cold War, both the US and Soviet governments calculated Soviet GDP to include tractors rusting on the plains of the Ukraine. That the tractors had no real value to the local farmer was not considered. With government, cost is always recorded as value.

Cheering NPR

My latest post the Blog at Mises.org(Mises.org):











I never thought I'd be cheering NPR, but Michelle Norris really makes Sen. Baucus squirm. Sure her economic theory is off, but some of her questions are spot on.

Norris: "Will this stimulus package in the end add to the nation's deficit woes?"

Baucus: "Well ... it's ... um ... My thought is ... It probably will initially, but all economists say we should do this. All ... I'm not saying all, the vast majority of economists say we should do this. We need to give the economy a little bit of a stimulus, a little bit of an increase. This is the advice we were given by economists. This is the advice we were given by business people. It's I think the right thing to do at this point."

The vast majority of economists, or just the Brain Trust? Didn't Rothbard write a book about this? Funny how history repeats itself.

Ok, it's not actually funny -- more like ironic, but you get the point.

Go NPR!

Economic stimulus in search of economic science

Will the proposed economic stimulus packages improve the economy? Will a few hundred dollars in my pocket solve anything?

If you adhere to the long-refuted mush of Keynes, you will answer yes. If, on the other hand, you subscribe to economic truth, you will answer no.

In order to improve the economy, the government needs to: reduce taxes, reduce spending, and get out of the money/credit creation business. Putting a few hundred dollars in every pocket is a game that's been played for centuries. The Roman emperors sought the same end -- placating the masses, though the Romans ran games and festivals instead of simply slipping a few hundred bucks into open hands.

Isn't it ironic that a politician cannot hand over money to voters, yet, during an election year, he can offer the very same bribe in the form of an economic stimulus package.

Economies grow when money is invested in capital goods. A few billion bucks chasing consumer goods that have already been produced leads to more inflation. Yet, come November, the voter will not see the inflation, he will only remember the cash.

If Bush and the rest are serious about stimulating the economy, they need to take the three actions specified above. Will they? Never.

OK, so who will? Ron Paul of course. His platform is based on solid economic science; a platform that will stimulate the economy in perpetuity.

Vote Ron Paul

Central Planning: the shattering mirror

Due to government initiatives and regulations, corn demand is up and, hence, more land is being devoted to corn. Yet, the demand for corn and land is reducing another government intervention -- land conservation. One government program undoes another government program: the definition of chaos.

Take the new unconstitutional¹ federal light bulb standard; incandescent is being phased out in favor of fluorescent. So, the feds reduce energy but introduce more mercury into landfills and the water supply. Clean Water Act anyone? Government at odds with itself.

Decades ago, FA Hayek showed that government, unless checked, necessarily becomes more intrusive and more oppressive, ending in serfdom. Ludwig von Mises showed that government planning necessarily leads to chaos. You can see those truths in the interventions above.

Never, never, did our Founders risk their lives for an intrusive central state that taxes an absurd amount of income, robbing the productive for the sake of the nonproductive. Never, never, did they conceive of a nation where the largest employers are governmental agencies.

Yet, here we stand, a nation where the federal government taxes wages for programs that are nonsensical, and at odds with each other. The examples above prove that central planning is an oxymoron; tax-funded chaos leading toward serfdom.

Everything is not lost. On the horizon is the movement of Liberty; a movement that has once again found a leader: Ron Paul.

Paul is the only candidate who will check government expansion. He is the only candidate who actually believes YOU are capable of running your life. That my friends is the essence of Liberty.

notes:

1. Nowhere in the Constitution is the federal government granted such powers. In fact, the 9th and 10th Amendments forbid the feds from such intrusions into the lives of the people and the several states. Other than Ron Paul, the Constitution is a dead letter in DC.

Is repealing the 20th century such a bad idea?

My latest post the Blog at Mises.org(Mises.org):











Income tax revolt is slowing making its way to the ballot in Massachusetts, and it's picking up a few enemies along the way. According to a letter in the Boston Globe: "So when Libertarian leader Carla Howell launched a new effort to junk the income tax earlier this year, the powers that be made it clear that this time they would do everything they could to discredit it."

An opponent of the prior attempt to repeal the tax (Howell tried to repeal the tax in 2002) is none other than Michael Widmer of the Massachusetts Taxpayers Foundation. As the letter notes, "(T)he Taxpayers Foundation is a business lobby that often opposes broad-based tax relief."

This quote from Widmer regarding the prior attempt clearly defines the issue: "Essentially (Howell's) trying to repeal the 20th century."

Repeal the 20th century? Hmm. So, what's the problem here?

note: Here in Ohio, the income tax is only 35 years old, while a number of states have no income tax at all.

The Payday Interest Rate Controversy

My latest post the Blog at Mises.org(Mises.org):











I never quite understood the Payday interest rate controversy until today when, like clockwork, I felt the first rumble of my daily, late-afternoon hunger pangs.

In Pavlovian fashon, I hastened over to the vending machine and began depositing change. Then it hit me: I was about to pay almost twice the price for a Payday bar now than I would have had to pay for a Payday bar in two hours. You see, the drugstore on my route home sells the whole suite of vendible goodies, and the drugstore charges a price much lower than the vending machine.

Since originary interest is merely a reflection of "the ever fluctuating ratio between values assigned to want satisfactions in the immediate future and those assigned to want satisfactions in the more distant future," I willingly accept an apparently onerous rate of interest in order to satisfy a passing desire for sugar. Or, I should say that I am forced to accept an onerous interest rate by a vending business that takes full advantage of my current desire. And, amazingly, government and its minions allow this to happen.

Where is my do-gooder advocate? Where is my politician stumping to end unfair Payday interest? Can't these folks remove the vending machines and end this interest rate nonsense?

Yes, that's the solution: legislate in order to stop the voluntary exchange, as if legislation and the strong arm of government can change time preference with the stroke of a pen. Huh!

The Tenth and Servitude

In 1 Samuel, the Bible records the warning of God as spoken through Samuel: And he will take the tenth of your seed, and of your vineyards, and give to his officers, and to his servants. (8:15) He will take the tenth of your flocks: and ye shall be his servants. (8:17)

God was warning Israel about the evils of a king, yet the Israelites persisted. In the end, God allowed them a king, along with the king's requisite taxes -- servitude. Centuries later, the American patriots demanded an end to the king's tax and revolted.

In his book, For Good and Evil: The Impact of Taxes on the Course of History, Charles Adams writes that the tenth is historically considered to be the most a population will grant its rulers for any extended period of time. Anything greater sparks rebellion. However, we currently allow multiples of the tenth to be taken by the DC kings and their state and local minions.

Don't you think its time to rethink our current situation in light of the Bible and the founding ideals of this nation? Don't you think its time to revolt once more?

I believe that it's time, as do many others. The Ron Paul movement is just beginning to gain steam. Add to it the income tax revolt in Massachusetts and the likely one here in Ohio, and we appear to be saying "enough is enough!"

As noted by Adams, prosperity only occurs when a nation reduces taxes and allows free trade. Taxation destroys both the economy and the nation. It's a simply truth, yet, like the Israelites, we have been turning our backs on it. Time to change.

Vote Ron Paul.