It is nearly as predictable as death and taxes:  when a disaster of some sort occurs — e.g., Hurricane Katrina, Missouri River flooding, or earthquakes in China — after the dust settles and the rebuilding effort begins, some economist or pundit will bring up that ultimately, the disastrous event could spur some sort of economic stimulus.  As Chileans are sifting through the rubble in the aftermath of their recent earthquake, sure enough, the following headline appears on this article on Forbes.com:  "Chilean Earthquake May Boost Growth"; the first sentence in the subtitle:  "If country can maintain immediate disaster relief, reconstruction efforts could stimulate economic growth."

The theory is that the rebuilding of an area following a disaster brings in new construction, creating jobs, spurring investment, and creating demand for raw materials and other products.  Adding to the benefit, many times the buildings destroyed were older, less well-constructed, perhaps less energy-efficient, and often in the poorer areas of the afflicted area.  The reconstructed infrastructure is then more modern, built to stricter standards, more environmentally friendly, and perhaps even more aesthetically pleasing.  Sounds like a great deal, eh?

Unfortunately, such a thought process ignores a simple, fundamental aspect of economics:  resources have alternate uses.  In addition to the most tragic aspect of the earthquake, the loss of life, economically speaking the time, energy, effort, and money spent in rebuilding Chile (or Haiti, or New Orleans) could have been spent elsewhere — was being spent elsewhere (or planned to be) prior to the quake.  The economic activity from the reconstruction efforts in Chile we will see; however, the economic activity that won't occur elsewhere (both inside Chile and out) is unseen.  Every dollar — or Chilean peso — spent on replacing a building in Santiago that can't be spent on, say, a new factory, or on new copper mining equipment (Chile is a major producer of copper).

The aspect of the unseen economic impact was identified by 19th century economist Frederic Bastiat in his "Parable of the Broken Window".  In his story, a shopkeeper's window is broken by his young son.  The window must be replaced, which of course "stimulates the economy" for the glass maker employed to replace it (and of course for any involved on an ancillary basis — e.g., the labor involved in installation, the truck owner who transports the glass to the shop, etc.).  The impact on the local economy is seen.  But what isn't seen in this specific example is what the shopkeeper was going to do with the dollars — or francs — if he hadn't had to buy a new window.  Perhaps he needed a new heating and cooling system, or wanted to expand the size of the store to put in a sushi bar, or even was contributing to a college fund for his glass breaking son or to his own retirement fund.  Anyone of those activities could be better in the long run for the shopkeeper — and perhaps even for the entire economy at large (who couldn't use another sushi bar?).  That alternate activity and all the economic dominoes it might have toppled are gone, replaced by a smiling glass maker.

The same principle applies to government programs that incentivize particular economic behaviors.  "Cash for Clunkers", for example, distorted the economic incentives towards buying a car for many.  This was great news to auto dealers and manufacturers; however, what about the people for whom it really made more sense sans incentives to buy clothes, or health insurance, or braces for their children?  And what about the businesses negatively impacted — in an unseen way — by that government-funded anti-stimulus?  They will never know what hit them.  At least they have that new F-150 in the driveway.

I think, perhaps, the best way to combat this kind of short-sighted thinking is to bring the broken window parable to life in a very practical, hands-on way:  whenever someone mentions the "silver lining" of increased economic stimulus provided by a natural disaster, simply throw a brick through his window.  If he complains, tell him you're stimulating the economy.  Somewhere, perhaps a certain 19th century economist will be watching and smiling.

        

In response to this Thomas Friedman column in the Chronicle, I sent the following letter:

re:  America's future lies with Jetsons, not Flintstones

In discussing innovation, job creation, and capital investment, Thomas Friedman hints at some of the recipes for success but seems to remain transfixed by his belief that we in the US would be better off if we emulated China — and he continues to support policies that run counter to what would help make the US economic climate more competitive.

It isn't government incentives or direction that we need more of — such government intrusion on the marketplace skews development and innovation towards the pet projects and political cronies of those in government power, and politicians don't have the knowledge and understanding of what consumers want or what would power innovations.

Rather than government incentives, we need to remove the government disincentives to investment and innovation.  Our current corporate tax rate is among the highest in the world — and the Obama Administration is welcoming its forthcoming increase, while advocating higher taxes on capital investment.  To paraphrase Paul Otellini (the Intel executive quoted by Friedman), this raises the "cost of operating ... after tax".  Additional taxes and mandates associated with health care "reform" and "cap-and-trade" proposals by President Obama would only further raise the cost of doing business in America — and make foreign markets more appealing by comparison.

If we want an American economy that hums along with Jetsons-like efficiency, we need to stop taxing ourselves into the Stone Age.

Sincerely,
Dave Smith
Houston, TX

        

In response to this column by Thomas Friedman, I emailed him thusly:

Dear Mr. Friedman,

In your column "Global Weirding is Here", you suggest that "surely the silliest is the argument that because Washington is having a particularly snowy winter it proves that climate change is a hoax".  I agree with your statement completely:  one year — even several — does not necessarily indicate a trend.  However, I remember vividly during the tragic hurricanes that seemed to be constantly hitting the Gulf Coast during 2005 (Katrina, Rita, etc.) global warming ("weirding") advocates who attempted to paint the active hurricane season as itself evidence of the existence of man-made (or, perhaps, man-exacerbated) climate change — a phenomenon, we were told, about which the "debate is over". 

For example, Robert F. Kennedy said "Now we are all learning what it’s like to reap the whirlwind of fossil fuel dependence which Barbour and his cronies have encouraged. ... Katrina is giving our nation a glimpse of the climate chaos we are bequeathing our children."  Activist and author Ross Gelbspan wrote “The hurricane that struck Louisiana yesterday was nicknamed Katrina by the National Weather Service. Its real name is global warming.”  Al Gore himself said (referring not just to hurricanes but to the spate of abnormal weather in 2005) "unless we act quickly and dramatically ... this, in Churchill's phrase, is only the first sip of a bitter cup which will be proffered to us year by year until there is a supreme recover of moral health."

Is the ribbing of Al Gore part of a "festival of nonsense", or merely giving him and his fellow travelers a taste of their own medicine?  I would vote the latter.

Sincerely,
Dave Smith
Houston, TX

Update:  the same column was reprinted in the Chronicle.  I submitted an edited version of the above to the editorial page.

        

"For every action, there is an equal and opposite reaction." — Sir Isaac Newton's Third Law of Motion

In his first major official action with regard to trade policy, President Obama followed in the footsteps of Herbert Hoover and George W. Bush by imposing tariffs on tires imported from China.  In the words of President Obama's former minister, Jeremiah Wright:  "the chickens have come home to roost" — almost literally.  China, as countries tend to do when one country's government blocks market access (see:  Smoot-Hawley Tariff Act), China has now responded by imposing its own sanctions on American imports:  namely, chicken products imported from the US.

The Chinese tariffs range from 40.1% to 105.4%, and include whole chickens as well as other poultry products such as sausage and chicken feet, which, according to the AP story, are apparently a delicacy in China.  Hopefully, this represents only a trade skirmish, and not a full-fledged trade "war".

The action by China follows a familiar pattern.  It is as if Newton'sThird Law of Motion were adapted and applied to the economics of tradeby Adam Smith and David Ricardo:  for every protectionist trade action,there is an equal and opposite protectionist trade action.  The real losers in this situation are , well, everyone.  American chicken producers now have a smaller market for their product — according to MarketWatch, Tyson Foods alone sold $224 million worth of chicken products in China in 2009.  Chinese consumers lose as well — they will have to higher prices and fewer choices when it comes to chicken products; MarketWatch reports that Chinese producers are unable to keep up with demand for chicken feet.

During the 2008 election, then-Senator Obama informed us that his election marked the moment when "our planet began to heal", "the rise of the oceans began to slow", when we "began to provide care for the sick and good jobs to the jobless", and in doing so "restored our image".  Unfortunately, even the purveyor of such Herculean feats can't defy the Laws of Motion.

Mr. President, meet Sir Isaac Newton.

        

        

In response to this news story in the Chronicle about a so-called "jobs bill" plan by Senate Democrats, I sent the following letter:

re:  Senate Democrats unveil jobs package

The so-called "jobs package" unveiled by Senate Democrats on Tuesday could use a good shave — by Occam's Razor.  The idea behind Occam's Razor is that the simplest idea or explanation is typically the best one.  Unfortunately, the Senate approach to creating jobs is unnecessarily complex. 

Consider the payroll tax exemption proposal for hiring new workers:  they would have to be unemployed 60 days or more to be qualified for the employer credit; not only would this require more paperwork, a bureaucracy to enforce, and perhaps lead companies towards hiring less productive or qualified applicants — all of which would lead to less efficiency and therefore ultimately become a drag on economic growth.  The draft outline contains other targeted, special interest "provisions sought by lobbyists for business groups, doctors and the satellite broadcasting industry".

Rather than requiring companies to jump through hoops to get tax relief, or providing government goodies for special interests, a much more simple, efficient, and effective proposal would be to decrease and simplify the tax burden on all businesses.  Rather than sending money to the government (and winding through bureaucratic red tape), businesses would have more money to hire workers or to invest in equipment, construction, or other endeavors that also increase the demand for new workers.

Sincerely,
Dave Smith
Houston, TX

        

In response to this editorial in the Chronicle, I sent the following letter:

re:  Decoding Davos:  Headlines from the World Economic Forum

In exhorting the United States to "get our own house in order" with respect to economics and prosperity, the Chronicle editorial staff certainly chooses a strange mix of remedies.  On the one hand, "towering deficits and a ballooning national debt" are (rightly) mentioned as a drag on the economy in need of a fix; however, the editorialists subsequently criticizes the "gridlock" that has ensued over so-called "health care reform" — the specific plans for which, as passed by the House and Senate, would add trillions to future deficits and debt, while restricting economic growth with tax increases, mandates, and prohibitions.  Not a good recipe for curing an economic malaise.

The Chronicle then lists with derision a persistent "balance-of-trade deficit", ignoring the fact that such "deficits" in balance of trade (also known as the current account) correspond with a surplus in the capital account.  When American consumers choose to spend their dollars on goods and services from foreign-based companies, those companies don't just bury the dollars in the back yard.  Instead, those dollars are invested back in the United States — in bonds, in stock shares, in factories, etc.

If the US wants to promote prosperity, it should promote the engines of economic growth:  trade, entrepreneurism, innovation, production.  Higher taxes and barriers to trade and investment promote none of those things.

Sincerely,
Dave Smith
Houston, TX

        

Last night, major corporations took over the airwaves and broadcast two political messages.  Then, they had commentary about the content and delivery of both speeches from government employees and paid political operatives.  Many were using the opportunity of camera time to effectively lobby the government to enact various policies and advocate a political agenda.

According to much of the comment (largely negative) surrounding the recent Supreme Court decision — Citizens United v. Federal Election Commission, in which the Court overthrew limits on corporate funding of advertisements concerning political issue advocacy — our rights were trampled on by those corporations and their political message.  Surely those who lambasted the decision will be incensed by last night's display?  Surely those who have decried the forthcoming corporate takeover of elections are up in arms?

Don't bet on it.  You see, last night's event was President Obama's State of the Union speech, followed by the Republican Response given by Virginia Governor Bob O'Donnell.  The corporations in question were General Electric (owner, for the near future, of NBC, MSNBC, and CNBC), NewsCorp (owner of FoxNews and Fox Business Channel), Time Warner Corporation (owner of CNN), and so on — corporations that have media divisions.

The case in question involves a group called Citizens United.  According to their website, their mission is to "restor[e] our government to citizens' control" by "education, advocacy, and grass roots organization".  They are a non-profit corporation, and they have produced films such as Broken Promises:  The U.N. at 60, ACLU:  At War With America (an irony of which to be discussed below), Rediscovering God in America, and the one that got them tangled up with the FEC:  Hillary:  The Movie.

The movie is advertised as being for the person who "want[s] to hear about the Clinton scandals of the past and present" and is billed as "the first and last word in what the Clintons want America to forget".  The movie was produced by CU to influence the 2008 election against Mrs. Clinton's candidacy.  Unfortunately, however, while Citizens United is a non-profit organization, under the rules of McCain-Feingold campaign finance "reform", corporations are banned from advertising and other activities during certain time periods during elections; the FEC decided that advertising and showing Hillary:  The Movie fell under those restrictions.

Citizens United had a broad range of support in their fight against the FEC from speech advocacy groups all along the conventional "left-right" spectrum.  The aforementioned American Civil Liberties Union — a target of CU derision in the past — filed an amicus brief on behalf of the group, as did the AFL-CIO (unions were included with corporations in the ban).  They acted alongside such conservative groups as Alliance Defense Fund and conservative lawyers such as Theodore Olson (chief advocate for George W. Bush in the aftermath of the Bush-Gore election in 2000 and later the Solicitor-General in the Bush Administration).

In standing with Citizens United, the Court recognized something simple and fundamental:  the actual wording of the First Amendment:  "Congress shall make no law... abridging the freedom of speech, or ofthe press; or the right of the people peaceably to assemble..."  There is nothing in the wording to suggest that such prohibitions are accorded only when the laws in question concern individuals but are null and void when free, voluntary associations of individuals (or, for that matter, coerced associations, as unions often are).  To uphold the prohibition imposed by McCain-Feingold, the Court would have to take the position that while Tom and Joe have free speech rights, should they pool their resources together, they then forfeit those rights.

There are many potential other pratfalls had the Court upheld the campaign prohibitions.  They would have essentially taken the position that a group of voluntarily-allied citizens would be banned from making a documentary or an interview of a particular politician, but a corporation like CBS would have no such restrictions on, say, a 60 Minutes piece.  This creates what would seem to me to be a huge inequity in the law, and a major source of potential government censorship.

As the author of the majority opinion, Justice Anthony Kennedy, wrote, "If the First Amendment has any force, it prohibits Congress from fining or jailingcitizens, or associations of citizens, for simply engaging in politicalspeech. ...When government seeks to use its full power ... to command where a person may get his or her information or whatdistrusted source he or she may not hear, it uses censorship to controlthought... The First Amendmentconfirms the freedom to think for ourselves."

Hear, hear. 

        

In response to this article in the Chronicle, I sent the following letter:

re:  Gut-check for Obama and Dems on health care overhaul

Commenting on the recent election of Republican Scott Brown to the US Senate in Massachusetts and the impact on the health care "reform" bills that passed the House and Senate — against which Mr. Brown campaigned — House Speaker Nancy Pelosi claimed that "Massachusetts has health care. ... The rest of the country would like to have that too."  My question to Ms. Pelosi is this:  if the "rest of the country" is so enthusiastic about the Massachusetts plan for health care, why have more states not implemented similar plans?

In fact, Massachusetts's experimentation with health insurance reform is in line with the Founding Fathers' vision of the states as "laboratories of democracy" — a marketplace of ideas instead of a top-down, one-size-fits-all approach dictated from Washington DC.  States are free to emulate the Bay State's program if they choose, or mix-and-match with various policies as they see fit.  That's the beauty of federalism.

Ms. Pelosi presumes to speak for what 300 million people "would like", and implies that without an expensive, intrusive, inefficient government overhaul, there is no access to health care.  She is wrong on both counts.

Sincerely,
Dave Smith
Houston, TX

        

In response to this editorial by Froma Harrop in the Chronicle, I sent the following letter:

re:  Taxing bankers is justified, but it should only be a start

In her paean to higher taxes, Froma Harrop states (erroneously) that "there cannot be lower deficits without higher taxes", and notes (correctly) that the national debt increased during the Reagan Administration.  Unfortunately, she is mistaking coincidence for causality.  Yes, under Reagan the income tax rates were reduced; however, the revenue from federal income taxes grew by 56% from 1981 to 1989.  Unfortunately, government spending rose by 69% during that same time period.  The budget deficits during this time were not the result of a reduction in revenue, but rather an increase in spending.

The key to controlling the deficit and national debt is not to take more money from the paychecks of hardworking Americans, but rather to have our politicians spend less of our money.

Sincerely,
Dave Smith
Houston, TX