Government – Page 143 – artdiamondblog.com

Barney Frank on Schumpeter’s “Great Concept”

Barney Frank. Source of photo: http://www.house.gov/frank/welcome.html

Policy-makers are often enthused by the innovation unleashed by Schumpeter’s process of creative destruction, but draw back out of fear of the destruction of jobs. In the passage below, Barney Frank expresses that fear.

I think that there are answers to the fear. More and better jobs are created, than destroyed; workers can invest in general skills that do not depreciate, and retool the specific skills that do depreciate; and conscientious workers suffer from lack of recognition and upward mobility, when creative destruction is stiffled. The pain is less than usually thought, and the gain is greater.

One of the consequences of this separation between economic growth and the well-being of the great majority of citizens is that an increasing number of citizens don’t care about economic growth. Not surprising. Not only do they not benefit, but in many cases they get the short-term disruptive effects.

I mean, there was a great concept from Joseph Schumpeter of creative destruction in which, as the old economic order is destroyed, resources are freed up for the new order.

Well, increasingly, we have people who see the destruction in their own lives, but don’t see that they’re going to be part of the new creation.

Source:

Transcript of remarks delivered at the National Press Club on "Wages" by Democratic Representative Barney Frank of Massachusetts, on January 3, 2007.

“Nature Cannot be Fooled”

In his famous minority report on the Challenger shuttle disaster, written near the end of his life, Richard Feynman does not mince words. He argues that the actual risk of shuttle mission failure was on the order of one in a hundred. Then he says:

(p. 168) Official management, . . ., claims to believe the probability of failure is a thousand times less. One reason (p. 169) for this may be an attempt to assure the government of NASA perfection and success in order to ensure the supply of funds.

. . .

(p. 169) For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.

Source:

Feynman, Richard P. The Pleasure of Finding Things Out: The Best Short Works of Richard P. Feynman. New York: Perseus Books, 1999.

(Note: ellipses added.)

The Mere Threat of “Hillary-Care” Reduced Investment in Drug R&D

CEO of drug company Eli Lilly. Source of image: online version of WSJ artcle cited below.

NEW YORK — Is the future of your health riding on what happens in Washington? Sidney Taurel thinks it might be. The Eli Lilly CEO ticks off a list of former "death sentences" being cured or turned into chronic conditions — "AIDS, leukemia, Hodgkins, hopefully solid tumors within the next few years. The potential for medical research is unlimited. We just need to make sure we don’t interdict it by the wrong policies."

And what might those "wrong policies" be? Anything, it would appear, that reduces the financial incentives for drug companies to invest in research and development. Mr. Taurel points without hesitation to the mere threat of HillaryCare in the early 1990s as an episode that reduced investment in R&D, as drug makers, including his own, redirected money toward the purchase of pharmacy benefit management companies. As another example, he offers the anti-drug industry crusade of Sen. Estes Kefauver in the late 1950s and early ’60s:

"At that point companies started to diversify. We bought Elizabeth Arden, we went into animal health and agricultural chemical products, later on in medical instruments and so forth. All other companies did similar things. And for a while after that we saw fewer new products. When this threat subsided the companies focused again on R&D and we saw a golden era in the ’80s and ’90s with a lot of new products and breakthroughs."

For the full interview, see:

ROBERT L. POLLOCK. "THE WEEKEND INTERVIEW with Sidney Taurel; Of Politics and Pills." The Wall Street Journal (Sat., December 2, 2006): A8.

Hugely Wasteful Health-Care Spending

Source of book image: http://www.encounterbooks.com/books/cure/

Milton Friedman is gone now, but the new book reviewed below, includes a forward written by him. Friedman can be praised for many reasons; a minor one is that he was tireless and generous in offering praise and support for others who were seeking to better understand free markets.

About 10 years ago, I broke my leg playing basketball. After I came out of surgery, with a cast stretching from my ankle to the top of my leg, an orderly asked me whether I had ever used crutches before. I hadn’t, so he showed me what to do, swinging through them from one end of the room to the other. The whole lesson lasted about 90 seconds. When I got my hospital bill, I saw that I had been charged $150 for "gait training on crutches." I did what all insured Americans do: I forwarded the bill to my insurance company. Why should I care? I wasn’t paying for it.

One of the problems with American health care, as David Gratzer notes in "The Cure," is precisely a payment system that takes the patient out of the equation. In the early 1960s, the average American paid out of pocket one of every two dollars that he spent on health care; today the figure is one dollar in seven. The inevitable effect is hugely wasteful spending (and inflated hospital bills like mine). In fact, per-patient costs have gone up almost exactly in inverse proportion to the share of spending borne by the consumer.

Dr. Gratzer cites a remarkable Rand Corp. study that tracked health-care spending by 2,000 families over eight years. The families who got free health care spent 40% more than the families with cost-sharing arrangements. And yet the health outcomes for the two groups were the same. The lesson: Market-based health insurance systems, such as health savings accounts, cut out inefficiencies and lower costs without compromising quality.

. . .

. . . : America is clearly at a crossroads in medical care. Within the next decade we will get either some version of Hillary-care or more free-market medicine, starting with universally available health savings accounts. Let’s hope that our nation’s policy makers read "The Cure" before they decide. They will learn that the government route flattens costs only by holding back the pace of technology, artificially controlling its price and rationing its use. That is not a prescription for better health.

For the full review, see:

STEPHEN MOORE. "BOOKS; The Market and Its Medicine." The Wall Street Journal (Tues., By December 5, 2006; Page D6.

The reference to the book under review, is:

Dr. David Gratzer. The Cure: How Capitalism Can Save American Health Care. Encounter Books, 2006. (233 pages, $25.94)

Goverment Planning Destroys Poor People’s Chance to Develop Themselves: More on Why Africa is Poor

The refuse from homes demolished by the Abuja city government as part of their master plan. Source of photo: online version of the NYT article cited below.

The story below, alas, is not an isolated example. The lessons from Hernando de Soto’s The Other Path, have still not been learned.

“They don’t want to see the common man, the poor man,” said Comrade Daniel, a motorcycle taxi driver, standing in the rubble of his neighborhood. He lost first his home and then his livelihood to a recent campaign to rid this stately capital of the blemishes of poverty. “They only care for themselves,” he said.

Mr. Daniel and others who live on the unruly edge of this tidy city in the mossy hills of central Nigeria say that Abuja has declared war on its poorest citizens.

. . .

. . . the city’s master plan was ignored for years by corrupt officials who allowed illegal neighborhoods to blossom, unauthorized street markets to spread and torpedo-like motorcycle taxis, called okada, often driven by illiterate young men, to choke the streets.

Much of that expansion was sanctioned — or at least overlooked — by the rulers of the day, and deeds were obtained by many of those who have lost their homes in the recent cleanup. Mr. Daniel, the motorcycle taxi driver, had a deed to his land, having paid about $160 for a small plot.

In 2003, a new minister was appointed to run the capital, and he declared his intention to hew strictly to the old master plan. Many political leaders cheered the decision, fretting that Abuja, built at enormous expense as an antidote to Lagos, was headed to the same chaotic fate.

But the declaration effectively rendered much of the daily life of millions of people illegal. As with most Africans, Nigerians deal mostly in the informal economy, the vast, unregulated, untaxed network that emerges, through the inexorable logic of the marketplace, to fill vital needs left unmet by government and the formal economy.

. . .

The master plan’s housing estates unfurl with the orderliness of a planned subdivision: town houses and apartments for the well heeled, tract homes and villas for the even better heeled. But there is little provision for the army of civil servants, whose low wages place the graceful homes of Abuja out of reach.

As for the maids, drivers, security guards and laborers without whom this city would cease to function — people like Mr. Daniel and his sister — there is no place for them at all. Many have moved farther still, commuting for hours from neighboring states to escape the bulldozers.

The government has said it plans to help resettle those displaced by the demolition, estimated to be in the tens of thousands, but those who have lost their homes say no one has offered them any compensation or a new place to live. And so they are left with the bitter knowledge that their capital has no place for them.

With their home reduced to rubble, Vashti and Comrade Daniel have moved into the back room of a cousin’s house. The house they lost was not some tin shack, but a proper house of bricks and mortar. Mr. Daniel’s income has been slashed by two-thirds by the ban on okada, and he does not know how he will rebuild.

“They say they want to make Abuja like London, but London wasn’t built in a day,” he said. “Once upon a time they had poor people in London, but they developed themselves. We just want that chance.”

For the full story, see:

LYDIA POLGREEN. "ABUJA JOURNAL; In a Dream City, a Nightmare for the Common Man." The New York Times (Weds., December 13, 2006): A4.

(Note: ellipses added.)

The reference to de Soto’s book is:

Soto, Hernando de. The Other Path. New York: Harper and Row, 1989.

"Okada" are the motorcycle taxis that the city government of Abuja is trying to ban. Source of photo: online version of the NYT article cited above.

Source of map: online version of the NYT article cited above.

“The Referee Should Not Be Too Quick With His Whistle”

I found the following wise comments while reading a short review of an old book by Edgar Monsanto Queeny, who followed his father as CEO of the Monsanto corporation, and who wrote a book called The Spirit of Enterprise which Schumpeter praised in a letter to Queeny.

(The abbreviation T.N.E.C. stands for the Temporary National Economic Committee, which I believe was an ad hoc congressional committee during part of F.D.R.’s presidency.)

Mr. Queeny does not give us a satisfactory analysis of the T.N.E.C. reports but his observations are always commonsensical and suggestive. What emerges, and what is important, is that the positive Liberal State should not aim at too subtle a plan for freedom. The referee should not be too quick with his whistle nor too ready to order players off the field. The rules of the game may well allow for a little hurly-burly. Economists like Professor Hutt, who are working out the rules of the game of free enterprise, deserve the highest praise. But they should realize that refinement has its price as well as simplicity, and of the two simplicity costs the less.

Shenfield, A. A. "Review of the Spirit of Enterprise by Edgar M. Queeny." Economica 12, no. 48 (November 1945): 264.

The reference to Queeny’s book is:

Queeny, Edgar M. The Spirit of Enterprise. New York: Charles Scribner’s Sons, 1943.

The Entrepreneur Versus the Government

A great story about Jim Clark, who founded Silicon Graphics:

(p. 46) Just a few years back, before the Internet boom, Clark’s house in Atherton had been surrounded by empty fields. Now he was surrounded by new houses, many of them bigger than his own. One morning he looked up from his kitchen table and saw the neighbors looking (p. 47) back. He requested, and was denied, a permit to build a fence tall enough to screen them from his view. The city of Atherton, California, had strict rules about fences, and the fence Clark wanted to build was declared too high. So Clark built a hill, and put the fence on top of the hill. It did not occur to him that there was anything unusual about this.

(page numbers above are from the Norton hardback edition; the full quote is on p. 31 of the paperback edition)

The reference to the hardback edition, is:

Lewis, Michael. The New New Thing: A Silicon Valley Story. New York: W. W. Norton & Company, 2000.

Your Tax Dollars at Work: Government Protecting Us from Bling-Bling

A dental grill, one form of the hip-hop jewelry sometimes called "bling-bling." Source of image: http://www.thesmokinggun.com/archive/0410062teeth1.html

If all you want for Christmas is to gild your front teeth, you may have to buy the bling-bling somewhere other than the Gold Plaza II kiosk at Crossroads Mall.

That’s because an employee of that shop, Bhavin Dalal, faces a felony charge of practicing dentistry without a license. He’s accused of helping customers fit their teeth for glittering mouthpieces known as grills.

It’s the first such case in Nebraska involving the hot hip-hop fashion accessory. And Dalal and his attorney, James Martin Davis, plan to fight it tooth and nail.

Dalal entered a not guilty plea Friday in Douglas County Court. Davis blasted the Nebraska Health and Human Services System for its investigation of Dalal and the charge that resulted.

"It’s overzealousness on the part of a bunch of bureaucrats" who don’t want people to wear grills, Davis said.

For the full story, see:

CHRISTOPHER BURBACH. "Dental Grill Seller Feels State Law’s Bite." Omaha World-Herald (Saturday, December 2, 2006): 1A & 2A.

(Note: the slightly different online title for the article is: "State puts bite on grill seller")

“Atlas May Actually Decide to Shrug”

(p. A16) During the recent off-year elections, the president repeatedly pointed to the booming economy and noted that his tax cuts were responsible. With growth strong and unemployment low despite the ending of the stock-market bubble, terrorist attacks and the war in Iraq, he had every reason to be proud. Moreover, both economic theory and the actual timing of the economic revival support his claims regarding the tax cuts.

That is why it is so odd that rumors swarm around Washington that the president may be willing to raise taxes as part of a "deal" on entitlement reform. In particular, the rumors suggest the president might be willing to get rid of the provision that caps the income level used to compute Social Security taxes and benefits. These rumors aren’t without substance; last year the president would not rule out raising the cap when asked.

Doing so would raise the marginal tax rate on the entrepreneurs that Mr. Bush credits for having led the economic recovery by more than 10 percentage points. The new effective rate would be five percentage points above the level when he took office. Moreover, in 2011, the rate would go up a further 4.3 percentage points to an effective 53% marginal rate on entrepreneurial income. The president would thus be not just raising taxes on entrepreneurs to well above the levels that prevailed in the Clinton administration, but to a rate higher than that which prevailed in the Carter administration. Most of the improved incentives for entrepreneurship and work brought about under Reagan would be repealed.

. . .

Last year an entrepreneur similar to me would have paid federal taxes equal to 33.9% of total income.

. . .

Don’t make it too tough on him, or Atlas may actually decide to shrug.

For the full commentary, see:

LAWRENCE B. LINDSEY. "Compromised." Wall Street Journal (Mon., November 20, 2006): A16.

(Note: the ellipses are added.)

The last line of the commentary is a not-so-veiled allusion to:

Rand, Ayn. Atlas Shrugged. New York: Random House, 1957.

When Government Bets, It Bets with Your Money

Source of graphic: online version of the Omaha World-Herald article cited below.

When an entrepreneur takes a risk, she risks losing her own money; when the government takes a risk, it risks losing your money:

(p. 1A) Omaha taxpayers escaped paying for the Hilton Omaha this year, but they likely will have to come up with the money for some big bills before the hotel is paid off in 2032.

In April, city officials were almost euphoric. They announced the city-owned convention hotel performed well enough that its owners, the taxpayers, wouldn’t have to pony up the money to make the debt payments on the hotel this year.

But a recent audit of city finances reveals a much gloomier financial picture.

The audit raises questions about how the hotel that is connected to the Qwest Center Omaha will generate enough money to maintain its upscale look in the years to come. The report also causes city officials to doubt whether expanding the hotel is realistic in the near future.

The Hilton’s troubles come at the same time that five other hotels are proposed for downtown Omaha. But those are not full-service, amenity-rich convention hotels that are costly to build and maintain.

Hilton Omaha mainly competes in a national market for convention business, and like Omaha as a whole, the Hilton has (p. 4A) found the convention market tougher than it expected.

Omaha borrowed nearly $103 million to build, equip and finance the state’s largest and fanciest hotel.

Before the 450-room hotel opened in April 2004, the city projected net revenues would be $8.4 million in 2005.

But net revenues last year totaled just $4.6 million, according to the audit conducted for the city by KPMG.

For the full story, see:

C. DAVID KOTOK. "Taxpayers Likely to Pay Hilton Bills." Omaha World-Herald (Sunday, November 19, 2006): 1A & 4A.

(Note: The online version has a slightly different title: "Taxpayer to get handed Hilton bills.")

Jeffrey Sachs “Has Apparently Spent More Time Studying the Economic Thinking of Salma Hayek than that of Friedrich”

Salma Hayek. Source of image: http://www.imdb.com/gallery/granitz/0273-spe/Events/0273-spe/hayek_sa.lma?path=pgallery&path_key=Hayek,%20Salma

(p. A18) Scientific American, in its November 2006 issue, reaches a "scientific judgment" that the great Nobel Prize-winning economist Friedrich Hayek "was wrong" about free markets and prosperity in his classic, "The Road to Serfdom." The natural scientists’ favorite economist — Prof. Jeffrey Sachs of Columbia University — announces this new scientific breakthrough in a column, saying "the evidence is now in." To dispel any remaining doubts, Mr. Sachs clarifies that anyone who disagrees with him "is clouded by vested interests and by ideology."

This sounds like one of those moments in which the zeitgeist of mass confusion about national poverty, world poverty and prosperity comes together in one mad tragicomic brew.

. . .

Mr. Sachs, who is currently best known for his star-driven campaign to end world poverty, has apparently spent more time studying the economic thinking of Salma Hayek than that of Friedrich.

. . .

Mr. Sachs’s empirical analysis purports to show that Nordic welfare states are outperforming those states that follow the "English-speaking" tradition of laissez-faire, like the U.K. or the U.S. Poverty rates are indeed lower in the Nordic countries, although the skeptical reader (probably an ideologue) might wonder if the poverty outcome in, say, the U.S., with its tortured history of a black underclass and its de facto openness to impoverished but upwardly mobile immigrants, is really comparable to that of Nordic countries.

Then there is the big picture, where those laissez-faire Anglophones in, first, the U.K. and, then, the U.S., just happened to have been the leaders of the ongoing global industrial revolution that abolished far more poverty over the past two centuries than a few modest Scandinavian redistribution schemes. Mr. Sachs apparently thinks the industrial revolution was led by IKEA. Lastly, let’s hear from the Nordics themselves, who have been busily moving away from the social welfare state back toward laissez-faire. According to the English-speaking ideologues that composed the Heritage Foundation/Wall Street Journal Index of Economic Freedom, Denmark, Finland and Sweden were all included in the 20 countries classified as "free" in 2006 (with Denmark actually ranked ahead of the U.S.). Only Norway missed the cut — barely.

Mr. Sachs is wrong that Hayek was wrong. In his own global antipoverty work, he is unintentionally demonstrating why more scientists, Hollywood actors and the rest of us should go back and read "The Road to Serfdom" if we want to know what will not work to achieve "The End of Poverty." Hayek gave the best exposition ever of the unpopular ideas of economic freedom that somehow triumph anyway, alleviating far more national and global poverty than more fashionable Scandinavia-envy and grandiose plans to "make poverty history."