Tuesday, September 20, 2011

Community Monies

The Wall Street Journal today ran an article about community monies in Brazil called "In Pockets of Booming Brazil, a Mint Idea Gains Currency." Curiously, the author does not mention that 1,000s of other communities worldwide have local monies in circulation. The author seems to think that they stimulate growth but they don't. Central banks tolerate them because they are no threat to them: community monies in Brazil and elsewhere are fixed to sovereign currencies (e.g., each Ithaca Hour = $10 USD) so they lose purchasing power along with central bank notes. I find community monies downright pernicious because they induce people to hold inferior assets: relatively illiquid, zero interest notes with default risk. The only people benefited by them are the issuers.

If we are ever going to supplant national currencies in a major way, the alternative notes will have to be superior to what governments produce, not inferior to them. That is the idea behind the bearer money market mutual fund shares detailed in my essay "Reducing the Poor's Investment Risk: Introducing Bearer Money Market Mutual Shares."

Friday, September 16, 2011

What to do about the United States Postal Service? It's almost bankrupt, you know.

Several years ago, on this blog ("Adam Smith, Profitability, and Efficiency") and in a scholarly publication (“On the Economic Efficiency of Organizations: Toward a Solution of the Efficient Government Enterprise Paradox,” Essays in Economic and Business History 25 (April 2007), 143-54.), I argued that the public-private distinction had been empirically bashed enough times that a new paradigm was necessary. In other words, not all private organizations are efficient and not all government ones are inefficient. Rather, I suggested, what matters much more than its ownership structure per se is an organization's internal incentives and the type of market (competitive to monopolistic) that it operates in. So the problem with the United States Postal Service (USPS) is not that the government owns it but rather that it has a monopoly on certain types of package delivery and that the remuneration of its employees is based largely on their seniority rather than their productivity. Open any organization to competition and reward employees for achieving goals aligned with the organization's purpose and it will thrive, even if it remains a government entity. It might be easier to privatize the USPS than to change its current culture but the privatization must be done correctly, i.e., without monopoly privileges of any kind and to companies that know how to properly incentivize workers, supervisors, and executives.

While discussing this issue with my son, Alexander Hamilton Was Wright, it dawned on me that physical delivery of letters over long distances could easily be eliminated even if a recipient or sender does not have email. Imagine a system of local letter delivery companies that zap mail back and forth to each other electronically, scanning paper documents when the sender doesn't have email and printing them when the recipient doesn't. No need for expensive, complex, international hub and spoke systems with airplanes, 18 wheelers, etc., just printers, scanners, and local delivery persons. Such a service would be cheap (the distance wouldn't affect the price but the quality of the desired output would), especially if competition was encouraged, and of course it would be faster than "snail" mail. So I'm not much alarmed at the prospect, however dim given our bailout-happy government, of the USPS shutting down. Everybody who wants will still get physical mail, maybe twice or thrice a day (from competing delivery companies).

Wednesday, September 14, 2011

Focus on Prosperity, not Jobs

From Washington DC to my little prairie hamlet (Sioux Falls, actually a thriving small city of 160k, give or take), politicians are talking about using the government to "create jobs." Obama has a plan, of sorts, and so does Sioux Falls's esteemed mayor, Mike Huether, who thinks that a new "event center" he has been pushing will create 1,100 construction jobs.

Can the government really create jobs? I'm often asked. Absolutely, I respond, but should it? Aren't we really interested in prosperity, not jobs?

The government can create jobs directly by employing people or contracting with businesses and it can do so indirectly through its policies. Huether has the former in mind, Obama some of both. But neither will deliver what Americans really want, which is prosperity. The JOBS mantra is a load of bunk: American economic history is about working fewer hours at easier work for more and better stuff, not about employment. (And claims by the New York Times to the contrary, we are working less for more compensation and more and better stuff. More technically, real hourly compensation has increased markedly in both business and manufacturing.)

The federal government, for example, could ensure that every American would have work to do 18 hours a day, 7 days a week, 365 days a year by simply outlawing farm machinery and food imports. We could all work picking and shucking corn, milking cows by hand, etc. We'd be impoverished, but we would all have jobs. No politician would dare implement such a policy, of course, but tens of thousands of rules and regs have the same cumulative effect: creating work that need not be done. Reversing such policies would eliminate jobs but actually be good for the economy, especially after the workers freed from the bondage of un- or counterproductive work find value-producing work. I'm not saying that ALL regulations should be eliminated, just pointing out that they come with costs that are rarely understood or directly measured.

What about when governments hire employees or contract with private construction companies or other businesses that then make hires? Most people seem to have the sense that expanding government employment probably isn't a very good thing, at least not the way such employment is currently constituted (high pay and benes based on seniority rather than productivity). Surely the latter type, though, is beneficial? Only, I respond, if one forgets about Bastiat's window, or "that which is seen, and that which is not seen." What is seen are the burly men fixing a bridge or building an events center. What is not seen are the costs, the income that is diverted (through taxation) from one purpose to another. It isn't clear how such reallocation can add to the total number of jobs (unless they are lower paying than the ones they replace), but it is clear that it creates very salient jobs that politicians up for re-election can point to proudly and that it makes it difficult for their opponents and critics to point to the jobs lost due to the taxes. But we know that they were lost: the $1,000 or $10,000 that you paid in taxes did not go to the corner coffee shop, to the auto or boat manufacturer, etc.

If a government can somehow increase wages more than it decreases it, its ability to create prosperity with those wages must be limited in scope because communist nations like the former USSR that had nothing but government employment stagnated economically. They created plenty of jobs, in other words, but little prosperity. Why do the Obamas and Huethers believe that they can do any better?

How, then, can government promote prosperity? The quick and easy answer is by protecting life, liberty, and property because that will enhance incentives for improving productivity, for making more with less. What is meant by life, liberty, and property, and how government can best protect them, afford no easy answers but we can't even begin to have that conversation if politicians fixate discussion on "jobs.

Friday, September 09, 2011

Is Rick Perry Right about Social Security?

During the debate on Wednesday night, Republican presidential candidate Rick Perry has taken som flak for calling Social Security a Ponzi scheme. Who's right?

On page 163 of Fubarnomics, I call Social Security a quasi-Ponzi scheme. I hedged because Ponzi schemes, pyramids, and related scams and flim flams are by definition illegal. Social Security isn't illegal and can't be unless declared unconstitutional, something SCOTUS has not done and is unlikely to do at this or any future juncture. Also, as Stephen Colbert hinted at last night in his critique of Perry's claim (sorry Parry's claim for Colbert -- the A is for AmericA and IowA), Social Security is not designed to enrich just one or a few people at the top, it is designed to provide modest annuities to millions of superannuated individuals (and in some cases their spouses and dependent children).

Social Security is like a pyramid scheme because it worked by increasing the number of taxpayers at the bottom of the pyramid. Demographics (the Baby Boom) helped at first, as did enlargements to the program. But now there are no new groups of any size (with the possible exception of immigrants) to add to the program and the demographics have reversed. Instead of a pyramid with a few at the top garnering benefits and a lot at the bottom each paying a little for their support, Social Security is more like a rectangle with the number of taxpayers not far outnumbering the recipients. Soon, the remaining taxpayers may feel the burden of taking care of so many beneficiaries too much to bear. In that sense, the Ponzi scheme metaphor is apt.

Interestingly, the government does seem to be following some of the recommendations I made in Fubarnomics, especially shifting Social Security from a special, highly regressive tax to the general fund. Obama apparently wants to continue the transition. The next step would be to tell everyone older than some age (I've volunteered mine) that they will receive Social Security payments as promised and everyone younger (including myself) that they had better start saving now because they will not receive any Social Security retirement benefits (and that the life insurance and disability components will phase out over the next few years). The final step would be to improve the regulation of our private security system: retirement plans, disability insurance carriers, and life insurers.