Posted on by Daniel Klotz

Free Markets are Efficient Distributors, Not Our Savior

I think the recent U.S. Government economic bailout package was misguided and essentially socialist. As I wrote in my last post, I think the market would achieve a more sustainable strength if left alone to do what markets do. Here is some additional background thinking on why that has become my position.I know many of you agree with my end conclusion (bailout bad, free market good, at least in the current situation). I’m curious to know if your reasoning is similar to mine or much different. For those who disagree, I’d like to better understand where it is that our opinions begin to split.

I want maid service; you want maid service. I want a nice car; you want a nice car. I’d like a custom suit; who wouldn’t?

We can’t all have everything we want. There is not enough to go around. That’s scarcity, and it’s a fact of life.

Everyone knows we get into trouble when we ignore the facts of life or think we can sneak around them. Unfortunately, that’s where we are right now with our economy: we have gotten into trouble.

We tried for too long to overcome scarcity with credit. For years, both you and I could have nice cars, even though we couldn’t afford them. We were easily able to get a loan. Or heck, we could even charge it on a credit card. With a 28% APR, even if one of us falls way behind on payments or goes bankrupt, the bank issuing the card still makes out OK.

The so-called rescue plan now in action props up this faulty economic paradigm, this inaccurate way of understanding the world.

Wild paths for planets were invented to keep the geocentric view of the cosmos alive in the face of pesky facts. Keeping our current economic paradigm alive requires treating the facts in a way just as ridiculous.

As early astronomers observed the movements of the planets, it became more and more difficult to sustain the paradigm that the Earth was the center of the cosmos. Pesky little facts. They always ruin things; it’s always easiest to conceal and ignore them. (That’s how we wound up with ridiculous maps of planets doing loop-the-loops, like Jupiter in the image to the right.)

For instance, there is this fact that not everyone can have everything. What we face right now is not a crisis, it’s a consequence. Still, it’s so easy to sweep that fact under the rug and pretend that our present way of looking at the economic world is tenable. In our current paradigm, there is no such thing as bad debt. There is still only subprime debt.

This paradigm is nonsense. It disregards the fact that resources are in fact scarce, and not everyone can have everything they want. Our current paradigm believes that everyone can have what they want, and in fact has every right to expect credit so that they can buy what they want.

Not only does this violate the scarcity part of Economics 101, it also violates the part about prices.

If everyone can purchase $100,000 cars, auto manufacturers can keep making $100,000 cars. The paradigm we live under (which is still hanging on for dear life) holds that, thanks to the wonders of credit, we can all afford $100,000 cars (and SUVs and pickups, of course). There is no reason to make or focus on more affordable cars. If price is not a barrier, what incentive is there to focus on high value at low price?

You can see that our current way of doing things messes up in two ways: First, by ignoring scarcity, and second, by making prices less relevant than they really are.

Gasoline right now is a shining example of how this works. When it comes to oil, it’s impossible to ignore the fact that it is scarce. Even when that scarcity is exaggerated by OPEC (when they limit production and shipping), all they are really doing is spreading scarcity out over a longer period of time. Yet, even with a scarce resource (and, really, all resources are scarce), prices can go down. That’s because demand can fluctuate even as supply is predictable.

In a nutshell, if we were still dealing with $4.50/gallon gas, this recession would be worse than it is. But everyone is scaling back, and that means fewer miles are being travelled. Fewer miles being traveled means lower demand for gas. Lower demand for gas means a lower price on gas.  Earlier this year, I thought Tom Friedman presented a great idea: Why shouldn’t the government set a “price floor” on gas, guaranteeing that it will always cost $4/gallon or more? If the “real price” ever dipped below $4, the difference would go toward developing alternative energy.

Problem is, that suggestion rests on the assumption that people’s ability to afford $4 gas won’t substantially change. It is now obvious that that is a bad assumption. Prices are meaningful, and should generally be left as free as possible.

There is such a thing as bad debt. Bad debt is debt taken on to pay for something that is overpriced specifically because the law of scarcity has been ignored. (Think houses. We can’t all own houses, scarcity says. So many people kept saying different.)

No sensible person “believes” in free markets in the sense of a zealous adoration of them. What people like me mean when we say we “believe” in free markets is that we think that free markets constitute the most efficient way of distributing scarce resources.

When you work, you either make resources more useful and valuable, or you help distribute those resources. (You may do both.) That helps everyone out, and you get paid for it. Then, you turn around and pay for something else, thus giving another person an incentive to produce it for you.

Do free markets have cracks? Heck yeah. That’s why we don’t “believe believe” in them. We just think that, as economics goes, they’re the best way we have. Governments are extremely slow moving; the decisions of a centralized socialist government are ridiculously inefficient in distributing scarce resources when compared to the efficiency of countless smaller, private transactions in a free market.

So, right now, when we say the federal government’s bailout plan is “socialist,” this is why we mean it as a bad thing. It is not because we love free markets in and of themselves. Free markets not warm and huggable things. Instead, we mean it as a criticism because we love our neighbors and our world, and we know that free markets are the most efficient way of meeting the bulk of humanity’s needs.

Posted on by Daniel Klotz

Will It Float?: Me

Yesterday Tom Friedman of the New York Times wrote that in this credit crunch that is hurting the economy, no one is an island:

Well, you say, “I don’t own any stocks — let those greedy monsters on Wall Street suffer.” You may not own any stocks, but your pension fund owned some Lehman Brothers commercial paper and your regional bank held subprime mortgage bonds, which is why you were able refinance your house two years ago. And your local airport was insured by A.I.G., and your local municipality sold municipal bonds on Wall Street to finance your street’s new sewer system, and your local car company depended on the credit markets to finance your auto loan — and now that the credit market has dried up, Wachovia bank went bust and your neighbor lost her secretarial job there.

Five-Dollar Pig by Flickr user EricGjerde

Let’s take a look:

  • Pension fund? Ha! Yeah, right. We have about $450 in a 401(k) at this point.
  • Refinance our house? Nope. We’ve been smart, and have consciously chosen to rent for the past four years. It continues to be a good decision.
  • Local airport? Our local airport stopped offering public flights more than a year ago. Also, I haven’t flown since the summer of 1999—it’s too cumbersome and expensive, and rail and carpooling has worked beautifully for me.
  • New sewer system? I wish. This town’s infrastructure is crumbling. Besides, why can’t a municipality save up for a major expense, like we private citizens do for our own purchases?
  • Auto loan? Nope. I’m still driving my trusty 1994 Geo Prizm. Until I can pay cash for a newer used car, I’m not intending to buy one.
  • Neighbor lost her job? Again, my neighbors are doing OK. Not great, but they have never been doing great. We do alright for ourselves, but the whole disparity of wealth thing has been biting us in the butt for a long time.

I don’t have much of a vendetta against Wall Street. I do, however, think our entire economic system has gotten off-kilter and is ultimately unsustainable. I have never benefited from our current economic situation, compared to how others have benefited. Where I am today, I have basically nothing to lose. In fact, with our student debt far outweighing our assets, I have less than nothing to lose.

So from where I stand, with none of Mr. Friedman’s arguments applying to me, I have to ask, Why prop up an unsound and unsafe structure? Why shouldn’t we allow it to implode and rebuild itself? I have full confidence that our economy will rebuild itself. I believe that the free market works, as long as basic protections for stockholders, consumers, and workers are in place, and as long as antitrust is actively weeded out.

Is it not possible that what is happening is the market saying that the financial sector has grown too bloated and that we have collectively taken on too much debt? If that is the case, we don’t need a bailout, we need the financial sector to shrink along with our collective debt. That will be painful. I’m sure I will be affected by that economic pain, but it is not as if everything is currently fine and dandy for me economically. But isn’t it possible that such pain is an unfortunate fact of life that is necessary for a more sustainable economic future?

Posted on by Daniel Klotz

Lack of Young Leaders, or a Lack of Leadership from the Rest?

Jeff Hawkes of the Intell and I both attended a meeting Monday morning. We walked away with the same concern—our community appears unsustainable unless we encourage and enact true innovation—but with opposite ways of framing it.

In his column yesterday, Jeff writes, “…we had better start to worry if young people in general begin thinking their future and Lancaster County are not compatible.”

I would put it differently:

We had better start to worry if young people’s future and Lancaster County’s future are not compatible.

The way Jeff frames the issue is not unique. It is the favored way of addressing the issue among the majority of the county’s established leadership. They are worried about how people my age (I’m 26, and in economic development conversations, “young people” refers to people roughly 23–35) perceive our community.

I, on the other hand, am worried about the reality of our community.

Waiting rooms: the new meeting spaces for community leaders? Photo by Flickr user SirTwilightKing, under a Creative Commons license.

Right now an important reality about our community (Lancaster County) is that the leadership is aging. Monday’s meeting was a summit of everyone involved to date in the ongoing process of developing an “economic development and sustainability plan” for the county (dubbed “Lancaster County: Our Economic Future – Strategies and Indicators”). I sat at a table with a few older gentlemen involved in municipal government across the county. Since I wasn’t explicitly invited into this conversation, I will withhold names. They were swapping updates about mutual friends (who were themselves aging community leaders). It began when one of them (a borough mayor) said he ran into so-and-so at a doctor’s waiting room recently, and the two had held a conversation on the state of the county and where it is heading. The mayor remarked that waiting rooms are becoming ad-hoc meeting rooms for county leaders. The other men at my table affirmed the truth of his observation and laughed.

I didn’t laugh. You might say I threw up a little bit in my mouth.

The aging of our leadership is disturbing enough. What adds insult to injury, though, is that many of today’s policy-makers and leaders were tapped out as up-and-coming leaders when they themselves were in their 20s. As they have aged, they have remained focused on their agendas and visions for making our community better. You have to admire their intention and their efforts. These folks have worked hard for decades in a bona fide effort to better their communities.

Let me also be quick to say that I in no way wish to demean older folks, whose contributions of experience and wisdom are grossly neglected by our society as a whole. And, “older folks” is also a poor description of many of our current leaders—yes, they are generally two decades or so older than me, but they are hardly “old.”

Still, the truth is that they do not have any legitimate claim to represent the population they are so concerned about. They are not the young, creative, talented people which they acknowledge our county is both losing and failing to attract. (It is labeled a “brain drain,” but really it is a drain of vitality in more areas than just the mental one.)

So, I want to raise a significant question: Is the problem that there aren’t young leaders? Or is it that our current leaders are letting us down?

In my opinion, it’s the latter (though in many cases is it accidental, not devious). Leadership entails raising up consecutive generations. It is not a neat matter of doing more mentoring—it is a matter of choosing, rather than passively refusing, to pass the flame on to new generations.

There is a strong pool of young, talented, creative leaders already in our community. Not nearly enough, but they are here. They are struggling to get a foothold and to be heard when they should be eagerly lifted up and given megaphones.

A letter from an anonymous (why anonymous?) writer at NewsLanc.com is much more simple-minded in its analysis: “Lancaster fails because in recent years it has been foolishly and tragically lead by an ignorant, self indulgent, short sighted establishment, whose members usually support one another!”

Short-sighted? I can probably agree with this, but it’s not always because they do not try. The “establishment” simply needs younger eyes with fresher perspectives. Maybe I am too trusting, but I disagree that the problem is ignorance or self-indulgence. Asking our current leadership to think like young members of the creative class is like asking me to think like an older, third-generation Lancastrian. I can make a good-faith effort, but you know I won’t nail it.

There were a total of 4 young people at Monday’s Planning Commission meeting: myself, Emma Hamme, Brandon Porinchak, and Shanon Solava-Reid. Brandon and Emma are talented community leaders, but they were there not as invited participants but rather in support roles as part of the Planning Commission staff. I was there because I overheard about the process, butted in with my two cents on the issue, and persisted in asking to be included. Shanon is to be commended for making a place for herself, and doing an excellent job, at the Lancaster County Community Foundation.

It is telling that I was only able to stay for half an hour of the 2-hour meeting, because in the end I’m still just an assistant in my organization, and I was called back to the office to prepare materials for a meeting the next day. When I left, the average age of the participants still in the room must have gone up about ten years. The sad fact is that the room more accurately represented the current leadership after I left.