The White House Fat Police

(HT Drudge Report) First Lady Michelle Obama is on a crusade to end childhood obesity with the aid of the Task Force on Childhood Obesity created by Presidential Memorandum on February 10, 2010 to help her with this task.  Her allies include the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC).  As reported by Peter Maer of CBSNEWS in "White House: Stop Marketing Unhealthy Foods to Kids" the First Lady said,

We have a roadmap for implementing our plan across our government and across the country...No one gets off the hook on this one from governments to schools, corporations to non-profits all the way down to families sitting around their dinner table.

This sounds a little intrusive, but the administration insists that they will use the bully pulpit and not legislation.  Well, at least they will not start with legislation.  But Federal Trade Commission Chairman Jon Leibowitz said,

A regulatory approach is certainly not where we want to start...You start by pushing self-regulation, by pushing your bully pulpit; sometimes shaming companies that don't do enough.

Why use legislation when the threat of legislation is enough?  Maer reports some changes the Task Force will or might pursue through extortion or legislative force. 

• The FTC will continue hearings to determine whether firms have honored past commitments and whether they can make them do more. 


• The advisory panel will push for better food content labeling on products and vending machines. 


• Labeling could be pushed to the front of packages. 


• Restaurants should re-evaluate portion sizes, improve kid's menus, and list more healthy food choices. 


• State and local governments could tax unhealthy foods. 


• Schools should promote healthier food in cafeterias like swapping the deep fryers for salad bars. 


• Schools should have more time devoted to physical activities. 

The role of the federal government is to secure our inalienable rights to life, liberty and the pursuit of happiness.  The Obama administration's efforts are not new, it is only advancing a long standing federal intrusion into the nation's kitchens and it is unwarranted, redundant and therefore unnecessarily costly. When the government acts as the watchdog of the American waistline it is impinging on our right to liberty, the freedom from outside compulsion or coercion.  The government assumes that its citizens' objective is longevity, not life.  The government estimates the cost of treating obesity related ailments at $150 billion per year.  Where is the cost benefit analysis?  Where is the measurement of obesity related pleasures?  I know that I get at least $10 of more pleasure from a good doughnut than a small selection of fresh fruit.  If I am a typical consumer and eat one doughnut per month multiplied by 300 million consumers, that alone amounts to $36 billion of pleasure.  Longevity and health are simply not the only objectives that we pursue.  Gay men don't live as long as straight men but our nation almost unanimously wants the government out of bedrooms.  If consumers were only interested in health and longevity, nobody would ride a motorcycle, get a tattoo, or attend a soccer game in Europe! 

The information that the government provides is redundant.  If I want advice about my weight I consult my mirror, scale and wife.  I pay my doctor to tell me of life style health issues including weight.  Even television has a show designed specifically to trim our waistlines, "The Biggest Loser."  My options are much the same with my children.  

The government intrusion into the food manufacturing industry is also unnecessary because the companies operate in a competitive environment.  They will provide nutritional information about their food without a government mandate as the market dictates.  Many commercials tout the health benefits of food products.  Some consumers prefer taste or ease of preparation to health.  When markets help consumers' realize their desires they fulfill the inalienable right to the pursuit of happiness.          

In times of huge federal deficits, one might note that while not one bit of these measures is the federal government's business, every bit costs taxpayers. 
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The Little Engine Who Could?

On Friday, the Bureau of Labor Statistics released unemployment data for April.  Like the little engine that could, the data tells the story of a little engine, the American market economy, carrying an oversized train over a high mountain pass on the track to economic recovery.  GDP growth for the first quarter of 2010 groaned in at 3.2%, a rather anemic rate for the second quarter of economic recovery, but sufficient to invigorate discouraged workers who come out of the shadows and reentered labor markets bumping up the labor force participation rate to 65.2% in April from 64.9% in March and better exposing the burden of unemployment which jumped to 9.9% from 9.7%.   

How did we get to the point that the little engine's success is in doubt?  It left the station in good mechanical order and properly packed and began its journey at a full head of steam.  Although the little engine is imperfect, many of its problems were created or compounded by those in charge of maintaining the track.  Unhappy with that important assignment, they wished to choose the direction of the track, the speed of the train and the loading of cargo.  As the little engine chugged through the plains, a man in charge of the rails gave a wonkish wink to the little engine as he added home ownership goals and weaker lending standards to achieve those goals to the little engine's burden. 

Further down the line, another man compassionately raised the home ownership goals.  Imprudent workers on the train responded and grew bloated on bad loans that were needed to meet the new goals.  It was like creating a downhill run before the little engine began its uphill battle but the dirt had to go somewhere and it wass added to the top of the mountain.  

The train raced downhill, but it knew excess speed on a flat run is as dangerous as the long pull uphill.  It feared both “The Boom and Bust.” A wise man with long experience working the track saw the looming disaster, but rather than keeping the track clear, stoked the little engine's fire with lower interest rates, adding to the train's speed but depleting its fuel. 

Finally, as home loans started to go bad and the bloated banks fail, the long uphill battle began and the little engine chanted, "I think I can, I think I can."  Terrified by the slowing train and the long climb, the compassionate man yelled at the little engine, "This is your fault; you are letting your cargo (the bad loans) fall off the train.  Banks that are too big are failing.  People on Main Street will be hurt!"  He quickly arranged a bailout for the banks that added to the debt burden of the lumbering train. 

A post partisan man who supported the bailout pushed the compassionate man and his followers out of the way and pontificated, "Can't you see what you have done?  You have let the little engine choose its path.  You trusted the little engine too much and it is hurting Main Street!"  He quickly organized shovel ready projects to help the little engine but added more debt to its burden.  Angry at those who made the little engine run and refusing to recognize the jobs and products it carried or the burden created by the track maintenance crew, the post partisan man cried, "You earn too much.  We should be more like Europe.  It's time to give back to the community."  He raised taxes, but only on the wealthy, to pay for a health care program, further adding to the weight of the train. 

The train slowed but continued to groan, "I think I can, I think I can."  At its side it sees Greece's little engine wrecked and smoking.  Those in charge of their track had promised too much for too long are facing an angry mob demanding that their little engine maintain their benefits, but the train’s cargo has already been looted. 

The little engine passes other European little engines whose track maintenance crews fear that Greece's wrecked engine will run into theirs further burden their own little engines with more debt to bailout Greece.  The little engines of Spain, Italy, and Portugal look hopefully to the larger European engines whose debt burden is growing. 

Will the European engines crash and burn?  More importantly to American's, will our little engine follow suit?  If we as an electorate continue to support expanded entitlements through increased debt, it will.  It we continue to expand the size and scope of government, it will. If we continue to bail out failed enterprises, it will.  If we view the market economy, our little engine, as a goody bag from which policy makers can take from one group and give to another, it will.  It is past time to return our trust to the spontaneous actions of economic agents and to limit the actions of government officials who would hamper growth and prosperity by redistributive rules or worse, taking over part or all of the economic planning function.
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Solow on Markets and Their Failures

In Pirates of the Caribbean: The Curse of the Black Pearl," Jack Sparrow describes Will Turner's father as a "good man and a pirate," a seeming paradox.  Outside of economics, many argue that conservatives trust markets to allocate resources and liberals do not, making it impossible for a  to see fundamental value in markets.  Robert Solow is a politically liberal economist and sees value in markets.  Saying that he is a politically liberal economist does not describe his contribution to economics, which can be summarized by noting that he was awarded the Nobel Prize in Economics in 1987 for his work on economic growth theory.  Because many incorrectly believe that a liberal could recognize the value of markets I will first establish his liberal bona fides and then provide a few quotes from his New Republic book review, "Hedging Markets," to demonstrate that he values markets but notes their failures.

A Wall Street Journal article notes that Solow has long advised Democratic presidential candidates and is an Obama backer.

Robert Solow, the Nobel Prize winning economist who long has counseled Democrats, said Barack Obama should roll back the Bush tax cuts for the rich but shouldn’t use the proceeds to cut taxes for the middle class, as the Democratic presidential candidate has proposed...

Instead, he would use the money “both for urgent needs now and for future deficit reduction,” he said. “The government needs that money and ought not to be using it to promote consumption [consumer spending.]”...

Mr. Solow was quick to add: “I understand this” — backtracking on a promised middle-class tax cut — “is not a politically easy thing to do.” He remains an Obama backer.

In "Hedging Markets," Solow gives an introductory lesson on markets and their failures.

My late colleague Evsey Domar, who was, among other things, a student of the Soviet economy, told us how the planning bureau began by setting production quotas for paper factories in tons per year. The result was paper so thick that it could not fit in a Soviet typewriter or anywhere else. So the clever planning bureau changed to setting quotas in terms of square meters per year. The result was paper so thin that even a member of the planning bureau could see right through it. The lesson is that it is so much simpler and more effective to tell paper producers that they have to compete to sell their paper to notebook manufacturers (who are also competing with each other), and live off the proceeds.

If this is how more or less free, more or less competitive markets can deal with something as simple as a spiral notebook, how much more remarkable it is that they can do the same for something as complicated as a computer or a refrigerator. But there seems to be no other practical way to run a modern economy efficiently. That is what Adam Smith understood: a competitive market economy, motivated primarily by individual pecuniary self-interest, can produce coordination where one might expect only chaos.

He invented for that process the memorable image of the Invisible Hand. In the following two centuries and more, an army of economists has spent an enormous amount of time and intellectual effort refining and elaborating Smith’s initial insight, teasing out exactly how far that logic can be carried, how the hand operates, investigating when and how it breaks down, and elucidating odd or complex special cases such as professional team sports, or Internet services, or health care...

Today, of course, no one is against markets. The only legitimate questions are: What are their limitations? Can they go wrong? If so, how can we distinguish the ones that do from the ones that don’t? What can be done to fix the ones that do go wrong? When is some regulation needed, how much, and what kind? More broadly: how to protect the economy and society against specified tendencies to market failure without losing much of either the capacity of a market system to coordinate economic activity efficiently or its ability to stimulate and reward technological and other innovations that lead to economic progress?Today, of course, no one is against markets. The only legitimate questions are: What are their limitations? Can they go wrong? If so, how can we distinguish the ones that do from the ones that don’t? What can be done to fix the ones that do go wrong? When is some regulation needed, how much, and what kind? More broadly: how to protect the economy and society against specified tendencies to market failure without losing much of either the capacity of a market system to coordinate economic activity efficiently or its ability to stimulate and reward technological and other innovations that lead to economic progress?

The subtitle of John Cassidy’s book illustrates the problem. Most market failures--they occur every day--are not even nearly calamities. They start with the existence of partial monopoly power in this or that industry, with the result that the market price is “too high” and the rate of production “too low” in the precise sense that everyone could be made better off if that error were corrected. They extend to cases [of  externalities] where the market does not impose the full costs of their actions on certain producers and consumers, with the result that economic activity is misdirected: the consequences may be minor (a small amount of pollution) or major (fish stocks collapse from overfishing) or potentially catastrophic (climate change from excessive unpenalized emission of greenhouse gases). And what are we to make of the stock-market collapse of October 1987, the largest one-day fall ever on the New York Stock Exchange? It was in one sense a calamity, but it left essentially no trace in the “real” economy of production, employment, consumption, and everyday life. Evidently being for or against “free markets” does not come close to being an adequate response to the problems that arise in a complex modern economy.

To be sure, Solow would tend to find more instances of market failure severe enough to justify government intervention than I, but we are generally viewing problems within the same economic framework.
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Loans by the DOE: Good Investment or Political Payoff?

One danger of a government highly involved in decisions of private companies is that economic success becomes dependent on political connections. A second danger is that the average citizen will not have the time to gather the information to distinguish between economic interventions that will benefit the economy and those that benefit the politically connected. Corruption can be disguised as a public investment, necessary for some larger good. Both dangers are good reasons for the government to avoid unnecessary interactions. Josh Mitchell and Stephen Power, writing for the Wall Street Journal, describe how two politically connected small startup firms making luxury hybrid sports cars received nearly one billion in loans from the Department of Energy in "Gore-Backed Car Firm Gets Large U.S. Loan."

WASHINGTON -- A tiny car company backed by former Vice President Al Gore has just gotten a $529 million U.S. government loan to help build a hybrid sports car in Finland that will sell for about $89,000.

The award this week to California startup Fisker Automotive Inc. follows a $465 million government loan to Tesla Motors Inc., purveyors of a $109,000 British-built electric Roadster. Tesla, like Fisker, is a California startup focusing on high-end hybrids, with a number of celebrity endorsements that is backed by investors that have contributed to Democratic campaigns.

The awards to Fisker and Tesla have prompted concern from companies that have had their bids for loans rejected, and criticism from groups that question why vehicles aimed at the wealthiest customers are getting loans subsidized by taxpayers.

"This is not for average Americans," said Leslie Paige, a spokeswoman for Citizens Against Government Waste, an anti-tax group in Washington. "This is for people to put something in their driveway that is a conversation piece. It's status symbol thing."

DOE officials spent months working with Fisker on its application, touring its Irvine, Calif., and Pontiac, Mich., facilities and test-driving prototypes.

Matt Rogers, who oversees the department's loan programs as a senior adviser to Energy Secretary Steven Chu, said Fisker was awarded the loan after a "detailed technical review" that concluded the company could eventually deliver a highly fuel-efficient hybrid car to a mass audience. Fisker said most of its DOE loan will be used to finance U.S. production of a $40,000 family sedan that has yet to be designed.

We know that the market is generally better at allocating resources than the government, but that the government can sometimes improve market outcomes. Was this a good investment, a payoff to the politically connected, or something else?

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Ants, Markets and Spontaneous Order (Repost I)

One of the difficult ideas to explain in economics is how a spontaneously ordered markets result in such a marvelous outcome: the greatest benefit to society from the allocation of resources. Markets, with proper laws and foundational regulations, guide self-interested or greedy agents into creative, innovative actions that are not only good for the involved economic agent, but society as a whole.

It is not easy to convey the efficiency of spontaneously ordered markets to students. They seem to understand how self-interest or greed orders an individual’s activities profitably, but not how this benefit extends to society. Russ Roberts, in his EconTalk interview with Deborah Gordon, "Gordon on Ants, Humans, the Division of Labor and Emergent Order," discovers a brilliant example to describe spontaneous order—ant colonies.

Ant colonies are well ordered and appear to operate under some sort of central command, but it is not so. The colonies have no central planner. Each ant secretes pheromones and hydrocarbons based on conditions surrounding the colony. Other ants smell the pheromones and hydrocarbons, and use these scents to guide their actions into digging, patrolling, and foraging. As the scents change, ants alter their behavior and the colony adapts and prospers.

Imagine the confusion that would result if a queen ant did order activity in the colony. How would the queen know the conditions around the colony? Should the ants dig, and how deep? How many ants should patrol and where? Once patrolling is accomplished, how many ants should forage and in what direction? Each reporting function would be new to the colony, time consuming, contain less information than spontaneously ordered functions, and be totally unnecessary.

Humans behave in a manner similar to ants. Each has an infinitesimal knowledge about the overall functioning of the economy. The best home builder (brightest, hardest working and most honest) probably has no idea how roof tiles are produced, let alone how automobiles are assembled. Each individual collects information provided by prices and profits and directs his or her activities accordingly. As prices and profits change, economic activity through individual action changes. Resources are reallocated, products are innovated, and the economy adapts and prospers.

Collective behavior in a human colony creates confusion based on insufficient information if colony planners attempt to alter the reallocation of resources and innovation within society. Planners just don’t have the information possessed by thousands of economic agents. Diverting resources to information gathering and planning is time consuming and costly; diverted resources cannot be used to produce goods and services.

It is here I believe that the analogy between ants and humans breaks down. Ants follow secreted chemicals that dictate their actions. The human brain allows for a wider range of behavior that may profit the individual but be destructive to others and the entire human colony. Foundational rules such as the prohibition on theft and definition of property rights support the spontaneous ordering of resources and innovation. While there is disagreement among economists just how broad these foundational rules and regulations should extend, it is clear that nearly all economists believe that society should maintain through collective actions the greatest freedom possible on resource allocation and innovation.

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Sony and 3D TV

Markets is a wonderfully innovative.  Sony announced that it intends to sell 3D TVs  to consumers beginning in 2010.  As is the case with many new products a standard format has not yet emerged.  Maija Palmer, writing for the Financial Times on September 1, 2009 in "Sony to throw its weight behind 3D TV," describes the market for the emerging technology.

3D technology looks set to hit the home consumer market next year, with Sony on Wednesday announcing plans to sell 3D televisions globally by the end of 2010.

Sony’s decision to throw its weight behind the technology will be an important boost for the 3D industry, which has so far focused mainly on cinemas. British Sky Broadcasting has said it would introduce a 3D satellite channel in the UK next year, but it had been unclear whether there would be equipment available to view it on.

Speaking at the IFA technology trade show in Berlin, Sir Howard Stringer, Sony chief executive, will announce plans not only to sell 3D Bravia television sets, but to make Sony’s Vaio laptop computers, PlayStation3 games consoles and Blu-ray disc players compatible with the technology...

The consumer electronics industry has yet to agree on a single 3D standard, posing the risk of a format war akin to that between VHS and Betamax or Blu-ray and HD-DVD...

The electronics industry is looking for the next technology to boost sales, as high-definition television sales move past their peak. Hyundai is producing early 3D sets for the Japanese market and Panasonic has flagged up plans for products.

Sony’s commitment, however, improves 3D’s chances of becoming mainstream. It has given no indication of prices, but analysts expect early 3D TVs to cost several thousand dollars. Hyundai’s 3D TVs cost more than €3,400 [about $4,900].

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Markets Have Few Friends in Politics

It's often hard to devine how a politician's public pronouncements will affect policy when he or she assumes office. Both President Obama and former President Bush praised our nation's reliance on markets. In Audacity of Hope (2006) President Obama wrote,

Our Constitution places the ownership of private property at the very heart of our system of liberty.... The result of this business culture has been a prosperity that's unmatched in human history...The result of this business culture has been a prosperity that’s unmatched in human history. It takes a trip overseas to fully appreciate just how good Americans have it; even our poor take for granted goods and services – electricity, clean water, indoor plumbing, telephones, televisions, and household appliances – that are still unattainable for most of the world. Our greatest asset has been our system of social organization, a system that for generations has encouraged constant innovation, individual initiative and the efficient allocation of resources.

President Bush expressed faith in markets during a CNN interview held June 18, 2009 in Eire, Pennsylvania, when he criticized President Obama's reliance on government rather than markets to solve the nation's problems.

Concerning the economy, Bush told the 104th annual Manufacturer and Business he knows "it's going to be the private sector that leads this country out of the current economic times we're in. You can spend your money better than the government can spend your money."

Bush remained optimistic about the country's future, pressing for free trade, open markets and the free enterprise system, the Times reported.

"We'll come out of this better than before," he said.

He was less sanguine bout Obama's plan to overhaul the U.S. healthcare system.

"There are a lot of ways to remedy the situation without nationalizing healthcare," Bush said. "I worry about encouraging the government to replace the private sector when it comes to providing insurance for healthcare."

Also in the Audacity of Hope, President Obama emphasizes the role of government in correcting perceived imperfections of markets.

Aside from making needed investments that private enterprise can't or won't make on its own, an active national government has also been indispensable in dealing with market failures...But it was during the stock market crash of 1929 and the subsequent Depression that the government's vital role in regulating the marketplace became fully apparent. With investor confidence shattered, bank runs threatening the collapse of the financial system, and a downward spiral in consumer demand and business investment, FDR engineered a series of government interventions that arrested further economic contraction.

At best, President Obama's actions indicate that prior to his administration there was a huge imbalance in our economy incorrectly favoring markets that required a vigorous government to correct. At worst, he gave lip service to markets that he described as the "very heart of our system of liberty."

The second quote shows that President Obama also exhibits a distressing view of the positive influence of government during the Great Depression, our longest and most severe economic crisis. The government made the recession much worse than it would have been if it had not intervened. The Federal Reserve contracted the money supply when it should have been expanded. The Congress and President Hoover promoted protectionism when they should have defended trade. Both the Hoover and Roosevelt administrations used a variety of policies to freeze wages and prices that should have remained flexible. If government policy helped, it was by accident, not well thought out coordinated policy.

President Bush said that he supported markets, but when the financial crisis hit and push came to shove his administration overrode bankruptcy law and passed the biggest bailout in American history. President Bush was famously quoted as stating that, "I've abandoned free-market principles to save the free-market system." At best, President Bush feared to trust market institutions he extolled when the economy under stress. At worst, his support of markets was feigned and as Don Boudreaux writes,

The man who never cheats on his wife because no other woman will have him is not particularly principled - but he proudly fancies himself that way. So the first bimbo he sniffs who'll do him the honor will prompt him to "abandon his principles" with as much alacrity as a hungry dog will attack a ham. Such are the principles of our "leaders."

In one case, we have a president who secretly waits for a crisis to eagerly replace market institutions with government, and on the other, a president who fears trusting markets to solve economic upheaval once it occurs. Neither was a friend of markets.
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Amartya Sen On Capitalism

Amartya Sen is an Indian professor of economics at Harvard University and the 1998 Nobel Prize winner for Economics. His curriculum vitae is impressive. He cannot vote in U.S. elections, but considered himself a supporter of Barak Obama's candidacy for president of the United States. Amit Roy in "All for Obama, Amartya counts the gains," for the Telegraph of Calcutta India reported,

New York, Nov. 5: Amartya Sen today told The Telegraph he was delighted with Barack Obama’s victory and that it had important consequences for India.

“It was a big night. I went to bed late. It’s an excellent result. I obviously don’t have a vote in America — I am an exclusively Indian citizen — but I have been a supporter of Barack Obama’s candidature right from the beginning,” the Nobel laureate, who teaches at Harvard, said from his home in Boston.

In "Economic Systems" I observe that many political pundits are calling President Obama a socialist. I then describe several economic systems and let the reader decide how to classify the president. Based on his article, "Capitalism Beyond the Crisis," (The New York Review of Books, Vol. 56, Num. 5, March 26, 2009.), I believe that Sen would classify Obama as an old-fashioned adherent of capitalism. His description of the role of government in a capitalist system comes very close to President Obama's agenda.

Sen begins by describing fundamental features of a market system.

It seems to be generally assumed that relying on markets for economic transactions is a necessary condition for an economy to be identified as capitalist. In a similar way, dependence on the profit motive and on individual rewards based on private ownership are seen as archetypal features of capitalism.

He notes that Adam Smith, the founder of economics who wrote on the efficiency of markets, also expressed concern about what markets leave undone, including alleviation of poverty and education.

The most immediate failure of the market mechanism lies in the things that the market leaves undone. Smith's economic analysis went well beyond leaving everything to the invisible hand of the market mechanism. He was not only a defender of the role of the state in providing public services, such as education, and in poverty relief,...he was also deeply concerned about the inequality and poverty that might survive in an otherwise successful market economy.

Sen also finds support for regulation of financial markets in Smith's writing.

If we were to look for a new approach to the organization of economic activity that included a pragmatic choice of a variety of public services and well-considered regulations, we would be following rather than departing from the agenda of reform that Smith outlined as he both defended and criticized capitalism.

Sen goes beyond Smith and finds support for government actions in dealing with economic psychology and externalities like pollution in the work of Cecil Pigou. He expresses the need of government to provide public goods. Few economists would deny the importance of government in dealing with externalities and public goods.

Sen ends by supporting capitalism moderated by government actions to ameliorate its shortcomings.

The present economic crises do not, I would argue, call for a "new capitalism," but they do demand a new understanding of older ideas, such as those of Smith and, nearer our time, of Pigou, many of which have been sadly neglected. What is also needed is a clearheaded perception of how different institutions actually work, and of how a variety of organizations—from the market to the institutions of the state—can go beyond short-term solutions and contribute to producing a more decent economic world.

Although nearly all economists see the need for markets in providing goods and services and allocating resources, and most see some role for the government in correcting market failures, there is often a chasm between economists on these issues. Like Cole Sear in "Sixth Sense," some economists see market failures,...they're everywhere, and others see very few.

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Ants, Markets and Spontaneous Order

One of the difficult ideas to explain in economics is how a spontaneously ordered markets result in such a marvelous outcome: the greatest benefit to society.  Markets, with proper laws and foundational regulations, guide self-interested or greedy agents into creative, innovative actions that are not only good for the involved economic agent, but society as a whole.

It is not easy to convey the efficiency of spontaneously ordered markets to students. They seem to understand how self-interest or greed orders an individual’s activities profitably, but not how this benefit extends to society. Russ Roberts, in his EconTalk interview with Deborah Gordon, "Gordon on Ants, Humans, the Division of Labor and Emergent Order," discovers a brilliant example to describe spontaneous order—ant colonies.

Ant colonies are well ordered and appear to operate under some sort of central command, but it is not so.  The colonies have no central planner.  Each ant secretes pheromones and hydrocarbons based on conditions surrounding the colony.  Other ants smell the pheromones and hydrocarbons, and use these scents to guide their actions into digging, patrolling, and foraging.  As the scents change, ants alter their behavior and the colony adapts and prospers.

Imagine the confusion that would result if a queen ant did order activity in the colony.  How would the queen know the conditions around the colony?  Should the ants dig, and how deep?  How many ants should patrol and where?  Once patrolling is accomplished, how many ants should forage and in what direction?  Each reporting function would be new to the colony, time consuming, contain less information than spontaneously ordered functions, and be totally unnecessary. 

Humans behave in a manner similar to ants.  Each has an infinitesimal knowledge about the overall functioning of the economy.  The best home builder (brightest, hardest working and most honest) probably has no idea how roof tiles are produced, let alone how automobiles are assembled.  Each individual collects information provided by prices and profits and directs his or her activities accordingly.  As prices and profits change, economic activity through individual action changes.  Resources are reallocated, products are innovated, and the economy adapts and prospers.

Collective behavior in a human colony creates confusion based on insufficient information if colony planners attempt to alter the reallocation of resources and innovation within society.  Planners just don’t have the information possessed by thousands of economic agents. Diverting resources to information gathering and planning is time consuming and costly; diverted resources cannot be used to produce goods and services.

It is here I believe that the analogy between ants and humans breaks down.  Ants follow secreted chemicals that dictate their actions.  The human brain allows for a wider range of behavior that may profit the individual but be destructive to others and the entire human colony.  Foundational rules such as the prohibition on theft and definition of property rights support the spontaneous ordering of resources and innovation.  While there is disagreement among economists just how broad these foundational rules and regulations should extend, it is clear that nearly all economists believe that society should maintain through collective actions the greatest freedom possible on resource allocation and innovation.

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Acemoglu, The Financial Crisis and The Stimulus

In a recent post, "Acemoglu on Greed," I tried to highlight the difference between economists and others on the impact of greed on society.  His paper, "The Crisis of 2008: Structural Lessons for
and from Economics," is the best of two worlds: short on words but long on economic content, and I wish to share with my students and other readers a few of this thoughts, and recommend the entire paper.  To cut to the chaff, he gives guarded support for the stimulus as a way to avoid an "expectational trap" in which consumers and policymakers turn away support from a market system.

Acemoglu believes that preserving and strengthening market institutions and regulatory underpinnings of free markets is more important than escaping from the current recession.  

[I]t is obvious why we should heed issues of economic growth. Barring a complete meltdown of the global system, even with the ferocious severity of the global crisis, the possible loss of GDP for most countries is in the range of
a couple of percentage points, and most of this might have been unavoidable given the overexpansion of the economy in the prior years. In contrast, modest changes in economic growth will accumulate to much larger numbers
within one decade or two. Thus, from a policy and welfare perspective, it should be self-evident that sacrificing economic growth to deal with the current crisis is a bad option.

In an expectational trap, consumers and policymakers become pessimistic about "future growth and the promise of markets." 

We may see consumers and policymakers start believing that free markets are responsible for the economic ills of today and shift their support away from the market economy. We would then see the pendulum swing too far, taking us to an era of heavy government involvement rather than the needed foundational regulation of free markets.  I believe that such a swing and the anti-market policies that it would bring would be the real threat to the future growth prospects of the global economy.  Restrictions on trade in goods and services would be a first step. Industrial policy that stymies reallocation and innovation would be a second equally damaging step. When the talk is of bailing out and protecting selected sectors, more systematic proposals on trade restrictions and industrial policy may be around the corner.

He offers guarded support for the stimulus package.

A comprehensive stimulus plan, even with all of its imperfections, is probably the best way of fighting off these dangers, and on balance, there are sufficient reasons for academic economists as well as concerned citizens to support current efforts as insurance against the worst 0utcomes we may face.  Nevertheless, the details of the stimulus plan should be designed so as to cause minimal disruption to the process of reallocation and innovation. Sacrificing growth out of our fear of the present would be as severe a mistake as inaction.

In addition to the paper, interested readers would profit from listening to Russ Roberts interview with Daron Acemoglu. 

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The Pope and Selfishness

In a My Way article, Frances D'emilio reported that Pope Benedict XVI said in his Christmas message,

"Wherever an increasingly uncertain future is regarded with apprehension, even in affluent nations...In each of these places may the light of Christmas shine forth and encourage all people to do their part in a spirit of authentic solidarity...If people look only to their own interests, our world will certainly fall apart."

The Pope has an obligation to speak on moral issues. I dispute the economic order that may be implied in, or insinuated into his statement by others.

I assume that "a spirit of authentic solidarity" refers to generous behavior towards others as taught by Christ. Let's now assume that we double our authentic solidarity by cutting selfishness in half. How would this alter economic institutions?

I would guess that little would change in the market oriented Western world, and that poor nations would institute economic reforms that would make them more like us.

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The Car Czar

The auto industry bailout legislation proposes a "car czar" who would oversee the implementation of the Detroit automakers' sweeping restructuring plan.

I wonder who will be the car czar? He or she will need more knowledge about the auto industry that thousands at GM, Ford and Chrysler who have spent their careers and considerable talent trying to make cars Americans want to buy at affordable prices.

In addition to extensive information about auto production, and consumer tastes, David M. Herszenhorn, of the New York Times, that the Democrats’ legislation calls for the czar and his or her team to have "appropriate expertise in such areas as economic stabilization, financial aid to commerce and industry, financial restructuring, energy efficiency and environmental protection."

Congress seems to believe that the automakers don't desire to capture the profit that a truly innovative product would bring, that other automakers have also purposely avoiding making or cannot make a green, fuel efficient car, that the knowledge to make such a vehicle is readily available to Detroit automakers, but not their rivals, if they just try a little harder.

With all that knowledge, the czar will also need to be a benevolent souls with a strong hand, able to sit down with interested parties, automakers, unions, creditors, suppliers, auto dealers etc., and hammer out agreements to implement the plan.

The same New York Times article also quoted Dana M. Perino, the White House Press Secretary who said "Mr. Bush would insist on aiding only those automakers that can survive long term."

Gee, the car czar must be near to all knowing, all powerful, and benevolent. I wonder who that could be?

A Few Side Notes:

1. Russ Roberts of Cafe Hayek has two great quotes, one by Hayek and the other by Adam Smith about knowledge and economic organization.

2. Russ Roberst also of EconTalk interviewed Jonathan Rauch, of the Brookings Institution and the Atlantic Monthly, about the Chevy Volt, GM's planned electric car. You can listen to the podcast.

3. Mark Phelan of the Freep.com writes 7 myths about Detroit automakers. Detroit's cars are not as bad as many believe.

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What Can Regulators Regulate?

In an important article titled, "What Can Regulators Regulate? The Case of Electricity" written in 1962, George Stigler and Claire Friedland observe,

The literature of public regulation is so vast that it must touch on everything, but it touches seldom and lightly on the most basic question one can ask about regulation: Does it make a difference in the behavior of an industry?

As the House Committee on Oversight and Government Reform hearings begin, the washingtonpost.com reports that

Internal Freddie Mac documents show that senior executives at the company were warned years ago that they were offering mortgages that could pose dangers to the firm, hurt borrowers and generate more risky loans throughout the industry.

The documents also suggest that the GSE's executives knew their firms were falling behind private sector firms in product innovation and market share. Parenthetically, this suggests that the GSE's were not the culprit of the housing bubble, its bursting, or the ensuing financial crisis, but rather a somewhat late player. Fannie's CEO, Daniel Mudd expressed concern in 2005 that

A business presentation in 2005 expressed concern that unless it didn't [push into new markets], Fannie could be relegated to a "niche" player in the industry. Mudd later reported in a presentation that Fannie moved into this market "to maintain relevance" with big customers who wanted to do more business with Fannie, including Countrywide, Lehman Brothers, IndyMac and Washington Mutual.

In a wonderful Cato Policy Report touching on the social value of free markets and the impact of regulation, titled, "Are We Ailing from Too Much Deregulation," David R. Henderson notes that the GSE's were important players in the mortgage industry

Of the more than $15 trillion in mortgages in existence in early 2008, about one third were owned by, or were securitized by, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing and Veterans Administration and other government agencies [GSE's] that subsidize mortgages.

Despite falling behind private financial companies, the GSE's knew their importance in the industry. The washingtonpost.com reports that

The documents suggest than Fannie and Freddie knew they were playing a role in shaping the market for some types of risky mortgages. An e-mail to Mudd in September 2007 from a top deputy reported that banks were modeling their subprime mortgages to what Fannie was buying.

When Representative Darrell Issa (R-Calif.) who said (washingtonpost.com) that the executives at the GSE's need to take responsibility for their actions and the companies failure, and other members of Congress who have said similar things should remember with some humility their institution's failures to oversee their creations. Regulators, both those at the Office of Federal Housing Enterprise Oversight (OFHEO), and in Congress were unable to successfully regulate Fannie Mae and Freddie Mac. Particularly egregious were members of Congress who blocked regulatory reform.

Why did regulation fail? Henderson suggested two reasons: regulators have little incentives to regulate well, and regulatory agencies are often captured by the industry they regulate. Slate's Jack Safer beautifully illustrates political capture by Fannie and Freddie in, "Fannie Mae and the Vast Bipartisan Conspiracy." Let me suggest a third reason regulators, congressional or otherwise, fail: they do not have the knowledge needed to control a spontaneously and organically growing market, nobody does.

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Great New Products

The current financial crisis and economic downturn has caused many to question the wisdom of market based economies. I must point out that, despite the downturn, the goods and services we enjoy are produced by markets. PCWorld lists and describes The 100 Best Products of 2008. Not one was produced by the government. These are of course technology products. There are a great many non-tech innovative products as well. Can anyone name a new government product that is as innovate, useful or fun?

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