Tuesday, December 30, 2008

The least ideological defense of free markets

One of the failures of proponents of free market principles is not communicating the ideas in a logical and coherent manner. Frequently, advocates make generalized, exaggerated, and unqualified claims that lead to logically weak and easily defeated arguments.

One of the least ideological and most coherent defenses of free markets is done by Alvaro Vargas Llosa and George Ayittey, contributors to the book Making Poor Nations Rich, discussing their work on a C-SPAN program. You can watch the entire program by clicking on the link below:


Tuesday, December 23, 2008

DART-ing to the airport (Part 2)

(In the spirit of Christmas, I write this post with gratitude to my neighbors who were forced to finance about 3/4 of my public transit trip. Thank you! Read part 1 here. )

...The only notable observation as the train emerged from the tunnel into downtown was a yuppie couple walking their dog. Dallas has been making an effort to bring residents back into the downtown area with some success.

At Union Station downtown I had to switch from the DART light rail to the TRE (commuter train heading to the airport). I had never been to Union Station in Dallas and was not sure what to expect. Fortunately, all trains run on only two tracks, right next to each other. There are no different platforms to find for different trains and different destination. One only needs to make sure to get on the train going in the right direction. A man asked me what time the Blue Line train was coming, heading south. As I was running my finger down the schedule posted near the ticket vending machine, the man expressed surprise that that , actually, was a schedule. I didn’t know if he’d been this close to the ticket machine before.

The TRE commuter train arrived shortly; we boarded to stay warm during the 20 minutes to departure. Almost every seat was eventually occupied, and there were several people traveling standing. In 2007 the TRE carried a total of 2.5 million passengers. On an average weekday last month it carried more than 10,500. It took 30 minutes to reach Centerport station, halfway between Dallas and Fort Worth and nearest to the airport. A shuttle bus was waiting, a pleasant surprise given that the online schedule (on the TRE website, not on Google Maps) showed I’d have to wait 20 minutes for the shuttle. According to the driver they usually wait for five minutes past the TRE’s scheduled arrival time at the station (if the train is late) to pick up passengers for the airport. The shuttle technically goes to the airport, but in fact we were deposited at the Remote South parking lot, from which the final leg of the journey is effected on the intra-airport shuttles, depending on which terminal ones has to go to.

The entire trip, from locking my front door to lining up to check in luggage (Northwest Airlines now charges $15 for the first checked bag) cost me $5 and took two hours. The same one-way trip in a taxi costs $50 and takes 40 minutes. A friend can drive you “for free”, though the round trip would take two gallons of gas and, when you add the airport entry fee, the real price approximates the public transportation fare.

I was pleasantly surprised by my experience: although it took longer than the alternatives, it was by far the most relaxing way to accomplish the trip. And I was able to do productive work on my computer for most of that time. The only thing is, next time I will use Google (a private company) to do my trip planning on the DART system (a public organization).

And then I wonder if we shouldn’t just let Google run our public transit. I mean, my trip cost me $5 and it cost the taxpayers in Dallas around $13.50 in subsidies. (Thank you, neighbors, for paying for most of my trip!) Maybe this helps explain why my property taxes went up 10% this year when housing values (on which the taxes are based) are crashing. So I say, let Google run DART! I won’t mind looking at some targeted text ads inside the train while I’m riding for free, saving $5, saving Dallas taxpayers another $13.50, and saving Lee from his worries of being caught (again) without a ticket.

DART-ing to the airport (Part 1)

The outside temperature had been 30 degrees earlier, then it dropped to 28. An hour later I felt none of the cold as I was running to the bus station dragging a suitcase behind and worrying I might miss the bus. It was a feeling I had last felt a decade and a half earlier. This would be my first purposeful use of public transit as an adult. I had declined several offers for a ride to the airport and was dead set on using only public transportation to get there from home.

Public transportation in the Dallas area is operated by the Dallas Area Rapid Transit (DART), running buses and DART light rail, and in collaboration with the Trinity Railway Express (TRE) commuter train service provides a link from the city to the Dallas Fort Worth International Airport and on to Fort Worth itself. Altogether is served more than five million passengers in November of 2008.

Two days prior I had gone on the DART website to find out how I could get to the airport from my home using only public transit. The website’s “A to B done quickly” trip planning function did not work but a customer service representative answered the phone quickly and was very informative. With her help I had the schedule figured out: I would take the bus to a DART train to the TRE train to a Shuttle to another Shuttle. Figuring it all out, including time spent on the website and speaking with customer service took me 30 minutes. It was my first time, after all. Then a friend showed me how in 30 seconds I could get the same information on Google maps. (Click on 'get directions' and then select 'by public transit' from the drop-down box, where the default is 'by car.') Except Google had more helpful scheduling and map information and was better organized.

I had not realized that on my block there were DART bus stops. Rushing and dragging the suitcase behind it took me one minute to get to the farther stop, the one I needed. I was exactly five minutes early, as the DART website advised. Four minutes later the chilly air had cooled my face pleasantly and was starting to freeze my fingertips through the gloves. Right as the bus was coming.

I was the only passenger, though on an average weekday over 160 thousand people ride on a bus in Dallas. The driver had served four years in the Army in Germany in the late 70s and early 80s. He liked it so much he extended his stay by two years. He didn’t look that old but said he had a 31-year old son. It was a short trip to the DART rail station.

I could take either the Red or Blue lines, whichever came first to go downtown. On an average weekday 70,690 passengers ride DART rail. At the station there were a few people. I met Lee. He had a sore throat. He had moved from Chicago two months ago to the south Dallas neighborhood of Oak Cliff to care for his blind mother. He was the only son out of six children. He had a jacket ripped at the left sleeve and said he earns his living by doing small projects in a woodworking shop his father had left him. He asked if I would leave him my ticket after my last stop but we were going in different direction. The time he got caught without a ticket he said he was only issued a warning. I wondered if DART statistics count all passengers or just paying ones.

The Red Line train came first and left a minute ahead of schedule. There were a few riders, Lee and I among them. Between this station and downtown the line goes underground, like a subway. As it went into the tunnel my ears popped. I suppose the fast moving train caused the air pressure in the tunnel to rise. Inside the car the electronic mini billboard caught my attention: free pregnancy tests, become a barber, try Newport seafood and steaks, hiring RNs part and full time, trivia answer: b) a can of who hash, time 3:20. It was actually 3:23.

To be continued...

Saturday, December 20, 2008

Lacking: Sense of Humor And Other Things

The last post (Wanna See a Bigger Crisis...) stirred some unexpected responses from readers. They seemed to take seriously the suggestion to keep healthcare costs and prices high in order to avoid a bigger economic slump.  I wonder what exactly they thought… “Hm… the logic is straight forward but… something seems a bit off… “ This tells me that I am lacking as a humorist.  Although it also makes me wonder why would anyone think that the suggestion was serious? Was it the reliable data from the Bureau of Labor Statistics? 

Clearly, to keep healthcare costs and prices up makes no sense overall despite the fact that some in the healthcare industry benefit from the current structure. But it makes just as little sense to advocate artificially propping up housing prices when they have come down. If it is the policy of the United States to promote home ownership then why do some advocate having the government increase housing prices? Maybe it will make homeownership more affordable for the poor?  It makes little sense to complain about prices going down in one industry and up in another.

Perhaps there is something wrong with both industries, and the direction in which prices have moved is merely an indication of problems. Mandating higher prices in the housing sector and lower prices in the healthcare sector doesn’t solve the problems of these industries. It would be like trying to cure your child’s fever by sticking the thermometer in the freezer for a minute to lower its reading. The indicated temperature will come down but your child is still sick. By focusing on the prices as the problem and hurrying with solutions to the price issue we not only ignore the underlying causes of the problems but we may make things worse both in housing and in healthcare.

Wednesday, December 17, 2008

Wanna See a Bigger Crisis – Solve the Healthcare One

Why are we complaining that healthcare prices keep going up? Didn’t we just see what happened when housing prices came down? It seems the bottom fell out of our economy. I say, to keep America’s economy going strong (or at least, to keep it from completely collapsing), don’t let healthcare costs come down! Learn from the housing crisis: be proactive and keep healthcare prices up!

I looked at the US Bureau of Labor Statistics (BLS) data for the healthcare and construction industries and found some insightful information. With the collapse of the housing segment of the economy the home construction industry is taking a serious hit. Many construction workers, naturally, are losing their jobs. Consequently, these formerly employed workers lose their income (which, according to the BLS, was higher than the national average income in all private industries) and the butcher and baker, etc. who used to sell to these workers and their families lose customers and revenue, and in turn their suppliers lose revenue, etc, etc, along the chain. Clearly, the negative effect ripples (or rips?) throughout our feeble economy.

The construction industry employed (yes, past tense, since all data are for 2006, the latest available) 7.7 million workers, 2 million of them in no way associated with residential construction, which leaves 5.7 million affected by the housing crisis. These are a lot of workers in an industry that is collapsing. We are witnessing the consequences and feeling the pinch as unemployment increases and incomes slide.

Now let’s look at the healthcare industry. Like construction, it also paid above the national average. Unlike construction, it employed nearly two-and-a-half times as many workers—a whopping 13.6 million! It is the single largest industry in these United States. Imagine what would happen if healthcare prices collapsed—hospitals and doctors’ offices across the country, unable to generate the cash flow to pay their employees, would have no choice and be forced to lay off many of these workers. A lot more butchers and bakers, etc. etc. would be hurt by the ripple (or is it now tsunami?) effect of such layoffs.

Well, one might say, tough luck for those Porsche-driving, trophy-wife sporting doctors who ignored us and overcharged us on our last office visit! Alas… Of the 13.6 million workers in healthcare only 3.4% (less than half a million) are physicians and surgeons. They number fewer than even the top management and business types employed by the industry (4.2%). So if docs and execs account for less than 8% of healthcare workers… who are the 92%? According to the BLS, they are middle-class Americans whose jobs require [certain skills and training but] less than 4 years of college education. Are these the good American jobs we want to sacrifice on the altar of low healthcare costs? Haven’t we seen and suffered enough from the consequences of low housing prices and growing unemployment in the much smaller construction industry? Why do we never learn from history?

So why are we complaining that we have a healthcare crisis? Solving it would cause a much bigger one, you see.

Sunday, December 14, 2008

Yet Smaller Minority View

Why do proponents of freedom and free markets often sound wacky, closed-minded, ideological, and unreasonable? Why did free market ideas get their turn as public policy only after absolutely everything else had been tried and failed, and are on their way out at the first sign of economic disturbance? I suspect the answer to the first question might help with the second one.

I recently encountered a short essay by George Mason University professor Dr. Walter E Williams on the auto industry bailout. Professor Williams is a free market economist whom I greatly respect but his essay illustrates my concern. I was sad to see how most people, not sold on the free market ideas, could easily see him as ideological, disconnected from reality and, worse yet, irrelevant to the real economic issues of the day. He is neither. The problem with the small minority of true believers in individual freedom and free markets is that their approach to communicating their ideas leaves most people scratching their heads and wondering what planet those free market weirdos come from.

I take several paragraphs of Dr. Williams’ essay to illustrate why I think free market proponents sound like the members of a wacky cult to a vast majority of the people. (You can read Prof. Williams' complete essay here )

Let's not allow Congress and members of the bailout parade panic us into allowing them to do things, as was done in the 1930s, that would convert a mild economic downturn into a true calamity. Right now the Big Three auto companies, and their unions, are asking Congress for a $25 billion bailout to avoid bankruptcy. Let's think about that a bit.

I agree with the call of Prof. Williams. It just doesn’t seem that this call is really effective at having many people consider his viewpoint. Majority of people don’t understand nor, consequently, buy the idea that the federal government helped usher in the Great Depression of the 1930s. But by being controversial instead of informational in the opening paragraph the author would tend to turn away readers who he might wish to persuade.

What happens when a company goes bankrupt? One thing that does not happen is their productive assets go poof and disappear into thin air. In other words, if GM goes bankrupt, the assembly lines, robots, buildings and other tools don't evaporate. What bankruptcy means is the title to those assets change. People who think they can manage those assets better purchase them.

In theory this is always true. In practice many things influence the outcome, so it is sometimes true. In Detroit, history (empirical evidence) shows, it is frequently not true. When GM closed factories and laid off 30,000 workers in Flint, Michigan in the 1980s (subject of Michael Moore’s first film Roger and Me ) other industrial companies did not come and take over the closed GM plants or employ the laid off workers. The same is largely true of Detroit where many more American car companies have abandoned facilities. Fifteen years ago when I first moved to Detroit I was shocked by the sight of long abandoned factories and yards. The same ones still lie vacant today. Drive south on Interstate 75 and merge onto I-94 West near downtown Detroit to see the skeleton of the old Fisher Body Plant (photos/history) on Piquette Street dominating your view. Or see the photo essay The Industrial Ruins of Detroit. There is plenty of evidence that the buildings, assembly lines, and tools have lost their value, fallen into disuse in the last four decades and have never found productive purchasers and uses.

Here is how Walter P. Chrysler biographer Vincent Curcio put it in his 2000 book Chrysler: The Life and Times of An Automotive Genius:

It took Detroit a long, long time to recover from the disaster of 1933…

Investment in the city dried up for a long, long time. The skeletons of huge uncompleted buildings haunted the cityscape for decades, and large tracts of land intended for housing lie empty and weed-covered even now, sixty-five years later. Detroit became a gigantic and failed place…

With so much and so vivid evidence in plain sight, the theory that assets of bankrupt enterprises go to more productive uses sounds like a fairy tale to the lay observer.

Two vital marketplace signals are the profits that come with success and the losses that come with failure. When these two signals are not allowed to freely function, markets operate less efficiently. To be successful a business must take in enough revenue not only to cover wages, rents and interest but profits as well. In order to accomplish that feat executives must not only satisfy customers but they must do it in a manner that efficiently utilizes all of their resources. If they fail to cover costs, it means that resources are not being used efficiently and/or consumers don't value the good being produced relative to some other alternative. When a firm routinely fails to turn a profit, there are bankruptcy pressures. The firm's resources, workers, building and capital become available to someone else who might put them to better use. When government steps in with a bailout, it enables executives to continue mismanaging resources.

This is again true but we have to pay close attention to the details: First, we’ll have to see how long the dramatic decline in car sales lasts, but it may be possible that the market size during the past several years had been artificially sustained with too easy credit and profligate (and unsustainable) consumer spending. This means that it is possible for the foreseeable future to have a car market measurably smaller than it has been thus far. This in turn implies a significant overcapacity exists in the car manufacturing business, which would indicate that the auto manufacturing assets may not be turned over from an unprofitable to a profitable company (managers), but could simply be left to sit idle, the cost of converting them to other uses too high.

Second, the fact that a firm’s resources in a bankruptcy become available to someone else in no way means that there is someone else who can productively employ these resources. They may sit idle. Again, plenty of examples exist in the rust belt of America.

Herein lies the crux of the matter: Idled assets and unemployed workers may not have alternative uses and employment, unless the costs of these assets and workers becomes very attractively low. It is possible that if Detroiters were willing to accept $4/hour to work in a factory that manufacturing firms might flock to Michigan. It’s possible, even somewhat likely. This, however, would mean a reduction in the standard of living of these workers that is unseen and unimaginable in our lifetime, and unacceptable to the workers. The unspoken risk is that it may cause a disruption of the social fabric and of civil behavior. The real question is then: how do we sustain the standard of living while realizing that Toyota isn’t simply going to take over the bankrupt GM plants in Michigan?

Professor Williams’ paragraph sounds like there is no problem, that everything can work out without anyone giving it a second thought. This is perhaps why free market proponents often seem disconnected from reality: a failure to acknowledge the fact that many individuals are suffering and that, as I briefly discussed above, their suffering may not end in the foreseeable future. On the other hand, advocates of government intervention say, “We see and acknowledge the problem, we feel your pain, we’ll have the government do something.” The government, clearly, can do something—it’s an easy sell for people who face immediate economic difficulties. Instead of educating people that government intervention doesn’t help and makes things worse, and offering better alternatives, the free marketers come in and say, “Don’t worry about it, it will all work itself out.”

The failure of the free market economists is to engage in a public conversation about alternative solutions to the very real economic challenges we are facing. Just because the government shouldn’t force a solution on everyone doesn’t mean that every single individual should face and handle one’s problem completely alone without any support from or interaction with the rest of the community. Public discourse through the media, or in town halls, or in college or community seminars can be educational, it can stimulate creative ideas and solutions. All economic progress comes from inventing valuable things to do and to make. Such progress comes neither from government programs nor from doing nothing and only hoping each individual would figure something out alone.

Free marketers today seem to instinctively oppose any "public" or "community-based" solutions because they equate them with coercive government mandates. They seem to forget that Ford, Toyota, Google, and The Red Cross are all voluntary, community-based solutions to the problems of transportation, information gathering, and emergency response. By constructively engaging in public debate supporters of economic freedom are likely to contribute to both solving the current economic challenges and to legitimizing free market ideas as reasonable alternatives to socialism and coercive collective action.

Friday, November 28, 2008

There are no regulated markets, only restricted freedom

"We need smart regulation!" This is the mild version of the outcry for regulating market activities that came after the economic slowdown and the housing and financial crises. The talk seems to be that markets went to excesses, that markets failed, and that markets need to be regulated in order to prevent people from losing too much money. I think that term "regulated market" is an oxymoron. It makes no sense.

Markets are simply an abstract notion that means the voluntary interactions of individuals, given any and all constraints, to solve their economic problems and desires. When we say we are regulating a market, it sounds rather impersonal, technocratic, and even appropriate. But we don't regulate the market, we limit people's freedom to interact in some way. The market is not regulated. When people have less freedom, they interact differently, taking into account their increased constraints. The resulting interaction is the market.

People always face some constraints. We don't have enough money or enough time to buy all of the things we want, so as consumers we give up some purchases. If we are offering products for sale, we are incapable of communicating to all potential customers the value of our product, so we give up some sales. These are real constraints. If the authorities tell us it is illegal to buy or sell some product, some of us stop trading that product and some simply hide from the authorities. The market is not regulated, the market is simply the individual's voluntary efforts to satisfy some economic need in the face of the given constraints, be they natural or government created.

So let's be clear, we don't regulate markets. Even "smart market regulation" plainly means restriction on citizens' freedoms.