My letter to the NY Times re: How to Eliminate Scandals Over Subsidies

Re: Scandal Around Billionaire Prime Minister Leaves Czechs in Limbo

Dear Sirs:

I have a sure fire way not only to minimize but completely eliminate scandals over government subsidies. Eliminate the subsidies!

You are welcome,

Patrick Barron

A friend asks why there have been no more Paul Volckers at the Fed

Dear XXXX,

You ask, where is a Volcker-like Fed chairman today? The answer is that no president would appoint one and no government really wants one! Governments want easy money and will appoint only a Fed chairman who will succumb to money printing. Frankly, I believe that it is impossible to make a fiat currency sound. Here's why:

1. As I stated above, no government really wants sound money, because governments are the main beneficiary of easy money.
2. No one who works in the Federal Reserve System, as did Paul Volcker for many, many years before becoming chairman, is a true proponent of sound money. If Volcker were honest and really wanted sound money, he would not work for the Fed. Volcker was president of the NY Fed. He knew how the system worked and would have quit if he truly didn't believe in it. In other words, anyone who works for the Fed is an inflationist. It's only a matter of degree. Volcker did print money, only he didn't print as much as either his predecessors or his successors.
3. The political pressure to inflate is irresistible. No one can ignore it. Even if you or I were appointed Fed chairman, we would inflate. If we did not, we would be removed for some reason.
4. If we really wanted sound money, we would abolish the Fed and force banks to abide by normal commercial law, which would require them to back their deposits with a commodity. Once an organization is given the power to inflate the currency, inflation is exactly what will happen. In other words, "A person or entity that CAN print money WILL print money." So don't give any person or entity the power to print money! It would require an act of Congress to eliminate the Fed anyway, which is not likely to happen.
5. You ask why Paul Volcker didn't peg the dollar to gold at some higher level. The answer is that he had no power to do so, even if he wanted to do that. Furthermore, Volcker was not chairman in 1971, when Nixon took the US off the gold exchange standard. This act by Nixon just proves that the real power over the currency is political.
6. My conclusion is that only political action can restore the dollar, not administrative action. In other words, the American people must want sound money. Barring a complete collapse of the dollar, as happened to the French assignat, this is not likely to happen.

My letter to the NY Times: No Nation Can Harm Another Through Trade

Navarro tells Wall Street to stay out of trade talks

There is nothing that another nation can do to harm another through trade. If a nation foolishly chooses to manipulate its currency to spur exports, it gifts goods to its trading partners. If it restricts imports to spur domestic industries, it harms its own citizens while leaving potential trading partners in the same position as before, which is NOT a definition of harm. The only policies that our government need adopt are unilateral free trade externally and laissez faire economics internally. Our motto should be "We will mind our own business and set a good example to others."

EU to the UK: We will not allow you to sell our citizens superior goods at bargain prices

From today's Open Europe news summary:

 

Ireland demands level playing field in any Brexit deal

Speaking at a meeting of the European People’s Party (EPP) in Helsinki yesterday, the Irish Taoiseach, Leo Varadkar, said that Ireland wants the future relationship between the EU and UK “to be as close as possible” but added that it “must provide a level playing field and the integrity of our single market must be upheld.”

Elsewhere, Reuters reports that the European Commission also stresses the importance of such a commitment, quoting one EU official explaining that “It is important that Britain would not undercut our own products on our own market in the all-UK Irish backstop.”

Meanwhile, Cabinet Brexiteers have reportedly warned Prime Minister Theresa May that obligations on a level playing field “would mean a single market through the backdoor.”

Source: The Times I The Times II Reuters

 

Here you have the EU position in a nutshell. The EU is to be a closed trading bloc in which its citizens will be forced to buy shoddy, overprices goods produced within the bloc. Why the rest of the sovereign nations of the EU have remained in this blatantly inhumane association for so long is mystifying, except that continental Europeans have experienced many centuries of governmental dictatorships under many forms rather than the Anglo-Saxon tradition of the common law and government being responsible to the people.

My letter to the NY Times re: Trump's Fracking Boom

Re: Trump fracking boom imperils landscape of the American West

Dear Sirs:

Thanks for the very informative and uplifting report of the success of increased drilling on federal lands. Frankly, I doubt that my conclusion is the one that you expected, but there is no hiding the fact that under President Trump the US is becoming a world energy powerhouse. Try as best they could, your reporters could not disguise the vast economic benefits to all parties from opening these sparsely populated lands to normal economic development. Sure, they tried to generate concern over the sage grouse population decline (thirty percent in the last two years), but they never connected the cause and effect dots between that decline and opening these areas to oil and gas development, perhaps because there is no connection. Even if there is a connection, surely the vast human benefits, well documented by your reporters, should ameliorate that concern to some extent. The only other attempt to generate the reader's outrage fell flat; i.e., that some of the drilling was "just east" of the Big Horn National Forest and "next to" Hovenweep National Monument. There will always be something that is "just east" or "next to" some already protected area. Of course, water is always a big issue in the West, but your reporters found no broad based concern by local landowners. Some were concerned and others were not. Let the locals figure it out.

A Simple Example to Understand Seemingly Complex Economic Principles

Simple examples can be used to explain what seem at first glance to be complex economic principles. I'll use a hypothetical yet commonplace experience to explain how money may be used for only one of three purposes--it can be held/hoarded, saved/invested, or spent. Furthermore, my example will show that foregoing consumption--i.e., either holding or investing--is necessary for non-inflationary lending and that credit decisions must always be made by the entity taking the risk and especially not government. Here's the scenario:

Let's assume that my colleague and I go to McDonalds for lunch. When my colleague reaches for his wallet to pay for his five dollar Happy Meal, he finds that he left his wallet on his desk. I lend him the money and we have an enjoyable lunch. When we return to work, he repays the debt.

What economic lessons that can be learned from this simple story?

1. Expanding the money supply is NOT required in order to increase lending.

When I gave my colleague five dollars, total loans in the economy expanded yet the money supply remained unchanged. Upon returning to work, my colleague retrieved his wallet off his desk and repaid his loan. At that point loans in the economy fell by five dollars yet the money supply remained unchanged. Therefore it is a fallacy that expanding the money supply is necessary in order to increase lending.

2. A prior act of foregoing consumption IS required to expand loans.

Let's expand somewhat on our previous example. Where did I get the five dollars that I lent to my colleague? I had to have foregone previous consumption in order to have this amount available to lend to my colleague. Fortunately for my colleague I did not consume all that I could have.

3. The holder or hoarder of money does not harm the economy.

The act of carrying that extra five dollars in my wallet can be characterized as holding or hoarding. Hoarding is not the same as investing. Had I invested my money I would not have had the additional five dollars in my wallet. Instead the five dollars would have gone into some production process that would yield increased benefits later in time. Instead I desired the flexibility to spend the money for some unforeseen purpose. Lucky for my colleague that I didn't spend it on some frivolity or invest it in longer term production. Instead I hoarded five dollars and was able to lend it to him in order to purchase his lunch. Although the term hoarding is often used disparagingly, one can see that it serves a useful, economic and social purpose.

4. Money cannot be used at the same time for more than one of three purposes.

I had a choice of what to do with my unspent (unconsumed) five dollars. I could have carried it in my wallet, an act of holding or hoarding in order to take advantage of unforeseen circumstances. Or I could have invested in production, such as lend it to my son to buy gasoline for his summer lawn mowing business. Or I could have spent it on consumption, perhaps upgrading from a five dollar Happy Meal to a Big Mac, super sized fries, and a milk shake. Of course had I invested it or spent it, I would not have had money to lend to my colleague for lunch. The important point is that I could not do both hoard the money and invest it and/or spent it. Furthermore, we can see that there is no room in our simple example for a "multiplier effect" that emanates from the lending process, as is claimed by those who defend fractional reserve banking. I could lend the money only once.

5. The lender of money assumes the risk of non-repayment.

There was little possibility that my colleague would not repay his loan to me. However, I doubt that I would have lent my five dollars to just anyone who happened to be in McDonalds at the same time as we were. Let's assume that the person on front of me had been a stranger and not my colleague. I probably would not have lent him the money, despite the probability that he was a good credit risk. The important point is that I would not have known him.  "Know your borrower" is rule number one in banking. The age old truism is still valid that good character is the best trait in a borrower. I would have known the character of my colleague but not that of a total stranger.

Yet much borrowing (and resultant defalcations) on loans today are made by giant firms based upon numerical credit scores. The lender never meets his borrower. The loan production offices that generate the loans applications do not know their applicants. Many of these loans are then sold to a government owned entity, such as Fannie Mae or Freddie Mac.

Furthermore, lending also has become a tinder box of political risk. For example, the infamous Community Reinvestment Act requires banks to make loans that do not meet their lending criteria. If the borrower and his property reside in an arbitrarily and ill-defined underserved area, the bank must lower its credit standards. The result is higher loan losses. We would not desire a government mandate that I be allowed to loan my colleague five dollars to pay for his lunch at McDonalds only if I also lend five dollars to complete strangers.

 We must look askance also at outright loans by government or government loan guarantees to politically connected borrowers. We taxpayers are the true holders of the loan and will suffer if the loan is not repaid. The Export-Import Bank is a prime example. We taxpayers are on the hook for non-payment of government loans to foreigners so that they can buy the products of politically connected groups. It's simple corruption disguised as a legitimate banking function. It would be absurd for the government to design a program to lend money only to people who desired to buy lunch at McDonalds in order to help the world's largest fast food chain maintain its sales in a highly competitive environment. It is no different just because the program helps foreigners buy American products. In both cases the real lender is the American taxpayer.

Conclusion

Simple examples from everyday life help us clarify our thinking about what at first appear to be highly complex economic problems.

My letter to the NY Times re: Typical Keynesian Whitewash

Dear Sirs:

Fareed Zakaria's review of the Adam Tooze book Crashed: How a Decade of Financial Crises Changed the World is a typical Keynesian whitewash of a deeply flawed monetary and regulatory system. Like Tooze, Zakaria sees the Federal Reserve Bank as the hero in "saving the financial system" that was going into free fall in 2008. But why was it going into free fall, and was the Fed's massive, multi-trillion dollar bailout really the answer? To agree with Tooze and Zakaria is to condone monetary counterfeiting pre-2008 and even more monetary counterfeiting thereafter. One of the prime purposes of sound, as opposed to fiat, money is to allocate scarce resources. The Keynesians do not admit that resources are scarce. They equate the medium of exchange, in this case fiat dollars, with real capital. Yes, fiat dollars can be increased to unlimited amounts at the click of a Federal Reserve Bank computer, but real resources and real capital must be accumulated by hard-working people. Zakaria and Tooze--and the rest of the Keynesian dominated Main Stream Media like the New York Times--fail spectacularly to understand the distinction.

Understanding Economic Theory Is Essential to Understanding the Benefits of Free Trade

In a recent post I explained that China's manipulations of its own currency hurt only herself and not her trading partners and, therefore, retaliatory tariffs were not warranted and would be self-defeating anyway. China harms herself by causing her own money supply to expand, which destroys capital through malinvestment and causes prices to rise domestically. Retaliatory tariffs cause American goods to rise in price, resulting in a recession and general lower standard of living. Few economists claim otherwise.

It seems that everyone is in favor of free trade, as long as it is the other guy who must compete with foreign products. When it comes to their own products, the most typical response from American manufacturers begins with the caveat that "although free trade is beneficial most of the time, it causes harm under certain circumstances." There follows a convoluted chain of cause-and-effect purporting to prove that lower priced foreign goods would hollow out America's key manufacturing industries and turn America into a second class nation.

The purpose of this brief response is to counter these claims and explain why understanding economic theory is vital to the argument in favor of free trade.

There are two books which address the fact that we cannot experiment with an economy the way that physical scientists do. We must use logic to form irrefutable conclusions of what MUST happen, even if we cannot see it! The first is Frederic Bastiat's early nineteenth century classic That Which Is Seen, and That Which Is Not Seen. Henry Hazlitt's updated the book a hundred years later in order to appeal to modern readers. His Economics in One Lesson employs a series of short stories to illustrate that one must always consider the economic effects of an intervention on all and not just a few actors, plus, that one must look to the long term effects of an intervention and not just the short term effects.

So, let's use logic to consider the effects of China's economic interventions on itself and its trading partners who do nothing to retaliate against China in any way.

1. China uses its capital in an inefficient way. Outright subsidies to any industry must be paid by someone. The very fact that China believes that it cannot compete in certain industries to its own satisfaction without subsidies is an admission that these industries are inefficient. Therefore, Chinese internal subsidies are transfers of capital from more efficient industries to less efficient industries. Put another way, if the targeted industries already were very efficient, more capital would flow to these industries and subsidies wouldn't be necessary.

2. Monetary expansion to fund an industry causes overall higher prices and malinvestment. This is the classic Austrian Business Cycle Theory. China may very well expand its steel industry, for example, with monetary expansion, but such action will disrupt the time structure of production and result in a higher price level and a recession. Other factors of production that feed the Chinese steel industry will rise in price, necessitating another round of currency expansion, which will lead to even higher prices and another recession. It's a vicious cycle that can end only with an end to currency expansion.

3. China's overall economy will be less developed, weakening the impact of subsidies to targeted industries. Because capital is stripped from more efficient industries, China's ancillary industries will be less developed, harming the targeted steel industry indirectly. Public infrastructure may be less than it would be otherwise, for example. The many business-to-business goods and services that feed the steel industry will lack the capital to expand. The workforce may lack adequate education. The list is endless. China's economy will lack coordinated growth, as was so apparent in the moribund economies of the old Soviet bloc. The point is that something must be sacrificed to aid the targeted industry. Of course, this is a classic Bastiat "Not Seen" scenario.

4. American products get cheaper and gain market share. It may be true to some small extent that the steel industry, for example, may not be able to expand and may even contract in the face of equal quality Chinese steel that can be purchased at lower prices. But all the many American manufacturing firms that USE steel will have a lower cost of production and, therefore, will be able to expand their markets. Again, something has to give; i.e., the Chinese may be able to sell more steel to American manufacturers, but these manufacturers can sell more finished goods into the world market.

5. American industries benefit from the general expansion of all levels of production. This is a corollary to number three above but opposite. Because the companies that use cheaper Chinese steel reduce their costs, passing along the savings to customers in the form of lower prices, passing along the increased profits in the form of dividends to shareholder, increased investment in their own firms, or a combination of above. The reason for this beneficial prospect is that America becomes more capital intensive, and that capital came in the form of a gift from China.

6. Chinese subsidies actually become subsidies to Americans' standard of living. The purpose of production is consumption. Although we may give lip service to how much we love our jobs, what we really mean is that we are satisfied with the life style that we can obtain through meaningful labor. I truly doubt that many of us would work if we were not paid. Chinese subsidies allow us the option to work less for the same standard of living or work as long yet enjoy a higher standard of living because our pay goes further. We workers have more options. For example, as we become richer through Chinese subsidies, mothers may opt for part time work instead of a full time job, or they may leave the workforce altogether. Fathers may decide to pursue lower paid but less stressful careers. Let us not forget that leisure is a valuable good in and of itself.

Conclusion

Finally, the idea that all subsidies can be eliminated worldwide and businesses can compete on a level playing field is a foolish idea. What is the definition of a subsidy? Is it government provided healthcare? How about a state or municipality forgiving business taxes in order to entice industries to expand or relocate? If the government builds a super highway near a plant, is this a subsidy? Likewise, industries in many developed economies decry the fact that undeveloped countries have lower environmental standards, worker safety requirements, and worker rights. Periodically one reads that the European Union is threatening a member for having taxes that are too low and, thus, provide an indirect subsidy.

Capitalists must accept all of these interventions by foreign governments as part of the unknown and uncontrollable factors of conducting business and not lobby their own governments to take self defeating economic reprisals. Unilateral free trade is the best and only real option.

China's Currency Manipulation Does NOT Harm Its Trading Partners

Americans are being told that China's currency manipulations are causing harm to its trading partners, America being the main victim. Nothing could be further from the truth. China's currency manipulations certainly cause harm, but to China itself!

No country can cause harm to another by adopting any economic intervention. All economic interventions cause harm only to the country that adopts them. This applies to subsidies of home industries, quotas restricting import volumes, tariffs imposed on imports, and currency manipulations.

A nation typically manipulates its currency by giving more of its own currency in exchange for the currency of other countries. Thus foreign importers can buy more goods per unit of currency exchanged. In other words, if the free market exchange rate between the dollar and the yuan is six yuan per dollar, an importer would be able to buy goods costing six yuan by tendering one dollar. If the Bank of China arbitrarily decides to boost imports, it can give eight or ten yuan for each dollar presented. Chinese goods drop in price on the American market.

Protectionists such as President Trump view this as harm, but where exactly is the harm? A Chinese good that previously cost a dollar now may be purchased for sixty or eighty cents. Our American standard of living goes up at China's expense! The extra money in Americans' pockets may be used to consume or invest more. This is a very strange definition of harm.

The real harm occurs in China. The Bank of China sets off price inflation in its own country. It may try to mitigate this inflation by raising the interest rate on its own debt in order to withdraw the extra yuan from circulation. This is known as "sterilization". It then appears as if China has achieved greater exports with no price inflation. However, China's debt rises. Eventually holders of Chinese debt will desire to draw down their yuan-denominated debt. Demand for yuan for spending purposes will increase. At that point China will be faced with a dilemma. Either it can raise the interest rate high enough to entice enough marginal holders of debt to roll over their holdings or it can print yuan. The former causes a recession and the latter causes price inflation.

There is no such thing as a free lunch or an economic intervention that causes harm to others and not one's own country.

The market provides its own punishment for irrelevant discrimination

My letter to the Mercatus Center:

Re: Should hot workers subsidize ugly ones?

Excellent points by Omar Ahmad Al-Ubaydli, but aren't all forms of irrelevant discrimination self-correcting and self-penalizing? If a company hires only beautiful workers and ignores ugly ones who may be better qualified, won't this company suffer in the market place? Same with height, etc. If the stockholders of a company accept lower dividends because they like the idea that their company employs lots of beautiful people, so what? They are the ones deciding to accept lower dividends. In other words, let the market work and leave people alone.

Unilateral Free Trade Would Benefit All UK Citizens

From today's Open Europe news summary:

Removing tariffs post-Brexit could see prices fall up to 1.2%, suggests new study

According to a report by the Institute of Fiscal Studies, UK households could see prices fall by around 0.7-1.2% if the UK were to eliminate tariffs on all goods after Brexit. The report noted, “This compares with the estimated 2% increase in prices that followed the depreciation in Sterling in the wake of the referendum result. This suggests that the scale of ‘quick wins’ from running an independent trade policy is relatively small.” The report also argued that removing tariffs could “be very damaging for some UK industries in the short run.” The director of the IFS, Paul Johnson, said, “If we leave the customs union, we can come to our own trade deals with other countries, we can reduce tariffs. But even if we reduce that as much as possible, the effect on prices will be really quite small relative to what is still a big cost of leaving the customs union because it would make trade with the rest of Europe so much more expensive.”

Separately, UK inflation rate fell to 2.7% in February, down from 3% in January. This is also closer to the annual UK wage growth, which was estimated at 2.8% in December.

Source: BBC News The Guardian

Despite the negative tone of this report, it illustrates that tariffs are harmful to the nation and merely transfer wealth from one's own citizens to a few politically connected companies. By declaring unilateral free trade all UK citizens would get the equivalence of a 0.7 to 1.2% tax free pay increase. Sounds pretty good to me!

The EU elite are ignorant of the true meaning and importance of "comparative advantage"

From Open Europe news summary of 14 March 2018 (my highlight):

Commenting on Prime Minister Theresa May’s Mansion House speech earlier this month, the EU’s chief Brexit negotiator Michel Barnier called it a “surprising idea” that the UK would be allowed to benefit from convergence with EU rules in some areas while “open[ing] up the possibility of divergence when there is the comparative advantage for it.” He stressed the importance of social and environmental standards to the EU’s regulatory framework, asking, “Does the UK also want to distance itself from this model which they have constructed gradually with us and engage in dumping against us?”

To answer Barnier's question--emphatically YES! The UK should seek to benefit where it has a comparative advantage. In fact every person on earth should seek to so benefit. A comparative advantage means that people engage in the division of labor/specialization, and allow others to do the same, in order to produce more goods and services for the market. Note that no one needs to possess an absolute advantage, meaning that he can produce a good or service better or more cheaply than all others in the market. For example, a brilliant lawyer may be able to perform secretarial services better than anyone on the planet; nevertheless, it is to his and everyone else's advantage for him to hire these services in order than he may perform his more highly rewarding legal services. Therefore, everyone is able to participate and succeed in the market economy. In short, Michel Barnier, and I'm sure others in the EU elite, are completely ignorant of economic science.

Can an Economy Advance Without Savings?

According to Frank Decker, Honorary Associate at the University of Sydney Law School, it certainly can. Not only that, but eschewing savings in favor of "monetisation of assets" will yield better results! I refer to his article in Economic Affairs--Volume 37, Number 3, October 2017--, a publication of the Institute of Economic Affairs, London.

Mr. Decker purports to answer the question "Central Bank or Monetary Authority? Three Views on Money and Monetary Reform." The three views examined are commodity money, state money, and money as a derivative of property. All three views are explained very well, and a beginner to the study of the role of money will learn a lot in a short period of time.

Commodity money is the name Decker aptly gives to money backed by gold or some other widely accepted medium of indirect exchange. Commodity money's proponents see two major advantages--that it ends inflation and the business cycle. He quotes Mises and Rothbard to good effect.

State money, or money as a state liability, is fiat money that all the world knows today. Its two most famous proponents are Keynes and Friedman. State money's main advantages, as seen by Decker, are that the state can engage in countercyclical spending and the state can fund itself by printing all the money that it needs for current expenditures.

Decker's third type of money--money as a derivative of property--sounds no different than fractional reserve banking, except that the fraction of reserves required to be held by the lending banks is so low that it is not a factor of lending restraint. Decker gives the example of a business that uses its assets as loan collateral. According to Decker, the money that the bank creates is NOT created out of thin air, because it is backed by private property; i.e., the loan collateral. According to this theory, money can be created ad infinitum, because each round of loans creates new property with which to engage in another round of  property-backed money creation. If this isn't money "out of thin air", I don't know what is!

Decker desires to find the best monetary regime to promote economic development. Of the three money systems, he settles upon a property based system with a central bank as benign overseer. His choice of this system, such as it is, shows his lack of knowledge of economic theory. In fact, he is a thorough empiricist, with all the limitations that are emblematic of trying to gather billions of facts with which to determine cause and effect. Austrian economists know that economics is a deductive science in which reliable conclusions can be drawn by using proper logic based upon irrefutable maxims.

Decker's two reasons for passing over commodity money are rather astounding. He believes that commodity money would "impose limitations on civil liberties and property rights", because "Countless episodes of monetary history show that economic actors will always find ways to monetise their assets.". He is certain that banks will continue to engage in creating money substitutes out of thin air--i.e., paper money and/or book deposits--even though it is against normal commercial law or, under a free banking system, that money creation would be limited by normal banking presentment practices. But most damaging, according to Decker, is that commodity money would restrict a nation's development. Astonishingly he states that "Commodity money would also retard economic development, as the monetisation of assets allows investment without the prior accumulation of savings,..."! In other words, why save when capital can be created ex nihilo at the stroke of a computer key? Counterfeiters must be wondering why they are persecuted when their actions are actually beneficial!

Decker equates capital with book entry capital accounts. It is as if an Iowa farmer believed that he could acquire seed corn by making an entry on his books. He would not have to save some corn from last year's crop; he could consume it all and perhaps plant pieces of paper. Of course, this capital that Decker believes appears magically actually comes from real people giving up real assets. Frederic Bastiat's That Which Is Seen, and That Which Is Not Seen and Richard Cantillon's insight that money enters the economy at specific places, unduly rewarding specific individuals (the Cantillon Effect), could not be more appropriate.

In order for Decker to be correct he must see new factories, houses, etc. arising and believe that nothing was sacrificed to build them. But clearly that is not how the world works. The sacrifice is there, even if NOT seen. Inflating the money supply robs current holders of assets, those who sacrificed and saved, for the benefit of the earlier receivers of the new money. It is a transfer of wealth, not an increase in wealth.

Decker sounds like a gambling addict who counts only his winnings and not his losses. The winners are the earliest receivers of the new money, who can buy at existing prices. Later receivers see increasingly higher prices and/or lower returns on investment.

Today's interest rate suppressions that favor borrowers come at the considerable expense of savers, many of whom are retired. Their standard of living deteriorates, but, since Decker cannot find statistics to record this fact, he believes that it is not happening. He fails to go that next and necessary step to consider that which is both seen and unseen, per Bastiat's timeless insight.

No individual or group of supposedly wise men should ever be given the power to create money out of thin air or to manipulate the interest rate. Only commodity money, which is controlled by no one, can protect private property and perform the market's time coordination function, AKA the interest rate. Spending requires prior savings, and savings cannot be spent twice.

The old saving that "there is no such thing as a free lunch" needs an addendum--Somebody always pays.

Bastiat and the Hubble Space Telescope

A few days ago my wife and I watched a fascinating program on PBS. The long running Nova series featured the history and accomplishments of the Hubble Space Telescope. The program was titled Invisible Universe Revealed. This episode was composed of three parts.

The first third of the program explained how the astronomers secured funding for the space telescope and successfully built and launched it. Senator William Proxmire, Democrat from Wisconsin, had the space telescope in his sights. From 1975 to 1988 the senator awarded his monthly Golden Fleece Award for egregiously wasteful spending. According to Nova, funding for Hubble was secured when Nancy Roman, Chief Astronomer-to-be, pointed out, apparently to the satisfaction of Congress, that for the cost of a night at the movies, every American would enjoy fifteen years of astronomical revelations. Hubble was launched by the Space Shuttle on April 24, 1990 and deployed a day later. That's when the real problems began.

The second part of the program was devoted to the thrilling repair conducted by astronauts on the orbiting telescope. Construction faults in the giant reflecting mirror made the telescope unusable. Incredibly these faults were not discovered until the telescope was in earth orbit. Nevertheless, the telescope was fixed, and this is the best part of the program. From diagnosing the problem, agreeing upon a feasible fix, to astronauts practicing the repair in a giant water tank (20 months of training!), and finally conducting the repair in space, the viewer is astonished at the knowledge, dedication, and skill of everyone associated with this NASA program.

The third part of the program attempts to sell the results of the Hubble program to the viewers. In my opinion, this is the weakest part of the program. The astronomers do their best to get the viewer excited about the things that they themselves feel are important, explaining difficult concepts in lay terms and showing beautiful pictures taken by Hubble. But for this viewer, it just didn't work. And here is where my economist side started thinking about Frederic Bastiat's timeless essay That Which Is Seen and That Which is Not Seen.

The astronomers seem truly excited that now they can answer two questions that (they claim) have perplexed mankind from time immemorial; i.e., how old is the universe and how many stars are there.

The answer is 13.7 billion years. The number of stars is a so large that it's beyond human comprehension:  2 with twenty zeroes behind it, which is called 200 quintillion! There are 200 billion galaxies in the universe and each galaxy has 100 billion stars. (I must confess that these questions have not caused me to lose even one minute of sleep...ever.) Furthermore, the telescope has revealed many facets of the universe that are of great interest to astronomers. Did you know that the universe is expanding at an ever increasing rate; that there are black holes at the center of all galaxies, and that there is a previously unknown force, called black energy, which makes up seventy percent of all the "stuff" in the universe? Me neither, but I must confess that, even after learning of my ignorance of these matters, I'm still not clear how my life has been made better. And this is where Bastiat comes in.

Even though the program honestly gives some air time to the skepticism the astronomers faced in order to secure funding, it makes no attempt to show that all that money and all that new knowledge has translated into even a smidgen of the improvement of mankind and how the project meets even the most expansive description of the proper role of government. Bastiat would point out that all that funding came at a cost, even if a relatively small per citizen cost, of real improvement in mankind's satisfaction. Each citizen did NOT have some higher satisfaction met, otherwise government funding would not have been necessary. Furthermore, the small-per-citizen cost argument used by Nancy Roman to justify the spending really doesn't stand up to serious analysis. If every American gave me just one cent each year, I could live very well and no one would be able to say honestly that his satisfaction was impaired even in the smallest way much less foregoing a night at the movies. You can see that almost any specious program can be justified by this type argument.

I dare say that a survey of most Americans would find that few know anything about the Hubble Space Telescope and its accomplishments to improve mankind's knowledge of the universe. In fact I question that the Hubble Space Telescope has done one positive thing for the improvement of mankind beyond the satisfaction felt by the very few in the astronomy field. Pure knowledge may be important in some way to those who seek it, but why force others to forego even the smallest satisfaction in order to provide it to an elite few?

So, should and would the Hubble have been built? This question cannot be answered unless individuals are allowed to fund it voluntarily and not have government coercively extract the funds from them through taxes. Perhaps some very wealthy individuals could have been convinced to fund the project. Maybe some sharp Madison Avenue marketers would have developed a program to raise the funds from a vast, interested citizenry. Furthermore, there is such a thing as pursuing an end before its time has come. Perhaps a Hubble-type telescope could have been placed in orbit a few years later at a greatly reduced cost, a cost that could have been borne by private donors. Who knows. But we do know that the Hubble Space Telescope has reduced the quality of our lives in a small way that can never be recovered. Personally, as much as I was impressed by the Hubble's accomplishments, I would have preferred a night at the movies.