Unemployment "Insurance"

North Carolina has new Republican majorities in both the House and the Senate.  With a new Republican governor, North Carolina has Republican control of the reigns of government for the first time since Reconstruction.  

The outgoing Democrats have left North Carolina with a $2.6 billion debt that it owes to the Federal Government for unemployment expenditures.  Since the recession NC has had higher than the national average unemployment.  Additionally, NC has had generous benefits (greater than our neighbors) that last for 26 weeks (that's half a year).  So when the economic recession settled in NC, the pool of unemployment funds were quickly drained.  The Democratic majority in the legislature and Democratic Governor had a choice to either reduce the outflow of funds or find a new source.  Their solution?  They decided to borrow the money from Washington D.C.  As a result, we now owe $2.6 billion and the unemployment rate is still above the national average.

The new Republican Governor and majorities in the House and Senate are moving legislation through each chamber that will reduce the "benefits" and shorten the span from 26 weeks to a range of 12 - 20 weeks depending on the state of the economy.  Such a plan will quickly pay off the debt and put money back (about $2 billion) into the unemployment insurance fund.

In economics, there are two axioms that everyone should be familiar with.  The first is if you want more of something, use taxpayer dollars and fund it.  The second is if you want less of something, tax it.  What is unemployment insurance?  Well, it certainly is not insurance.  

What is insurance?  It is a method to reduce risk.  It helps alleviate the cost of something bad  happening.  In order for insurance to work, we need to understand class risk.  Class risk means that I know that a certain percentage of people will be affected by something, but I couldn't tell you who in particular.  I might know that so many people will get cancer in a given year or that a certain percentage of people will be killed in a car accident in a year or so many homes catch fire, etc.  Since I know the percent of people harmed, I know the risk.  We can then pool together the funds and help offset the cost of the event.  

Suppose that it costs $100 to set a broken bone.  Further suppose that there is a group of 10 of us who fall into the risk class that says one of us will break a bone once this year.  Each of us then contributes $10 to the pool, for a total of $100.  The "winner" is the guy you breaks a bone.  The "losers" are those that do not.  So when it comes to insurance the "winners" are those that get cancer, those who are in car accidents, those who homes burn down, etc.  The "losers" are those who pay into the fund, but nothing bad happens to them.

So let's apply this reasoning to unemployment "insurance."  First, can we identify risk classes?  No, not really.  Can we estimate how many will lose their job in the next year?  Again, not really.  With many insurances, we can modify the risk class we find ourselves through our behavior, like good driving vs. a record of drunk driving.  Is there any consideration along these lines for unemployment "insurance"?  Sadly no, like most government things, it's one size fits all.  Finally, am I paying into the fund that I am insuring against?  Yes, but it is subsidized by those who don't work.  I don't simply mean the unemployed, I mean those that don't have a job and do not want a job.  To the extent that funds come from the General Fund, those that pay sales tax, the gas tax, etc. are also paying into this fund.

If unemployment "insurance" isn't really insurance, then what is it?  It is simply a transfer payment to those who meet the government's definition of eligible recipient.  And now, finally, we can apply that first axiom, which is if we want more of something, have the government pay for it.  If we want more people unemployed, pay them not to work.  If we want people to be without work for week after week after week, pay them week after week after week.

The critics of the new governor have asked him to try to live on $350/week (the new proposed rate).  However, they miss the point.  This transfer payment is not supposed to replace work.  It is to help offset the cost of an event, losing one's job.  People respond to incentives and if the cost of being unemployed is high, those people will be highly motivated to take the next job out there.  If they are not highly motivated, they will wait until the "perfect" job comes along.  The reality is that the "perfect" job does not exist.  The reality is that you take the next job (which will pay less) and you work up the ladder again.

It is only by using the natural incentives found in the market will the economy recover.  The market will put people back to work.  We just have to let the market do its job.

Austrian Economics Forum Spring #1 2013 (Part 1)--Buchanan and Methodology

It has been awhile since I made a AEF post.  Let's just chalk up last semester as a mess.  I might get back to posting them, but I realize that I need to move forward.

Yesterday, February 1st, was the 2013 kick-off meeting for the AEF at NC State University. There was quite the group there.  In addition to the group of graduate (and a few advanced undergraduate) students there were Prof. Stephen Margolis, Dr. Roy Cordato and his wife Dr. Karen Palasek, and additionally there was Dr. Mike Munger--Chair of Duke University's Political Science Department and all around nice guy.

There were two readings for this session, both written by Nobel Laureate James Buchanan (1919-2013).  The first reading was from Chapter 3 of his book Cost and Choice: An Inquiry in Economic Theory (1969).  The Chapter is called Cost and Choice.  It is found here: http://www.econlib.org/library/Buchanan/buchCv6c3.html#Ch. 3, Cost and Choice

This chapter is really an attack on the Neo-Classical approach to economics.  While I think that his criticisms are excellent when directed to the Neo-Classical approach, I don't think they have much impact on the Austrian approach to economics. 

To start, Buchanan says that mainstream economists say that science (and hence economics) must rest on something measurable.  There must be empirical and objective content.  Buchanan states, "the behavioral postulate" and the subsequent predictions of economic man are "drained of power," unless "specific descriptive content is given to 'costs' and to 'benefits' or to 'revenues.'"  He further states that, "There is no implied presumption that men should behave economically."  And then, "The motivational assumption is vital in that this allows the scientist to use the objectively observable magnitudes of money cost and money revenue streams as representations of the subjectively evaluated alternatives of choice in individuals' behavior patterns."

This simple insight is devastating to the Neo-Classical approach.  As Buchanan points out, "Objectively observable cost-revenue streams cannot serve as surrogates for the subjectively evaluated alternatives in which noneconomic elements are influential."  In other words, when I actually buy something, I am making an unobservable, subjective valuation of the product and another valuation of my next-best alternative, what eventually becomes my opportunity cost.  The seller is also making a similar calculation, albeit from the other point of view.  However, the core of the Neo-Classical approach depends upon observable, objective data.  All they can observe is the final trading price, not all the "stuff" that actually is needed for a trade to occur.  There is no action in the Neo-Classical system it is assumed that individuals will just maximize according to constraints. 

The reason I think that this is not a criticism of the Austrian approach is because Austrians do not rely on objective empirics as a foundation to economic science.  For the Austrian following Menger's approach, we start with the Ends/Means framework.  An individual thinks of an end and then imagines how to best achieve that end.  This assessment leads to action and thereby we can deduce economics.  This is the Praxeological approach.  

The next section of Buchanan's chapter centers on the idea of cost.  For me, there is only one kind of cost--opportunity cost.  Opportunity cost is a marginal cost.  It is the subjective value of the next-best (foregone) alternative when a decision is made.  To illustrate, I use this example in my class.  Suppose I want to buy a soda from the store and the price is $1.  What is the cost of the soda?  The answer is NOT $1; that's the price, but it is not the cost.  The cost, the true cost, the opportunity cost is the value of the next best thing that I could have purchased with that dollar.  Perhaps it was a bag of chips.  The value I would have received from that bag of chips is foregone because I bought the soda.  That foregone value is the cost of the trade.  Another example...  Suppose that you are an entrepreneur and you have a choice between Project A and Project B.  Each have an upfront expenditure of $100.  Project A will yield revenues of $150 and Project B will yield $130.  So which do you choose?  Project A of course, because it has a return of 50% while Project B is only 30%.  The cost of choosing Project A is not the $100 expenditure, it is the 30% return that I am unable to get because I am not doing Project B.  Suppose that for whatever reason the initial expenditure for Project A climbs to $110.  Now the rate of return drops to 36.36%  I still pick Project A and my cost is still the 30% return from Project B even though my expenditures for Project A have increased.  If the initial expenditures climb high enough, I will choose Project B and my "cost" will change, but the point is that the initial expenditure is NOT a "cost."

Buchanan argues along these lines, however, he makes a distinction between three types of costs.  He uses opportunity cost in the same way that I outlined above and uses "objective costs" for what I was calling "expenditures" in the above example.  Buchanan adds a third type of cost in his analysis "choice-influenced cost."  He states that there can be "opportunities lost" and that these lost opportunities should be counted as a type of cost.

On this point Cordato and I parted ways.  Cordato argued that since Buchanan was defining terms, that this was a perfectly appropriate thing to do.  I understand that point and it is valid, nevertheless I disagree.  I object to the notion that a reduction of future choices is a cost.  I think that all costs are only opportunity costs.  They cannot be borne by another.  They are completely subjective and they only occur when a decision is made.  I can imagine a situation where I shut down my business and that creates "a reduction in future choices" for those who are no longer employed.  Some may argue that this is a cost, but they would also have to argue that I am imposing a cost on another.  But where is these former employees' decision?  They are not making a decision and so I reject the notion that they are incurring a cost.  Another in the discussion group said, what if someone got bone cancer.  Is that a cost?  I want to push that example further and just take simple aging.  As one gets older, there are future choices that I am unable to do.  The body aches and I can't run as far or for as long.  Is aging now a "choice-influenced cost"?  There is too much that can be put into this concept and as a result, its meaning is confused, watered-down and eventually lost.  

One person did point out that in order to read the rest of the book, you had to take Buchanan's definitions.  So on that point I conceded and we moved onto the next reading.  

One last point, this reading and discussion reminded me of a quote from Wicksteed.  Wicksteed wrote in 1888 in The Alphabet of Economic Science, "When two men give the same thing, it is not that same thing they give."  Brilliant!  If two people give a $5 bill away, they are giving up (incurring) their opportunity cost for that $5 note.

The second reading was Buchanan's "Natural and Artifactual Man."  It was originally a lecture to a Liberty Fund Conference in 1978.  It has been reprinted in vol. 1 of Liberty Funds collected works of Buchanan.  

Since this post is already a little long, I will hold off and break this into two parts.  So part 2 will follow shortly.

The next AEF meeting will be a lecture by Prof. Ed López newly employed at Western Carolina University.  He will be talking about his book, Madmen, Intellectuals, & Academic Scribblers (2013).

Simpsons Reference Austrian School Economists

Claiming every little bit of victory that one can...  "The Simpsons did it." now applies to their referencing the Austrian School of Economics.  Enjoy.

Government's Cold Reality -- Part 2

A really good article by Jon Sanders has appeared on the John Locke web site.  It follows up on the ridiculous new proposed policy to make cold medicine that contains pseudoephedrine accessible only with a prescription.  

The amazing thing pointed out in this article is that for each move the government makes, the drug-makers make counter-moves.  They stay a step or two ahead of the law.  Each time they do, the meth that they cook up is more dangerous and deadly.  Each time they revise their formula, they use less pseudoephedrine.  In fact, now they can make meth without any at all.  Here is the link.

New EconStories Video--Deck the Halls with Macro Follies

Our friends at EconStories have produced another hit: "Deck the Halls with Macro Follies."  Enjoy!

Government's "Cold" Reality

Warning: You may be reading the words of a criminal.  The rate at which the government is eroding our liberties is striking and by the time you read this post, you may be breaking the law.  You have been warned...

There may be some of you who have noticed that my postings are done this semester.  (If you haven't, that's not a big deal.)  The reason why my postings have dropped off is because I have been ill for most of the semester.  I think that I may have been well for 2 -- 2.5 weeks  over the past 15 weeks.  I think that there are several factors, like the children going to a school for the first time.  (Last year, we home schooled.)  Nevertheless, when one in the family is starting to begin the path of recovery, another of one picks up something new and then I catch it.  

Today, I have a nasty cough.  My son also has a persistent cough.  This weekend my wife has come down with something new--a sore throat and a fever.  (I am looking forward to getting that one next!)

As the least sick driver in the house, it is my duty to go out and get the medicine.  And here we come to it.  My state, North Carolina, has decided that we are not to be trusted to buy pseudophedrine HCL.  First, we must show IDENTIFICATION to be registered in a statewide system.  We don't have to show ID in Presidential elections where we choose who will be the most powerful man on the planet, but we have to present ID for a stuffy nose!  Second, the amount we are allowed to buy is limited.  There were two boxes I was considering.  The first was just straight up pseudophedrine.  The other box was a mix of pseudophedrine and a sinus pain reliever.  My wife frequently has sinus troubles and I thought that she might like that.  So I, as a normal consumer, chose both.  

And then the machine chimed.

I would be breaking the law to buy two boxes!  Oh heavens!  How dare I want something that deals with multiple symptoms and something else that only deals with a stuffy nose.  I know!  How dare I think that I shouldn't over-medicate myself while providing multi-symptom relief for my wife!

The government can explain how they are just looking out for me.  They can explain how through this law they are cracking down on Meth makers and users.

All of these reasons are really irrelevant.  What it comes down to is the relation between the individual and the state.  Who owns my body?  Am I sovereign over myself?  The Classical Liberal/Modern Libertarian says that as long as I am not violating another's rights, then I should be free.  I should have control over what I put into my own body.

The political landscape is changing.   For the past several years, it was argued that the U.S. is a Center-Right country.  I think that most people live their lives conservatively.  I think that most people want the national government to be fiscally responsible and fiscally sound.  I also think the perception on individual rights is on the rise.  In the last election (Nov. 2012), marijuana for recreational use has passed in a few states.  The traditional American position was a fairly Libertarian one.  Historically, we don't see government interfering with personal choices until the Progressive Movement joined with the Prohibitionists. 

The lesson learned in the 1920s was that while alcoholism is bad, making alcohol illegal was worse.  Being addicted to drugs is bad, but drug war is worse.  It is time to stop the Nanny State.

It is time to have a serious discussion on the fundamental nature of the relationship between the individual and the State.  Does the state derive its powers from the people?  Or do people derive their rights from the State?  Are individuals sovereign to be masters of their own lives?  Or is the State the master of us all?

The cold reality is that the state is force.  Before a government can ever do, it must first take.  It is either force in action or it is the threat of force.  It cannot make us better people.  It cannot make us a more moral people.  It cannot make us thrifty, hard-working and generous.  

The choice that every generation must answer is how much government shall we have.  To sit on the sidelines is to make a choice.  To not think about it, is to make a choice.  To not read and engage is to make a choice.  To conclude, I turn to the words of the great Austrian economist, Ludwig von Mises:

Everyone carries a part of society on his shoulders no one is relieved of his share of responsibility by others.  And no one can find a safe way for himself if society is sweeping towards destruction.  Therefore everyone, in his own interest, must thrust himself vigorously into the intellectual battle.  No one can stand aside with unconcern: the interests of everyone hang on the result.  Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.

I, Pencil: The Movie

Our friends at the Competitive Entreprise Institute has just put "I, Pencil: The Movie" up on YouTube.  I invite everyone to take a look.