Milton Friedman: coercion and the fourth category of spending

In the main,  when people discuss Milton Friedman's fourth category of spending they do so in a mistaken vacuum. How so? They forget to point out HOW other people's money came to be. Stated alternatively, other people spending other people's money on other people, the discussion thereof, many, many times leaves out Friedman's first point: coercion.

Hence one ends with an isolated discussion of how Friedman's fourth category of spending points out the careless way or ineffective/inefficiency produced by other people [politico] spending other people's money [taxpayer] on other people [recipient class]. True enough. However the isolated discussion  decouples the coercion and only discusses the single phenomena without discussing [coupling] the ability of such a spending phenomena to emerge.

Think about it, how many times have you heard the discussion, in isolation, of other people spending other people's money on other people?? Meanwhile, twenty six discussions later a separate subject is discussed regarding coercion of forcibly appropriating other people's money. Moreover, the discussion of coercion many times appears in isolation from Friedman's total discussion.

Nay, nay! One must discuss both subjects as coercion must occur first and only then can one arrive at other people spending other people's money on other people.

Problem solved! Please go to 11:00 to 11:34 of the Youtube video below and hear Friedman himself discuss the two phenomena in tandem.

The Do-Gooder and the Hijack of the Do-Gooder’s Cause by the Rent Seeking Special Interest

Twin Political Dupery: When the Both Sides of the Table Phenomena Dupe the Taxpayer AND the Union Member

What is the "both sides of the table" phenomena regarding collective bargaining in conjunction with a government monopoly? The public choice theory proposition of the both sides of the table phenomena is basically:

　

(1) if bureaucrat X is negotiating with collective bargaining public sector union Y, exactly what motivation does bureaucrat X have regarding negotiations? The problem goes back to Milton Friedman's fourth category of spending: other people (bureaucrat X), spending other people's money (taxpayer money), on other people (recipient class which in this case is a public sector union). Therefore the bureaucrat has little motivation because he/she is spending other people's money not his/her own money,

(2) public sector unions have found that they can collect dues through members and funnel dues into political action funds. They then fund the campaigns of politicos that promise them [public sector unions] more compensation/benefits. They not only fund certain politicos but actively encourage their union members to campaign for the politico. Once they get their particular candidate elected they have now secured a politico who over sees bureaucrat X.


Political dupery in action


The public choice theory proposition of both sides of the table phenomena many times is discussed in terms of collective bargaining by unions and resulting rich benefits bestowed upon the union and its members. However, rather than pointing to the richness of the benefits and the inability of the taxpayer to pay such benefits, what if one focuses on the political dupery of the benefits.


The both sides of the table phenomena, long the norm for public sector unions, is no longer in play in many locals as tax revenue streams have been reduced, the taxpayer can‘t afford more taxes to pay the benefits, and taxpayers have elected politicos that have changed those sitting on one side of the table. Hence the politicos bestowing benefits via taxpayer dollars and/or deficit spending to build dependent political constituency has, for the time being, ended. The accumulation of benefits via the both-sides-of-the-table phenomena is then defended by the now unrepresented yet purposely built dependent political constituency. Hence they can’t rely on the other side of the table and begin a second line of political maneuver which is strike, slow down, picket, etc.


A much overlooked item is the accumulation of benefits bestowed were in fact bestowed based on the short term political time horizons (next election) by a series of politicos (many of which are now long gone). The actual ability to pay the basket of benefits/wages, unfortunately, was never the aim of the politico. That is, its not the accumulation of “unrealistic promises” its really the purposeful accumulation of unrealistic promises [its not an error or oversight, its purposeful].


The result is the union and/or union employee think/perceive they “negotiated” items, when in fact, there never was any true arms-length negotiation. There was never any intent to negotiate long term funded realistic benefits and wages. Rather, the union or union representative, the supposed accumulated “negotiated” benefits/wages thereof, are in reality an accumulation of purposeful politico promises matching politicos short term political time horizon devoid of long term funded realistic benefits and wages.


One might consider this proposition: the both sides of the table phenomena, where the union or union member thought they where negotiating benefits, was a benefit mirage. Stated alternatively, the purposeful political dupery of the politico toward the taxpayer in the both sides of the table phenomena was simultaneously the purposeful political dupery of the union side of the table as the politico actually, in the long run, duped both the taxpayer and the union.

　

To make this concept even clearer, the both sides of the table phenomena is portrayed as duping the taxpayer. True. But the both sides of the table phenomena is duping the union and union worker as well. The politico is duping everyone in the room as well as outside the room.


The end result is a union that thinks they have played a role along with politicos to dupe the highly defused taxpayer when in fact they themselves were duped. The basket of benefits is a basket of promises not a basket of negotiated benefits that are funded and realistic. Therefore, the union strikes, performs walkouts, performs work slow downs and pickets based on dupery. That is, they have yet to figure out that benefits promised are much different than benefits negotiated and funded under a limited tax revenue stream. Stated alternatively, their very strike is occurring as they have yet to figure out they have indeed been duped too.

　

“Fair Share”: another name for politico constituency building through the use of other peoples‘ money.

“Fair share” or a version thereof has been used many times by politicos over the years. Two components exist: fair and share.

“Fair” has very little meaning other than what one wants it to mean in a particular context. Generally, given a context of political debate, where fair is very often used, fair is said to mean: what you are doing or advocating and what someone else is not doing or advocating. That is, “fair” is how one paints the world vs. other portraits available that conflict with one’s own painting of the world.

Examining the politico’s use of "share", within the phrase fair share, means something exists that needs divided. Now comes the introduction of an implicit underlying assumption of zero sum thinking. That is, the desire of the politico is to politically frame the talking point that one party is gaining at the expense of another party. Hence the real underlying manufactured argument is that  party B deserves additional gains from party A based upon "something" existing in the abstract that somehow was divided improperly.

Therefore, "fair" and "share", are combined into an argument ultimately of: "advocating deserve". The politico advocates deserve by selling zero sum thinking by framing the argument as one party can only gain from the loss of another party regarding some abstract something that was divided somehow improperly. Hence the loss requires restoration, additional gains, or “deserves”.

In point of fact, with a free people in a free market, exchange only occurs at mutual exchange. That is, two free parties do not exchange unless each party perceives a gain and hence we come to exchange at mutual self-interest. Party A does not cause an exchange trigger at the detriment of party B as no exchange would occur as B would not find his self-interest. B turns down the zero sum exchange and goes elsewhere to seek an exchange of mutual self-interest.

If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can only gain at the expense of another. - Milton Friedman

The politico argument is then exposed, as regardless of the manufactured abstract something that was somehow divided improperly, exchange is mutual self interest driven not zero sum driven. There is no need to restore, cause additional gains, or “deserve” as mutual self interest occurred at exchange, not zero sum.

Regardless of the economics of exchange, the politico presses on by further framing parties to exchange as now being classes to exchange (parties suddenly, notionally and purposely become classes). The politico frames exchange as not occurring between “parties” rather occurring between distinct “classes” with particular assigned attributes with attributes either trumpeted or vilified as the debate point unfolds. It remains the zero sum argument, side stepping mutual exchange reality, however goes one step further and frames parties as good vs. bad classes and classes butting heads resulting in zero sums.

The final stage of the political argument is to substitute “shirk” for “deserve”. The politico purposely puts forth the fallacy that one class is gaining at the expense of another class as being a stone cold fact, and in order for the losing class to made whole, a shirking partner needs introduced. The shirking partner is politicos through the mechanism of government who will redistribute the abstract something that was somehow divided improperly. The power to act as the shirking partner (a partner who takes part of the value and provides none of the effort) through the imposition of a cost [tax] then allows the politicos through the mechanism of government to build a dependent political constituency class through redistribution of the value extracted.

What is purposely left out of this debate is that "work" is irritating toil. Apparently the irritating toil is required of some, and the value produced by the irritating toil becomes a "claim" or "right" which  is deserved by others. Stated alternatively, the irritating toil of work producing value, comes complete with a shirking partner, a shirking partner who then takes part of the value and provides none of the effort, and uses such value as a political constituency building exercise. That the abstract something that was somehow divided improperly is then purposely captured by the politico as a value used directly for dependent political constituency building.

　

Politicos and Rent Seekers: Manipulating Variables

What if rent seeking agents, over time, have discovered that consolidating gives them a higher probability of manipulating variables. However, consolidating under one special interest umbrella might be considered or challenged as collusion. A political party, meanwhile, identifies the consolidation strategy of rent seekers attempting to manipulate variables and purposely allows the political party to be a stealth collusion vehicle.

Suppose a political party seeking control actively recruits a massive coalition of special interest groups aka rent seekers. Each group has its own interest and those interests are quite diverse. The cohesive theme of the political party is not some common thread of ideology, the theme becomes a common thread of "funding".

How does a rent seeker find funding and/or special conditions? Funding and/or conditions are secured through politicos operating through the mechanism of government. Hence a particular political party deploys a strategy of purposely attracting diverse rent seekers then acts as the consolidation agent offering funding through politicos operating through the mechanism of government. That the political party seeking control is not acting on ideology to consolidate support, rather the political party becomes a stealth mechanism of collusion leading to funding to consolidate support.

Considering the above proposition, then funding and/or special conditions must flow from the particular politicos of the political party through the mechanism of government to the special interests. Any threat to the stealth collusion, meaning any disruption of funding, reduction in funding, and changes in special conditions must be averted. If a threat appears to the stealth collusion, the political party loses control and the rent seekers lose the ability to manipulate variables.

Lets assume for a moment that such a political party acts as a stealth collusion mechanism for rent seekers. Further assume that the political party wins election and gains the objective it seeks of control. The next step would be for the politicos of said political party to immediately and generously bestow funds and/or special conditions to the coalition of rent seekers. One would then assume a massive spike in government spending with such spending falling resoundingly with the rent seekers.

However, the model of stealth collusion of a political party purposely consolidating rent seekers with the aim of manipulating variables requires constant and consistent funding. Further, the rent seekers can not sustain "growth" unless additional spending is funneled in their direction. Hence a spike in government spending as political pay back for supporting the political party must be followed by additional spending to satisfy the rent seekers and the rent seekers' particular constituency.

The model of stealth collusion of a political party purposely consolidating rent seekers quickly becomes unstable as other people [politicos] spending other peoples' money [taxpayer] on a recipient class [rent seeker] soon becomes an un-financeable proposition (run out of other peoples' money). When the spending run-up becomes clear to James and Jane Goodfellow and government finances become increasingly precarious, then popular support swings to a funding cut back. However, when funding cut back proposals emerge and before such funding is cut back the rent seekers, acting in their own self interest, spend money and manpower in organized protests against funding reductions.

The eventual funding cut back then causes the political party, sponsoring the stealth collusion, to pick winners and losers among the consolidated rent seekers. The picking of winners and losers not only causes decent among all rent seekers making up the cabal, but dissention occurs between the final chosen winning and losing rent seekers.

One must consider if the above theoretical example does or does not seem familiar to current affairs.

“Cutting Spending in the Tax Code” and “Tax Expenditures”.

Milton Friedman’s fourth category of spending is basically: other people [politicos through the mechanism of government] spending other peoples’ money [taxpayers] on other people [recipient class]. An implicit and explicit assumption is that “other peoples’ money” was produced privately, temporarily owned privately, then transferred to state from private hands via tax. That is, the public sector only exists due to a transfer payment [tax] from the private sector.




What if a certain subset of politicos have an alternate view of “other peoples’ money”, in that, the money was never owned privately? Making this change in assumptions, the fourth category of spending becomes: other people [politicos] spending the state’s money [state owned] on other people [recipient class].


How could the money be viewed as never being owned privately? One must consider the following politico talking points: “cutting spending in the tax code” and “tax expenditures”. These talking points have been used extensively in the recent overall debt ceiling debate/spending debate. The two talking points are referring to tax deductions/tax preference items of one sort or another, which in essence are being referred to as a form of “spending/expenditures”.


Cutting spending in the tax code aka tax expenditures comes from the point of view that leaving certain sums of money in private hands, via the tax code, is an “expenditure” of the state’s money. The implicit assumption is that the money was the state’s money to begin with and the state is spending its money upon a recipient. Stated alternatively, the state is giving back something it had ownership of in the beginning.


Consider this point: “cutting spending in the tax code” and “tax expenditures”, viewed as the state spending its money upon a recipient, would then mean all monies were the state’s to begin with and whatever the state deems necessary for the recipient to posses is then determined by the tax code. That is to say, the money remaining for James and Jane Goodfellow is not determined as a transfer from the private sector to the public sector, rather the Goodfellow’ allowable remainder money is a transfer from the public sector [ownership sector] to the private sector [recipient sector].

Public School Shenanigans vs. the Voucher-Student-Consumer

A very interesting observation set forth by John B. Taylor in his book Getting Off Track, how government actions and interventions caused, prolonged, and worsened the financial crisis is the cheap money bubble created by the Federal Reserve set the stage for the financial shenanigans that followed leading up to the financial crisis. No cheap money bubble, no environment for shenanigans. That is a most excellent point. If you create an economic environment for shenanigans, don’t be surprised by the ensuing shenanigans. (1)


Taylor’s observation is applicable to public education in the United States. How so? Milton Friedman pointed out the environment for public education shenanigans long ago in his 1955 essay The Role of Government in Education. That is, Friedman introduced the voucher concept, in that, the money should follow the student rather than being bestowed upon the educational institution. By bestowing the money upon the educational institution you create an environment for shenanigans. (2)

Friedman further advocated that this new consumer, the voucher-student-consumer, should be free to choose what educational outlet he/she will spend the money upon. That is, Friedman advocated freedom of choice in schools so the new voucher consumer student had a competitive educational market place competing for his/her business. The student then having the ability to make exchange at the point of mutual self interest.

A basic problem in K-12 education and also in higher education is the failure of funds to reach the classroom (student). Money is funneled away to top heavy in numbers and well paid administration with Cadillac health care plans and defined benefit retirement plans. Many instructors, professors and classroom teachers also have first class benefit plans and the same defined benefit retirement plans. Moreover, professors have tenure (life time appointments) and teacher unions and organizations make it near impossible to remove non-performing public school teachers.

Further, top heavy administration, top shelf benefit plans, lavish retirement plans, and employee entrenchment are not going away any time soon. Nay, nay! The situation is perpetuated by public education employees along with their associated organizations and unions voting for, campaigning for, and providing funding for politicos that will continue the status quo. -Or- voting for and supporting politicos that will perpetuate the environment for shenanigans.

Going back to Milton Friedman, we need to revisit Friedman’s fourth category of spending: Other people (politicos), spending other peoples’ money (taxpayer), on other people (recipient class). The recipient class in this case being public education employees. Hence the environment for shenanigans is closely related to the “other peoples’ money” phenomena. (3)

However, the public education environment for shenanigans is to a major degree mitigated by a simple proposition set forth in 1955 by Friedman: the money should follow the student rather than being bestowed upon the educational institution. The voucher-student-consumer , now given the power to be a rational consumer [holds the purse strings with the freedom to choose], is going to demand that the money arrives at the classroom level for his or her education. A supply will quickly follow.

The voucher-student-consumer will quickly put an end to the shenanigans.

Notes:

(1) John B. Taylor, Getting Off Track, how government actions and interventions caused, prolonged, and worsened the financial crisis.

(2) Milton Friedman, The Role of Government in Education. http://www.freerepublic.com/focus/f-news/1173402/posts

(3) Milton Friedman, Four Catagories of Spending. http://bartsblogg.blogspot.com/2008/10/milton-friedman-4-ways-money-is-spent.html

Firms have social responsibility? Firms spending someone else's money for social responsibility?

“So the question is, do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? And my answer to that is, no they do not” - Milton Friedman

The above is an often quoted line by Milton Friedman. Few go further to determine what Friedman was meaning. Social Justice advocates use the quote to show the supposedly crassness of  the private enterprise system. That equality of outcome requires social responsibility/social justice.

Friedman stated: ' The discussions of the "social responsibili­ties of business" are notable for their analytical looseness and lack of rigor.' That observation may well come from Friedman studying F.A. Hayek. Hayek spent an entire decade studying "social justice". Hayek's conclusion was that social justice does not exist as its advocates never come forth with a definition [Friedman's: "... their analytical looseness and lack of rigor"]. (1)

Social justice comes from the concept "fair". That is, what is fair. Thomas Sowell has explained that "fair" is a concept that has little meaning except to the user of the term in a particular context. That is to say, "fair" is what you are doing and the other guy is not doing. (2) (3)

Further, firms are artificial entities. How can an artificial entity have a responsibility? Or as stated by Friedman: "Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom". Friedman makes a grand point which has been pointed out by Harold Demsetz on multiple occasions that firms are merely a collection of households. (4)

Going back to the quote above that began this essay, what did Milton Friedman mean? Likely much of the the answer can be found in the following 1970 essay by Friedman.

The Social Responsibility of Business is to Increase its Profits - by Milton Friedman


When I hear businessmen speak eloquently about the "social responsibilities of business in a free-enterprise system," I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free en­terprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing em­ployment, eliminating discrimination, avoid­ing pollution and whatever else may be the catchwords of the contemporary crop of re­formers. In fact they are–or would be if they or anyone else took them seriously–preach­ing pure and unadulterated socialism. Busi­nessmen who talk this way are unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.


The discussions of the "social responsibili­ties of business" are notable for their analytical looseness and lack of rigor. What does it mean to say that "business" has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.

Presumably, the individuals who are to be responsible are businessmen, which means in­dividual proprietors or corporate executives. Most of the discussion of social responsibility is directed at corporations, so in what follows I shall mostly neglect the individual proprietors and speak of corporate executives.

In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for exam­ple, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.

In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them.

Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straightforward, and the persons among whom a voluntary contractual arrangement exists are clearly defined.

Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he rec­ognizes or assumes voluntarily–to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to de­vote part of his income to causes he regards as worthy, to refuse to work for particular corpo­rations, even to leave his job, for example, to join his country's armed forces. If we wish, we may refer to some of these responsibilities as "social responsibilities." But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are "social responsibili­ties," they are the social responsibilities of in­dividuals, not of business.

What does it mean to say that the corpo­rate executive has a "social responsibility" in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expendi­tures on reducing pollution beyond the amount that is in the best interests of the cor­poration or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire "hardcore" un­employed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate exec­utive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsi­bility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.

The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct "social responsibility," rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it.

But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.

This process raises political questions on two levels: principle and consequences. On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are gov­ernmental functions. We have established elab­orate constitutional, parliamentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in ac­cordance with the preferences and desires of the public–after all, "taxation without repre­sentation" was one of the battle cries of the American Revolution. We have a system of checks and balances to separate the legisla­tive function of imposing taxes and enacting expenditures from the executive function of collecting taxes and administering expendi­ture programs and from the judicial function of mediating disputes and interpreting the law.

Here the businessman–self-selected or appointed directly or indirectly by stockhold­ers–is to be simultaneously legislator, execu­tive and, jurist. He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds–all this guided only by general exhortations from on high to restrain inflation, improve the environment, fight poverty and so on and on.

The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This jus­tification disappears when the corporate ex­ecutive imposes taxes and spends the pro­ceeds for "social" purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil ser­vants–insofar as their actions in the name of social responsibility are real and not just win­dow-dressing–should be selected as they are now. If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expendi­tures to foster "social" objectives, then politi­cal machinery must be set up to make the as­sessment of taxes and to determine through a political process the objectives to be served.

This is the basic reason why the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce re­sources to alternative uses.

On the grounds of consequences, can the corporate executive in fact discharge his al­leged "social responsibilities?" On the other hand, suppose he could get away with spending the stockholders' or customers' or employees' money. How is he to know how to spend it? He is told that he must contribute to fighting inflation. How is he to know what ac­tion of his will contribute to that end? He is presumably an expert in running his company–in producing a product or selling it or financing it. But nothing about his selection makes him an expert on inflation. Will his hold­ing down the price of his product reduce infla­tionary pressure? Or, by leaving more spending power in the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce less because of the lower price, will it simply contribute to shortages? Even if he could an­swer these questions, how much cost is he justi­fied in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropri­ate share of others?

And, whether he wants to or not, can he get away with spending his stockholders', cus­tomers' or employees' money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have re­duced the corporation's profits and the price of its stock.) His customers and his employees can desert him for other producers and em­ployers less scrupulous in exercising their so­cial responsibilities.

This facet of "social responsibility" doc­trine is brought into sharp relief when the doctrine is used to justify wage restraint by trade unions. The conflict of interest is naked and clear when union officials are asked to subordinate the interest of their members to some more general purpose. If the union offi­cials try to enforce wage restraint, the consequence is likely to be wildcat strikes, rank­-and-file revolts and the emergence of strong competitors for their jobs. We thus have the ironic phenomenon that union leaders–at least in the U.S.–have objected to Govern­ment interference with the market far more consistently and courageously than have business leaders.

The difficulty of exercising "social responsibility" illustrates, of course, the great virtue of private competitive enterprise–it forces people to be responsible for their own actions and makes it difficult for them to "exploit" other people for either selfish or unselfish purposes. They can do good–but only at their own expense.

Many a reader who has followed the argu­ment this far may be tempted to remonstrate that it is all well and good to speak of Government's having the responsibility to im­pose taxes and determine expenditures for such "social" purposes as controlling pollu­tion or training the hard-core unemployed, but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by busi­nessmen is a quicker and surer way to solve pressing current problems.

Aside from the question of fact–I share Adam Smith's skepticism about the benefits that can be expected from "those who affected to trade for the public good"–this argument must be rejected on grounds of principle. What it amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic proce­dures. In a free society, it is hard for "evil" people to do "evil," especially since one man's good is another's evil.

I have, for simplicity, concentrated on the special case of the corporate executive, ex­cept only for the brief digression on trade unions. But precisely the same argument ap­plies to the newer phenomenon of calling upon stockholders to require corporations to exercise social responsibility (the recent G.M crusade for example). In most of these cases, what is in effect involved is some stockholders trying to get other stockholders (or customers or employees) to contribute against their will to "social" causes favored by the activists. In­sofar as they succeed, they are again imposing taxes and spending the proceeds.

The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his "social responsibility," he is spending his own money, not someone else's. If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any ob­jection to his doing so. In the process, he, too, may impose costs on employees and cus­tomers. However, because he is far less likely than a large corporation or union to have mo­nopolistic power, any such side effects will tend to be minor.

Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.

To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects. Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to chari­ties they favor by having the corporation make the gift than by doing it themselves, since they can in that way contribute an amount that would otherwise have been paid as corporate taxes.

In each of these–and many similar–cases, there is a strong temptation to rationalize these actions as an exercise of "social responsibility." In the present climate of opinion, with its wide spread aversion to "capitalism," "profits," the "soulless corporation" and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.

It would be inconsistent of me to call on corporate executives to refrain from this hyp­ocritical window-dressing because it harms the foundations of a free society. That would be to call on them to exercise a "social re­sponsibility"! If our institutions, and the atti­tudes of the public make it in their self-inter­est to cloak their actions in this way, I cannot summon much indignation to denounce them. At the same time, I can express admiration for those individual proprietors or owners of closely held corporations or stockholders of more broadly held corporations who disdain such tactics as approaching fraud.

Whether blameworthy or not, the use of the cloak of social responsibility, and the nonsense spoken in its name by influential and presti­gious businessmen, does clearly harm the foun­dations of a free society. I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely farsighted and clearheaded in matters that are internal to their businesses. They are incredibly shortsighted and muddle­headed in matters that are outside their businesses but affect the possible survival of busi­ness in general. This shortsightedness is strikingly exemplified in the calls from many businessmen for wage and price guidelines or controls or income policies. There is nothing that could do more in a brief period to destroy a market system and replace it by a centrally con­trolled system than effective governmental con­trol of prices and wages.

The shortsightedness is also exemplified in speeches by businessmen on social respon­sibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse.

The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all coopera­tion is voluntary, all parties to such coopera­tion benefit or they need not participate. There are no values, no "social" responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form.

The political principle that underlies the political mechanism is conformity. The indi­vidual must serve a more general social inter­est–whether that be determined by a church or a dictator or a majority. The individual may have a vote and say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.

Unfortunately, unanimity is not always feasi­ble. There are some respects in which conformity appears unavoidable, so I do not see how one can avoid the use of the political mecha­nism altogether.

But the doctrine of "social responsibility" taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." (5)

Notes:

(1) Hayek, his contribution to the political and economic thought of our time, Eamonn Butler.

(2) Intellectuals and Society, Thomas Sowell.

(3) A Conflict of Visions, Thomas Sowell.

(4) From Economic Man to Economic System, Harold Demsetz.

(5) The New York Times Magazine, September 13, 1970

Government promises?

In the coming debate regarding major reductions in federal spending certain politicos will frame “spending” as “government promises”. That a reduction in spending is somehow a reduction in a promise.



There were never any “government promises“. You see, governments don’t think nor make decisions. Any promises were exactly made by politicos, with other peoples’ money, through the mechanism of government.



The reduction in spending, meaning a reduction in politico promises, creates a basic problem for politicos: they have spent the better part of eight decades spending other peoples' money to build dependent political constituency. They have constructed, maintained, and perpetuated spending as a political constituency building exercise and could care less about the actual outcome of the particular spending. Spending focus by politicos is primarily on the dependency factor to built and maintain constituency. They also grant rent seekers (special interests) benefits (taxpayer money) as a further extension of political constituency building.


The result is: reducing/eliminating other people (politicos) ability to spend other peoples' money (taxpayer) on other people (recipient class) is in fact a threat to politicos’ constructed, maintained, and perpetual political constituency building exercise. Hence reducing spending is a threat to their supporting political constituency (votes, political donations, campaign volunteers, etc.).


Therefore, perpetuating spending is paramount to the politico. Framing the argument that spending equals government promises is an attempt to portray reduced spending as broken promises. The Orwellian phrase “government promises” is merely new speak for “politico promises” as governments don’t think or decide, only politicos think and decide.

NPR: Poster Child for Milton Friedman's Fourth Category of spending?

The House of Representatives voted 228 to 192 to defund NPR.


"The bill calls for an end to all federal funding to NPR and its affiliates.


It also prohibits stations from using federal funds to pay NPR dues and to purchase programming. It would block NPR from applying for grants provided by federal agencies such as the Corporation for Public Broadcasting, Department of Education, Department of Commerce and the National Endowment for the Arts." (1)




Simple Proposition

The simple proposition is: what is the mission of government? What public goods should state offer? Would the list of public goods include radio and television broadcast?

Government has obviously gotten into the delivery of public goods that are very much in a gray area. However, radio and television is a competitive market with many, many, many outlets. Demand for a wide variety of content had spawned a supply of a wide variety of content.

In the gray area of government delivered public goods, public radio and television is the poster child. The market delivers the content demanded by consumers. Why would the government enter a market that smoothly functions in the area of demand and supply?

If people demand the content of NPR, then NPR can deliver such content or a competitor can offer such a service. That is to say, if the market actually exists for NPR's content, NPR can deliver such content in a free market place and other competitors will enter the market and deliver the content as well.

Neither the possible competitors nor NPR deserve or should require a subsidy in a highly competitive free market that delivers a wide variety of content. That is, if NPR requires and needs a subsidy then why doesn't all radio and television outlets require a subsidy? Why do radio and television outlets thrive in a free market without subsidy but somehow some way NPR needs a subsidy?

The Simple Answer to a Simple Proposition

The simple answer to the simple proposition is that particular politicos have decided to subsidize NPR. That a non-free market solution of government intervention and subsidy has been a chosen path of particular politicos. One might say that politicos chose winners and losers and NPR was been granted "winner status" with government subsidy.
 
One must remember, the particular politicos that have chosen the subsidy path are doing so with your tax dollars. Its a classic case of Milton Fiedman's fourth category of spending: other people (politicos) spending other peoples' money (taxpayer money) on other people (NPR).  (2)
 
Notes:
 
(1) http://www.newsmax.com/Newsfront/npr-funding-house-votes/2011/03/17/id/389846?s=al&promo_code=BE2A-1
 
(2) http://bartsblogg.blogspot.com/2008/10/milton-friedman-4-ways-money-is-spent.html

The Keynesian bucket diagram of “spending”: an economic theory or a political theory?

At the blog Our Dinner Table a recent post is entitled Keynesian Stimulus in One Sentence. The proposed definition is: We’re not sure why you are not spending your money, but we don’t like it, so we are going to spend it for you. (1)

That’s a most excellent definition!

Moreover, the proposed definition might lead one to say John Maynard Keynes economic propositions morphed, through neo-Keynesian and new-Keynesian followers, supporters, and advocates into a political proposition. That Keynesianism is no longer an economic proposition but a political proposition.

How so?

Keynesian deficit spending aka stimulus

Keynesian supporters love to refer to deficit spending by the politico-title "stimulus". That deficit spending by politicos [politicos through the mechanism of government] will somehow, some way [generally the lack of agregate demand argument] "jump start the economy". That government deficit spending will jump start the private sector and hence bring an economy out of recession. -Or- We’re not sure why you are not spending your money, but we don’t like it, so we are going to spend it for you.

Politicos in the candy shop

Many politicos love Keynesianism. Why? If we are going to spend more money it creates the perfect environment for political constituency building activities by politicos. Politicos through the mechanism of government can then satisfy rent seekers (special interests), expand existing entitlement programs or propose new entitlement programs, and to some extent offer up good old pork barrel spending to those voters in the home district. That is, the politico is handed the golden opportunity to exercise political constituency building through the mechanism of government by creating dependency groups, rewarding existing dependency groups, and spending other peoples‘ money on the electorate in the home district.

The lovely diagram of the "bucket"

The jump start stimulus theory always comes with the lovely diagram of the "bucket". The bucket represents demand. The bucket's content is household, business, and government demand for goods and services. A recession is a bucket that is not full to the brim. The bucket is no longer full as the demand components of households and businesses have shrunk and hence its the government's responsibility to increase its expenditures (increase its component of the bucket) in order to bring the bucket back to full.

Seems like common sense. However, the increased government expenditures that attempt to fill the bucket is really draining the bucket simultaneously. Its counterintuitive. As the government increases spending, private capital formation leaks out of the bucket [private sector capital formation being the main driver of private sector employment growth]. Hence you try and try to fill the bucket but it remains below the brim.

Once you stop filling the bucket with government deficit spending, you now must pay for the deficit spending. Hence Keynesians raise taxes. The taxes then create another leak in the bucket. Hence the bucket goes right back to the level that you began with before you started this wasted exercise.

Economics or politics?

Keynesians can never stop spending. This is the point of metamorphosis where an economic proposition becomes a political proposition. You see, each time you attempt to fill the bucket with deficit government spending, the size and scope of government increases. That is, a residual amount of government is added, an additional increment of size and scope of government, an entitlement here a rent seeker there, is added to the existing layers. A political constituency layer is added to the great pyramid scheme of political constituency building through: other people (politico) spending other peoples' money (tax payer) on other people (recipient class). -Or- Maybe its the fourth category of spending and a fifth category of spending: other people, borrowing other peoples' money, and spending borrowed money on other people. (2)


Paying back the deficit spending?

Wait! It gets better. When Keynesians raise taxes to pay for the deficit spending, part of the tax is to pay for the new permanent incremental layer of government aka political constituency enhanced or increased. That is, a permo-tax for the new permo-layer of political constituency.

Then as any good chocolate sundae of spend and tax/tax and spend would have it, a cherry must be added atop. The new tax level merely allows politicos additional revenue to spend. Rather than paying back the deficit spending, politicos through the mechanism of government merely spend more on government size and scope aka political constituency building.


Keynesians should wear the bucket over their political constituency building heads.


(1) http://ourdinnertable.wordpress.com/2011/03/14/keynesian-stimulus-in-one-sentence/

(2)http://www.youtube.com/watch?v=5RDMdc5r5z8

Wisconsin is coming to a state capital near you!

Wisconsin. Ah, a picture of Wisconsin's state capital building in more tranquil times.


You might ask yourself: how does a nice monopoly such as state government go bankrupt? What do unionized state employees have to do with the bankruptcy of a nice monopoly such as state government?


State government as a monopoly, and monopoly pricing


Governments are monopolies over the services they render. Monopoly theory is vast and undetermined. However from monopoly theory we can surely state that: price can/could/may be influenced by a monopoly.


Conventional wisdom goes one step further and assumes that monopolies controlling prices is related to wages paid. That is, if a monopoly can influence price then surely a monopoly can influence input costs including wages paid.


This is where conventional wisdom comes to the fork in the road and creates a conventional fallacy.


Monopolies and unionized labor


Its intuitive to think that monopolies influence price and hence influence input costs including labor costs. That a monopoly would never deal with a unionized work force. That the monopoly would depress wages. Wrong. Its counter intuitive.


The classic example was the once telephone monopoly Atlantic Telephone and Telegraph (AT&T). Did AT&T have a well compensated work force? Yes. Were AT&T employees unionized? Yes.




Why do monopolies hire monopolies?


Why would one monopoly hire another monopoly i.e. unionize work force. Because the monopoly has pricing power in that: price can/could/may be influenced by a monopoly. Why bother fighting it out at the collective bargaining table when the monopoly can merely pass the cost of labor onto consumers through price.




What if a monopoly or quasi monopoly is regulated as a public utility?


If price increases are regulated by a public utility commission i.e. price controls, the monopoly will act as a "non profit" regarding compensation as compensation figures may well be a matter of public record. That compensation will be paid under a veil.


How so? You see, non profits such as rural electric co-op's know that their members (end users) will be very unhappy if the price paid for wages is high. The co-op members will think the co-op is functioning to enhance itself rather than functioning as a collective scheme to secure rural electric power. Hence the rural electric co-op keeps wages reasonable and skews compensation to benefits and retirement. They can then advertise to their co-op members that wages are very reasonable when in fact total compensation [wages, benefits, and retirement] is much, much, much higher than the pure "wage" they advertise to their co-op members.




Government Monopoly and collective bargaining schemes




One must examine the "both sides of the table" phenomena when considering collective bargaining regarding a government monopoly. What is the "both sides of the table" phenomena?


(1) if bureaucrat X is negotiating with collective bargaining public sector union Y, exactly what motivation does bureaucrat X have regarding negotiations? The problem goes back to Milton Friedman's fourth category of spending: other people (bureaucrat X), spending other people's money (tax payers money), on other people (recipient class which in this case is a public sector union). Therefore the bureaucrat has no motivation because he/she is spending other people's money not his/her own money,


(2) public sector unions have found that they can collect dues through members and funnel dues into political action funds. They then fund the campaigns of politicos that promise them [public sector unions] more compensation. They not only fund certain politicos but actively encourage their union members to campaign for the politico. Once they get their particular candidate elected they have now secured a politico who over sees bureaucrat X.



Wisconsin is coming to a state capital near you!


We know monopolies will hire monopolies. We know that if "wage" is a matter of public record compensation will be skewed toward benefits and retirement compensation. We also know that collective unionized bargaining in the public sector suffers from the "both sides of the table" phenomena. Finally we know that the monopoly through pricing power influence will pass on increased labor compensation costs to the end user. Finally, in the realm of government monopoly price is tax and tax is increased to the end user which is the tax payer aka YOU.


Therefore, unionized collective bargaining in the public sector is a collective bargaining scheme against the tax payer. The collective bargaining scheme has no incentive to reduce costs as cost can be merely passed onto the end user. Moreover, the collective bargaining scheme, in a government monopoly setting, actually has incentives to pass on larger and larger price increases to the end user in the form of price influence and in this case tax increases. Lastly, the end user, the tax payer aka YOU are not represented at the negotiating table due to the "both sides of the table" phenomena.




Update 02/27/2011: The Political Economy of Government Employee Unions - Thomas DiLorenzo
http://www.lewrockwell.com/dilorenzo/dilorenzo203.html
Update 03/01/2011: Katherine Kersten: The good life (for unions especially).
http://www.startribune.com/opinion/commentary/116956308.html
Update 03/02/2011: Dodging the Pension Disaster - Josh Barro
http://www.nationalaffairs.com/publications/page/dodging-the-pension-disaster-preview

ObamaCare: consequences, unintended consequences and hidden consequences

ObamaCare, the unread, un-debated , and poorly crafted legislation has immediately yielded consequences.

We need to examine the immediate consequences, immediate unintended consequences, and the continuation of consequences and unintended consequences. Once we examine the self evident consequences we can then seek hidden consequences.

What kind of consequences and unintended consequences have already occurred and what hidden consequences can one expect as time passes?

News stories will surely rage on as the consequences and unintended consequences continue to mount. Over time the unintended consequences will begin interacting with one another creating yet a new set of unintended consequences. Then all the unintended consequences will begin to cascade and create a seemingly insurmountable economic mess.

However, hidden consequences need examined as well.


Why are there going to be Unintended Economic Consequences?

The ObamaCare legislation fails a series of important economic axioms and fails a series of important insurance axioms. The major axioms violated by ObamaCare is that the plan is the world's most expensive and complicated solution that does not solve the problem. ObamaCare is a scheme to allocate scarce resources to competing ends through price fixing which merely causes non-price rationing (time/quality). (1) (2) Also, the risk management matrix of insurance being applied to low frequency/high severity risk is totally mismanaged. (3)

The correct solution would have yielded the simplest and least expensive solution that actually solves the problem. The correct solution would have allocated scarce resources to competing ends through a free market based on price as the only logical rationing agent. The correct solution would have applied insurance to its most efficient area which is low frequency and high severity risks.

It should be clear to all that violating economic and insurance axioms sets a stage for a train wreck. The violations listed above are a mere sampling of axioms broken. The list of economic and insurance errors within the legislation creates a laundry list. Violating sound economic and insurance principles yields unpleasant unintended consequences.

Put aside economic and insurance axioms for a moment and purely look at ObamaCare from a consumer purchase perspective: (a) the consumer has been warned for years to "read their insurance policy" before purchasing the policy, (b) understand your insurance before you purchase the insurance, (c) ask questions before you purchase insurance, (d) fit the insurance to your particular need for insurance. ObamaCare violates every basic consumer purchasing guideline.

What are the immediate Consequences and Unintended Consequences?

Mr. Obama hadn't put his pen down after signing the poorly crafted legislation into law when the consequences and unintended consequences began. Here is a short sampling:


(a) not all components of the plan where scored by the Congressional Budget Office (CBO) and hence any deficit savings referred to were immediately lost when additional components were added and a $260 billion dollar deficit increase appeared over the next 10 years. Hence an already widening deficit ending as national debt puts the U.S. in a more precarious financial situation, (4) (5) (6)


(b) the medicare physician fee schedule change aka "Doc Fix" was not added into the CBO calculation by design. Hence add another $371 billion to the deficit over the next 10 years. More debt to an already out of control deficit and consequently national debt, (7)


(c) authorizes the hiring of 16,000 additional IRS agents to enforce the rules yet no enforcement mechanism was written into the legislation. We then have 16,000 more public employees with no mechanism for enforcement, (8) (9) (10)


(d) AT&T, 3M, Deere & Co., Caterpillar Inc., AK Steel, Valero Energy and Verizon by law had to immediately restate earnings to reflect the present value of their long term health liabilities as well as the higher taxes. The total amount is estimated at $14 billion once all companies write down earnings. Companies had been incentivized through the tax code to provide benefits to retired employees. That tax incentive has been removed. Retired employees with health-care benefits and drug benefits provided by their x-employers will likely be cut loose by smaller employers and hence forced to purchase such coverage themselves. (11) (12) (13)

(e) your freedom to choose different health care plans has been extremely curtailed and mandated coverage elements must be included in your plan regardless of your needs. The most ridiculous being that single men and women who can't have children must still have pediatric services included in their plan and pay the premium to fund the benefit. Further, the reduction in available deductibles, the mandated inclusion of preventative benefits and the many mandated coverages will force insurance cost to rise significantly, (14)


(f) an additional 2.3% tax is imposed on medical device makers and an annual tax of 2.3 billion will be applied to drug makers. When you increase the tax on something you get less of that item. Medical devices that could save your life or a drug that could save your life will now be curtailed,
(15) (16)

(g) the mandate of requiring everyone to buy health insurance was immediately challenged by a series of state attorney generals as unconstitutional. (17) The U.S. Constitution has no clause requiring a citizen to buy any particular product. Will you be required to by a vehicle from GMC next?


Will there be more Unintended Consequences?

ObamaCare's 3000 pages are basically an outline. The legislation authorizes over 100 new government departments that will then write the rules and regulations. That is to say, ObamaCare is an attempt to centrally plan a once free market through rules and regulations. Planned economies always fail as they attempt to plan what were once millions of daily individual decisions made in each individuals self interest. Each individual made decisions based on the least expensive simplest solution that actually solved their individual problem.


The mountain of rules and regulations that are about to appear will attempt to duplicate the workings of a free market. The "control" of the individual and his/her individual decisions that existed with in a free market is now replaced with "control" being mandated and assumed by a central authority aka government. The attempted central planning is no different than the former Soviet Unions attempts to centrally plan. That somehow the central government has "special knowledge" that you and other individuals do not possess and hence this special knowledge replaces the individuals self interest based decisions. Centrally planned economies result in vast shortages in many areas while creating mass surpluses in other areas.

Hidden Consequences

Hidden consequences are those economic undercurrents, those economic trends and economic phenomena acting in the background.

There lurks plenty of hidden economic consequences. However for this discussion think of these three factors acting in the economic shadows:

(1) over 100 new federal government departments created to handle a command and control market for health-care and health insurance,

(2) 16,000 new IRS agents to enforce government mandates,

(3) the unionization of the personnel in (1) and (2) above.


Consider this economic phenomena: the tax increases added to medical device manufacturers and drug makes will be passed onto consumers. Its an economic fact that input costs, and tax is an input cost, is always reflected in the final price of the producer. Hence the consumer of a product or service ultimately pays any tax placed on the producer.

Now consider this economic phenomena as described by William Graham Sumner is his 1883 essay The Forgotten Man:


"Sometimes people go on to notice the effects of trades-unionism on the employers, but although employers are constantly vexed by it, it is seen that they soon count it into the risks of their business and settle down to it philosophically. Sometimes people go further then and see that, if the employer adds the trades union and strike risk to the other risks, he submits to it because he has passed it along upon the public and that the public wealth is diminished by trades-unionism, which is undoubtedly the case. " (18)

What Sumner is explaining is an economic phenomena in the private sector. Unionization of the public sector had not occurred in 1883. However, just like taxes being assessed to a producer and ultimately transferred to the consumer, the cost of unionized labor is transferred from the producer to the consumer.

Now think about the difference between the private sector producer negotiating with unionized labor and the public sector negotiating with unionized labor. What incentive exists for the private sector producer to negotiate with unions vs. the incentive that exists for the public sector to negotiate with unions? That is, do the incentives differ between private and public entities when negotiating with unions?

William Graham Sumner and Milton Friedman


If we take Sumner's theory that the cost of unions to the producer is consequently a cost passed onto the consumer, then the cost of unions in the public sector is passed onto the tax payer. Then is there a difference in the magnitude of the "transfer of cost" of union labor in the private and public sectors?



The magnitude of the transfer of cost of union labor in the private and public sectors is related to Milton Friedman's four categories of spending. In other words, incentive exists in the private sector to negotiate for the best price for union labor. In the public sector there is less incentive to negotiate for the best price therefore causing a greater transfer of cost. The less the incentive to negotiate with union demands surely affects the magnitude of the transfer cost of union labor. Why is there less incentive in the public sector?

The incentive level between private and public sector negotiations with union labor costs lies within Milton Friedman's four ways that money is spent:

The first and most common way in the private sector is people spending their own money on themselves. In this case, the buyer is interested in both quality (the best product or service that he can afford) and value (getting it at the best price) because he is both the producer of the wealth being spent and the consumer of the good or service being procured.

The second way is when people spend their own money on others (such as gifts). Here they are still concerned about value (it's their money), but less concerned about service quality as they are not the consumer.

The third way is spending other people's money on yourself. Think of the rich man's girlfriend who buys herself the nicest dresses in the store on his credit card without even looking at the tag. She wants quality, but value is irrelevant since she sacrifices nothing.

The fourth way is when people spend other people's money on other people. In this case, the buyer has no rational interest in either value or quality. Government always and necessarily spends money in this fourth way. This guarantees inefficient public spending because the spenders have no vested interest in efficiently allocating those funds.

Public sector money falls in the fourth way of spending. Bureaucrats spend your tax money when negotiating with federal workers that are almost all unionized. In other words, other people are spending other people's money on other people. Since no rational interest exists in either value or quality, we find that the union employees within government have negotiated large salary, benefit, and pension packages.

Hence Sumner and Friedman are correct. Much of their correctness lies in the fact that today public sector employees total compensation far exceeds that of private sector employees. (20)That is, over time the fourth category of spending has benefited public sector unions and the enormous cost has been passed onto the consumer which is the tax payer.

Therefore we have a hidden economic phenomena at work within ObamaCare. Those public sector employees charged with overseeing the centrally planned program known as ObamaCare will create a dynamic, continuous, shadow cost driver. The unions representing these public sector employees will push as hard as ever for compensation enhancements. The compensation enhancements will be approved just as they have in the past due in part to Friedman's fourth category of spending. And as Sumner explained those compensation enhancements will be passed onto the consumer (taxpayer).




(1)http://www.washingtonpost.com/wp-dyn/content/article/2010/03/14/AR2010031401389.html

(2)http://online.wsj.com/article/SB10001424052702304871704575159940357375132.html

(3)http://thelastembassy.blogspot.com/2010/03/socialized-medicine-scheme-trickle-up.html

(4)http://www.gop.com/index.php/comms/comments/obamacare_quick_facts/

(5) http://www.investors.com/NewsAndAnalysis/Article.aspx?id=527363

(6)http://article.nationalreview.com/429092/an-off-budget-office/thomas-sowell

(7) http://www.gop.com/index.php/comms/comments/obamacare_quick_facts/

(8) http://thehill.com/blogs/on-the-money/domestic-taxes/87697-republicans-assail-irs-provision-in-health-care-bill-

(9)http://www.newsmax.com/InsideCover/Obamacare-Democrats-healthcare-IRS/2010/03/18/id/353209

(10)http://online.wsj.com/article/SB10001424052702304370304575152181030785348.html

(11) http://online.wsj.com/article/SB10001424052748704100604575146002445136066.html

(12)http://www.smartmoney.com/investing/economy/congress-hates-capitalism-it-seems/

(13) http://online.wsj.com/article/SB10001424052748704100604575145981713658608.html

(14) http://www.investors.com/NewsAndAnalysis/Article.aspx?id=528137

(15) http://www.smartmoney.com/investing/economy/healthcare-change-will-leave-you-with-less-change/

(16)http://farrmiller.com/blog/?p=323

(17)http://www.ameripac.org/original-articles/states-wage-constitutional-obamacare-legal-war/

(18) http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=1654&layout=html#chapter_108194

(19)http://newsgroups.derkeiler.com/Archive/Soc/soc.history.medieval/2006-05/msg00040.html

(20)http://mjperry.blogspot.com/2010/03/two-americas-public-vs-private-sector.html