What would Adam Smith do?

My sophomore year I read Adam Smith's Wealth of Nations and have never been the same since. It remains #1 on the list of my favorite books. I wondered what would Adam Smith say with regard to the growing slice of the economic pie spent by the government on social programs. This was answered when I read the excellent analysis by Profs. Jody Lipford and Jerry Slice of Presbyterian College. An excerpt follows below.

The Role of Government in Modern U.S. Society: What Would Adam Smith Say?
December 10, 2007
Jody W. Lipford, Jerry Slice
Washington Examiner (excerpt), Orange County Register

The role of government in the United States and other western democracies has expanded dramatically over the last century. Compared to its pre-twentieth century functions, government has taken on new and vast roles, including old-age pensions, government-provided health care, and a host of other programs that typically comprise a modern welfare state.

What would Adam Smith, the eighteenth-century Scottish moral philosopher, say about the expanded role of our modern government? For Smith, the ideal functions of government were few and well defined. In his classic work, An Inquiry into the Nature and Causes of the Wealth of Nations, written in 1776, Smith outlined three important government functions: national defense, administration of justice (law and order), and the provision of certain public goods (e.g., transportation infrastructure and basic and applied education). Clearly, government has grown beyond the bounds of these simple duties.

Some would argue that government has expanded because of necessity, that modern society requires redistribution of wealth for stability and regulation to constrain the excesses of an unfettered market. Many believe it is unrealistic for government in the twenty-first century to adhere to the limited roles envisioned by Smith. We have our doubts about these arguments. However, we raise a different but related question: if Smith is right that national defense, administration of justice, and public goods are essential to a free and prosperous society, might government’s expanded roles one day crowd out its traditional and essential functions to that society’s detriment?

When we examine evidence on this question, the findings are striking. We first categorize national government expenditures according to whether or not Smith would support them. Under the category Smith would support, we include expenditures on national defense, administration of justice, transportation, and education. We consider social expenditures on Social Security, Medicare, health, income security, and labor and social services beyond the bounds that Smith would support. Next, we examine trends in these expenditures.

Here are some of our findings:

• In 1962, expenditures that Smith advocated accounted for 54.4 percent of the U.S. budget. Yet, by 2005, this percentage had fallen to 27.6 percent, with the Congressional Budget Office projecting this percentage to fall to 22.0 percent by 2011.
  
  
• The trend for the social expenditure category runs in the opposite direction. In 1962, social expenditures accounted for only 23.4 percent of the U.S. budget, but by 2005, they accounted for 58.1 percent, and they are expected to account for 63.3 percent of the budget by 2011.
  
  
• When we examine state and local government expenditures, we find the same trends, though they are less pronounced than their federal counterparts. The trends show no sign of reversal for either level of government.

Our analysis shows that social spending is rapidly replacing expenditures on traditional government functions advocated by Smith. As a result, governments will find it increasingly difficult to provide and maintain traditional services without significant tax increases or larger deficits.

These observations are not lost on federal budgetary experts. The Congressional Budget Office (CBO) documents that the amount and composition of federal spending have “changed dramatically,” and that most of that growth has been in three programs: Social Security, Medicare, and Medicaid. These programs now account for 42 percent of federal expenditures. In total, mandatory programs now account for over half of federal spending. The CBO notes that health expenditures will increase much more than Social Security expenditures in coming years, and that “if past growth rates persist, spending for health care will eventually consume such a large share of the nation’s output that real (inflation-adjusted) spending on other goods will have to decline sharply.”

The consequences are clear. Continued higher rates of social spending will require higher taxes, larger deficits, or dramatic cuts in other government programs, such as those deemed essential by Smith. These, in turn, may cause “slow private capital formation, lower economic growth, and in the extreme...a sustained economic contraction,” according to the CBO. These outcomes are the opposite of Smith’s model for economic prosperity.

Despite these dire predictions and their resulting consequences, the political will for change is weak. And the longer these trends continue, the more difficult it will be politically to change them. Perhaps it is time for the American public and its elected officials to give more heed to the wise words of a Scottish philosopher who wrote some 230 years ago.

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Jody W. Lipford is a professor of economics at Presbyterian College in Clinton, S.C.

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Jerry Slice is a professors of economics at Presbyterian College in Clinton, S.C.

Go on with your bad self Montana

This is from the Motley Fool's blog.

http://caps.fool.com/blogs/viewpost.aspx?bpid=191675&t=01007820309211448063

(Personal note: the Interstate Commerce clause was the justification for outlawing segregation in public facilities in the south - so I have mixed feelings about its use.)

I HEART Montana!

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MAY 08, 2009 – COMMENTS (7) | RELATED TICKERS: MON , TAN , A

I don't have a lot of time, so will make this quick.

Excerpts from here. Commentary in bold.

The state of Montana has decided to pick a fight with the Federal Government. The Montana State Legislature recently passed legislation, which was signed into law by the Democratic Govenor Brian Schweitzer, which exempts citizens of Montana from federal background check requirements if a gun was made in Montana, sold to a resident of Montana, and intended to remain within Montana.

The idea behind this is that if the gun remains within the state then the commerce clause of the U.S. constitution does not apply and the Federal Government would not be allowed to regulate the sale or distribution of these firearms. This is an interesting concept, and is sure to generate a fight. This one could get really ugly, really fast.

I'm sorry what's that US gov't? You say that states rights are dead? I don't f^&king think so!

Montana is claiming that this is less of a gun control issue and more of a state’s rights issue.  That may be the case, but I can’t think of a quicker way to generate a federal fight that is on the express lane to the Supreme Court than something like the sale of guns.  For once it appears that legislators actually had some logical thought processes when they came up with this plan.  Great work Montana.  I also find it interesting that the Governor of Montana is a democrat and he is supporting this legislation on the basis that the states should be free of such federal conrol. 

States should be free of such federal control. The interstate commerce clause is possibly the most abused clause in the entire Constitution, and it's time to return to what our founders intended for the states to be, and that's individual states with their own laws free from the powers of a central gov't.

To put it another way, the federal gov't and the supreme court have ruled many times in the past that all the states were going to be whitewashed and made to follow estentially the same laws (federal), and Montana has just said "um...screw that I think we are going to be RED instead of white."

Not surprising from the state which was first to remove federally imposed speed limits even though the gov't threatened to remove interstate funding....(lol as if the federal gov't would let the interstates go to ruin...).

I know that similar arguments were made when the issue of Marijuana grown and used (is that the term you would use?) in California does not fall under federal authority because it does not enter the stream of “interstate commerce” which would allow federal regulation.  The argument failed because the Supreme Court stated that pot grown in California was indistinguishable from pot grown outside of California.  The Montana gun manufacturer would get around this requirement by a “Made in Montana” stamp which is clearly place on the gun.

See, and you thought there was no reason that the pot-heads and gun nuts would ever get together! Well...bring on the pot-smoking gun toters cause mama always said "freedom is as freedom does!"

Dare

Someday I believe a change is going to come

It seems that our politicians and their followers always forget the admonition on Santayana that "those who cannot remember the past are condemned to repeat it." This is never more evident from our forgetting that the greatness of America lies in its willingness to benefit from failure. Imagine an industry vital to national defense, with high levels of employment being allowed to fail. No I am not talking about the banks or the automobile industry, I am referring to the horse industry. It was vital to the military, vital to workers and essential for the functioning of the economy. Yet it failed - displaced by innovation and a new product, the automobile. Milton Friedman once said that if we used the same arguments then as we used on Lockheed and Chrysler, that we would still be riding in stagecoaches between Philadelphia and New York. Yet here we are at this time not letting Chrysler (again), General Motors and nineteen big banks fail, although to date we have let 31 smaller banks fail. But what the past has shown us is that failure is good. Yes it is disruptive. Yes it is traumatic. But it is also cleansing. It sends the harshest market signal that change is needed. Failure begets innovation and creativity. From the ashes of the dinosaurs come new products that take advantage of the opportunities created by failure. Instead of resisting change the market economy embraces it. Instead of fearing change, a capitalistic economy welcomes it. Preserving the old by propping it up hinders innovation and growth, stifling the new. Is it any wonder that those economies that have not allowed failure have themselves failed? They condemned themselves to slow growth, low productivity, high unemployment and meaningless make work jobs. The Obama administration and the Bernanke Fed do this country a disservice by propping up failed institutions and in so doing waste the nation's fortune. That disservice is compounded by injecting government control in autos and in banks with more to come in education and health care. Want evidence that government control stifles innovation? Just look to pharmaceuticals where the US is the world's leader in developing new drugs. Countries with government controlled health care do not innovate because it is costly to do the R&D necessary to bring those drugs to market. Look here in the US at what drugs are available in VA hospitals to see the impact of price controls. Anyone who knows and understands markets knows that as a result, government control makes us worse off. We will be poorer, less healthy and less educated. The government without a profit motive will not ruthlessly produce the products that people demand at minimum cost. It will not be motivated to bring products to market that people demand rather it will bring to the market what the government wants us to consume. It will be like the old Soviet Union with underpriced products and overpriced products. There will be products on the shelves that cannot be sold and shelves empty of products that people want. There will be shortages and government made crises. There will be more waste and fraud. There will also be a dirtier environment. There will be a small privileged class and virtually no middle class. Don't believe me. Just look to history and tell me I am wrong. Are you sure this is the change you wanted? 

More Random Thoughts

1. Its interesting that in my News-Sentinel articles, the most comments are generated by articles on global warming or on the flat tax. First, the left attacks me regarding expressing skepticism over global warming. I tell them as I tell my students that "I have no dog in this hunt". Even though one usually can pick sides depending on who is advocating what, I reserved judgement on global warming until I studied the issue, read the literature, looked at the models and pored over the empirical results. I concluded that the global warming scare lacked empirical gravitas. When I wrote about this, it was if I had attacked someone's religious beliefs. Now after answering all those hate emails, I am now convinced that not only has global warming become a religion, it actually has engendered a cult following. Do I hear anyone say "the religious left"? The second issue is the flat tax. I wrote that I did not like the "fair" tax because it was on consumption and is usually a hidden tax. I want the people to know exactly how much of their fortune they are paying to the government. I know that what would happen with a "fair" tax, that you would soon hear "it's not fair to tax the milk going to babies", "its not fair to tax the drugs of the elderly" and a myriad of others. Soon special interest groups would be getting rebates and the game of tax avoidance would be on. What is more simpler than no exemptions and no deductions of any type? If you earn income (anything that can be spent), then it is taxed at 20 percent. If you qualify for subsidies, you get them through those programs and not through the tax code. Imagine, a tax code that just collects revenues and is not used to reward or to punish? What a novel idea! Well the hate emails on this issue come from the right who have invested so much time, energy and effort into the "fair" tax. Again, its as though I have attacked someone's religion.

2. I don't understand the government's position in the Chrysler situation.  At issue is the $6.9 billion that the debt holders are not willing to give up in return for the government's offer of $2.5 billion. Well no wonder! It is a raw deal, giving the government and the labor union - which has junior status  - a superior position than senior debt holders. To top it off, the only suitor, Fiat, will not have to pony up a dime. Truly outrageous, especially since the President has chosen to name names and blame the bond holders, trying to smear them. I can image what the union thugs (yes there are a few of them) will do to the companies and company CEOs holding Chrysler debt. Maybe they can get ACORN to picket their offices and homes. However, what I don't really understand is why is the government simply not paying off the bond holders? Come on, $6.9 billion is just chump change to this administration. Haven't they already dumped that into Chrysler already, promising to spend even more after reorganization when they start producing cars that the government will then try to force us all to buy? Mark my words, this government will move to up the taxes on fossil fuels, mandate even higher milage standards and institute a luxury tax on SUVs and nonfarm pickups. I for one will keep my F-350 pickup. No greenie weenie mini car can tow either my redneck bass boat or my toy hauler travel trailer. If I hitched a mini up to either, I would spin and burn out the tires and would be forced to cast for bass on my concrete driveway or camp where I stow my trailer. No thanks Mr. President.

3. The senate just defeated the administration's bill on mortgage cramdowns, 45-51. Its a miracle. While bankruptcy judges can modify mortgage tems on vacation homes, investor properties and multifamily residences, primary mortgage loans cannot be modified. There is evidence that shows that when vacation homes et al were exempted, their loan rates rose. It was therefore likely that mortgage rates on primary mortgages would also rise as lenders would have to compensate for anticipated additional losses given foreclosure rates. Its hard to imagine in a political world where politicians vent against big banks that such a measure failed to pass. Oh and did you notice that Bank of America, Citibank, Wells Fargo and Morgan Stanley were on the administration's side? Since they are wards of the state with billions of TARP funds keeping them afloat, is it any wonder?

4. Speaking of Chrysler, The administration is stating that the bankruptcy will be quick? Huh? I was on the board of subprime lender, New Century Financial. It took well over a year to finalize the bankruptcy. Now the creditors are suing everyone who received money from New Century trying to recover what they can. Why are the creditors of Chrysler going to be different? The only way that this will be quick is if Obama pays off the creditors or keeps threatening to break their knuckles.

5. Like the bad penny, ethanol keeps turning up. The public has rejected biofuels and the industry is sustaining high losses and is in disarray. True to his anti-market bent, the president has decided that he knows best. Despite being totally discredited, Obama is stepping up his efforts to force this turkey on us. Even though, ethanol is more costly that oil to produce, is less efficient, produces more wear on engines, increased the cost of food worldwide and is not environmentally friendly, the administration wants to ramp up how much ethanol we are forced to use, produce more vehicles that can burn higher levels of the stuff and increase the number of stations that sell the higher level blends. Do I hear, the payoff to corn farmers continues to more important than the rest of the world? Further evidence that politics and political correctness trump everything else, is the dictating of florescent light bulbs. These environmentally unfriendly and simply dangerous bulbs would have otherwise be banned. However, they are being mandated? Would someone kindly explain this one to me?

6. I have few heroes: Milton Friedman, Tom Sowell, John Lewis, and Jack Kemp. Of that group I guess you would think that John Lewis now democrat representative from my home district in Georgia is out of place. Well read David Halberstam's remarkable book "The Children" - one of my top ten favorite books of all time - and John Lewis will be your hero as well. However, this is about Jack Kemp who died on September 2. I remember feeling that he was elected to congress from Buffalo one year after retiring from the NFL only because football had made him a folk hero in upper New York state. Imagine my surprise when he turned out to be my idea what Republicans should be, free market and all inclusive. Jack Kemp loved free markets. He also love all Americans, especially the dispossessed, and would take his ideas into the inner city and argue with the liberals why capitalism is the best vehicle for social change and economic advancement. He strongly favored tax cuts, enterprise zones, and incentives that fostered innovation and rewarded productive economic behavior. I recall the Center for Neighborhood Enterprise's Bob Woodson, one of Kemp's close friends, saying that in this country we have a program rewarding all sorts of destructive behavior but precious few that rewards those poor people who struggle to send their kids to good schools, keep them out of jail, preach abstainism, keep them off drugs and hold them to high standards. Jack Kemp was one of the few Republicans who understood this and tried to do something about it. Although the Republicans are on the right side of the voucher issue which despite of their views pre-election, Obama and his education secretary Duncan favored, precious few Republican politicians are like Jack Kemp. He would take his message directly to the people in the neighborhoods. Jack Kemp would have been in the DC schools the day the congress killed the DC vouchers rather than just bemoaning it in the safe and secure halls of congress. That most blacks have strong conservative values has been well documented. I always marvel that a people so religious would prefer to be in a party that openly mocks and derides the religious to one that openly embraces faith. Yet it is so perhaps in part that few Republican leaders choose to take their message to the inner cities. This, too is a tragedy and remains an opportunity lost.

7. Walter Williams has written on grade inflation (http://www.creators.com/opinion/walter-williams/fraud-in-academia.html). I told my students this semester that I was not going to participate in the new grade scale at UT that further dumbs-down our academic standards. It awards minuses so that an A- counts for 3.7 quality points, a B- is 2.7 and a C- is 1.7. As a result, UT is saying that an A student really is only a B+ student, a B student is now really a C student and a C student is in reality a D student. I then told them that I was astounded that students would not accept mediocrity in most things but the most important one - education. None would want an energetic but mediocre surgeon, pay money to hear a hard working but untalented band, yet wanted mediocrity in the classroom to be rewarded with As. Well not in my class. Although I will admit that my standards have slipped. I have now been at UT long enough to be teaching second generations. What I hear is "Mamma says, where are the outside readings, the extra books, the bi-weekly written reports that she had to suffer through?" Well, dear reader, if I had those same requirements, I would be ridden out of the university on a rail. Imagine, even given my present standards, one MBA class protested my course all the way up to the university ombudsman, complaining that my course requirements "exceeded the norm expected in the MBA program". I responded saying that the students should then be protesting all their other classes. As a result, I will never again teach MBAs. Its not worth the grief.