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In Defense of Markets (PT 2)
Posted by: Jon Henke on Thursday, September 22, 2005

Brendan Nyhan takes a couple odd shots at free markets...
After their free market dreams didn't quite work out in post-Saddam Iraq, conservatives are turning to the Gulf as the newest laboratory for half-baked Heritage Foundation policy proposals.
I'm not sure how he means "their free market dreams didn't quite work out in Iraq". To be sure, we weren't able to privatize industries quite as much as we might have liked. But the changes that were implemented were—as noted here previously—quite successful. "[A]fter declining by 12% in 2001, 21% in 2002, and 22% in 2003 (part of which was due to the war) ... Iraq's economy grew in 2004. In fact, it grew quite a bit. The IMF estimated "Iraq's economic growth for 2004 will surpass 50 percent"." And while oil sales—which accounts for 2/3rds of the Iraqi economy—have declined since the onset of the war, Iraq's economy is still projected to grow by 4% this year. That's not strong growth, but the Iraqi economy had been consistently declining in size since the 1970s, and the insurgency is certainly a compromising factor.

Meanwhile, back to the Gulf. Nyhan calls the proposals "half-baked Heritage Foundation policy proposals", but doesn't actually mention what those proposals are. Or levy any actual criticism. We are, I suppose, left to imagine that these Heritage proposals are kooky, left-field policy ideas.

Well, here are the proposals. There's...

  • ...the "Gulf Opportunity Zone", which proposes cutting the tax and regulatory barriers that disincentivize business investment in the region. Such a move "will spur investors to take business risk". That's not controversial...that's econ 101.

  • ...the "Emergency Spending" proposal, which suggests we "pay for Katrina’s cleanup by redirecting existing spending". That's the kind of proposal that John Kerry would have gotten behind just a couple years ago. During the 90s, we had PAYGO, which compelled Congress to "require that new direct spending and revenue legislation be deficit neutral". A year or so ago, John Kerry was pretty hot on that idea, too. Today, though, it's "half-baked"?

  • ...the "Housing Relief" proposal, which proposed "a rent voucher/certificate program". Half-baked? Kevin Drum called it " a terrific idea, and one that should be supportable on a bipartisan basis". Atrios (!) calls it "a good idea", though he thinks it will "never actually make it into a piece of legislation". Well, not if Democratic pundits insist on calling basic free-market ideas "half-baked Heritage Foundation policy proposals".

...etc. If these ideas are now considered "half-baked", it only goes to show how far we've drifted from the very basic free market ideas and ideals that have long distinguished the US economy.

Finally, Nyhan is skeptical of Congressman Jindal's claim that "We now have a once-in-a-lifetime opportunity to let the free market policies that we know will work for New Orleans flourish". Nyhan calls that claim...
a perfect expression of the faith-based economic policy that has taken over the Republican Party.
But what's "faith-based" about the notion that free market policies work? I mean, on an empirical basis, we have quite a lot of history to demonstrate that free markets are more efficient than the alternative. And what is it about protection of private property and voluntary exchange that's unlikely to work?

The market may not produce the results Nyhan wants, but it will certainly be more efficient than the reimplentation of the Davis-Bacon Act, (more) massive federal subsidies and (more) barriers to trade.


And while we're at it, Jesse Taylor from Pandagon makes some problematic criticisms, too. (though, he gets points for his amusing nickname for John Stossel: "El Mustachio, the Lucha Libre of Lazy Libertarianism")
If all local projects, essential and whimsical, were paid for with local taxes, competition among states and cities would force them to become more efficient.
Define "local". New Orleans is one of the largest shipping ports in the world. The entire nation's economy depends in large part on that city. As much as they'd like it, you can't ship things by boat from Nebraska. ... All that's going to happen is that cities like New Orleans, economically vital but disturbingly impoverished, won't have enough money to worry about efficiency.
Jesse seems to believe that we need New Orleans so much that we can pay billions through the government to prop it up, but there's no way that New Orleans could pay to sustain simply passing along the costs to users.

That's an odd argument to make.

It's odd, because it seems to assume that, if the government doesn't subsidize New Orleans, the public—which, you recall "depends in large part on that city"—won't be willing to pay for the services of the port they found so valuable.

What if we said the same thing about Chicago O'Hare airport? It is "one of the largest shipping [air]ports in the world. The entire nation's economy depends in large part on that [airport]. As much as they'd like it, you can't ship things by boat [to] Nebraska. ... All that's going to happen is that [airports like O'Hare], economically vital but disturbingly impoverished, won't have enough money to worry about efficiency."

But is that the case? Well, no. "The Chicago Airport System is fully self-supporting and receives no local taxpayers dollars".

Certainly, if the federal government stopped subsidizing New Orleans, there would be an immediate incentive for some to move away from the area, but that would be a remarkably good thing for the people who stayed: less labor competition means higher wages.

Ultimately, as Stossel contends, a lack of federal subsidies will force areas to internalize the costs of production into the prices of goods and services. As things stand now—and Jesse notes that there is "not a single spot in America that doesn't have potentially destructive natural disasters"—we're playing by the "If You're Paying, I'll Have Top Sirloin" rules Russel Roberts noted back in 1995:


Note that, despite all that additional spending, the only group coming out ahead on the deal is the resteranteur, who set up the strange rules in the first place.

UPDATE: As Sammler of Stone City notes, Mark Kleiman seems to agree, writing "I like the idea of giving money to individuals. So should anyone who believes in limited government. It's fast, it's efficient, and it's fair. But I'll bet any amount of money that's not what happens, since it would deprive those currently in office of the chance to hand out goodies on a discretionary basis and thus to accumulate chits in the favor bank." Further, he writes that "making the city government a protectorate" isn't "within the authority the Federal government has, or should have."

[Cross-posted at Chequer Board]
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Previous Comments to this Post 

I am very exercised on this issue, to the point of making common cause with Mark Kleiman. The truggle over whether to rebuild New Orleans in place, or whether to let those most directly involved choose where they wish to live and work, should gather advocates of freedom, of moral economic policy, and of increased opportunity for the poor in one camp.

On the other side, as Mr. Kleiman has pointed out, we are bound to see government functionaries fight for their own power: "But I’ll bet any amount of money that’s not what happens, since it would deprive those currently in office of the chance to hand out goodies on a discretionary basis and thus to accumulate chits in the favor bank."

A little more on the moral case, here.
Written By: sammler
conservatives are turning to the Gulf as the newest laboratory for half-baked Heritage Foundation policy proposals

Yes, because rebuilding it the same way will work just fine

There must be a tremendous disconnect for certain people. They see a New Orleans or a Detroit which are hellholes full of dreadful poverty and crime despite being the laboratory for liberal policies for DECADES and don’t think that maybe something else should be tried? That maybe the Heritage Foundation can offer more than the welfare state? They don’t look at New York City and see that the city was shit until Republican leadership came on the scene in Giuliani and Pataki?

"Reality-based" my ass.
Written By: shark
URL: http://
There must be a tremendous disconnect for certain people.
The disconnect springs from the fact that understanding of economics by the left is about at the stage where people understood physics in the 1500-1600s - namely , what little they think they know is wrong.

Those on the right have advanced a bit, but not are nearly where they should be. They’re about at the stage of people who thought they understood Newton, but still believed that a rocket ship wouldn’t work in space because it needs something to push against.

Neither side understands basic economics with any clarity at all, and that continuously leads to nonsensical debates such as we’re having over Katrina reconstruction. The debaters on the right sort of understand the right thing to do, but their hazy grasp of economics prevents them from debating the issue as effectively as they should. The debaters on the left are bringing out the equivalent of "heavy objects fall faster than light ones" justifications for their positions, and then simply deny the evidence if anyone points out how their position is based on stuff that’s been contradicted with numerous real-world experiments.

If I had a billion dollars to spend in a trust-fund foundation, I think I would set its mission as teaching the fundamentals of free market economics at the high school level. That would have more impact on freedom in the long term than any other project I can imagine. Bill Gates, are you listening?
Written By: Billy Hollis
URL: http://
BILLY, I could not agree more. Most important would be to couple a few good econ. courses with all journalism classes. That way when a politician says something stupid like how they are going to create jobs. Or cap prices. The reporter would know enough to challenge them.
Written By: Kyle N
URL: http://
These are "faith-based" proposals because the term "faith-based" is an easy ad hominem attack on something liberals really dislike: believing a non-governmental higher power. Christians are loonies only slightly removed from the fundamentalists who flew into towers, don’tcha know? Only Christians are even worse, because we tend to vote Republican! Horrors!
America won’t be America again until we are all atheists who consistently vote for higher taxes and more entitlements for designated victim groups.
Written By: Nathan
Most important would be to couple a few good econ. courses with all journalism classes.
Something tells me you would enjoy reading a rant I did on that subject a while back. It’s here.
Written By: Billy Hollis
URL: http://
"New Orleans is one of the largest shipping ports in the world. The entire nation’s economy depends in large part on that city."

Mr. Taylor is conflating the port with the city. As Joel Garreau wrote recently in the WaPo: "Throughout the world, you see an increasing distinction between ’port’ and ’city.’ As long as a port needed stevedores and recreational areas for sailors, cities like New Orleans—or Baltimore or Rotterdam—thrived. Today, however, the measure of a port is how quickly it can load or unload a ship and return it to sea. That process is measured in hours. It is the product of extremely sophisticated automation, which requires some very skilled people but does not create remotely enough jobs to support a city of half a million or so. ...[D]istinct from the city are the region’s ports, lining 172 miles of both banks of the Mississippi, as well as points on the Gulf... The dazzling Offshore Oil Port, for example, employs only about 100 people. Even the specialized Port of New Orleans, which handles things like coffee, steel and cruise boats, only needs 2,500 people on an average day"

We don’t need the city of New Orelans, we just need the ports of New Orleans.
Written By: Dan
URL: http://
After their free market dreams didn’t quite work out in post-Saddam Iraq,
Nyhan is another example of a young liberal short on experience and knowledge and long on ego. He seems to think he’s got it all figured out and engages in one of the lamest liberal pathologies which is to declare any conservative policy a failure if it achieves anything less than immediate 100% efficacy. Those expectations stand in stark contrast to the inability of liberals to acknowledge the failure of economic central planning and various government sponsored social engineering programs. We have had almost 70 years of big government programs and there is clear evidence that almost none of them achieve their stated goals and many actually create bigger problems resulting from those proverbial "unintended consequences."

I am not that familiar with the actual economic strategies being employed in Iraq. However, one doesn’t need to know what they are to know that the reconstruction of Iraq began a little over two years ago and the terrorist insurgency has hindered much of the reconstruction effort to date. I don’t believe it is rational or fair to declare policies a failure so soon after they were implemented. However, Nyhan and his liberal fellow travelers refuse to acknowledge that 40 years of Great Society anti-poverty programs led to the predicament of many, if not most, of the 50,000 poor people who lacked the basic transportation and wherewithal to evacuate New Orleans. Furthermore, it is evidently clear that the New Deal did nothing but make the economy worse and prolonged the Depression. How about those price controls in the 1970’s?

Nyhan isn’t alone however. Just go back through the last couple of years and look at liberal/Democrat proposals to every social and economic problem we face. Kerry, Clinton, Gore, Krugman etc. all advocate raising taxes, price controls on pharmaceuticals (in the context prescription drug benefit), single payer health care system, etc. Also, the Democrat controlled legislature in Hawaii just passed a bill imposing price controls over wholesale gasoline sales in that state (and yes I know the Governor is Republican but it wasn’t her policy and just because she is too craven a politician to veto the bill doesn’t affect my point). Brilliant.

So, according to Nyhan, two years is sufficient time to declare market based policies in Iraq a failure, but 70 years worth of uncontradicted evidence of failure of governmental intervention in the economy doesn’t mean anything. It is politically correct to talk nice and avoid personal criticism of your opponents. However, liberals consistently hold themselves out as smarter than conservatives yet they advocate policies that clearly don’t work. I think it is fair to say that after a group of people make stupid proposals for years and years that they just might not be that bright themselves.
Written By: Anonymous
Please, please, please, don’t use "disincentive" as a verb.

I know it’s not technically "wrong", but, God, is it ugly.
Written By: Sigivald
URL: http://
D’oh! My bad. It actually is wrong. I meant to write "disincentivize". I’ll change that asap.
Written By: Jon Henke
"As Sammler of Stone City notes, Mark Kleiman seems to agree, writing "I like the idea of giving money to individuals. So should anyone who believes in limited government. It’s fast, it’s efficient, and it’s fair."
That is true only if, after you’ve given an individual money, they can’t come back and demand more simply because they’ve spent the first allocation on champagne and have nothing left for foie gras, while their children have no shoes.

Expectations need a reset.

Written By: hershblogger
Bill O’Reilly has spent much of the past week bashing "big oil". He is looking for the sole individual who determines the price of gasoline each day.

It never ceases to amaze me how often prominent figures imagine market forces do not apply to this industry or that.

His is a particularly hot wind.
Written By: Roger Snowden

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