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Public Education

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Somebody I care much about recently sent me this image. The quote is by John Green, a young author of several books. As much as I care about the person who sent the image to me (and I care a lot), I have to say that this quote is a great example of how statements that appeal to the most basic of our emotions and seem irresistibly right at first sight, are often plagued by fallacies, tend to be fundamentally wrong and could even be dangerous…

  1. The first fallacy is almost too obvious. Can we really say that people with no education are stupid? Mr. Green needs to exercise a bit of prudence here. There are, of course, millions of examples of people who had little or no education but were brilliant, honest and productive…and made history and built entire nations…(Did you know that Benjamin Franklin did not have any formal education?)
  2. But more importantly, Mr. Green builds his case for public education (i.e. government education) by using the perennial argument of the positive externality – but completely forgetting the negative externality associated with it! Let me explain. Let’s assume that people who receive government education are better citizens because of it. They communicate better, understand other people better, drive better, are more productive, etc. Arguably then, people who interact with these educated individuals receive a benefit even if they themselves did not get educated, i.e. they receive a positive externality. One could even make the case that the positive externality has ripple positive effects all over the economy (society). While all of that could be true, we can never forget that providing government education (and producing the positive externality) is not free. The government must tax people to pay for it. And this imposition (taxes are not voluntary) generate a symmetric negative externality. The money paid in taxes could have been used for other (perhaps equally or even more important) activities and everybody who those activities would have benefited would never receive those benefits. Is the positive externality bigger than the negative one? Hard to say. The way government education has been decaying in quality in this country, however, I would bet the answer is no.
  3. And even more importantly, Mr. Green says that he “likes to pay taxes for schools” but, in his defense of government education, he seems to be fine denying the same pleasure to others. That is, the pleasure of doing what one likes or considers right and not what others like or consider one should do. If Mr. Green likes to donate money for government education he should be entitled to do it (we will even applaud him and buy more of his books) but if somebody else doesn’t, then he or she should not be forced to do it. That is, unfortunately, what taxes do. They force people to pay for what somebody considers the “right” thing to do.
  4. Lastly, to say that government education exists for the benefit of “the social order” is just an inch short of the North Korean utopia. What is the “social order”? Is it one in which we have government education because some people believe that the positive externality is bigger than the negative one? What about the basic human rights and opinion of those who believe the opposite? Even if you believe with all your heart (as Mr. Green seems to do) that government education produces a large positive externality, does that give you the right to impose that “social order” to others? And that is when this type of quotes become dictatorially dangerous.

What is Economic Freedom?

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The conversation at Mercer University for this new academic year will be centered on economic freedom. This is part of what the university calls the “grand challenge,” a central theme around which the university schedules seminars, conferences, movies, etc, to generate important conversation among students, faculty and staff.

The first thing, of course, is to define economic freedom. Here is where I come in:

Economic freedom is the fundamental right of every person to control his or her own actions and property so long as he or she does not infringe on the economic freedom of others.

It is, as you can see, a simple idea but it has powerful implications. Economic freedom essentially has to do with being able to exercise personal choice over what is yours (your own body/labor and property). In economically free societies, individuals are free to work, produce, consume and invest in any way they please. In economically free societies governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.

And why does economic freedom matter?

It matters first from a moral perspective. Freedom to control what is yours is essential to your pursuit of happiness. It also matters from a utilitarian perspective. It has been largely shown (there are hundreds of papers) that countries in which economic freedom is protected grow faster and reach higher levels of living standards and economic development. Just to mention some comparing cases: the US favored economic freedom, the Soviet Union didn’t; Colombia favored economic freedom, Venezuela didn’t; Chile favored economic freedom, Bolivia didn’t.

What are examples of policies that restrict economic freedom?

Communist and/or socialist regimes have, of course, provided multiple and obvious examples of restrictions to economic freedom. But one can see some of these cases also in democratic countries in the west. Here are some policies that can significantly restrict economic freedom: increasing tax rates, minimum wages, tariffs (which are taxes on foreign goods) and protectionism, buy local or national product campaigns, increasing the provision of public goods (which means increasing the tax burden), bureaucracy, red tape, etc. All of these policies will restrict economic freedom at different levels.

Why is it timely to talk about economic freedom?

Because it is an election year in the US and we have heard some very interesting (scary) proposals from both parties. For example: free college (which obviously means that more taxes are going to be collected to pay for college), a wall between the US and Mexico (which will restrict the free movement of goods and labor), increasing tariffs for Chinese goods and other imports (which will also restrict the free movement of goods and services), etc. By the way, the US used to be among the leading countries in indices of economic freedom. However, the US’ index has been falling over the last few years and now it is only in the top 20.

Can restricted economic freedom be justifiable in some cases?

The typical example is poverty alleviation. While some may recognize that increasing taxes affects economic freedom, they may still argue that if those taxes are used to alleviate poverty, then perhaps lower levels of economic freedom are not such a bad thing. Well, it turns out that they are (again, multiple papers have looked into this). First, is it moral to oblige people to alleviate poverty? After all, taxes are mandatory and, therefore, cannot be considered a “voluntary contribution” to alleviate poverty. But is it moral to forcefully collect money from somebody to give it to somebody else? Second, what are the unintended consequences of collecting taxes to alleviate poverty? Well, companies and individuals may decide that they don’t want to play by those rules and move to other countries where taxes are lower. This will mean that the capacity of the economy for creating goods and services as well as jobs will decrease, and consequently poverty will increase, in the future. The best policy to sustainably alleviate poverty is economic freedom.

 

Keynesian economics Chilean style

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President Bachelet spent a couple of hours yesterday supervising the construction of some of the 25,000 apartments that the Chilean government is building for low income families. The construction of these apartments is part of a program elegantly labeled the “Extraordinary Program of Economic Reactivation and Social Integration,” under which the Chilean government is spending more than US$ 1 billion.

The President emphasized yesterday that the program has two goals: to build housing for low income families and to reactivate the economy creating more than 100 thousand jobs. An that’s the way you do Keynesian economics in Chile.

I have already expressed my concerns about the direction that Chile has been taking in recent years. This program is just another example. Let’s point out the most obvious problems with this initiative.

  1. Where is the money coming from? How did the government get $1 billion to spend in apartments? It all comes from taxes, of course. Essentially, the government is taking forcefully the money from some Chileans to spend on housing for some other Chileans. The fact that the government does spend the money is the crucial Keynesian component. The President will argue that those resources are generating jobs, increasing sales and generating a multiplier effect that helps reactivate the economy. This idea is simply wrong. Remember the “broken window fallacy”? If all you need is spending then brake a window, the owner of the house will have to spend money to fix it and that will increase sales at the local Home Depot and generate a multiplier effect as the owners and employees of Home Depot buy supplies, groceries, etc. Brake enough windows and you will reactivate any economy. If Bachelet wouldn’t have taken $1 billion in taxes from the first group of Chileans, these would have spend it or invest it and that would have generated a similar or even a bigger multiplier effect.
  2. Ok, but ins’t it good to spend on social housing? It is if you are spending your own money. But not so much if your good deed is done with money that belongs to somebody else. Is it moral to steal money from a rich person only to give it to a poor person?

The myth of job security

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The unions are on strike in Bolivia. The protest has to do this time with the announcement that the government is planning on closing a few public companies that have been unprofitable and bankrupt for quite some time now. Not a very surprising outcome. I have argued before that, apart for notable exceptions, public companies in Latin America are typically condemned to fail as soon as they are established.

In an interview with Pagina Siete, the president of the unions claims that the strike is legitimate because the actions of the government attempt against the sacred concept job stability: “our Constitution is being perforated with the new law [which mandates the termination of the public companies mentioned above] because there are no longer guarantees that workers won’t lose their jobs – this threat sets a bad precedent for the entire economy.”

The real bad precedent here is the pervasive concept of “job stability” (estabilidad laboral), which remains highly prevalent in Latin America. Under this philosophy, jobs come to be viewed as “rights” and not as what they really are: temporary opportunities. Let me explain. Jobs are created when countries grow and companies (including public ones) see profitable investment opportunities. But when those opportunities disappear due to the natural progression of business cycles, some of those same companies exit the market and, inevitably, some jobs are destroyed. At the same time, however, as the cycle and technology  change, other investment opportunities arise for other companies and some other jobs are created. That is the natural progression of economic growth. Schumpeter called it “creative destruction.” Notice that the underlying principle of the process is the exact opposite to job stability. A healthy economy grows when companies are free to destroy and create jobs as they search for profitable opportunities.

Insisting on job stability will only stiff the economy and undermine the process of economic growth. For once I hope that the government of Evo Morales carries with the new law. I have strong doubts though. Populist and lefty regimes like Evo’s are typically the prisoners of unions.