Sunday, November 04, 2007

War on Poverty

Anthony Bradley writes,

“There is nothing new under the sun.” The oft-quoted saying from the book of Ecclesiastes is especially true of John Edwards’ well-intentioned but misguided “poverty tour.” Edwards’ proposals to help the poor are nothing more than a remix of Franklin Roosevelt’s “New Deal” and Lyndon Johnson’s “War on Poverty” and, like those previous initiatives, miss the mark.

Government wealth redistribution schemes, larger labor unions, and expanded government social programming have never helped the poor in the past and will continue to fail the truly disadvantaged in the future.

Do you agree? If not these schemes, what is the best strategy for solving the problems of poverty within our country? How about globally?


Robby said...

Allowing charities to easier handle problems would work much better than redistributing money through taxes. Welfare and the minimum wage are likely the largest motivations and causes of poverty in the US.

Free trade is the solution globally. The combination of large subsidies on US farms and lack of free trade is probably a large cause of hunger/poverty in many countries.

Well-intentioned but misguided attempts to fix problems rarely work whenever these attempts create barriers to letting the most efficient solution, the free market, handle societies problems.

Greg said...

Here's another thought.

Westy said...

I guess if I ask, I should also provide my own answer.
The key I do believe is the earned income tax credit. As well, benefits to parents for their children completing high school should be added.

Chairman said...

Tangenting again... The default position of the free market is typically a lazy one. The more I learn, the more I doubt the efficacy of the free market. A key underlying assumption of frictionless markets is required for those espousing free market. Check out Friedman's original NYT article on the role of corporations, which is one of the fundamental free market/corporate philosophy articles. The assumptions there need to be satisfied. Similarly, you need to have an assumption that there is enough competition for innovation to benefit. In many industries, you're closer to monopoly and oligarchy, than true competition. And if there is enough inertia, monopoly will trump innovation.

Even in the U.S., you don't see frictionless markets, and time after time, you see how regulation forces innovation. Gregg Easterbrook (TMQ) offers some very interesting thoughts along these lines in his book, A Moment On The Earth. The free market is not the best answer, unless you have specific conditions. When regulations set the bar high, then innovation does matter, and overall society is improved. Think back to slave labor. Once we got rid of it, we had to find ways to replace production. Same for child labor. One role of government is to find ways to improve the society at large.

Here's a hypothetical question. If the U.S. government made a law that each imported cars must have at least a 50 mpg fuel efficiency by the year 2012 (5 years from now), who do you think that will help more? Toyota/Honda/Nissan Or Chrysler/Ford/GM? History suggests that the Detroit will count it's blessings that it's not subject to these regulations, only to find that the Japanese manufacturers will clear the bar earlier than needed, and dominate market share for years to come. And in all likelihood, by that time, if you set these high bars, you're creating an even stronger Chinese presence, who are just developing their competencies right now.

Businesses treat regulation like the plague, when in fact, it's often an external stimulus for innovation. The free market usually ends up being beneficial for the strongest competitor. It doesn't always end up with what's best for society.


Robby said...

Of course regulation forces the free market to adapt, I don't see how that is an example of the free market failing to be efficient. The large majority of monopolies are in fact created by failed regulation which is why monopolies have such a negative perception. In a truly free market a monopoly wouldn't be one for long if it didn't continue to provide the best service and if a monopoly continues to provide the best service that is not necessarily a bad thing.

It is no surprise that pollution has become such a problem when current laws make it virtually impossible to sue for air and water pollution. Large oil subsidies have definitely contributed to pollution. Eliminate those and you would be surprised just how quickly the free market would produce environmentally friendly solutions.

Chairman said...

I think that the notion of the environment (in the U.S.) being worse today than, say, 100 years ago, is a common one. It is also wrong. Air quality and water quality are the highest they've been since the start of the industrial revolution. Other measures would also suggest that the environment now, overall, is stronger than it was 300 years ago, when Indians were decimating the land.

Monopolies, once they get to become a monopoly, can squash competition. If you examine basic basic strategy (Porter's 5 Forces is a good place to start), barriers to entry can become so huge that competition becomes nonexistent.

The notion of a true free market would be one where there would be no regulation, right? Or are you using a different definition?

Robby said...

I guess I didn't really read your question and assumed mentioning cars was alluding to the free market not being environmentally friendly. In reading your question I see no problem with the Chinese/Japanese creating a cheaper/better car and don't really see what the problem is other than that the government creating these regulations in the first place would seem to be a huge waste of time.

There is no market without private property and property rights. I was assuming this. Problems arise when property rights are not properly defined (air, water, personal etc...) Commenting on what you mentioned before, slavery is an obvious violation of rights while child labor may not be. The problem with children working is if they are either forced or taken advantage of, in these cases it is just a form of slavery and another obvious violation of rights.

Unless monopolies are given special rights by the state how exactly do they squash competition? They undercut prices? Outstanding, the free market has lowered prices for the consumer once again. Surely there is someone in the world who has the bankroll to withstand these short-term losses if there is in fact the ability to profit.

They will patent all current and related technologies? This appears to be a problem with government regulations not the free market. The government invented patent system could definitely use an overhaul or even a complete elimination.

If a monopoly becomes inefficient it will be replaced, the free market does not fail. Government regulations are the only reason this wouldn't happen.

Chairman said...

Westy - The first step in alleviating poverty globally are to ensure nutrition (in the form of access to adequate calories and clean water). Hunger, poverty, and low education are so intertwined that it's hard to distinguish. But study after study shows how children who have adequate nutrition outperform children who have inadequate education. Something as simple as 6 oz. of milk, twice a day, makes for a difference of night and day. Alleviating hunger makes education possible. Education allows for changes in perspective from subsistence to something more long term.

Robby - It's not that monopolies undercut prices for potential newcomers. That's a tactical issue, and not really that big of a deal, like you suggested. More to the point is that that monopolies stifle innovation because they are able reduce competition by increasing the cost of entry into a business. For industries that require high technology, costs of entry are very high to begin with. Monopolies push that even higher. When the cost of entry is so high, no rational entrepreneur would enter that industry.

Robby said...

That's the magic of the free market. If an individual or corporation (as long as they don't have unfair protection like they do in the US) makes an advancement in technology they are fairly rewarded. If their improvement is large enough they may even have time to develop a temporary monopoly of a product using that technology. Luckily as time passes technology improves and their competitive advantage diminishes. Likely they would even have to significantly advance their technology to remain competitive. I do not know of any monopolies that have lasted a very significant amount of time (>100 years?) and think that in itself shows how little of a problem monopolies actually are.

I will assume that your argument would then be that you think monopolies are more likely to arise in an unregulated industry. I do not this is the case.

Looking at the list of monopolies in the Wikipedia 'Monopoly' entry I don't see any that appear to be free market failures. Most of them appear to have been created by governments and those that weren't have used government regulations to maintain their monopoly.

Let's take Microsoft as a recent example. The government has done very little to stop their evil monopoly powers (they were in trial for a while and eventually released a version of windows without the media player included from what I understand). Nevertheless all sorts of new companies and technologies have sprung up and Google has a very real chance of passing Microsoft and becoming the largest computer/software related company in the world with a decent chance of challenging Microsoft's core business. I think this is a great example of the free market working, and working quite quickly (~10 years) and don't see much evidence of innovation stifling having taken place. I guess we can only argue under what system the maximum innovation would have taken place (I say completely free markets) but there is no way for that to be proven.

Sounds like we agree on the solution to ending poverty being to end food distribution problems. Now we just need to eliminate government regulations and allow the free market to do it's job to fix that problem.

Chairman said...

First, I think that we may have confusion in terms. I'm assuming that a truly free market would be free from government regulation. Are you suggesting otherwise? Obviously, I think that regulation can have a positive effect on businesses from an innovation standpoint. If you're building regulation into the argument for a free market, that's more like a "sort of free market, guided by a deliberate hand," as opposed to the whole "invisible hand" argument. Then we may not be arguing the same thing.

In any case, I don't doubt that free market and monopoly are great for the corporations. In fact, my Roth IRA is full of companies that have monopoly/oligarchy characteristics. But, the original argument that monopoly and the free market best serve a few, rather than society in general still stands.

With the Microsoft example, has it really benefited people, in general? The PC industry is a very tough on. If you break down the costs at the factory, roughly 20% of the cost of making a PC goes into labor, raw materials, and factory overhead. The other 80% go to Microsoft and Intel/AMC. Has this made for a superior product for the end user? How does this explain the fervor that's characterized by the open-source Linux folks? As far as Google taking over for Microsoft, we'll see. The same arguments were made for AOL and Yahoo! over a decade ago. Market cap figures are thrown around a lot, but are often a lot of bluster. From a pure earnings perspective, Microsoft has a P/E ratio of 23.6, while Google is coming in at 57.8. This means that Google's stock price is roughly 2.5x higher than it should be, from an earnings perspective, normalized against Microsoft's earnings. They aren't taking over Microsoft, yet. And it will require a few leaps and bounds before they're truly direct competitors.

Also, there's a difference between government imposed monopoly and one that results from the free market. Oil is a very common monopoly. Many nations have nationalized their oil, such as Saudi Arabia, Iran, etc. Some economies have been able to take oil and serve it's citizens very well. The United Arab Emirates comes to mind. However, some economies are decidedly not the case, If you look at a situation where monopoly has completely stifled innovation, it's Iran. Their technology is outdated by at least 30 years. Why has it gotten to this point? Observers have suggested that the lack of a need to innovate have killed Iran's oil industry, which actually takes a loss domestically, and I believe, imports oil. Interestingly, some people in the know actually believe that Iran needs nuclear power, not for weapons, but for providing power, largely from the inefficiency of it's oil industry.

In short, monopoly is definitely good for the few who have the monopoly. It's generally not as good for the millions who do not.

Robby said...

In our current system monopolies can arise and become problems because of bad government regulations. Taxpayers subsidize laying cable and the government only allows one company to use it or taxpayers subsidize oil operations and competing companies have no option of similar subsidies. Or as you point out oil is nationalized. These are not examples of free market monopolies.

In a truly free market monopolies would not have all of these advantages and are in fact not a problem. I used Microsoft (btw, with PCs reducing in cost faster than almost any other industry I'm sure it can be argued that the Microsoft monopoly has not caused much of a problem for the end user) as an example because I do not see many ways they have been helped to become a monopoly by the government (besides corporations having special privileges not allowed to regular citizens which I don't think should be allowed). Perhaps this was a bit of a stretch. If companies like Microsoft do not count I do not know of any examples of monopolies that are a result of free market economies. This would seem to be because either because the free market has never been allowed the chance to work or the free market deals with monopolies quite efficiently, correct?