David R. Henderson  

Betty Friedman Nails It

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"People talk about Main Street vs Wall Street. It should be Main Street vs the Beltway."

David Friedman's latest post is so to the point that I'll simply quote the whole thing:

Reading Google News this morning, I noticed a headline:

Home Prices Continue to Fall:
D.C. Bucks Trend

I was particularly struck by it because yesterday, driving back to our temporary home in Fairfax from a visit to D.C., my wife commented on the amount of new construction we saw. The economy may not be doing so well, but the government industry is booming

Or, to quote my wife, "People talk about Main Street vs Wall Street. It should be Main Street vs the Beltway."


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COMMENTS (12 to date)
chipotle writes:

I did not know that D. Friedman is currently temporarily DC-based. Are there any opportunities to hear him speak?

IMHO, he has a truly unique mind.

Daniel Kuehn writes:

DC's business is not profit maximizing and therefore doesn't collapse when profit-making opportunities fall. That doesn't seem to be anything to get angry about.

Why should we be angry that the DC housing market hasn't crashed? If it were to crash tomorrow, should we be less angry? I guess I don't get it. What makes his wife happy to see people not foreclosed on? Isn't it a good thing that at least one housing market is doing semi-OK? I don't get the shadenfreude of it all.

Ignoring, for a second, Main Street's own pathologies, I think it should be Main Street against Wall Street when Wall Street screws us and Main Street against Washington when Washington screws us.

That's a close competition, to be sure. But I don't see why the non-profit-maximizing (and therefore somewhat recession-proof) nature of government spending should be something that makes me angry. What exactly am I supposed to get enraged over about that?

Daniel Kuehn writes:

Since this is the second time in the recent past I've picked on both David's simultaneously, I'll second chipotle's point that David Friedman is a great guy to follow, and I'm quite partial to EconLib as well.

Ryan writes:

@Daniel

DC's business...

DC is not in "business". It has no competition which is partly why people could be angry over DC spending, and in addition, your house may have been foreclosed on, but the banker's house who was bailed out by DC didn't and neither did the politician who enabled the bail out (nor his/er 15 staffers, etc.).

Daniel Kuehn writes:

Ryan - you are reading an awful lot into my use of that word.

Coolidge has a great line about America and business. I meant to communicate the meaning of Coolidge's first usage of "business", not the meaning of his second usage. I would have thought that would have been abundantly clear from context.

rpl writes:

Ryan, you're pettifogging a bit on the definition of business. Daniel's meaning was clear from context, and in fact his definition of "business" appears before yours, at least in Webster's.

As to whether people should be angry about government spending, I'd say that for most people it would be pretty hypocritical if they were. Virtually every program in DC has strong support from some segment of the voters. That's why it seems to be so hard to make meaningful budget cuts. Even the supposed small-government advocates in the Republican party seem to regard Pentagon spending as virtuous, and I have to say, an awful lot of those Fairfax houses were purchased with Pentagon dollars.

Perhaps you are one of the few people who are skeptical of all spending, not just the other party's. In that case, good on you, but you should recognize that that is not the prevailing view on "Main Street."

Ryan writes:

@rpl, @Daniel

I admit I was being a bit trivial there, but, rightly or wrongly, to not understand why there may be anger when people view "Main Street" contracting yet, DC is "business" as usual demonstrates a certain aloofness.

Sure, it is hard to ween the calf from the mother's milk, but I think you make a good point, in that, people may feel angry more because they felt that they've been deceived by following a party based limited government rhetoric, which doesn't hold true once examined against reality.

I was born a skeptic and I agree with Daniel, that the anger needs to be more precise, but as Robert Reich writes

There’s little difference, after all, between the right’s depiction of a “chablis-drinking, Brie-eating” establishment and the left’s perception of a rich one percent who fly to the Hamptons in private jets.

http://robertreich.org/post/13317294020

Randy writes:

@Daniel,

DC's business is not profit maximizing..."

I disagree. DC is in the population exploitation business. While there is no economics term for the returns to exploitation (though rent is probably pretty close), I see no reason to think of these returns as something better than profits. And yes, the returns to exploitation should decline when the returns to profits, etc., decline.

Daniel Kuehn writes:

Randy -
That seems wrong from a scientific perspective, but useful from an ideological perspective.

Certainly we can talk about public employees and politicians as utility maximization. Certainly for certain public employees and politicians that involves rent maximization. As an analytic point alone, I'm guessing that number is small.

For most politicians (whose population is much smaller than public employees in general), utility maximization means vote maximization, which can mean rent maximization, but that's certainly not the bulk of the federal budget. Most of the federal budget goes to Medicare, Social Security, and Defense. Certainly there is rent seeking involved in the execution of these dollars - most notably in Defense, but also in Medicare. But these budgets would be large even if there were no rent-seeking whatsoever. And certainly the public employees who staff these organizations (including my wife and David Henderson - both of whom work at DOD educational institutions - my wife and NDU and Henderson an NPS) are not rent seeking in the way you describe. They're utility maximizing to be sure, but so are we all.

If you just want to get across the point that you think "taxation is theft" or "Social Security is a Ponzi scheme", then just say that. You're allowed your politics, after all. Don't do bad science by applying analytical concepts like "rent-seeking behavior" to situations where they are inappropriate.

David Friedman writes:

The name is actually Betty Cook.

Randy writes:

Daniel,

"Most of the federal budget goes to Medicare, Social Security, and Defense."

These are the cost centers of the political organization. The profit center is the IRS, and it brings in several trillion dollars each and every year - more than enough to cover costs and still provide a handsome return to the executives and most of the employees. Not to mention the value of the joy they find in manipulating other people's lives.

"If you just want to get across the point that you think "taxation is theft"..."

No need to be so subjective. It is a fact that political organizations exist to exploit populations. I'm not using the term in an inherently negative sense here. Exploitation simply means the act of employing a resource to the greatest possible advantage - in this case, employing a population to the greatest possible advantage.

David Friedman writes:

To expand a bit on my view of the situation:

1. Most goods are normal goods--we buy more of them when our income goes up. One would expect that to be true of most goods produced by government. So the first guess would be that the richer a society is, the more money it will spend on government. That fits the usual historical experience. A richer country won't necessarily spend a larger fraction of income on government, but it would be moderately surprising if it didn't spend a larger absolute amount on government.

In a recession, the country as a whole is poorer than usual, so one would expect government spending to decline. The visual evidence that it is increasing, as reflected in the real estate markets near the capitol, is thus striking.

Further, government gets its money from the population. So if people are poorer and government is richer, that suggests that one thing making people poorer is that government is taking more of their money, hence main street vs the Beltway. The situation is complicated by the fact that at the moment spending is largely of borrowed money, but presumably the taxpayers will eventually have to pay for it.

2. In my view, the expansion of government in response to economic problems is one of the causes of economic problems, one of the reasons why a serious recession or depression is as bad as it is. Crisis provides an opportunity for government to expand, government expansion hinders economic activity, hence the "cure" becomes a contributor to the disease. I think that pretty clearly fits the history of the Great Depression, and probably the current recession as well.

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