Thursday, April 16, 2015

In Defense of Payday Loans

In August last year, Last Week Tonight with John Oliver did a segment on payday loans. The video can be seen here below.

This is not the first time I am writing about a video segment that was aired on this show. I have written about the show's segment on Ayn Rand before. That post can be seen here.

The video was full of humor and compassion. But just as the previous video about Ayn Rand was based on puddle-depth knowledge about Rand or Objectivism, this video is based on economic ignorance.

Oliver does not come out and say that they ought to be regulated. He simply points out how payday loan companies use various legal loopholes to avoid regulations. One of the regulations that he mentions, which failed, is the interest cap that was imposed on payday loan companies by the Illinois state government.

Never mind that price controls have been attempted many times throughout history much to everyone's pain and suffering (see here, here, here, and here).

Lately, I've been reading a lot of Thomas Sowell's articles. Sowell is not a libertarian or an Objectivist. He is certainly an old-school conservative. Therefore, I do not agree with everything that Sowell says. However, when it comes to economics, the man is as sharp as a razor blade.

The following are some of the highlights of Sowell's views on the media's witch hunt against payday loans. The original article was published in The Washington Times and the entire post can be found here.

Yet there is remarkably little concern on the political left as to the actual consequences of the laws and policies they advocate. Once they have taken a stance on the side of the angels against the forces of evil, that is the end of the story, as far as they are concerned.
The interest rates charged on such unsecured loans to people with low credit scores are usually higher than on loans to people whose higher incomes and better credit histories make them less of a risk.
Because those who take unsecured short-term loans are usually poor and often ill-educated, the political left can cast the high interest rates as unconscionably taking advantage of vulnerable people. However, similar economic principles apply to more upscale, short-term lending to well-educated people who have valuable possessions to use as collateral.
Editorial demagoguery against “predatory” lending might well be called predatory journalism — taking advantage of other people’s ignorance of economics to score ideological points and promote still more expansion of government powers that limit the options of poor people especially, who have few options already.

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Wednesday, April 15, 2015

You Didn't Make Sense With That (from Cafe Hayek)

Back in July 2012, when President Obama was running for reelection, he gave a speech that encapsulated everything that I despised about him. Today, that speech is known as the “You Didn't Build That” speech. The portion of the speech that got so many people's attention reads as follows:

There are a lot of wealthy, successful Americans who agree with me – because they want to give something back. They know they didn’t – look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something – there are a whole bunch of hardworking people out there.

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business – you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.”

Of course, President Obama didn't come up with that on his own. He was actually channeling Elizabeth Warren who said something just as daft before President Obama did. She said:

There is nobody in this country who got rich on their own. Nobody. You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”

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There has been an ungodly amount of political commentary that was made about these two speeches – both for and against. However, I discovered the most impassioned, intelligent, and cogent criticism of this particularly mendacious view yesterday at Cafe Hayek ( It was written by Donald Boudreaux who is an economics professor at George Mason University.

So, I have decided to share Professor Boudreaux's post in full here:

You Didn't Make Sense With That
By Donald Boudreaux, April 12th 2015

I’m sick of hearing the “you didn’t build that” mantra trumpeted whenever someone feels the need to flaunt his or her faux sophistication about the way the world works.

Yes, it’s true that entrepreneurs and investors who profit in the marketplace typically don’t build much of the infrastructure they use to connect with their input suppliers and with their customers. But this fact proves far less than those who shout it out think it proves.

First, and least importantly, the fact that government in practice supplies X amount and Y kinds of infrastructure does not necessarily mean that that infrastructure would not have been provided – and provided better – by the private sector had government not entered that arena.

Second, no serious proponent of free markets has ever denied the reality that government supplies a great deal of useful infrastructure. Nor has any serious proponent of free markets denied that the use of infrastructure built by others, government or not, is beneficial to all of those who use it productively.

Third, and relatedly, all serious proponents of free markets understand that every person in a free market today, every minute of every day of every year of his or her life, depends upon the productive efforts of hundreds of millions of people. The fact that some of the hundreds of millions of people upon whom each of us depends are government employees, or are set to their tasks by politicians, does not make those particular workers or those particular tasks any more important to each individual’s success in markets than are the tasks that are performed by the private sector. A government-built road might have contributed to Smith’s success, but so, too, did the privately produced truck that he uses to serve his customers. Likewise with the privately produced fuel for that truck and the privately produced and manned filling stations* where that fuel is pumped into the truck. So, too, for the food that Smith eats to stay alive and alert, the privately designed and manufactured clothing that he wears, and the privately supplied financing that tides his business over during a slump and privately supplied insurance that makes his business risks more bearable.

Fourth – and following closely from point number three – those who scream “You didn’t build that!” are oblivious to the importance of the margin. The government-built road that Smith uses to earn handsome profits by serving consumers might well be absolutely essential to Smith’s success, but this fact doesn’t mean that the road’s contribution at the margin to Smith’s success is significant. Smith’s profits depend upon what he adds to the road’s services – how Smith himself uses the road to create value for consumers. If Smith uses the road to ship truckloads full of ordinary toothpicks to market, he might earn just enough to continue in that line of work, but he’ll not earn magnificent profits. If instead Smith uses the road to ship truckloads full of new’n'improved toothpicks – toothpicks that sell at prices only slightly above that of ordinary toothpicks but, in addition to doing what ordinary toothpicks do, also are guaranteed to prevent gum disease, cavities, bad breath, insomnia, and erectile dysfunction – then Smith profits magnificently. Smith’s “above normal” profits (as economists call them) have nothing to do with the road (or with, say, the private efforts of entrepreneurs who are responsible for the delivery truck Smith uses) and everything to do with Smith’s own innovative efforts.

Fifth, government-supplied infrastructure doesn’t guarantee entrepreneurial success – a reality that is not as trite as it might seem in this context. If government-supplied infrastructure did guarantee entrepreneurial success, then everyone with access to that infrastructure would be a successful entrepreneur. Precisely because government-supplied infrastructure is supplied widely, and typical free of any marginal cost to users, the very fact that only some of the people who use it do so entrepreneurially – and, of this number, only a fraction do so successfully – means that successful entrepreneurs contribute at the margin things creative and unique above and beyond the value of whatever inputs, including portions of the infrastructure, that are used to make these creative and unique contributions. Entrepreneurs’ profits come from, and reflect, the value that they add.

It’s true that, because the various pieces of infrastructure (and the inputs used to produce and maintain them) are scarce, infrastructure has a cost. Everyone who uses it should pay his or her appropriate share of this cost – but the amounts due to government as payment are not some open-ended claim on successful entrepreneurs.

Again, the fact that only a relatively small handful of entrepreneurs succeed at the level of achieving a net worth of (say) $10 million or above means that such success is not at all easy and that such success is not remotely guaranteed or even made likely by government’s provision of infrastructure. The marginal contributions of successful entrepreneurs depend far more upon their own contributions. The reality that infrastructure in developed countries is supplied widely (and, again, is often available to users at zero marginal cost) is evidence – when set beside the other fact that relatively few individuals today earn as entrepreneurs even as little as hundreds of thousands of dollars of net personal wealth – that market entrepreneurship is far more scarce than is infrastructure. So to discourage market entrepreneurship with higher taxes and more government-dictated regulation is insane.

Finally, sixth: If market entrepreneurs didn’t build the infrastructure they use to earn profits, nor did consumers and salary and wage workers build the infrastructure they use to get to shopping malls, supermarkets, vacation destinations, and their places of work. Yet those who benefit the most from competitive, innovative markets are the masses. If government’s provision of infrastructure justifies politicians and professors pointing accusing fingers at people who benefit from government-supplied infrastructure and accusing those people of not paying their ‘fair’ share for it, then pointing fingers only at successful entrepreneurs makes no sense.

There’s more to say, but this post is already too long.

* A genuine example of private infrastructure.

Monday, April 13, 2015

Did Korea's Economic Development Require State Protection?

A common argument that is often brought up to argue against free market capitalism is Korea's economic development. Many argue that despite the fact that President Park Chung-hee was a dictator, one thing that people cannot argue against is the economic development that Korea enjoyed under his 17-year-long rule.

Specifically, what those people are usually referring to is the series of protections, quotas, tariffs, and subsidies that President Park had given to what were then nascent chaebol companies.

One such defender of that point of view is Professor Ha-joon Chang, an economics professor at the University of Cambridge, and the author of such books as Bad Samaritans, Kicking Away The Ladder, and 23 Things They Don't Tell You About Capitalism.

Professor Ha-joon Chang
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Much can be said about his books, and I plan to do so in the future. For now, however, I will focus only on his defense of the infant industry argument, which is an idea that argues that emerging businesses and industries require government protection – in the form of tariffs, subsidies, and quotas – from their more entrenched competitors, particularly foreign competitors.

In that article that I linked earlier from The Independent, Professor Chang compares nascent industries to his six-year-old child. If this weren't a cringe-worthy moment of stupidity and/or academic dishonesty, I don't know what is.

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Moving on, in Bad Samaritans, Professor Chang makes the argument that Korea's economy did not develop because of neo-liberal economic policies, but rather due to heavy government involvement in the economy. There is no question that that is true.

There is also no question that Korea's rapid economic growth was nothing short of miraculous. There is a reason that it is often referred to as the Miracle on the Han River. But is that proof that protectionism was what allowed Korea's economy to develop so quickly? Well, that's quite hard to confirm considering the fact that Singapore and Hong Kong, which practised freer trade policies, went through much quicker and greater economic development.

“But they are city-states; they cannot be compared to a country that is so much bigger like Korea,” I often hear people say.

Fine, fair enough. Then one has to wonder about China and India. Both countries are much bigger than Korea and their economies grew much more quickly after they began to liberalize their respective economies (see here and here).

Of course, this is certainly not to say that government controls and economic programs are non-existent in Hong Kong or Singapore or China or India. They are not free market economies. But they have shown that freer markets do lead to greater growth.

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Another point that Professor Chang does not mention is that subsidization and other forms of government protections do not guarantee economic survival or development in any way, stretch, or form.

Yes, Korea is an example of an economic success story. However, we also have to look at other examples where protecting infant industries were not successful. For example, African cotton farmers want their governments to end the subsidies programs for their respective national industries so that they can finally compete in the international market; and which African country's economic development could ever compare with Korea's economic growth?

The problems of protecting infant industries are not limited to African countries. In the United States, despite the government's efforts to prop up Solyndra, a company that specialized in manufacturing solar cells, with up to US$535 million of taxpayers' money, the company still declared bankruptcy.

Similar examples can be found in Korea, too. Samsung was certainly one of the chaebol conglomerates that the Korean government helped to protect and nurture. However, Samsung is not the only business that got so much love from the government. Another industry that has gotten a lot of love from the Korean government is the rice industry. So why has Samsung become an internationally well-known name but there isn't a single Korean food-producing company that is as well-known outside of Korea?

In other words, no amount of subsidies or trade protections ever seems to be able to prevent what was always doomed to fail from failing.

So what does Korea owe its economic success to? That is a difficult question to answer; much more difficult than Professor Chang would like for his readers to believe. It's certainly not free market economics. As Professor Chang has shown, the Korean government has been heavily involved in Korea's economy. But as I have shown, freer markets like Hong Kong and Singapore have grown more quickly than Korea and subsidies do not guarantee success.

Though that specific question may be harder to answer, what is much easier to answer is that Korea's economy did not develop because of the government's protections, subsidies, and overall involvement in the economy, but rather in spite of them.

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Friday, April 10, 2015

The Politics of Good and Evil

One of the most unfortunate things about modern day politics is that there is no shortage of cheap moralizing, which often has the tendency to allow people to fall into the us vs. them” mentality.

For example, when people say that they want to push for free lunches for all school children, or greater welfare programs for the poor, what they are doing is essentially positioning themselves into different camps. However, it is not as simple as merely declaring one's position. That is because this us vs. them” mentality also allows people to place themselves on the side of caring and compassionate people, while (consciously or unconsciously) castigating those who disagree with them as uncaring monsters.

The fact is that cheap moralizing allows people to make a moral claim without having to go into too many details. And what a wonderful political tool it is! It allows people to feel good about themselves when they, for example, claim to support greater welfare without having to show much in the way of evidence in regards to its moral shortcomings or success (or the lack thereof) ratios.

Once people have convinced themselves of the “goodness” of a particular cause, it is very hard to get them to see reason. For instance, when South Gyeongsang Governor Hong Jun-pyo announced that free lunches would no longer be provided for all students, but only for those from poor families that qualified for the program, Governor Hong's opponents predictably went on the offensive. While they heralded themselves as angels who were trying to achieve the utopian dream of economic justice for all, they castigated Governor Hong and his supporters as monsters who abandoned the people.

It is no wonder that so many politicians love to engage in cheap moralizing. It is the easiest way to whip up support and votes.

However, there is another reason why this is so dangerous. As Milton Friedman once said:

“Nothing is so permanent as a temporary government program.”

To explain, once something has been whipped up to be good, and once enough people have bought into that idea, it becomes nearly impossible to reverse it. It's the main reason why so many people oppose Governor Hong's plan to scale back the free lunch program.

After all, if people agree to reverse “good” policies, it would mean that those who once supported those “good” policies would, by definition, have to admit that they are now “evil.”

Perhaps it is time that people put away their religiously guarded morals, and reflect on that thought just a bit, and wonder just how reasonable it is to claim that the opposition is simply evil.

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Thursday, April 9, 2015

Quote of the Day (April 9th, 2015): Thomas Sowell on the Minimum Wage

Today's quote comes from the great economist Thomas Sowell about the minimum wage. The following quote was taken from his book Basic Economics (Chapter 10: Minimum Wage Laws).

Minimum wage laws make it illegal to pay less than the government-specified price for labor. By the simplest and most basic economics, a price artificially raised tends to cause more to be supplied and less to be demanded than when prices are left to be determined by supply and demand in a free market. The result is a surplus, whether the price that is set artificially high is that of farm produce or labor.
Making it illegal to pay less than a given amount does not make a worker’s productivity worth that amount — and, if it is not, that worker is unlikely to be employed. Yet minimum wage laws are almost always discussed politically in terms of the benefits they confer on workers receiving those wages. Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is the wage that many workers receive in the wake of the creation or escalation of a government-mandated minimum wage, because they either lose their jobs or fail to find jobs when they enter the labor force.

Links of the Day (April 9th, 2015)

It is always quite odd to see the New York Times post something that makes sense in their op-ed pages: The Real Reason College Tuition Costs So Much

For those of you keeping score at home, I, too, wrote about the ever increasing costs of higher education here.

EconStories, which produces and uploads videos about economics on its Youtube channel, has been uploading a series of fun videos called EconPop. These videos dissect movies to discuss economic issues. The latest video that they uploaded was a discussion of The Hudsucker Proxy where they talked about competition and the minimum wage. The link to that video can be found here.

EconStories were the same people who created the two amazing rap battle music videos that featured Friedrich A. Hayek and John Maynard Keynes. Check the videos, Fear the Boom and Bust and Fight of the Century.

And finally, here's a story about North Korean who defected to South Korea and then became a successful businessman.

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Wednesday, April 8, 2015

Quote of the Day (April 8th, 2015): Uberrapists!

Today's quote of the day comes from The Korea Times. The article, Rape-charged US Uber driver brings chills to Korean market mentions that an Uber driver based in the United States, who had been held in custody without bail since December on charges of rape, was acquitted. He was acquitted because his lawyers were able to come up with evidence that cleared him of all charges and showed that the woman had filed a false report.

Here are the ways that the Korea Times could have reacted.
  • Relief that an innocent man had been set free.
  • Anger than an innocent man had been detained for months for a crime that he did not commit.
  • Questioned whether the reasons the man could have been held for so long was the fact that he was black and an immigrant.
  • Concern that false rape claims might do real harm to actual rape victims.

However, here is the reaction that the Korea Times journalist, Ko Dong-hwan, chose to go with:

Despite the acquittal, the incident raised alarms on criminal motives that could have been harbored by Korean Uber drivers if the service hadn't been stopped earlier this year on the Korean Peninsula.

Innocent until proven guilty? The immorality of guilt by association? Bah! Who has the time for that sort of thing? Certainly not the Korea Times!

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It was brought to my attention that the offending quote can no longer be found in the Korea Times article. In fact, even the article's title has been changed to the much more neutral US Uber driver acquitted of rape charges.

However, the article still does have the odd disconnect as the article changes mid-way when it stops mentioning the case at hand completely and then repeat the Korean government's position that it will not tolerate startups operating in Korea that violate domestic laws, no matter how innovative and creative they may be.

Perhaps someone at the Korea Times reads this blog? Well, that might be too much to hope for.

Regardless of the reason, I am glad to see that such a ludicrous statement was removed. Also, in the future, I shall remember to take screen shots.