Sunday, January 30, 2011

Innovation versus the Sputnik fallacy

Published in The Tennessean, Sunday, January 30, 2011

Innovation versus the Sputnik fallacy

by Richard J. Grant

In Lake Wobegon, are all the subsidies above average? Does everyone receive more in payments from the government than they pay in taxes?

Lake Wobegon's above-average students would recognize immediately that it is impossible to receive such across-the-board subsidies from Lake Wobegon's government alone. The extra resources would necessarily come from outsiders, perhaps from a neighboring county.

No doubt President Barack Obama had visions of America as one big Lake Wobegon when he warned us that, “This is our generation's Sputnik moment.” He fears that we might be falling behind in scientific research, noting that China has become “the home to the world's largest solar research facility and the world's fastest computer.” His solution is to subsidize innovation, whatever he imagines that to be.

It is of course quite likely, if we send more research dollars to the people of Lake Wobegon, that we could concentrate their minds on producing better solar panels and faster computers. This would all be so exciting that we would pay no attention to what is happening, or not happening, in the neighboring counties. While the visible achievements in Lake Wobegon would attract all the media attention, we could never see what the neighboring counties might have achieved with the resources that were taxed away.

This is the Sputnik fallacy. The Soviet Union did indeed put the first satellite into orbit. Its top priority was to seize any strategic advantage, and with its government-controlled economy, it could direct resources toward its missile program. But for what else is the Soviet Union remembered? We now know that the collectivization of its industry and agriculture necessarily led to oppression, inefficiency, and widespread poverty.

When Sputnik went into orbit, Americans recognized both a great engineering achievement and the danger of such a capability being possessed by an avowed enemy. What Americans might not have recognized at the time was that it would cost us far less, as a percentage of our wealth, to put a satellite into orbit than it cost the Soviets. And our German scientists were volunteers.

The United States government directed resources into the space program and military related research. In the context of an exceptionally free society and economy, it did not take long for the United States to surpass the Soviet Union in space-related capabilities. But if Americans had attempted to approach everything the way the Soviets did, then the story would have turned out much differently.

Throughout the 1960s, we were reminded of the many inventions and spinoff consumer products that emerged from the space program's research. These were visible and much publicized. We knew the space program was expensive, and most of us agreed on its importance, but we can never know for sure what kinds of inventions never happened or what we lost in their being delayed.

Perhaps our successes in space contributed to an overly optimistic view of government capabilities and to the rise of the Great Society programs for which we have paid so dearly. As we expand the role of government in research and other aspects of our lives we will pay more dearly still.

The country that won the space race is the one that was most successful at limiting the role of government in the lives of its citizens. It was the country where, by world standards, all the subsidies were below average.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Richard J Grant archived at The Tennessean

Sunday, January 23, 2011

Healthy government protects citizens, their property

Published in The Tennessean, Sunday, January 23, 2011

Healthy government protects citizens, their property

by Richard J. Grant

With the advent of personal computers, we heard talk of something called the “information society.” It is certainly true that this new technology enabled us to save, process, and communicate certain types of information more cheaply and efficiently than ever before. But a bigger truth is that we have always lived in an information society.

Thousands of years ago, the acquisition and interpretation of information was no less important to the survival of our ancestors than it is to ours today. Knowledge of how to find food and to evade enemies and other threats has always been important. We have also benefited from the improvement and use of tools and the expanded production of consumer goods that this made possible.

We see the still-evolving Internet as a great and complex innovation, which it is. A spinoff from Defense Department research, it took on a life of its own. But even the Internet, with all its power and potential, is but a relatively crude tool compared to that resilient human-network phenomenon that we call “the market.”

We speak of the market as being the product of human action, but not of human design. Nobody invented, or even thought of inventing, “the market.” As a network of human trade relations, the market, in this broader sense, just emerged. It was natural for individuals to trade goods and services and to produce whatever they couldn't find. Such individual trades enabled goods to change hands many times and to travel long distances.

Such trades generate a type of knowledge that could not exist otherwise. The act of trading reveals information about the desires of the traders and about the availability of the goods that are exchanged and of any resources needed to produce them. By necessity we are interested in prices, quantities, and qualities. Knowledge of particular prices from recent trades tells us how much of one good we might expect to receive in exchange for another.

We are best-served in such relationships when the trades are voluntary and free of coercive interference. Only then can we be sure that the traders are acting on their true preferences and are able to offer their best goods and services.

No matter how sophisticated and powerful our communication technologies become, markets will always remain a human phenomenon. No machine, or committee, or politburo can ever do more than guess at the types of choices that individuals would make. This is why the centralization of economic choices by governments, whether through regulation or direct control, tends toward disappointment.

In this sense, when we coercively collectivize an activity, we tend to dumb it down. That is why successful societies, the societies most likely to survive and prosper, are those in which individuals are relatively free from the coercion of freelance thugs or government officials.

Private associations and corporations distinguish themselves from governmental organizations by their voluntary nature. They demand a mutual respect for each individual's property and person. This is civil society; and this is why private forms of association are superior for most types of activities.

Governments earn their keep only to the extent that they assist in the protection of citizens and residents against force, theft, and fraud. A healthy government will assist in strengthening the definition and enforcement of private property rights. An unhealthy government will infringe on those rights and yield incivility.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Sunday, January 16, 2011

Palin's character carries her through adversity

Published in The Tennessean, Sunday, January 16, 2011

Palin's character carries her through adversity

by Richard J. Grant

In autumn 2008, just before the elections, some colleagues asked whether or not I considered Sarah Palin qualified to be president. My reply was, “She doesn't have to be. She just has to be better qualified than Obama and Biden.”

Was she better qualified? Two years later, a poll by Rasmussen Reports found that “52 percent of likely U.S. voters say their own views are closer to Sarah Palin’s than they are to President Obama’s.” This was reflected in the 2010 election results when voters rejected the president's big-government agenda by severely reducing his congressional support.

Though few admit it, Sarah Palin has shaken up both parties. Character and ideas have consequences. It has not been lost on the political professionals that, after two years of observation, the American people show a greater affinity to the constitutional attitude of the hockey mom than to that of the “constitutional scholar.”

Political professionals never rest, and the worst of them never let a crisis go to waste. That is why a tragic, but local, event that men of integrity would have faced with dutiful strength and perspective has instead been whipped into a national spectacle of character assassination and cheap self-advertisement.

The shooting of 20 people in Tucson became the surreal backdrop for a modern witch hunt, the perfect opportunity to frame and smear a pesky opponent. The media's speedy and drone-like convergence of attention on Sarah Palin was too smooth to be an accident and too incessant to be real.

Palin's accusers, none of whom was morally qualified to cast the first stone, insisted that the shooting was the result of a polarized political atmosphere. Learning the truth about the shooter was apparently a low priority. Palin, and everyone like her, had to be framed.

Facing this, Sarah Palin stood up and responded to her critics firmly, clearly, and with an uncommon civility. She might never be president but, in the face of a media ambush, she certainly set an example for the incumbent.

But maybe she has already had a greater impact on history than her critics will ever admit. The more we listen to her, the more we detect a consistency of thought that improves with experience and refinement. We also see more of what we sensed from the beginning: She has something that runs deeper than love of country. She has more than just a gut feel for who we are and what it means to live here.

The party professionals who claim to hope she will run in 2012, because she would be the easiest to defeat, are bluffing. The clever ones are. If they truly believed it, they would not put so much effort into denigrating her, unless their real goal is to discourage everyone like her.

Her attackers showed during the past two years that they have nothing positive to offer. Voters have already rebuffed them. It is not Sarah Palin who has had to change; the president has had to change. His program is the pig begging for lipstick. He is the one now pretending to be something that he is not, whether we call it “centrist” or some other mushy word.

But at least he has had enough sense to change his staff and to bring in advisers who will spend the next two years asking, “What would Sarah Palin do?”


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Richard J Grant archived at The Tennessean

Sunday, January 09, 2011

Charities should reconsider their support for the estate tax

Published in The Tennessean, Sunday, January 9, 2011

Charities should reconsider their support for the estate tax

by Richard J. Grant

After the recent tax debate, Congress chose to keep most of the major tax rates where they were in 2010. One rate that will be higher is the estate tax. But a more interesting fact is the source of some support for the estate tax.

It is understandable that a benefactor and possible heirs would oppose the existence of an estate tax. It reduces their choices. Any after-tax uses to which they could put their wealth would also likely be available in the absence of the tax. A non-taxed estate could be bequeathed to any heir, which could include any relative, friend, organization, charity, or even a government treasury.

It doesn't work the other way around. The estate tax takes from the estate a portion of any wealth that is not allocated to governmentally approved uses. Contributions to any organization that the government deems to be a “charity” would be deductible from the taxable wealth of the estate. Deductibility gives charitable organizations a relative advantage in the competition for inheritable wealth.

As Paul wrote in his second letter to the Corinthians (9:7), “Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver.” But that seems not to be good enough for many lobbyists for charitable organizations. In their eagerness to do good they forget that their complicity in the unequal imposition of the tax code is a resort to compulsion. They might believe that they are increasing charitable giving, but they are not increasing charity.

The irony is that they might not be increasing charitable giving either. The act of giving implies that there is something to give. But to the extent that taxation diverts and hinders wealth creation, there is a risk that the tax advantages enjoyed by charitable organizations will be offset by the wealth-reducing effects of the tax itself.

Government officials already know that the inheritance tax is a poor source of revenue. The higher the inheritance-tax burden, the more likely it is that wealthy individuals will find ways to avoid paying the tax. Tax avoidance is, of course, never costless. Much wealth is dissipated in the attempt to maximize after-tax wealth and satisfaction. The high-tax reality diverts many people into careers as lawyers, accountants, and financial planners rather than the possibly more-productive careers that they might have enjoyed in a low-tax world.

Economists refer to the tax-deductibility of charitable contributions as “reducing the cost of giving.” Statistical studies that focus on this aspect suggest that higher tax rates encourage charitable giving. But they seem to have missed what economists call the “wealth effect.” Benefactors who wish to allocate their estates between heirs and charitable donations are better able to give to both when their after-tax wealth is higher. But higher tax rates reduce after-tax wealth.

Professors William Beranek, David R. Kamerschen, and Richard H. Timberlake of the University of Georgia have found that this not only makes good theoretical sense but also shows up very clearly in the statistics. Their study on “Charitable Donations and the Estate Tax,” which was recently published in the American Journal of Economics and Sociology, shows that it is far more likely that a reduction in the inheritance-tax rate will be associated with increases in charitable giving.

We need not force people to give.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Richard J Grant archived at The Tennessean

Sunday, January 02, 2011

New year means time to repeal ‘euphemisms’

Published in The Tennessean, Sunday, January 2, 2011

New year means time to repeal ‘euphemisms’

by Richard J. Grant

At the beginning of each New Year, we like to believe that we can have a fresh start. And sometimes we really need one.

The trouble with fresh starts is that they don't start from where we would like to be, they start from “here.” This year we start from where the 111th Congress left off. We must recover from two years of overdosing on a witches’ brew of one part Obama administration with two pinches of Democratic majorities. This year begins with one less pinch.

Historians might one day characterize this political brew as “death by a thousand euphemisms.” The administration began with the “American Recovery and Reinvestment Act of 2009.” This particular act was an attempt to take credit for what would have happened had the act not been passed. As we often say about justice, recovery delayed is recovery denied.

It is a trait of progressives to feel satisfied with their good (and highly acclaimed) intentions regardless of the real outcomes. But for the past two years their intentions, manifested in policies that divert resources away from private stewardship into politicized show projects, have retarded people's efforts to adapt and to make needed changes.

The halfway point of the last Congress was also the peak, capped by the pinnacle of euphemisms, the “Patient Protection and Affordable Care Act.” This was the health-care reform bill that was supposed to fix the old system and reduce costs. It was the bill that turned out to be so complicated, and so full of unrelated payoffs, that we were told by the Speaker that we would have to “pass the bill so you can find out what is in it.” But we found out sooner than we were supposed to.

Due diligence led health-care and insurance providers to price-in the expected effects of the new provisions. In some cases, the threat of unlimited liabilities being imposed on those who dared to offer any viable insurance product resulted in the self-preserving response of discontinuing any product that might be likely to attract uninsurable, but politically favored, pre-existing conditions. As we will quickly learn, the trouble with socialism is that we can impose lower prices but we cannot impose lower costs. The best we can do (to make the costs appear lower) is to lower the level of service.

The euphemisms kept rolling right through the summer of 2010 when the president signed the “Wall Street Reform and Consumer Protection Act.” This act was about as long, complicated, and wide-open to administrative imperialism as was the big health-care reform. It continues a long tradition of enhancing the levers of political favoritism that might be better-reflected in the less-euphemistic title, the “Protecting Wall Street from Consumers Act.”

Voters sort of lost their sense of humor with all this, so the Democrats delayed some of their less-popular projects until they were safely past the November elections. But even afterwards, they dared not enact a statute to embody the euphemism, “net neutrality.” Instead, they relied on the Federal Communications Commission to thumb its nose at the Constitution by claiming regulatory powers over internet service providers and hoping that the next Congress would not have the wherewithal to stand up against it.

We have these and 996 other anti-constitutional euphemisms to repeal. As for fidelity with the Constitution, now that would be a fresh start.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Richard J Grant archived at The Tennessean