Category: free market

The Party Swamp

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June 30, 2024

by Stephen Stofka

This week’s letter is on expectations and alliances. After separating voters into two parties, alliances within each of the parties coalesce to form intra-party squabbles. These alliances can form despite radically different approaches to managing problems: analytical and instinctual. Voting for the same candidate might be a person with an instinctive dislike of government and a business owner who estimates the impact of that candidate’s policy preferences on a company’s bottom line. These two different approaches also produce conflict.

In past weeks I have distinguished between expectations and anticipations, the first being more analytical and the second more imaginative or instinctual. The two work symbiotically in our individual lives but that symbiosis becomes outright conflict in a group. Some prefer a more analytical approach to discussing and solving problems while others rely on their gut, their moral compass. Individuals participating in that debate want to convince others to adopt their perspective and values. Perspective evolves over our adult lifetime and its purpose is to protect our values which have evolved since childhood. Attacking a person’s perspective can be perceived as an attack on their values, so we are resistant to persuasion. A variation of a 17th century quote goes, “A man convinced against his will is of the same opinion still.” The trick to persuasion is to insert your argument into another person’s perspective like a key and let them turn the key.  

In the Democrat Party, the center left contends with the radical left who weaponize shame. Advocates of DEI funding and mandates within all public institutions honestly believe that such training will moderate or eliminate racist attitudes. The majority of U.S. colleges and universities require students to take these non-credit classes to graduate. For students with a heavy academic schedule and work commitments, the burden of that mandate multiplies a student’s stress. Those within and without the academic community debate the conflict between these mandates and academic freedom.

Those favoring more spending on affordable housing disagree with voters in the party who prefer the personal space buffer that R-1 Single Family Home zoning gives residents. Proponents of free needle exchange must overcome fears that such tolerance will introduce a moral hazard that promotes more rather than less drug use. Supporters of more resources for  immigrant housing, job and medical services encounter principled opposition from those who are mindful of the resources and money that must be diverted from other programs. Should the needs of newcomers take higher priority than those of long- time residents, particularly the descendants of those African-Americans brought to this country centuries ago? Party leaders struggle to manage these ideological conflicts because these issues permeate the leadership ranks as well.

The Republican Party is more dominant in the ex-urban and rural parts of each state. Party leaders and candidates express strong support for religious faith as a cornerstone of American society. According  to Pew Research, Republicans attend church more often than Democrats or Independents but the majority of Republican voters do not attend church weekly. Like Democrats and Independents, a third of Republicans rarely step inside of a church. Those who believe that public institutions should be secular confront those who think religious principles and doctrine offer the only sound foundation to good governance. A person supporting their argument with Bible verses may truly believe that they are taking an analytical approach. In their belief framework, the Bible is history, recorded by various authors or sources but inspired by God himself. To those devotees, the Bible is fact, not an arbitrary assembling of oral traditions and myths. Two Republican voters, each with very different religious beliefs, practices and priorities still vote for the same candidates and issues. Leaders within the party must negotiate a compromise between Christian compassion and checkbook constraints.

Immigration is a key issue on ideological lines even though most immigrants initially settle down in urban areas where political sentiments skew Democratic. When the labor market is strong in the U.S. relative to other countries, that acts as a draw to legal and illegal immigration. The emphasis is on the “relative to other countries” part. A mismatch in labor market demand between the U.S. and neighboring countries is an important contributor to immigration flows. The strong economy in the late 1990s and early 2000s attracted a surge of immigrants, far more than today’s levels when adjusted for population.

 A recent analysis by the Federal Reserve estimated that restrictive immigration policies from 2017 to 2020 made it moderately more difficult for employers to fill job vacancies.  Farmers and ranchers, a strong Republican cohort, have long lobbied for changes to the H-2A “guest worker” program that would help them meet seasonal worker demand. The number of slots for foreign workers is not enough to meet demand and the application process is burdensome. Employers have similar complaints about the H-2B program for non-agricultural workers, and are heavily used by janitorial and landscaping services. Regardless of the impact of restrictive immigration policies on their businesses, owners may still vote for a candidate who promotes an immigration crackdown.

Jobs and sustainable wages are the cornerstones of family support, individual self-respect and autonomy. Those in rural areas are keenly aware that urban areas offer a more developed communications and transportation network that attracts companies, jobs and talent. For the past several decades, small to medium-sized manufacturing has migrated to foreign markets which offer lower labor costs. The influx of immigrants is yet another potential threat to community stability and resources. Long established immigrants who came to the U.S. through a legal process may not feel welcoming to those who have jumped ahead in the immigration line.   For decades, rural areas have fought to retain businesses and develop more jobs at a sustainable wage. Those who advocate more government spending on infrastructure to attract businesses clash with those having an ideological preference for laissez-faire markets.

Candidates within each party search for and exploit the shifting alliances within their party’s voters. Challenges to incumbents emerge not from the other party but from a primary election by a candidate in their own party. Primary elections attract only a small percent of party faithful whose political passion gives their small numbers a lot of leverage within the party. Fringe candidates with less funding can appeal to special interest groups to further an agenda with a dedicated party base. A candidate can appeal to a single-issue like abortion, immigration, or project a no-nonsense, get-tough persona and attack an incumbent who compromised on a piece of legislation. A Representative must learn to manage different sets of alliances: those in their district and state, and those in Washington. Next week, I will look at several Representatives and how they have navigated relationships of political power within their party.

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Photo by Ryan Noeker on Unsplash

Intended and Unintended Consequences

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August 13, 2023

by Stephen Stofka

This week’s letter explores the free market and rule of two laws in our lives. Advocates for a laissez-faire market quote Adam Smith’s mention of the invisible hand in The Wealth of Nations, or WON. In a free market, individuals pursuing their own self-interest unintentionally promote a general welfare, a positive outcome as a result of the Law of Unintended Consequences.

Smith was particularly concerned with what I will call the Law of Intended Consequences. Under the guise of acting in the public interest, individuals furthered their own self-interest at the expense of the public welfare. In Part I of WON, Smith spent several chapters documenting many examples of collusion between business owners and merchants, labor guilds and city magistrates to further the gains of a small minority at the expense of the majority. This included price supports, price fixing, protective trade restrictions and the granting of monopolies through licensing. The only solution was a system of governance that promoted a general law and order with as few laws as possible.

The free market encourages a set of problems that subtract from the general welfare. Individuals pursue the most gain with the least cost. We want to buy low and sell high. We tout the principles of equality, but more often choose to maximize our own welfare. Transportation is most affected by this trait. Railroad, truck and airline carriers would prefer to supply the shorter distance routes which generate the most profits at the least cost. Without regulation and cross-subsidy, long distance routes that connect local or regional markets are underserved. This cripples the formation of a national transportation system. Although Adam Smith died a few decades before the introduction of railroads, he compared shipping goods by water to land based transportation by horse drawn wagon (Chapter 3). The former was far more profitable and explained why the “art and industry” of cities and towns close to water improved at a faster pace than inland communities.

This free market mechanism of the invisible hand fostered densely populated cities whose crude sanitation promoted epidemics of disease. In 1800 London had a population density averaging 30,000 people per square kilometer, a density more than twice as high as present-day New York City. The rich could afford a wagon and horse for transportation and moved to the outskirts of a city to escape the filth, smoke and disease of congested cities. The poor died prematurely. That was the invisible hand at work, subject to the same Law of Unintended Consequences.

In an ideal world, public laws would strike a balance between the laws of intended and unintended consequences. However, the very making of public law invokes the Law of Intended Consequences. Elected representatives tend to serve narrow ideological or geographical constituencies that are aligned with a representative’s own welfare. That is not a condemnation of their self interest but a description of the difficulty an elected body faces when trying to pass any law that claims to serve the public welfare.

In Article I, Section 8 of the Constitution, the framers limited Congress’ lawmaking authority to specific powers and those that promoted the general welfare. To James Madison, the main architect of the Constitution, that wording was clear. It meant only those laws that supported a broad public welfare like the common defense. Richard Lee, one of the anti-Federalists suspicious of centralized authority, protested that the general welfare could include “every possible object of human legislation,” as Michael Klarman (2016) quoted in his account of the making of the Constitution. Lee was worried that a strong central government could expand its power to tax for any reason that it deemed to be in the general welfare. A small class of people or a central government could argue that their welfare was the general welfare.

People in difficult circumstances clamor for a piece of the tax purse. Pharmaceutical manufacturers argue that a liberal extension of profit-protecting patent rights will promote more drug development and advance the general welfare. Advocates of trickle-down economics champion laws that promote lower taxes and fewer regulations, arguing that business owners will spread the wealth to working families. This is the collusion between private industry and lawmakers that Adam Smith documented 250 years ago. Our motivations and machinations do not evolve.

The welfare of the individual and that of the public must ever come in conflict. There is an inherent weighting we attach to each person’s welfare and each of us gives greater value to our own welfare. In the Part II, Chapter 3 of the Theory of Moral Sentiments, Smith remarked that we get more upset over the loss of the tip of a finger than we do over the loss of millions of lives if China were to be swallowed up by an earthquake. We cannot agree on society’s maximum welfare, or ophelimity, because we use different weighting coefficients to measure welfare. Lawmaking is a compromise between competing calculations of interest, both individual and public.

A laissez-faire market, like a pure white paint, is not efficient. A bit of black or umber tint mixed into a white paint base gets a wall covered in fewer coats and the tint is not noticeable. Each participant in a free market gains from cheating so some regulation is necessary as an incentive toward self-policing. We argue over how much regulation to mix into the free market base. We have different personal convictions, values and tastes, ensuring that our disagreements will persist.

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Photo by Tom Wilson on Unsplash

Keywords: general welfare, trickle-down economics, free market, invisible hand

Klarman, M.J. (2016). The Framers’ Coup: The making of the United States Constitution. New York: Oxford University Press, pp. 322-3.