An Economic Choice-Freshwater or Saltwater?
- Posted by Jeff Carter
- on October 18th, 2012
There is a lot of misconception when it comes to economics. Because macro economists are rarely right in predictions over the long haul, there is an excessive amount of spin when it comes to economic theories. Further, because economic incentives shape our behavior, it’s pretty easy to interject emotion into the debate. Once emotion is involved, it becomes easy to use words like “fair” and “balanced” and “invest” or “spend”.
We have seen it all over the past decades. But it’s important to tease out what is really going on. Today we have a choice between what’s known as Freshwater Economic policies, and Saltwater Economic policies. Romney is an advocate of fresh, and Obama an advocate of salt. The reason the two ideologies got their names is that the particular universities that advocate for either are located near the ocean (salt) or a lake (fresh)!
Saltwater economic policies fail. The reason they fail is because they don’t rely on the individual to make decisions for themselves. What they try to do is set up a labyrinth of economic incentives to shape decision making. An outcome of this line of thinking is something like targeted tax cuts. Give tax cuts to a behavior or segment of people that you are trying to positively effect, and you should derive positive outcomes. Of course we know that because it’s the long arm of government that writes the policies behind decisions like this, winners will be chosen, and losers cast aside. Once a person in power has the power to make a decision, cronies get favors, and the great unwashed are left with their hands out.
Another example of this is Tax Increment Financing Districts(TIF). In Chicago, to qualify you have to set you business up in a certain area of the city. Then, you have to fill out reams of paperwork to qualify for the tax rebate. In order to receive the rebate, you have to meet with your alderman and the alderman decides if you are worthy of the rebate. There is a fixed allocation of money for rebates, so not everyone gets the rebate. That’s classic salt water thinking.
If a TIF was a freshwater program, all they would do is lower taxes for everyone. Then let the business owners decide if they wanted to take the risk and locate there or not.
Saltwater economics makes its way into lots of regulation. Take a gander at USDA regulation of the food supply. Government subsidizes, and restricts and eliminates competition-which kills free markets. Did you know that if you grow organic chickens in the state of Indiana, it’s illegal to sell them in Illinois without a distributor? No health insurance company can compete across state lines either which is just one reason why health insurance costs more. CAFE standards on cars actually create worse incentives for energy efficiency than if there were no standards at all. Our entire government health care system concentrates on minimizing costs-instead of trying to figure out ways to lower all in prices which only causes costs to rise continually. There are plenty of examples that illustrate the stupidity of saltwater economics.
Freshwater economics is derided by a lot of people because it’s so simple and elegant. There aren’t any grand schemes to think up. No spider webs to construct. The initial tenant of freshwater economics is that every individual can make a decision for themselves better than an over arching authority. To put it in economic terms, each individual tries to maximize their own self interest or utility. Plus, they are rational when deciding what to do.
This means if a grossly obese person wants to belly up to the 7 Eleven and chug Big Gulps non stop all day, they should be able to do it without paying an extra tax. They are maximizing their own utility. It might not be the decision I make. But, that doesn’t matter. It also means I can grow poultry and sell it anywhere I want, direct to consumers. Freshwater economics incentives always allows everyone to interact in a messy marketplace. Things aren’t cut and dried, and delineated with clear lines.
This logic extends to all kinds of policies. The important precept is to create the same incentive for everyone, and let individuals choose their own fate. That’s what creates markets. Markets always make decisions better than one centralized individual, or even a panel of experts.
Obama has developed an entire administration with individuals making decisions for us all, or a panel of experts making those decisions. He eschews a market based decision making matrix for a centralized one. Obamacare is riddled with panels deciding which drugs to approve, which treatments to approve, and who should get what. Dodd-Frank has panels that decide if a bank has too much risk concentrated in one place and a czar chairing a commission on consumer protection. Obama’s chief of regulation, Cass Sunstein has rewritten regulations with a bent that nudges people to make decisions government thinks are better for them. Obama’s energy policy is picking inefficient green energy over any other form of energy and creating economic subsidies that alter free market balance.
Time and time again, Obama chooses government over the individual.
Government should never have that kind of power. Detractors of Romney say he isn’t that much different. He isn’t perfect, but in the debates, he has argued in favor of individuals making decisions for themselves. That’s why lower taxes with less loopholes are better. It gives choice to individuals. Eliminating loopholes takes power away from government and lobbyists. Instead of relying on big government, that tax change will rely on rational people making decisions for themselves in a freer market. Vouchers put the power in the hands of the individual to decide for themselves, not in an oppressive government program that picks and chooses for you.
It took us 100 years(going back to Woodrow Wilson) to create this bureaucratic albatross. It’s going to take us time to unwind it. Change will be glacial, but Romney is momentum in the right direction.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)
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