The Law Of Increasing Opportunity Cost And The Problem Of Big Government

Imagine a country that produces two kinds of goods, public goods and private goods.

Public goods are things like national defense. They benefit everyone and it is hard to stop non-payers from getting it (it would be hard to stop a non-payer from getting defended).

Private goods are those that only one person can enjoy and you can keep non-payers from getting it. A Big Mac for example. If you don't pay, you don't get it and if I eat a particular Big Mac, no one else can eat it.

What I am going to show is that as government gets bigger, it will actually get more expensive in terms of what we have to give up in the private sector. The bigger government gets, the more costly it is.

Now also imagine that this country has 5 workers. Some are better at making private goods (their skills are more entrepreneurial) and some are better at making public goods (their skills are more bureaucratic). The table below shows how much of each good each worker can make in a day if they only produced that good.

Notice that worker I is very good at making private goods, but not so good at making public goods (so he is more entrepreneurial and not so bureaucratic). Worker V is the opposite.

These kinds of numbers make sense-we know in the real world people don't all have the same abilities. There is a best plumber, a best doctor, etc. The best doctor is not likely to be a good plumber and vice-versa.

The next table will show all the combinations of private goods and public goods that we can produce if we are at full-employment. That is, if we use all workers.

If we started with all workers making private goods, we make 25 (and 0 public goods). But if we want to make some public goods, we need to move a worker. The best move is to have worker V start making public goods. We give up only 3 private goods and we gain 7 public goods.

If we want more public goods, we would then move worker IV, then worker III and so on.

But each time we do this, we give up a different and increasing number of private goods for each public good gained. The next table shows this.

At first, the cost of each public good is .429 private goods (3/7). We lose the 3 private goods that worker V makes and gain the 7 public goods he can make. But then when we move worker IV, we give up 4 to get 6. So that cost .667.

The more public goods we produce, the more costly they will be in terms of the private goods we have to give up. This is what makes the growing size of government so alarming. We can't see this so easily in the real world. Notice that the last public good costs 2.333 private goods, much more than the first one.

Here are some basic terms that economists use to discuss this issue:

Opportunity Cost-The value of the best foregone alternative. There is no such thing as a free lunch. If we want to build one more skyscraper, we may have to give up one submarine, since there may not be enough steel to go around (steel is scarce!).

The law of increasing opportunity cost-As more of a particular good is produced, the opportunity cost of its production rises. Why is the law of increasing opportunity cost true? Different resources are better suited to different productive activities. This is just about the same as saying people have different abilities, like some are more entrepreneurial and some are more bureaucratic.

End ObamaCare’s Ban on Physician-Owned Hospitals

A little-known Affordable Care Act provision stifles competition and drives Medicare costs up

By James Lankford and Brian J. Miller. Excerpts:

"A tiny paragraph in the enormous Affordable Care Act prohibits physicians from building or owning hospitals. Any existing physician-owned hospital built before 2010 is prohibited from growing beyond the size it was when the bill passed."

"likely contributing to higher prices for Medicare and reduced access to treatment for millions of Americans."

"Government price controls for Medicare have failed to keep costs down, as program costs have grown 5.9% a year over the past decade."

"The current political debate has focused on the effects of monopoly power and consolidation across industries, including healthcare. The Biden administration’s executive order on competition specifically mentions hospital consolidation and subsequent rising costs. Yet political leaders overlook the most obvious way to increase healthcare options: letting doctor-owned and -managed facilities grow as they did before 2010."

"Specialty physician-owned hospitals focused on cardiology and cardiac surgery were found to deliver higher-quality care than nonprofit hospitals, with lower rates of hospital readmission or mortality for high-risk surgery. Physician-owned specialty hospitals for orthopedic procedures, such as hip and knee replacements, offered lower costs and higher quality than nonprofit counterparts."

"Allowing doctors to own and run hospitals would give rural communities another option to maintain local high-quality care and encourage local investment in existing hospitals."

Emission Cuts Will Fail to Stop Climate Change. What to Do Then?

Nathan Myhrvold outlines the possibilities for ‘geoengineering’ to cool the Earth and remove CO2 from the atmosphere.

By Tunku Varadarajan of The WSJ. Excerpts:

"Make no mistake—Mr. Myhrvold is concerned about climate change. But he’s a scientific realist who thinks the shibboleths on the subject—embodied in such documents as the Paris Agreement of 2016—are misbegotten. Mankind isn’t capable of reducing emissions enough to keep temperatures from rising unacceptably.

He laments that policy makers largely scorn geoengineering—human interventions in the Earth’s natural systems to thwart or neutralize climate change. Such interventions could make a difference by following two broad approaches: solar-radiation management, “which seeks to reflect sunlight back into space,” and direct air capture, which means “sucking carbon-dioxide from the sky.” While these methods may “sound crazy,” he says, “they could work.” But research of this kind is actively discouraged."

"Data from rigorous long-term CO2 measurements around the world show that “despite all the coal plants shut down, all the electric vehicles sold, all the solar and wind power deployed, all the people now working from home rather than commuting,” the concentration of CO2 continues to rise “just about as fast as it has for the past 40 years, and faster than it did in the 1960s and ’70s.”"

"Geoengineering is about “deliberately trying to reduce climate change.” Excess CO2 traps a little less than 1% of heat from the sun, “so if we could make the sun 1% dimmer, we could shut off climate change.” When Mount Pinatubo, a volcano in the Philippines, erupted in 1991, it lowered world-wide temperatures by 1 degree Celsius for about 18 months. Human-emitted particulate pollution has historically offset about 20% of human-emitted CO2. “Ironically,” he says, “the Clean Air Act made our air better but hurt climate change.”

The simplest solar-radiation management scheme, Mr. Myhrvold says, “is to emit particles in the stratosphere to mimic Mount Pinatubo."

"“Marine cloud brightening” is another solar-related intervention. “The idea is to increase the number and size of low clouds that form over the oceans so that more incoming sunlight bounces back into space instead of heating the ocean.”"

Geoengineering would appear to be the application of science par excellence. But along with the activists who “don’t want a technical solution to climate change,” he says, “there’s a second set of people who may not have that ideology, but have a more realpolitik sort of view.” This group—which comprises most Western governments—want “people to shut up” about interventions. He likens this approach to “The Little Engine That Could,” a children’s story about a small blue engine that pulled an entire train over a hill, inch by inch, through the sheer force of its will. “Opponents worry that once you have geoengineering, people won’t make sacrifices to cut emissions. They want a sword of Damocles hanging over humanity as a means to force us to follow their ideology.”

Mr. Myhrvold uses an analogy he describes as “horrible in some ways.” When the AIDS epidemic hit, some people saw it as punishment from God. “Their attitude was, ‘This is what you get if you indulge in the practices we don’t approve of.’ ” In climate change, he says, this moralistic attitude takes the following form: “I don’t like aspects of our society, I don’t like technology, I don’t like capitalism, and this is nature’s retribution. And so we have to change the way we live.” Such beliefs “have become a very powerful disincentive, particularly for academic researchers.”"

Trump, Buttigieg and the East Palestine Train Derailment

Townspeople in Ohio become props for politicians fanning anxiety.

WSJ editorial.

"It’s still unclear what caused the Feb. 3 train derailment in East Palestine, Ohio, but Donald Trump and his opponents aren’t letting the tragedy go to political waste. The former President on Wednesday lambasted the Biden Administration’s response during a visit to the rural Ohio town, while Democrats spin a progressive parable of corporate greed.

Local public anger is boiling over amid a lack of certainty about what caused the Norfolk Southern Corp. derailment, how long it will take to clean up the disaster, and what the long-term environmental harm might be. Enter Mr. Trump, who on Wednesday donned a superman cape and handed out bottled water while denouncing Biden officials. “They were doing nothing for you,” he said. “They were intending to do nothing for you.”

Bottled water aside, Mr. Trump may have made matters worse by suggesting the tap water is unsafe, even as Gov. Mike DeWine and Environmental Protection Agency head Michael Regan were drinking tap water themselves to reassure the public.

But Biden officials have also contributed to the mistrust with a cookie-cutter progressive narrative. In a Feb. 19 letter to Norfolk Southern CEO Alan Shaw, Transportation Secretary Pete Buttigieg accused railroads of spending “millions of dollars in the courts and lobbying members of Congress to oppose common-sense safety regulations, stopping some entirely and reducing the scope of others” while buying back stock.

Mr. Buttigieg cites a 2015 Obama Administration regulation mandating Electronically Controlled Pneumatic (ECP) braking technology on some trains carrying flammable liquids such as oil. ECP brakes apply pressure throughout trains instantaneously, unlike conventional brakes in which each car receives a signal sequentially through an air pipe.

The costly rule provided marginal safety benefits, but it would have advanced the left’s anti-fossil fuel agenda: First, block pipelines. Then make it prohibitively expensive to move oil by rail. Industry groups sued, and Congress instructed the Transportation Department to re-evaluate its analysis and the Government Accountability Office to do an assessment.

GAO in 2016 identified myriad problems with the government’s cost-benefit analysis, and the Trump Administration rescinded the rule in 2018. There’s no evidence ECP brakes would have prevented the derailment, and the Obama rule wouldn’t have applied to the Norfolk Southern train because it wasn’t classified as a “high hazard flammable unit train.”

Mr. Buttigieg also criticized Norfolk Southern and other railroads for deploying technology to inspect tracks, which labor unions oppose. Automated inspections are more efficient and can detect safety problems better and more quickly than the human eye. But Biden regulators have limited the technology’s use, and there’s no evidence it contributed to the derailment.

Mr. Buttigieg also claimed that the accident supports the need for union-backed regulations requiring a minimum of two crew-members on trains. Technology is making it safer and more efficient to operate freight trains with one worker in the cab, as many passenger trains do. Regardless, the East Palestine train had three crew members.

Another Buttigieg red herring: Paid sick leave will make trains safer. “A healthy and well-supported workforce is a safer workforce,” he says. Again, there’s no evidence a shortage of paid sick leave contributed to the disaster. And why is he re-litigating a fight between unions and railroads that his boss and Congress settled late last year?

Demands by four railroad unions for more paid sick leave nearly resulted in a crippling national strike last fall. But Congress passed and President Biden signed legislation imposing a contract that grants unions a 24% pay raise over five years plus an unscheduled day of sick leave on top of existing railroad policies that offer an average three weeks of vacation.

***

Mr. Buttigieg also flogs $18 billion that Norfolk Southern has reportedly spent on buying back stock and dividends in the past five years, which he suggests came at the expense of safety. But there’s no evidence of that either. Train derailments have fallen by half since 2003 and by more than 80% since 1980 even as deregulation has made railroads more efficient and profitable.

There are still roughly 1,000 derailments a year, as Mr. Buttigieg said last week, and the one in East Palestine has drawn more attention than most because of its major damage. But politicians aren’t helping anyone in the town by exploiting the tragedy for their own ends."

It’s Time to Stop Demonizing Buybacks

See Stock Buybacks Aren’t Bad. They Aren’t Good, Either by Jason Zweig of The WSJ. Excerpts:

"Don’t let a handful of anecdotal examples blind you to the broader evidence. A clear-eyed look at some of the rhetoric swirling around buybacks will show whether it holds up.

Buybacks starve companies of capital they could deploy more profitably by investing in the growth of their businesses.

This critique implies that the same management we shouldn’t trust to allocate excess capital correctly in a buyback will allocate it correctly for other purposes.

Expecting oodles of surplus cash not to burn a hole in the typical CEO’s pocket, however, is like putting a pile of raw meat in front of a lion and expecting it not to disappear.

My favorite examples come from the 1970s, when—just like now—giant oil companies had vastly more capital than they could plow back into their existing wells.

Instead of buying back shares, in 1979 Exxon Corp. bought an electric-motor maker for $1.2 billion—only to bail out a few years later, barely breaking even. Exxon also pumped at least $1 billion into futuristic office equipment—only to back out of those businesses, too, by the mid-1980s.

Exxon’s then-rival, Mobil Oil Corp., spent more than $1 billion to buy a company that made cardboard boxes and ran the Montgomery Ward department-store chain. That flopped, too.

Companies have been artificially hyping their market value by repurchasing their own shares.

A new study, “Share Repurchases on Trial,” by accounting and finance professors Nicholas Guest of Cornell University, S.P. Kothari of the Massachusetts Institute of Technology and Parth Venkat of the University of Alabama, analyzes the stock returns of thousands of companies from 1988-2020, comparing those that repurchased shares against firms that didn’t, adjusting for their size and other factors. In the year of a repurchase, companies that did large or frequent buybacks had slightly lower—not higher—returns. Over longer periods, their returns were indistinguishable.

Research published in 1967 showed similar results. 

Companies doing buybacks invest less in capital expenditures or research and development.

Younger companies with great prospects for internal growth tend to plow all their cash back into the business, leaving nothing for buybacks. As companies mature, their growth opportunities dwindle and their business generates more cash than they need, making share repurchases an appropriate choice for the surplus.

So, on average, accelerating companies don’t do buybacks, while decelerating businesses do. Investors tend to pay more for fast-growing stocks, so the short-term market performance of slower-growing companies doing buybacks turns out to be a bit lower.

In general, it isn’t that companies invest less because they’re doing buybacks. It’s that they do buybacks because they have less left to invest in.

Buybacks are on the rise because overcompensated CEOs are using them to fatten their own pay.

While the raw dollar amounts of buybacks have risen, as a percentage of the total value of the U.S. stock market they have shrunk by almost half since 2007—to roughly 0.7% from 1.3%, according to S&P Dow Jones Indices. The buyback boom has been dwarfed by the rise in stocks overall.

"What’s more, the “Share Repurchases on Trial” study finds that CEOs of companies doing buybacks don’t earn noticeably more compensation—including salary, bonus and stock options—than those at comparable companies that aren’t repurchasing shares. On average, CEOs doing buybacks don’t even earn 1% more in total pay."

Beijing Urges Rural Officials to Hire Humans—Not Machines

With migrant workers’ opportunities dwindling, authorities are pressing local officials to find more for them to do, even if some of the work is inefficient

By Stella Yifan Xie of The WSJ. Excerpts:

"China’s top economic agency recently called on local governments to find more work for rural laborers, such as widening roads and digging canals—even if the tasks could more efficiently be done by machines. 

“If it’s possible to use human labor, do not use machines, and mobilize local residents to do the jobs,” said a directive released by China’s National Development and Reform Commission last month

The decree, which updated guidelines for a government rural relief program called Yi Gong Dai Zhen, or “work as relief,” reflects Beijing’s concerns that migrant laborers are running out of opportunities as China’s economy evolves.

The country’s nearly 300 million migrant workers used to be able to find employment easily on construction sites or in factories as China industrialized. Many jobs have disappeared, however, as China’s economy becomes more service-oriented, with more need for baristas or bank employees."

Reminds me of this story about Milton Friedman:

"While traveling by car during one of his many overseas travels, Professor Milton Friedman spotted scores of road builders moving earth with shovels instead of modern machinery. When he asked why powerful equipment wasn’t used instead of so many laborers, his host told him it was to keep employment high in the construction industry. If they used tractors or modern road building equipment, fewer people would have jobs was his host’s logic.

“Then instead of shovels, why don’t you give them spoons and create even more jobs?” Friedman inquired."

From Mark Perry.

‘The 1619 Project’ on Hulu Vindicates Capitalism

Its examples of racism are all the result of actions by governments

By David R. Henderson and Philip W. Magness. Excerpts:

"But almost every example presented is the result of government policies that, in purpose or effect, discriminated against African-Americans."

"the federal government forcibly evicted black residents of Harris Neck, Ga., during World War II to build a military base."

"After the war, the government refused to let the former residents return."

"The FHA discriminated against minority neighborhoods by classifying them as too “hazardous” for lending."

"the FHA’s statement in the 1930s that “no loans will be given to colored developments.” This policy lasted into the 1970s"

"The Wagner Act of 1935 gave white unions privileged bargaining positions under federal law. This government-sanctioned cartelization of labor allowed entire industries to exclude black workers."

"The narrator states that “the New Deal represented the first affirmative-action policy for white people.”"

The (Even-Stronger-than-We-Thought) Relationship Between Economic Liberty and National Prosperity

By Dan Mitchell.

"I frequently call attention to the “anti-convergence club” because of the many real-world examples showing that nations with free markets and limited governments enjoy much better economic performance.

Here are just a few case studies.

• North Korea vs South Korea
• Botswana vs neighbors
• Chile vs Cuba
• West Germany vs East Germany

All this seems like a strong argument for smaller government. And it is.

But all this data I’ve been sharing may understate the case for economic liberty.

I wrote last October about how satellite-based measures of nighttime light (a proxy for economic vitality) show that nations with less political freedom have a tendency to exaggerate economic performance.

So what happens if we measure the relationship between economic liberty and economic performance using this more-accurate satellite-based data?

Sean P. Alvarez, Vincent Geloso, and Macy Scheck answered that question. Here are some excerpts from their new study.

…the well-documented proclivity of dictators to fudge GDP numbers biases our estimations of the effects of economic freedom on economic development. Since dictatorships are generally also countries with low economic freedom, overstated GDP numbers can fool us into finding more modest effects of economic freedom. To test our argument, we employed newly generated adjustments to GDP numbers based on artificial nighttime light intensity that corrected for the overstatements that dictators made… Swapping unadjusted and adjusted GDP numbers as dependent variables in similar econometric setups allowed us to estimate how large is the bias. For income levels between 1992 and 2013, we find that the true effect of economic freedom is between 1.1 and 1.33 times larger than estimations based on manipulated GDP numbers. For income growth, we find smaller effect for the economic freedom index as a whole but some signs that some components (size of government and the security of property rights) have underestimated positive effects that should not be neglected.

Wonky readers may be interested in the results contained in Table 2 from the study.

And here’s some of the text discussing those results.

…the use of adjusted GDP figures suggests that the effect of economic freedom (i.e., the aggregate index) is roughly 25% larger than estimated with unadjusted GDP figures. For the different components of the index, the use of adjusted GDP figures has an uneven effect. For example, regulation and freedom to trade suggest that the true effects are roughly 20% larger than when using the unadjusted GDP figures. In contrast, the true effects for the component that speaks to the protection of property rights are more than 33% stronger. These are economically significant results that speak to a large bias against finding a pro-development effect of economic freedom.

The bottom line is that economic liberty apparently matters even more than we thought – about 25% more.

So if you want to know why I’ve been so critical of Bush, Obama, Trump, and Biden, that’s part of the answer."

Advice for the new World Bank chief

By Tyler Cowen.

"From my latest Bloomberg column:

First, contrary to the prevailing wisdom, the World Bank should not make climate change more of a priority. Climate-change issues are more closely associated with rich and middle-income countries than with the poorest countries. The very poorest countries, because they have small economies, do not as a rule emit much carbon. Indoor air pollution, such as burning wood or fuel for heat or cooking, is usually more of a problem. Those emissions can be toxic, and the World Bank should try to help reduce them. But that won’t do much to cut carbon emissions.

The World Health Organization estimates that about seven million people die each year from the direct effects of air pollution. For poorer countries, alleviating that problem should be a greater priority than fighting global climate change.

The reality is that if the World Bank can help elevate some very poor countries into middle-income countries, climate-change problems will become somewhat worse — at least in the short to medium run. “We make climate-change problems worse” is not a marketable slogan. But it is selfish to try to get the World Bank to do more good for the wealthiest nations and less good for the poorest nations, which is essentially what prioritizing climate change would do. And of course the world’s wealthier nations are broadly coincidental with the major shareholders of the World Bank…

If there is any area where the World Bank should double down, it is in public-health interventions. Over the last several decades, the successes have been extraordinary. In Africa, for instance, child mortality rates have plummeted, and many public-health indicators have improved considerably, especially outside of major conflict zones. Why not invest more in what is working?"

Despite gloomy headlines, our planet is getting cleaner and healthier

By Cameron English of The American Council on Science and Health.

"KEY TAKEAWAYS

• Dreary, despondent headlines about pollution and climate change are the norm. But they are not painting a full or accurate picture. 
• While Earth is still no Garden of Eden, many countries are making serious efforts to become clean and green. The results are scientifically notable but underreported by the media. 
• Human ingenuity is the ultimate resource. In a world filled with bad news, that's a fact worth celebrating.

There is no shortage of bad news in media headlines. “Climate change is already killing us,” the World Health Organization (WHO) declared in the run up to the UN’s COP 27 Climate Change Conference. “Low levels of air pollution deadlier than previously thought,” McGill University lamented. “Brazil’s plans to pave an Amazon road could open path to more deforestation,” yet another despondent headline from NPR blared. 

Most people undoubtedly accept that climate change, air pollution, and deforestation are very real problems we ought to take seriously. What fewer of us seem to realize, however, is that the world has taken these issues seriously and made significant progress toward solving them as a result. This observation leads us to an important but oft-overlooked conclusion: Economic growth and technological innovation are making our planet a cleaner, safer place to live.

Pollution is plummeting

“Between 1970 and 2020,” according to the U.S. Environmental Protection Agency (EPA), “the combined emissions of the six common pollutants (PM2.5 and PM10, SO2, NOx, VOCs, CO, and Pb) dropped by 78 percent.” Similar trends have been observed in other developed nations as well. Between 1970 and 2016, the UK reduced its emissions of all air pollutants except ammonia by 60%. The trend is unmistakable to anyone looking carefully at the evidence. Drs. Hannah Ritchie and Max Roser helpfully summed up the situation for Our World in Data in 2019:

“What becomes clear is that far from being the most polluted in recent history, the air in many rich countries today is cleaner than it has been for decades.”

They rightly cautioned that we have more work to do. Many developing countries have yet to acquire the resources necessary to invest in pollution-reduction measures; they are primarily focused on raising their standard of living by gaining access to abundant food and energy supplies, for example. As their economies develop, they will have both the means and the desire to tackle air pollution. This pattern has been observed in countries all over the world.

More food on less land

One of the best ways to bring a nation out of grinding poverty is to boost its agricultural productivity. The introduction of high-yielding crop varieties during the Green Revolution, led by plant pathologist Norman Borlaug, nicely illustrated how this phenomenon works. According to a July 2021 study, enhanced crops developed between 1965 and 2010 increased food production by more than 40%, saving the world a whopping $83 trillion. Addressing the environmental impact of agriculture, the authors didn’t mince words:

“Our paper also sheds light on a concern, often expressed in the literature, that agricultural productivity improvements would pull additional land into agriculture at the expense of forests and other environmentally valuable land uses. We find evidence to the contrary… the Green Revolution tended to reduce the amount of land devoted to agriculture.” 

Here’s just one way we know this conclusion is correct. Since 1961, farmland has only expanded by 7% while the global population has boomed — increasing by nearly 150%. Hannah Ritchie and Max Roser also captured the significance of this explosion in food production:

“The world passed ‘peaked deforestation’ in the 1980s and it has been on the decline since then… We lost 150 million hectares — an area half the size of India — during that decade… Since then, deforestation rates have steadily declined, to 78 million hectares in the 1990s; 52 million in the early 2000s; and 47 million in the last decade.”

What about climate change?

Of course, climate change is the elephant in the room. Greenhouse gas (GHG) emissions have increased in recent decades, which has led the WHO and others to warn about the looming public health impacts of heat waves, wildfires, and other natural disasters caused by global warming. Even here, though, the disaster projections that so often make headlines are out of step with the evidence.

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For one thing, improved infrastructure (such as widespread air conditioning) has helped prevent a lot of weather-related mortality. Deaths due to natural disasters more broadly have also plummeted: A century ago, natural disasters commonly killed more than a million people annually. Today, that figure hovers somewhere between 10,000 and 20,000 deaths per year.

Recent research has shown that fossil fuels have generated far fewer GHG emissions than projected by commonly used climate models, a divergence that “is going to only get larger in coming decades,” climate researcher Roger Pielke, Jr. explained in November 2020. This means that the worst-case climate scenario grows “increasingly implausible with every passing year,” climatologists Zeke Hausfather and Glen Peters argued that same year in the journal Nature. These results led the New York Times to report in October 2022:

“Thanks to astonishing declines in the price of renewables, a truly global political mobilization, a clearer picture of the energy future and serious policy focus from world leaders, we have cut expected warming almost in half in just five years.“ [Emphasis added]

Greener planet

What does all this mean? The economist Julian Simon was right: Human ingenuity is the ultimate resource. We have always faced serious threats to our well-being, but we’re also very good at developing long-term solutions to those problems. In a world filled with bad news, that’s a fact worth celebrating."