Friday, June 26, 2009

Battle of the Century: stocks vs. flows

"The rich get richer while the poor get poorer". The famous rallying cry for more equality used to impress me before I bothered to take the time to be more thoughtful about it. Usually, the above statement (which, by the by, to save you the suspense, is false) is accompanied by income statistics showing rising inequality of incomes over the course of the 20th Century. I could reproduce some of those graphs here, but criticisms of their methodology and conclusions have been handled by people a hell of a lot smarter and accomplished than me. No, the problem I have with looking at income statistics is that it misses the point completely. Inequality concerns should stem from income immobility, wealth differences, and the source of the inequality. I have a really hard time begrudging a wealthy business owner his billions. After all, he took the risks and provided the public with something they wanted, be it delicious cake, useful software, or the better living we enjoy through chemistry. I do however have a problem with wealth accumulated by force, usually these days under government sanction. I cannot condone theft, be it by a common thug in the street or by a sponsored thug in a boardroom, giggling over a no-bid defense contract. Also, if you don't think the former proliferates because of government sponsorship, ask yourself how much crime occurs because peddling drugs is the most attractive opportunity for a lot of young people. Then ask yourself if holding down a part time job below the government-mandated minimum wage might be a better use of their time. Then press the issue by wondering what might happen to streetcorner purchases of drugs if their sale were legal. No one buys corn furtively or shoots someone else for stealing their stash of sofa cushions.

Enough preaching though. Rants against the minimum wage and drug laws are best left for another post (if at all, since all the good arguments have already been made, and made better by proper economists). No, I wanted to talk briefly about stocks and flows, and we can imagine this in several ways. If you're mathematically inclined (and I suspect you'll read this, mom, so this one's for you), you can think of a stock as the initial function, f(x) and a flow as its first derivative, f'(x). Indeed, that's how economists usually think of it. Well, that's at least how I've often heard it described to me. For the rest of us, we can imagine a stock as a pond, and the flows as the streams leading in and out of the pond. Or perhaps the stock is a balloon, and the flows are the guy blowing it up, as well as the pinhole leaks deflating it. When we think of income and wealth, we see income as a flow and wealth as the stock. Well, we see income as an inflow to the stock of wealth, but we can easily imagine outflows as well: consumption expenditures, like ice cream and hookers (more of a service, really, but let's not pick nits); consumer durable expenditures, like cars and mailboxes; and investment goods, like houses and financial instruments.

Now, any good economist should be hopping up and down, ready to put a big fat F with a circle around it across the end of my last paragraph. I know I would if I were grading this. Consumer durables and investments do not drain the wealth pond. Consumables do, of course, but your car is part of your wealth, as is that deck you built last summer and the new siding and the shed out back. Sure, these things depreciate, but they're more a conversion into an illiquid form of wealth than any sort of consumption. Yes, we get pleasure from seeing our beautiful home; we enjoy driving up to a manicured lawn, but these things increase our total wealth in a way that enjoying a snifter of VSOP brandy never could. So, the point is, it's a mistake to mistake cash for wealth. Hell, there's a good case to be made that friendship makes us wealthy. Indeed, I pretty clearly recall Bryan Caplan making just that very argument in the not-too-distant past. I thought it was a great point. Look at your friendships as stocks instead of flows, and you will be able to forgive minor slights much more easily. Do the same with your intimate relationships and your business relationships, and your family and you might very well find yourself making more rational decisions, as well as improving your forbearance and spiritual charity.

Now, before I go getting all maudlin, I should move on to the reason I decided to write this post. I really wanted to address so-called government regulation. Like many other things we commonly mistake for flows, this one is, in fact, a stock. Every bureaucrat that makes up another little rule we have to follow adds to the already-impressive burden of compliance we face at work or elsewhere. Don't believe me? Look for an unabridged OSHA manual.

I doubt many readers caught Veronique De Rugy's testimony on midnight regulation. The YouTube clip boasts a whopping 72 hits, three of which are mine. Yet, she makes an almost obscenely obvious point: as if the normal progression of increased regulatory agency burden isn't bad enough, lame duck administrations have even more incentive to pile on the bureaucracy, especially when it seems likely that power will shift to the other party. It's like opening the sluice gates into our little pond. It will certainly drown out marginally poor swimmers.

The causes of the run-of-the-mill increases in regulatory burden are pretty plain to see. Bureaucrats need to justify their existence and their budget. Of course they have every incentive to craft new regulations. And when our legal system makes it all but impossible to challenge shitty regulations, we just adjust to things and move along, looking for the next loophole and contorting in an effort to comply. This is human nature, no different than adjusting to living with lions in the neighborhood (solution: get in the car) or dealing with drought in Kansas (solution: go West [life is peaceful there] go West [in the open air]). Still, the more contorted we get, the greater the regulatory burden, the harder it is for new folks to jump in the pond, so we end up with porcine natators, bobbing on their government-issued flotation devices, urging the regulators (who very, very, very often once worked, or expect to work in the future for the very companies they regulate) to keep the faucets running. The threat of nimble competition is frightening, as well it should be. It's in their best interests to have a formidable stock of regulation to keep them well-insulated against the speedo-bedecked Michael Phelpses of the world who could swim circles around them if they could just manage to get in the water.

Okay, so that analogy got dumb. So what? The point is, with the regulatory burden getting bigger and bigger all the time, we can probably expect big corporations (those organizations that have the resources to comply with the regulations) to take up an increasing share of the business world. This is not Hayek's emergent order. This is something else. This is artifice, brought on by the intersection of private greed and public coercive authority. This is the ongoing threat to liberty and prosperity we face, and these are the sluiceworks from the ponds of our wealth to theirs.

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