THE CAPITAL OF SELF- INTEREST / BARRON´S EDITORIAL COMMENTARY ( HIGHLY RECOMMENDED READING )

Monday, August 17, 2009

EDITORIAL COMMENTARY

The Capital of Self-Interest

By MARK HIRSCHEY

Politicians are self interested, not altruistic.

IN THE WEALTH OF NATIONS , ADAM Smith put forth the revolutionary concept that the individual pursuit of self-interest promotes the good of society. By pursuing their own interests, individuals support the good of society more effectively than when they intend to promote social welfare.

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages," Smith said.

Today, politicians rail against what they describe as the misplaced self-interest of investment bankers, CEOs and other corporate executives. There are plenty to hold responsible for the current economic malaise. Blame greedy Wall Street executives who created dangerous financial derivatives. Blame greedy bankers who took advantage of easy credit to grant mortgages that borrowers could not afford. Blame the greedy borrowers themselves.

This list missed one important group: greedy politicians.

If Adam Smith was correct in surmising that we are all motivated by self-interest, then "we" also includes politicians. If corporate executives can be fairly described as motivated by money, power and prestige, the same description applies to "public servants." When Willie Sutton was asked by the Federal Bureau of Investigation why he robbed banks, he famously replied, "That's where the money is." Today, anyone seeking money, power and prestige heads to Washington, D.C. That's where the money is.

Tax What You Don't Like

For example, legislators routinely increase the tax on cigarettes to reduce smoking, but argue that increasing minimum wages will not decrease employment among low-wage workers. They ignore how increasing the minimum wage makes it more difficult for employers to justify the training costs necessary to make teenagers into useful workers.

Eliminating low-wage job opportunities prevents lots of kids from gaining valuable job skills. Lawmakers do not reduce poverty by getting teenagers and other part-time workers fired or never hired in the first place. Kids need better basic education and training, but they also need low-wage job opportunities for the experience that will allow them to earn higher wages. Enlightened economic policy would focus on ways to help workers earn maximum wages, not minimum wages.

Why is unenlightened minimum-wage policy popular and invariably supported in Congress and state legislatures and municipal councils? It isn't credible to argue that presumably well-intentioned politicians are simply ill-informed and naïve about the link between rising minimum wages and higher teenage unemployment. They don't need to read government-provided unemployment statistics to see the problem. Many are old enough to remember low-wage assistance from carry-out kids at the grocery store, gas-pump jockeys, and waiters and waitresses in popularly priced restaurants. So many of those jobs are gone; do they ever wonder why?

The legislative jihad against minimum wage jobs continues because it is in the self interest of politicians to kill such jobs. That's how you increase the need for public assistance and government-sponsored training programs for jobs that don't exist. Politicians prefer handouts to wages because recipients of handouts are beholden to political providers. Public dependency grows when the market system is forced to shrink.

Car Swap

Next we have the Customer Assistance to Recycle and Save (CARS) program, charmingly referred to as the Cash for Clunkers program. Available at registered new-car dealers this summer, the now-$3 billion program provides U.S. government vouchers valued at $3,500 to $4,500 when consumers destroy an eligible vehicle and purchase a new one.

Consumers who want to take the family on a summer vacation, or buy food or back-to school clothing, have to pay their own way, but those who want to buy a new car might be in luck. If they meet political guidelines before the money runs out again, some of their costs will be picked up by taxpayers.

Sponsors want consumers and taxpayers to believe that government aid will reduce new-car costs by a commensurate amount, but whom are they kidding? Industry-provided rebates and sales incentives are shrinking and prices are firming. This gift to consumers is actually a gift to dealers and manufacturers and the United Auto Workers' union. The best thing that can be said about it is that it's a small gift -- most of the clunkers being traded in this summer were going to be replaced soon anyway. They were clunkers, after all.

Healthy Redistribution

Looking ahead to the fall, we have a whole host of politicians to thank for the pending reform of our nation's health-care system. Never mind the lack of evidence that government is able to prudently control health-care costs (have you seen the federal budget deficit lately?), or effectively direct future improvements in health-care technology.

Don't even imagine what the government manual looks like that describes brain surgery; it's hard enough to picture how government bureaucrats will decide who does and doesn't qualify for knee replacement, alcoholism treatment or breast implants.

As for the cost, in the four decades we have had the Medicare and Medicaid programs, health-care spending in the United States has more than tripled, from 5% to 16% of gross domestic product.

In the past half century, federal outlays accounted for an average of 22.2% of GDP. The fiscal 2010 Obama budget boosts that to 27.2%. When health care is more fully nationalized, federal outlays as a share of GDP will rise to 43.2% -- double what they were in 2007.

Politicians would have us believe that this enormous grab for money, power and prestige has nothing to do with political self interest. Taxpayers should remember the advice of Adam Smith and Willie Sutton. After all, politicians are people, too.

MARK HIRSCHEY is Anderson W. Chandler Professor of Business at the University of Kansas
Editorial Page Editor THOMAS G. DONLAN receives e-mail at tg.donlan@barrons.com.

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