Naked Economics: Undressing the Dismal Science pdfdrive com

New York Times headline: “In Washington, One Bank Chief Still Holds Sway.”
The story began, “Jamie Dimon, the head of JPMorgan Chase, will hold a
meeting of his board here in the nation’s capital for the first time on Monday,

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with a special guest expected: the White House chief of staff, Rahm Emanuel.
Mr. Emanuel’s appearance would underscore the pull of Mr. Dimon, who amid
the disgrace of his industry has emerged as President Obama’s favorite banker,
and in turn, the envy of his Wall Street rivals. It also reflects a good return on
what Mr. Dimon has labeled his company’s ‘seventh line of business’—
government relations.”
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There is nothing inherently wrong with this. Politics is a necessary but
imperfect process, and everyone has a right to seek influence. Military bases get
built or closed in a way that reflects the makeup of the Senate Armed Services
Committee as much as or more than the military needs of the country. A private
army is not an option, so this is the best we can reasonably expect. But the less
the economy is left to politics, the better. Powerful politicians should not be
deciding, for example, who gets bank credit and who does not. Yet that is
exactly what happens in autocratic nations like China and in democratic
countries like Indonesia where politicians play “crony capitalism.” Projects that
have the potential to be highly profitable do not get financing while dubious
undertakings sponsored by the president’s brother-in-law are lavished with
government funds. Consumers lose in two ways. First, their tax money is
squandered when projects that never should have been funded in the first place
go bust (or when the whole banking system needs to be bailed out because it is
full of rotten, politically motivated loans). Second, the economy does not
develop as quickly or efficiently as it might because credit (a finite resource) is
channeled away from worthwhile projects: car plants don’t get built; students
don’t get loans; entrepreneurs don’t get funding. As a result, resources are
squandered and the economy does not perform anywhere near its potential.
Government need not run steel mills or parcel out bank loans to meddle in the
economy. The more subtle and pervasive kind of government involvement is
regulation. Markets work because resources flow to where they are valued most.
Government regulation inherently interferes with that process. In the world
painted by economics textbooks, entrepreneurs cross the road to earn higher
profits. In the real world, government officials stand by the road and demand a
toll, if they don’t block the crossing entirely. The entrepreneurial firm may have
to obtain a license to cross the road, or have its vehicle emissions tested by the
Department of Transportation as it crosses the road, or prove to the INS that the
workers crossing the road are U.S. citizens. Some of these regulations may make
us better off. It’s good to have government officials blocking the road when the
“entrepreneur” is carrying seven kilos of cocaine. But every single regulation

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carries a cost, too.
Milton Friedman, who was a delightful writer and an articulate spokesman for
a less intrusive government (and a far more subtle thinker than many of the
writers who haunt the op-ed pages these days purporting to have inherited his
mantle), makes this point in Capitalism and Freedom by recounting an exchange
between an economist and a representative of the American Bar Association at a
large meeting of lawyers.
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The economist was arguing before the group that
admission to the bar should be less restrictive. Allowing more lawyers to
practice, including those who might not be the sharpest knives in the drawer,
would lower the cost of legal services, he argued. After all, some legal
procedures, such as basic wills and real estate closings, do not require the
services of a brilliant Constitutional scholar. He argued by analogy that it would
be absurd for the government to require that all automobiles be Cadillacs. At that
point, a lawyer in the audience rose and said, “The country cannot afford
anything but Cadillac lawyers!”
In fact, demanding only “Cadillac lawyers” completely misses all that
economics seeks to teach us about tradeoffs (for reasons that have nothing to do
with the fact that General Motors is a basket case). In a world with only
Cadillacs, most people would not be able to afford any transportation at all.
Sometimes there is nothing wrong with allowing people to drive Toyota
Corollas.
For a striking international example of the effects of regulation on the
economy, consider the civil unrest in 2000 in Delhi, India.
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Delhi is one of the
most polluted cities in the world. After the Supreme Court of India made a major
decision regarding industrial pollution, thousands of Delhi residents took to the
streets in violent protest. “Mobs torched buses, threw stones, and blocked major
roads,” the New York Times reported. Here is the twist: The protesters were