Thursday, July 19, 2012

Deadweight Loss

The news has discussed the "economic recession" much lately, in terms of unemployment, GDP, and spending rates. I prefer the term "economic correction". These figures are not measures of prosperity. In a time of war or disaster, unemployment would be low but it would not be prosperous. In a debt bubble GDP and spending might be high, but it would not be prosperous.

Prosperity is the goal, and how do you maximize prosperity? Someone might compare the governments of Somalia and the United States saying "Somalia has anarchy. Look how poor they are. The US Government makes us prosperous." Except it's because America is bountiful that we've prospered, mostly despite the government.

So hold on to your Keynesian worship of central banks and Marxist contempt of the bourgeoisie. There is just one simple economic concept I wish everyone would ponder: "Deadweight Loss".

This simple relationship of the demand-supply curve shows that when an interference restricts price or supply, the market will not perform at equilibrium (where consumers pay producers a negotiated price for goods). Demand will not meet supply. A market inefficiency is introduced with any such interference, e.g.: subsidies, taxes, licenses, permits, regulations, price caps, etc. This is waste, aka "deadweight loss" (yellow chart area). The money taxed or taken is also surely to be spent on a subsidy elsewhere, creating further deadweight loss.

Folks go on about "social goals", but let's refute any bullpucky about "government investment". Government is taxation, force, and special interests. Politics is my gang vs. your gang, so drop the humanistic spin because charity works just fine in free markets too. Check yourself and the chart again if you truly hold faith in government "fixing the economy". The point to take home is that government makes the economy as a whole less efficient and therefore less prosperous. The path to prosperity is free markets.