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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Spencer Aland joins the ASI

Written by Spencer Aland | Wednesday 02 September 2009

I am delighted to become a part of an institution as prestigious as the Adam Smith Institute. As a student of both Economics and Political Science at Brigham Young University I have gained great respect for the man whose name this great institution bears and also for the timeless principles he introduced to us so long ago. Adam Smith left us with more than a new way of looking at the world; he left us the key to understanding the remarkable order of things in what was previously seen as chaos.

The problem that many politicians and institutions find themselves in today is that they feel as if they have progressed ahead of classical economic theory. They act as if the laws that have governed economic principles since the dawn of man no longer apply to them. Is this a result of arrogance or of simply ignorance? I would argue for the later. The laws of economics are being ignored in this generation and we can see the punishment that the invisible hand can deal to us if disregarded or coerced. The economic future of the world depends on the ability of our leaders to back off the free markets, and yet they insistently continue to attempt to micromanage in a loosing battle. The market has indeed turned to chaos, but we are the cause and not traditional economic thought.

I a big fan of American Football and enjoy a good round of golf when the weather is right. I enjoy travelling and being around friends and family as often as possible.

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Regulating pay: A step backwards

Written by Spencer Aland | Wednesday 02 September 2009

With the recent economic recession many governments have taken it upon themselves to rescue private businesses, pumping them full of taxpayer money. Governments around the world have decided that it would be best to save companies that could not survive in a free market system and in so doing they have intensified the economic uncertainty in the market. Almost immediately, the government starting capping CEO pay, and regulating bonuses, to protect taxpayer’s money that should not have been there to begin with.

The problem is that without incentives to perform, a high-quality CEO will leave to a company that can afford to pay him more. If a failing business is not able to attract superior management to itself by paying more then it will most certainly continue on its path towards complete failure. The government should mind a lesson practiced regularly in the world of sports.

According to Sports Business Daily the average annual salary for a football coach in the National Football League in America was just under $3 million with only 13 coaches making less than the average. The interesting point is that of the 13 coaches that make less than the average only 1 has ever made it to the Superbowl. In college sports the story is not much different; according to the NCAA the average salary for football coaches has increased to over $1 a year and bonuses for winning a single game can reach as high as $450,000. No one would argue the fact that coaches indeed make a difference on how well a team performs, and clearly the best coaches are paid the most. The government doesn’t attempt to cap coaches’ salaries in publicly funded universities because they understand that a coach that can win will fill the stadiums and gain a profit for the University. The same is true in the world of business.

According to an article published in the Journal of Managerial Finance titled CEO Pay and Company Performance authors Kevin J. Sigler and Joseph P. Haley found, “a positive and significant connection between the pay of CEOs and the performance of their respective firms."  They further stated, “From our results it appears that CEO pay is used to align the interests of shareholders with company CEOs, reducing agency costs within the firm." Those in charge of determining CEO pay are those that have the most to lose, the shareholders. Deciding how much to pay a CEO is a simple matter of economic trade-off between compensation and expected performance.

Just as I assume the lowest paid coach will likely not have a good season, I also assume a low paid CEO will not bring in a large profit margin. Incentives to perform need not be tampered with if the government would keep out of private business. Let any company pay its CEO however much they desire, and if it doesn’t work out then let the company go under. The best way to regulate CEO pay is to allow the free market to punish and reward decisions by shareholders on the matter.

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A fast food tax? Not so fast

Written by Spencer Aland | Friday 04 September 2009

The possibility of a new tax on fatty and unhealthy foods may be very real in the United States and other European countries. The idea behind the new tax is twofold: firstly, countries hope to regain additional costs in healthcare caused by obesity related diseases, and secondly to affect behavior so as to discourage the consumption of fatty foods. More specifically, in the United States the tax would be put into place to fund public healthcare expansion. Is the tax justifiable or is it simply a way increasing government control in the private sector?

Although it may be easy for government officials to sell this idea to the general public by claiming that if fast food is more expensive you will eat less of it, in reality it is a but more complicated. The idea that fast food is a normal good is false. In fact, it has been found in almost all circumstances to be an inferior good, meaning that if the price of that good increases so will the demand for that same good. Inferior goods are unique in that they appeal more to low-income individuals because of how easy they are to access and also because of their price. As low-income individuals are able to increase their income they are therefore able to substitute out of fast food and into better types of food which are more expensive. If the price of healthier foods increases they will be forced to substitute back into fast food; however, if an individual is currently dividing his or her disposable income between both healthy and unhealthy foods and the price of unhealthy foods increases then in order to maintain their current overall consumption they must shift exclusively into fast food and spend no money on healthy foods, therefore increasing demand and consumption of unhealthy foods which are still comparatively cheaper than their healthy counterparts.

A study out of Tulane University confirmed the fact that fast and fatty foods are indeed correlated with low-income areas. The government also knows about the ineffectiveness of altering behavior by taxing inferior goods, but they are easy targets to line their pockets. Attacking a product that everyone knows is unhealthy is politically easy, and it is also useful in pulling the wool over the public’s eyes while government programs continue to creep more and more into the private lives of its citizens.

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To save or not to save

Written by Spencer Aland | Wednesday 09 September 2009

The Obama administration is divided on more than just its healthcare policy. The name Obama has been synonymous with spending since he first took office in a misguided effort to stimulate economic growth. While the Obama spending program for government is no secret, it has also aimed to entice consumers to spend more money in the hurting economy through government tax credits and rebates. However, now President Obama wants to create incentives for the American people to save more money.

I am not in anyway opposed to saving, but what exactly does the Obama administration want people to do? If the American people save all the money they receive in tax incentives and government rebates then the money spent by government to stimulate the economy would have zero effect. Not only does Obama’s proposed saving program give incentives for individuals to save, but it also creates incentives for companies to donate into employees savings as well. It is as if the government is trying to counteract all of its spending measures to stimulate growth. Perhaps Obama would have more success if his right hand knew what the left was doing.

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No competition, no progress

Written by Spencer Aland | Thursday 10 September 2009

As reported by the BBC, a recent study has found that there was no improvement in maths skills between 14-year- old students today and those studying during the 1970s. Considering all that has changed and definitely been improved upon in the last thirty years, this should be very troubling to all parents in England.

Advancements in mathematics, engineering, and other major disciplines have worked to transform our world into a technological marvel compared to a mere thirty years ago. Most of these advancements are due to an increased number of private universities, and more importantly, increased competition between all universities. The competitive marketplace has thrived among universities in America, and has lead to a host of scientific and economic breakthroughs.

When the evidence of what free market competition can do on an academic level is increasingly evident, why will government not allow it to enter into the primary and secondary schooling system? Why, after thirty years, can children not perform any better in basic maths skills? Without competition among schools, teachers have no incentives to improve teaching; they have essentially “leveled out" in their field of work. Principals and administrators have nothing personal to gain by putting more pressure on teachers. There is no adequate mechanism to hold administrators accountable for failure. Unless proper competition is injected into the education system we will be stuck in the same place in another thirty years (or worse).

the simple truth is that more competition among schools will lead to more accountability placed on administrators and teachers, which will inevitably lead to better educated students.

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One year after Lehman's collapse

Written by Spencer Aland | Tuesday 15 September 2009

Is it true that in hindsight everything appears in 20/20 vision, or is the government so confident in its own conclusions that is refuses to take a better look? Marking now a year after the fall of Lehman Brothers, and the beginning of the current economic recession, it seems that all we hear from political leaders is that the entire economic recession was caused by too little oversight and regulation by government. But are governments trying so hard to be seen doing something about it that we are headed towards massive amounts of over-regulation, and perhaps planting the seeds for further economic crises?

Government intervention was in large scale the cause of the current economic crisis. In America, for example, the government organized programs aimed at what it called “fair housing" to give all Americans the chance to own a home regardless of past economic or credit status. Fannie Mae and Freddie Mac were essentially the long arm of the government to carry-out these programs and were given a direct line of credit into the US Treasury. The problem is that governments are not willing to leave anyone out, or have any losers, since their primary interest is in pleasing the masses and not turning a profit. The private sector may leave some people out, but it also doesn’t throw massive amounts of money to people that will never be able to repay either - that is unless the government throws equally large amounts of money at them first without expecting repayment. Governments simply do not internalize costs or risks, and government money carries those same tendencies with it. There was just too much of it floating around in investment firms pocketbooks.

Now governments all over the world are once again trying only to please the masses without internalizing any of the costs. They are cracking down on CEO pay and bonuses, limiting investments, and in some cases taking ownership stakes in high risk areas. The government just can’t keep its hand out of the market. The current conditions are due in large part to government covertly trying to buy the free market out, and now they are openly trying to suffocate the market which can only lead to similar or worse outcomes.

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Out of control spending

Written by Spencer Aland | Sunday 20 September 2009

As reported by the BBC, this government has finally decided that spending cuts are going to be necessary after Gordon Brown lead many to believe cuts would not be needed. Were we really expected to believe that a government that has put us nearly £900 billion in debt may not have needed spending cuts? With government spending reaching over 44% of the entire national income did the government truly expect to sit there and tell the British people that spending cuts might not be obligatory?

Government spending has simply reached astronomical proportions. We can no longer claim to live in a free market society. We live within the bounds the government has set for us, instead of the government living within the limits we have given to it. The invisible hand has been cut off, and the free market is caged. I am insulted that the government would dare to look at the people who elected them – the very people who they have laden with over £14,000 of debt each – and say that they believe spending cuts ‘might’ be necessary. What ‘might’ be necessary is a change of command from government to the people, and from the treasury department to the free market.

Government spending is nothing more than a facade to cover up increased debt and limited economic growth through open and fair trade in the free market. How much more government control of the economy do people need to see before they realize that government is painting them into a corner, or would they rather begin to climb the walls rather than stand up for change?

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The end of capitalism?

Written by Spencer Aland | Wednesday 23 September 2009

If I were to describe something in a single statement and then ask you to determine what I was describing, what would come to mind with the phrase, “A heavy progressive or graduated income tax"? Like me, you would probably answer that it was a description of the tax system within the country you reside since most European and American government tax systems are indeed based on this principle. Would it surprise you to find out that this statement is in fact the second most important step towards a communist state, second only to the absolute abolition of private property, as presented by Marx in The Communist Manifesto?

The makings of a communist state are still alive and well, nesting inside the hollowed out remains of once proud capitalistic nations. No matter how much government paints itself up to be a supporter of the free market it is at the same time undermining it.

A frog will most certainly jump out of a pot of boiling water, but put him in the same pot and slowly heat the water until it boils and the frog will never notice until he is dead. Are we simply enjoying the warm waters so much that we don’t realize what is happening? Communism is a parasite. The system is designed to benefit all, but it cannot function with being able to drain the wealth out of those that produce it. If you remove the wealth it feeds on then it will die. We have a parasite problem, and it is killing capitalism with progressive taxes and over regulation. But no one will do anything about it because they are too busy swimming.

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Brown and Labour: Not adding up

Written by Spencer Aland | Sunday 27 September 2009

Gordon Brown, and the Labour Party have some big problems coming their way in the coming elections. Many within Labour have already given up on the next election and some are even calling for Brown to resign for the sake of the Party. Both the Prime Minister and his Party are sinking further in popularity, but don’t seem to be doing much about it.

Brown has tried to rally support through international efforts such as the G20 meetings, but this has been greatly frustrated with the latest meeting of the U.N. and rumors of President Obama’s snubbing of the Prime Minister. Although U.S. President Obama may not have intentionally snubbed Gordon Brown, the media coverage did not help him, nor did the Prime Minister himself in responding to the allegations at all. Brown’s futile attempts to meet with Obama looked more like an unpopular adolescent during middle school, trying to appear ‘cool’ by being seen with the ‘in group’.

The problem that Brown faces is that he is not seen as someone the people can trust. The latest polls from the Guardian show that less than 14% of the population feels that the Labour Party is honest and upfront about the economy. Brown himself is sporting a remarkably low 26% approval rating. The Party just doesn’t seem to be able to add or subtract; if £5 goes in £20 can’t come out. Individuals are expected to balance their own budgets and they have a right to expect their government to do the same. Cries to either decrease spending or even to increase taxes have fallen on deaf ears within the governing party, and it appears Brown may be more concerned about building his own popularity abroad than mending fences at home.

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Car scrappage scheme extended

Written by Spencer Aland | Tuesday 29 September 2009

altThe government funded car replacement scheme in the UK has now been extended. The program is one of many that have been instituted throughout many countries to help stimulate the auto industry. But are the programs actually worth the money? To help with this question let’s examine the U.S. model since the program did spur large amounts of auto sales and since the program has ended we can look at some solid numbers.

Using average numbers from America - given that an average “clunker” or older car is getting 15 mpg and travels an average of around 12,000 miles per year it would use about 800 gallons of fuel. If the owner of the car took advantage of the government program and traded in for a vehicle that got 25 mpg they would use 480 gallons of fuel less each year. That adds up to a large amount of savings for the consumer so far, and that’s where the politicians would want the analysis to stop.

As reported by the New York Times nearly 700,000 vehicles were traded in during the program which means the total fuel consumption in the United States would be reduced by nearly a quarter of a million gallons which equals out to a little less than 11.5 million barrels (there are 19.5 gallons to a barrel). The problems start to become apparent in these numbers, the U.S. uses 20 million barrels of fuel everyday so the actual savings in fuel are just over a half a day’s worth. Although that isn’t that impressive, it’s still something. However, the real predicament is in how much that fuel is worth compared to the amount of money spent to save it. If there was 11.5 million barrels of oil saved, as of 11/09/09, it would be worth just over 816 million dollars, but the government spent 2.87 billion dollars to save that money. That means that for every dollar saved in the “cash for clunkers” program the government spent around $3.50 which is far from impressive.

Yes there may have been jobs saved, and increases in demand, but I am more than confident in saying that any short term benefits will soon be eclipsed by inflation and even worse by massive decreases in demand over the long run.

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