Buy Local First, or Money Is Made To Wander

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It is shopping season, and some do-gooders want to tell you how and where to spend your money. Go to a local coffee shop or book store and you might see a sign promoting ‘buy local first.’ The logic is simple – buy locally manufactured and sold products and more wealth will remain in your home town. Better, keep the money even closer – in your neighborhood. The theory goes that big stores like Wal-Mart undercut independent local businesses and ruin neighborhoods. Of course nothing could be further from the truth. Buying from the most competitive provider, is the best way to promote your hometown, even your neighborhood’s prosperity.

First off, the irony of a book store or a coffee shop bashing long distance trade is too delicious to pass by. Unless you live on Hawaii’s Big Island, it is more or less impossible for an American to buy local coffee. Coffee is an international commodity that is historically the one of the pillars of international shipping and trade. Books are an even purer form of long distance trade. Unless you live in Oxford MS, you probably don’t want to only read locally written books. The whole point of writing is to allow ideas to travel beyond a local audience. These hotbeds of ‘buy local’ activism are among the most obvious beneficiaries of long distance trade.

Confronted with the obvious paradox of simultaneously marketing international products and promoting ‘local first,’ these shop owners would probably say that the real enemy is large corporations like Starbucks or Amazon driving down margins and siphoning profits to out of town headquarters. No surprise there, businesspeople don’t like competition. Likewise, local politicians support ‘local first.’ After all, the local shop owner is much more likely to contribute to a local mayor than is Starbucks’s Howard Schultz. Everybody wins except for the neighborhood.

Economists like Bastiat and Hazlitt long ago debunked the ‘local first’ notion. Their core point is that while it is easy to see how the local shop keep benefits, it is harder to see how this harms a disparate and unidentified community denied free trade. Of course ‘local first’ trade means paying more; if a local business offered a better value, there were would be no need to cajole people into shopping there. Alternately, even nice businesses charge as much as they can for their products, so increased ‘local first’ business enables favored local businesses to keep prices somewhat higher than if they had to compete with national chains.

So ‘local first’ means paying more. Doesn’t that contribute to the neighborhood? Not really. Every extra dollar spent on ‘local first’ is a dollar a neighbor cannot spend on painting his house, or enjoying a steak meal. By concentrating money on less efficient ‘local’ providers, money that could buy even more things is lost. Every time a consumer bases his decisions on altruism rather than self-interest, potential wealth is lost, and the neighborhood’s standard of living is reduced.

The whole point of trade is to allow people to do whatever they do best, thereby ensuring that overall, more people have more wealth. An extreme example of ‘local first’ is Thomas Thwaites’s The Toaster Project. Rather than just buy a $12 toaster, Thwaites decided to build one himself; ‘local first.’ Naturally, without the benefits of long distance trade, his toaster cost 100 times more, not counting the value of his time and effort. The book purports to comment on the evils of consumerism, but it unintentionally demonstrates the immeasurable benefits of long distance trade and specialization.

Another tragic example of the ‘local first’ fallacy is the ‘green energy’ movement. Among the arguments for wind and solar power is that they keep money ‘local.’ Setting aside the fact that these technologies don’t actually work when the wind is still and the sun has set, they still harm their communities. The ‘local energy’ argument suggests that most of an energy bill goes to pay for far away coal mines, and that is bad. The alternative is to pay 4 to 10 times more for ‘local’ energy. Paying more for the exact same service prevents spending money that could better create local wealth. Not choosing the rational lowest cost provider of electricity is literally destroying wealth, causing unemployment, and reducing the local standard of living.

This Christmas, don’t sign up for the guilt trip that is ‘local first.’ It may be hard to believe, but by allocating your shopping budget to the vendors that give you the best value, you will be creating the most wealth, employment, and local benefit.

Middle Class Welfare And The Payroll Tax Holiday

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Part of Pres. Obama’s latest stimulus package involves renewing a payroll tax holiday that was to expire at the end of 2011. Because FICA taxes are one of the few income taxes that most Americans actually pay, the extension is popular and will probably pass Congress in some form. Of course Social Security and Medicare, the programs funded by FICA taxes, are hopelessly insolvent, and the tax holiday only worsens the problem. More telling is that the tax holiday finally debunks the notion that these programs are self-sustaining entitlements; the tax holiday exposes them simply as middle class welfare.

The government goes to great lengths to present Social Security as an earned right, a savings. A government TV ad opens to a young black man walking with an older man, presumably his grandfather. As is very natural on TV, the young man asks what Social Security is. The old man likens the public pension program to planting a tree. When the young man pays his FICA taxes (15.3% of most people’s wages), he is planting a tree that will grow until he retires, and then he can use the value of that tree. Meanwhile, more young workers will plant their own trees, making for a beautiful forest of savings and security. Less metaphorically, every few years, the Social Security administration mails a statement to each taxpayer tallying his contributions and the benefits he has earned so far.

The use of black actors is telling because blacks’ lower life expectancies compared to other races makes the value of their Social Security taxes less than zero – they would on average be better off stuffing their mattresses with cash. Likewise the tree metaphor is a subtle lie. Trees are tangible, practically immoveable, and each one is a discreet asset that cannot be comingled or vanish without a trace. Trees are reliable and keep growing their whole lives. Finally, the Social Security statements suggest that an individual’s benefits are fixed, like money in a savings account; they suggest that the benefits cannot be taken away because they are the property of individual workers.

The government would like people to believe that FICA taxes are more like forced savings and less like a general fund tax. Taxes pay for collective needs such as national defense or roads, while FICA taxes are personal. They are money set aside for the retirement needs of the individuals who pay them; the statements say as much. The TV ads and the statements suggest to the uninformed that these taxes are more like personal savings.

Of course Social Security and Medicare are the biggest lies a government has ever told its people. There are no savings, and there are no reserves. Indeed the programs are underfunded by perhaps $60 trillion. Any savings accounts are illusory, as Congress raided them long ago. Medicare’s costs continue to climb, while the purported insurance premium remains constant. There is no connection between retirement benefits earned and taxes paid. Even worse, no retirement benefits are earned, they are just middle class welfare doled out by unreliable politicians.

Obama has taken the final step toward debunking the personal savings myth of FICA taxes. By wishing to extend the 2011 temporary tax cut, he is using FICA taxes as a political tool to lever his stimulus bill past a skeptical Congress. If FICA taxes are to pay for one’s retirement, then cutting those contributions should also cut future retirement benefits, but that premise has always been a lie.

Social Security and Medicare have always been a ‘pay-as-you-go’ benefits package. There has never been a connection between FICA taxes and retirement benefits. Retirees currently benefit from entitlements set at the whim of Congress, not earned through savings; this is a system of middle class welfare. There is no Constitutional way to constrain future Congresses from altering benefits or eliminating them altogether. The only news is that Obama is no longer working from the ‘plant a tree for a future generation’ script. Like every other tax, FICA is a political tool, and those who were relying on government for their retirements should think again.

Gingrich On A Bench

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Former House Speaker Newt Gingrich is surging in the polls, and may win the upcoming New Hampshire GOP Presidential Primary. Gingrich’s surge is sensible on some levels – he obliterates the GOP stereotype of an ill-spoken hick who backslaps his way to office; he would surely beat Pres. Obama in a debate; he is an idea man in a time when the old ideas seem to be failing. Gingrich is knowledgeable, a nimble orator, and supremely confident. Compared to many recent pol scandals, his divorces and penchant for expensive jewelry are mild baggage. Indeed, through today’s prism, his ’90s book scandal looks trivial, even virtuous considering his eventual IRS exoneration. Still, Gingrich is a risk, and GOP voters should think hard before betting on this horse, when the wager is the chance of a second Obama term. When the nation desperately needs to reverse its socialist ways, an insider technocrat like Gingrich may be the wrong choice.

 

Gingrich’s gaff, sitting on a bench with Speaker Nancy Pelosi, is embarrassing, but also a window into his psyche. First off, Gingrich exposed himself as a global warming true believer. Gingrich stated that global warming is real, is a threat, and requires immediate action – a set of beliefs inconsistent with the views of the GOP base. More importantly, Gingrich states that government action can spur innovation to solve global warming. Well, Mr. Gingrich, even if global warming is a real threat, there is no evidence that there is any solution short of returning to a pre-industrial standard of living.

 

Gingrich is free to believe in global warming. After all, the issue is dead, and the world is poised to turn away from carbon caps. The real threat is that Gingrich is a problem solver, and he is not afraid to use the government as a problem solving tool. Would Gingrich repeal Obamacare or Dodd-Frank, or would he try to ‘fix’ them? Would Gingrich reverse the FCC’s net-neutrality power grab or would he adjust its misguided policies? Gingrich is a classic beltway insider, even decades removed from office. His connections and careers all point toward a leader that will not cut government, but simply try to run it better. The only path toward saving the US from collapse involves a permanent reduction in the scope of the Federal Government, and Gingrich is not the man for that challenge.

 

Another peek at the inner Gingrich is his quick apology for the Pelosi bench ad – he did not even try to defend himself. Consider his former colleague Rep. Frank. He used the US banking system as his sandbox where he engineered social justice by demanding home loans for unqualified buyers. More than any single person, Frank caused the housing bubble and ultimate collapse that crippled the US economy and ruined countless lives. Frank’s policies and general arrogance proved that he was a despicable abusive tyrant, yet when he was forced to retire to avoid a tough reelection, he apologized for nothing. While Frank’s stomach and chins may be jelly, his heart is stone. Gingrich, by comparison, routinely apologizes, reverses himself and carries on. Frank’s convictions may be evil, but they are fixed. Gingrich twists and turns based on whims few can fathom.

 

Gingrich is smart, articulate, and a master of the political knowledgebase. If the goal were to run the Executive Branch better than Obama, Gingrich would be a fine choice, but slowing the march to hell is no longer an option. The US needs a more serious man, a true reformer, and someone with no love for the beltway.