Sunday, August 30, 2009

Bastiat in 1849

Here I encounter the most popular fallacy of our times. It is not considered sufficient that the law should be just; it must be philanthropic. Nor is it sufficient that the law should guarantee to every citizen the free and inoffensive use of his faculties for physical, intellectual, and moral self-improvement. Instead, it is demanded that the law should directly extend welfare, education, and morality throughout the nation.
This is the seductive lure of socialism. And I repeat again: These two uses of the law are in direct contradiction to each other. We must choose between them. A citizen cannot at the same time be free and not free.

Saturday, August 29, 2009

You Can Keep Your Insurance if you Like IT?

According to President Barack Obama: "If you like your private health insurance plan, you can keep your plan. Period."
This is a pure distortion if not outright falsehood. Under Section 59(B)(a) of HR3200 and Section 151 of the bill that passed out of a Senate committee, every American would be required to buy health insurance. And the insurance must meet certain government-defined standards. For example, under Section 122(b) of the House bill, all plans must cover hospitalization; outpatient hospital and clinic services; services by physicians and other health professionals, as well as supplies and equipment incidental to their services; prescription drugs, rehabilitation services, mental health and substance-abuse treatment; preventive services and other care including
dental, vision, and hearing services for children under age 21. The bill also establishes a Committee to develop additional minimum benefit requirements. If your current health insurance doesn't meet all those requirements, you won't immediately be forced to drop your insurance for a government-specified plan but you would be required to switch if you lose your current insurance. Perhaps more importantly, for those who get insurance through work, those plans would all have to satisfy the government's benefit requirements within five years. With the increased costs, why wouldn't your employer simply dump you into the government-run "public option." As many as 89.5 million workers will lose their current employer-provided plan and be forced into government-run insurance. This is not allowing people to “keep your insurance plan if you like it.”
Seniors, will also lose their current coverage, at least the 10 million seniors currently participating in the Medicare advantage program. The House bill cuts payments to the Medicare Advantage program by roughly $156.3 billion over 10 years.

Friday, August 28, 2009

David Brady on Health Care Reform, Public Opinion, and Party Politics

Russ Roberts interviews David Brady over on Econ Talk on health care

Brady argues: "It is likely the average person is a Keynesian"

To the extent that Brady is correct, this has dire implications for liberty. The question is, if this assertion is true, how did this happen?

Brady does on:

"Political dynamic is to always expand it. Reality: due to tax changes over last 25-30 years, we have removed more and more families from the income tax. Political economy of that is unhealthy; any expansion to government starts off with 40% support because it doesn't cost anything out of pocket to those off the taxes, unless they worry about the dynamics of higher tax rates."

This is key, Brady looks at the dynamic of change and the underlying trend in the US seems to be a willingness to trade liberty for security. The result of that is a decision to accept less future freedom and growth for current security.

Why is this? I am thinking about the distinction in classical philosophy between the wise and the many. If the many can be represented by the character of George Castanza from the old Seinfeld TV program and the wise (in the Aristotlean sense) might be represented by figures such as Robert Higgs or Milton Freedom, I wonder what are the realistic actions that are open to those who aspire to move from the many to the wise?

Direct link to interview -

Thursday, August 27, 2009

We Need More Government Spending?

Paul Krugman ( tells us that government deficits are not a problem and that more government spending is necessary to create prosperity. He sees more government spending as a cure for every economic evil and Krugman is not alone.
People point to idle factories, unemployed workers and their unsatisfied wants. All we need to do, they say, is to get the government to start priming the pump. A little government spending would provide the would-be workers with the wherewithal to buy the things they desperately need. This would encourage businessmen to put the unemployed to work in the idle factories. But, wait, this makes no sense. Where does the government get the money to spend? The government can pay out only what it borrows or collects in taxes. So when government spends it is directing resources away from areas that people would have chosen to spend their own money on to areas that government bureaucrats have selected.
There are some simple economic facts we should not ignore. No free man works, buys or sells unless he fully believes that such action will make him better off. No free man ever takes a job at any wage unless he believes he is better off working at that wage than he would be if he did not take it. Likewise, no employer ever employs a man at any wage unless the employer feels that he will better his situation by employing that man at that wage. So, in a free economy, employees and employers believe that they have the best available terms. When they feel otherwise, they shift jobs or employees.
Similarly no one purchases a car or anything else unless that car (or other item) makes the person better off than doing something else with the money. Similarly, no car dealer sells a car unless he places a higher value on the money he receives than he does on the car he sells. In a free economy, all voluntary trades are mutually beneficial – all parties to a transaction believe they are made better off by the transaction. Consequently, any interference with freely made transactions must result in a decrease in the satisfaction and happiness of all persons concerned.
When the government raises the money it spends by borrowing or taxing its citizens, it merely transfers spending power from private owners and earners of the money to the political spenders in power. This creates no new wealth. It reduces the amount private citizens can spend while increasing the amount government can spend. With less money in their pockets and bank accounts, private individuals must reduce the amounts they spend or invest. Money spent by governments cannot create any more jobs or produce any more wealth than it can when spent by private persons. In fact, it creates less, because both the tax collectors and tax spenders must be paid a commission and the resources are not being used where the private individuals would have used them. The labors of the government officials add nothing to the wealth of society. The shift of the money from private citizens to political spenders must result in fewer productive jobs.
If the government spends its money by giving out subsidies to one privileged group, the productive facilities of the country are then partially directed toward satisfying the desires of that group instead of the desires of those who originally earned the money. Many workers and investors must shift from producing goods and services for consumers who earn their money, to producing goods and services for those who first receive the dollars distributed during the government's spending spree. Individuals are less well off because they have not been able to enter into mutually beneficial trades. For instance, if the government spending is for war, then some of the nation's investors and workers must go to work producing munitions and military supplies. All the savings and workers so engaged are withdrawn from industries satisfying the private needs and wants of individual consumers. The end result, of course, is a reduction in the satisfaction of the needs and desires of all those who prefer consumer goods over war goods.
Any switch of money from private owners to political spenders can only result in a redirection of the nation's productive forces and temporary gains for those who first receive the government orders or subsidies. In the end, a readjustment of the nation's productive forces will become necessary.
While Krugman and others are arguing for more government spending they are implicitly or explicitly arguing that if there is a reduction in present government spending a depression could be the result. This argument can not hold unless the economy is unable to adjust to changes in demand or supply. If the government reduces both taxes and spending, it will leave more money in private hands. This money then can, and will, employ more people at higher real wages to make more of what people want most. The nation's productive forces would be redirected toward satisfying the wants of productive persons, rather than satisfying those who were the recipients of government expenditures.
In a free market economy, every worker and investor tends to seek those outlets which will produce what consumers want most, as indicated by the wages and prices consumers will pay. So workers and investors now engaged in satisfying political spending would soon find more profitable outlets satisfying the increased spending of private producers. Everyone would soon have more. That is not a depression. That is prosperity.
In cases where the government prints the money, either directly or indirectly, by first printing bonds and then issuing new money with only its own bonds as security, the result is inflation. Inflation is a tax on everyone who owns or is owed a dollar. Its effects are more hidden than those of other taxes.
Another important difference is that inflation transfers economic wealth from one group of people to another group, as well as from private citizens to the government. The inflation tax is a boon to all who owe dollars and a burden on all who are owed dollars. It changes the values of every contract that specifies a future payment in dollars. It reduces the value of the money involved.
Taxes which raise prices or curtail private spending cannot increase prosperity. Increased taxes reduce the voluntary transactions of a free people and thus make them worse off than if they did not pay the higher taxes. A reduction in government spending and taxing will allow individuals to retain more of their income and thus splendid it where they see mutually beneficial trades.
Competition in the service of consumers is the one and only sure way to produce a prosperity. If government is going to try to create prosperity through spending, then it can only make it appear to be achieving this if government spending is constantly increased, with an ever-increasing share of total production going to the nonproductive. If these constantly increased expenditures are not stopped in time, the result will be a runaway inflation like that which took place in Germany in 1923.
The U.S. is currently running a government deficit nearing $2 trillion. How will that deficit be paid? By printing money and issuing more debt. The U.S. in 2008 had a debt to GDP ratio of about 40 percent. In just a few years that ratio will exceed 80 percent. Issuing more debt is simply transferring taxes from the current productive individuals to future productive individuals. The more debt, the higher the taxes that future generations will have to pay. The amount of money created in the past couple of years is staggering. As shown in the following diagram, the monetary base has exploded – it rose about 760% from January 2008 to January 2009.

The money base has not been lent at this stage but when that base money is circulated through lending, inflation has to occur. Only if the base money can be reduced prior to it being circulated will inflation be minimized. But, if the liquidity is reduced won’t it cause another recession?
Government spending can not lead to prosperity.

The Minimal State

Boyes blogs over at E Learning for Educators

Elearning for Educators: The Minimal State

Tuesday, August 25, 2009

Book Club The Not So Wild, Wild West: Property Rights on the Frontier

Subject: ASET Book Club Event - August 2009

Thursday, August 27

The Not So Wild, Wild West: Property Rights on the Frontier
5:45 p.m. - 7:15 p.m.

RSVP by Friday, August 23
The authors emphasize that ownership of resources evolves as those resources become more valuable or as establishing property rights becomes less costly. Rules evolving at the local level will be more effective because local people have a greater stake in the outcome. This theory is brought to life in the colorful history of Indians, fur trappers, buffalo hunters, cattle drovers, homesteaders, and miners. The book concludes with a chapter that takes lessons from the American frontier and applies them to our modern "frontiers"-the environment, developing countries, and space exploration.

Monday, August 24, 2009

"Government can not efficiently do these things."

Elearning for Educators: "Government can not efficiently do these things."

A Plea to Economists Who Favour Liberty: Assist the Everyman

Don Klein mades the argument that economists may have a moral responsibility in to engage in public discourse.

His book A Plea to Economists Who Favour Liberty: Assist the Everyman is a quick read and very provocative.

Thursday, August 20, 2009

misplaced medical egalitarianism.

Martin Feldstein makes the following point:

"But budget considerations aside, health-economics experts agree that private health spending is too high because our tax rules lead to the wrong kind of insurance."

Due to scarcity rationing will always occur - the question is what process will be used.

The extremes of the continuum are liberty (decentralized agents interacting on their own knowledge) v. totalitarianism (Leviathan dictating allocation). As Boyes and I discuss , the current health care debate provides an outstanding example of the continuum of allocation methods and an opportunity to reflect on incentives and unintended consequences.

Feldstein discusses how tax rules (taxes are another example of increasing scale and scope of Leviathan in civil society as well as coercive power) lead to unintended consequences. Moreover, like regulations, these tax rules institutionalize in a very pernicious manner the power of the government and lead to a loss of liberty that may be permanent. (I am thinking now of the observation that the closest thing on earth to immortality is a government program). As more and more agents "accept" or become accustomed to the loss of liberty, the state has further room to grow.

Feldstein's phrase misplaced egalitarianism suggests another line of discussion that Boyes and I may blog exploring the impact of this notion on Liberty.

Wednesday, August 19, 2009

Larry Reed, FEE and freedom, by way of The Austrian Economists

Thanks to the Austrian Economists

Larry Reed took over FEE and has been putting his stamp on it. In this Reason.TV interview, Larry discusses the 3 lessons of the freedom philosophy that we are in 2009 in danger of forgetting. Roughly stated they are:

1. Government can provide you with absolutely nothing except that which it has first taken from somebody else.

2. A government big enough to give you want you want, is big enough to take everything you have.

3. A free people are not economically equal, and an economically equal people are not free.

Problems with Health Care

Each year thousands of people die because their kidneys fail and they are unable to get a transplant. The problem is that the policy of creating a private market in kidneys creates shortages. In today's newspapers, an interesting AP article appeared. It reported that:

Israeli man: I sold kidney, got $20,000 after surgeryby Carla K. Johnson and Adam Goldman - Aug. 19, 2009 12:00 AMAssociated Press

NEW YORK - In 2005, a rebellious and sporadically employed Israeli man flew to New York to give up a kidney to save an American businessman. For that, he said he was paid $20,000, which appeared in a brown envelope on his hospital bed after the operation.
That payoff would be illegal. But the kidney donor, 39-year-old Nick Rosen of Tel Aviv, said that doesn't matter. "I smoke pot. That's also against the law."

What is quite incredible is the price -- $20,000. When a kidney was auctioned on ebay, the price reached about $5 million before the government forbid the auction. With a larger supply, the price would decline. It has been estimated that the price would be in the hundreds, not the thousands or millions of dollars. Think of the lives that would be saved.

Monday, August 17, 2009

Up or Out?

Up or Out?

I find David Warsh an insightful observer/critic of our profession. To the extent that what Vernon Smith calls an ideology of honesty prevails, the system of natural liberty seems to lead to higher order emergent and evolutionary outcomes. To the extent that this ideology is lacking or corrupted, liberty has a difficult time flouishing. This is the argument that Smith makes in The Theory of Moral Sentiments.

Warsh's post directs our attention to the topic of honesty within our profession.

Sunday, August 16, 2009

More on incentives in health care

How American Health Care Killed My Father - The Atlantic (September 2009)

The author confirms the central role that incentives and institutions play in this market (as in all markets).

All of the actors in health care—from doctors to insurers to pharmaceutical companies—work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also all behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity, and discourage transparent competition based on price or quality. That result in a generational pyramid scheme rather than sustainable financing. And that—most important—remove consumers from our irreplaceable role as the ultimate ensurer of value.


We will need to reduce, rather than expand, the role of insurance; focus the government’s role exclusively on things that only government can do (protect the poor, cover us against true catastrophe, enforce safety standards, and ensure provider competition); overcome our addiction to Ponzi-scheme financing, hidden subsidies, manipulated prices, and undisclosed results; and rely more on ourselves, the consumers, as the ultimate guarantors of good service, reasonable prices, and sensible trade-offs between health-care spending and spending on all the other good things money can buy.

Friday, August 14, 2009

Central banks . . .

"Leaving a financial crisis is like leaving an awkward social gathering: a good exit is essential. In 1936-37, the Federal Reserve made a colossal mistake in its “exit strategy”. This time round it is crucial that central banks get their timing right."

Central banks must time a ‘good exit’

By Randall Kroszner

Published: August 11 2009

This raises a great question and reveals a great deal about the opportunity cost of centralized, state action. To the extent that the Fed or any other central bank is a representation of the state, then Hayek's knowledge problem prevails. So it is entirely understandable that the FED in 1936-7 did not "exit" either at the right time or in the right way - whatever that is.

So, Kroszner (see here for a great analysis titled the only winning move is not to play) reminds us of the dangers of centralized decision making.

Wednesday, August 12, 2009

Incentives and adaptive efficiency

Incentives matter. I think Boyes highlights a key application in economic reasoning, one that I have been reflecting on in the context of my summer reading as well as the current expansion of the state in our country.

Incentives come from the institutional framework of society. These institutions, as Douglass North tells us, can be formal or informal, and they are important in shaping the incentives that shape behavior. Boyes does a great job of exemplifying the impact of incentives and incentive changes in this post.

However, I am interested in the process by which both the institutions and the incentives change. In rereading North's challenging book - Understanding the Process of Economic Change - I encountered his concept of adaptive efficiency. North argues that the emergent and evolutionary process that characterizes change is shaped to a large extent by the degree of adaptive efficiency embedded in a society.

In addition, he argues that while formal institutions can be changed very quickly (the example that Boyes provides us - or the current effort to change the "rules of the game" for health care)informal institutions (norms, beliefs, values, and shared cultural constructs) change very slowly, in his words this change is incremental and gradual. Further, my reading of North, Hayek and Smith leads me to believe that the informal institutions that emerge have a stronger influence than do formal institutions on the evolution of change. In writing this however, I wonder how
Boyes' Australian example reflects the relative importance of formal and informal norms and their relation to adaptive efficiency.

So, what we seem to be seeing in contemporary political debate in the US is an effort to quickly change a formal institution in the face of no change in informal institutions. Stated differently, current political leaders seem to be attempting to shape formal institutions in a way that conflicts with informal institutions - norms, beliefs, conventions held by a large segment of society.

This also seems to illustrate the adaptive efficiency of our society - that is a flexibility that encourages trial and error and failure. To the extent that the current political movement fails, there has been a higher order outcome and, tragedically, vice versa.

The relationship between Economics, Values and Organizations is the topic of a collection of essays that I might recommend.

So, Boyes challenges us to consider the impact of an attempt to change formal institutional structure in a rapid, tops down manner. His example of Australia seems to have lead to a higher order outcome, but the contemporary effort at change, while still unclear, may have the opposite effect. I can't help but think about the alternative to this tops down approach - the emergent and evolutionary development of institutional structures described by Hayek.

Douglass North - Economic Performance Through Time

Arnold Kling on Adaptive Efficiency

Benjamin Friedman - The Moral Consequences of Growth

Nathan Rosenberg - How the West Grew Rich

Rizzo - On Leviathan and Krugman

"Let me go back to Krugman’s article. I italicized an interesting phrase. Big government can work when it is run by people who understand its virtues. He should have said big government can work when it is run by people who themselves determine how well it works."

Higgs - a great post

Opposing view - Megan McAardle

Tuesday, August 11, 2009

Picture from Mises Captures the democrats' attitudes toward the public's frustration; captures the republicans' attitudes toward spending during the previous administration. Wake up, leviathon has to be limited sometime and somewhere.

Universal Health Care

In Britain, the universal health care system employs 1.4 million people, the third largest employer in the world. With that type of advocacy for a program, it is virtually impossible to eliminate. This is what would occur to the U.S. if we adopt any type of universal health care or government system. Whenever people are able to enlist the government to support them, they are not likely to give up the support easily. The attempt by the Obama Administration to push the universal care system is pushing the U.S. away from liberty and more toward government control of our lives. The incentives of the system now existing are basically wrong, as I noted in a previous post, but could be corrected without too much trouble; and they are wrong because of government interention to begin with.

The employer based system we now have was instituted after WWII when government wage and price controls would not allow employers to raise wages. The driving force behind cost increases in health care was the government paying for it.

Monday, August 10, 2009

Incentives: Perhaps they ought to be considered in the health care debate

Towards the end of the 18th century, England began sending convicts to Australia. The transportation was privately provided but funded by the government. A lot of convicts died along the way, from disease, poor nutrition, and little or no medical treatment. Between 1790 and 1792, 12% of the convicts died, to the dismay of many good-hearted English men and women who thought that banishment to Australia shouldn't be a death sentence. How might captains be convinced to take better care of their human cargo?

You might lecture the captains on the cruelty of death, and the clergy from their pulpits did just that. You might increase the funds allotted by the state provided to the captains based on the number of passengers they carried. You might urge the captains to spend more of those funds for the care of their passengers. (Some entrepreneurial captains hoarded food and medicine meant for the convicts and sold them upon arrival in Australia.) You might urge the captains to spend the money more carefully. You might try to shame them into better behavior. But these approaches did not work.

What did work was when the government decided to pay the captains a bonus for each convict that walked off the boat in Australia alive. This simple change worked like a charm. Mortality fell to virtually zero. In 1793, on the first three boats making the trip to Australia under the new set of incentives, a single convict died out of 322 transported, an amazing improvement given that in some cases as many as 33 percent of the convicts died from transport. Did the captains become more compassionate? No, they were just as greedy and mean-spirited as before. But under the new regulations, they had an incentive to act as if they were compassionate. Convicts were suddenly more valuable alive than dead. The captains responded to the incentives.

What are the current incentives in health care? Doctors are paid for procedures -- paid by Medicare and Medicaid. Doctors also face lawsuits when they do not diagnose a disease or problem. Consumers want the best care possible at no cost. They are treated for anything with a small co-payment when they have insurance. They utilize emergency rooms when they don't. There are no incentives for consumers to save because what they buy, they are not buying with their own money. Suppose employer based health insruance was eliminated so that anyone could buy personal insurance. Consumers would be offered a smorgasboard of options -- no copyament or deductibles at very high premiums to very high copayments or very high premiums (so-called catastrophic insurance) for much lower premiums. Then consumers would have to be concerned with what tests are undertaken when visiting the doctor or whether to visit the doctor in the first place.

Sunday, August 2, 2009

misplaced medical egalitarianism

Martin Feldstein makes the following point:

"But budget considerations aside, health-economics experts agree that private health spending is too high because our tax rules lead to the wrong kind of insurance."

Due to scarcity rationing will always occur - the question is what process will be used.

The extremes of the continuum are liberty (decentralized agents interacting on their own knowledge) v. totalitarianism (Leviathan dictating allocation). As Boyes and I discuss the current health care debate provides an outstanding example of the continuum of allocation methods and an opportunity to reflect on incentives and unintended consequences.

Feldstein discusses how tax rules (taxes are another example of increasing scale and scope of Leviathan in civil society as well as coercive power) lead to unintended consequences. Moreover, like regulations, these tax rules institutionalize in a very pernicious manner the power of the government and lead to a loss of liberty that may be permanent. (I am thinking now of the observation that the closest thing on earth to immortality is a government program). As more and more agents "accept" or become accustomed to the loss of liberty, the state has further room to grow.

Feldstein's issue of misplaced egalitarianism suggests another line of discussion that Boyes and I may explore as it relates to Liberty

Saturday, August 1, 2009

Organizations that support Liberty

The Association of Private Enterprise Education (APEE) is an association of teachers and scholars from colleges and universities, public policy institutes, and industry with a common interest in studying and supporting the system of private enterprise. APEE hosts an annual conference for members to share their scholarly findings and offers a number of awards to recognize individuals who have contributed to the cause of private enterprise. Support for young scholars is often available to attend the annual conference. The association sponsors the Journal of Private Enterprise so scholars may share their research with the wider academic community.

The Clemson Institute for the Study of Capitalism is dedicated to exploring the moral, legal, constitutional, political and economic foundations of capitalism. The Clemson Institute is particularly devoted to fostering a serious examination of a free society.

The Foundation for Economic Education (FEE), one of the oldest free-market organizations in the United States, was founded in 1946 by Leonard E. Read to study and advance the freedom philosophy. FEE’s mission is to offer the most consistent case for the “first principles” of freedom: the sanctity of private property, individual liberty, the rule of law, the free market, and the moral superiority of individual choice and responsibility over coercion.

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals. The Foundation develops, supervises, and finances its own educational activities to foster thought and encourage discourse on enduring issues pertaining to liberty.

Click here to see Liberty Fund co sponsors.

For over 25 years, the Mercatus Center at George Mason University has sought to bridge this gap. Mercatus applies scholarly research to the problems facing policy makers. Bringing together a network of scholars and experts from around the globe, the Mercatus Center provides policy makers with the economic tools to make sense of today's most pressing issues. Mercatus turns ideas into action.

The Ludwig von Mises Institute was founded in 1982 as the research and educational center of classical liberalism, libertarian political theory, and the Austrian School of economics. It serves as the world's leading provider of educational materials, conferences, media, and literature in support of the tradition of thought represented by Ludwig von Mises and the school of thought he enlivened and carried forward during the 20th century, which has now blossomed into a massive international movement of students, professors, professionals, and people in all walks of life.

Reason is the monthly print magazine of “free minds and free markets.” It covers politics, culture, and ideas through a provocative mix of news, analysis, commentary, and reviews. Reason provides a refreshing alternative to right-wing and left-wing opinion magazines by making a principled case for liberty and individual choice in all areas of human activity.