Wednesday, September 30, 2009

Law, Legislation and Liberty

Robert Higgs observes - "You need a strong stomach to endure the messages disseminated by . . . "

The following claptrap does require a strong stomach and it is not from the popular media:

"I believe that redistribution that compensates for differences in opportunity is justified." (Mark Thoma)

Thoma is a respected member of the economics profession, well published and accomplished in the mathematical tools of the trade.

If this comes from within the profession, what hope is there?


What is a right? Isn't it an entitlement. We are endowed ...with life, liberty and the pursuit of happiness. We are entitled to life, entitled to liberty, and entitled to the pursuit of happiness. We are not entitled to happiness, just the pursuit of happiness.
FDR proposed a new set of rights which have taken hold and used to justify government intevention today. Here are FDR's "economic rights".
The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;
The right to earn enough to provide adequate food and clothing and recreation;
The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
The right of every family to a decent home;
The right to adequate medical care and the opportunity to achieve and enjoy good health;
The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
The right to a good education.
Are we entitled to these? If so, how are they provided? The answer typically given is that government provides them. OK, if so, how are they financed? Well, with taxes or by printing money or borrowing the proponents say. But, this means that the government is taking from someone in order to provide these rights to someone else. So how can the government both deny rights and provide rights. It can't. That is why these can not be rights. No one can guarantee a good education to everyone or a decent home to everyone, etc., etc. Trying to do so is what prompted the subprime mortgages and the financial mess we are currently experiencing.

Monday, September 28, 2009

Not until September 17, 2008, did a panicked Fed-

Last week in a post on the event of 2008 Boyes described the government reaction in the US as panic.

Jeffrey Rogers Hummel writing over at CATO agrees:

"Not until September 17, 2008, did a panicked Fed finally set off a monetary explosion, doubling the base in less than four months."

Peter Boettke repeats this government use of panic over on The Austrian Economists:

"Stiglitz says "Economics would have suggested that if you did a debt to equity conversion, converting long-term debt into equity, the financial institution would be well capitalized, there would be no reason to panic, and there would be more confidence in the market. But those who saw an opportunity to use scare tactics to get what they wanted did use those scare tactics, and it worked." Prescott argues that with "benign neglect the economy would have come roaring back quite quickly..."

I am not certain about the issue of intentionality - crediting the agents who work for the state for this level of Rove like or Emanuel like foresight seems, to be improbable, but regardless of intent, the agents of the state clearly created panic and a "war mentality" to deal with the events of 2008.

In a post over on Taking Hayek Seriously - a passage from The Road to Serfdom seems on point:

To make a totalitarian system function efficiently, it is not enough that everybody be forced to work for the same ends. It is essential that the people should come to regard them as their own ends." (“THE END OF TRUTH” and it’s chapter 11 of The Road to Serfdom, pp. 171-180 in the Collected Works edition)

So there is clearly a dual intent in the actions of the agents of the state, particularly over the past 75 years - from Hoover to FDR to Bush(es) to Obama the ultimate goal is" that the people should come to regard them[the ends of the agents of the state] as their own ends."

In stark contrast to this collectivism we hear the voices of Boyes and others suggesting individual and independent analysis and freedom of action. The acceleration of collectivist mentality poses a much greater threat to liberty than the mere actions of the state. To the extent that the agents of the state succeed in achieving collectivist mentality the scope and breadth of liberty are sharply curtailed leading to the Road to Serfdom.

Sunday, September 27, 2009

Radio Show

I was a guest on Terry Gilberg's talk show on KFYI

You might get a kick out of it.

Arizona Compared to Ten Nations

A report from the Arizona State University's "University Economist" compares Arizona to several small nations. One primary finding is that "Education spending as a share of GDP, adjusted for the share of children in the population, is below the norm of the comparison group in Arizona. Only Ireland, Singapore, and the UAE spends less than Arizona." This seems to make the case that less spending on education improves standards of living. During the period examined, 1982-2007, Singapore, Ireland and UAE had among the highest rates of growth of all countries. Consider the following graph which shows standards of living in Mexico, the United States, and Ireland in 1850, 1900, 1950, 2000, and 2006. The point here is how rapidly Ireland grew. If you examine the wealthiest nations in the world you will find Singapore and Hong Kong listed.
Perhaps Arizona needs to reduce expenditures on education.

Sunday, September 20, 2009

Regime uncertainty

Boyes writes of the government response to the 2008 "crisis"

"Their panic went against the basic foundation of a market system. It created the feeling that private property rights were unsecure; that could be confiscated at any time."

The comparative advantage of the state which arises from the ability to coerce is in the definition and enforcement of property rights. From this function flows stability, order and the ability of the agents in society to use their own knowledge and their own preferences for their own ends. It is this liberty that allows for the discovery of responses to changes in the environment.

Boyes points out that in addition to attacking property rights, the reaction of the government during events in 2008 lead to a feeling of uncertainty which, in many ways, creates a fear that seems to have resulted in a demand for more security through the increased power of the state.

So there is a twin concern illustrated by the government's reaction to events in 2008 - first an increase in both scale and scope of the state in the affairs of its citizens and second, a regime uncertainty that is accelerating.

Higgs makes a point about this second issue that is particularly relevant in the 21st century in the USA:

"pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns. This uncertainty arose, especially though not exclusively, from the character of federal government actions . . ." Regime Uncertainty

While Higgs was discussing the Roosevelt administration during the Great Depression he could well have been addressing Bush, Clinton, Bush Jr. or our present president's administration. Boyes's post reminds us of both the insecurity and uncertainty that results from the recent trial and error approach of Leviathan to expand the scope and scale of the state.

The basis of this expansive governmental power comes from a philosophy that seems to be embraced by both major political parties and certainly politicians of all stripe. In reading a blog post on an Obama appointee the following seems appropriate to this topic:

"You owe your life — and everything else — to the sovereign. The rights of subjects are not natural rights, but merely grants from the sovereign. . . .A new intellectual champion of absolutism has now emerged. Mild-mannered University of Chicago law professor Cass Sunstein has been advancing the radical notion that all rights . . . are grants from the state. In a book co-authored with Stephen Holmes, The Cost of Rights, he argued that "all legal rights are, or aspire to be, welfare rights," that is, positive grants from the state. There is no difference in kind between the right not to be tortured and the right to taxpayer-subsidized dental care." Absolutism Redux

So, there seem to be two processes at work here - first an inflation of rights (dental care as a right?) and second and more concerning, an argument that seems to have found an audience that the state grants these rights, that is rights are a creation of the state. The emergence and metastasis of this second notion explains a great deal of the uncertainty, insecurity and fear that characterized the 2008 period. The "panic" that Boyes describes was induced by agents in the government acting in their own interests.

This idea of public choice as a useful prism to understand government activity was illustrated for me as I read an old Ken Rogoff open letter to Joseph Stiglitz.

Rogoff writes:

" But what really puzzles me is how you could be so sure that you are 100 percent right, . . . Throughout your book,(Globalization and its Discontents) you betray an unrelenting belief in the pervasiveness of market failures, and a staunch conviction that governments can and will make things better. You call us "market fundamentalists." An Open Letter

Rogoff hits it on the head - whatever else Public Choice tells us about the behavior of the actors that make up the state, many if not all of these state actors display the hubris that Rogoff sees in Stiglitz - an overriding sense of correctness, of knowledge, of the right. Whenever I hear or read this assurance on the part of a state representative I am reminded of Hayek. From the Use of Knowledge in Society to The Fatal Conceit Hayek argues convincingly against certainty and knowledge by individual actors. It is through the interaction of partially ignorant actors that allows for an emergent order, an order that has a higher likelihood of liberty than the actions of the sovereign.

Friday, September 18, 2009

What Caused the 2008 Collapse?

The policymakers in both Bush and Obama administrations have argued that without the Fed and strong Treasury intervention the U.S. economy would have fallen into a sink hole when Lehman collapsed. In yesterday's Wall Street Journal, John Cochrane and Luis Zingales provided an argument that that I agree with. It was not the collapse of Lehman but was instead the panic shown by Bernanke and Paulson that led to the collapse. Two weeks prior, on Sept. 7, the government took over Fannie Mae and Freddie Mac, wiping out much of their shareholder equity. On Sept. 16, the government bailed out AIG, lending it $85 billion. On Sept. 25, Washington Mutual, the nation's sixth-largest bank, was seized by the FDIC. On Sept. 29, Wachovia, the nation's seventh-largest bank, was sold to avoid a similar fate. All this would have happened without Lehman.

This was not a logical, step by step action to stop systemic problems. It was pure and simple, PANIC. Their panic went against the basic foundation of a market system. It created the feeling that private property rights were unsecure; that could be confiscated at any time. To cement this feeling that private property rights were not secure, the Federal Reserve and the Treasury Department went to Congress to ask for $700 billion for the Troubled Asset Relief Program (TARP).

Cochrane and Zingales provide the graph shown below illustrating the point. On Sept. 22, bank credit-default swap (CDS) spreads were at the same level as on Sept. 12. (CDS spreads are the cost of buying insurance against default.) On Sept. 19, the S&P 500 closed above its Sept. 12 level. The Libor-OIS spread—which captures the perceived riskiness of short-term interbank lending—rose only 18 points the day of Lehman's collapse. But, it shot up more than 60 points from Sept. 23 to Sept. 25, after the TARP testimony. (Libor—the London Interbank Offer Rate—is the rate at which banks can borrow unsecured for three months.)

Monday, September 14, 2009

Property rights and liberty

I got to thinking about the foundational nature of property rights after reading the following by Megan McArdle:

"I have no doubt that I place a much, much higher value on property rights than does John Holbo. But I am not one of those libertarians who takes the sanctity and inviolability of property rights as their most important first principal. Property rights exist only in the context of society, and not only are they far more contingent and flexible than I think many libertarians acknowledge, I believe they have to be. Property rights are an evolved institution that happens to work better than the alternatives for enhancing human welfare."

Since this comment is in the context of the health care debate raised on our blog it seems to be both relevant to that discussion as well as the broader nature of liberty.

So, using the following, from FA Harper as a working definition:

"Liberty stems from liber, which means to be free. And so the definition of liberty I would propose is this:

Liberty is the absence of coercion of a human being by any other human being; it is a condition where the person may do whatever he desires, according to his wisdom and conscience."

There you have it - liberty and freedom imply a personal responsibility, an acceptance of consequences and the ability to use moral reasoning.

Property rights are the evolving institution that is the important constraint on liberty - that is property rights establish the boundaries of my liberty.

So, I end up disagreeing with Megan, I do see property rights as the first principle of liberalism and liberty.

Property Rights and Liberty Part II

If you read Locke, Hobbes, Hume, Mill, and other enlightment scholars, you see the common approach of beginning in a "state of Nature" where there is no scarcity. Then, as society evolves, there are fights over scarce resources or property. The very first and most important element of a functional society is the recognition and acceptance of private property rights. Nothing else is required. There is no need for a government or state if all citizens sign a social contract agreeing to recognize private property rights and if all citizens post a bond to hire a sheriff or someone to arbitrate conflicts. There is no need for a state provided defense or solution to so-called public goods or externalities, or to provide a safety net.
Robert Higgs noted that in the 20th century, especially during the past seventy years, Americans have placed their faith in government — increasingly the federal government. Since Franklin Delano Roosevelt assumed the presidency in 1933, voluntary relief has taken a back seat to government assistance. Eventually, hardly any source of distress remained unattended by a government program. Old age, unemployment, illness, poverty, physical disability, loss of spousal support, childrearing need, workplace injury, consumer misfortune, foolish investment, borrowing blunder, traffic accident, environmental hazard, and loss from flood, fire, or hurricane all became subject to government succor. (See
In other words, once you admit a role beyond private property rights there is a slippery slope -- an inability to stop Leviathin. You might read Gene Healey's "The Cult of the Presdency" to see just how this growth has occurred. So, I strongly disagree with Megan.

Saturday, September 12, 2009

The Forgotten Man

The chart to the left was taken from Murphy's blog on which in turn was taken from Mankiw's blog.
It shows how the Obama economics team claimed the $725 billion TARP would reduce unemployment by stimulating the economy -- the bold blue line. Without this recovery, the economics team argued, we would have experienced the higher unemployment illustrated by the light blue line. In reality, we have experienced the red dots -- approaching a 10% unemployment rate. Has the government program stimulated the economy and led to a recovery? No. While it might provide temporary shots in the arm in particular sectors, such as the cash for clunkers did for the auto sector, it can not provide a sustained recovery. It is merely transferring spending from private individuals and businesses to the government. Moreover, it typically means a slower growth in the future if not an outright double dip or triple dip recession -- such as occurred in the 1930s. Instead of investment in machinery, we have expenditures on community organizers. Instead of private spending on whatever income earners want to spend on, we have spending on the Murtha Airport. Amity Schlaes' book discussed in the previous blog is a great read. Combined with Murphy's The Politically Incorrect Guide to the Depression, provides an alternative view of whether government policies helped get the economy out of the depression.

Wednesday, September 9, 2009

Amity Shlaes: The Forgotten Man

A great review

Mises Daily by | Posted on 9/3/2009 12:00:00 AM

So to me, while The Forgotten Man may occupy a place in the reviews as an economic history of the Great Depression — which it is up to a point — more than anything else it is a character study of the one man who above all defined and shaped the New Deal: Franklin Delano Roosevelt. And the book reads as a 383-page indictment of him.

Considering what we face today, this book is a must read, for example:

"With the possible exception of Al Capone's Chicago gang, 1930s America saw no greater pile of buccaneering stickup men and rogues than those with whom FDR surrounded himself. As one of the book's central themes, Amity Shlaes condemns them for introducing "regime uncertainty" into the economy, thereby exacerbating the Great Depression. Keep in mind that "regime uncertainty" is but a euphemism for "utter lawlessness."

This "regime uncertainty" was a direct result of the ideological underpinnings of FDR and his Brain Trust.

. . .

Throughout the book, Shlaes demonstrates that FDR considered the law not as something to be respected and adhered to, but as something to be cynically manipulated or ignored at leisure. In his hands, the law became a weapon to be used against his enemies and other, arbitrarily chosen targets. During his first year of rule alone, "10,000 pages of law had been created" (p. 202), and an army of bureaucrats and police had been raised to enforce them.

. . .

H.L. Mencken once observed that the great thing about democracy is that the people get what they deserve — good and hard. Mrs. Shlaes never lets the reader lose sight of the fact that while FDR ushered in the final destruction of the Republic, the American voters, for whatever reason, wanted FDR, loved the New Deal — and still do to this day.

. . .

And, like all socialist systems of government, everything quickly began to harden into an immovable inflexibility. Mrs. Shlaes tells us "the New Dealer's economic failures were working to their own political advantage" (p. 267). The massive increase in the size of the federal government allowed FDR to build himself a formidable political machine, so well-oiled by patronage jobs, bribes, and handouts that "millions of voters [were] under obligation to him" (p. 375), making an election defeat impossible.

As Mrs. Shlaes persuasively argues, the Great Depression did not end because of the New Deal. Quite the opposite, "the New Deal was causing the country to forgo prosperity, if not recovery" (p. 263). FDR and his New Deal became vampires, living high off a Great Depression that his policies were feeding and keeping alive.

Tuesday, September 8, 2009

Proponents of true capitalism have an upward battle to fight.

The hill becomes steeper daily. This Mises post outlines one of the fundamental reasons, the misunderstanding or mischaracterization of capitalism by "intellectuals" and those on the left and right.

The continuing mischaracterization of markets, liberty and freedom have resulted in what would otherwise be laughable - the work of Michael Moore. His latest jeremiad and reaction really do illustrate the extent to which thoughtful and civil debate about the role of markets, liberty and freedom have been marginalized.

The inability to engage in a meaningful way with opponents of markets, liberty and freedom is in large part due to the hubris of those who condemn these ideals and ideas without effort at understanding. But part of the responsibility for the lack of engagement lies with those of use who to believe in liberty - clearly we need to reconsider how to approach this discussion and engage otherwise reasonable people.

Monday, September 7, 2009

End the Fed

Ron Paul's crusade against the Federal Reserve has taken the form of a book. You can read a chapter from the book at

Sunday, September 6, 2009

Scope and scale of government

Bob Higgs makes the point that the assault on liberty takes two forms - the extension or expansion of government powers. It is this ratchett effect the is the mechanism that diminishes our liberty.

This ratchett effect is celebrated by statists and, in an interesting book, I came across the following sentiment about WW I:

"For Dewey, the growing drumbeat for war seemed to present a glorious opportunity: mobilization he predicted, would shake up the status quo, expand state power, and give progressives the chance to mold society anew." (p 107 Gage).

All war is an opportunity to "expand the state" and the attitude expressed is disturbingly familiar, the expansion of the state is perceived in some way to be glorious. And what is glorious? The dictionary tells us that it is characterized by splendor; magnificent; delightful; wonderful. So, to the extent that the population finds expanded state power wonderful, the ratchett effect that leads to diminished liberty accelerates - for it is only a tenacious belief in liberty and individual freedom that keeps Leviathan at bay.

What is this glorious state power used for? It is used to "mold society anew". Terrifying words that evolve the Inquisition or the Holocaust and yet the wider population seems to find this wonderful and delightful prospect.

Thinking about the process of economic change, it seems to me that this fundamental change in thinking - state power is glorious rather than a ultimate evil - poses the greatest threat to future progress. This belief system will be far more pernicious than the looming deficits and debt, the health care "debate" or any other goofy scheme concocted by the republicans or democrats.

Thursday, September 3, 2009

A Neglected Masterpiece of Economic Analysis

Bob Higgs writes:

I recently read a book titled Banking and the Business Cycle: A Study of the Great Depression in the United States, by C. A. Phillips, T. F. McManus, and R. W. Nelson. It was originally published by Macmillan in March 1937, later became a hard-to-find, almost-forgotten book, and in 2007 was reissued by the Mises Institute in an inexpensive paperback edition.

I am willing to say that I know of no better book on the economic dynamics of the 1920s boom and early 1930s bust in the United States. I know about several other excellent books that every student of economics and economic history should read on the same topics, but if I could recommend only a single book to an aspiring economist, or even to an interested lay reader, this is the one I would recommend.

It is tempting to characterize its theoretical framework as Austrian, as indeed it is in many respects (Mises and Hayek are cited favorably, along with many other sound economists, many of them now forgotten), yet Phillips, McManus, and Nelson’s framework is broader and more eclectic than a strictly Austrian analysis would be. Moreover, besides being packed with excellent economic analysis in a great variety of applications, the book contains a wealth of quantitative evidence, which the authors handle with admirable caution and good sense. They present many tables and charts, but not a single equation. For modern mainstream economists, who can scarcely move a muscle without writing a raft of equations, this book stands as a brilliant reproach.

Read more here

Liberty and Healthcare

Why are we spending more on healthcare?

The answer from Nobel Prize winning economic historian Robert Fogel:

The main factor is that the long-term income elasticity of the demand for healthcare is 1.6—for every 1 percent increase in a family’s income, the family wants to increase its expenditures on healthcare by 1.6 percent.

So, in terms of liberty, if there is an ultimate and instrumental value in allowing freedom to act upon individual knowledge for individual aims, then there is no basis for expansion of government - both scope and depth or breadth in the health care market and a strong argument to reduce government intervention.

Eliminating Medicare, Medicaid, licensing for health care professionals and other command interventions society would benefit in terms of both allocation and distribution.

The War on Disease (or on health?) currently waged by Leviathan is merely another example of encroaching power at the expense if our liberty and freedom. This should be no surprise given the examples of the War on Drugs, War on Poverty, and War on Immigrations which resulted in mal-allocation, mis-allocation and an irreversible increase in scope and breadth of the government.