Sunday, January 31, 2010
The U.S. government’s interventionist responses to the financial and economic crisis that began in 2008 have significantly undermined economic freedom and long-term prospects for economic growth. Economic freedom has declined in seven of the 10 categories measured in the Index.
Click here for full details.
Saturday, January 30, 2010
No doubt, it is because of the moral or ethical dimension of her understanding of the role of government and the nature of capitalism. This understanding is as follows:
1. The purpose of government is the protection and implementation of the basic individual rights of life, liberty, and property. These ethical principles define, sanction, and provide the foundation for liberty as the paramount value for the political/legal order. The sole legitimate purpose of the state is the protection of liberty, and if the state pursues any other ends, then it debases its legitimacy.
2.Capitalism is neither immoral nor amoral. Rather, it is, as Rand states, “a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.”
Individual rights are the linchpin of Rand’s political philosophy, and it is in terms of this concept that she understands capitalism.
Thursday, January 28, 2010
I could not watch the speech – I just get too frustrated with the posturing and the phony applause. So I read the transcript. Based on that, I have a few thoughts about what President Obama said. I show a picture here of the good, the bad and the ugly. I have to admit, I didn't see anything good in the address, just lots of bad and ugly.
The Administration extended or increased unemployment benefits for more than 18 million Americans, the President stated. The problem is that this extends unemployment. It sounds harsh and perhaps cruel, but paying people to be unemployed keeps them unemployed. The nonsense about cutting taxes for 95 percent of the public and not raising taxes for anyone is just that, nonsense. What about the increased taxes on cigarettes? Obama coes not call fees taxes and sin taxes don't count. It is just rhetoric and semantic definitions -- nonsense.
Obama proposed that “…we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses ..credit..”. First, what funds did Wall Street banks repay? Wasn’t it simply money created by the Federal Reserve out of thin air? Then what actually occurred was that the Federal Reserve lent out money that cost it nothing and then got principle and interest back. The Federal Reserve made a profit. But, the Federal Reserve transfers some of that profit to the Treasury which goes to spending already committed. So how can we take that money and now spend it again? Isn’t that simply another increase in government spending and more debt or additional money printing?
The President wants to undertake spending on infrastructure. This mimics the policies undertaken by Japan during the last 15 years. Japan decided to get itself out of its recession by spending on infrastructure. After 15 such stimulus plans, Japan remains mired in its second “lost decade”. And, Obama and Biden went to Florida today, to announce $8 billion spending for fast trains. Wow, what an extravagant waste of taxpayer funds. And note, the states not getting part of this $8 billion includes Arizona, even though Phoenix is much larger than Las Vegas, and the corridor between Phoenix and Tucson would look like a planner's dream for fast trains.
In addition, Obama wants serious financial reform, whatever serious means. The problem is that the financial system was regulated when Barney Frank and Chris Dodd pressured Fannie and Freddie to extend subprime loans – that is to purchase subprime mortgages. Regulation is the problem not the answer.
Obama says “we need to encourage American innovation.” Wow, that must mean to cut taxes on companies. No, it means government spending – “we made the largest investment in basic research funding in history..” If these projects had profit potential they would not need government spending. But the problem is that many of the research projects were ludicrous.
One of the most foolish statements made was “We will double our exports over the next five years…using a National Export Initiative…” Cutting taxes and reducing costly regulations would allow businesses to lower prices and thus sell more. Perhaps what the President meant is that his policy of spending a rising debt will reduce the value of the dollar – this will stimulate exports. Is that what the Preside called the National Export Initiative – is it simply another name for increased debt and thus a reduced value for the dollar?
College tuition is high – to those paying for college. Automobiles aer expensive -- to those buying cars. So what happens when the Administration provides subsidies for college – demand will rise and colleges will raise tuition further. Why are more people being paid to attend college -- perhaps without government interference they would find some other training more valuable. The President also proposes that any loans undertaken will not have to be repaid if the borrower does public service. Oh boy, all we need is more government employees. Why do we want people to do government service?
In the speech Obama said he will continue pursuing his health plan because many millions lose insurance every day. Well, since insurance is tied to employment, when employment goes down, people lose insurance. An easy fix is to untie insurance from employment. Do we need 2000 pages to state that and a few other things?
The speech is no different than most State of the Union Addresses. They contain promises of larger government, reduced liberties, and more nanny state. After reading the transcript I am very happyI did not watch the speech.
He blogs provocatively on Think Markets and a recent post answers a question that has been repeated expressed here - "What to do?"
I think that intellectuals can do their part. We should discard the idea that it is more “scientific” or more “objective” to follow an issue-by-issue approach to politics. We ought to recognize the instability of the “on its own merits” policy regime. We need to focus on general rules that inhibit state action. We need to accept the lessons of constitutional political economy, public choice theory and slippery-slope analysis.
Ok, while I am not an intellectual I do see both merit and my role in Rizzo's proposal. As educators, our instruction should be firmly rooted in the presentation and clarification of "general rules" in the context of an emergent, evolutionary order. While the Dec. 2009 debate over at CATO Unbound suggested some concern with Hayek's view law v. legislation, I see this as a fundamental distinction that eludes the vast majority, including my fellow educators.
What we need is to create or restore a secular “religion” or dogma. We need a dogma of laissez-faire. As long as John Maynard Keynes’s argument in “The End of Laissez-Faire” is accepted (that is, we should put away the old classical liberal dogmas and decide each issue on its own merits), the special interests will be there to convince a “pragmatic” public that their policies are the ones that, on the merits, warrant support.
This is an interesting approach that looks to a restoration of classical liberalism - the 19th century self confidence and optimism. As I think about the metasatizing welfare state I can only conclude that supporters of the mega-state are filled with self doubt and pessimism. Perhaps an avenue to open civil dialogue with those who embrace interventionism - that is those who willingly trade their liberty for perceived security is to find a way to explore the self doubt and pessimism that colors their perspective.
An unfortunate consequence of this self doubt and pessimism is the emergence of "the strong man" or the "jefe" or "caudillo". All recent politicians fall into this category - they are wanta be strong men (or women). Like Peron, Mussolini, Stalin, Hitler, . . . the list goes on, these "strong men" play on the self doubt and pessimism of the populace.
Listing to the president last night in the state of union, the predictable populist rhetoric of his speech followed in the tradition of strong men, with a particularly American bent. Like Huey Long, the president played to the lowest emotions in blaming individual agents in our society, then presented his vision as the solution. To place this type of messianic, strong man at the head of the mega-state will inevitably lead to further erosion of the rule of law, loss of liberty and increasing coercion.
Rizzo goes on, in the post referenced above:
I am not arguing for a non-rebuttable dogma, but a strong presumption.
In his attempt to engage in a civil manner with interventionists, Rizzo reveals a dilemma for those of use who advocate liberty as both an instrumental and ultimate value. This is the slippery slope, for if the argument begins with the notion of liberty as the default, this opens the door for consideration of state action and, as we have seen in the 19th and 20th century in American economic history, once the state establishes a rationale for coercion, then there is no turning back.
The actions of the state over the past 30 years illustrate Higg's thesis in Crisis and Leviathan. As I read Higgs, in suggests that the expanding scope of government never recedes, but that the scale has the potential to recede - think post WW 1 and 2.
I wonder, is there any justification for hope of a receding scale if, in fact, the US can withdraw from Iraq (I believe our president committed Aug of 2010 for withdrawl) and Afganistan?
Wednesday, January 27, 2010
The Boom v Bust video uses humor to identify the absurdity of this argument. But there are several seductive elements of state action that entice support - both from the masses yearning for security and for the elite hungering for power.
The mass of our society have been bombarded with misinformation about the consequences of state action. From an early age, school children learn a very biased view of American economic history - from the New Deal of FDR, to the expansion of the welfare state under LBJ. That is, information is provided to our fellow citizens that fails to consider the economic way of thinking. That is, all actions have costs, these costs may have consequences in the future and that people react to incentives in predictable ways.
So, as Boyes illustrates with the moral hazard of the recent financial crisis, who would not play a game that says - heads I win, tails you lose? That is, I can buy a house, make a profit, keep the profit and move on or, if the house falls in value, I walk away and the taxpayer bears the cost.
In this example, my profit is immediate (upon the sale of the house), the cost is in the future and I do not bear the cost (actually I might bear a tiny part of the direct cost in higher future taxes and clearly I lose liberty with the expansion of the state - but this might be a tradeoff I would willingly make in the face of the potential profit from this transacton).
So, Boyes describes moral hazard and I think it is worth emphasizing the moral component of this consequence.
If liberty is both an instrumental and ultimate value and the markets capitalism are grounded in individualism and freedom, it appears that there can be an argument that markets are moral in the same dimensions.
Coercion, on the other hand, is immoral - the use of force to achieve actions contrary to individual desire. And, as Boyes argues, this coercion leads to moral hazard that destroys wealth.
The state, then, destroys wealth and the moral foundations the support the existence of a free society.
Tuesday, January 26, 2010
At all levels, state and local government employment grew by 13 percent across the United States from 1994 to 2004. The number of judicial and legal employees increased by 28 percent. The number of public safety workers increased by 21 percent. The number of teachers increased by 22 percent.
Michael Hodges’ invaluable Grandfather Economic Report uses the Bureau of Labor Statistics to chart the growth in state and local government employees since 1946. Their number has increased from 3.3 million then to 19.8 million today—a 492 percent increase as the country’s population increased by 115 percent. Since 1999 the number of state and local government employees has increased by 13 percent, compared to a 9 percent increase in the population. The United States had 2.3 state and local government employees per 100 citizens in 1946 and has 6.5 state and local government employees per 100 citizens now.
In 1947, Hodges writes, 78 percent of the national income went to the private sector, 16 percent to the federal sector, and 6 percent to the state and local government sector. Now 54 percent of the economy is private, 28 percent goes to the feds, and 18 percent goes to state and local governments. The trend lines are ominous. Bigger government means more government employees.
Those employees then become a permanent lobby for continual government growth. The nation may have reached critical mass; the number of government employees at every level may have gotten so high that it is politically impossible to roll back the bureaucracy, rein in the costs, and restore lost freedoms.
Sunday, January 24, 2010
What these people don't seem to realize is that their five year plans would be as successful as were the Soviet Union's five year plans.
People are exiting California in droves. The people leaving want a better business environment in which to work or a better tax situation. They are running to Texas and Utah because these states have enhanced the business environment. It is not because these states have micromanaged their states; it is surely not because these states have directed resources to only certain uses.
The Republic has to give up on its quest to turn Phoenix into New York City. That is not why people came to Arizona. That is why people are leaving NYC as fast as they are leaving California.
Arizona does not need to spend more on public education and higher education. It needs to get the state government out of the business of managing the economy and providing an accelerating number of government services. It needs to allow education to be privatized just as it needs to get out of the real estate business and every other type of business. Government's role is simply to protect private property rights. Let's get Arizona to do just that.
Saturday, January 23, 2010
The authors analyze the impact ofwith the observation:
The “heads‐I‐win, tails‐the‐Government‐or‐investor‐loses” moral hazard incentives
that have increasingly shaped the behavior of market participants.
They conclude with a call for a return to confidence in the only system that has demonstrated an ability to convey meaningful information that can incentivize productive behavior and wealth creation:
For the dwindling few who haven’t lost faith in the markets (or at least haven’t found a better alternative), a possible alternative to outside audits of risk systems would be shift to more reliance on market pricing of financial entity risk.
Friday, January 22, 2010
Click here to read the full analysis - the key point is to emphasize the uncertain or, to use Douglass North't term - non ergodic nature of society.
Wednesday, January 20, 2010
Our readers should not be surprised by these claims from Sen, let alone disagree with them. Any reader of Vernon Smith's "Two Faces of Adam Smith"
Click here to read Vernon Smith's accessible view of Adam Smith.
Adam Smith's first book was intended to lay the foundation for a trilogy that was not completed. This book deals with the processes of individual ethical behavior and decision making, the Wealth of Nations examines societal decisions and his last, unwritten work, was to have dealt with jurisprudence. While this is a challenging book, it is well worth the effort - Econ Talk has a wonderful book club on this text that includes 6 excellent podcasts to clarify your reading.
Saturday, January 16, 2010
Thursday, January 14, 2010
|Gross Public Debt-fed|
Tuesday, January 12, 2010
As we know, Adam Smith would have viewed human behavior as self interested and responding to incentives. The greed of the miser, if this is what Blinder and other see as self interested behavior, is far too limited a conception of the complexity of the motivations of the individual to be of much use in attempting to understand how individuals act. As a moral philosopher, Smith recognized that we act in predictable ways to improve our own position and condition in life based upon our own understanding of circumstances and the incentives that confront us. This often, in fact frequently, involves cooperative behavior as we attempt to coordinate our needs with the needs of others to reach our own interests.
In previous posts I have lamented the lack of civil discourse in attempting to explore these ideas that - at their essence - ask us to examine virtue and vice. The imposition of greed in a pejorative manner does little to advance a discourse that attempts to understand how we all act under conditions of uncertainty.
In an odd coincidence, after reading Boyes refutation of Blinder, I had a conversation with my 12 year old regarding her current reading - a biography of Wilma Rudolph. While I recalled the general outline of her life, my daughter informed me that with 22 children, the Rudolph family struggle to support themselves shaped the lives of all the family. Wilma's parents, throughout the Great Depression refused government assistance, the father worked 2 jobs and the mother took in sewing. Both parents were self interested, not only in their own lives but in the lives of their family. I can't imagine anyone using the word greed to describe this self interested behavior.
Finally, Milton Friedman on greed
This is the foundation Blinder uses to argue that new and more financial regulation is necessary, “My fear is that a once in a lifetime opportunity to build a sturdier and safer financial system is slipping away.” Blinder argues that partisan politics will be the death mill of what should be a great time to increase regulation of the financial services sector.
There are so many errors in Blinder's editorial that it is difficult to count them. First, Adam Smith did not argue that greed was good only if channeled and harnessed. He found greed or self interest to be a basic motivating factor that led to good outcomes. Recall the butcher, baker and candlestick maker?
Second, lack of financial regulation or lack of "proper" regulation had nothing to do with the financial collapse of recent years. That collapse was the result of government corruption, government intervention in markets, and the policies of the Federal Reserve. What would have occurred had there been no Freddie or Fannie? What would have occurred had not Barney Frank pushed Fannie and Freddie into providing subprime loans? What would have occurred had rating agencies been competing for business rather than being a cartel of three created by the government? What would have occurred had the Fed not kept interest rates far below the “natural” rate? There would have been no bubble and thus no collapse.
Blinder appears to be among those economists who see market fialures everywhere. Economists have spent the last 50 years discovering cases where markets might fail. Nobel prizes have been awarded for finding that there is asymmetric information in markets, that externalities exist, etc., etc. Unfortunately, few economists have realized that markets work – that if left alone these so-called failures will not exist. Much like the prisoner’s dilemma, if the game is played more than once, the players have an incentive to find a way out of the dilemma – the dilemma disappears.
I find it disheartening that an economist could argue that he knows what is best -- and that is to limit the functioning of markets and to harness greed. How arrogant! Is the answer to our economic problems really that “…at least a few senators – Republicans and Democrats – will have to temper their partisanship, moderate their parochial instincts, slam the door on the lobbyists, and do what is right for America.”? Blinder thinks so.
Hamilton views the near term at
So yes, the situation continues to improve, but no, it's not anywhere near where we'd like it to be.
Bob Higgs diggs into the recent jobs report and argues:
Total employment peaked in 2007 at 137.6 million persons on nonfarm payrolls, fell slightly in 2008, and then dropped precipitously in 2009 to 132.0 persons, for a two-year loss of 5.6 million jobs. In 2009, total employment was approximately equal to its magnitude in 2001, even though the labor force had grown substantially in the interim. The sharp recent decline in employment, which normally increases from year to year along with the labor force, has been bad enough, but when we examine the components of aggregate employment, we discover even worse news.
We find that the loss of employment has occurred entirely in the private sector: employment fell from 115.4 million persons in 2007 to 109.5 million persons in 2009, a decline that took private employment back to its level at the end of the 1990s. As private employment has collapsed since 2007, however, the government payroll has actually grown slightly from 22.2 million persons in 2007 to 22.5 million persons in 2009, which puts this class of employment roughly 1.7 million persons above its magnitude in 2000.
Sunday, January 10, 2010
While it can be a dangerous business to forecast or predict the short term, Boyes outlines a number of issues that pose structural threats to the US economy. We have previously blogged on regime uncertainty resulting from the increasing scale and scope of government action. This regime uncertainty presents a threat to society in two dimensions. The first is to decision making by the wealth creators in society. As scope and scale of centralized planning and direction increases the complexity and unpredictability of government coercion (think the current health care debate, funding for adventures in the middle east, etc) wealth producing decision makers will alter plans in such a way as to adversely impact productive investment. Using Baumaol and Powell's phrase - productive entrepreneurship will be reduced and replaced by wealth destroying entrepreneurship as individual decision makers respond to the incentives of centralized "planning" to maximize well being. (think here of Duke Cunningham, Ben Nelson or any K streeter).
The second dimension is articulated by Acton over on Beacon by Art Camden. The threat to liberty from expansion of centralized and coercive action by the state is, as Acton recognized, the overriding threat to a way of life that is free.
The danger is not that a particular class is unfit to govern. Every class is unfit to govern. The law of liberty tends to abolish the reign of race over race, of faith over faith, of class over class.
Regime uncertainty is a necessary byproduct of state action, this action by its nature must be coercive. So liberty will always be the casualty of state action. But even more troubling are the consequences of regime uncertainty. As the mass of individual decision makers experience greater uncertainty they must confront a fear of the unknown reach of the state. This fear enables the state to encroach on private life in response to the demand of the masses to alleviate this fear. So a self generating mechanism accelerates the process of state coercion. (TSA responses to "threats", privacy invasions from the Patriot Act and other legislative efforts are contemporary examples that follow in the tradition of Lincoln's civil war "justified" abridgements, the Wilson/Palmer actions against dissent, JE Hoover as the embodiment of the end result of power, . . . well the list goes on,
This latter example is a penetrating example of the clear and present danger Acton found in coercive state action:
Great men are almost always bad men, even when they exercise influence and not authority: still more when you superadd the tendency or the certainty of corruption by authority.
So, Boyes and I concur on the long term consequences on The Road to Serfdom, a path that public policy predicts "leaders" will be incentivized to tread and that the masses will be incentivized to demand.
Stepping back and looking beyond our borders, is there any ray of hope? In a world of Chavez, Morales, Kim and the cabal of African thugs is there any reason to be positive?
Thursday, January 7, 2010
Wednesday, January 6, 2010
1. Two types of sympathy - direct (with the actor) and indirect (with the object)
2. Role of government in justice
3. Interesting analysis of resentment and punishment - sentinel example.
"What is Part II about? Merit and demerit: consequences and effects of actions as well as the motives. Gratitude and resentment, compounded sentiments: the action one is grateful for.
Justice and beneficence, discussed in first podcast: Justice can be enforced with force, whereas beneficence has to be voluntary and free--among equals. Justice like grammar is precise; justice is of a negative nature. You don't praise for getting grammar or justice right; satisfying grammar or justice is not cause for praise or approbation. Beneficence, like aesthetics, is both positive and negative.
P. 82-84, "sacred laws of justice"--some of best writing so far. You think more about yourself than other people do. "Though every man may, according to the proverb, be the whole world to himself, to the rest of mankind he is a most insignificant part of it...". "In the race for wealth, and honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of...". "To be deprived of that which we are possessed of, is a greater evil than to be disappointed of what we have only the expectation," discussed last time. P. 87 and following: utility not our primary source of sentiment, but notions of justice are.
I think the sources for Smith's or for Hayek's thinking about spontaneous order would be diffuse. For Smith, I think Mandeville must have been big, as well as his teacher Hutcheson, and probably Hume's economics and other evolutionary tendencies. Ferguson was Smith's contemporary (in fact, it seems they were born nearly the same week), and I wouldn't say Ferguson was particularly influential on Smith. As for Hayek, again, I don't think you can point to a specific source. Surely Menger and Mises would figure prominently in his years up to age 30. I think Hayek first uses spontaneous order in The Constitution of Liberty (1960, 160), and credits Michael Polanyi's The Logic of Liberty (1951) for it. But Hayek addresses the general idea, and refers to Hume and Smith, as early as his 1933 lecture "The Trend of Economic Thinking." Someone, btw, who I think was much more influential up to that time than shows in the citations is Herbert Spencer. I think that a lot people, perhaps Hayek, were influenced greatly by him but didn't cite him because doing so would be politically/academically incorrect."