Friday, April 30, 2010
From David Brooks:
The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.
I am not a Brooks fan, but this certainly captures many dimensions of the discussion that Boyes and I have focused on this month.
In particular - the confidence in power is troubling. A free society vests confidence in liberty, not power.
A second troubling issue is the knowledge confidence that Brooks uncovers. Rather than recognizing that we cannot know and this lack of knowledge can best be addressed by a decentralized market order that rests upon individualism, Brooks points out the individualism: false (a salute to Hayek) that is assumed when participants in a society falsely believe that they can foresee the future.
Thursday, April 29, 2010
What is dangerous about their framing of the issue? I will highlight two features.
First, there is the failure to draw important distinctions between public and private, and between coercive and voluntary. Most of the new paternalists simply don’t mention these distinctions at all.
The two issues raised by Whitman are indeed critical. Those favoring the replacement of individualism with policies and planning may intentionally blur these distinctions. The result is that the majority in society fail to see this distinction - hard as this is to believe. Returning to my man on the street survey, how many people see taxes as coercive?
Hayek's view is that planners must, by necessity first avoid the rule of law, then dismantle the rule of law to achieve policies and plans that further social justice. That is, once general rules are rejected and replaced with specific regulations for specific individuals or groups of individuals, the advance toward serfdom and tyranny has commenced.
Intentions versus Consequences
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Tuesday, April 27, 2010
I have been motivated (see this review) to read Tocqueville's Democracy in America, I hate to confess that I have never read this important text. This will be a part of my summer reading list as I am completing the reading for a Hayek Liberty Fund conference the first week of June. That reading has focused my attention of the fragile set of beliefs that support a free society. Hayek is clear that the threats posed by majority rule are significant and that for the general rule of law to prevent coercive redistribution by the majority, a shared belief in liberty as an ultimate value is necessary.
It seems to me that 180 years ago Tocqueville recognized the potential tyranny of the majority - I am anxious to share his perspective in an effort to reignite my optimism about our future.
I know I have shared this scenario which I believe I read on The Coordination Problem some time ago.
Our future can be viewed as a horse race. The three horses entered are named Smith, Schumpeter and State. As long as the first two are ahead of the last, our future should remain bright.
I think of this scenario due to today's Coordination Problem post on what is a major step in the direction of affirming the role of liberty in society -
Like Boyes, I am not optimistic about the ability of our free society to continue in the face of a real dearth of conscious consideration of liberty as a value. I am hopeful however, that conversations with Boyes, Tocqueville and the Liberty Fund participants will allow an optimism to emerge and evolve based upon knowledge that I have not yet encountered.
I recognize that, working in higher education, I am in an environment that is particularly sympathetic to notions of social justice and egalitarianism and hostile to liberty. My reading of The Constitution of Liberty, particularly the exploration of coercion and the role that democratic decision making plays in its use, have me more and more concerned. My concern is juxtaposed with colleagues and students who are concerned that the state is not moving rapidly enough to address pressing violations of social justice and egalitarianism. My admiration for Hayek is growing as I am experiencing on a very small scale both the hostility and ignorance he encountered (both in and out of the academy) and a growing frustration and difficulty in maintaining a semblance of civility in discourse.
After class today I asked one of my top students if he would share his ultimate value. I know a bit about his background and was confident that he would be conscious of his ultimate value. After a pause (90 seconds) he responded - free will.
I would guess that if Jay Leno (or Greg Pratt) conducted a man on the street survey with this question we would be dismayed, but not surprised by the response to the question - What is your ultimate value?
I would speculate that some surveyed could not be able to identify their ultimate value, a number might advance justice and a few might advance some version of egalitarianism. How many would articulate liberty, I wonder?
To illustrate this muddle, I asked my class today to react to the following scenario:
For some reason you are standing outside an adult bookstore. You see a person walk in and exit later with a pleased expression. You ask what he purchased and the reply was - 3 items:
1. The first item contained only adults.
Do you think the person be free to purchase this item?
2. The second item contained adults and another species.
Should the person be free to purchase this item?
3. The third item contained adults and children.
Do you think the person be free to purchase this item?
The scenario proposes a third party viewing an exchange between two interested parties. The question was intended to explore liberty, sphere of personal freedom, individualism, general rules, values and morality.
So, should a line be drawn and if so, where?
The majority of my class drew the line at item 3.
I wonder, if more of these types of discussion were conducted in a civil manner, would the value of liberty be more consciously on the mind of participants in our society?
How many of our fellow citizens are consciously grateful that they do not live in North Korea and are consciously aware that with this gratitude comes with a responsibility?
Saturday, April 24, 2010
Wednesday, April 21, 2010
Buried on p.A12 on The New York Times:
Fearing that health insurance premiums may shoot up in the next few years, Senate Democrats laid a foundation on Tuesday for federal regulation of rates, four weeks after President Obama signed a law intended to rein in soaring health costs.
Tuesday, April 20, 2010
Nobel laureate Friedrich Hayek described the price system as an information-transmission mechanism. The interplay of producers and consumers establishes prices that reflect relative valuations of goods and services. Subsidies distort prices and lead to misallocation of resources (judged by the preferences of consumers and the opportunity costs of producers). Prices no longer convey true values but distorted ones.
Hayek's mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct.
In the U.S today, we are moving away from reliance on honest pricing. The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time. Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates.
Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.
If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.
Monday, April 19, 2010
Sunday, April 18, 2010
The Dangers of Letting Someone Else Decide
by JONATHAN KLICK
The more we protect individuals from making decisions (good or bad), the less willing they will be to invest in decisionmaking capacities. A few years ago, I was bemused when I spoke at an orientation session for new law students, finding that a third of the room was filled with their parents. This feeling eventually turned to despair when I discovered this is a fairly ubiquitous phenomenon. By coddling their children (setting up default rules in such a way to protect them from their failure to make a good decision, so to speak), it seems, today’s helicopter parents have actually stunted their children’s development. You may think I am exaggerating the costs of this (and that I may be a little bitter that the parents, year after year, assumed I was the A/V guy, reacting with shock when they found out I was the professor they had come to hear speak), but there is at least some evidence of this coddling leading to negative long term consequences. Apparently a number of firms report that entry-level candidates are now bringing their parents to job interviews and letting mom negotiate their benefits for them.
Saturday, April 17, 2010
A reading of Hayek's classic The Road to Serfdom provides one plausible explanation. The belief systems that emerge and evolve shape the "consensus" of society. The road to liberty was one that emerged over considerable time and was gradual and incremental. Liberalism expanded in England and on the continent as a strong understanding and belief in liberty and freedom expanded. This informal institutional development lead to what Hayek called Individualism: True. In his view this was a commitment to allow the individual to use their own knowledge for their own ends in the absence of coercion. Now, this coercion might come from other individuals or it might come from the state, but the commitment to individualism led to a firm understanding of liberty and coercion and a clear picture of the trade offs involved in securing personal liberty (property rights, contract rights, freedom of thought and action) in the face of potential or actual predation by submitted to a central authority. This trade off was based upon clearly limiting the central authority and concentrating the locus of planning within the individual. That is, the state would be one of many players that would shape a constitutional framework - rule of law, individual order, separation of powers at the national level, federalism as a further check, etc, and with other players (formal institutions and informal) would commit to a law that was adaptively efficient and could be dynamically stable.
The essential connection between individualism and adaptive efficiency is clear, both in Hayek and in reflecting on incentives. The diffusion of knowledge and the process of learning lead result in much different outcomes if one begins from catallaxy and socialism. These differences can be viewed through time.
Entrepreneurs play a key role in the discovery process. Whether this discovery results in success or failure, it is this process that is at the heart of a dynamic society. As agents of learning in complex world, entrepreneurs play a key role in the process of economic change.
Boyes points out how measurements of economic change are impacted by the scale and scope of state involvement in society. This expansion impacts the economy in a number of ways:
1. Changing the incentive structure that shapes entrepreneurial behavior
2. Increasing uncertainty
3. Redistributing income
4. Dramatically shaping belief systems
The notion of wealth creation v. wealth destroying entrepreneurship is explored by Powell, Baumol and others and rests upon the view that incentives shape the direction of behavior. This view seems to be confirmed when examining measures of entrepreneurial behavior across countries using instruments such as the Frasier or Heritage indices. While it may seem to be a tautology, it is important to repeat the impact of entrepreneurial behavior on economic performance and economic change. Larger scale and scope of the state provides increased entrepreneurial opportunities for agents to engage in wealth destroying rent seeking behavior and less opportunity for wealth creating rent eroding behavior. That is, profit opportunities rise in actions with the state and fall in actions in the private sector.
Uncertainty from diffused knowledge and the process of learning create incentives for agents operating under liberal societies that are in fact individualistic to quickly internalize the consequences of actions and to engage in the level of learning that best suits their own needs. This process moves toward wealth creation under a liberal society that places consistent and clear constrains on coercion. As any number of social scientists point out, centralized planning tends to increase rather than increase uncertainty due to the socialist focus on planning detail or individual activities (what Hayek refers to as the preoccupation with legislation. The civil law system of Continental Europe is used by Hayek as an example to contrast the liberal or common law system that is the constitution of liberty). Gary Becker et al do a nice job of exploring a contemporary example that supports Boyes concern about the future impact of large scale and scope of government involvement in our society. In Uncertainty and the Recovery the authors develop this argument:
other government proposals created greater uncertainty and risk for businesses and investors. . . .
Congressional "reforms" of the American health delivery system have gone through dozens of versions. The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest, expand and hire harms households as well, because it slows the creation of new jobs and the growth of labor incomes.
. . .
The uncertainty about monetary policy has important political dimensions as well. The Fed now faces greater political pressures than at any other time in the past quarter century, as seen from the grilling the Senate Banking committee gave to Fed Chairman Ben Bernanke in deciding whether to approve his reappointment. These pressures may intensify greatly if, and when, future Fed actions to restrain inflation conflict with politicians' desires to prop up housing and the major government enterprises enmeshed in housing finance.
Even though some of the proposed antibusiness policies might never be implemented, they generate considerable uncertainty for businesses and households. Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse.
Becker deftly sees the impact of increasing scale and scope of government on entrepreneurship and uncertainty inherent in complex environments. His colleague Greg Mankiw, in a recent post, shows the ultimate aim of the central planner or interventionist or Keynesian or socialist:
I have long said that one of the prime motives for healthcare reform had nothing to do with health per se but rather was a desire by those on the left for greater redistribution of income. The Tax Foundation has now put some numbers to that proposition for the recently passed bill. Roughly speaking, the top 1 percent of the population pays an additional $50,000 in taxes because of this legislation, and each of the bottom 50 percent gets about $1000 in benefits. Click here for the more complete description.
So, here it is, the end of planning or socialism - social justice or income redistribution. And the question becomes, what type of process leads to a shared belief system that would not only support for but agitate for equal outcomes.
This is the message in Hayek's Road to Serfdom - that it is the change in beliefs that leads to anti-individual, anti-liberal, egalitarianism? This change in beliefs is due, in the view of some (Sowell, Hayek) to the role played by intellectuals in shaping belief systems. The unfortunate result of this "intellectual" domination of the emergence of shared beliefs was exemplified by a blog post by Paul Krugman entitled Are Austrians Self Hating Keynesians. (Note: like his colleague Brad deLong, Krugman has since changed the title of the post - seems even he could see the potential harm to his propaganda campaign from discourse that verges toward that of previous central planners).
Hayek worries that as material progress advances, individuals in society lose memory of the reason that liberty is an ultimate and instrumental value and begin to be concerned with either a safety net or a more "just" distribution of material. This replacement of the freedom to act (individualism) with a freedom from want (fill in the want) is the tipping point to totalitarianism.
Friday, April 16, 2010
A wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improve¬ment, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government...
Before the late nineteenth century, government spending was a very small percentage of gross domestic product in most Western countries, typically no more than five percent. In most cases this state of affairs had persisted for well over a century, often for many centuries. But with the twentieth Century came the growth of governments across the Western world, where government spending is as much as 100 percent gross domestic product.
Some authors attribute the rapid governmental growth of the twentieth century to war, international conflict, and crisis more generally. Robert Higgs (1987), in his Crisis in Leviathan, argues this position. He postulates a ratchet effect. For instance, state activity invariably expands in wartime, if only to fight the war. Taxes increase, resources are conscripted, and economic controls are implemented. When the war is over, some of these extensions of state power remain in place.
Is government necessary for a nation to succeed? Most economists believe government has as its most basic function the protection of people and property. In addition, many argue that a provision of limited set goods and services, called public goods, such as roads and national defense, is also a necessary role for government. But, Gwartney, J., Lawson, R. and Holcombe, R. “The size and functions of government and economic growth,” Joint Economic Committee, p. (V) (1998) state, “as governments move beyond these core functions, they will adversely affect economic growth because of (a) the disincentive effects of higher taxes and crowding-out effect of public investment in relation to private investment, (b) diminishing returns as governments undertake activities for which they are ill-suited, and (c) an interference with the wealth creation process, because governments are not as good as markets in adjusting to changing circumstances and finding innovative new ways of increasing the value of resources”. Daniel Mitchell concludes “government spending undermines economic growth by displacing private-sector activity. Whether financed by taxes or borrowing, government spending imposes heavy extraction and displacement costs on the productive sector.” http://www.heritage.org/research/budget/bg1831.cfm;
Empirical evidence suggests the share of overall government spending that maximizes economic growth, is between 17% and 30 percent of GDP. In 2007 the OECD average of total final government expenditures was 40.4% of GDP, while for the Euro area the average was 46.2% of the GDP.
Several people have pointed to the Rahn curve as illustrating the optimal size of government. As the size of government, measured on the horizontal axis, expands from zero (complete anarchy), initially the growth rate of the economy—measured on the vertical axis—increases. As government continues to grow as a share of the economy, expenditures are channeled into less productive (and later counterproductive) activities, causing the rate of economic growth to diminish and eventually decline.
A substantial growth in average government expenditures has a corresponding decline in average economic growth. Barro, Robert A., (1989 “A Cross - Country Study of Growth, Saving and Government,” NBER WorkingPaper No. 2855) found that “the ratio of real government consump¬tion expenditure to real GDP had a negative associ¬ation with growth and investment.” A New Zealand Business Roundtable study found that “An increase of 6 percentage points in government con¬sumption expenditure as a percentage of GDP, (from, say 10 percent to 16 percent) would tend to reduce the annual rate of growth of GDP by about 0.8 percent.” A National Bureau of Economic Research study concluded that “An increase in gov¬ernment spending by 1 percentage point of trend GDP decreases profits as a share of the capital stock by about 1/10 of a percentage point.”
Although examples of OECD countries reducing government expenditures are few and far between, three instances of substantially reduced govern¬ment expenditures among the OECD countries occurred between 1960 and 1996: Ireland from 1986 to 1996, New Zealand from 1992 to 1996, and the United Kingdom from 1982 to 1989. In each case, the reduction in government expenditures led to periods of substantially improved growth. Conversely, a 10 percentage point increase in government expenditure as a percent of GDP from 1980 to 2006 was associated with approximately a six-tenths of a percentage point reduction in growth during the entire 15-year period.
What does this say about the significant increase in government spending in the U.S. over the past three years? It suggests a considerable slowdown in economic growth. Given that US government expenditures have risen as a percent of GDP by 28 percent since 2006, 6/10 of a percent of 28 percent will slow about 17 percent, from a growth rate of say 3.3 percent to 2.7, or from 2 percent to 1.66.
Tuesday, April 13, 2010
Both Kling's comment and the paper are well worth a read -
Monday, April 12, 2010
Wednesday, April 7, 2010
US economic growth can be characterized as a 3 horse race - the horses are called Smith, Schumpeter and the State. As long as the first 2 are ahead of the last, the economy can continue to grow.
There are a number of points to be made about the emergence of a system of Federalism. North, Wallis and Weingast in their new book Violence and the Social Orders describe the state in natural orders (limited access) and open access orders. They indicated that, in open access orders the state as represented by the government becomes larger, denser and more visible in society. They also underscore the importance in open access orders of both a national government and what they call subnational government organizations - towns, counties, improvement districts, school districts, and states.
I wonder to what extent this emergent federalism acts as a force to balance the predatory forces of the state? Further, is it possible that the 3 horse race can in any way constrain wealth destruction by the state?
Tuesday, April 6, 2010
"The natural progress of things is for liberty to yield and government to gain ground." – Thomas Jefferson
Paraphrasing Abraham Lincoln, Eleven score and four years ago our forefathers brought forth on this continent a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal. Now we are engaged in a great civil war, testing whether that nation, or any nation, so conceived and so dedicated, can long endure.
We are indeed engaged in a war, either a civil war of progressives versus tea partiers or a second revolutionary war. We either turn in the direction of what the founders had in mind or America ceases to exist as that shining light on the hill, the last best hope for mankind.
The country was founded on the belief in natural law, whereby the right to life, liberty and property were fundamental. Moreover, natural law and the non aggression principle defined the role of government – you could do what you want with what you own except to aggress against the private property rights of others. The government was to protect private property rights.
The US constitution was unique: other constitutions say, "Government grants you these rights," whereas in the US constitution says, "You are born with these rights, they are yours, and no government on earth can take them from you." From the beginning, people such as John Adams and Alexander Hamilton called for a greater federal government. But, the federal government remained small. It was not until 1857 that Congress approved a specific appropriation for the president to hire a private secretary.
Although the Civil War ended the idea of states rights and led to a growth of the federal government, it was not until the progressive era -- Teddy Roosevelt and Woodrow Wilson – that the role of government changed.
The story of the growth of the federal government can be divided into two parts: before and after 1913. In1913 the 16th amendment to the Constitution, which permitted a federal income tax, was ratified and the Federal Reserve was created. A government that began in 1776 as a protector of individual rights by 1913 had evolved into one that presumed to guarantee the economic welfare of its citizens.
When the federal income tax was introduced in 1913, the highest tax bracket was 7 percent for all income above $20,000. Because of the demand for war-related spending, by 1918 the highest rate rose to 77 percent beginning at $4,000. This was the context in which Warren G. Harding was elected to the presidency in 1920 with the theme, a “return to normalcy.”
In the late 19th century the president most sensitive to liberty was the Democrat Grover Cleveland, who, in the 1880s and 1890s, defended the gold standard, reduced tariffs, relied heavily on his veto pen, and rooted out corruption. When the Republicans took over with William McKinley in 1897, they continued their trend of expanding government and using subsidies and tariffs to benefit Big Business. In 1898, they took America on its first step toward global empire – the Spanish-American War.
Teddy Roosevelt, continued with US imperialism, intervening in Venezuela, the Dominican Republic, Nicaragua and Honduras. Under Roosevelt, the US government did withdraw from Cuba, and in return, the US was given control of Guantanamo Bay. He also “protected” some say, I say confiscated, some 230 million acres of national land = 35,938 square miles. He called for a graduated income tax. It was Woodrow Wilson who rammed a tariff law through Congress which had attached, the graduated Federal income tax. Wilson also herded the passage of the Federal Reserve Act in 1913.
The progressives have justified their actions on the basis of two clauses of the Constitution. Article I, section 8 of the U. S. Constitution grants Congress the power to "lay and collect Taxes, Duties, Imposts, and Excises, to pay the Debts and provide for the common defense and general Welfare of the United States." This general welfare clause created debates even in the Articles of Confederation. Most of the founders believed that the clause was intended to deal only with the enumerated powers of the govt. , that is, to tax and spend only on those things so enumerated – paying debts for instance. Most did not believe it was an invitation of unlimited govt. But it has been so interpreted by the Progressives.
Similarly, the Commerce Clause: (Article I, Section 8, Clause 3) was intended to prevent states from charging import and export duties on other states. But, this clause has been interpreted as the right of the federal government to intervene in any action because the action might deal with interstate commerce. In other words, the Progressives see no limits to the expansion of the federal government in the constitution.
Monday, April 5, 2010
So, I am in the odd (and uncomfortable position) of perhaps agreeing with Thomas Friedman. I did not read his recent editorial (in fact, I have not read much of the man since The World is Flat), but he was referenced in a provocative posting - Immigration is Key to Entrepreneurial Economy.
The blogger speculates that the "problem" of immigration may be self correcting, if the government continues the "war on immigration". He writes:
The primary reason that we see so many immigrants pursue entrepreneurship is that they are opportunity focused - surveys reveal that this is what drives many of them to leave for new a new country. I have to wonder how attractive the US will look in a few years after our mad dash to socialism is fully in force.
Friday, April 2, 2010
$50 Billion Tidal Wave: How Unfunded Pensions Could Overwhelm Arizona Taxpayers | Goldwater Institute
The result was both predictably and very, very discouraging. All responses indicated that the Goldwater Institute was biased and to take anything that was produced there with a grain of salt. (Never mind that the Pew Center for the States a non profit on the "other" side of the ideological spectrum came to the same conclusion - with a lower order of magnitude).
So, rather than focusing on the core issue - the looming threat to citizens from unsustainable entitlements, my higher education colleagues attacked the messenger. I counted responses from English, Sociology, History and Humanities faculty - not surprising I suppose.
I did wonder where my colleagues in business and economics stood.
Thursday, April 1, 2010
Mario Rizzo channels Bob Higgs in a March 31 analysis in which he elaborates:
Clearly, there are strong political incentives that favor big and complex laws with long-haul effects—the bigger, the less transparent, the longer term, the better. These perverse political incentives are a greater danger to the future of the Republic than a single law, even the monstrous new medical entitlement. Any complicated issue has the potential for a gargantuan bill, with all the opportunities that offers for political spectacle and trading. Everything-and-the-kitchen-sink legislation will always attract politicians.