Government fails at the basics, too


The private military contractor Blackwater “has sent a
private sector warship equipped with helicopters to the Gulf of Aden
, and is
offering its services to shipowners concerned with Somali piracy. 

Blackwater Worldwide executive vice-president Bill Matthews
said: “We have been contacted by shipowners who say they need our help in
making sure goods get to their destination. The McArthur can help us accomplish

I have no comment, other than to ask this:

Why is it that I hand over 50% of my income to the
government and submit to humiliating violations of my privacy on a regular
basis, and it can’t even perform the one role it is constitutionally authorized
to do?  Why is a private company with a
single ship able to do what the worlds superpowers, with their massive budgets
and huge stockpiles of nuclear weapons cannot? 
Are they even pretending to “defend our freedoms” or is mindless repetition
of that phrase enough to fool the masses into surrendering theirs?


No such thing as a free lunch


When arguing against the Genetic Information Nondiscrimination Act last year, I wrote

If discrimination based on comprehensive genetic screening is legal, we can expect health providers to tailor plans according to our individual risk factors. That might be to the disadvantage of a minority of high-risk individuals, but greater information about risk factors will lower uncertainty, and thus lower rates overall. Furthermore, insurers will offer incentives to people who take proactive steps to discover health risks and take steps to alleviate them. Expensive procedures such as frequent biopsies or preemptive removal of organs might be fully covered for individuals whose genetic profiles uncover a high cancer risk.

Unfortunately, Congress did not heed my arguments, and banned genetic discrimination anyway.  It is now illegal for health insurers to take genetic factors into consideration when setting premiums.  What effect do you think the law had on the incentive of insurance companies to pay for their customer’s genetic screening? 

If the goal of the law was to encourage genetic screening, it clearly had the opposite effect.  In response, celebrities are now “fighting for women to have access to MRIs and genetic testing.”  Having coerced insurance companies to ignore the results of genetic testing, people now want to coerce them to pay for it.

Do you think that people who find out that they have a higher probability of having an illness with genetic factors would be more likely to purchase more health insurance than individuals with a low probability of genetic illness?  As I wrote last year,

It does not take an economist to predict that rates would immediately rise, as healthy people, refusing to pay for their neighbor’s health risks, stopped using insurance altogether. As the young and healthy jump ship, insurance companies would have to increase rates, accelerating the trend. Without further government interference, the health insurance business would disappear completely, shortly after millionaires on their deathbeds became the only people able to afford policies.

Are you still wondering why healthcare is so expensive in the U.S.?


What you need to know about the economic "crisis"


Economics is not a complicated science. This may not seem obvious to you if you’ve following the news from Washington, where a cabal of politicians, financiers and lobbyists have been spent the last several weeks desperately making a series of increasingly complicated, expensive, and ultimately unsuccessful plans to “save the economy.” As the costs of their schemes have spiraled from billions and into the trillions of dollars, it has become increasingly urgent for you, the source of Congress’ deep pockets, to examine the potential impact of their actions on your taxes, savings, and investments. Even if you have no intention whatsoever of voting this November (which, given the choices, is hardly unreasonable), it would behoove you to take the consequences of the pending federal bailout into consideration for your own benefit.

The key to understanding economic theory is to grasp that the same principles that apply to your personal finances, and perhaps to your interaction with your local grocer apply equally to the world at large, at all levels of economy activity. The key to understanding politics is to grasp that political success requires advocating policies which violate these basic economic principles – and then evading the consequences of their own policies – with the voters’ eager participation in the delusion.

A Potato Farmer Learns About Business Cycles

Suppose, for example, that you grow heirloom potatoes. Each season, you harvest most of the potatoes for consumption or sale, and save a fraction to plant the next season. The saved potatoes are your supply of loanable funds – the consumption you forgo now to invest in future production. The percentage of saved potatoes is your savings rate, and also your interest rate, since the consumption you forgo now is your investment in next season’s production capacity. Suppose that you have reached an equilibrium, so that each year’s saved potatoes are just enough to produce the same sized crop next year. Common sense indicates that you cannot increase your future consumption of potatoes without an increase in savings, and therefore a decrease in present consumption. This is a key point – increasing the rate of economic growth is only possible through increased investment. Increased investment is only possible through increased saving. An increase in saving requires a decrease in current consumption. The same principle applies when you decide to dine out less often this month to afford a new iPod next month.

Imagine that you keep track of your remaining potato stock in a ledger. If your ledger is accurate, each hash mark in the ledger corresponds to a real potato – the potatoes are your “gold standard.” For a while, potatoes are plentiful and life is good. Then, one day, you see a commercial for the latest product from Apple – the iTater, a laptop made from potato starch. You must have it – but your ledger shows that the expense would cut into next year’s seed stock. No problem – you just add another zero to the count of remaining stock and proceed to the nearest Apple store. You experience utopia with your iTater – welcome to the boom phase of the business cycle! Your constituents (the wife and kids) are happy, consumer spending is up, and interest rates are down (saving potatoes requires less of a sacrifice in current consumption – according to your ledger.) You have taken your ledger off the “potato standard” and created a fiat currency – but who cares, life is good, right?

What happens next season? Since the act of writing down numbers does not actually conjure up potatoes, you will be unpleasantly surprised when your stock of real investment capital suddenly runs out, and is not sufficient to meet planned expenses. You may be forced to liquidate your assets at a large loss (the iTater market is not so hot now that the iTater 2.0 is out), and without a true accounting of available investment capital (the seed stock in your cellar) long term planning becomes impossible. Welcome to the bust phase of the inflationary business cycle!
If you wise up to your economic fallacies, you will cut current consumption (no iTater Lite for the kids) to restore savings rates and pay debts. But suppose that you take a hint from Washington, and decide to implement a “bailout plan” by adding some more zeroes to your ledger, and resuming unsustainable consumption level by getting the tots the iTater Lites. You might even get a loan from your neighbor Mr. Wen.

What happens now? You’ve “rescued” your personal economy this season at the cost of further depleting your investment capital. You’ve won the “vote” of your kids this season, but you have even less capital for next season. Rather than allowing your personal economy to recover, you have further distorted your grasp of reality, and now have no idea how many spuds you have to consume, and how many you need to save. You can attempt borrow seed stock from your neighbor Mr. Wen, but unless you can drastically cut consumption to pay interest, he will eventually grow impatient and refuse to lend any more. The more you attempt to extend the illusion, the farther out of touch you become with reality, as the numbers on your ledger show exponential growth upwards while your actual consumption plummets toward zero. You’ve discovered hyperinflation, the ultimate destiny of all fiat currencies.

The Roots of the Housing Crisis

Let’s now apply the analogy of the potato farmer to the mortgage crisis our economy is now experiencing. The seeds of the crisis were laid during the New Deal, with the federal government’s creation of Fannie May and Freddie Mac for the purpose of allowing mortgages to be issued at below market rates. In other words, they are a form of price control (a price ceiling) on interest rates for home mortgages. As with all price ceilings, the consequence of making goods artificially cheap is a shortage. In this case, the physical supply of building materials, land, architects, and construction workers is not sufficient to meet demand. The existence of coercive government price controls is obscured by a number of elements intended to maintain the myth that every American family has a “right” to a home. The elements include the superficially “private” charters of Freddie and Fannie (and now, the other institutions being bailed out), the extra-legal guarantees provided to those entities (massive lobbying and high-level relationships with both political parties), and the indirect way the costs of shortages are paid (price inflation, rather than an increase in taxation).

Much of the blame for the mortgage lending meltdown has been placed on the “failure of the free market.” But is there really any truth to this? The financial industry is the single most regulated industry in the economy. The failing institutions are precisely the ones that New Deal policies were meant to protect us from: the FDIC was supposed to prevent bank runs, the SEC was supposed to be stop shady investments, Fannie May and Freddie Mac were supposed to make sure that loans went to people who deserved them. Opportunistic politicians like John McCain are quick to blame the capture of regulatory institutions on lobbyists and “special interests.” He promises to fix the problem by giving yet more money and power to corrupt government agencies, much like a mob boss who blames his enforcers for his protection schemes, and then promises his victims to lay off them if they just give him more guns and money. The only reason that special interests are so involved in government is that the government has ingrained itself so deeply in our lives. Giving more power to the state to regulate markets and redistribute wealth and privileges from one group to another only increases the incentive to strengthen one’s political connections.

There are two particular stimuli for the present housing “crisis.” First, is the expansion in the money supply by the Federal Reserve, motivated in part by the desire to pay for American overseas commitments without a proportionate increase in taxes, in part as a response to the destructive consequences of the anti-business sentiment that created regulations like Sarbanes-Oxley, and as a response to its own inflationary policy of the late 1990’s, which (much like the case of the unfortunate farmer) resulted in the boom and bust of the Dot Coms. Second, is the 1995 Community Reinvestment Act, which basically forced banks to make unprofitable subprime loans to poor neighborhoods and minorities. In 1999, the repeal of the Glass-Steagall act was tied to the CRA rating of banking institutions, again forcing them to make unprofitable mortgages. As the consequences of the loose money policies and the CRA began to come crashing down in 2008, the government responded with HOPE NOW and Project Lifeline, which use a combination of threats and taxpayer-sponsored bribes to prevent the markets from self-correcting. Unfortunately, as our farmer learned, attempting to fix over-consumption by increasing consumption only makes the situation worse.

The vicious pattern of inflationary business cycles is a downward spiral that is not a creation of the unrestrained greed of businessmen. Yes, businesses are complicit to the extent that they have taken part in the state’s redistribution of funds from taxpayers and dollar users. But this is only a minority of politically-connected enterprises. The Community Reinvestment Act is in fact an attempt to force financial institutions to become altruists – that is, act against their own self-interests. The mortgage crisis is primarily the inevitable result of a political-economic ideology that essentially attempts to turn wishes into reality through collective delusion. This ideology is in turn the product of a philosophy that rejects objective reality in favor of a reality created by the collective consensus, rather than the inescapable consequences of cause and effect.

The Philosophy of Make-Believe Economics

The German philosopher Emmanuel Kant famously argued that there are two realities: the noumenal, which is the way the world really is, and the phenomenal, which is the way conscious beings perceive it with their senses. Since the conceptual faculty is an object of distortion, the real world is forever beyond human understanding. Our perception of reality is therefore only an illusion, but it is a collective delusion, shared by all of society. American philosopher John Dewey took Kant’s premises to their natural conclusion: since “ultimate” reality is unknowable, social consensus is the sole determinant of truth and morality. Dewey rejected the notion of truth and of right and wrong as such, and held that pragmatic experimentation should be our sole guide to action, with democratic consensus as the ultimate manifestation of truth, morality, and political change.

Few people act like our potato farmer and deny the objects and events that happen before his very eyes. Yet in economic matters, most people, including most politicians, mainstream economists, and investors unconsciously follow Dewey’s philosophical principles: reality is ultimately driven by social consensus, and the success or failure of markets depends only on the optimism or pessimism of consumers and investors. This is more than the belief that wishes and prayers affect reality – this is a belief that one’s wishes arereality – if only enough people share the delusion.

The Federal Reserve and the Treasury Department are faithful followers of Dewey and Kant. By artificially lowering or raising interest rates, the government attempts to turn our perception of reality (the interest rate) into reality – our actual propensity to save. But pretending that there is a sufficient stockpile of spuds in the cellar is not the same thing as having a sufficient stockpile. The artificial manipulation of interest rates leaves investors flush with cash, but short on worthwhile investments (or vice versa) and thus diverts increasingly scarce resources into increasingly inefficient investments. Prudent investors (like the banks notin this week’s news stories) stay away, while politically-connected spendthrifts splurge. Markets become increasingly unstable, and sooner or later, things come crashing down. The more you attempt to evade reality, the worse the disaster that you are asking for will become.


Freedom and Toleration

This post is inspired by the State of Texas’ recent abduction of 416 kids from a
polygamist compound

One way to measure the degree of freedom in a society is by
looking at the kinds of associations made by its members. A free people can choose
to enter into any association they wish, and are not forced into any associations
against their will. By associations, I include both social associations, such
as friendships, meeting, publications, and marriages, as well as material
associations, such as gifts, trade, business agreements, and common property.
Voluntary associations are those entered into by mutual consent to mutual
benefit.  Non-voluntary associations (the
status of minors aside) include taxes, crime, restrictions on trade and
commerce, and any other regulation of consensual behavior that is imposed on
individuals against their own judgment.

A free society requires a certain kind of tolerance for other
people’s beliefs and associations.  Because
the term is unclear, it is necessary to distinguish two kinds of toleration. Political toleration is equal treatment under
the law – the presumption that every human being has the same rights as
everyone else. A violation of this kind of toleration is only possible in
interactions that involve the threat or use of force.  Political discrimination includes
preferential or detrimental treatment of any group or individual based on any
criteria other than an individual’s respect for the rights of others.  Examples of political intolerance include
laws that favor the rich or poor (such any government tax or fee that is not
fixed), racial quotas, or limitations on contracts based on sexual orientation
or the market share of one’s business.

In contrast to political toleration, social toleration is
non-judgmentalism.  As applied to
cultural distinctions, it is known as multiculturalism.   A total commitment to social toleration requires
the presumption that no particular culture, way of life, or value system is
superior to any other. Practically everyone engages in various kinds of social
intolerance when they issue moral praise and condemnation, or choose to
associate or dissociate with various people or groups based on their beliefs or
identities.  There are many levels of intolerance
— we might buy our groceries from someone we would not necessarily want as a
business partner or spouse.

I believe that a free people must be politically tolerant,
but socially intolerant. Political tolerance is necessary because the freedom
of association requires that individuals be able to establish any voluntary
association they choose, including those that the majority disapproves of, such
as polygamous relationships.  A society
that does not respect this right will eventually succumb to pressure group warfare
followed by dictatorship, as conflicting moral views battle in the political
arena until one seizes power by force.  Social
intolerance on the other hand, is necessary because in a society that does not
use political means to prohibit destructive (but voluntary) behavior and ideas,
people must rely on their own judgment for moral guidance.  In order to live successfully in a politically
pluralistic society, individuals need to use their own judgment to decide which
associations are harmful or beneficial within the context of voluntary
associations.  (In this context, a
presumption of innocence is equally important in social as well as political

Politically, freedom means the freedom to disagree – to be
free to make choices regardless of the approval of others. A free people must
be free to create and join religious cults, no matter how absurd their beliefs
or how self-destructive their practices are. Socially, freedom requires an
ethic of self-reliance and independent moral judgment. To survive and thrive in
a free society, we must decide which people and groups to join and which ones
to condemn and avoid.

The government’s drug war funds terrorism

USA Today:

Vice president [Dick Cheney] was to push Karzai to take steps to extend Afghanistan’s governance beyond Kabul and conduct successful elections next year. The discussion also was to address ways the Afghan government can curb corruption and deal with rising production of poppies, which are used to make narcotic drugs that fund insurgent operations.

Politicians claim that since profits from illegal drug sales fund terrorism, we ought to blame illegal drug use for terrorism.  But this is a reversal of causality.  It is only because politicians have made certain substances illegal, that the production of those substances in areas beyond the reach of the authorities is highly profitable.  If it is true that the drug war funds terrorism, it is yet another demonstration that the destructive consequences of a rights violation ultimately harm everyone, even when the banned activity is legitimately immoral.

The fact that the combined might of the U.S. military is utterly unable to eliminate drug production in a third world country under its control is at the same time laughable and comforting, since I can be assured of an ample supply should politicians declare their next war on a product or service I actually value.