Another Job Killing Idea From Obama

This article from the Wall Street Journal is very dismaying.

Some quotes from an interview Obama gave to “60 Minutes” on Sunday.

“I did not run for office to be helping out a bunch of fat cat bankers on Wall Street,”

“You guys are drawing down $10, $20 million bonuses after America went through the worst economic year that it's gone through in -- in decades, and you guys caused the problem. And we've got 10% unemployment."

Obama just doesn’t get it. He is focused on some sense of class struggle and fairness more than getting the economy going again. The easy reaction is to look for someone to blame and divide the nation by pitting the “fat cats” against the “working man”. This is a false dichotomy and by making such divisive, negative remarks, Obama is ensuring that uncertainty, lack of trust, and downright contempt continue from both sides. Indeed there wouldn’t even be something like “both sides” if Obama stopped perpetuating it. No wonder banks aren’t lending.

Said one, “I am a CPA. My clients are unable or unwilling to jump through the ‘hoops’ the regulators have established. Hence they are just sitting on the sidelines rather than investing and creating jobs”

Uncertainty in the financial and business industry causes business to hunker down and wait it out. Obama increasingly talks about raising taxes on companies’ profits or cutting salaries that are tied to company performance. Why would any business take a risk by investing and hopefully turning a profit when all their benefits from doing so will be undercut by the government?

In the Great Depression FDR caused so much business uncertainty by constantly changing the rules and adding new regulations and oversights and taxes that it virtually killed business investment, thus prolonging the depression.

We’re seeing much the same thing happen now. No politician will ever see that it’s government causing the problem. Mr. Obama, it wasn’t the banks that caused the mortgage crisis, it was excessive regulations on the banks that forced them to lend to risky borrowers that caused the mortgage crisis.

Now, by removing all incentive for banks and big business to branch out, invest and hire more workers, and instead forcing them to lend when it doesn’t make financial sense to do so, you’re going to solve the problem? How can we solve a problem by repeating the very same mistakes that caused it? Does that make any sense?

Which Side Are You On?

"Which Side Are You On" by Florence Reece

Come all of you good workers,
Good news to you I’ll tell,
Of how that good old union
Has come in here to dwell.

Which side are you on?
Which side are you on?
Which side are you on?
Which side are you on?

My daddy was a miner,
And I’m a miner’s son,
And I’ll stick with the union,
Till every battle’s won.

They say in Harlan County,
There are no neutrals there.
You’ll either be a union man,
Or a thug for J.H. Blair.

Oh, workers can you stand it?
Oh, tell me how you can.
Will you be a lousy scab,
Or will you be a man ?

Don’t scab for the bosses,
Don’t listen to their lies.
Us poor folks haven’t got a chance,
Unless we organize.

I like this song. It's obviously pro-union, and I definitely don't support unions, but I do like the history lesson. This is a good illustration of why sometimes it's hard to implement sound economic policy, especially in times of trouble. When emotions are running so high, as they were when this song was written, it's almost impossible to talk people down and explain why unions might be economically damaging.

In the Great Depression, people were desperate for work and for money. In their desperation, they chose the most obvious path to secure jobs and high wages - unions. While it seemed like the right thing to do, it was probably one of the worst things they could have done.

It was around this time that unions started turning into the type of organizations we know today. They were given collective-bargaining power by the government and started using strikes and coercive tactics to accomplish their goals. By demanding higher wages than was justified by the economy, they severely weakened their companies' profitability which limited growth and job-creation. Also, by raising the wage above the market rate, businesses demanded less labor. So while the goal of unions was to secure jobs, and it accomplished this for a select few, all they really accomplished was to curb employment and limit companies' growth, helping to prolong the depression.

In times of perceived crisis we must be extra-vigilant and guard against emotion-driven policies that, when scrutinized, don't hold up economically.

The Case For Private Schools

Educating our children is one of the most important responsibilities we have. The benefits of education are very clear. In developing countries virtually any effort to help would be moot if that society doesn’t receive education first. Women in our society and around the world are breaking out of their submissive roles and proving that they have something to contribute. People who try to control and exploit women and children argue vehemently against education because they know it’s a path to freedom.

In our society education is often seen as a “positive externality” – something that one person has or does that has positive spillover benefits to the rest of us. The evolution of our economy from agriculture to manufacturing to technology and services could not be possible without education. It’s pretty easy to argue for increased education and the benefits that come with it and there are very few that need convincing.

Therefore, it now seems logical to not argue for education, but rather to argue the best way to go about educating our children.

Public schooling in this country has had support from the very beginning, including such famous supporters as Thomas Jefferson, Noah Webster, Benjamin Rush and George Washington. These men believed that education was so important that it should be free, available to every child regardless of circumstances, and absent religious coercion. Despite this early and formidable support, public education did not make it into the constitution.

Many state constitutions specifically call for public education, but it wasn’t until 1918 that at least elementary school enrollment became compulsory. Oregon passed a law in 1922 saying that all children must attend public school and private schools would no longer be allowed to operate. The law was appealed to the Supreme Court as Pierce v. Society of Sisters and was unanimously ruled unconstitutional.

The Opinion of the Court was delivered by Justice James Clark McReynolds:

“We think it entirely plain that the Act of 1922 unreasonably interferes with the liberty of parents and guardians to direct the upbringing and education of children under their control: as often heretofore pointed out, rights guaranteed by the Constitution may not be abridged by legislation which has no reasonable relation to some purpose within the competency of the State. The fundamental theory of liberty upon which all governments in this Union repose excludes any general power of the State to standardize its children by forcing them to accept instruction from public teachers only. The child is not the mere creature of the State; those who nurture him and direct his destiny have the right, coupled with the high duty, to recognize and prepare him for additional obligations.”

Okay, now that we have a little history out of the way, let’s look at the real issue, the one that has been raging before and after the Supreme Court case just mentioned. Which is better, public school or private school? They both have their merits and they both have their drawbacks. On the whole, it is my opinion that private school provides the most quality education, provides the best choices and makes the most economic sense.

Before I make my case for private school, let me lift up an area where public school provides a valuable service that private school cannot – integration. I think it’s good for kids to be exposed to people that are different from them. In public school, kids and parents have no choice in where they go to school, except of course by selecting what school district to live in. In public school kids will be taught alongside those of other races, religions, creeds, languages and socio-economic backgrounds. It’s a good life experience to learn from and listen to those that are different than us.

Private school, on the other hand, runs the risk of isolation. Since parents will choose what school they want their kids to go to, they will choose on that reflects their own values. As such children of religious parents will go to religious schools, children of atheistic parents will go atheistic schools, etc. This opens the door to extremism, narrow-mindedness and possibly even xenophobia. While those dangers are certainly a possibility, I think the reality of their fruition is very slight. On the whole, the benefits of private school largely outweigh their costs.

With private school (or charter schools) parents have a choice in where to send their children. They do not have to accept being stuck at a failing school with failing teachers. If they feel their child is not getting an adequate education, they can simply change schools. If a school is failing, enough parents will pull their children out and that school will be forced to shut down due to lack of tuition. Failing schools should be allowed to fail, not be continually propped up with tax-payer dollars.

The quality of teachers and curriculum would be greatly increased if we went exclusively to a private or charter school system. Once schools have to start competing with each other, the race will be on to attract the best, most qualified teachers. You will see teachers’ salaries spiral upwards as good teachers suddenly become in demand and bad teachers are no longer able to find jobs. The increase in wages will attract other intelligent and capable people into the field of teaching; an area they might overlook now because of the low pay and poor working conditions.

Those schools that have the best teachers will attract the most students. If one school becomes too in-demand that it can justifiably raise its tuition rates, another school will pop up with lower tuition in an effort to compete. This constant competition among schools will keep teachers’ salaries high and tuition low.

Also, similar with colleges, you will see private schools recruiting. Having the best students reflects well on them so the incentive is there to offer free bussing, scholarships, and other perks like tutoring. And nobody will be left out. Since students will now be paying customers, it wouldn’t be in a school’s interest to deny enrollment. If there is a block of students that cannot be accepted into the “elite schools,” there is still demand for their education. In the private sector, if there is a demand, a service will be provided to meet it.

There are many teachers that enter the profession to teach the “unteachables.” These great men and women willingly accept the challenge of teaching those children to whom learning does not come naturally. These teachers will gravitate and be recruited by schools that will specialize in that type of education. For those children that need extra help, they will get much better schooling and much more needed attention in private or charter schools than they will in public school.

And it doesn’t have to be specialized or elite schools that enter the business. There will be schools that fit neighborhood demand or cater certain localities just like our public schools do today. The only difference is you can be assured the school will be of very high quality.

Now, compare this outcome with that of our current public school system. Public schools obviously aren’t socialist, but in many respects they have the same drawbacks as with any socialist system.

In public schools, there are no prices (tuition) to send signals. With private schools, those schools that are charging a higher tuition do so as a reflection of increased demand. The increased demand comes from a quality service provided. Because parents have very little choice in where to send their kids, they cannot “vote with their feet” if they feel a school is failing. In private schools, the market is able to send signals as to which schools are failing and which schools are thriving. These signals come in the form of tuition rates and whether the school is attracting or losing students.

Public school, on the other hand, has no such signals. Schools are in no danger of going out of business because they are paid for by the state and therefore don’t have to worry about losing money. Also, parents don’t really have a choice in sending their kids somewhere else so public schools are virtually guaranteed students, even if they are terrible. These two facts (guaranteed money and students) work to remove the incentive for public schools to increase their performance and also ensure that failing schools are allowed to continue failing.

Now obviously every teacher and principal (well, most) wants to do well and increase their performance and quality. The problem is that the system is constructed in such a way that it’s impossible to gauge if you’re doing well or not. Because there are no free-market signals, public schools must rely on aptitude and other scholastic tests to measure the performance of their students.

Obviously testing students is a good thing, but not when it’s your only measure to gauge success. Since it’s public schools’ only option, what happens is that schools start “teaching to the test”, with their only aim to pass the test to ensure they receive continued funding. This is a perverse incentive. The true aim of schools should be a comprehensive education, not to tailor it some way the state deems appropriate, with the goal being, not education, but securing more money.

Remember Justice McReynolds’ quote from Pierce v. Society of Sisters, “The child is not the mere creature of the State.” When the state creates the tests, and says you must teach the children is such a way that they pass this test, you’ve created a potentially dangerous situation.

Also with public schools, and related to the performance-gauging problem, we end up with strange legislation like “No Child Left Behind.” All this legislation did was cement the fact that schools had to teach to a state-written test, but left it up to the schools themselves to set the benchmarks. This created the incentive to set the benchmarks very low so that they’re easily met. All of these results in children being taught to a test – a test that isn’t at all rigorous, challenging, educational, or intellectually stimulating. Clearly a losing situation.

Okay, so how do we go about achieving this vision of all private or charter schools? Really, not much has to change. Property taxes are largely based on what school district you live in. This can be amended so everybody everywhere pays a flat property tax (instead of it being higher or lower depending on the school district).

Government will take this tax revenue, and instead of giving it directly to schools, will give it to the parents in the form of a voucher. The parents can use this voucher toward tuition at any private or charter school they want. The schools still get their revenue, even poor families will still be able to attend private school, the government will be able to say it helped, failing schools will go out of business, quality of education and teachers salaries will spiral upwards and economic principles and liberty will be maintained. Private schools are truly a win for us all.

As an aside, here is a very intersting report from the Cato Institute very clearly shows how the public school dilemma cannot be solved simply by "throwing money at it."

Meaner, Greener EPA

Once again, by not following economic principles, the government has made us worse off. The EPA announced on Monday that carbon was a gas that was dangerous to people’s health. This opened the door to them being able to mandate carbon emissions through taxes, regulations, and command-and-control practices.

Basically what happened is this: cap-and-trade legislation is stalled in the Senate and might not pass at all. Instead of accepting defeat or re-working his proposal in a more pragmatic manner, President Obama has found a way to bypass congress and try to accomplish his climate change vision anyway. Only this is much worse than a cap-and-trade bill.

As I've argued before, cap-and-trade, at its heart, is economically sound. The reason behind cap-and-trade has nothing to do with climate change and it’s unfortunate that this administration has hijacked it for that purpose. The current legislation proposing cap-and-trade strays from the economics behind the idea, but it’s definitely better than the alternative – an expanded and more powerful government agency.

If politicians and the American people could see cap-and-trade for what it was, and implement it in the proper way – not some perverse way that’s distorted by partisan politics (i.e. handing out carbon permits to political allies) – then this EPA threat would go away.

It’s unfortunate that Obama would resort to such barbarian tactics such as threats, circumventing the political process and advancing a political agenda against the wishes of the country. So I regret that we’ve been painted into this corner of “pass cap-and-trade or else”, but in light of the circumstances, the best bet would be to pass the cap-and-trade legislation.

As I've argued before, cap-and-trade is a good thing – from an economic standpoint; only bad things have resulted once it got dragged into a political fight. So hear this. If you were against cap-and-trade because you thought it would be a business killer, the expanded EPA will be much worse.

Cap-and-trade creates property rights and curtails pollution at the least possible cost with no taxes and very little government involvement. The Meaner Greener EPA will use taxes, regulations, command-and-control and massive oversight to accomplish its goal, which won’t be at lowest cost and will still result in less pollution reduction than cap-and-trade.

Cap-and-trade is an economists’ solution to pollution. The EPA is a politicians’ solution to pollution. I have previously written why economists are ignored by politicians. Let’s not now shun cap-and-trade only to be hit by the much worse and more damaging EPA.

An Economic Look at Obama's Job Speech

Obama gave a speech today about job creation and what he was going to do with the excess TARP funds. Let’s look at this speech with an economic eye:

“The fear among economists across the political spectrum was that we were rapidly plummeting toward a second Great Depression.

“So, in the weeks and months that followed, we undertook a series of difficult steps to prevent that outcome. And we were forced to take those steps largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that led to the crisis, decided to hand it over to others to solve.”

What political pettiness.

“To achieve this, and to prevent an economic collapse, we were forced to extend assistance to some of the very banks and financial institutions whose actions had helped precipitate the turmoil.”

Because those banks were forced to lend, by the government, to unqualified applicants they never would have lent to on their own.

“These were not decisions that were popular or satisfying; these were decisions that were necessary.”

Maybe to a politician such as yourself, Mr. Obama, in your incessant need to “dosomethingdosomethingdosomething,” but to most economists, they most definitely were not necessary.

“This fall, I signed into law more than $30 billion in tax cuts for struggling businesses, extended an effective tax credit for homebuyers, and provided additional unemployment insurance for one million Americans.”

I cut taxes, then immediately raised them to pay for all this government assistance.

“In addition, we are working to break down barriers and open overseas markets so our companies can better compete globally, creating jobs in America by exporting our products around the world.”

Oh, is that what it’s called when you impose a 35% tariff on imported tires from China?

“Partly as a result of these and other steps, we're in a very different place today than we were a year ago.”

We are in a different place. We’re worse off.

“This is welcome news, and news made possible in part by the up to 1.6 million jobs that the Recovery Act has already created and saved according to the Congressional Budget Office.”

Job created or saved: temporary jobs, part-time jobs, and seasonal jobs. Our underemployment rate is as high as it’s ever been (those who have a part-time job but are looking for full-time work). Temporary jobs count too. I can find a one-day job moving rocks and it counts as a job created. If I find a different one day job the next day it counts as a job created. ARRA is not created or save 1.6 million jobs the way he wants you to believe it has.

“For even though we have reduced the deluge of job losses to a relative trickle, we are not yet creating jobs at a pace to help all those families who have been swept up in the flood.”

Because the government can’t create jobs! Only the private sector can do that. Businesses need a stable environment in which to flourish. A constant clear message of low taxes and a hands-off government are what are needed. By your constant meddling Mr. Obama, you’re only creating and sustaining uncertainty – the ultimate job killer.

“There are more than seven million fewer Americans with jobs today than when this recession began.”

Recessions hurt. The market needs to self-correct. By trying to interfere, you’ve, paradoxically, only made the problem worse.

“And it speaks to an urgent need to accelerate job growth in the short term while laying a new foundation for lasting economic growth.”

Unsustainable empty subsidized job growth is not the way to lay a foundation for lasting economic growth.

“We're proposing a complete elimination of capital gains taxes on small business investment along with an extension of write-offs to encourage small businesses to expand in the coming year.”

Now, just so you don’t think this piece is only to bash Obama, I like this idea. This blog does not follow politics. It follows economics. As such, we will follow the economics whether it takes us left or right. This as it happens, is more of Obama going right than us going left, but the fact remains that we support it. However, Obama must be careful. A tax cut here and a tax cut there will not be effective if the overall business environment is one of high taxes and high regulation.

“We're proposing a boost in investment in the nation's infrastructure beyond what was included in the Recovery Act… What this means is that we're going to see even more work - and workers - on Recovery projects in the next six months than we saw in the last six months.”

It didn’t work the first time, so let’s double down.

“I'm calling on Congress to consider a new program to provide incentives for consumers who retrofit their homes to become more energy efficient.”

This is another good idea and one where perhaps the economics takes us left. I have previously defended cap-and-trade (though not in the context of global warming) and I now defend this idea. Making your home energy efficient has, in my opinion, qualities of a positive externality. That is, it provides benefits beyond those explicitly for the homeowner. By putting in energy efficient windows, it reduces your overall power consumption, reducing demand, and thus bringing prices down for everybody. Because positive benefits spillover to other people, this type of behavior should be encouraged. A government subsidy accomplishes this.

“These steps provide a framework in which companies can compete and innovate to create those jobs.”

Government subsidized job growth does not foster competition. Raising tariffs in order to keep high domestic prices on tires so those workers don’t lose their wage does not foster competition. The words “government” and “competition” are mutually exclusive Mr. Obama.

“There has rarely been a less loved or more necessary emergency program than TARP, which - as galling as the assistance to banks may have been - indisputably helped prevent a collapse of the entire financial system.”

More political hyperbole and fear mongering. It was not one of the most necessary government interventions in history. I understand TARP was Bush’s idea, and I was just as critical of Bush for proposing it as I am of Obama for defending it.

“Launched hastily under the last administration, the TARP program was flawed, and we have worked hard to correct those flaws and manage it properly.”

More political pettiness. That’s quite off-putting Mr. Obama. And I would quarrel with you that you have managed it properly.

“And today, TARP has served its original purpose and at a much lower cost than we expected.”

But since we never met a tax dollar we didn’t like, instead of giving back it to the taxpayer, we’re going to use it further fund a failed ARRA program.

“For even before this period crisis, much of our growth had been fueled by unsustainable consumer debt and reckless financial speculation, while we ignored the fundamental challenges that hold the key to our economic prosperity.”

So we’re going to repeat the same mistakes that caused it by needlessly intervening in places the government has no business.

“We cannot go back to an economy that yielded cycle after cycle of speculative booms and painful busts.”

By “saving” the economy from a necessary correction, you’ve only delayed the inevitable. The economy cannot be propped up by the government forever so another crash will be necessary. Then government will “save” us again, thus necessitating another crash. You’re exactly right Mr. Obama; we cannot go back to a government-intervention-caused boom-and-bust cycle. Stay out of the way.

“We cannot continue to accept… a health care system in which exploding costs put our businesses at a competitive disadvantage.”

I agree. Abandon Medicare and Medicaid, roll back interventions in the healthcare market, enforce anti-trust legislation and let economic principles be your guide. Your current healthcare ideas will only compound a problem you yourself (government) created.

“Because an educated workforce is essential in a 21st century global economy, we've launched a competitive Race to the Top fund through the Recovery Act to reform our schools and raise achievement, especially in math and science.”

Because there is not a problem in the world that can’t be solved by throwing money at it.

“Because even the best trained workers in the world can't compete if our businesses are saddled with rapidly increasing health care costs, we're fighting to do what we have discussed in this country for generations: finally reforming our nation's broken health insurance system and relieving this unsustainable burden.”

I admire you for wishing for reform Mr. Obama, but the key to reform is a more free-market based approach and less government intervention.

“We'll set and enforce clear rules of the road, close loopholes in oversight, charge a new agency with protecting consumers, and address the dangerous, systemic risks that brought us to the brink of disaster.”

By “address the dangerous, systemic risks that brought us to the brink of disaster,” you mean you will point the finger at yourself (government) right? Banks and lenders only played by the rules the government set out. By creating perverse incentives, you got perverse results.

“And because our economic future depends on our leadership in the industries of the future, we are investing in basic and applied research, and working to create the incentives to build a new clean energy economy. For we know the nation that leads in clean energy will be the nation that leads the world. I want America to be that nation.”

And I want a teleporting recliner that makes pizza, but wishing won’t make it happen. I admire encouraging research, but to expect to transform our entire economy simply by throwing money at it is naïve. Green technology won’t become the norm until there is a real demand for it – not artificial demand created by government funding.

“There are those who claim we have to choose between paying down our deficits on the one hand, and investing in job creation and economic growth on the other. But this is a false choice.”

I agree, it is a false choice. Very few with economic understanding would ever think that creating unsustainable empty jobs at taxpayer expense is a wise choice.

“One of the central goals of this administration is restoring fiscal responsibility. Even as we have had to spend our way out of this recession in the near term, we have begun to make the hard choices necessary to get our country on a more stable fiscal footing in the long run.”

HA! Massively increasing spending only to even more massively raise taxes is not fiscal responsibility and it is certainly not putting us on stable fiscal footing.

“Despite what some have claimed, the cost of the Recovery Act is only a very small part of our current budget imbalance. In reality, the deficit had been building dramatically over the previous eight years.”

It’s Bush’s fault.

“The fact is, we have refused to go along with business as usual;”

More like, “The fact is, we have refused to go along with business. As usual.”

“And I made clear from day one that I would not sign a health insurance reform bill if it raised the deficit by one dime - and neither the House nor Senate bill does.”

The massive increase in spending that is necessary in this bill will be paid for by even more massively increasing taxes. You’ve proven yourself spend happy Mr. Obama. You’ve never met a tax dollar you didn’t like so why should we believe you that you won’t spend the extra tax revenue on even more social programs? You’re doing it right now with the excess TARP funds. Instead of giving it back to the taxpayers, you’re putting it into ARRA.

“And the question we'll have to answer now is if we are going to learn from our past, or if - even in the aftermath of disaster - we are going to repeat it.”

You’re doing everything necessary to ensure we repeat it. Government intervention creates more problems than it solves. Yes, we are definitely going to repeat our mistakes.

“As the forces of the status quo marshal their resources, we can be sure that answering this question will be a fight to the finish.”

It seems to me the status quo has been ever-expanding government, regulation, and the curtailing of liberty. It seems to me it is you who is fighting to maintain the status quo, Mr. Obama.

An Economic Poem

"One From One Leaves Two" by Ogden Nash

Higgledy piggledy, my black hen,
She lays eggs for gentlemen.
Gentlemen come every day
To count what my black hen doth lay.
If perchance she lays too many,
They fine my hen a pretty penny;
If perchance she fails to lay,
The gentlemen a bonus pay.

Mumbledy pumbledy, my red cow,
She's cooperating now.
At first she didn't understand
That milk production must be planned;
She didn't understand at first
She either had to plan or burst,
But now the government reports
She's giving pints instead of quarts.

Fiddle de dee, my next-door neighbors,
They are giggling at their labors.
First they plant the tiny seed,
Then they water, then they weed,
Then they hoe and prune and lop,
They they raise a record crop,
Then they laugh their sides asunder,
And plow the whole caboodle under.

Abracadabra, thus we learn
The more you create, the less you earn.
The less you earn, the more you're given,
The less you lead, the more you're driven,
The more destroyed, the more they feed,
The more you pay, the more they need,
The more you earn, the less you keep,
And now I lay me down to sleep.
I pray the Lord my soul to take
If the tax-collector hasn't got it before I wake.

A New Economic Understanding in the Military?

MIT wins $40,000 prize in nationwide balloon-hunt contest

Ala F.A. Hayek, the value of de-centralized knowledge is everywhere. The military was offering $40,000 in a contest for the first team to find 10 red weather balloons scattered around the country.

The contest is open to anybody and everybody and the rules are very simple: be the first to submit the coordinates for all 10 balloons and you win. How can one person possibly find all 10 balloons, scattered around the country? The answer is they can't.

No one person will be able to acquire all the knowledge necessary in order to solve the problem. Each person will be forced rely on other people's knowledge, the internet, cell phones, GPS, etc. In other words, all the information is out there, but is scattered amoung thousands or millions of people and the technology they have built.

This is fun game that illustrates the power and the necessity of dispersed knowledge. This is an invaluable economic lesson. No one person can be expected to have all the knowledge necessary to run an economy. No government could possibly know everything possible to "plan" an economy.

Our market works because I do what is in my interest and you do what is in yours, and our neighbors do what are in theirs. All of us working in our own best interest magically comes together to promote the interest of us all. As Adam Smith famously said,

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

For a short, excellent illustration of this idea, I highly encourage reading, I Pencil by Leonard E. Read. I also highly encourage reading Hayek's seminal work, The Use of Knowledge in Society.

Another Bad Idea on Healthcare

The Senate is set to vote on key aspects of the proposed healthcare bill. Specifically what they are voting on is whether or not to partially fund the bill by decreasing Medicare funding by $460 billion. The Democrats say this proposal wouldn’t hurt Medicare because it would simply eliminate waste and inefficiency from the system.

I don’t understand how these people think. It is truly beyond my comprehension how anybody can think this healthcare bill is a good idea. Even the most basic understanding of economics shows that it’s a terrible way to go about healthcare reform.

I have previously written about the massive failings of Medicare, and how much of our current problems with increasing prices and dropped coverage stem from this broken, socialist system. Now, their solution is to fix the problem that Medicare caused by making Medicare even worse.

This is just another example of government repeating its same mistakes. How on earth could we fix the problem by repeating the same mistakes that caused it in the first place? Not only does this current legislation seek to repeat the same mistakes, it actually aggravates them.

Medicare is already broken. It’s an inherently flawed system – something that can’t be fixed just by giving it more money. Simply providing more money doesn’t do anything to change the backwards incentives it creates nor does it change the inefficient, complex central planning that is inherent is such a program. So while Medicare can’t be fixed by getting more money, our healthcare system as a whole can be made even worse by cutting even more money from Medicare.

Already the reimbursement rates and formulas are inadequate, and to try to keep the system alive while cannibalizing it makes no sense. This bill is economically backwards and will do absolutely nothing to reform healthcare. It takes the lazy route by trying to address only the symptoms of a broken healthcare system, while completely ignoring the causes.

For true healthcare reform, in a way that will actually work, which includes eliminating Medicare and Medicaid, click here. We have all become so caught up in the details of Obama’s ideas for healthcare reform that we never stop to think if it’s the right kind of reform. Opponents to this bill are immediately labeled as anti-reform. That is absolutely not true. Instead we are trying bring some semblance to conversation and not rush hastily down a dead end street, but instead recognize there are other ways to go about reform that don’t include an eventual government take over.

You can craft the straightest, most perfectly designed arrow, but it will never hit its target if it’s shot in the wrong direction.

Senator Bennet Has Gone Rogue

Colo. Sen. Bennet Says He'll Vote for Health Care Bill, Even if it Costs Him His Job

This article is shocking enough on its own, so there is really not much more to say on it. When a politician so blatantly ignores his role as representative of the people, it’s time we all take notice. I suspect politicians have long voted their conscience regardless of the will of their constituents, but at least they play the game. Bennet blatantly disregards the political process and the integrity of our Constitution.

If the process works like it’s supposed to, those holding elected office represent the will of their constituents, otherwise they wouldn’t have been elected. This whole process breaks down when one is appointed to the position. Bennet was appointed to his seat by Colorado Democratic Governor Bill Ritter after Senator Ken Salazar, also a Democrat, was appointed as Secretary of the Interior by Barack Obama.

It obviously frustrates me when a politician not of my liking makes it into office. That is even worse when he was appointed rather than elected. Now, if I’m being fair, I suppose Governor Ritter did the right thing by appointing a Democrat to fill a seat vacated by a Democrat. Except for a few pockets, Colorado is largely Republican, yet it’s represented by a Democratic Governor and two Democratic Senators.

The political temperature in Colorado is clear: they do not support the Democrats agenda. I will make a prediction now that Governor Ritter and Senator Bennet will be replaced by Republicans in the midterm elections.

So what we have is a Senator who was not elected and does not represent the will of the voters, making decisions on behalf of Colorado. It’s not like he’s acting benevolently either. He understands and accepts the consequences that he will probably lose his Senate seat for this. This is a shame and an outrage.

The process of appointing representatives to fill vacant seats has always bothered me. I suppose to mitigate the chance of situations like this from happening again, Senators who are appointed should not allowed to vote until, and if, they get elected in the next election. I recognize this isn’t an ideal solution, but the way I see, it’s either that or have elections immediately following a vacancy (but that’s not ideal either because it might be too fast to run an adequate campaign).

Both options I present aren’t perfect, but I think they are better than having an appointed official making decisions that the people don’t agree with. The will of the people must be maintained at all costs. Article I, Section III of the Constitution calls for Senators to be appointed by their state legislature. The 17th Amendment replaces this system with direct election of Senators by popular vote, but it still allows the governor to appoint senators in case of vacancies.

It’s a problem when this system is abused. Senator Bennet is taking advantage of his appointment to advance a personal agenda, doing exactly what the Founders feared – abusing power.

I’ll leave you with this thought: It’s unfortunate that this is happening on an issue I am vehemently opposed to – government takeover of healthcare. But even if it was a Senator whose views were in line with mine that said no matter what he would vote his own way, regardless of the will of the people, I would be just as outraged and would vote him out the first chance I got.

This issue is above partisan politics. It’s about maintaining the integrity of democracy and our Constitution.

Paul Krugman- Wrong Again

Paul Krugman never ceases to amaze me. I’m convinced he masquerades as an economist hoping to give himself some legitimacy. He might convince the ignorant, but those of us that actually understand economics know him as an economist in title only. No self-respecting economist would ever argue for the economically backwards “solutions” to problems that Krugman does.

In his article, Krugman argues that not enough has been done to save jobs and that nobody in Washington seems to care about unemployment anymore now that the worst of the recession seems to be behind us. I’ll agree with him on one point: the stimulus didn’t work.

Krugman seems to believe that it didn’t work because it wasn’t big enough – not big enough! No Mr. Krugman, the stimulus didn’t work because artificially created demand is a band-aid fix at best. In Krugman’s world, the best fix would be to pass a second, larger stimulus package. That is insanity! He does, at least, accept the fact that a second stimulus seems to be a political impossibility.

As most politicians do (for that is the only way we can view Krugman), he seeks to address the symptom instead of the cause. He proposes a New-Deal-type workers program that would amount to nothing more than digging holes only to fill them again. This is no way to talk about job creation. That type of government program is the economic equivalent of empty calories – they might seem tasty but they will never fill you up, and instead, only make you unhealthier.

A second “solution” Krugman offers is government-provided subsidies to employers to hire more workers. Let’s think about this for a second regarding what incentives it creates. A subsidized worker is cheaper for the employer to hire. Why would he keep his expensive employees that he must pay full price for when he can hire cheaper employees whose wages are subsidized by the government? I’m afraid a very real consequence to Krugman’s idea would be that employers fire at least as many workers that they hire on (if not more).

Krugman has the gall in his article to imply that, if we don’t implement his ideas, we are being cruel and short-sighted. Krugman, a Keynesian interventionist, is calling us short-sighted? That’s the pot calling the kettle black.

One of the biggest complaints I have with Keynesian economics is the short-sightedness of it. By continually intervening and preventing the market from self-correcting, we are doing nothing but perpetuating the problem, ensuring it’s never fixed! Short-term and empty job creation that is unsustainable and does nothing to address the underlying cause is what’s short-sighted, Mr. Krugman.

Krugman casually dismissed tax cuts as ineffective and not really worth talking about. Instead he argues for any number of programs that will have to be funded by increased taxes. He goes beyond dismissing tax cuts and actually argues for tax increases – in a recession!

Income tax cuts would give the worker more money to buy goods and services which would increase the demand for workers. If they didn’t spend their extra money, they would save it. Savings necessarily fuels investment, which is critical for growth.

There are those who argue that cutting taxes would only lead to a greater deficit. So what? Deficits are not nearly the nasty beast they’ve been made out to be. The Great Depression was aggravated because the federal government sought to preserve a balanced budget, which meant they needed to raise taxes and cut spending – both bad options in times of economic trouble.

In any case, the responsibility to prevent a deficit is not on the taxpayer. This idea that the government can spend freely and then simply keep on raising taxes to cover the deficit is absolutely inconsistent with our founding ideals.

The burden is on the government to spend as little as possible, and only spend on those areas that are legitimately governmental – providing national defense, protecting property rights, providing a criminal justice system, enforcing contracts, and ensuring economic integrity is maintained (accounting for market failures, i.e. monopolies, public goods and externalities). Beyond these core responsibilities of government, there is not much for them to do. We as citizens have a duty to pay the taxes that are necessary to fund the government that we created.

But for the government to spend recklessly and then look to us to pay for it is backwards. The burden is on the government to not out-spend revenue, not on us to ensure that we pay for everything they want to do.

If government didn’t have the blank check that it does now, it would never have the means or capacity to intervene in every aspect of our lives and the economy. If government never intervened, many of the problems we face today never would have been created. It is excessive government intervention in the market that causes most recessions, and if it doesn’t cause them, it definitely prolongs them.

Yes, tax cuts are the more responsible, sustainable and economically sound solution to our problems. It addresses the underlying cause and it’s consistent with liberty and the founding ideals of our country.

In case I haven’t convinced you, consider this example on why stimulus spending will never be successful in maintaining jobs.

By pumping so much liquidity into the market, inflation is almost sure to rise (especially so when you couple it with loose monetary policy and seignoirage that we're currently experiencing).

So, we can reasonably expect high inflation in the near to mid future. Inflation and employment are necessarily economic trade-offs. If unemployment rises, inflation falls. If inflation rises, unemployment falls. This is known as the Phillips Curve.

So, assuming jobs were actually created by this spending, we've effectively traded more jobs for more inflation. So far so good. I think everybody would say that's a fair short-term trade off.

So after unemployment returns to its natural rate, people will want to bring down the high inflation. To bring down inflation, GDP must be sacrificed (called the sacrifice ratio).

Typically about 5% of GDP must be "sacrificed" to bring down inflation by 1%.

Okun's Law tells us that a 1% change in unemployment results in a 2% change in GDP. Putting this all together, a 1% reduction in the inflation rate requires a 2.5% rise in unemployment. The higher inflation goes, the higher is the unemployment that's required to bring it down. The higher unemployment goes, the greater the drop in GDP.

For example, if we want to bring down inflation by 4%, we would need to sacrifice 20% of one year’s GDP and unemployment would have to rise by 10%. This all doesn't have to happen in one year. It can be spread out over 5 years of a 4% reduction in GDP and a 2% rise in unemployment.

So what has the stimulus actually accomplished? It may have created some jobs (a dubious claim), but in the not-so-near future those jobs will have to be lost and GDP will have to be sacrificed for inflation to come down. And you know what it's called when GDP shrinks instead of grows? A recession!

This stimulus money was maybe a flicker of light in the darkness, but its long term effects will be nothing but prolonging the recession it was meant to save us from.

Funny Yet Serious

I found this cartoon on Greg Mankiw's blog:
(Click to enlarge)


















source: http://www.slowpokecomics.com/

In all seriousness, I don't blame Obama for winning the Nobel Peace Prize. I do blame him, however, for accepting it. The Nobel committee and Obama worked in concert to undermine the value of such an important prize.

The real shame in the whole matter, was that Morgan Tsvangirai of Zimbabwe, did not receive the prize. Tsvangirai was instrumental in breaking Robert Mugabe's deadly stranglehold on their country.

In Zimbabwe there is still a lot of work to do, but Tsvangirai has been instumental in effecting positive and peaceful reforms - despite Mugabe's best efforts.

Thanks to Tsvangirai, Zimbabwe finally has a glimmer of hope for the first time in generations. It's unfortunate that his positive influence and efforts have gone without the recognition they deserve because the Nobel Committee and Obama politicized an award that could - if given the chance - carry real weight toward positive humanitarian reform.

Realism vs. Idealism

President Obama believes in a good thing: diplomacy. He believes America has been too arrogant in years past and that arrogance has gotten us where we are today. He believes that if he replaces the traditional American attitude of “we’re the boss,” with a new attitude of “what do you think?” that all will be made well. Like I said, Obama believes in a good thing. Believing in Santa Clause is a good thing too, but we would be foolish to think it would change the world.

Obama thought that the way our enemies and rivals viewed us was justified. He thought that if he could just schmooze them with a little Obamalove, that all would be forgiven and we could all live happily ever after. So far, his relations with the rest of the world have been barely more than him saying, “I’m sorry for the way we’ve acted. How can I make it up to you?”

The unfortunate truth is that we live a world of realism. When Obama takes a step back as a concessionary gesture, our rival takes a step forward. The power we give up by striving for reconciliation is gained by those seeking to undermine us. In short, we live in a zero-sum world.

Obama is operating under the assumption that if he draws back and presents America as a more passive nation, then other nations will also draw back. This theory sounds very appealing and it’s hard to blame Obama for pursuing it, but blame him I will.

By granting concessions, Obama sees himself as extending an olive branch. He assumes that other countries will accept the gesture of peace and respond in kind. Obama envisions a grand bargaining table where everything can be hashed out if only America stopped trying to tell everybody else what to do. Again, this sounds noble and on its surface it’s very appealing. But as president, Obama has a responsibility to look beyond surface illusions. We, as the people, have a responsibility to look beyond surface illusions.

The “Can’t we all just get along?” approach is the easy way out – which would be great if other countries played along. But they don’t. Now don’t get me wrong, I’m entirely for diplomatic solutions. In fact, that’s the only type of solution that will ever be possible. Two sides can trade bullets all day long, but nothing will ever be solved until they actually sit down and talk.

I blame Obama not for his diplomatic intentions, but rather I blame him for neglecting to run the race and instead going straight for the finish line.

When Obama changed tactic on the missile-defense shield in Poland and the Czech Republic, he thought he was giving a concession to Russia in the name of goodwill. He thought that that gesture of goodwill would be returned by Russia agreeing to pressure Iran to halt its nuclear program.

Instead, Russia must have listened when Obama took office and starting basically telling the world, “I’m sorry, it’s all our fault.” Russia viewed Obama’s concession on missile defense as something it was owed, not as a gesture of goodwill. Obama, in Russia’s mind, had simply taken a step in the direction of repayment. If Obama wanted Russia’s help regarding the Iran issue, he would have to deliver a big offering, namely the U.S. dropping its support of Ukraine and Georgia.

Obama had hedged his bets on Russia. If he can’t get Russia to play along, he will be exposed for the paper tiger that he is. As such, the pressure is enormous to get Russia on board. Unfortunately, the only way to do that is to cede them a massive amount of power – something that is clearly not in our interest.

By blinking on the missile defense issue, Obama has shown that he is weak. Russia has him right where they want him – as a pawn that must bend to their wishes lest they tighten the screws even more.

The rest of the world is watching and have acted appropriately: Iran doubts Obama’s resolve and therefore feels no danger in continuing its nuclear program. The Taliban ousted empire after empire from Afghanistan and now know that Obama is not committed to the fight either. Israel knows Obama is wary of making a strong commitment either way regarding the Palestinian issue and has taken the opportunity to strengthen its grip in the region.

If Obama’s goal was to make other countries feel better about themselves, he succeeded. His policies so far have strengthened them and weakened us. International relations is a long term game so I recognize it’s unfair to prematurely judge Obama’s tactics. But let’s look at the way the world works to see if his ideas might bear fruit in the future.

For Obama’s policies to work, he must retreat from aggression and so too must every other nation. If every nation follows suit, tense situations will become de-escalated, cooler heads will prevail, and a sound, equitable solution might be achieved. This is clearly the optimal outcome as it’s in everybody’s best interest.

However, while the end result might be in everybody’s best interest, getting there never will be. Nations are rational actors. That is, they pursue what they perceive to be in their own best interest. In the world of international relations, security is the golden fruit. The more power a country acquires, the better equipped it is to provide for its own security. Not only will it have the means to defend itself, it will have the reputation of being strong, thus preventing attacks before they even occur.

Nations seek power. Therefore, for a country to willing to give up some power because it’s in the world’s best interest is unlikely. If a nation is willing to walk away from power, as Obama did on the missile defense issue, it leaves that power on the table for someone else to pick up. Russia could have agreed to reciprocate Obama’s concession by pressuring Iran on the nuclear issue. Instead, they snatched up the power Obama left behind. Not only does Russia now have power it did not have before, the United States doesn’t have power it once had. That swing of power can be devastating.

Let’s say all countries follow suit with Obama and agree to give up some power in the name of the greatest good. In effect, they are leaving some of their power on the table and are trusting that nobody else will snatch it up. It would be very tempting for a country to renege on the deal and snatch up all the power that it could. Not only would it not have to give up any of its power, it could become stronger through others’ weakness.

Of course every single country sees the situation that way and therefore will never willingly give up power; and if it does, it will be too tempted to try to snatch it back and become strong when everybody else is becoming weak.

It is in every country’s interest to “cheat” the system, that is, it is the dominate strategy. Thus, the interest of the individual (the dominate strategy) is in conflict with the optimal outcome – a dilemma in the truest sense (for more on this, see Game Theory).

Obama would be better off by recognizing the situation for what it is, that a tenuous peace can be achieved if the scales are balanced just so. In these fleeting moments of balance, that’s the time to work towards peace. Obama’s strategy will never work. Not only for the reasons mentioned above, but by stacking the deck against himself and giving power away to others, Obama is not only perceived as weak, but is actually weakening the country. In a world of power politics, the weak players never have a say in what goes on. Why would Obama think that he would be able to manipulate the situation when he is too weak to be worth listening to?

I fear Obama has massively misjudged the arena of international relations. He is a guppy in a shark tank. Hopefully he will come around, but that will be almost impossible without some hard knocks to hammer the message home. I never, ever want to see our country or our president take hard knocks.

A Bad White House Policy That Transcends Politics

As reported in the Wall Street Journal, the White House has had a long standing policy that it does not send condolence letters to the families of soldiers who commit suicide while in combat.

This is a terrible policy. Suicide is major problem and to continue to stigmatize it through policies such as these does nothing to help.

Suicides in the military are often caused by combat-related stress. I think that point is undeniable in the case of one who takes his life on the battlefield. How is this loss of life any less tragic or any less deserving of our sympathies than if he died from an enemy’s bullet?

A soldier losing his life on foreign soil, regardless of the circumstances, is a very grave situation and deserves the hallowedness of any combat-related death. Nothing is gained by sweeping suicides under the rug or by trying pretend they don’t exist. There is no reason that the White House not honor these deaths.

By continuing this policy, the White House is tacitly complicit in the Army’s terrible track record for dealing with suicides. As long as suicides are shunned and covered up, our soldiers will never be able to get the help they need. The Army has policies and training programs in place to deal with suicides, but they do nothing to address the underlying problem. These policies are largely lip service, instituted from the top down. Unless real change is instituted from the bottom up, we have little hope for getting real help for our soldiers.

Now, I write this as an outsider, so I admit the following is based on perception only. The problems in the Army are systemic. First of all, the Army’s mission is different from other military. They are the ones with boots on the ground that go door-to-door looking for the bad guys. That type of job description usually attracts a certain type of person: a gung-ho adrenaline seeker looking for adventure.

Also, the Army attracts those that come from diverse backgrounds and thought maybe they wouldn’t fit it, nor care to, in the Air Force or the Navy. The type of person who joins the Army might be blue-collar with a tough background. This is nothing bad, it’s just the nature of the situation. Perhaps those with more opportunities in life sought out the Air Force, with the perception that it’s more “white collar” to the Army’s “blue collar”.

Because of the nature of the Army, their job description and the type of people they attract, they have young officers that are sold-out to the “tough guy” image. The Army, by their own admission, pushes promotions on young soldiers, perhaps giving them too much too soon. This immaturity therefore carries up into the leadership. If a young soldier is feeling depressed or is thinking of suicide, he cannot go to his peers or superiors for help.

Countless soldiers that have experienced the situation have said they feared ridicule and belittlement if they admitted their problems. Their fellow soldiers and their leadership tell them to “suck it up,” that they are “warriors” and there can’t be any “crybabies on the battlefield”.

Obviously the Army has its problems. It has failed leadership at several key levels. It attracts a type of person that might be prone to trouble anyway. None of this armchair analysis is meant to disparage our soldiers. Rather it is an attempt to look at the causes of the problems facing the Army so that we might try to learn how to fix them.

A mandate coming from the Pentagon telling the Army to include more suicide prevention videos will do nothing to help. The Army doctors that, instead of treating the patient, simply attempt to cover up symptoms by psychomedication do not help. The White House that continues to treat suicides as something to be ashamed of does not help.

These are our young men. They made a conscious decision to join the Army and serve their country. If the Army breaks them – and it does break them, for that’s what happens when something that is already fragile is handled without care – it, and the entire country, especially the White House, has a duty to honor our fallen.

The Colorado Springs Gazette ran a two-part investigation into the violence of Army soldiers. It does a good job of exposing and explaining the failures of the Army that lead to the current problems. I highly encourage everybody to read it. Part one. Part two.

The Army has taken steps to address this problem. Hopefully they are sincere and effective, but I fear they are mostly lip service and nothing fundamental will change. Certainly nothing will change so long as the White House continues with a policy that is destructive and only adds to the problem.

The White House must send a strong, clear, consistent and unwavering message that every combat death is a tragedy, suicide or not. Once it’s out in the open, hopefully soldiers will feel comfortable getting help and hopefully the help they receive is of the highest quality. If that happens, then hopefully this entire article will become moot.

Thanksgiving and Independence

Thanksgiving. A time when we look back at our roots and continue with a proud tradition. I think I’ll do that today, only instead I’ll look back at the roots of our country, at the birth of a proud tradition of personal liberty and limited government – a proud tradition that I hope continues well into the future.

Perhaps one of the most important documents ever written was the Declaration of Independence. It’s unfortunate that this document gets overlooked. Oh sure everybody knows what it is and it’s always mentioned in the same breath as the Constitution, and you might have even been forced to memorize the first paragraph of it in elementary school; but do you understand it? Do you appreciate its gravity and relevance? Do you appreciate its radicalism?

Let’s take a closer look at it on this Thanksgiving Day to see why we truly should be thankful.

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

In other words, when the course of history requires a group of people to renounce allegiance from one country, and instead create their own, equal country, which they have every right to do, dignity dictates they must formally air their grievances by stating their case in writing.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

It is plain and obvious that all men are created equal. They are born with rights that are inherent and cannot be taken away. These include the right to life, liberty and private property. (The main inspiration for the Declaration was John Locke, who argued that government’s main duty was to protect property rights. Locke said, “Man... hath by nature a power.... to preserve his property - that is, his life, liberty, and estate - against the injuries and attempts of other men.” Property, to Locke, meant more than simple possessions as we think of it today. It meant being able to do with one’s body and labor as one saw fit; it meant opportunity. The Declaration summed this all up with the term “Pursuit of Happiness”).

--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,

Man creates government and gives government authority to protect the rights that we are all born with. Government can only do as much as we say it can. If government does something the people don’t agree with, it is no longer a legitimate government.

--That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

If government ceases to protect life, liberty, or property, or if it gives itself powers that the people did not give it, the people have a right to throw off that government and start again. It is here that the Founders lay out their vision for government: “to effect their Safety and Happiness”. In other words, the legitimate functions of government are providing security and protecting liberty and property rights.

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed.

It would be counter-productive to throw off government for trivial and temporary grievances. In fact, man has proven himself more likely to suffer under a corrupt and tyrannical government than to throw it off. It is easier to suffer than to institute the proper form of government.

But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

But when the people are constantly and continually abused with the goal of such abuse to suppress, silence and control the people, they have the right and the duty to provide for their own welfare and throw off the tyrannical government and institute a new one.

--Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

From here the writers list their grievances with King George of England. I won’t take up space by listing their specific reasons for abolishing ties with Great Britain, but what they write is important and I encourage you to read the entire Declaration here.

They conclude with these three paragraphs:

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Nor have We been wanting in attentions to our Brittish brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Now are we, in the present time, anywhere close to this? No, thank God, we aren’t. This is still a strong country that we should be very proud of, despite our political failings. But just because we aren’t close to suffering the injustices that would necessitate a revolution, that doesn’t mean we should become complacent. Tyranny and socialism creep. We must constantly review the Declaration of Independence, the Constitution and the writings of our Founding Fathers. The message in them is clear – limited government that works to ensure the safety and property of its citizens, whom are free to enjoy their individual liberty, knowing that it is something we are all born with, and no government can ever take away.

I for one am thankful to live in such a country. I am thankful we have such a clear thesis statement for our government. I am thankful that we have such a history of liberty that citizens can become complacent and believe in government as a beneficent entity that seeks only to enhance our lives. It’s a good thing that we haven’t suffered the tyranny so common in governments. The down side is that people come to believe tyranny doesn’t exist and accept without question as government takes ever-increasing control of our lives.

The problem is that once the power is acquired, history has shown it almost always takes a revolution to restore individual liberty. I don’t want a revolution in this country. I would much rather constantly watch our government, constantly slap their hands as they reach for things that don’t belong to them, constantly question their motives and remind them of our founding ideals. I would rather constantly remind government and my fellow citizens of such things.

I am thankful that so far, our government hasn’t achieved a critical mass of power that it decides it no longer wants to let go, and is now finally strong enough to swat away any resistance or voice of protest. This country is a country we can all be very proud of. Let’s not become so complacent in our pride that we close our eyes.

Happy Thanksgiving.

Drilling For Oil to Preserve Nature?

Audubon Society Drills For Oil

Environmental conservation is a noble goal and is something we should all strive for – if it doesn’t cost too much. There are those that argue that regardless of the social cost, environmental protection must be pursued. But most people realize that, in order to live a higher quality of life, we are willing to impose some environmental damage. For most of us, we are willing to pollute by driving a car rather than walking to work or finding some other means of conveyance. On the margin – that is, on a personal level – the extra social cost of the added time and burden are not worth the benefit of reducing pollution by a negligible amount.

Does this mean we are doomed to ever-increasing pollution? After all, if I choose to drive to work and my neighbor chooses to drive to work and his neighbor chooses to drive to work and all of our co-workers choose to drive to work, then we have millions of people impacting the environment. What might have been negligible pollution at the individual level suddenly becomes a full blown environmental problem in aggregate.

The point is, choices are made at the individual level. If we can find a way to influence individual’s behavior, we might be able to come up with a solution to environmental protection. Mandates and regulations don’t work – at least not as effectively as other means. By just adding rules you have done nothing to change the incentives.

Rather what we need is a free-market approach to environmental protection. The Audubon Society can attest to this approach. For years environmental groups have been lobbying congress to create laws to protect the environment. These groups have been spending money for somebody else to advance their cause. Regulations, while maybe partially effective, are expensive to get put into place, come with a negative backlash, and offer no return on investment.

The Audubon Society realized it could better advance its agenda if bought property it valued instead of just lobbying for its protection. Property rights are the surest way to accomplish almost any economic goal. If we want to protect a diminishing or scarce resource, simply assign property rights.

The Audubon Society bought the Rainey Sanctuary in Louisiana. Buying property is the most efficient way to gauge our values. If we value protecting the environment more than we value other activities, we will choose to spend our money protecting the environment. The fact that the Audubon Society was able to purchase this land, that they were willing to pay more for it than any other potential buyer, shows that we valued that land as an environmental sanctuary more than other uses it could have been used for. The Audubon Society gets many donations from members and the general public. So they were using the people’s money to buy that land. That’s a good thing. It means that land is being put it most highly valued use.

To simply protect the land through laws means there very well might be a use for that land that society values more highly. Laws in no way can be used to reflect what we as a society value. The Audubon Society sought to buy the land instead of seeking protection for it because it made economic sense to do so. They put their money where their mouth is and actually bought the land, instead of standing on the sidelines and essentially paying somebody else to protect it. This tactic eliminated much of the negative backlash that comes from regulation.

Since they were spending money anyway to protect the land, they might as well use that money to purchase it. This way, they can use the land as they see fit to further advance their goals. This includes drilling for oil. Yes, the Audubon Society drills for oil in a wildlife refuge.

They see it as in their interest to allow the drilling and use the money they receive to purchase other wildlife areas. This is a win-win situation for everybody. Environmentalists get to advance their cause by generating revenue that they can use productively. Oil companies and those of us who benefit from oil (everybody) get to continue to reap the benefits, and personal liberty and economic principles are maintained. In all cases, the land is being put to its most highly valued use.

It’s easy to decry the environmental damage done from oil drilling when you don’t have a stake in the game. Without ownership of the property, it’s easy not to take into account the benefits of drilling. Since, if you don’t own the property, you don’t reap the benefits, drilling is seen as only costly. It’s easy to tell other people what to do with their property. But when you can benefit by allowing drilling, it suddenly makes sense to do so. The Audubon Society weighed the benefits of drilling against the costs and decided that the added revenue would be more valuable than keeping the land drill-free. With the money generated, they buy other land where they may decide to keep it pristine. Again, everybody wins.

Property rights are essential to solving almost every economic problem. We ensure the land is going to its most highly valued use, there is no excuse nor pressure for government to overstep its bounds, and we ensure that benefits to society are exceeding or at least equal to costs. None of these things are possible with simple regulation and government protection.

For a great article on this very subject, please read Dwight R. Lee’s article, To Drill or Not to Drill, from the Independent Institute.

'Rainy Day' Bailout Fund?

Have bailouts become such a part of our culture that we now introduce taxes that exist for no other reason than to fund them? Talk about the ultimate case of moral hazard.

Once again politicians have hijacked economic policy and are trying to use it for political gains. In the UK, politicians including Gordon Brown, want to create a fund that will be held until the next bailout is required. Where will the money for this fund come from? From the Tobin Tax.

The Tobin Tax, an idea from economist James Tobin, seeks to impose a small tax on currency exchange, with the idea of reducing instability caused by speculation. This article isn't about the merits or economic sense of the Tobin Tax, but to get an idea of it, see Greg Mankiw's view or Aswath Damodaran's view on the subject.

When economists propose excise taxes, which is what the Tobin Tax is, the goal is not to raise revenue as with conventional taxes. Rather, the goal of an excise tax is to alter behavior. Economists don’t care what the money goes to, although in this case Tobin wanted the money to go towards helping economic development in third world countries.

The point is, it’s not the goal of an excise tax to raise revenue to achieve some political end. But, politicians will be politicians and I guess it’s reasonable to expect them to always have a political end in mind.

What’s scary about this is that they want to collect the money generated by the Tobin Tax and use it to fund future bailouts.

From the Forbes article:

“The Group of 20 emerging and developed economies has asked the International Monetary Fund to look at ways banks could help pay for taxpayer bailouts, such as a 'Tobin Tax' on transactions or a levy towards a global fund.”

Have we really come to rely that much on government assistance? Are we getting to the point that the essence and beauty of the free market – that failing companies die out, thus ensuring a competitive, cheap, high quality marketplace – is soon to be something of the past?

When businesses cease to be competitive and instead become subsidized by the state, that’s when we make the transition from capitalism to socialism. In contrast to Karl Marx, it seems the dawn of socialism won’t come from a massive workers’ revolt, but rather by a slow creep that nary a soul sees coming – until it’s too late.

To Promote the General Welfare...

I once heard a preacher say, referencing the Bible, “When you can’t figure it out, read the directions.” This article won’t be about religion or the Bible, but it will be about reading the directions. We are very fortunate that our country came with an instruction book: The Declaration of Independence and the Constitution. Both documents very clearly make the case for a limited government with very clearly defined roles.

Let’s say you buy something that requires some complicated assembly. If you don’t read the directions, you may very well put it together wrong, and it could potentially fall apart and hurt someone. The same is true for our country. When we try to build our government without deference to our Constitution, some quirky things happen that can become very dangerous.

We can begin to misinterpret or deliberatly reinterpret clauses and words in the Constitution. For instance, we can interpret the term “public use” as meaning “public purpose.” Or we can use the term “promote the General Welfare” as a “loophole” to accomplish pretty much whatever we want.

There is obviously much to be written about the Constitution, and I’m sure I will write more as time goes by, but this article will confine itself to the General Welfare clause.

The term “general welfare” appears twice in the Constitution, once in the preamble and again in Article I Section VIII. Thankfully, James Madison and others recognized that this could be a dangerous term and thus went well out of their way to explain exactly what they meant by this term.

The General Welfare clause was very clearly not meant as carte blanche for the government to do whatever it saw fit to accomplish the nebulous goal of promoting the general welfare. The Founders recognized that if they were to use such a broad term, they must qualify it and specifically enumerate what they meant by it.

In The Federalist Papers #41 Madison explains,

“It has been urged and echoed that 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’ amounts to an unlimited commission to exercise every power which may be alleged to be necessary for the common defense or general welfare. No stronger proof could be given of the distress under which these writers labor for objections, than their stooping to such a misconstruction.

“Had no other enumeration or definition of the powers of the Congress been found in the Constitution than the general expressions just cited, the authors of the objection might have had some color for it; though it would have been difficult to find a reason for so awkward a form of describing an authority to legislate in all possible cases…

“But what color can the objection have, when a specification of the objects alluded to by these general terms immediately follows and is not even separated by a longer pause than a semicolon?”

What Madison is saying here is that to use the term “general welfare” as an open ended authority for government to accomplish anything it sees fit is to undermine the entire premise of the Constitution. He says that for one to “[stoop] to such a misconstruction” immediately exposes one as having an ulterior motive other than that of limited government.

To use the term “general welfare” to accomplish a goal in which the Constitution provides no other means, is to blatantly disregard the specific enumerations that immediately follow it. Indeed it would be ironic if one tried to resort to “general welfare” because he couldn’t find justification for his desired action anywhere else in the Constitution, because the term “general welfare” is just a summation of the limited power specifically enumerated in the other areas of the Constitution.

It’s like a dog trying to find a bone by chasing its tail. It will never work.

Here is Article I, Section VIII so you can see for yourself.

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

To establish Post Offices and Post Roads;

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

To constitute Tribunals inferior to the supreme Court;

To define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations;

To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;

To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

To provide and maintain a Navy;

To make Rules for the Government and Regulation of the land and naval Forces;

To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;

To provide for organizing, arming, and disciplining the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;

To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings; And

To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.”

As you can see, there is a list of enumerated powers that immediately follows the term “General Welfare”. It is these enumerated powers – and no others – that the government may use to “promote the general welfare”.

Dirty Laundry and Property Rights

U.S. Residents Fight for the Right to Hang Laundry

This seemingly silly article has very important implications. Those of us who are subject to Home Owners Association (HOA) rules are often frustrated by the silly tenets stating what we can and cannot do. For instance, some of the tenets I have to follow are that the side of the drapes that one sees from outside must be white. This forces me to buy two sets of drapes, a white one for against the window, and then one of my choice covering it that those of us inside the house can enjoy. Another silly tenet is that I have to get permission and submit a request – with drawings (I am not kidding) – for installation of a satellite dish.

These tenets, while frustrating, are the part of the rules I agreed to by purchasing the house – that is, I had a choice on whether or not I wanted to abide by them. These tenets are agreements within the community in which I choose to live. So what happens when someone outside the community tries to tell me what I can or cannot do with my property?

This is where it gets interesting, but thankfully, it doesn’t have to be complicated. The article mentioned and cited above raises the issue of who has what right. Does the property owner have the right to hang her laundry outside? Does the neighbor across the street have the right to a laundry-free view? The answer might seem obvious, but in today’s world where property rights are eroding right and left, the answer is not always so clear.

Because of disastrous Supreme Court rulings like Hawaii-Housing v. Midkiff and Kelo v. New London, what once was a fundamental property right can now be called into question. Where before the neighbor would be laughed at and ridiculed for complaining about someone hanging laundry on their own property, now, articles like this one must be written to clarify and stress the importance of property rights.

Because nobody seems to have the answer (due in large part to the rules always changing, ala the cases mentioned above), we turn to lawyers and legislators to come up with laws about what we can and cannot do, about how we can and cannot use our own property. This is the wrong tactic, and luckily (as always) economics gives us clear direction.

Ronald Coase articulated the brilliantly simple idea of what is now known as the Coase Theorem. What it basically says is that we don’t need legions of lawyers, legislators and judges to decide who can do what with their property. All we need to do is decide which person has the property right.

Does the property owner have the right to hang her laundry or does the neighbor have the right to an unobstructed view? This is significant for an important reason: it doesn’t matter who is assigned the property right. As long as property rights in general are enforced, an efficient allocation will result regardless who is actually assigned the property right.

For example, let’s assume that a court rules that the neighbor has the right to an unobstructed view. This doesn’t mean that the property owner can no longer hang her laundry; it simply means that the table is now set to negotiate. Whoever values their behavior more will be allowed to continue with that behavior.

Let’s put this idea in context first and then we’ll illustrate with an example. As the situation is now, if a court decided that the neighbor had a right to an unobstructed view, it would be illegal for the property owner to hang her laundry. A law would have to be written specifically banning laundry hanging. If she continued to hang her laundry anyway, the police would have to come, issue her a ticket and a court date (or a fine). If she did go to court, the judge would have to decide if she really did or did not violate the law and if so, to find an appropriate punishment. In any case, whatever happens, even if she’s found innocent, there is clearly a waste of resources. Everybody’s time could be much better served if they didn’t have to deal with such a trivial issue. That is how the situation is handled as things currently stand.

Now, if we apply the Coase Theorem, things instantly become much simpler. Let’s continue with the assumption that it’s the neighbor who was assigned the right to an unobstructed view. The property owner that wants to hang her laundry, if she truly values that activity, can negotiate with her neighbor. She could, for instance, offer to pay her neighbor $20 to help offset the inconvenience of the compromised view.

If the neighbor agrees to that, then obviously the view was worth less than $20 to her, while the ability to hang laundry was worth more than $20 to the property owner. Everybody wins and all at lowest cost. If the neighbor does not agree and instead asks for $50, the property owner can decide if hanging her laundry outside is worth $50. If it’s not, then the neighbor valued her right to a view more than the property owner valued her right to hang clothes, so again everybody wins at lowest cost.

As the situation stands now, if the court said it was illegal to hang your clothes outside, then regardless of how much one did or did not value an activity, the situation would never change. For example, let’s say the neighbor valued her view at $10. That is, if the property owner would offer her $10, the neighbor would say it’s okay to hang the laundry. But now, even if the property owner valued hanging laundry at $1000, it’s still illegal. No matter how much one might value an action, and no matter that both neighbors might agree, it’s still illegal.

This is not a lowest cost solution because not only do you have the explicit costs that are required to enforce such a law, you have the implicit costs of value. There is an activity that has potentially $1000 of value that is not allowed to continue. If the neighbors were allowed to negotiate, the property owner could pay the neighbor $10 for something she values at $1000, thus giving society a savings of $990. In other words, there is now $990 worth of social welfare that we otherwise wouldn’t have had, all at a cost of $10.

With the law approach, the social benefit is only $10 (that of the neighbor), while the cost is at least $1000 plus the extra cost of administering and enforcing the law.

The beauty of the Coase Theorem is that we will get the same result even if the right is assigned to the other party, the property owner. Let’s say that the property owner has the right to hang her laundry. Her neighbor can either offer her money to not hang her laundry, or she can live the obstructed view. Whichever costs her the least, in her mind, is the action she will choose.

If she values her view at only $10, she might offer that $10 to the property owner. If the owner says no, the neighbor is okay with that because she doesn’t value her view that much. If however, the neighbor REALLY values the view, say at $1000, that might be enough to convince the property owner to not hang her laundry.

In the article, the property owner hangs her laundry outside because it saves her $80 a month in energy bills. So long as she gets more than $80 to not hang her laundry, she will be happy to use the dryer. Either way, whoever values their action the most is the one that will be able to continue.

Since this will all come about as an agreement between the parties (a contract), by default both of the will be better off. A contract would never be entered into if both parties weren’t better off. Thus, by simply assigning property rights, we can save everybody time and resources, can achieve our goals at lowest cost, and can ensure that everybody is better off. With the law approach, it’s a lose-lose situation. While it may arguably achieve its goal, it is not lowest cost and at least one person is definitely worse off.

In economics, we call the Coase Theorem a “Pareto Improvement”. That is, it is possible to allocate resources in such a way that people are made better off and nobody is made worse off. We have achieved “Pareto Optimality” when it’s impossible to change the allocation of resources in such a way that we make one person better off without at the same time making one person worse off.

The Coase Theorem, assuming transactions costs are low, can be applied to many areas of our lives, and can be critical for helping us evaluate public policy like cap-and-trade.

For many many many many reasons, property rights are critical to liberty, economics and just about everything that’s important in our lives. Property rights must be vigorously defended and held in a sacred regard. Property rights provide the underpinning of our entire society, affecting everything – even our dirty laundry.