A "Helpful" Program That Really Hurts

"Philadelphia Gives Homeowners a Way to Stay Put"

This article, from the New York Times by Peter S. Goodman, frustrates me. This is a good illustration of how bad economic policies have come back to bite us. At first, while reading it, I actually had some hope. This sounded like good-faith effort on everybody’s part to try to reach a deal and keep people in homes. If the lender and borrower could reach a deal on their own, then it was obviously in each party’s interest to make the deal. When freedom of contract is upheld, everybody wins.

But then I read this:

“Those outcomes are similar to the ones produced by the Obama administration’s $75 billion program aimed at stemming foreclosures, which gives cash subsidies to mortgage companies as an inducement to accept lower payments. But in Philadelphia there is one crucial difference: the mortgage companies have no choice but to participate. They have to attend the conferences and negotiate in good faith or they cannot proceed with a sheriff’s sale.”

Both policies are bad. Obama’s policy of providing subsidies to mortgage companies to help stave off foreclosures may sound like a good thing, but its economic consequences are very real. In economics, we should only give subsidies in very specific circumstances, that is, to encourage more behavior that results in a positive externality.

While staving off foreclosures certainly sounds like something that is positive and should therefore be encouraged, we must recognize the foreclosures in the first place are the market’s attempt at correcting the housing bubble. By intervening and not letting the market go where it wants to, we are just drawing out a bad situation. Recovery will be no faster or less painful if we continue to try to stifle necessary forces.

Philadelphia’s program is similar. If both parties agreed on their own, that would be one thing. But forcing one party to agree to terms that are not in its interest to agree to is damaging from an economic and a liberty standpoint. A major reason the mortgage crisis happened in the first place is because mortgage companies were forced to lend when it did not make financial sense to do so. As a result, some creative financing was born, resulting in very bad programs like adjustable-rate mortgages and interest only mortgages. Nothing good can happen by again forcing banks to loan when it doesn’t make financial sense to do so.

It’s easy to empathize with the homeowners who are in this regrettable situation. Surely nobody wishes a foreclosure on anybody. Houses are homes and to be forced to give that up can be devastating one’s family life. But the fact remains we won’t get out of this mess until some hard necessary corrections are allowed to happen. In the long run, it’s in everybody’s interest for the market to correct itself. By not allowing the short term pain in the meantime, we’re just assuring our economy remains in a perpetual state of uncertainty.

“…three years ago, Mr. Hall committed the sort of mistake that has upended millions of households. At the recommendation of a for-profit credit counselor, he took out a new mortgage — a variable-rate loan from Countrywide Financial, which is now owned by Bank of America. He paid off some credit card debt, and he borrowed an extra $15,000 to renovate his home, expanding his mortgage balance to $63,000.
The loan began with manageable payments of about $500 a month. But Mr. Hall’s interest rate soon soared — something he says was never explained to him — lifting his payments to $950 a month.

“When I got the mortgage, I didn’t really understand it,” he said. “They told me this would improve my credit and that was it. It was just, ‘sign here,’ and ‘initial here.’ ”

No More Construction Work

He might still have managed had construction not come to a halt. By 2007, Mr. Hall’s employer was cutting work hours. In August 2008, it shut down, turning his $1,000 weekly paycheck into an $800 monthly unemployment check.

Every day, he set the alarm clock and headed to the union hall at 5 a.m., waiting and hoping for work. Every day, he went home, still jobless and discouraged, now confronting the displeasure of his wife, who worked as a nurse, and who he said never came to terms with their diminished spending power. After months of bickering, she left him last December, taking their daughter.

“She was saying, ‘How are we going to have Christmas? How are we going to go on vacation?’ ” he recalled. “She just seen it getting worse instead of better, and she got depressed.”

In January, his truck was repossessed, leaving him to walk through the winter dawn to the union hall for his daily ritual of defeat.”

This is a tragic situation, but one that could have been easily avoided. Had Mr. Hall not borrowed against his mortgage, had he refinanced right away to lock in a low rate as soon as his mortgage started climbing (as millions of others did), had he taken the time to understand his mortgage as any responsible borrower should have done, perhaps he wouldn’t be in this situation.

This also illustrates the economically damaging role unions play. Because of the high wages demanded by unions, it makes it infeasible for construction companies to pay them their wages in tough economic times. Instead, the company was forced to go out of business (which might have happened anyway, but unions certainly took away any competitive advantage it might have had).

Now, Mr. Hall depends on the union to find him another job, but since unions worked to destroy his job, how can they be expected to find him another? I’m sure the unions of other trades are quite effective at keeping outsiders out, ensuring a high wage for them, while ensuring joblessness for everybody else. Unions are very very damaging to an economy.

Of course, all this criticism is easy to see in hindsight, but that’s the point. Mr. Hall was just playing by the rules of the game at the time, he was just responding to the incentives that were in play. People respond to incentives. That’s why it’s imperative that we let the market work. We must pay the painful price of foreclosures and lower wages. If we continue to subsidize the risk, thus lessening the impact, our hindsight might not be 20/20 and we could easily make the same mistakes again. Indeed we’re already making them.

Why Don't Politicians Listen to Economists?

This is a frustrating topic for me. Those of us who understand economics – especially those of us who appreciate liberty – cheat. We already know the answers ahead of time. Okay, well not really (the old saying “If all economists were laid end to end they still wouldn’t reach a conclusion”…). But I do think that those economists that neglect liberty are missing a big part of the picture.

Economics gives us a blueprint for how the world works. Really. If we know how to read the blueprint, we can identify what policies are good and what policies are bad. It’s funny because usually the first thing out of a first year economics student is “Man! Why do politicians keep instituting policies that clearly don’t work?!”

That seems a befuddling idea. Here we have an entire discipline that is dedicated to studying how our economy works, how people behave when confronted with incentives, and how to best allocate scarce resources. These people have doctorate degrees. They are smart! Why on Earth, then, don’t politicians listen to them?!

The answer to that question is simple. Unfortunately it does nothing to relieve our frustrations.

I’ll begin with a quote by Henry Hazlitt, "Economics is preeminently a practical science. It does no good for its fundamental principles to be discovered unless they are applied, and they will not be applied unless they are widely understood."

This is a simple place to begin. Most people simply do not understand economics. Economics, though mostly common sense, is something that can be confounding at first glance. It’s a reality of economics that the consequences of our actions are often the exact opposite of what we intend.

For example, let me illustrate with basic minimum wage. This is a politicians’ seemingly great solution to a terrible problem. When the politicians say, “It’s wrong that you’re not receiving a living wage. I have enacted a policy to give you more money!” the people say, “More money?! Wow! What a great idea! Who could be against giving people more money?”

This unfortunately puts the economist in the awkward position of actually being the person arguing against giving people more money. It’s no wonder people listen to politicians over economists. Politicians tell people what they want to hear; economists tell people the truth.

The fact is, minimum wage artificially raises the wage above the market rate. As labor is now more expensive, companies demand less of it. The result is they pay a few workers more money, while laying off even more employees. Minimum wage was meant to help the worker, but it actually did more harm by making it harder to find a job.

This argument is the same for many political “solutions” to problems – they cause more harm than good. Tariffs, rent control, agriculture subsidies, Medicare, “cash-for-clunkers”, bailouts, welfare, unemployment, capping-salaries, certain taxes, social security… this list could go on and on. Even ignoring their effects on liberty, these policies have disastrous economic consequences.

All of the above programs sound good and are doubtlessly implemented with the best of intentions. Therefore it’s easy to understand and empathize with the politician that wants to pursue these policies, and it’s equally easy to understand why nobody listens when economists speak out against them. To argue in favor of these policies is easy, takes just a few minutes and requires no advanced education. To argue against them can be complicated, lengthy, counter-intuitive and requires an education that most Americans just don’t have.

This is not to say that Americans are stupid, for that clearly is not the case. America is one of the smartest countries in the world. Americans, in spite of their intelligence, are just simply ignorant of economic principles. Is it any wonder people listen to politicians ahead of economists?

That said, there is also another force working against sound economic policy: the nature of politics. What I mean by this is that the incentives created by our political system work against economics.

Most economics works in the “long-run”. That is, it takes time for prices and supply to adjust to bring the economy into equilibrium. How long does it take? Nobody really knows. What is certain though, is that while the economy is in disequilibrium, it is painful. Politicians feel the duty to “save” us from that pain so they enact legislation that “fixes” the problem. All this really does, though, is to draw out the disequilibrium and delay the economy from self-correcting. Since we’ve now extended the painful period instead of just enduring it for a short while, the politicians feel the need to re-“save” us. Oh what a vicious negative cycle it turns into.

There is an inherent conflict in politics and economics. As mentioned, economic policy requires a long view. Politics, however, requires a very short view. Political terms range anywhere from 2 years to 6 years. As such, politicians are only looking, at a maximum, 6 years into the future.

In order to get elected, the politician must prove himself capable, he must be a problem solver, he must have “vision.” Ambition may be a good thing politically, but economically it’s not always so positive. A politician might see a “crisis” unfolding and shout, “Don’t just stand there, do something!” This leads to politicians clamoring over each other to be the first to “do something.”

An economist might just look at the same “crisis” and shout, “Just stand there!” Often more damage is done by acting hastily and in an economically reckless manner than if we just did nothing. This works in the politicians’ favor. By “solving” the first problem, they can take credit for action. Conveniently, their solution only delayed the problem or created another one for them to “solve.” This puts politicians in the enviable position of ensuring they have job security while constantly looking like the hero to their constituents.

But what’s good for the politician may not be good for us.

So, we’re left with a seemingly unsolvable problem. Oh sure I think we can go a long way by ensuring economic education becomes a pillar of our school system, with continuous economic education from middle school all the way through high school; thus ensuring we’re at least economically literate enough to recognize a poor policy when we see one, but that only solves half the problem.

Politicians, regardless of their economic education, will never “just stand there.” But I suppose that’s a pretty good problem to have, for it’s a reminder that we are living in a thriving democracy with regular elections and freedom to choose our government. If our only complaint is that our society is so free that it’s hard to look beyond the next election, that we want to replace our politicians with someone more like ourselves, and that it’s possible to do so, then I suppose we have nothing to complain about at all.

An Economic Look at Healthcare - Part II

In part I, we examined why government intervention in the healthcare market leads to higher prices. Specifically, we looked at why Medicare and Medicaid create many more problems than they solve. If we abolish these socialist forms of healthcare, we would already have gone a long way towards reducing costs and increasing efficiency.

While abolishing Medicare and Medicaid must be the first step in reforming healthcare – and it would be very big step – more must be done. Government does not provide the answer to this important question. It has been government intervention in the healthcare industry that has caused prices to spiral upwards, so it makes no sense to think that even more government intervention would fix the problem.

We must dig deep and try to find the root of the problem instead of just addressing the symptoms. Government “fixes” to the problem will never work because they only address the most recent, obvious symptom of the problem, while doing nothing to address the cause.

For example, a recent proposal seeks to “solve” the problem by simply capping premiums and co-insurance payments. Just capping the price so they can’t climb any higher does nothing to address why prices were climbing in the first place. In fact, it’s through governmental policies such as these that directly lead to higher prices in the first place.

It’s an unfortunate reality that most government programs have consequences opposite of their intended effect. By capping prices, the government just creates perverse incentives. Insurance already has a built-in flaw. People don’t pay the full amount of treatment so it seems cheaper than it really is. Capping prices exacerbates this problem. By capping prices, people are in effect encouraged to use more healthcare, thus causing prices to spiral upwards.

If increased government intervention in the healthcare market is not the proper way for reform, then what is?

Many people argue that healthcare is a right, that some things just transcend economics. If that’s the case, then people don’t care if government healthcare is efficient or not because people’s health is much more important than efficiency.

That argument seems logical and has a lot of appeal. However, we can do much better. Is it really okay to settle for a broken healthcare system and dismiss it away as okay because “healthcare isn’t about efficiency anyway?” Efficiency means we’re putting our money and our resources to their most highly valued use. It means that we get the maximum value out of our dollar, our capital, and our healthcare workers. It means, in short, that we get the most bang for our buck.

Isn’t our healthcare worth our maximum effort? Don’t we deserve to see our dollar go as far as it can possibly go? Don’t we deserve to know that we’re getting the maximum and most beneficial use out of our healthcare equipment and employees? To say that the government has a duty to provide healthcare is to accept that we will never strive for efficiency and in turn will ensure we settle for a healthcare system that falls far short of its potential.

Excuse me for wanting and demanding better.

Government-run healthcare may seem like the easy fix, but if we really examine it we’ll find that it’s neither a fix nor is it easy. Please don’t accept the “easy” way out just because it’s obvious and appears to require very little work. Government-run healthcare will not give you want you want, no matter the humanitarian arguments behind it.

Instead, we can follow simple economic principles to reform healthcare. There is a role for government in the healthcare market; it’s a very limited role, but very, very important. Government’s failure in healthcare is twofold:

First, it intervenes when it shouldn’t by providing healthcare in the first place.

Second, it doesn’t intervene when it should. One of the legitimate functions of government is step in when there’s a market failure. One of the few areas the market fails is in the case of monopoly. By not enforcing anti-trust legislation against insurance companies, they giving in to large insurance lobbies and fostering monopolies.

This is a problem for several reasons. Insurance companies have been granted special legislation by politicians which has led to the fostering of monopolies, perverse business practices and an upward spiraling of prices.

If the proper kind of reform was implemented, healthcare costs would be pushed low enough that everybody would be able to afford it and nobody would be excluded, this eliminating government’s urge to “save” us from the healthcare debacle.

Most people are risk-averse. They would gladly pay $1,000 to avoid a potential loss of $100,000. But if government interventions cause prices to increase, suddenly they have to pay $5,000 to avoid a potential $100,000 loss. The change in the situation might make a risk-averse person decide to take the risk of losing $100,000 rather than pay the $5,000.

As costs continue to increase, all of the healthy people that would normally choose to purchase insurance decide not to. This leaves only those high-risk customers as the ones who carry insurance. Because they are high risk, the company must increase premiums in order to make a profit. Since the healthy, low-risk people choose not to carry insurance, the risk pool is very shallow and thus the company cannot afford to take on those who are already sick or are a high risk. This leads to insurance companies dropping coverage and refusing to cover pre-existing conditions. The fewer people they have, the higher costs rise. The higher costs rise, the fewer people they have. This is clearly an ugly negative reinforcing cycle.

This terrible cycle could be easily broken if the government let competition work like it is supposed to. If insurance companies were allowed to operate in such a way that they don’t need to seek protection from the government in order to make a profit, the costs wouldn’t be so high as to discourage people from enrolling in insurance.

If the risk-averse people find that costs are low enough that it’s in their interest to carry coverage, the risk pool becomes deeper. With this deep risk pool, outlays by the insurance company wouldn’t be nearly so damaging. Since insurance companies would be taking in more money than they pay out, costs would drop even further. The further costs drop, the more people will decide to carry coverage. The more people that enter the pool, the less damaging outlays become. In order to stay competitive, if their costs went down, they would be forced to pass this savings on to the customer, thus lowering premiums. The lower the premiums, the more people will choose to participate. Thus, a negative reinforcing cycle is turned into a positive one.

Since insurance companies would no longer be offered protection from the government and would no longer be forced to comply with legislation that creates perverse incentives, there would be no reason to not cover pre-existing conditions. The risk pool would be deep enough and overall healthcare costs would have dropped so much that a pre-existing condition would no longer be a catastrophic liability to an insurance provider.

Also, if true competition were allowed to flourish, it would no longer be in an insurance company’s interest to deny coverage for any reason. They only do so now because it makes financial sense to do so. As the situation exists now, a pre-existing condition would hurt their bottom line and they don’t have anything to fear by angering their customers because they are protected by the government from competition.

If the right kinds of reforms were implemented, where insurance companies truly had to compete with one another, not only would costs be low enough that pre-existing conditions wouldn’t be an issue, but the negative backlash against any company that denied coverage would be devastating.

People do business with companies for many reasons, only one of which is price. If an insurance company got the reputation for dropping bad customers, it would turn people off. You can bet there would be another insurance company willing to exploit its "heartless" competitor. If the system were constructed in such a way that true competition could flourish, dropping bad customers wouldn't be nearly the problem it is today (not even close).

Okay, so what about the indigent and the people that really, truly, can't afford healthcare? Don't we need a program like Medicaid to provide for them? The intentions of Medicaid are something to be proud of. It's a great thing that, in this country, nobody will be denied medical care because they lack monetary resources. That's the theory anyway.

In reality, Medicaid is so broken that it often leads to doctors refusing to treat patients. If they find care in an emergency room, the cost is passed along to insurance holders contributing further to rising prices. As medical costs go up, the Medicaid system becomes even more inadequate leading to even more patients being unable to get treatment. It's a tragic negative cycle.

This problem is only compounded by the outrage that many Americans feels because they are already forced to pay for Medicaid through taxes and then they have to pay for it again through rising insurance costs.

We can do much better, all through the free-market and personal choice. Consider this: CSPAN is a commercial free channel that airs government proceedings. It receives no tax support. CSPAN is funded through a small fee that is added to your cable or satellite bill. We could fund medical care for the indigent in a similar way.

If you choose to make a claim on your insurance, it will be with the understanding that you will also be paying a small fee that will go towards healthcare for the poor. If you don't want to pay the fee, then you will choose to pay for your healthcare costs out of your pocket. This will lead to a decrease in insurance claims which will further drive down insurance and healthcare costs.

Many people will gladly pay the small extra fee on their claim, knowing it's a matter of choice and it will go towards a good cause. The backlash that comes with paying taxes will be eliminated and personal choice and liberty will be maintained.

In light of all of this, it is clear that government intervention in the healthcare market does nothing but increase costs. It would be insanity to think that more government involvement in healthcare would reduce costs. It’s government that created the problem in the first place so why on Earth would we think that more of the same would fix the very problem it created?

Einstein said it best, “The definition of insanity is doing the same thing over and over again and expecting different results.” Government-run healthcare will NEVER solve our problems. Government might seem like the easy answer, but just because it seems easy doesn’t mean it’s right. We need take a step back and look at the problem critically and logically. We need to address the causes of the problem, not just the symptoms.

If we take a detached, clinical look at the problem, it becomes clear that a free-market approach to reform is where the answer is. It truly will work and it truly is that simple. This is the real “easy” solution. Imagine, we just sit back and let the market work. It really is that simple. No massive bureaucracies, no million pages of legislation, no committees, no formulas, no rules and regulations, no ever-increasing government whose only purpose is to support itself.

Why would we so vehemently fight for a policy that is so clearly not in our interest? Are we really that insane?

An Economic Look at Healthcare - Part I

Healthcare reform is certainly a very hot topic. Emotions run very high on this issue on both sides of the debate. This issue seems to capture all the hot-button issues: liberty, economics, religion, politics, the proper role for government, compassion, interest groups, capitalism, socialism… the list goes on and on.

In such a cacophony of opinions and debates, very rarely do people address the root issue of rising costs. They bemoan high prices and seek to “teach the robber baron insurance companies a lesson!” Well, we must ask ourselves: what is the actual cause of rising healthcare costs? Why are prices rising? People and insurance companies play by the rules they’re given, that is, they respond to the incentives they are presented with.

As such, we must look deeper, we must find out why insurance companies don’t accept pre-existing conditions and why premiums keep rising. It’s not just that they’re evil and they want to exploit the sick and dying patient to line their pockets with money. That argument is far too simplistic and contributes nothing to the debate.

If we truly want healthcare reform, if we truly want to reduce costs, if we truly want to make healthcare available and affordable to everyone, we must roll up our sleeves and dive in. I wish it were as easy as saying “the government will fix it.” Unfortunately, if we want to fix the problem, real work must be done to peel back the layers until we find out what’s actually causing the problem. For too long we’ve sought to only address the symptoms.

This is the first of a two part series on health-care reform. This part will look at the major cause in the distortion of the healthcare market, Medicare and Medicaid, and show exactly how they contribute to rising healthcare costs.
Step one in reforming healthcare should be to get the government out of it. Its two major healthcare programs, Medicare and Medicaid, create most of the problems a government-run healthcare plan is meant to fix.

The following is a straight-forward explanation of how Medicare and Medicaid actually work. I will insert commentary from time to time, but I assure you, the way these government programs work and the resulting economic consequences is presented truthfully, with no fabrication. This can be found in any economics textbook. It is neither complicated nor a secret.

The bulk (71%) of government healthcare spending is to Medicare and Medicaid as of 2004. This money mostly goes to direct payments to physicians, hospitals and other health care provided through Medicare and Medicaid.

In 2004 Medicare cost the government $309 Billion and Medicaid cost $290 Billion.
What do we get for our money? Medicare benefits are subject to strict limits that are less generous that most private health insurance programs. Medicare does not cover long-term care for the elderly in nursing homes and provides only optional and limited prescription drug coverage. Many people over 65 in the US have private insurance plans to cover the things Medicare misses. All this funding for “free” healthcare and people STILL buy private insurance.

Because our population is rapidly aging, leading to an inverted population pyramid, we have less people in the work force (taxes) and more people receiving Medicare benefits. Because of this (and many other things as we’ll see) the cost of administering Medicare is spiraling upwards.

In order to try to keep an unsustainable program going, Medicare started limited payments to physicians in what’s known as the Medicare Fee Schedule (MFS) that sets payments according to time, skill, and the intensity of the services rendered. It’s a complicated formula designed to limit payments.

The fact is that anytime you have a committee trying to work out a complicated formula, the price won’t be accurate and at the very least will lag behind the true market cost of the procedures. As a result physicians are vastly underpaid by Medicare and it’s leading some to refuse to accept Medicare patients or offer them lower-quality care in an attempt to re-coup costs. This system turns patients into a liability for the doctors, creating the incentive to NOT treat them. Something you never want to see.

Medicare limits payments for specific hospital providers to certain amounts independent of the actual costs of the procedures. The current law pays hospitals a flat fee for illnesses classified into Diagnosis Related Groups (DRGs). Under the DRG system, payment for a medical procedure is the same regardless of any complications that might develop during the medical procedures.

For example, a hospital treating a heart-attack patient will be eligible for a certain flat fee no matter how much is actually spent caring for the patient. This obviously can work both ways, but it can create the incentive for the hospitals to “cut-corners” in order to maximize profit by reducing the quality of medical care provided to the elderly.

The payment for each DRG is based on the average cost of treatment for the illness in all US hospitals, adjusted for differences in local wage costs, the greater cost of providing care for Medicare patients in hospitals with teaching programs, and higher costs related to treating a disproportionately large share of low-income patients.

At the extreme, this system could lead to some hospitals shutting down if they have a high proportion of elderly patients.

The MFS and DRG amount to nothing more than committees, review panels and complex formulas. Can you imagine the administrative costs of such a system? All this central planning and extra time and costs to try to accomplish something the market does automatically and much much more effectively.

As with any insurance system, Medicare encourages the consumption of medical services beyond the efficient level (prices are seen as lower resulting in a higher quantity demanded). The government has chosen to limit overconsumption by placing limits on reimbursement to medical providers.

Medicare increases the quantity of medical services demanded by the elderly. The DRG system acts to limit the quantity of medical services supplied to the elderly by capping the price per unit of service to medical providers. Clearly a backwards policy as far as economics is concerned.

Despite these attempts by the government to limit costs, spending on Medicare has risen faster than the average rate of cost increases in healthcare spending for the nation as a whole. Private sector spending increased by 2.9% while Medicare spending increased by 8.7%.

In 1997 congress passed legislation that sharply reduced payments to healthcare providers for most medical procedures and encouraged those covered by Medicare to enroll in managed care programs. This is clearly and band-aid solution and yet another example of government intervention that only makes a bad problem worse.

The sad fact of Medicare is that it’s unsustainable. To keep it going the government must do either: cut benefits, raise taxes or limit eligibility. All bad options.

It is crucial to control spending per beneficiary under the program in the future as the number of beneficiaries begins to swell due to the aging of the US population. Since Medicare constitutes such a large share of demand for medical services in the United States, its policies affect both medical service prices and the use of those services. In other words, Medicare has monopoly power to in effect become a price setter. The rising costs of healthcare are largely due to Medicare itself! And by expanding the idea of it through similar programs we’re supposed to reduce costs? Does that make any sense?

The Medicare payment system, in some cases, has perverse effects that actually increase spending. For example, the prospective payment system limits the amounts that Medicare pays for hospital stays. In doing so it has encouraged hospitals to transfer patients quickly to skilled nursing facilities or to long-term facilities where Medicare is obligated to pay on a fee-for-service basis, thereby contributing to increased costs.

Costs could be reduced sharply by increasing deductibles and coinsurance payments for those covered by Medicare. This would increase the portion of medical expenses borne by patients themselves, and as I will discuss later, would decrease the quantity of such services demanded. Medicare combined with medigap often reduces the out-of-pocket cost per service to zero, thereby encouraging consumption beyond the point at which marginal benefit falls to marginal cost.

The current legislation wants to cap and reduce coinsurance payments and deductibles! EXACTLY the wrong idea! You couldn’t be more backwards if you tried. Yet another example of a government intervention that does nothing but make a bad problem worse.

In regards to prescription drugs Medicare also contributes to the rising prices. Medicare subsidizes spending on medicine for the elderly which provides incentives to increase total expenditure on prescription drugs. It is also increases the incentive for health care providers to prescribe drugs for the elderly. The increase in demand for pharmaceuticals puts upward pressure on prices.

Okay. On to Medicaid.

The biggest difference between Medicaid and Medicare, besides the people they target (Medicare is for the elderly, Medicaid is for the poor), is that Medicaid is primarily administered by state governments.

Much of the problems are the same – soaring prices, limits on reimbursements which changes incentives, and unsustainable structure.

Medicaid is the insurance of last resort- it takes many patients with no other insurance programs like crack-addicted babies, the homeless with disabilities and AIDS patients who run out of private insurance and exhaust all other financial means of paying medical bills. It’s also pays for long-term care for the elderly who have run out of their savings. Definitely a noble program, unfortunately it’s flawed.

Medicaid has created the incentive for many elderly people to conceal their financial assets from the government so they can get their nursing home and medical expenses paid through Medicaid instead of spending their own money.

Because of reduced reimbursement rates, many physicians are refusing to treat Medicaid patients. Even though spending for Medicaid is constantly increasing, many poor patients are finding it harder to obtain medical care from physicians and must resort to hospital emergency rooms for routine medical care.

This increases the demand for medical services in the emergency room, extends wait times and leads to those who do have insurance being charged extra for the patients who theoretically should be covered under Medicaid. It is easy to see how a program meant to help poor people actually hurts them and everybody else by driving up medical costs and leading to declining coverage.

What are states doing to try to control medical costs? A common strategy has been to reduce reimbursement rates to Medicaid providers. Because pharmaceuticals are a major factor in higher costs, many states are restricting reimbursement rates to providers of prescription drugs and even requiring Medicaid recipients to pay some of the costs. Healthcare only works when people pay something. Even state-run “free” programs like Medicaid realize that their patients have to pay at least something.

Some states are actually placing limits on how much they will pay for Medicaid recipients’ medical costs. Other states are making it more difficult for low-income people to qualify for Medicaid, and as a result hundreds of thousands of individuals are losing their Medicaid health insurance. These cut have been especially severe in Florida, Vermont, and Tennessee. As we can see, it’s the STATE (not private insurance) that is refusing to cover these people. It’s the state that is dropping coverage.

These distortions we see in the private sector arise and are a necessary response to backward government policy. It’s not that the private sector created their perverse policies and the benevolent government must come along and save us poor people from the evil insurance industry. Clearly the private sector has had no choice but to respond in a similar way because government policies have tied their hands where they have no other choice. Don’t you see how government intervention leads to the exact opposite effect it’s meant for? Don’t you see that continuing down this road will NEVER fix anything?

Just a few final thoughts on Medicaid and Medicare.

During the period from 1984-1986, Medicare actually froze payments to physicians, but the cost of treating those patients increased at a rate of about 10%. During that time physicians were able to increase the volume of patients they saw in order to offset the price freeze. Clearly just capping fees is not an adequate solution to the problem.

Medicare, in an attempt at reform, tried using the Prospective Payment System which pays hospitals a fixed amount per patient regardless of the length of stay. These fixed payments or DRGs (discussed earlier) have the intended goal of physicians not over-treating patients and discharging them from the hospital efficiently. Again, a noble goal that unfortunately misses the mark. The result is physicians are paid too little, which forces them to over-treat privately insured patients to try to make up the difference. Combine that with lower quality care for those that need it most and I’d say that’s another example of a lose-lose situation caused by government policy.

State governments tried the same approach with Medicaid. They limited their reimbursement to hospitals for Medicaid patients to covering the minimum possible average cost of hospital services. The average reimbursement rate under Medicaid is about 80 percent less than hospital cost of services.

Unfortunately, low rates of reimbursement under Medicaid have reduced access to medical care for those enrolled under the program. Many doctors are unwilling to accept Medicaid patients and some hospitals are reluctant to admit them. Because of difficulties in finding physicians to treat them, Medicaid patients often seek treatment at hospital emergency rooms, where costs of treatment are more expensive.

There are no easy solutions to the healthcare crisis. But continuing down the same road that caused the crisis in the first place is just plainly a short-sighted bad idea. If the MANY government interventions in healthcare are lifted, the market can and will work like it’s supposed to and you’d find that everybody is able to afford coverage, perhaps even without insurance at all.

The economic consequences of government intervention in healthcare are clear. Why would we think that any politician would know the answer? Why would we trust them with an issue as big as this? We need to listen to economists. We need to follow sound economic policy if we’re to solve the problem. I wish it were as easy as just saying, “the government will fix it,” but the sad truth is it’s not. Don’t be willing to settle for the easy answer just because it seems easy.

The Undying Legacy of Keynes

John Maynard Keynes was an extraordinary man. He completely and totally revolutionized economics. He meant well. He truly believed he had the country’s best interest at heart when he rolled out his theories on recession and his ideas for a government fix.

People either love him or hate him. I think it’s impossible to do either if we truly understand him. It is impossible to divorce Keynes from modern economics. Keynes is famous for what is now called “Keynesian Economics”. But even classical economics has been greatly influenced by Keynes, so much so that we probably never know that much of our current economic thought, even that which isn’t “Keynesian” comes from Keynes.

His ideas on the relationship between savings and investment and the Keynesian Cross gave rise to the IS/LM model, perhaps the most thorough understanding of international economics our science has yet come up with.

Keynes indeed contributed very much to economics. Despite being a reluctant revolutionary, Keynes remained modest to a fault. He was just a good guy.

As such, it’s almost with reluctance that I criticize him.

Keynes believed there were unseen forces in place that prevented the economy from reaching efficiency (or as close as we can get in the real world to this theoretical idea of “efficiency”). He believed prices were fixed in the short run. As such the supply side of the economy couldn’t adjust to balance wages and prices with output.

Keynes theorized that since wages and prices wouldn’t adjust, the only thing that could adjust was output. Since something had to give, if prices didn’t adjust to bring us to full employment, output would have to drop, thus putting us in a recession.

To guard against the fall in output, Keynes proposed that we stimulate the demand side. Who says we have to wait for prices to adjust; are we just supposed to suffer in the mean time? From this, government intervention was born. Cutting taxes or increasing spending to stimulate aggregate demand was seen as the solution by Keynes.

Once politicians got a hold of that idea, it was over. While the occasional tax cut may have occurred from time to time, it’s as if the politicians just discarded that half of the equation and focused only on increased spending.

It’s this type of thinking that gave rise to government provided welfare. By the government creating minimum wage and backing labor unions, the “sticky wages” that Keynes bemoaned were cemented in place. I have a few disagreements with Keynes, but this is his biggest failure.

He recognized sticky wages were problematic to the economy. His policies were meant to temporarily offset that problem by using government intervention. That temporary fix might be nice, but it led to a temporary problem becoming a permanent one.

Instead, Keynes should have addressed the problem and not the symptom. Keynes was brilliant. He had unprecedented authority. People in high places listened to him. If he had encouraged governments to discourage sticky wages, the country we call America would be much different today.

If he had encouraged government to avoid policies like minimum wage and backing labor unions, his problem of sticky wages would have gone away. If he had used his considerable influence to explain to people that prices needed to adjust, that the worker should expect fluctuations in his wage, then instead of reinforcing the idea of sticky wages, instead of giving it credibility, he could have dismissed it. If Keynes had said we should do everything in our power to avoid sticky wages, it would have happened.

Instead we have had generations believing they are entitled to a certain wage that is not market determined. We have had generations believing that they need not worry because the government is there to solve their problems.

Keynes didn’t care much for notoriety. He didn’t care if he went down in history as the greatest (certainly the most notorious) economist ever. If he had put pressure on the correct issue – fighting sticky wages – instead of a reactive government policy, the whole idea of “Keynesian economics” might not exist today.

Keynes, by trying to solve a problem, just ensured that it continues forever. So I guess we can call him the greatest economist ever, certainly so if greatness is measured by relevance. Keynes, by his misguided policies, ensured that he remain forever relevant.

The Case For Free Immigration - Part III

This is the third of a three part series. Parts I and II.

This country was founded on liberty. This country was founded on free immigration. For much of our history, the government had nothing to say about immigration. Anybody who wanted to come here could. There were no visas, no quotas and no laws regarding this issue.

Indeed our country is one of the few in the world that was actually founded on a principle. We came together with a common idea, with a common view of liberty and government’s proper role. We were able to shape the befuddling idea of the history of our own future.

Are we willing to sacrifice the ideas our country was founded on at the expense of an artificially high wage? On the idea that “I got mine”? Does that make any sense? Are we willing to sacrifice the “soul” of liberty?

I think Ronald Reagan can say this much more eloquently than I can, so I offer the following from Reagan’s famous “city on a hill” farewell address:

“I've been reflecting on what the past eight years have meant and mean. And the image that comes to mind like a refrain is a nautical one--a small story about a big ship, and a refugee and a sailor. It was back in the early '80s, at the height of the boat people. And the sailor was hard at work on the carrier Midway, which was patrolling the South China Sea. The sailor, like most American servicemen, was young, smart, and fiercely observant. The crew spied on the horizon a leaky little boat. And crammed inside were refugees from Indochina hoping to get to America. The Midway sent a small launch to bring them to the ship and safety. As the refugees made their way through the choppy seas, one spied the sailor on deck and stood up and called out to him. He yelled, "Hello, American sailor. Hello, freedom man…

“The past few days when I've been at that window upstairs, I've thought a bit of the "shining city upon a hill." The phrase comes from John Winthrop, who wrote it to describe the America he imagined. What he imagined was important because he was an early Pilgrim, an early freedom man. He journeyed here on what today we'd call a little wooden boat; and like the other Pilgrims, he was looking for a home that would be free.

“I've spoken of the shining city all my political life, but I don't know if I ever quite communicated what I saw when I said it. But in my mind it was a tall proud city built on rocks stronger than oceans, wind-swept, God-blessed, and teeming with people of all kinds living in harmony and peace, a city with free ports that hummed with commerce and creativity, and if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. That's how I saw it and see it still.”

Let me further illustrate this idea. Come with me back in time to 1775, to Patrick Henry’s famous line, “Give me liberty or give me death!” What was he really saying here? Patrick Henry’s willingness to sacrifice his life for liberty, as profound as that is, is only the surface.

What, after all, is liberty? What is a free country? What is this idea that Patrick Henry is obviously so passionate about? Freedom means liberty for all. Liberty is not subject to temporal bounds. Liberty is not something that can be given and taken away. Liberty, in its eternity, is not subject to the whims of a finite government. Liberty is something that lives within us, which drives us. People are not satisfied until they have achieved liberty. Lives have been sacrificed for it, wars fought over it.

Patrick Henry was making a statement to the world (and I believe he knew it at the time): Liberty lives here! Here, we value liberty above all things, even our lives! If you try to take away our liberty, you will have to kill us! Anybody who loves liberty can come here knowing they will find refuge, just as we found refuge here! Fight with us! We will fight with you!

Is that idea already dead? After a mere 200 years? Is that the lifespan of liberty? Once, we were willing to die for liberty for all. Now we won’t even reduce our wage. Once, we would fight to the death to defend the idea of liberty. Now we just fight those most seeking it. Once, we found refuge in liberty. Now that refuge has turned to comfort and complacency.

Let’s pause here a moment and reflect on the founding values of our country. They are literally written in stone at the base of the Statue of Liberty, in a poem by Emma Lazarus titled The New Colossus:

Not like the brazen giant of Greek fame,
With conquering limbs astride from land to land;
Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles. From her beacon-hand
Glows world-wide welcome; her mild eyes command
The air-bridged harbor that twin cities frame.
"Keep ancient lands, your storied pomp!" cries she
With silent lips. "Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"

This poem is incredible and I think it’s worth breaking it down a little bit.

With all the power and fury of lighting, she is the “Mother of Exiles.”

She stands vigilant with a beacon of “world-wide welcome.”

“Keep ancient lands, your storied pomp!” Keep your ceremony, give me liberty.

“Give me your tired, your poor, your huddled masses yearning to breathe free, The wretched refuse of your teeming shore.” Though you cast them aside, they are welcome here, and welcome with open arms.

“Send these, the homeless, tempest-tossed to me, I lift my lamp beside the golden door.” The homeless. We are all homeless until we find the land of liberty. The tempest-tossed. We are all battered by storms until we find shelter in liberty. I lift my lamp beside golden door. Follow me to the place of liberty. I light the way and I stand guard to ensure you safe passage. You are welcome here.

Yes Patrick Henry and Ronald Reagan both shared Winthrop’s vision of a shining city upon a hill; a shining beacon calling out to all who love liberty. Because Patrick Henry was willing to die for liberty, he lit a fire that started this nation. Ronald Reagan realized that this country was founded on eternal values, and to stay consistent with liberty, he must not restrict freedom of movement. Emma Lazarus recognized the inherent compassion in this country. Liberty is consistent with compassion. Compassion is consistent with free immigration. To change course now would be to betray the cause that Patrick Henry and so many others were willing to die for. In a very real sense, to restrict immigration is to kill the soul of liberty.

Free immigration has very important implications. On the economic side, free immigration is essential to the division of labor and economic output and growth. It is well documented that an autarkic society is not sustainable. While restricting immigration does not equal autarky, it is a step in that direction. In an age of globalization, free information and (increasingly) free enterprise, it seems almost barbaric to restrict the liberty of an individual to move where his output could be greater. Restricted immigration has the same negative economic effects as do labor unions, tariffs and minimum wages.

On the human side, the consequences of restricted immigration can be dire indeed. Free immigration often times means the difference between life and death. It is absolutely inconsistent with liberty if your actions cause harm to another individual. Restricting immigration is an action (in the natural world, movement would be absolutely free, so restricted movement must be artificial; anything artificial is the cause of an action) that can and does cause harm to innocent individuals every day.

And finally on the intangible side, on the “soul” side, some of the greatest thinkers of our time, indeed some of the fiercest advocates of liberty contend that immigration must be free. Our ancestors came here because they loved liberty. Liberty is not subject to temporal bounds, so how now can we seek to restrain it by restricting immigration?

The Case For Free Immigration - Part II

This is the second of a three part series. Parts I and III.

The arguments for free immigration from a liberty perspective are less empirical, but perhaps more important and with greater consequences. I will start with the most obvious example of restrictions on migration being inconsistent with liberty: emigration.

It is almost universally condemned if someone wishes to leave a country but cannot. Why then, is the inverse not true? What good would emigration be if there were no immigration? Let me paint a picture: during World War II, many Jews were the subject of unspeakable oppression. It didn’t have to be this way. It’s no secret that the Germans hated the Jews. When Hitler came to power, he first tried to force the Jews to move from Germany.

As Hitler’s influence increased, as the Nazi empire expanded, there was no place left in Europe for the Jews to go. While some were lucky enough to emigrate to North and South America, most of them simply were not wanted by any other country. Since Hitler could no longer force them out, he had to come up with another solution to the Jewish problem: the final solution.

As tragic as that story is, imagine how much more tragic it could have been if there was no immigration. Free immigration is paramount because without it, free emigration means nothing. Germany was happy to see the Jews go. It wanted them to leave. But since most other countries in the world closed their doors to the Jews, they couldn’t leave. This is just as outrageous and deserves just as much condemnation as if Germany had told the Jews they couldn’t leave and were going to be put to death.

Imagine if that were the case. Let’s pretend that every country on this planet had their doors open to the Jews but the Germans would not let them leave, despite the Jewish pleas. The outcry would have been enormous: how dare you not let them leave?! Look what will happen to them if you force them to stay! Unfortunately without free immigration the argument is exactly the same, only instead it’s directed at the countries that told the Jews “no”.

Because most countries didn’t open their doors, the Jews were not allowed to leave. They were forced to stay and we all know what happened to them. Free immigration can very well mean the difference between life and death. While that may be true only in the most extreme circumstances, liberty demands that the door be always kept open, just in case.

Furthermore, since free emigration is something most of the world’s countries can agree on, it is equally important to have free immigration for a second reason. If all the countries in the world adopted a policy of free immigration, the one country that didn’t would be very conspicuous. In a world of restricted immigration, the country that doesn’t allow its citizens to emigrate can basically go unnoticed because nobody will take its emigrants anyway, so what is the big deal if it’s illegal for them move?

Immigration must be free to put the spotlight on those countries that don’t allow emigration. Even if the entire world is free except for the population of one country, it’s just as much of an injustice as if all people of the world were not free. The liberal demands freedom for others just as much as he demands it for himself. All the freedom in the world means nothing if one can’t get to it. If there is even one country in this world that does not allow either free immigration or free emigration, liberty has not been achieved.

Let me frame the importance of free immigration in another way. Liberty says that people should be free to do as they please unless their actions cause harm to another. Similar to the argument made in part one for efficiency, who exactly is being harmed by free immigration? It is perfectly acceptable to prevent someone from coming on to your private property. If you don’t want someone on your property, and they come anyway, they are violating your liberty and can be arrested or sued, immigrant or otherwise. If the argument against free immigration is that of property and being invited, it’s already illegal to trespass; you don’t need an additional restriction on top of it.

A key function of government is to maintain and secure property rights. This entails many things, including the knowledge that I will feel secure that, if I buy something, it will be mine. If I buy a car from someone, I know the government will protect me if that person decides to take his car back. If he steals the car, he will go to jail. If he sues me for the car, there will be a justice system in place so I can argue why the car is mine and not his. In other words, contracts would be impossible to enforce if there weren’t a stable government backing up and defending property rights.

One of our key liberties is the freedom to contract. We own our bodies and, as such, can do with them what we please so long as we don’t harm another person. Since I own my body, I own my labor. If I want to sell my labor to someone who is willing to buy it, it is government’s responsibility to enforce and protect that right. Indeed it is the most important duty of government. I’ve said it before and I will continue to say it: all of our rights mean nothing if we aren’t secure in our property. All of the legitimate functions of government (that of the protective state) are for naught if we aren’t secure in our property rights. I cannot stress enough the importance of this.

This is very important. It means that a buyer and a seller should be allowed to find each other and make a deal. If it weren’t in both parties’ interests, the deal would never be made anyway. Thus, by default, when a contract is agreed to, both parties are better off.

For a government to restrict this, not only is it preventing a mutually beneficial transaction, it is violating the very core of personal liberty. For a government to prevent the freedom of contract of a buyer and a seller just because one has to cross an imaginary line to do so is the most ridiculous thing I’ve ever heard.

Property rights themselves mean nothing if the freedom to contract is undermined. Indeed, you cannot separate the two. If there is no freedom to contract, there are no property rights. If the government fails to enforce the freedom to contract, it has failed in its most basic responsibility.

Some “defenders” of liberty put forth the argument that a country, just like a property owner, has the right to deny entry if it feels like it. These people say that it’s only okay for an immigrant to come to this country if invited. While at first this may sound consistent with what I have argued above, it most certainly is not. The country is not a piece of private property, therefore it cannot be owned. If it is not owned, the idea of trespassing doesn’t work.

A country is nothing more than a collection of individuals’ property with an imaginary line drawn around the whole thing. There is nothing magical that happens when one crosses that imaginary line. Who is the guardian of the line? Our government? Why would the power of an imaginary line overrule the right to freedom of contract? If I want to hire an immigrant worker if I live in Colorado, does it make any sense that I can’t because there is an imaginary line stopping him from coming?

Or, pretend you live in Texas. Your backyard backs up to a Mexican’s back yard. If you wanted to hire him to mow your grass, it would be illegal to do so. It would be illegal to walk five feet into your property and do work that you invited him to do and are willing to pay him for. This is your neighbor we’re talking about! While this example might seem a little silly, the point it illustrates is an important one. Whether a potential immigrant lives next door or a thousand miles away, the argument is exactly the same. It’s only when we boil it down to its most basic, like the example just illustrated, that the true lunacy of such a policy becomes apparent.

These same so called “defenders” of liberty say the country acts as a club. As such we can decide for ourselves what our policy of immigration can be. Just as a private club can vote on whether or not to accept new members, so should the country be able to. Again, this may sound good on the surface, but it’s just as hollow as any other excuse to deny immigration.

In a private club, members make a conscious effort to join and join because of some shared vision or goal. Who among us chose to join this country? Most people who vote to exclude outsiders are ones who never made the conscious decision to join in the first place, but rather had the good fortune to be born here. Isn’t it ironic that the only people who would make the country more like a club, thus maybe giving this argument some legitimacy, are immigrants, the very ones that are excluded!

Similarly, what is our common goal as a country? I doubt you can say we have one, for the collection of individuals here is about as heterogeneous as you can get. I suppose if we had to say what our common goal was though, it might be to live the “American dream”. The American dream is that anyone can succeed here, regardless of your background. Again do you feel the irony that we want to exclude the only people who the “American dream” might apply to?

America is very clearly not like a club, so to defend a backwards policy based on the assumption is faulty. Rather, I suspect that “defenders” of liberty are simply trying to reconcile their own personal views on immigration with the idea of liberty. Since restricting immigration is plainly and obviously inconstant with liberty, they have to come up with some creative arguments for them to avoid looking like hypocrites. But even a quick examination of those arguments shows how faulty they are.

As just mentioned, a border between one country and another is nothing more than a line drawn on a map. An imaginary line acting as a barrier to free movement is inconsistent with liberty. By crossing that imaginary line, the immigrant is simply agreeing to leave his country’s sphere of influence and enter into another country’s sphere of influence; he is agreeing to no longer be governed by the laws of his country and instead be governed by the laws of another country. Provided he does not harm anybody, liberty has nothing to say regarding his movement, anymore than it can have a say if he crosses the street.

An important aspect of liberty is freedom from government coercion. Liberty would never have government intervention trump an individual’s liberty of movement. Immigration is, in the truest sense, a victimless crime.

The Case For Free Immigration – Part I

This is the first of a three part series. Parts II and III.

Immigration is a hot topic. In virtually every newspaper everyday there is at least one article relating in some way to immigration. People’s emotions on this topic run very high. It’s strange that even though people argue about immigration, they all seem to be on the same side. It seems to me that free immigration is one of the few topics in which both left and right can unite to denounce. Why the backlash against immigration? I feel a lot of people react emotionally to the issue and never bother to really analyze its consequences.

This is a big topic and there is much to say on it. I will break the argument down into three parts. The first part, this one, examines the economic case for free immigration. I will identify some examples of why economic analysis tells us that immigration should be free. This is not meant to be a comprehensive answer. If I were to thoroughly explain all the economic ramifications of free immigration vs. restricted immigration, it would literally take a book. This is meant to give a general idea of the economic case for free immigration and I hope the discussion can be continued through questions, comments and challenges. But I assure you, the economic case for free immigration is formidable.

The second and third part of the argument for free immigration will deal with liberty and what I call “soul”.

There are many definitions of efficiency, and all of them lead to the conclusion that the best economic policy is free immigration. The first aspect of efficiency we’ll look at is the intersection of marginal social benefit and marginal social cost. Efficiency is measured by comparing marginal social benefit (MSB) with marginal social cost (MSC). When the two are equal, we have achieved efficiency. As long as MSB exceeds MSC, the action in question should continue, whether it’s buying pizza or letting immigrants into a country.

In other words, as long as the benefit we get from an action is greater than the cost we suffer, we should go ahead and do it. Think of eating pizza. If you’re really hungry, you will really value a piece of pizza. The benefit to you of eating that piece will greatly exceed the cost of, say, $3. Once you’ve eaten your first piece, you’re not quite has hungry as before. You’re still hungry, and hungry enough to pay $3 for a piece of pizza, but if that second piece of pizza cost $5, you might not eat it. Once you have enough pizza that you’re full enough that you no longer want pizza and would rather save your $3 for something else, the benefit of eating pizza is less than the cost of $3. The last piece of pizza you will eat is the one that gives you only $3 worth of benefit. At this point, the marginal benefit of eating pizza equals the marginal cost of eating pizza. If you ate any more pizza, its value wouldn’t equal the value of the money you’d have to spend to get it.

This example works for immigration too, as we’ll see.

So, when MSB equals MSC, the action in question should be stopped, or rather, it will stop - all on its own. The question then becomes how do we measure MSB and MSC? And whom do we ask? Well, we measure by asking people. In economics, there is positive economics and normative economics.

Positive economics is simply fact, something that shows a definite cause/effect and can be proven. For example, to say that when the price goes up quantity demanded goes down would be positive economics. Normative economics is what we think should happen, but is ultimately only opinion. An example would be someone saying something like, “The government should provide healthcare because it’s wrong that some people can’t afford it.”

So in order to measure if the marginal social benefit of immigration exceeds the marginal social cost of immigration, we need to ask people how they feel about it. Some claim a normative judgment is required because at some point we have to decide to not include some people. In other words, we have to make a conscious decision to exclude some people.

But as any statistician will tell you, the larger your sample size, the more accurate your result. Also, when collecting data, it is imperative that the sample be as random as possible. For example, if you ask 100 baseball fans whether baseball should be eliminated, it is pretty easy to guess what their answer would be and their response would not accurately reflect the opinion of the population at large.

Immigration is no different. If we want people’s views on immigration, to decide if immigration would make them better or worse off, in order to create immigration policy, it would make no sense to ask only those people in a high-wage area; we would know what the answer would be and it would not accurately reflect the view of the population at large. If we do not accurately reflect the larger population, our conclusions about where MSB equals MSC would be incorrect. If it’s efficiency we are striving for, it is essential that we can accurately measure MSB and MSC.

Also, immigration, by definition, affects at least two countries. Therefore, we need to collect data from at least two countries; but which two? If we are interested in the United States, we would collect data from the United States (even though we probably already know that outcome) and which other country? Mexico? But what about all the other countries that have people who wish to immigrate here? If we collect data from Mexico, it is probably a safe bet that the results will be the opposite of what we found in the United States (a high wage country vs. a low wage country).

So now if we want to accurately capture MSB and MSC, we are back to square one. We have two sets of conflicting data. Which one is true? Which one do we follow? Well, probably neither set of results is true and it would be unwise to create policy based on either one. Therefore, we must include a third country. Indeed, we would not be finished; we would not have an accurate feel for MSB and MSC until all countries are included. Including everybody is the only scientific approach. It is the only approach where a normative judgment is not required and it is the only approach where we can trust our results will be accurate.

There is another way to measure MSB and MSC: remove immigration restrictions. Immigration will flow until naturally MSB and MSC intersect. We will know that MSB exceeds MSC as long as we have immigration. Once we achieve efficiency, immigration will naturally stop, without any type of governmental coercion or intervention. The simple fact that there are many people in this world that wish to immigrate tells us that, for them, the marginal benefit of doing so exceeds the marginal cost. The second aspect of efficiency comes in here: immigration restrictions prevent resources (labor) from flowing to their most highly valued use.

In our example of marginal social cost and marginal social benefit above, we used pizza to illustrate the idea. You would eat pizza until the benefit of doing so equaled the cost. What if you ate that next piece? Well, for one, you would be spending your $3 on something that you don’t truly value. In other words, you would rather spend your $3 on something else, so to spend it on pizza would be silly. If there is something that you value more highly than pizza that you could get for your $3, you should spend your money on that which gives you the most benefit. You’re in effect wasting your money by buying pizza you don’t truly value. Not only do you get something you don’t truly value, you don’t get something you actually do value. This is clearly a waste of resources.

Also, by buying that next piece of pizza, that means that pizza is no longer there for somebody else to eat. Perhaps they value that pizza a lot more than you do and would be willing to pay $10 for it. But they can’t because you already ate it. That pizza would have been put to better use if it had been consumed by someone who truly valued it, just as your money would have been put to better use if you had used it to buy something you truly valued.

It’s this idea that is behind immigration. If there is pressure for immigration, it means that resources (labor) are trying to move to their most highly valued use. To restrict immigration means we are wasting resources by paying for labor that we don’t value as highly as other labor. Our social welfare (well-being) and the value we get for our money would be better served if that money was spent on something we truly value – more effective and cheaper labor.

Similarly, those laborers who are prevented from moving where they desire are having their labor wasted. It could be more valuable somewhere else. They could get more bang for their labor buck if they were allowed to emigrate to where their labor is more highly valued. Immigration restrictions are a blatant, artificial means of preventing resources to naturally flow to their most valued use.

To the classical liberal, government should have no role beyond protecting its citizens from harm. Traditionally, this has often been an argument for immigration restrictions. Immigration is harmful; therefore government has a duty to regulate it. Really? Who, may I ask, is being harmed? The typical answer is that the American worker is being harmed because he can’t find a job because his job has been taken by an immigrant; or similarly, that his wage would be depressed because immigrants work cheaper.

Economically speaking, neither argument is valid. Labor is a commodity just like any other. As long as that commodity is in demand, there will be ample work opportunity for everybody, and wages will spiral upwards. When demand for labor decreases, there will be fewer jobs and wages will fall. Immigration doesn’t affect the domestic worker in either of these areas. Immigrants come to this country only as long as there is a demand for their labor; in other words, only as long as there are more jobs than workers.

If this is the case the domestic worker already has his job and there is still yet more work to be done. When the demand for labor decreases, as in times of recession, the immigrants do not come, and in fact go home, leaving the jobs that are left for the domestic worker. When immigration is free, supply of labor will always meet demand, just as for any other commodity. Insert government intervention into the mix and we fail to achieve efficiency.

The argument that immigrants work for cheaper is also not consistent with efficiency. Since when are we guaranteed a certain wage? Classical liberals for decades have been crying out against labor unions and minimum wage because these are impediments to the free market. They are artificially propping up a wage above the market equilibrium price. Government intervention in the form of immigration restrictions does the same thing. By restricting immigration in the name of high wages is just as offensive as labor unions and minimum wages. The market - and only the market - should set the price for commodities, including labor.

Taking all of this into account, it seems clear that restricting immigration is an unwise policy from an economic standpoint. If we are striving for efficiency – whether we define efficiency as the intersection of marginal benefit and marginal cost, the maximization of resources or the intersection of supply and demand – by restricting immigration we can virtually guarantee that none of these things happens. Any way you slice it, if sound economic policy is our goal, restricting immigration should be the last thing we do.

Why Cap-and-Trade is Economically Sound

Cap-and-Trade has gotten a lot of attention lately as it’s at the forefront in the fight against climate change. It’s unfortunate that this sound policy has been hijacked and used for political gains by liberal politicians. As a result of this, the inspiration for, and the consequences of, cap-and-trade have been greatly distorted.

In reading on the blogosphere and newspapers, it is clear that hardly anybody actually knows what cap-and-trade is all about. The conservatives bash it because it’s been put forward by the democrats, therefore it must be a damaging tax, or at the very least, some clever smoke-and-mirrors trick designed to secretly advance an extreme leftist agenda. Neither of these claims is true. The liberals shout that it is the solution to climate change and if we want to stop global warming we must implement cap-and-trade. This, also, is not true. The conservatives respond back that anything that tries to reduce human-caused global warming will do nothing but retard economic growth and needless handcuff the energy and industry sectors. This, too, is not true.

For cap-and-trade to cause all this fuss, it must be something that people have strong opinions about, one way or another. But if you actually ask most of these people point blank, “So what is cap-and-trade?”, they look at you, look at each other, blink a few times, scratch their heads and then continue screaming about why it’s good or bad. I think it’s time to bring a little clarity to issue.

It’s unfortunate that cap-and-trade has been yanked into the global warming debate. The topic of human-caused global warming instantly causes blood pressure to spike, people’s faces to turn red and steam to come out of their ears. According to some, this issue is SETTLED and has been for a long time. If you don’t believe in global warming you either have your head in the sand or are just simply stupid. For the others, the issue is very clearly NOT settled and global warming advocates simply pick and choose their data and shout down any opposition in an effort to advance their extreme leftist agenda.

In the middle of all this, somehow cap-and-trade got put front and center. That’s really quite unfortunate because how can anybody become detached enough from the global warming fiasco to objectively look at cap-and-trade? They can’t. Right out of the chute cap-and-trade isn’t getting a fair shake.

I will attempt to give it the fair shake that it deserves. In order to do that, we must divorce cap-and-trade from global warming. Cap-and-trade has absolutely nothing to do with global warming, and as such, I will drop off the global warming debate right here and continue on without it.

In analyzing cap-and-trade, we must go back and look at its inspiration. In economics, it’s generally believed that the market is pretty much on auto-pilot. It will self-correct, automatically adjusting prices to equilibrate supply and demand; it will ensure that exactly the optimal amount of any product gets produced. This is great! The market does everything for us so we can just sit back and enjoy the show right? Well, no, not exactly. The market can fail, and does fail quite often. The three main areas of market failure are monopolies, public goods and externalities.

For our purposes, this article will focus only on the last two, public goods and externalities.

What is a public good? Using economic terms now, a public good is something that is non-rival and non-excludable. A good is non-rival if one’s use of the product doesn’t diminish another’s use of the product. For example, think of a fireworks show. Just because I am viewing the show, doesn’t mean there is less of it for you to view. A good is non-excludable if it’s impossible to keep somebody from using it. Think of sunlight. Once sunlight is provided, it’s impossible to limit who gets to enjoy it. Put these together and a public good is something everybody can equally use and something that, once it’s provided for one person, it’s provided for all.

National defense is the classic example of a public good. So why would this be a market failure? The market won’t adequately furnish national defense because there is no money to be made in it. If a private company provided national defense, once it’s provided, there is no way to charge people to use it. You can not just provide national defense for only those that pay for it. Once it’s provided, it’s provided. As such, people know they will be able to enjoy its benefits without paying for it. Why pay for something when you can get it for free? In economics we call this free-rider behavior.

Because of free-rider behavior, some essential services must be provided by the government.

What is an externality? Externalities can either be positive or negative. A classic definition of an externality is an unintended, non-market interdependency. All that means is that it’s something good or bad that is not reflected in prices. For example, let’s say you love going to the symphony. You pay money every weekend to hear the symphony play. A new neighbor moves in next door who just happens to be a classical pianist and she practices every Sunday. When she plays, you can hear her music through an open window and it brings you great joy. She is in effect enhancing your life without you having to pay for it. This is a positive externality.

A negative externality is something that causes you discomfort but you are not compensated in any way for it. For example, let’s say you are hiking in the mountains to your favorite waterfall. When you get there you find that somebody has placed a billboard at the base of the waterfall advertising bottled water. That sign has caused you great heartache because it has ruined your view of the waterfall. This is a negative externality.

Since the piano player is enhancing people’s lives by her music, we would want to encourage her to play more, by perhaps paying her $20 every time she plays. This is called a subsidy. Since the person who put up the billboard caused people to become worse-off, we would want to encourage them to put up fewer billboards. Government might do this with what is called an excise tax.

The person who put the billboard up only did so because he didn’t realize the full cost of his actions. If he knew it would cause you discomfort, that it might make you so mad that you would boycott his bottled water, he wouldn’t have put it up. Are all billboards bad? Of course not! Billboards serve a vital purpose by advertising products and generating revenue for the company.

There is definitely a social benefit to having billboards. If there were no billboards, you might not know that you could drink bottled water, thinking you were forever doomed to drink out of the tap. The first few billboards that are put up provide benefits that are greater than the costs. But when so many billboards are up that they are even at the base of waterfalls, then the social cost becomes greater than the benefit. The last billboard put up made you worse off, not better off. You would have preferred if that last billboard was never put up.

Negative externalities have this effect. Because the person putting up the billboards didn’t take into account the social cost, or the non-monetary cost, of his actions, he provides too many of them. He continued to provide them when marginal social cost exceeded marginal social benefit. If there was a tax on every billboard put up, it would force him to take into consideration the extra cost (the social cost) of his actions. As such, since it costs him more money to provide each one, he will provide less.

Before the tax, the quantity supplied was more than what people would have paid for if it were up to them. After the tax, by bringing the perceived cost up to the true cost, the quantity supplied is much closer to the amount people would have paid for to be supplied. The marginal social benefit of the billboards equals the marginal social cost of them. As such, the optimal quantity is produced.

Okay, so what the heck does all this have to do with cap-and-trade?

Cap-and-trade is a way to prevent a negative externality - pollution. When companies produce, they necessarily produce pollution also. But since pollution is a negative externality, they are inflicting a cost on society that is not reflected in their costs of production. Polluting is free. It goes into the air. Since air is a public good, there is no way to stop companies from polluting into it (air is non-excludable). As such the incentive is for companies to produce as cheaply as they can, and if that requires polluting more than they otherwise would, so be it.

The reason public goods are tricky is because it’s very hard to assign property rights to them. Who owns the air? If we could solve the ownership problem, pollution would no longer be a negative externality.

Let me illustrate the importance of property rights with a classic economic example. In the old days, it used to be common for towns to have a public square. As was the custom, farmers would put their sheep in the square to graze. Since nobody owned the property, everybody who wanted to let their sheep graze there could. A problem should already be in the back of your mind. This common property provided the incentive for farmers to put as much sheep as possible into the area and to let them graze for as long as possible. As such the grass would quickly be eaten. No farmer would want to pay or take the time to plant new grass because why should he waste his energy when the grass is only going to get eaten by other people’s sheep? Property held in common encourages over-consumption. The farmers want get their sheep into the square as quickly as possible to graze before all the grass is gone. The farmer would think that if I don’t let my sheep graze there, somebody else will, so I might as well. Common property encourages over-utilization and over-consumption. Such a system is clearly not sustainable. This is known as the “Tragedy of the Commons.” (The same argument can be made for commercial fishing in the ocean. It’s in each fisherman’s interest to catch as many fish as possible as quickly as possible before they are all caught by somebody else. Is it any wonder the oceans are being over fished? All because there are no property rights).

If the town square belonged to a single property owner, he could charge to let people graze their sheep on his grass. This would provide the incentive for him to re-seed as necessary and he could charge a high enough fee to ensure only those who truly value grazing would pay enough to do so. Just by implementing property rights has an unsustainable negative turned into a wealth-creating, sustainable positive.

So, if we could come up with a way to create property rights in the air, we could solve the problem of a negative externality and a public good (we could avoid the tragedy of the commons)!

Cap-and-trade entails the government auctioning off pollution permits. Each permit could be good for 1 ton of pollution. Those companies that see polluting as a critical part of their production process would buy as many permits as they needed. Those companies that were only polluting because they could, because the air was a public good, would instantly reduce their pollution and revise their production methods to something less wasteful. It would no longer be in their interest to intentionally pollute as much as they can in order to minimize the production process.

Since pollution is a negative externality, it means that the companies are producing too much of their product. They are not taking into account the full cost of their actions. They neglect the social cost they are inflicting by polluting. Just the act of seeing or smelling smoke makes us worse off. People want to look at beautiful mountains, not ugly smoke. If the firms took into account the full cost of their actions, they would realize that they are producing more of their product than people actually want (with more production comes more pollution, and people want less pollution, not more).

Does this mean that there should be zero pollution? Not likely, for can you imagine the costs of a world without pollution?! We wouldn’t have anywhere close to the amount of products and services we have today and those that were provided would be so expensive that nobody would be able to afford them.

Clearly there is a benefit to pollution. Companies and society just must find a way to make sure that companies pollute so long as the social benefits of doing so exceed the social costs. As it is right now, because pollution is free, companies produce too much pollution, so much so that the social cost of pollution exceeds the social benefit of it. Cap-and-trade remedies this.

Cap-and-trade forces companies to internalize the full cost of their actions by making them buy a pollution permit (thus eliminating the market failure of negative externalities). It solves the tragedy of the commons problem by creating property rights in the form of permits (thus eliminating the market failure of public goods).
Companies are then free to sell permits (or the right to pollute) to other companies. This creates the incentive for firms to produce at lowest cost.

For example, suppose all firms must reduce pollution by one ton per day. Company A finds that, for it to reduce emissions by 1 ton per day, it will cost an extra $1,000. Company B, however, finds that it can meet the requirement for only $100 per day. If companies are allowed to trade the right to pollute, Company B can make a profit by offering to reduce its pollution by 2 tons per day. Since the cost of reducing one ton of pollution for B is only $100, it can reduce its pollution by 2 tons, thus meeting A’s requirement and its own, for only $200. Company A will pay company B anywhere from $201 to $999 to reduce pollution by the extra ton. This way, Company A achieves the least-cost solution, because it’s cheaper to pay company B than it is to pay to reduce emissions. Company B achieves the least-cost option and actually makes a profit by reducing its pollution by two tons. And the requirement is achieved. Pollution has been reduced at the least cost possible and the marginal social cost of pollution equals the marginal social benefit, thus ensuring that the optimal amount of pollution is produced.

Cap-and-trade is the best option for reducing pollution. Pollution exacts a cost on society but there is no way to capture that cost. With tradable pollution rights, the government is involved to the minimal amount possible (only to auction the permits and provide a basic measuring and monitoring system, for most of the measuring and monitoring will be achieved by the market itself –there is money to be made by reducing costs!).

With tradable pollution rights, economic liberty is maintained because companies can decide for themselves what is in their interest and the best way to go about it, rather than being a slave to some regulation. With tradable pollution rights we are assuring that the optimal amount of pollution is being produced, and not an ounce more, all at the least possible cost.

Cap-and-trade is indeed an economists’ solution to a tricky problem. It maintains the integrity of the free-market while avoiding the excess burden and impreciseness of a tax. Cap-and-trade is truly a winning recipe, if only people could see it for what it is.

The Dangers of Socialism

As far as I was ever concerned, an article of this type was no longer necessary. “The Dangers of Socialism?” Really? Is there anybody out there who doesn’t think socialism is dangerous? Perhaps in the 1970s or 1980s you would see an article like this, when the great ideological battle was still being waged. In the 1990s you probably definitely wouldn’t see an article like this because the dangers of socialism were still very real in many people’s minds, with the collapse being so recent.

So why an article now? I have become very disheartened by what I am reading in the newspapers and the blogosphere. It seems people have forgotten just what socialism actually is and, therefore, the dangers that come along with it. Does this view prevail because socialism has been so thoroughly defeated and it’s been 20 years since we’ve seen true socialism that people no longer see it as a real threat? Have people become so lax in our freedom that socialism actually looks like a viable alternative?

I have heard and read that socialism and democracy can exist side-by-side because socialism is an economic system, while democracy is a political system. These people say that the necessary pairing doesn’t have to be capitalism and democracy, but that we could have democracy paired with socialism, because then everybody is free, yet society is more equitable and just. I don’t buy it.

It is statements like these that illustrate just how dangerous socialism is – the danger is that people don’t perceive it’s dangerous. I’m reminded of the old quote, “The greatest trick the devil ever pulled was convincing the world he doesn’t exist.” Socialism is backwards from both an economic standpoint and a liberty standpoint. It doesn’t work economically and it doesn’t work politically. Or rather, it works much too well politically – for those in power.

Let’s start at the beginning and deconstruct socialism and its consequences. John Locke wrote that we have ultimate property in ourselves. That is, we own our own body and we have the right to protect it. Nobody can take away our property right to our own body, not other men, not society, and certainly not government. For, according to Locke, the only reason man forms government is to protect his body, his property. In the state of nature, man owns his body, and consequently, whatever he produces with his labor. For example, if he finds four apples on the ground, and he bothers to pick them up, he has mixed his labor with nature and the apples become his property. Nobody has a right to take away his apples. But man is unprotected. How can he stop another who is stronger than he from taking his apples? How can he guard against being murdered for his apples? He can’t by himself.

So, man leaves the state of nature and forms government. The government’s power comes from the people and the people give government the power to protect individuals’ property. Notice the direction of causation here. It is the people who give power to the government, not the other way around. Government has no rights of its own and it certainly cannot “grant” rights to its citizens. The right to private property, and to defend that property, is inherent - it is unalienable. It is neither granted by nor can be taken away by government.

Locke continues by saying that if anybody tries to take your property, he has declared war on you and you have the right to defend yourself and your property. Similarly, if the government tries to take your property, it has ceased being a legitimate government and the people no longer vest their power in it. If the government tries to seize your property, the people not only have right, but a duty to protect themselves and defend their property. Revolutions have been justified in such ways.

This is where we get into socialism. A socialist government has failed in two key areas. First, it is not a legitimate form of government because it fails in its most important duty – protecting private property. Second, it is exercising power that it does not have. As such, the people have no reason or obligation to follow. It quite simply lacks the authority to nationalize private property.

Putting aside the political argument for a moment, let’s look at socialism from an economic standpoint. Economically, socialism fails because it provides the wrong incentives. When the state owns the means of production, and when it sets mandates on what and how much to produce, it creates the incentive to not produce, but if you must, it creates the incentive to provide poor quality.

For example, pretend that you own a shoe factory. In capitalism, people come along and pay you for your shoes. If the quality is poor, nobody will want to buy them. If the price is too high, they will buy their shoes from the competitor down the street. Profit is directly related to quality, and as such, producers have the incentive to produce the best quality product possible, at the cheapest price possible, otherwise they won’t get any business at all. The customer is an asset. The more customers you have, the more money you make.

Contrast this with socialism. Again, pretend you have the same shoe factory. Only now, the state owns the factory and every other shoe factory. The state tells you that you must produce 1000 pairs of shoes and sell them for $10. The money from your sales doesn’t go to you, but to the state. For your efforts, the state will pay you $1,000. Now the incentive is to produce the shoes in the cheapest way possible. Quality doesn’t matter because the money you receive for producing is not tied to quality. The only thing that stops you from collecting your $1,000 is if you don’t produce 1,000 shoes. Thus the incentive is to use the cheapest materials and methods possible in order to maximize your profit. If you produce 1,000 shoes for $600, then you take home $400. If you spend $1,000 producing shoes, you take home nothing. Why would any person spend the extra time and effort to produce a quality shoe when it will actually cause them to lose money?

And what if 1,001 people need shoes? You were told to produce 1,000 pairs. Would you produce the next pair? No, because you wouldn’t get any extra money from it. It would actually cost you money to produce that extra shoe. In the case of socialism, the customer becomes a liability instead of an asset. The incentive is to produce to the fewest number possible in the cheapest manner possible. The result is shortages of very poor-quality products. Clearly a lose-lose situation.

Combine this with the almost comical fact that some factories produce too many shoes (there are less than 1,000 people who need them in the area). This means that in some areas there is a shortage of shoes and in other areas there is a surplus of shoes, with no mechanism for bringing the surplus to the shortage.

In capitalism, prices send signals. If there is a shortage, it means demand exceeds supply and price goes up. If the price goes up, it means money is to be made so people start producing more shoes. In an area of surplus, it means supply exceeds demand. To get rid of the excess, producers will drop the price in the hopes of selling them quickly. If demand still remains low, the producer will shut down business in that area and move to an area where he can sell his shoes for a higher price. Because of prices, the market is self correcting and those who need shoes get them.

In our example of socialism, one factory produces too many shoes and they just sit there on a shelf and collect dust. The price isn’t set by the market so there are no signals telling producers where shoes are needed most.

In capitalism, the incentives work with human nature. Capitalism uses humans’ natural self-interest to provide the best possible outcome. Socialism, on the other hand, tries to change human nature. It tries to ignore or change the fact that humans are self-interested. But remember, human nature always prevails. In both systems humans are simply following their nature and trying to earn the most money possible. In capitalism the incentives are to provide the best-quality, lowest-priced product. In socialism, the incentives are to provide the lowest-quality product without an ounce of extra energy. Socialism, from an economic standpoint, clearly fails.

Okay, so how does this tie in to socialism being dangerous? And what about that whole bit about socialism and democracy existing side-by-side?

To tie this all together, governments know that they cannot gain control if their power comes from the people. If the state owns the means of production, it owns the people. It creates the situation where people are completely dependent on government. The government can, at any time, shut down the factory, thus robbing you of your means of income - and survival. If the government controls the means of production, it controls what gets produced. Anything dangerous to the state – guns, knives, knowledge, hope – doesn’t get produced.

If your wage comes from the state, if your wage is not tied to your own performance, you have no incentive to do better. You have no incentive to seek an education or to become politically aware. Why would you waste your time and money in something that won’t provide any benefits? If the state tells you how many doctors there will be, how many trash men there will be, how many restaurant waiters there will be, how many bricklayers there will be, then what you are is your station in life. There is no reason to try to become something different. If the state sets the wage, why would anybody strive to become a doctor or a lawyer or a university professor? Why would anybody invest their time in something that is a lot of work if there is no extra reward? Again the incentive is created to do as little as possible, to find the easiest job and do the least work, because after all, the wage is the same regardless.

Socialism slowly saps people of their strength, of their hope, of their freewill. This is good for the government because a society that has no hope and no strength is easily manipulated. The society that is kept weak has no power of protest. The government ensures their continued power by keeping the population devoid of any political will. And, once socialism takes hold, successive generations are gradually indoctrinated to complete state control so that eventually the people are completely and totally dependent on the government. Even if they wanted to, even if they knew how, the people couldn’t possibly revolt and throw off their government because they would also be throwing off their very means of survival. Socialism is very good for the politicians, but very, very dangerous for the rest of us.

Are there governments out there in which it’s their explicit goal to oppress and control their population, for no other reason than to attain an ironclad grip on power? Unfortunately there are many situations like that, even in today’s world.

But perhaps more dangerous, and certainly more stealthy, is the gradual, almost unbeknownst, shift to socialism. For without doubt there are benevolent governments that are just trying to do the right thing. After all, these misguided but well-meaning politicians say, it’s the government’s responsibility to provide for the population. How can it be bad if the government ensures everybody has a job? How can it be bad if the government ensures everybody has healthcare? How can it be bad if the government ensures that everybody is able to buy a house? The government has a duty to provide these things! For we, as politicians (they may say to themselves) have a mandate! We were elected to provide people with increasing social welfare! It’s only just that everybody is equal. If only that pesky market stopped getting in the way. If only prices weren’t too high to keep essential services out of the hands of the population. If only greedy executives weren’t concerned with only their own well-being. If only…

Yes indeed the shift can be gradual, with everybody the whole time thinking they are doing the right thing. That is why socialism is dangerous. It is stealthy. It is aesthetically pleasing (if very shallow). It is in the interest of those in power. Once the interests of those in power become different from our interests, government has stopped being by the people and for the people. Democracy is the best political system in the world. It is consistent with liberty and economic principles. It most certainly is not consistent with socialism, however small the steps in that direction…