Archive for September, 2010

The Conscience of a Libertarian

September 30, 2010 3 comments

I’m back baby!  While I’ve been away the republicans released their “Pledge to America.”  So let’s talk about the republicans and politics and the transformation that needs to occur if we are going to avert the coming catastrophe (insurrection…?). 

Begin by thinking back to last year’s special election in New York’s 23rd congressional district.  If you don’t remember, here is what happened.  The leaders of the local Republican party got together in a private meeting and nominated a progressive (Scozzafava).  The actual Republican voters didn’t want a progressive and lined up behind a conservative candidate (Hoffman).  When it became clear that Scozzafava had no chance of winning, she dropped out and threw her support behind the Democrat (Owens) who eventually won in a close election. 

At the time I had a take on this election that I never heard anyone else articulate.  The outcome was generally considered a victory for Democrats and the Obama administration but I actually consider it a minor defeat (although not as bad as it almost was).  You see, recently I have come to look at politics through a different lens.  Rather than seeing Republicans and Democrats as sincere enemies I see them as a sort of modern-day Condottiere who, having noticed that they possess a monopoly on combat, have no need to actually engage in the act but merely to present the appearance thereof.  This avoids unnecessary bloodshed as well as giving the monopolist the ability to predetermine the outcome of all the battles.

With this view in mind, look at the above mentioned election more carefully.  The reason there was a special election in New York’s 23rd district is that Obama had appointed the previous senator John Hugh, a Republican, as Secretary of the Army.  The narrative coming out of the media was that he did this because it was a seat he thought the Democrats could pick up.  But what would have been an even better present for Obama to find under his tree in 2009 than one more democrat in congress?  A Republican who would actually vote for Healthcare.  As we have seen, the support of one Republican is Obama’s idea of “bipartisan support” which he would have loved to attach to that bill but was unable to. 

This is what I think the administration had in mind for New York’s 23rd district.  The reason that district was perfect was that it was a traditionally Republican district that had become fairly “moderate” in recent years and more importantly where the republican party candidate would be chosen by a handful of party insiders in a smoke-filled room.  I think Obama actually wanted Scazzafava and assumed the Republican voters in New York wouldn’t look at her carefully enough to realize that she was a typical progressive and would just rubber stamp her because she had an R by her name.  To their credit, the voters figured it out and stood up to it.  They ended up with a progressive anyway but at least it’s a wolf in wolf’s clothing.

Now look at what is happening in Republican primaries all over the country (for instance Florida and Alaska).  The pattern is becoming pretty pronounced I’d say.  Plus we have the case of Delaware where not only is Mike Castle considering doing the same thing but for a moment after he lost in the primary, the GOP threatened to withhold funding from his victor Christine O’Donnell. 

All of this begs the question: what does the Republican establishment fear more than losing ground to Democrats?  Republicans and Democrats trade power back and forth all the time but the people at the top never go anywhere and the special interests that they pander to always seem to do alright.  The thing that could really overturn their proverbial apple cart is an influx of outsiders who don’t have ambitions of careers in politics but instead have a set of values that they think should be reflected in government, people who aren’t beholden to party leadership for their positions and their future, in short, people who aren’t easily manipulated in the name of political compromise and self-preservation. 

So in the end I’ll take pretty much any outsider over any establishment candidate.  Sadly in my state I don’t really have this option, but I would encourage those who do to hang in there and not cave to the Carl Roves of the world who insist that it is all about beating the Democrats and that every principal may be sacrificed to this end.  But that being said, in the long run you can’t beat something with nothing.  We cannot sustain a political movement based purely on “outsideness” we must find a platform we can unite over.

Here is what the Republicans have proposed in an attempt to bring the right back together under their banner.  Most of this is stuff I am in favor of (they support the most damaging part of the healthcare bill….) but none of it will save the republic.  They are the same kind of promises that Republicans have been making for generations.  Most of them will never happen even if the Republicans take control of the legislature, though they may blame it on “Democrat obstructionism” just like the Dems. do now.  But even if they actually did get this stuff done, the political state of the country would continue to decay, it would just not do so quite as quickly as it does when Democrats are in power.

The structural changes which could actually make a difference and would be widely popular such as term limits or an audit of the Fed are conspicuously absent.  But what we really need to discover first, if we are going to turn this thing around is not these things, it is some kind of moral foundation.  When I say this I don’t mean a personal moral foundation, I mean a political moral foundation.  In other words, a set of principles that we can accept as the basis for a philosophy of government. 

What we have now is a situation where political battles take place over issues with no overarching moral frame of reference.  Interest groups fight with each other over whom the government should favor at the expense of others.  The right and left try to use it to impose their individual moralities on each other.  The poor try to use it to take from the rich and the rich try to use it to take from each other.  All of these battles take the form of right vs. left and we have learned to see all issues with only the right and left as reference points. 

Instead of evaluating a policy by asking who gains and who loses and which one do I like more, we need to start asking the question “Is this consistent with my moral view of government?”  For instance here are political statements which are not based on a moral foundation:

You should never raise taxes on anyone during a recession.

The rich in this country don’t pay their fair share.

Government employees shouldn’t have such lucrative pensions.

Teachers should make more money.

These are all statements about who the government should favor and by how much in a given situation.  They make no statement about the relationship between the government and the people.  On the other hand here is a political statement which is based on a moral foundation.

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their creator with certain unalienable rights and that among these are life, liberty, and the pursuit of happiness.”

Now consider this quote (paraphrase) which I have heard in a tea party commercial: “It’s time for a smaller, more caring government.”  There are two reasons why this will not do as a moral foundation.  First, advocating a “small” government is not a moral position.  How do you measure the size of government?  How small is small enough?  If it is “small” enough can it do whatever it wants so long as it doesn’t get too “big?”  These questions do not have satisfactory answers and therefore, “small government,” although the general sentiment behind it is something I certainly support, it is not enough to organize a movement around.

More importantly, the idea that government should be more “caring” is precisely the kind of moral nonsense that has led us to the point we find ourselves at now.  How can a government be “caring?”  Who should it care for?  Statements like this can be twisted to mean whatever anyone with any particular agenda wants them to mean.  What we really need is to stop treating government as something that should be “caring.” 

The idea that government should be caring is the ultimate collectivization of the altruist ethic and this makes it the most absurd form of altruism.  The idea that an individual should be caring implies that the individual should sacrifice their “self interest” for the sake of others.  But what does this mean for a government?  Can a government have a self interest?  The only thing that government can sacrifice for the benefit of someone is the interest of someone else.  This is exactly the type of moral confusion which we must avoid.  So I am putting forth the following moral platform. 

1.  Everyone has a right to their own life, liberty, and property and to the produce thereof and should be allowed to use them in whatever way they wish so long as it does not directly infringe on the same rights of others.

2.  The purpose of the government is to protect these rights.

3. The purpose of the law is to protect the rights of citizens from other citizens.  It should not be used to protect people from themselves or from roundabout effects of decisions made by others.  It should be as simple as is possible while accomplishing this purpose. 

4.  The law should be uniform and uniformly applied to all citizens.  This does not guarantee uniformity of outcomes or “opportunity.”

5.  Since taking from someone for the benefit of someone else violates the first person’s right to their own property, the government should never under any circumstances engage in the redistribution of property.  Nor should it be necessary in any circumstance for the government to weigh benefits to any person against costs to any other person.

6. The purpose of the military is to protect citizens from outside forces.

7.  This should be accomplished by the smallest and cheapest military possible.

8.  The natural check on the government is the threat of armed revolution.  This is one reason that the military should be as small as is necessary to ensure security from foreign invaders and it also means that the government must make no attempt at diminishing the collective military power of the people.

9.  The government has no business monitoring the behavior of law-abiding citizens.

10.  The above principles must not be compromised in any way for any reason, including convenience, economic efficiency, or physical danger.  The potential cost of lost liberty will always be far greater than the imagined benefits. 

This platform contains everything necessary for evaluating any political policy.  Notice that the moral foundation cannot be compromised.  If, for instance, we were to say “the government shouldn’t take from one citizen to give to another except in cases of extreme need,” this would be a worthless code because “extreme need” could mean anything. The original intent will eventually be eroded by continual and progressive compromise.  By building compromise into the foundation, you lay the groundwork for its eventual destruction.

However, there is another kind of compromise that is required here.  If we were ever to adopt a truly libertarian government it would require people on the left and right to both give up certain things that they would like the government to do.  People on the left would have to give up the redistribution of wealth, minimum wages, “safety nets,” gun bans, and government manipulation of markets.  The right would have to give up laws outlawing drugs and other personal behavior they consider immoral, government spying and other such “anti-terror” programs, subsidies to businesses (including farms), and other government manipulations of markets.

Personally I think we are coming to a point where most of the right, most of the center and much of the left can be brought around to this view.  There is certainly an element on the left which is fundamentally opposed to this moral platform.  They subscribe to a different platform, which holds that individuals are not responsible for anything, only collective outcomes matter and the government should have a right to do whatever is necessary to accomplish certain collective outcomes.  But these people make up a small minority in America (unfortunately they are largely in power right now). 

 The problem we have is that the majority have no moral political foundation whatsoever so they are constantly making what they consider compromises which lead to a system which confounds any attempt at moral comprehension.  As a nation we must realize that we cannot continue on without such a foundation and then we can have a debate about which one we want. 

The other side is doing everything possible to avoid this.  As an example of this notice that the Obama administration refuses to say whether the president actually is or is not a socialist/Marxist despite the constant stream of evidence dredged up by Glenn Beck to that effect.  This is because he has convinced the people on the left who subscribe to that moral foundation that he subscribes to it too but at the same time he has convinced the rest of us that there is no such thing as a moral political foundation.  This is why whenever he talks about it he just acts as though the very question is absurd and questions the intelligence of anyone who would consider it.  I suspect it is because they are aware of the fact on which our hope for salvation rests.  That if people actually realized that they need a moral foundation and began a national debate over what it should be, their side would not win.

Update: Right after I wrote this O’Reilly came on tv with these talking points.  By the way, the contrast between an unalienable right as I (and I believe the founders) conceive of it and the left’s idea of a right is illustrated nicely by the line “when workers were organizing for the right to organize…” (lol)

Upadate again: There’s nothing like a spelling error in the title, hope nobody noticed….(=


Support for Austrian Business Cycle Theory

September 16, 2010 Leave a comment

For those who aren’t familiar with ABCT, it can be most briefly explained with the parable of a home builder.  A man is given a stack of bricks of a certain size and decides to build a house out of them.  He designs the house based on the number of bricks he has and begins to build.  When he is half way done, he realizes that underneath the stack of bricks is a large mound of dirt which made the stack look larger than it really was.  He doesn’t have enough bricks to finish the house that he had designed and was half way done building.  He must build a smaller house but this means he has to tear down everything he had built and start over.  In this way the misconception about how many bricks he had to begin with is very destructive.

In a real economy, the bricks represent the real capital/savings available for investment.  The signal which tells investors how much capital is available is the interest rate.  If it were determined in the market, this would work fine but when the central bank sets the interest rate “too low” it signals that there is more capital available than there really is.  This causes investors to engage in more and longer term investment projects than they would if they were faced with a higher interest rate.  Eventually they realize that the savings necessary to support their investment are not available and the economy must restructure to adjust to the real environment in which it finds itself.  This adjustment takes the form of a recession.

Here is a passage from Wikipedia describing the process.

Though disputed, Austrian scholars assert that the boom then, is actually a period of wasteful malinvestment, a “false boom” where the particular kinds of investments undertaken during the period of fiat money expansion are revealed to lead nowhere but to insolvency and unsustainability. It is the time when errors are made, when speculative borrowing has driven up prices for assets and capital to unsustainable levels, due to low interest rates “artificially” increasing the money supply and triggering an unsustainable injection of fiat money “funds” available for investment into the system, thereby tampering with the complex pricing mechanism of the free market. “Real” savings would have required higher interest rates to encourage depositors to save their money in term deposits to invest in longer term projects under a stable money supply. According to von Mises’s work, the artificial stimulus caused by bank-created credit causes a generalized speculative investment bubble, not justified by the long-term structure of the market.

Von Mises further suggests that a “crisis” (or “credit crunch”) arrives when the consumers come to reestablish their desired allocation of saving and consumption at prevailing interest rates. The “recession” or “depression” is actually the process by which the economy adjusts to the wastes and errors of the monetary boom, and reestablishes efficient service of sustainable consumer desires.

Now compare that passage to the following excerpts from todays WSJ.

Some 1.5 million unfinished, unsold or unwanted residential units stand scattered across the country, products of a still-deflating housing bubble that threatens to undermine Spain’s broader economy for years to come. It is the hangover after an epic fiesta, a period Spaniards now refer to as “cuando pensábamos que éramos ricos”—”when we thought we were rich.”Once hailed as early proof of the success of the euro, Europe’s single currency, Spain’s low interest rates from the mid-1990s and its proximity to richer neighbors ushered in a decade-long period of prosperity.

…The decade through 2007 was a heady one for Spain. Flush with foreign investment and cheap credit that came with the arrival of the euro, it saw ambitious projects sprout everywhere. This was in stark contrast to the conservative approach to development that long held sway here.

…Problems started as early as 2006, when developers informed buyers that builders wouldn’t meet the initial deadline for completion, mostly because the construction boom had led to a shortage of labor and materials.

… Nowadays, scenic hillsides and beachfront vistas sit occupied by empty scaffolding, unfinished cinder-block frames and garbage heaps from work suspended months ago.

Anecdotal evidence?  Yes.  But striking is it not?  Now, lest I be labelled an Austrian economist, let me say that I think there are some shortcomings of ABCT and some questions left to be answered (as well as a bunch of long-standing methodological disputes that I won’t get into) but there is definitely some value in there.  It is amazing to me that mainstream economics can write this off entirely in favor of other theories with much more egregious philosophical flaws and a poor record of predicting economic fluctuations. 

Whether or not malinvestment is enough to explain a major recession is certainly open to debate but I can’t see how a reasonable person can look at the world and believe that it doesn’t exist or that it isn’t caused by low interest rates or that its effects are insignificant.  Sadly, the biggest problem with this theory seems to be the fact that its only policy implication is that we should rely on free markets rather than a semi-planned economy controlled by an interventionist central bank.  A conclusion which most policy makers and many economists seem determined to avoid if they can find any way possible.

Your Civil Liberties and The Maculate Reception

September 15, 2010 Leave a comment

It’s late in the fourth quarter.  Your team is down by five but they’re driving down the field and in opponent’s territory.  Then with 31 seconds left this happens.  You lose. 

This play has set the NFL on fire.  Everyone is up in arms about this rule demanding that it be changed.  The rule says (more or less) that when the receiver goes to the ground in the act of making the catch he has to maintain control all the way to the ground without dropping it.  That didn’t happen here.  Is this a bad rule?  I suppose there is room to argue here but one thing that I’m confident about is that someone made this rule after careful consideration of the alternatives.  The people who are upset about it now are probably not going through that process.  They are angry because something that looked like a catch and felt like a catch wasn’t actually a catch.  (If you want to see how mad some people are about this try this link but be on alert for explicit language. What do you think the chances are that a guy who cares that much about a football game is really going to quit watching cold turkey?  Gotta love selection bias).

But who is really at fault here?  Is it the referee for enforcing the rule?  Or the NFL for making the rule that resulted in this unfortunate result?  Nope, it’s Calvin Johnson.  He should have known the rule and he should have held onto the ball.  It’s that simple.  And he’s a great player, so guess what he’s going to do.  He’s going to hold onto the ball next time!  You see the rule of law is a very simple process really.  The law is made, people are then responsible for knowing and following it.  Sometimes they don’t.  Sometimes things happen that you wish didn’t happen.  But there it is naturally self-correcting.  You don’t need a new law every time something goes wrong?  Sometimes you just need to learn the laws you have. 

Now I could talk about financial reform or something like that here.  There’s actually a million laws (probably literally) that I could bring up as examples of us overreacting and making a bunch of laws in response to something bad that happened in the past that would correct itself if we left it alone or enforced the laws we already had.  And I have a big one coming up so females and soccer fans should keep reading, it’s not just a football post.  First though, I want to dig a little deeper into the sports analogy.

I played football for a long time and then took up rugby not too long ago.  When I was first learning the rules of rugby, it was a strange process because I kept asking people what was legal and what wasn’t and they kept giving me weird answers like “well technically this is illegal but you can usually do it in this situation and this situation but sometimes if you do it like this it might be a penalty.”  You see, in rugby the job of the referee is to keep the game moving along and make it somewhat fair.  There is a set of rules but they pretty much all carry the caveat that the referee can choose to enforce them or not at his discretion.  In certain situations there is an outcome that the referee expects to happen and as long as that happens, he doesn’t intervene.  When something else happens, he calls a foul and restores the expected outcome (we had a referee come and explain this to us in basically these terms).  Because of this, the rules are difficult to explain (and learn).  You have to develop a feel for what you can do and when.

This is, I think, a large part of the distinctive American character of Football.  The job of the referees is nothing other than enforcing the rules.  They’re not trying to make the best team win, or make it a close game, or keep it moving or anything like that.  Just learn these rules and enforce them the best you can based on what you see.  This is the essence of a rule of law society, as illustrated by the well-known parable of Justice Holmes.

So if Calvin Johnson following the rules in the future is not enough “justice” for you, what exactly do you demand that the NFL do?  Well there are basically two ways they can go.  One way is to make the rules more specific so that what happened on Sunday is a catch but other things that we don’t want to be catches still are not.  For instance: “if the player goes to the ground he must maintain control without the ball hitting the ground unless he has control for at least 1.5 seconds before going to the ground and then the act of the ball contacting the ground while secured knocks it out.”  This would require the referee to measure 1.5 seconds but that’s an objective standard which does not rely on any abstract concept like “justice” for its execution.

The other way they could go is to give the referees more discretion to give credit for a catch when it feels like a catch but not when it doesn’t.  An extreme example of this would be to change the rule to “if it feels like a catch, it’s a catch.”  This is basically the standard in rugby.  They certainly won’t do that in the NFL.  What they probably will do, is make the rule less precise by adding language like  “clearly demonstrate control” (when they make something subjective they tend to appease their conscience by adding words like “clearly”) or “football move.”  They won’t come out and declare that the rule of law failed and they’re replacing it with an all-powerful referee who enforces whatever he considers to be justice, they will just change the rule of law so that it grants such a power to some extent to such a referee.

So, if they were to do this, would it cause fewer controversies like this one or is it more likely that the newfound discretion bestowed upon the referees would actually have the opposite effect?  The answer is obvious and requires no further explanation.

Now consider cases like this.  This guy walks like a terrorist, talks like a terrorist, he probably is a terrorist and everybody would prefer for him to croak tomorrow.   But there is a reason that we have a constitution that prohibits the government from assassinating us at their discretion.  You establish the rule of law because the members of a society prefer to give up the right to pillage their neighbors in exchange for their neighbors giving up that same right.  In order to establish this, the society must create a government that has the ability to overpower all individuals and small groups.  This government is then a constant threat to dissolve the rule of law and seize complete control.  To prevent this, a strict set of rules must be created and imposed upon the government by the people. 

One of the key components of this set of rules is a prohibition on the killing or imprisonment of citizens without a trial by their peers.  In other words, the government must not be given discretion to dispose of citizens at will.  But now they are doing that!  The people who came up with these rules put a lot of thought into them.  There are reasons for them.  Once we let the government have this discretion where does that discretion end?  Would you want Nixon to have it?  What about Bush for that matter?  Who decides what makes someone a terrorist?  

 The rule of law is a complex and fragile mechanism.  Situations will always arrive in whch the rule of law seems like an encumberance but if we try to compromise it to kill a terrorist, we risk the corruption of the very concept which allows us to be free.  Terrorists can cause a lot of destruction but there is nothing they could bomb which would cause the destruction of the nation.  The only people who can bring down America are Americans by forgetting what it is they are defending.  This is more important than tax cuts and budget deficits.  We need to be outraged by this.

The Unions Calling the Chinese Black

September 10, 2010 Leave a comment

I almost choked from laughing so hard when I read this tease in today’s paper.

The United Steelworkers filed a trade complaint in the U.S. charging that China unfairly subsidizes its clean-energy technology sector.

Just incase you don’t get the joke here are some tidbits from the Obama “New Energy For America Plan.”

Invest In A Clean Energy Economy and Help Create 5 Million New Green Jobs: Barak Obama and Joe Biden will strategically invest $150 billion over 10 years to accelerate the commercialization of plug‐in hybrids, promote development of commercial scale renewable energy, encourage energy efficiency, invest in low emissions coal plants, advance the next generation of biofuels and fuel infrastructure, and begin transition to a new digital electricity grid. The plan will also invest in America’s highly‐skilled manufacturing workforce and manufacturing centers to ensure that American workers have the skills and tools they need to pioneer the green technologies that will be in high demand throughout the world. All together these investments will help the private sector create 5 million new green jobs, good jobs that cannot be outsourced.

Convert our Manufacturing Centers into Clean Technology Leaders: America boasts the highest‐skilled manufacturing workforce in the world and advanced manufacturing facilities that have powered economic growth in America for decades. Barack Obama and Joe Biden believe that America companies and workers should build the high‐demand technologies of the future, and he will help nurture America’ success in clean technology manufacturing by establishing a federal investment program to help manufacturing centers modernize and help Americans learn new skills to produce green products. This federal grant program will allocate money to the states to identify and support local manufacturers with the most compelling plans for modernizing existing or closed manufacturing facilities to produce new advanced clean technologies. This investment will help provide the critical up‐front capital needed by small and mid‐size manufacturers to produce these innovative new technologies. Along with an increased federal investment in the research, development and deployment of advanced technologies, this $1 billion per year investment will help spur sustainable economic growth in communities across the country.


And incase you don’t speak Washingtonese, this is just a long-winded way of saying “we will funnel tax dollars into the pockets of our union buddies in exchange for producing things that there is not a sufficient market for.”  And remember this speech?    But let’s curse the Chinese and their evil government subsidies.

Health Insurers Plan Hikes

September 8, 2010 Leave a comment

That was today’s WSJ headline.  So I have a few points.  First, with regard to my earlier comments about the government making it excessively difficult to be productive without working for a large company or the government, notice this quote.

The rate increases largely apply to policies for individuals and small businesses and don’t include people covered by a big employer or Medicare.

And second, recall that they blamed all the supposed problems with healthcare in this country on the free market when you read things like this.

Aetna Inc., some BlueCross BlueShield plans and other smaller carriers have asked for premium increases of between 1% and 9% to pay for extra benefits required under the law, according to filings with state regulators. (emphasis added)

… the White House contacted company officials and accused them of inaccurately justifying the increase.

About half of all states have the power to deny rate increases. Ms. DeParle pointed out that the law awards states $250 million to bolster their scrutiny of insurance-rate proposals, saying that will eventually curb premiums for people.

Some regulators say not all insurers have adequately justified their increases. “A lot of it is guesswork for companies,” said Tom Abel, supervisor at the Colorado Division of Insurance. “I was anticipating the carriers to be more uniform.”

This is nothing even remotely resembling a competitive industry.  It is a government-run industry and it has been for decades.  If you want to know how free and unregulated the health insurance market was before this bill here is a paper from 2006.

Finally, these people who are doing this, if they are not just flat-out lying to us, seem to have no idea how a market works.  Listen to this.

“I would have real deep concerns that the kinds of rate increases that you’re quoting… are justified,” said Nancy-Ann DeParle, the White House’s top health official. She said that for insurers, raising rates was “already their modus operandi before the bill” passed. “We believe consumers will see through this,” she said.

They think that they can force companies to give away more services and it won’t cost anything?  Really?  I can’t tell whether they think we’re idiots or they actually are idiots.  This seems to stem from a belief that all big companies make excess evil capitalist profits and therefore, they can always be squeezed by the strong arm of government to provide something for nothing.  This is simply not the case though, even with all of their anti-competitive regulation in the healthcare industry the rate of profit is below average. They think that companies are always trying to raise their prices arbitrarily and the only thing keeping them from doing so is government.  The idea of competition is apparently completely foreign to these people.  Furthermore consider the simple-minded approach they take to letting you keep your plan if you like it.

While the increases apply mostly to the new policies insurers write after Oct. 1, consumers could be subject to the higher rates if they modify their existing plans and cause them to lose grandfathered status.

Did this guarantee come from a careful analysis of the effects of the bill on the insurance market?  Of course not, they just wrote into the bill that insurance companies couldn’t change your plan.  They think the answer to everything is to make a law.  This is crazy.  There is always a way around these kinds of laws.  In a few years there will hardly be anyone left with “grandfather” status and the ones who do have it will probably be sacrificing other things that they would have gotten otherwise but had to give up to keep that status.  Any competent economist could have told you that this healthcare business made no sense and could only be a disaster.  Oh by the way, as a competent economist I can tell what the next shoe to drop will have to be.  Here’s a hint.

Massachusetts, which enacted universal insurance coverage several years ago, also has seen steadily rising insurance premiums since then. Proponents of that plan attribute the hikes there to an overall increase in medical costs, while insurers cite it as a cautionary example of what can happen when new mandates to improve benefits aren’t coupled with a strong enough provision to force healthy people to buy coverage. (emphasis added)

Scarcity in a Macro Model

September 8, 2010 Leave a comment

I made a bit of a breakthrough over the weekend that I eventually want to talk about.  First, though, I want to back up and discuss the philosophical foundations of macro theory to provide some context for what I will be discussing.

My main beef with all forms of Keynesian economics is that it assumes there is no such thing as scarcity.  Since economics is the study of the production and allocation of scarce goods, I consider this a highly undesirable characteristic of an economic model.  I have quoted Keynes on this subject in the past and I won’t rehash that here.  Instead I will highlight what I mean with a simple example using the IS/LM model.  In this model, if the government increases taxes and increases spending by the same amount, this causes an increase in output.  This is because output is assumed to be whatever demand happens to be and investment demand is assumed to be independent of savings.  This causes a spending multiplier

The reason for this is that saving is substituting for scarcity in this model.  The only thing holding down output and consumption is people’s stubborn tendency to save part of their income.  If everyone would just spend it all, output would be infinite and we would live in a socialist scarcity-free utopia.  When the government takes part of your income and spends it, that keeps you from saving some of it and this causes an increase in output. 

The obvious question that rarely gets asked is: where does that increased output come from?  The model doesn’t really answer this it just assumes that it will appear if it is demanded.  Frankly this is complete nonsense.  It may be true that increasing government spending increases output but if we get this result from a model with no concept of scarcity we haven’t really explained anything.  What’s more, we don’t know if this is desirable or not since we cannot have any concept of efficiency in a model with no scarcity.  More is always better and you always get more by increasing government spending or lowering interest rates. 

Similarly, this model assumes that if you lower interest rates, this increases investment demand.  Since investment demand is assumed to be independent of savings (and therefore independent of consumption), where does this increased investment come from?  The answer of course is that it just appears.  It must appear because we have assumed that it can’t come from anywhere except an increase in output.  For those who believe that some consumption must be foregone in order to invest, this model will seem very unintuitive. 

Now to go a bit farther, one might argue that adding aggregate supply introduces scarcity.  However, this is not the case because it still does not model any tradeoff between one good and another.  Because of this Keynesians believe in the concept of a natural level of output which prevents increases in government spending from having a long-term effect on output but anything that increases the natural level of output can only be considered beneficial.  What’s more, there is no reason within the model to interpret a temporary increase in output as undesirable and there is nothing preventing a series of progressive increases in government spending and/or the money supply (decreases in interest rates) from constantly distorting output above its natural level (sound familiar?).

In order to construct a theory with scarcity we must be very careful to focus on real goods or real wealth.  Our model must obey the following simple rule.  At any given point in time, there is a fixed quantity of real goods in existence.  This means that we have to consider carefully what we mean by real goods.  This must include all valuable resources in the economy.  For instance, it includes gold in a vault but not money in a checking account.  It includes a stand of trees that is sitting idle in the wilderness.  It includes minerals in the ground that are not yet dug up (although it may be appropriate to exclude these if they are unknown), and perhaps most importantly, it includes a quantity of that one important asset for which every person has an endowment just as rigidly fixed by nature — time.

When we think of wealth in this way, the idea of output takes on a different character.  The question is no longer about how much we have but how effectively we are maximizing the value of what we have.  The question is not how much will be created.  Instead it is into what form will the endowment we have be transformed.  To understand this consider the case of labor.  A typical view is to look at an increase in employment and a corresponding increase in “output” and say that we got more stuff so we are better off.  This is not precisely correct.  We did in fact get more stuff but we gave up some other goods to get it.  We transformed some amount of labor which could have been used for leisure or some other production, along with some other inputs most likely, into another form.  It is quite likely that this resulting form will be of higher value than the inputs, in which case it may be a Pareto improvement but when we lose track of the inputs we lose the ability to even consider this question.  The problem with unemployment from our standpoint is not that it causes us to have less but that it represents a situation where we are for some reason unable to transform the wealth we have into its most valuable form. 

In this context we can still talk about production and output but if we are to construct our model on markets that are in equilibrium on a micro level, then we will have to make the amount of output at any given time dependent on decisions made at previous points in time.  This is because any wealth which is capable of changing form instantly will naturally change to its most valuable form at that point in time.  Therefore, we may (and typically will) take these decisions for granted.  The important issue for our purposes will be how we arrived at that level of wealth, or to state it another way, how will we make decisions that affect the value of the wealth (output) in the future. 

What this boils down to is a distinction between consumption and investment, that is between using the wealth in existence at a given point of time to satisfy consumption at that point in time or to produce wealth at some point in the future.  For our purposes, we will assume that if wealth is consumed, it will be consumed in its most valuable form and typically that if it is invested it will be invested in its most valuable form.  This latter assumption marks the point of departure from Austrian business cycle theory, although it may at times be worth considering the possibility of “malinvestment.”  This would not be a significant change in approach so long as agents think that the chosen investment forms are of highest value at the time they are made.  Naturally, since there is some amount of time between the decision and the realization of the results, this belief could end up being incorrect, and if this happened in a systematic way it could constitute a valid theory of the business cycle.  Once we develop a model of a frictionless economy where markets clear, we can consider the effects of various market imperfections such as sticky prices or price controls.

With this approach in mind, we can consider the question which has been confounding me for some time until now.   If the decision between consumption and investment depends on the real interest rate, what happens if the Fed sets the nominal interest rate below the natural rate and manages inflation expectations in such a way that people actually perceive the real interest rate to be lower than the market clearing  rate?  This question is difficult because this describes a shortage of real investment.  In other words, lower interest rates should cause an increase in the quantity  of investment demanded but it should also cause an increase in the quantity of consumption demanded (decrease in quantity of savings supplied).  If more investment is demanded than supplied, how can this market clear without inflation expectations or interest rates changing?  Or in other words, when both consumers and investors are pulling harder on a fixed quantity of wealth, who wins?  Stay tuned for the answer.

Update: It’s worth noting that this approach is essentially that embodied in neoclassical growth theory so I don’t mean to make it sound that profound, just to contrast it with the approach taken by Keynesians.

Are We There Yet?

September 7, 2010 Leave a comment

This interview is from earlier this year but I just saw it on one of those annoying clip shows that happen on holiday weekends.  Recall numbers 9 and 10 when you hear

You gotta go in there my friend… here’s how we’re gonna do healthcare.  You don’t like it?  You get in line, brother. 

And remember number 16 when you hear:

It allows too much room for different narratives to take hold.