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Posts Tagged ‘rule of law’

Follow up on the Fed

November 3, 2010 1 comment

Sometimes I write something on here and then after a day or so of reflection I can’t help but feel like the important point may not have come across clearly.  This is the case with regard to the last post.  The regular reader may be able to put it into its larger context but this is so important that I want to make sure by stating it very explicitly.

As I have said before, progressives are people who don’t believe in a natural god but try to create one in the form of government.  They don’t believe in immutable natural laws so they try to create artificial laws to govern reality.  They don’t believe in unalienable rights so they try to create artificial rights that come from government.   They prefer this form of god because they think they can control it rather than the other way around.  They don’t like the fact that under natural law healthcare isn’t free so they think they can petition the congress with prayer until they pass a law declaring it free. 

In order to do this, they must try to cut the ties between the natural law and the object which they wish to control.  With healthcare they spent decades passing laws which destroyed all of the market forces regulating the insurance industry prior to the recent healthcare bill.  The Fed is how they have cut the ties between the entire macroeconomy and the natural market forces which govern a free economy.

The government doesn’t control how much gold is in the ground.  It is determined by nature.  This means that the value of it is determined by nature which means prices and interest rates and inflation are determined by nature in a free economy with real money.  If you petition nature for more inflation you are wasting your time because nature follows specific laws and none of them allow the spontaneous creation of more money.  This inherent scarcity of money is essential to its function. 

This is a problem for progressives because in the end they don’t want to live in a world governed by strict laws.  They want to control the laws.  They want to control who gets healthcare and what they get.  They want to control what you eat/drink/smoke/etc.  And they want to control the interest rate, inflation, prices, and the overall economy.  To do this they have to cut the tie between money and nature.  This is done by passing a law abolishing the use of gold as money and forcing everyone to accept their fiat money which can be “decreed” into existence out of thin air and then controlled by a secretive group of elite bankers. 

But this is the destruction of the rule of law.  Making decisions is no longer a matter of understanding the laws of nature it is a matter of guessing how the elites will exercise their arbitrary power.  It is the rule of men.   This is why they are always telling us that economic outcomes are at the mercy of “animal spirits.”  Here is Keynes.

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

And here is Krugman from yesterday.

What am I talking about? Something like a commitment to achieve 5 percent annual inflation over the next 5 years — or, perhaps better, to hit a price level 28 percent higher at the end of 2015 than the level today. (Compounding) Crucially, this target would have to be non-contingent — not something you’ll call off if the economy recovers. Why? Because the point is to move expectations, and that means locking in the price rise whatever happens.

It’s also crucial to understand that a half-hearted version of this policy won’t work. If you say, well, 5 percent sounds like a lot, maybe let’s just shoot for 2.5, you wouldn’t reduce real rates enough to get to full employment even if people believed you — and because you wouldn’t hit full employment, you wouldn’t manage to deliver the inflation, so people won’t believe you. Similarly, targeting nominal GDP growth at some normal rate won’t work — you have to get people to believe in a period of way above normal price and GDP growth, or the whole thing falls flat.

When the factors driving the economy are determined by nature then decisions can be based on “mathematical expectations.”  There would actually be a right and wrong thing to do.  Some people would come to the wrong conclusion about it but the right answer would be there and it would be a solid thing.  Every incentive would exist to predict reality accurately in order to make the right decision.  Those who predicted reality poorly would be punished by the market.

On the other hand, when all economic outcomes depend on the arbitrary decisions of a few people in Washington or the Fed then you are no longer trying to predict a solid consequence of natural events governed by natural law you are trying to predict the amorphous consequences of these arbitrary decisions and perhaps most importantly, these decisions depend on how you act in anticipation of them.  This is the rule of men.  When men rule they must depend on “spontaneous optimism” to drive economic activity. 

Of course they tell you that if you let them control healthcare/the economy/etc. they will make better laws than nature does and you will be better off.  But they can’t really change the laws of nature.  They can only make laws which are either in conflict or harmony with those laws.  When they are in harmony with them, then we are all responsible for our own destiny subject to natural law.  When they are in conflict we are at the mercy of the men who control those artificial laws.

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

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.

Deflation, the Debt and the Rule of Law

November 1, 2010 1 comment

In a real free market economic forecasting would be a matter of predicting natural events and the aggregated effects of individual actions.  These predictions would manifest themselves in the form of prices and those prices would direct scarce resources into their most valuable uses.  To predict the behavior of aggregate price levels you would have only to take into account expectations about the supply of money, by which I mean the amount of gold/silver etc. found in the ground, the amount of output in the economy and factors affecting velocity.  These predictions may be wrong at times and this may cause fluctuations in prices which may have other effects in the short run on the economy.  The important thing to notice though, is that none of these things would be controlled directly by the government or any other small group of individuals. 

By contrast, in our system the government and the Federal Reserve are constantly manipulating the most important signals that regulate an economy.  This makes the process of economic forecasting mainly an attempt at guessing what these people will do.   And to make matters worse, the rules governing their behavior are not even clear.

Case in point: the Federal Reserve and the Federal government are supposed to be separate entities so that the government does not have the power to print money and spend it at will which would constitute a disguised tax on people who hold dollars.  This would provide a great temptation for the government to simply spend as much as it wanted and never have to worry about where the money came from.  This is certainly not a very desirable situation.  But let’s look at what we have instead. 

We have a Federal Reserve system that prints money and they tell us that their job is to manage the rates of inflation and unemployment.  More specifically, they tell us that their goal is to maintain about 2% inflation per year.  Ok, so that should make economic forecasting fairly simple, after all they’re telling us exactly what they are trying to do so as long as we believe that they actually have the power to accomplish that goal there is no problem.  Except for the fact that they actually don’t have that power.  The way they create money typically is not just by printing it and spending it on something like the government would if they could print money.  Instead they print it and loan it out at interest.  This means that if nobody is willing to borrow it, they can’t inflate the money supply any more.  I’ve already discussed how this system breaks down so I won’t go over it all again.  To summarize, eventually the appetite for debt comes up too short to sustain the inflation rate at the promised level.  This causes a drastic contraction.  The only way to avoid it is to find a way to inject money into the economy to prop up prices.  So lets consider two ways of doing this.

One way is for the government to just print money and spend it.  They could print as much as they wanted and spend it and they would never accumulate any debt.  This would cause government to expand and in the long run likely make the currency unstable so I’m not advocating for this system but it at least would be capable of generating the desired inflation without much trouble.

Another system is one where in order to “inject liquidity” the government has to borrow.  Now the government has a potential problem when they borrow too much.  The problem is that people might get nervous and stop lending to them.  If this happened…. well nobody really knows what would happen, sovereign default, war, currency collapse?  Nobody knows.  The rules aren’t clear.  But wait a minute, there might be hope yet.  As luck would have it, there is a source of unlimited lending just when the government needs it.  You see, it turns out that the Fed is also in need of an endless source of borrowing.  So the government can just issue more and more debt and the Fed can buy it and everyone will be happy.  In fact, this will have the exact same effect as if the government just printed money itself.  Except for one thing–the debt. 

Instead of just printing the necessary dollars and “injecting” them into the economy and moving on, we are left with a massive collective debt to the Fed.  What does this mean?  Well… I don’t think anybody knows.  What if the Fed just keeps lending more and more to the government and the debt just gets bigger and bigger forever?  This might actually be possible but it would be exactly as bad as if we had no Fed and just let the government print as much as they wanted.  In other words we would likely get a lot of inflation.

What if the Fed decides to stop lending?  Do they have enough autonomy to do this?  Would the government change the rules to keep it from happening?  I don’t know.  What if the government actually pays off the debt?  Haha just kidding that one is impossible, if they did that it would cause a massive monetary contraction that would devastate the economy.  Either one of these would have the opposite effect, namely serious deflation. 

So how do you make long-term economic predictions?  It’s just a matter of guessing what a small number of elites in a smoke-filled room will do.  What rules will they make up when everything starts to fall apart?  Nobody knows.  If you guess inflation they can screw you.  If you guess deflation, they can still screw you.  But aren’t you glad that we’re not stuck “at the mercy of the free market?”

“Equal Protection”

October 7, 2010 Leave a comment

So you may have heard that the Obama administration is now giving waivers releasing certain companies from the requirements of the healthcare bill because it is forcing them to drop their current healthcare policies and dump their employees into the public “exchange.”  This is exactly the kind of thing I said would happen before the bill was passed but it seems to have caught them by surprise.  Maybe the reason is that they applied the same method of induction when considering the bill as Robert Gibbs today who was asked what they would do when every business ended up asking for an exemption and replied that they don’t think that will happen because it hasn’t happened so far…..

The other explanation of course, is that they did know that this would happen and they want it to because it allows them to micromanage the economy.  They can just pass a law which would put everyone out of business and then give waivers to the people they like.  That sounds fair right?  But don’t worry because democrats hate big corporations like McDonalds I’m sure they will use their power to hurt them and help the family owned restaurant down the street.

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.

In the News

My motivation to post has been a little sapped lately because the decline of the rule of law seems so obvious these days that I hardly feel it is necessary for me to point it out.  But if you haven’t noticed, here are a few things you should be outraged by.

1.  If you haven’t heard about the New Black Panthers, you’re probably watching MSNBC… If that’s the case, you should read this story and be outraged that the justice department (!) is apparently pursuing a different standard of justice for people of one color than another and much of the media doesn’t think this is an interesting story. 

2.  On the healthcare front we have a new development. Your waistline is now a public concern.  (If you haven’t read them already see “Insurance Vs. Welfare” and “First They Came for the Salt.”).  Here is some more professional commentary along the same lines.  Here is one of the smartest guys on tv on the issue.  Notice that at the end, the one guy figures it out and the chick making the big brother argument is speechless, haha.  Let me point out a few specifics about what’s going on here.  First, this was in the stimulus bill.  What does this have to do with stimulus and is it a coincidence that this was passed before healthcare reform?  We wouldn’t want any hate mongers frightening people by spreading false information about the healthcare bill giving the government power to monitor your health… Second, notice how they get these things done.  In the thousands of pages of supposed “stimulus” there is a vague provision giving some poorly defined powers to some poorly defined government regulator.

The National Coordinator shall, in consultation with other appropriate Federal agencies (including the National Institute of Standards and Technology), update the Federal Health IT Strategic Plan (developed as of June 3, 2008) to include specific objectives, milestones, and metrics with respect to the following: (i) The electronic exchange and use of health information and the enterprise integration of such information.‘(ii) The utilization of an electronic health record for each person in the United States by 2014.

Nobody knows what this means because it doesn’t say what it means.  Then later an unknown regulator decides what it means and tells us (we have to pass the bill before we find out what’s in it).  What it really means is “an unspecified regulator can do whatever they want.”  Third, notice that the way they are making providers comply is not by actually making a law forcing them to (that would be unconstitutional silly…) but by withholding all their medicare and Medicaid subsidies if they don’t (recall this post ).  Finally notice whom Obama appointed to run medicare and Medicaid in a recess appointment in order to avoid a public debate about his positions.  I wonder if that’s because they didn’t want a repeat of the episode where Elena Kagan couldn’t answer the question “does the commerce clause give the government the power to force me to eat a certain amount of vegetables?”

3.  Finally, can anybody explain to me a good reason why we shouldn’t be able to videotape the police in public?  I could explain to you a bad reason… a very bad reason…..

4. Even more finally, while I was writing this, Glenn Beck came on the tv behind me and dropped a pretty big bomb.  I will post a link to it when it becomes available.

Aright now that that’s all out of the way I will try to do something more original.

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