Ancient Roman consuls – equivalent to our presidents – wore togas edged in purple to mark their high status. As Republic became Empire, new emperors were said to “ascend to the purple.”

Purple clothing was a status symbol for most of human history. It was the ancient equivalent of the Mercedes-Benz. Originally discovered in the glands of shellfish (reputedly by Heracles’s dog!), it took 12,000 of the creatures to get just 1.5 grams of dye. Purple garments could be as rare and costly as gold in some places.

Modern innovations such as inexpensive synthetic dyes, the Minnesota Vikings, and purple M&Ms have taken away the color’s exotic reputation. But no worry. Federal regulators are doing what they can to bring it back.

Alpinil Industries, a dye manufacturer in India, sells its carbazole violet pigment 23 cheaply. Too cheaply, it seems. Even commoners can afford to buy products colored with their purple hues!

Irate American competitors convinced the government in 2004 to put an anti-dumping duty on Alpinil’s purple dye. That raised the price to match pricey American-made dyes. Purple would once again be reserved for the rich.

Now that the tax has been in place for five years, the Department of Commerce is wrapping up an investigation to see if it has been working as intended. A repeal would be best for consumers. Don’t expect to see it happen, though.

The benefits are concentrated to a few dye manufacturers, who have a strong incentive to lobby to keep the status quo. Meanwhile, the costs are diffused onto millions of consumers, none of whom have much incentive to spend thousands of dollars in an effort to save themselves a few pennies.

by Chidem Kurdas

The financial regulation bill approved last week by the House of Representatives does not, of course, refer to James Madison. But it might as well be an exhibit specifically created to demonstrate, by contrast, the advantage of limited and transparent government.

“It will be of little avail to the people that the laws are made by men of their own choice,” wrote Madison in Federalist Paper no. 62. “if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood …”

The 1,279 page “Financial Stability Improvement Act of 2009” – to use its official short title – gives new meaning to the words “voluminous” and “incoherent”.   It is like the preceding 1,502 page healthcare legislation, which is virtually unreadable, as Mario Rizzo pointed out.

Because I wanted to know what’s coming and was intrigued by Jerry O’Driscoll’s post on the topic, I plowed through Subtitles A and B about establishing the Financial Services Oversight Council and mitigating systemic risk. By the time I got to Subtitle C, having taken several hours to read  less than one-tenth of the whole, my attention was wondering.

But on p. 151 there was something that seemed out of place—a heading that says dental, vision or life insurance. The next page is on long term care insurance. Had some of the medical entitlement legislation made its way into financial legislation? Have the two monstrous bills got crossed? Are they breeding?

No, those sections are about the employees of the Office of Thrift Supervision, which is being closed down. The employees are to be transferred to other offices. There are pages and pages on their medical insurance, retirement benefits, etc.

So, I am still not sure what “systemic risk” means, other than it will mean whatever the Council and its staff want it to mean. But I am pretty clear about the status and funding of said staff, as well as the Council’s activities – “The Council shall meet as frequently as the Chairman deems necessary, but not less than quarterly,” says the bill – and  the perquisites of certain employees.

I don’t see how the legislation can prevent financial crises but it will certainly organize and re-organize bureaucracies and make sure to cover their dental benefits. Indeed, that’s the down-to-earth and comprehensible part of the bill. That’s what it actually does. As for the stated objective, those bureaucracies will have the discretion to figure out what they want to do.

“A financial holding company subject to stricter standards shall at all times after it is subject to such standards be well capitalized and well managed as defined by the Board,” goes one directive. How will they decide a company is well managed? By earnings? By stock price? By those criteria most investment banks were well managed until the 2008 crisis erupted.

The criteria are left “to be defined”.  If citizens had to read such documents, they would get a more realistic idea of what regulation is—it consists of bureaucracies that impose arbitrary standards on the rest of the population. Even the law giving them authority is opaque; what they do behind doors will be impossible to observe, let alone check.

Maybe organizations concerned about good government should pay people to read  major Congressional bills, given that very few will subject themselves to the stultifying unpleasantness without being paid for it. Looking at all those subsections and amendments would remind Americans of the advantage of limited government with laws that are clear and obvious.

Anything else “will be of little avail to the people” to use the words from 222 years ago.

by Roger Koppl

Today’s Los Angeles Times reports that “Businesspeople join the ranks of climate treaty proponents.” This support is old news as I noted last May in a post entitled “Water does not run uphill.”  The L A Times report nevertheless express surprise saying, “an unlikely batch of advocates has emerged to champion a new global warming agreement: businesspeople.”  And yet the same article contains clear statements that many big businesses see profit opportunities in a climate treaty.

Climate laws are barriers to entry.  Thus, the profit opportunities should be greatest for the biggest businesses and for the energy sector, lowest or non-existent for other business interests.  The story gives evidence supporting this inference.   Coca-Cola supports a treaty, the need for which represents the “consensus of oil and gas executives.”  The US Chamber of Commerce, however, opposes emission limits before Congress and expresses caution regarding a global climate treaty.  The US Chamber of Commerce represents a large number of very different business interests and businesses of different sizes.  Thus, it tends to support positions such as free trade and oppose measures such as the prospective climate change treaty being discussed in Copenhagen.

This analysis does not say anything about the reality of global warming or whether warming is anthropogenic.  But it should disabuse anyone of the notion that big business has acquired a social conscious.  Water does not run uphill.  Business support for a climate treaty reflects not social conscious, but careful calculations of profit and loss.

I recently finished reading Swedish economist Johan Norberg’s book about the financial crisis, aptly titled Financial Fiasco. It’s both short and informative. Six chapters and 155 pages, all of them worth reading.

The first two chapters are about the two big regulatory causes of the recession. One, monetary policy that was too easy for too long. The price system works. When the Fed messes with that price system, prices send out the wrong signals. People behave accordingly. Two, a decades-long drive to raise homeownership rates caused a lot of people to take out loans they couldn’t afford. It was only a matter of time before the consequences would come to bear.

Chapters 3 and 4 are about how the private sector reacted to the incentives regulators gave them. Let’s just say they acted badly. If people can game the system, they often will. Norberg’s criticism of overly-complicated securitized mortgage packages is both shocking and infuriating.

Chapter 5 is about how the government and private sector reacted to the crisis once the housing bubble popped. The $700 billion bailout program to reward bad behavior comes under fire.

Norberg is in top form in Chapter 6. Having looked at the causes and consequences of the crisis, now he offers a way out. One lesson is that politicians will always behave badly. “Politicians who distribute pork they cannot afford are reelected; butcher shops that sell pork they cannot afford go bankrupt. (p. 150)” Politicians are just like you and me. They go wherever their incentives lead them. We need to approach them accordingly.

The way to a full recovery is not bailouts. It is letting bad companies fail. And just as important, letting good ones prosper. “Government support for companies is thus not a way to save jobs, as politicians try to make us believe. It is a way to move jobs from good companies to bad companies.” (p. 151) In the long run, bailouts keep the economy down by keeping jobs and resources away from where they would do the most good.

Financial Fiasco has echoes of Tocqueville; a foreigner is trying to figure out how America works. Norberg, like Alexis de Tocqueville, is uncommonly perceptive. His experience living under an economy more thoroughly mixed than America’s allows him to see things that have escaped American commentators. This is extremely valuable. The fact that his book is concise, well written, and accessible to those of us who don’t have economics Ph.Ds makes it even moreso.

by Jerry O’Driscoll  

On Friday, the House of Representatives passed a bill to alter the regulation of financial services.  The Senate has yet to act.  Still, the House passage advances President Obama’s agenda to change how financial services are regulated.  

How to regulate large, complex financial institutions remains a sticking point between the two houses. On the big issue, however, no radical change is being proposed.  Major institutions continue to face various subsidies to risk taking and the government proposes to offset these incentives through regulation.  The doctrine that some institutions are so large and complex — and interconnected — that they are deemed too big to fail remains in place (if not enhanced). In an earlier post, Mario Rizzo asked if there is “A Positive Program for Laissez-Faire?” That began a lively debate on the issue.  Most agreed that risk to the taxpayer, not size of the institution was the central policy concern. 

The idea of offsetting risk through regulation has been tried repeatedly and failed. Many want some variant of what is called “narrow banking” in which banks with insured deposits would be circumscribed in their activities and limited to traditional banking.  Another category of institutions could engage in “casino banking,” but would be denied access to insured deposits and public backing.  

The Achilles heel in this proposal was recently highlighted for me by a very thoughtful and knowledgeable legislator. No matter what policymakers promise in advance, they will bail out large casino banks.  In technical terms, there is an ineluctable time-inconsistency problem. In order to control risk, public policy must control size.  I think he is correct as a matter of Public Choice.  

To keep the taxpayer off the hook, financial institutions must be downsized.  How that should be done is a different matter.  Size equates to risk in the policy regime in place in all major countries.

Wayne Crews and I have an article in today’s American Spectator about the antitrust crusade against Intel. Our key points:

-An FTC picking winners and losers is not capitalism. It is crony capitalism.

-Chips in “Wintel” desktop computers increasingly constitute just one subset of a vast semiconductor market. Only a small fraction of the chips in non-PC devices are Intel’s — and these devices are where the future lies.

-Regulators’ charges against Intel have changed over the years, but their verdict always remains the same: guilty. Suspicious.

-We’d be better off prosecuting the DOJ and the FTC for colluding against free enterprise.

In the short story by Arthur Conan Doyle, Silver Blaze, Sherlock Holmes solves the case by observing the absence of a predictable event: the dog that does not bark in the night when confronted by a stranger.  Keen observers must surely have noted a similar non-event since September 2008: the many once-free market economists who have all but withdrawn from the debate over the future of the US economy, or who have even turned up on the side of government intervention.  Where are all the real business cycle theorists who once argued that business cycles reflect Pareto-optimality?  Where are all the monetarists who used to worry about the inflationary implications of massive increases in the money supply?  Where are all the financial economists who used to thrust the efficient capital market hypothesis  down the throats of Wall Street brokers?  Where are all the law-and-economics scholars who used to boast of the efficiency of the common law?  Where are all the New Classical rational expectations scholars who used to explain why systematic  fiscal and monetary policies cannot  influence macroeconomic activity?  Where are all those Friedmanians who used to argue so effectively in support of capitalism and freedom?

Alas! It appears that, for many such, their free market principles were less than skin-deep, ideas to be celebrated when the times are good, but to be quickly jettisoned when the going gets tough.  Outside of public choice and Austrian economics, and such free market stalwarts as Sam Peltzman from Chicago and Harold Demsetz from UCLA, there are vanishingly few would-be  free market Georgie Patton’s on the current intellectual battlefield:

Where have all the free market soldiers gone?

Why, they have run for cover, almost every one!

Their models have failed, their math is undone.

They need new statistics and that is no fun.

They dig into trenches to evade the socialist gun.

Their escape routes are cut off, nowhere else to run.

They hide in the darkness and avoid the free market sun.

Come out, come out, counter-attack and be done!

An article in this month’s Info Tech & Telecom News quotes me about proposed stimulus funding for an in-flight broadband provider.

My take: it’s corporate welfare.

It is illegal to conduct an auction without a license in Alabama. Unlicensed auctioneers can be punished with fines of up to $500.

Applicants must pay nearly a thousand dollars for 85 hours of coursework. 8 additional hours are required every two years to keep the license.

It’s worth asking: Does this benefit anyone besides the people teaching the courses and the auctioneers who get to limit the amount of competition they have to face?

A fox, caught in a trap, escaped by tearing off his bushy tail.

After that, the other animals mocked him, making him feel so ashamed that his life was a burden to him.  He therefore worked out a plan to make all the other foxes the same as him, so that in their common loss he might better conceal his own deprivation.

He called a meeting of foxes. A good many came to it, and he gave a speech, advising them all to cut off their tails. He said that they would not only look much better without them, but that they would get rid of the weight of the brush, which was a very great inconvenience.

But one of them interrupted his speech.

“If you had not lost your own tail, my friend,” that fox said, “you would not be giving us this advice.”

Aesop 6th century BC

Let us hope that the alpha-male  US  fox, at the forthcoming meeting of all the foxes in Copenhagen in December 2009, remembers this fable, and understands its meaning, when listening to the pleas of all those foxes from Continental Europe who have already cut off their own tails, and now beg those that are yet not disfigured to mutilate themselves likewise.

If the big US fox is insufficiently smart to heed the fable, one can rest assured that the smarter foxes from India and the People’s Republic of China will prove to be adept at retaining their brushes so that they can mock and humiliate  the  now incredibly shrinking, debrushed US fox.

Charles Dickens depicts Fagin in Oliver Twist as a character possessed of a ready eye for redistributing wealth from the better off  into his own pockets and particularly skilled at harnessing others to pursue the petty larceny typically involved.  Fagin ultimately meets with a ‘bad end ’ because of his association with Bill Sykes, a much more significant villain with a disposition for violence.  Ultimately, Fagin realizes his most dreaded fear, ‘the drop’, despite the  relative pettiness of his own crimes. In Fagin’s simple mind, wealth exists and is there for the taking.  It will always be there, however, much is taken. Taking is a skill that has to be learned and has to be efficiently executed.  His boys just have to pick-a-pocket or two.

In this column, the part of Fagin is played by Larry Summers and the part of Bill Sykes is played by Barack Obama.  The play takes place not in the gin-sodden wastes of early 19th century East London, but in the campaign-fund -sodden wastes of 21st century Washington, DC.  Barack is especially attracted to Larry because of Larry’s appetite for picking-a-pocket or two and for his willingness to fence the less liquid of Barack’s stolen goods. Barack has made sure that Larry will be well-served by his ‘artful dodger in the Treasury Department, a collaborator who has already skillfully negotiated his own challenges from the legal system.

Larry has a well-laid plan for pocket-picking from the better off.  According to his calculations, wealth redistribution is a zero sum game ripe for the playing.  He explained the rationale at a conference hosted by the Harvard Business School in October 2008, in the final stages of the presidential election. In the last 29 years, he noted, US citizens in the top one per cent gained $600 billion. Those in the bottom 80 per cent lost about $600 billion. Those within the 80-99th percentiles stayed even. The ‘transfer’ of wealth (note the term) amounts to an additional $500,000 per year to the top 1 per cent and an $8,000 loss every year for those in the botton 80 per cent.  Larry’s solution to this ‘iniquity’ is to require every household in the top 1 per cent of the distribution , those making on average $1.7 million per annum, to write a check for $800,000. This money would then be pooled and used to send out a check for $10,000 to every household in the bottom 80 per cent of the distribution, those making less than $120,000 per annum.  Of course, Larry does not divulge that there would be quite some seepage from this transfer, into his own pockets, into  the pockets of  the artful dodger and into the very large pockets  of  his master villain, Barack, whose limitless appetite for transfers must be assuaged.

The question that remains to be answered is whether the futures of Larry and Barack will mirror those of Fagin and Sykes. Will some fortuitous Oliver chance across the paths of these shady characters before they can fulfill their dreams while destroying the market system that created the wealth that they covet?  Will both meet the dreaded drop in 2012,  if not before?  Or will pocket-picking accelerate to the point at which Atlas Shrugs and the wealth-creators remove themselves from the economy, leaving those who cannot create wealth to  share in the economic collapse of a negative-sum game as the United States begins a long decline into economic mediocrity? In the latter scenario, of course, Larry, Barack and the artful dodger will have ‘reviewed the situation’, and will be long gone, enjoying the loot that they have stolen through their pocket-picking skills.

O governo sabe direitinho o que é calendário eleitoral e, claro, também sabe o que é ciclo político-econômico, embora adore maldizer a teoria econômica sempre que pode.

by Glen Whitman

As discussed in the previous post, the “experts” in charge of implementing new paternalist policies will have a tendency to simplify their own theories to make them useful for crafting policy. That alone creates slippery-slope potential. But that potential is magnified by the existence of rent-seekers – that is, interest groups whose agenda is to change policy for their own interests. Such interests can be ideological, monetary, or simply personal. In the paper, we illustrate the power of rent-seekers to distort the facts and confuse the debate with two issues: environmental tobacco-smoke (ETS) and obesity. With respect to ETS, however, we have to run off a potential objection: that ETS is not really a paternalist cause at all, because smoke harms non-smokers (p. 714):

We should note that although policies addressing exposure to secondhand smoke (“environmental tobacco smoke” or ETS) are not strictly paternalistic, inasmuch as secondhand smoke can potentially harm bystanders, paternalist arguments have played an important supporting role. Most importantly, many actual and proposed anti-smoking regulations limit the ability of individuals who may not be bothered by smoke to expose themselves voluntarily to secondhand smoke as customers or employees of restaurants and bars. Furthermore, by creating a hostile environment for smokers, the ETS argument easily slides into the paternalistic. Thus, even some ETS arguments must be regarded as partially paternalistic either in intention or merely in effect.

After considering the ways in which ETS claims have been exaggerated, we draw some more general conclusions (p. 715):

The rent-seekers’ motivation for simplifying and distorting is not hard to see. The exaggeration of risks has the direct effect of creating greater public support for the policies they regard as best. It also has the indirect effect of making the cultural environment less hospitable to opposing groups, such as those who wish to smoke. This puts further pressure on individuals to stop smoking because they will find themselves uncomfortable in more and more public spaces. Thus the paternalist net can widen by increasing the number of those who, for self-interested or moralistic reasons, will support more inclusive bans.

And after presenting the similar case of obesity, where the distortion of facts by special interests is also apparent, we observe that rent-seekers can have a variety of motivations (p. 716-717):

As the secondhand smoke and obesity examples [just presented] suggest, rent-seekers with an interest in distorting and simplifying information come in at least two varieties. The first variety is old-style paternalists who believe they know best and do not necessarily care about the underlying preferences of the targets. Traditional temperance and health advocates fall within this category. They sacrifice the preferences of the targets to their own moralistic goals. The second variety is people who stand to benefit economically from the promotion or cessation of some activity. Examples include mutual fund companies that provide savings instruments, weight-loss clinics and programs, and manufacturers of smoking-cessation drugs. Public officials and agencies with an interest in preserving and expanding their domains also fall within this category, as do some individuals in their role as consumers and workers (e.g., non-smoking bar customers who would prefer to have more establishments cater to their tastes).

The larger point is that new paternalists cannot constrain the use of their own arguments in the publicy-policy debate. Once new paternalists premises are admitted, there is every reason to believe they’ll be used and abused by rent-seekers for purposes the new paternalists themselves would not approve of.

(As usual, full citations are available in the full paper. Cross-posted at Agoraphilia.)

By Justin Williams

In “Economic Contractions in the United States: A Failure of Government,” Charles K. Rowley and Nathanael Smith use their unique Public Choice lens to analyze the Great Depression and the current recession. Public Choice Economics, developed by James Buchanan and Gordon Tullock, is a revolutionary way for economists to look at government and its attempts at market intervention.

This very short but dense read will take the reader through all the ins and outs of the economy. Those readers who are intensely interested in the happenings of today, will find this book to be up to date and full of facts.

Rowley and Smith believe that the reason why the United States has only had mild recessions up until this point is due to the counterbalancing monetary and fiscal policies from the 1980’s to the 1990’s. For example, Ronald Reagan and Paul Volcker are very famous for reigning in inflation, while not decreasing spending. This was due to Reagan’s defense spending expansion and Volcker’s monetary contraction.

Rowley and Smith found that the United States is faced with the after effects of a perfect storm of expansionary monetary policy after 9/11 and an expansionary fiscal policy under George W. Bush and his many Congresses.

One very small, but interesting part of the book that should be pointed out is “The Sources of Moral Failure.” This section of the book shows that politicians are more interested in furthering their moral agendas, even if they put the economy at risk. Rowley and Smith highlight two types of politicians: those who receive support from the financial institutions to encourage overspending, and those who receive populist support and banned discrimination on the “basis of economic criteria.” Both politicians are looking out for special interest, and both politicians are putting everyone’s economic well-being at risk.

At the end, the two George Mason University and Lock Institute economists, propose solutions to help the economy get back on track. Even though they offer some relatively free market solutions (i.e. free trade, immigration, right to work,…etc.), they also endorse the Federal Reserve’s policy of monetary expansion. This leaves the reader to wonder, if it was expansionary monetary and fiscal policies that created the bubble, how will this solution be different as we know Congress will not reduce fiscal spending?

Overall, this book is a great short read. For the laymen, it may be overwhelming causing one to research the economic terms used in the book. But for those who have been keeping up with today’s economic indicators this is a must-read.

Rating 4.5/5

This op-ed from Tapu Misa contains an odd mix of democraphobia (yay!) and statophilia (boo!). First the good:

The catalyst for the march was the Government daring to ignore the result of the recent ambiguously worded citizens-initiated referendum on the child discipline law.

Which means the Government is clearly undemocratic. “The people are the boss and the Government has to listen to them,” said Craig.

Well, yes and no.

The trouble with the might-is-right, majority rules brand of democracy has always been painfully obvious for those of us accustomed to occupying minority perches.

As Benjamin Franklin put it: “Democracy is two wolves and a lamb voting on what to have for lunch.” In a straight-out numbers game, the lamb always loses.

I couldn’t agree more. She goes on, however, to defend a utopian version of representative democracy:

But representative democracy, as advanced by 18th century British MP Edmund Burke, promotes a higher ideal built on notions of the common good.

Burke felt MPs weren’t just delegates, elected to do their constituents’ every bidding. While “their wishes ought to have great weight”, he argued that an MP’s “unbiased opinion, his mature judgment, his enlightened conscience” ought not to be sacrificed in the process.

“Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion.”

True to his convictions, Burke backed several unpopular causes during his time in Parliament, knowing that it would probably cost him his seat (which it did), but determined to show “that one man at least had dared to resist the desires of his constituents when his judgment assured him they were wrong”.

He was right. Sometimes, the people can get it badly wrong.

Yes, they can. But so can those representatives they elect to lead. Afterall, they are elected by those same people who sometimes get it badly wrong. Representative democracy does have the capacity to mitigate the effects of moral panics and other short-term fluctuations in preferences. It does this by introducing some inefficiency into the transmission of preferences into policy, however, rather than by electing noble leaders.

There’s simply no justification for the assumption that politicians will be better than the rest of us. Sometimes politicians will make better decisions than the majority; sometimes worse. Representative democracy is still two wolves and a lamb voting on what to have for lunch, but with some slack in decision-making that may occasionally save the lamb when the wolves have only a fleeting craving.

As Crampton has argued, government implies a trade-off between the costs of populist democracy and self-serving politicians. When we give politicians more power in an attempt to reduce the mob-rule nature of democracy, we enable them to take advantage of the rest of us. As long as we have government, we can only ever strike a balance between these problems, never avoid both (unless we can elect wise and benevolent philosopher kings, of course, which seems to be the preferred option of many).

Still, it’s nice to see something other than democratic cheerleading from the MSM. I particularly like Misa’s conclusion:

As the philosopher and writer Ayn Rand observed, “Individual rights are not subject to a public vote; a majority has no right to vote away the rights of a minority; the political function of rights is precisely to protect minorities from oppression by the majority (and the smallest minority on earth is the individual).”

I find her proposed solution (and Rand’s, for that matter) hopelessly utopian, however. As long as we have government, there’s no way to navigate between the problems of mob rule and arbitrary power and have an acceptable degree of freedom.

Sounds like a good reason not to have government to me.

In the continuing research for my Public Choice paper, I started reading Brennan & Buchanan’s The Reason of Rules; my basic argument is that a primary reason for Githongo’s failure is that the rules in Kenya are absolutely atrocious, but this post isn’t about Kenya. Actually over the next couple of days whenever I write something related to that paper, just assume what follows has nothing to do with my paper, this post for example is about contractarianism.

Chapter 2 is where Brennan & Buchanan discuss the social contract as they see it, I found it particularly interesting because I do consider myself a contractarian in that I do accept the public goods justification for the existence of the state (although I probably accept less public goods than most people do.), and in that I agree that our rights come from agreement, not through reason or God. This makes for some rather interesting conversations at GMU, because while I can’t prove this for certain, it seems like most of the libertarians I know are natural rights libertarians, with those rights being derived from either God, or Reason.

The main objection my natural friends present to me is “Ugh! The social contract doesn’t even really exist! How can you believe that?” I usually then say the same thing about natural rights in kind of a mocking tone, but that’s neither here not there. Hume, my favorite moral philosopher made the same point my friends are trying to make, only more eloquently and better, because you know, he’s Scottish, and he’s David Hume:

AS no party, in the present age can well support itself without a philosophical or speculative system of principles annexed to its political or practical one; we accordingly find that each of the factions into which this nation is divided has reared up a fabric of the former kind, in order to protect and cover that scheme of actions which it pursues. . . . The one party [defenders of the absolute and divine right of kings, or Tories], by tracing up government to the DEITY, endeavor to render it so sacred and inviolate that it must be little less than sacrilege, however tyrannical it may become, to touch or invade it in the smallest article. The other party [the Whigs, or believers in constitutional monarchy], by founding government altogether on the consent of the PEOPLE suppose that there is a kind of original contract by which the subjects have tacitly reserved the power of resisting their sovereign, whenever they find themselves aggrieved by that authority with which they have for certain purposes voluntarily entrusted him. –David Hume, “On Civil Liberty” [II.XII.1]

If you don’t want to actually read that, his basic claim is that the idea of a “social contract,” is a work of fiction.

My response to my friends is that they (as well as Hume) are completely missing the point of contractarianism. The point is not that societies are literally founded upon social contracts (Although pirates apparently did), the point is that contractarianism can be used ex post facto to legitimize the existance of the state, so long as the state follows certain rules. Buchanan & Brennan do a much better job with this argument (In my defense, I don’t have a Nobel Prize):

As noted earlier, the empirical record of the establishment of historical states is essentially irrelevant (added emphasis is mine)to the contractarian explanatory argument. The fact that most historical states have emerged from conquest of the weak by the strong does not render unimportant or irrelevant the question,Can the existing state as observed within the rules that describe its operations be legitimized in the broadly defined contractarian vision? To deny the relevance of this question, and at the same time to hold the contractarian presuppositions, would amount to making the charge that all observable states are illegitimate. In this case, the contractarian must join with the ranks of the revolutionaries. If, however, within broad limits, the state can be legitimized “as if,” it emerged contractually, the way is left open for constructive constitutional reform. Existing rules can be changed contractually even if they did not so emerge.

That’s the point of contractarianism.

This semester I’m taking Public Choice, which is basically the economics of politics, or as GMU’s own Nobel Prize winning professor of economics James Buchanan so eloquently put it “Politics without Romance.” If you want to read more about Public Choice, start here, while I am sure that I’ll write more about Public Choice during later posts, it’s only tangently related to this post. For my final paper in this class, I am writing about the endemic corruption of Kenya, and the case of John Githongo (basically, my entire research agenda was given to me by Michela Wrong’s It’s Our Turn to Eat. I assumed that an easy starting point for this paper would be defining corruption, should be simple enough right? “Using public office for private gain,” a nice, simple, clean definition, couldn’t be easier. H.L. Mencken once said that “For every complex problem there is an answer that is clear, simple, and wrong.” I didn’t truly appreciate this how accurate a statement this was until I started researching for this paper.

In the book Corruption in Africa John Mukum Mbaku has an entire chapter devoted to defining corruption called “Bureaucratic & Political Corruption: Definitions & Measurement.” Did you note the ’s’ that ends ‘Defintions?” I didn’t. When I started that chapter I expected something along the lines of a couple of examples of corruption, then a listing of some common traits uniting all of the examples followed by a definition close to what I mentioned earlier, I wasn’t even close.

As it turns out, there are many many definitions of corruption, Mbaku lists no fewer than 6 accepted definitions of the term. Then he lists the three basic modern models of corruption:

1. Corruption is related to the performance of the duties of a public office
2. Corruption is related to the concept of exchange derived from the theory of the market
3. Corruption is associated with the public interest concept

Following this he goes into a typology for classifying corruption, there are 4 of them:

1. Cost Reducing- These lower costs imposed on business (from taxes for an example)
2. Cost Enhancing- Rent seeking via charging excessive rates
3. Benefit Enhancing- Civil servants provide more benefits to individuals than they are legally due (The most commonly found type in Africa)
4. Benefit Reducing- Civil servants capture benefits intended for the public (Mobutu’s Zaire comes to mind)

Unfortunately, this type of classification still has some level of controversy, and Osterfeld among others has argued that corruption should be defined by whether ot not it is harmful.Expansive corruption argues Osterfeld involves corruption that facilitates, improves and enhances competitive exchange, this is the good kind that contributes to wealth create and economic growth. The other type is restrictive corruption. This limits opportunities for mutually beneficial free exchange. Personally I think Osterfeld is completely missing the point, corruption is bad because it is a drain of resources, but to me anyway, the worst part is that it screws with incentive structures and messes with institutions, good or bad, corruption still does this.

Mbaku goes on to discuss other types of corruption, but the over-riding point is that there are a lot of different types of corruption, and even more ways of defining it, so I have a fairly simple question to ask- Everyone agrees that corruption is bad in general and especially when it comes to development right? That’s partly what efforts at improving governance are aimed at unless I’m very much mistaken, but if there are different types of corruption, are development agencies and everyone else that’s trying improve this treating corruption as if there is a panacea, or case-by-case? Moreover with so many different definitions do governance specialists even know what it is they’re supposed to be working on?

The evidence now mounts that the economic stimulus measures adopted by the Obama  administration during the early months of his administration have failed.  Economic growth is limited and sputtering. Unemployment remains high and rising in many states. This bad outcome was entirely predicted in the book co-authored by Charles K. Rowley and Nathanael Smith and published in September 2009  by The Locke Institute in association with the Institute of Economic Affairs (available at www.amazon.com).

Obama is cynically aware that his socialist agenda of healthcare nationalization, energy disruption  through cap and trade legislation, union-empowerment through card check legislation, and trade protection through small-print clauses in the stimulus legislation, will bring the US economy down, perhaps irreversibly,  to the poor performance levels of  highly regulated France and Germany. This is an acceptable price,  in the eyes of this left-leaning ideologue, for shifting the United States economy in the direction of socialism. The years 2009-10, for Barack Obama,  are equivalent to Mao Tse Tung’s two year Long March to Socialism in China in 1934-35.

It is a sad commentary on the poor judgment of many US voters that they placed into the Presidency a person who finds capitalism and free enterprise repugnant, and who is no friend to individual liberty.  Let us hope that the Founding Fathers structured the Constitution sufficiently well as to block the political manipulations of this dangerously narcissistic Manchurian candidate who actually succeeded in misleading the electorate of this once-great nation as to his true intentions.

This is another post from our guest Max Borders. You can find his earlier posts here.–Editor

“It takes all the running you can do, to keep in the same place.” – The Red Queen, from Lewis Carroll’s Through the Looking Glass.

Remember Ronald Coase’s The Nature of the Firm? It’s pretty hard reading. But if I understand it right, Coase poses a really important question: why do folks organize into firms? Why isn’t there a totally “free” market in labor? Why do organizations take on scales that result in relatively costly forms of order? Coase’s answer is “transaction costs.” It actually costs more to coordinate actions among scattered people with disparate skill sets—all of whom would have to contract with one another and hammer out details of said contracts. And then they have to get themselves all together somehow to divide labor and accomplish something profitable. So, up to a certain point, organizations arranged like hierarchies have just been less costly to organize. Simply said: it’s cheaper for some people to give orders and some to take them (the former pay the latter for the privilege of being the boss). But that’s changing—and fast.

Enter technology. Lest this starts to sound like one of those Fast Company “new media are revolutionizing everything” columns, suffice it to say technology is lowering the costs of organizing without the need for firms (transaction costs). Clay Shirky does a great job describing the phenomenon in his book Here Comes Everybody. He offers a solid overview of this transformation in progress. So what does all this mean for slowing Leviathan and growing voluntary community?

The Special Interest State

Turn now to Public Choice 101. Mancur Olson nailed it. The idea is pretty simple: our Republic – most any republic – will turn into a corporate state due to the problem of special interests. If you can pass a regulation or subsidy, some small group is going to win. The small group that stands to benefit most from a reg or subsidy also has the greatest incentive to organize and has the lowest organizing costs. The benefits are concentrated (on the interest group), but the costs are diffuse (we all pay marginally higher taxes and marginally higher prices.) We the People have neither the incentive nor can we afford to organize against every group behind this little legislative tweak or that. But the tweaks add up. The costs mount, but go largely unseen. Special interest groups almost always win. The result is tremendous deadweight loss. Democracy ends up serving them, not “the public interest” (whatever the hell that means). Rational apathy, rational ignorance and/or rational irrationality rule.

Glass Half Full

But here’s the optimism: If people like Shirky are right, it’s getting cheaper both to monitor and to organize against special interest groups—at least select ones. I’m not saying we’re anywhere near being able to fight them at parity. Perhaps we’ll never be. Nor are we likely to see the immediate effects of our new distributed, organization tools. But we may soon be equipped at least to slow the process of “demosclerosis.” We may already be. And as long as our collective productivity gains outpace the growth of the deadweight state, we’ll be okay—at least in some less-than-savory utilitarian sense. We’re also going to be better equipped to drive creative destruction and out-compete the government in some of its historic monopoly areas, such as education. (We might even unleash the forces of social entrepreneurship if you believe folks like Michael Strong.)

The Red Queen Effect

Optimism over. Offer a glimmer of hope and just as quickly dampen it at its source? What can I say? You see, the enemies of voluntary association and advocates of expanded state power have all the nifty tools at their disposal, too. So the costs of organization are going down for them. And I’m not just talking about organizing for those titanic tug-o-wars we call elections. I’m talking about organizing more rapidly to form Bootleggers and Baptists coalitions, which obscure all the corporatism that’s really in the works. I’m talking about new instruments that make controlling and pilfering from us lower-cost propositions. Hence the Red Queen Effect. My guess is that until we find THE disruptive innovation to dismantle the state, we will be engaged in this strange, destructive form tit for tat for quite some time.

That’s the title of  a forthcoming book by Mark Schrad, which looks very interesting. I’ve read a paper on this topic by the author, which has been very useful to the chapter I’m currently writing of my thesis (basically analyzing the consequences of  what Schrad calls “bad policy ideas” on constitutional effectiveness). I really wish the book were out now. Here’s the blurb:

In The Political Power of Bad Ideas , Mark Lawrence Schrad looks on an oddity of modern history–the broad diffusion of temperance legislation in the early twentieth century–to make a broad argument about how bad policy ideas achieve international success. His root question is this: how could a bad policy idea–one that was widely recognized by experts as bad before adoption, and which ultimately failed everywhere–come to be adopted throughout the world? To answer it, Schrad uses an institutionalist approach, and focuses in particular on the US, Russia/USSR (ironically, one of the only laws the Soviets kept on the books was the Tsarist temperance law), and Sweden. Conventional wisdom, based largely on the U.S. experience, blames evangelical zealots for the success of the temperance movement. Yet as Schrad shows, “prohibition was adopted in ten countries other than the United States, as well as countless colonial possessions-all with similar disastrous consequences, and in every case followed by repeal.” Schrad focuses on the dynamic interaction of ideas and political institutions, tracing the process through which concepts of dubious merit gain momentum and achieve credibility as they wend their way through institutional structures. And while he focuses on one episode, his historical argument applies far more broadly, and even can tell us a great deal about how today’s policy failures, such as reasons proffered for invading Iraq, became acceptable.

Here’s a video of a public choice teacher running an all-pay dollar auction, and describing its relevance to lobbying (hat tip: Max Borders).

The teacher misquotes WOPR, but at least he got the reference in there. Crampton runs a twenty dollar auction, which is more interesting because people care about the outcome a little more. He clearly needs to start recording his lectures.

Most of what is being written about healthcare is rather shallow and uninformed. I recommend an exception here, courtesy of Arnold Kling. One commenter on this post made an exceptionally insightful observation: the issues of healthcare costs involve far more than economic efficiency. There are deep ethical issues as well. The commenter said it well:

Nothing short of brutal, heavy-handed rationing can control health care costs. The problem with Kling’s voucher plan is that it makes this explicit. It would make each of us ration our own care (maybe half of us could cope with that). But it would also force people to ration care for their family members. I think most people know, deep down, that this must be done, but, come hell or high water,they will not do this individually. Just as people hate to take responsibility for their choices in the mate market, people desperately need a way to ration care while pretending they aren’t.

Governments fill this role. In Britain, NICE is the whipping boy. People rage at the bureaucrats so they don’t have to feel guilty for not dialyzing their demented octogenarian grandparents.

Maybe private insurance companies could ration care if they had the backing of the government (e.g. approved guidelines and procedures which make it virtually impossible to win a lawsuit against a compliant insurer).

Maybe doctors could enforce the rationing. They can pretend nothing more can be done. . . . I think the Swiss system may be something like this, though I’m not sure.

It takes two executioners simultaneously turning two keys to start a lethal injection machine. That way no one person can be held directly responsible for killing another. We get to pretend the “state” did it.

Controlling costs means denying care. Denying care means killing, even if we do it softly.

It’s worth noting that Public Choice theory says that politicians would never ever make rules for rationing. They will, of necessity, pawn it off on a bureaucracy. Maybe all those lunatics talking about “death panels” aren’t so lunatic after all.

UPDATE: Kling explains, with perfect clarity, what can and cannot happen, when, and why. Most informative!

by Chidem Kurdas

As Fannie Mae goes for its next withdrawal from the $200 billion kitty the US Treasury graciously made available to this government-created and -sustained mortgage financer, it may be useful to look beyond the current housing slump and consider what it augers for the future.

Having made yet another loss, the government-sponsored enterprise needs more money. A report Fannie filed with the Securities and Exchange Commission attributes the $19 billion third-quarter loss to the housing slump and mortgage defaults.  “We do not expect to operate profitably in the foreseeable future,” says  the company.

I always thought it was a great triumph of government public relations to come up with the sweet-sounding Fannie Mae moniker for an entity officially called the Federal National Mortgage Association.  Now I understand what the nickname really means—a pain in the taxpayers’ backside for the foreseeable future.

The business has been adversely affected by helping delinquent or imminently-in-default borrowers to modify their mortgages so as to reduce their monthly payments. As the economy recovers, defaults will decline, and presumably this aid will no longer be needed. But it is not clear when – or even if – the subsidy program will end.

In fact, it may be extended.  Fannie “may recommend supplementing the program with other initiatives that would allow us, pursuant to our mission, to assist more homeowners.”

By conventional wisdom, it is better for everybody and the economy at large that people not default on their mortgages. On that basis, the bailout of shaky homeowners via Fannie is good policy. It is certainly good politics. In view of the bailouts of investment banks, you might say it is only fair for families to get help with their mortgages.

Of course, the people getting this help are those that have mortgages in the first place. Those who do not own property or who were careful not to borrow too much do not get the defaulters’ subsidy. They’ll have to pay the taxes to prop up Fannie and get penalized for being frugal or poor. This is an income re-distribution program that is anything but fair.

More importantly, it sets a precedent. Housing will go down and go up, but whenever foreclosures start rising, the same politics will come to play. You’ve bailed out selected  mortgage defaulters today; why not bail out defaulters in the future?

Fannie is indefinitely dependent on government support. The report says, “we believe that continued federal government support of our business and the financial markets, as well as our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the government’s support of us or the markets could lead to an increase in our debt roll-over risk in future periods and have a material adverse effect on our ability to fund our operations.”

The defaulters’ welfare program will encourage new rounds of reckless borrowing, creating a vicious cycle of mortgage subsidies, government-sponsored enterprise losses and a federally mandated transfer of wealth. The transfer will be from people who don’t own their house (and who typically have lower incomes) to homeowners, and from those who do not over-extend themselves to those who get into a financial pickle.

Last year Arnold Kling  argued in a Cato Institute paper that the solution is to freeze the mortgage activities of Fannie and its cousin Freddie Mac.  As long as housing remains in the doldrums, that’s not going to happen. When the market recovers, it will be essential to push for the dismantling of GSEs.

BK Drinkwater has a couple of excellent posts on established businesses using the force of government to muscle out competitors ( I also like them because they both have my name in them, to paraphrase the man himself). Here’s another interesting example from the story of unlicensed contractor stings I blogged about at Fr33Agents the other day.

It turns out that the guy posing as a customer in order to arrest the unlicensed electrician is himself a state-licensed electrician. That is, a member of the state-protected cartel is helping the police with their job. This subsidy of law-enforcement is similar to Hall and Deardorff’s theory of lobbying as legislative subsidy. When special interests find it difficult to have extra sway over policy through outright bribery, they can provide services to already sympathetic legislators in order to make them more effective. Legislators supported by lobbyists providing research and pre-written speeches will be more able to pursue the legislative goals. Cops supported by unusually public-spirited electricians will be more effective in enforcing cartels.