In Search of the Elusive Unicorn

Economist Michael Munger writing in the Freeman, Aug. 11:

When I am discussing the state with my colleagues at Duke, it’s not long before I realize that, for them, almost without exception, the State is a unicorn. I come from the Public Choice tradition, which tends to emphasize consequentialist arguments more than natural rights, and so the distinction is particularly important for me. My friends generally dislike politicians, find democracy messy and distasteful, and object to the brutality and coercive excesses of foreign wars, the war on drugs, and the spying of the NSA.

But their solution is, without exception, to expand the power of “the State.” That seems literally insane to me—a non sequitur of such monstrous proportions that I had trouble taking it seriously.

Then I realized that they want a kind of unicorn, a State that has the properties, motivations, knowledge, and abilities that they can imagine for it. When I finally realized that we were talking past each other, I felt kind of dumb. Because essentially this very realization—that people who favor expansion of government imagine a State different from the one possible in the physical world—has been a core part of the argument made by classical liberals for at least three hundred years.

The March of Folly

Good quote to remember:

Mankind, it seems, makes a poorer performance of government than of almost any other human activity…three outstanding attitudes–obliviousness to the growing disaffection of constituents, primacy of self-aggrandizement, illusion of invulnerable status–are persistent aspects of folly…all are independent of time and recurrent in governorship.

– Barbara Tuchman, The March of Folly

Jobs? (No, not Steve)

Jobs? Jobs. Jobs. And more Jobs. Where are the jobs? Always the wrong answer to the wrong question. Do we have to wait upon big employers or the government for deliverance? Why not foster entrepreneurship and broaden capital accumulation to promote wealth creation? Instead we try to make the planet turn in the opposite direction. Maybe the French are finally starting to get it (if they listen to this banker). No such luck on this side of the pond.

From the WSJ:

The Emperor Creates No Jobs

France’s top central banker speaks some blunt economic truths.

French and German ministers met Tuesday in Paris to discuss the euro zone’s stagnant economy and rising unemployment. We hope they took with them the recent annual reportfrom French central bank chief Christian Noyer, who offers as clear an assessment as you’re likely to find in Europe of what ails the euro zone.

“The underlying objective,” Mr. Noyer writes, “is growth. Not just a temporary spurt, sustained artificially by public spending, but strong and lasting growth that creates jobs and is based on the development of modern and competitive production capacity. This kind of growth cannot just be summoned up. It requires a profound change in public policy.”

Consider France’s inflexible labor market. Mr. Noyer says France “is one of the biggest spenders on employment policies in the developed world, but it still has one of the highest levels of unemployment.” The central banker argues that France’s various programs and incentives to boost employment are undermined by their sheer complexity.

He also asks a fundamental question: “Do these subsidies not serve to offset market rigidities that could in fact be addressed directly at a lower cost and with more effective results?” In almost any other country, the question would answer itself. But to argue for “flexibility” in France is to risk the barricades. Maybe it takes a central banker to say that the emperor creates no jobs.

German GDP, Mr. Noyer notes, “contracted almost twice as much as in France in 2009.” But Germany’s greater labor-market flexibility allowed for a much faster rebound. France lost 500,000 jobs in that period, while German unemployment “remained stable,” in part because businesses could cut working hours when growth slowed. [Note: this is called market flexibility in the face of inevitable change.]

With French President François Hollande pushing older workers into retirement to “make room” for the jobless young, we hope he pays attention to Mr. Noyer’s words on jobs: “Public policies are often overly concerned with preserving the jobs of the past, at times to the detriment of future job creation.” He adds: “Today’s jobs are not the same as those of yesterday and, likewise, those of tomorrow will be different from the jobs that exist today.” [And nobody in government or the private sector really knows what tomorrow will bring. I doubt it will be a Tesla in every garage.]

Mr. Noyer’s third truth concerns government spending, which is 55% of GDP. “For the past ten years,” he writes, “France has had one of the highest levels of public spending in the world. Over a certain threshold, which our country has probably crossed, any increase in public spending and debt has extremely negative effects on confidence” (our emphasis). For this reason, trying to stimulate growth through a spending binge is bound to be counterproductive. Businesses and households, anticipating higher future taxes to pay for the binge, will cut back, offsetting any boost from deficit spending.

Mr. Hollande has in recent months led the charge for new German-financed spending to bring Europe out of recession. Mr. Noyer has hit on a better cure: less government spending, more flexible labor markets, and more competitive private firms able to create the jobs of the future. If only the President would listen.

The Political World We’ve Created

Ron Bailey writing at reason.com, Feb. 1:

For decades, an increasingly large percentage of our economic output has been moved from the positive-sum game of markets and private property to the zero-sum game of government and politics. According to the Office of Management and Budget, total government spending in the U.S. rose from 17 percent of GDP in 1948 to 35 percent in 2010. As public choice theory predicts, the more resources government bureaucracies control, the more lobbyists, crony capitalists, and entitlement clients will appear seeking to divert handouts into their pockets. Such would-be beneficiaries need experts to construct the facts that they use to justify to political patrons and agency bureaucrats why they deserve a share of the government’s largesse. To the extent that we live in a “post-truth era,” it is in good measure because it pays so well to dissemble, exaggerate, and spin for government grants and favors.

Our political class is no longer focused on win-win solutions, but on win-lose redistributions. This is hardly ideal for a democracy. Here’s another revealing quote by the economist Frederic Bastiat from 1848:

Government is the great fiction through which everybody endeavors to live at the expense of everybody else.

It shouldn’t be so.

Politics Without Romance

It’s a shame that the nonsense Mr. Buchanan had detected has taken root in our politics.

From the WSJ:

In Appreciation of James M. Buchanan

The Nobel-winning economist who understood how politics really works.

 By DONALD J. BOUDREAUX

James M. Buchanan, who died Wednesday at age 93, was one of history’s greatest economists. Though he won the Nobel Prize in 1986, Jim at heart was always a farm boy from Tennessee—an old-fashioned, hardworking American who disdained unearned privileges as well as deeply distrusting the promises of politicians and the passions of collectives.

The theme of his life’s work is best summarized in the title of his 1997 article “Politics Without Romance.” With longtime colleague Gordon Tullock, Jim launched a research program—public-choice economics—that challenged the widespread notion that politicians in democratic societies are more nobly motivated and trustworthy than are business people and other private-sector actors. In a wide river of books and papers, Jim warned against the foolishness of romanticizing government.

Jim regarded his work as simply extending and applying the insights of America’s founding generation, especially those of James Madison. Unlike too many pundits and professors over the past century—but like America’s founders—Jim understood that politicians’ lovely proclamations of their desires to improve society too often camouflage unlovely venal motives that prompt politicians to disregard the general welfare in order to transfer wealth and privilege to powerful interest groups.

Auto-company bailouts, Solyndra subsidies, farm programs, tariffs—the real and ugly reasons for these and many other government activities become clear after absorbing Jim Buchanan’s lessons.

His deep skepticism of government, combined with his expert understanding of free markets, led Jim to describe himself as a “classical liberal.” But it wasn’t always so. Like many of his generation, the young Jim Buchanan was a socialist. His socialism was cured, though, by his studies in economics at the University of Chicago. While there, Jim polished his keen instincts for detecting nonsense.

Jim’s nonsense-detection instincts are on full display in his 1958 book “Public Principles of Public Debt.” By the 1950s most economists were trumpeting the Keynesian myth that government debt is no burden on future taxpayers as long as it is held internally—that is, as long as “we owe it to ourselves.”

Wrong, said Jim. It is unfortunate that he is no longer here to speak out against the again-rampant Keynesians who advocate massive deficit financing. Misled by their own unjustified lumping together of taxpayers and domestic bondholders, Keynesians mistakenly conclude that government is exempt from the reality that counsels households and firms to follow prudent rules of finance. This Keynesian error is one that Jim never tired of challenging.

Not that Jim held much hope that his speaking out against unwise government policy would do much good. He sought to prevent harmful policies by tying politicians’ hands rather than by pleading with politicians to be more public-spirited. And to tie politicians’ hands Jim championed constitutional reform. He believed that only binding, enforceable constitutional rules can prevent Leviathan from eventually suffocating private markets and stamping out human freedom.

Ironically, the constitutional reform that Jim advocated practically requires the cooperation of the politicians whom he so distrusted. Yet it is a mark of greatness in Jim Buchanan that he held out hope, until his dying day, that clear-eyed scholarship would eventually persuade people of the dangers of unconstrained government and of the need to somehow rein it in.

Reality Check

We could accomplish entitlement reform by design, but, because of our political dysfunction, we’ll get it by default. Unfortunately, the last election showed that it’s probably still too early for a reality check.

From the WSJ:

None Dare Call It Default

A nicer term for what’s about to sock the middle class is ‘entitlement reform.’

By HOLMAN W. JENKINS, JR.

To call Greece First World may be a stretch, but Greece has defaulted once already, and it is only a matter of time until Greece defaults again. Welcome to default-o-rama, the next chapter in the First World’s struggle for fiscal sustainability.

Japan is piling up debt in the manner of a nation beyond hope. France, Belgium, Spain and Italy are defaults waiting to happen unless Europe can somehow generate the kind of growth that has eluded it for decades.

America’s fiscal cliff is an artificial crisis. We have no trouble borrowing in the short term. But at some point the market will demand evidence that long-term balance is being restored. President Obama said in his first post-election press conference that he doesn’t want any proposals that “sock it to the middle class.” He knows better. A long-term socking is exactly what’s coming to the middle class, which must pay for the benefits it consumes.

A few years ago, when the economy was humming, a common estimate held that federal taxes would have to rise 50% immediately to fully fund entitlement programs. Today, a 50% tax increase would be needed just to meet the government’s current spending, never mind its future obligations.

One way or another, then, entitlements will be cut. Don’t call it default. The correct term is entitlement reform.

You saw this day coming and saved for your own retirement. Don’t call it default when Washington inevitably confiscates some of your savings, say, by raising taxes on dividends and capital gains. Taxpayers accept the risk of future tax hikes that may make the decision to save seem foolish in retrospect.

According to economists Robert Novy-Marx and Josh Rauh, state and local taxes would have to increase by $1,385 per household immediately to make good the pension promises to state and local workers, including firefighters and cops. That’s not going to happen given all the other demands on taxpayers. Default, in this case, is the proper word for cities and states using bankruptcy to repudiate their pension obligations.

Prominent voices ask why the Treasury shouldn’t just cancel the government bonds the Federal Reserve has been buying. It’s money one part of the government owes the other. Dispensed with, of course, would be the idea that the Fed, in buying these bonds in the first place, was engaged in monetary policy. The Fed was printing money so Washington could spend it.

Now let it be said that inflation isn’t fundamentally a solution to the entitlement problem, but the Federal Reserve is being led by increments to accommodate inflationary financing of future deficits. Don’t call it default. Inflation is a risk savers are deemed to have accepted by putting their faith in the U.S. dollar.

Here’s what you weren’t told about Medicare during the presidential debates. Under the Paul Ryan plan, the affluent would pay more. Under the Obama plan, the affluent would flee Medicare to escape the waiting lists, shortages and deteriorating quality as Washington economizes by ratcheting down reimbursements to doctors and hospitals. Don’t call either default. You don’t have a legally enforceable right to the free care you imagined you were promised.

“Don’t worry” was President Obama’s implicit message during the campaign: If cutting subsidies for Big Bird is unthinkable, a joke, how much more so cutting benefits for middle-class voters?

Don’t go running to a judge when this doesn’t pan out. The courts do not overrule changes in government policy just because citizens find their promised free lunch isn’t forthcoming. Nor will it be fruitful to appeal to politicians’ sense of “fairness.” Politicians can be relied on to do what will get them re-elected. And, believe it or not, that is the good news.

If politicians weren’t eager to be re-elected, the trust necessary to be an investor would vanish altogether. While there is no escaping our challenges, there is a path in which the economy grows strongly and we don’t savage each other, and there is the other path. For years the trustees of Social Security and Medicare were accused of exaggerating the programs’ deficits by envisioning that America’s long-run growth would become more like Europe’s. Now who doesn’t fret that America’s growth is becoming permanently slower like Europe’s?

Which brings us to President Obama. He knows cuts are necessary but seeks to position Democrats politically as the defender of all spending. Notice that, with ObamaCare, he is deliberately creating a constituency of the young to set against the old in future fights over the allocation of federal health care dollars.

Meanwhile, saving the dynamism of the U.S. economy, while still affording an entitlement state, naturally falls to the other party in a two-party system.

Big Data, Voting and You

Quoted from the WSJ. Full article here.

Marketing politicians is now like selling drinks. It involves filtering polices and voters through algorithms.

The Obama campaign focused on data showing the “persuadability” of voters. Multivariate tests identified issues and positions that could move undecided voters, ProPublica said: “The persuasion scores allowed the campaign to focus its outreach efforts—and their volunteer calls—on voters who might actually change their minds as the result. It also guided them in what policy messages individual voters should hear.”

Big data give incumbents a big advantage, which seems to have surprised the Romney team. The Obama campaign has used cookies to track its supporters online since the 2008 election. It spent the past 18 months creating a new, unified database, factoring in some 80 pieces of information about each person, from age, race and sex to voting history. (The campaign denied reports that it tracked visits to pornography sites in its outreach algorithms.) The Romney campaign says it tried to match the Obama campaign’s collection and analysis of data but had to start from scratch and had just seven months after the primaries.

What does this mean for you? Voters need to develop buyer-beware habits. The era of politicians saying the same thing to all voters is over. Campaigns aim to tell voters exactly what each wants to hear: data-driven pandering.

Friedman on Freedom

 

Good quote by Milton Friedman:

Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.