Friday, August 22, 2008

Westover does public finance 

Craig goes from a discussion of Federalist 51 to a discussion of classic public goods:

At the heart of [MN House Speaker] Kelliher's misconception is a failure to distinguish between "private benefits" and "public goods," admittedly not always a simple distinction. The problem is, policy-makers who resort to the clich� of taxes as the price of civilization generally don't recognize that there is a distinction. "Public good" cannot simply be applied to the project de jour.

The best way to understand the idea of "public good" is by contrasting it with the more familiar "private benefit." Each of us engages in private benefit transactions when we exchange money for products and services we want. We get in a taxi, and for a fare, we enjoy the benefit of getting from point A to point B. We buy cup of coffee; we drink it, and nobody else gets to drink it. That particular cab ride and cup of coffee are not available to others.

Public goods in support of legitimate government functions provide benefits that, unlike our cab ride or cup of coffee, don't exclude anyone. A streetlight is the classic example: It benefits everyone and anyone equally at the same time. It would be virtually impossible and highly inefficient to limit access or proportionally charge people for the streetlight's glow. Police and fire protection and the court system are other examples � they don't limit discrete benefits to some at the exclusion of others.

The policy distinction boils down to this: If a taxi ride from point A to point B is a private benefit for which an individual pays a market fare, why is a bus or light-rail ride from point A to point B a "public good" subsidized with tax dollars? The only answer is, it is a more "civilized" way to travel.

Let me help my MnFMI colleague out here, because there's a distinction to be made. There are volunteer fire departments. Do they provide any less service than those supported by tax dollars? Well they might -- there was a story a few years ago of a house near International Falls that was allowed to burn to the ground because the home's owner didn't pay his annual fee of $25. They didn't allow the homeowner to free-ride, though they did hose down his garage since it was close to another house that had paid the fee.

The source of the problem there, and in Craig's case for transportation, is one of transactions costs. The situation in International Falls was hampered by negotiation over replacing voluntary fees with a property tax surcharge. Taxes are, as Craig says, the price we pay for not being completely civilized ... and the willingness of people to free ride is a good example of the "angels" that led to Madison's role of government. Transactions costs are another impediment that institutions aspire to overcome, and yes, sometimes those are taxing districts. If all we are going to concern ourselves over is the efficient way of delivering pure public goods, you will continue to combat cases where market failure and free riding are trotted out as explanations for greater use of force.

What folks like Speaker Kelliher lack is not a failure to understand public finance theory, but the ideal that persuasion and cooperation are the best form of social organization. Government is force, wherever it appears. Sometimes force can reduce transactions costs but not often, and the temptation to use force for other things, once granted in the case of fire or police, is something to which every politician, of every party, succumbs. Don Boudreaux makes the case:
Just as many on the right naively fantasize that foreign problems are best solved by force, "liberals" fantasize that domestic problems - real and imaginary - are best solved by force. Jobs disappearing in Ohio? No problem - force Americans to buy fewer foreign goods. Too many Americans without health insurance? Force taxpayers to give it to them. The "distribution" of income doesn't satisfy some Very Caring Person's criterion? Government should forcibly redistribute. A mine collapses in West Virginia? Uncle Sam should force mine-owners to increase safety. See? All very simple.
Kelliher and other liberal DFLers who favor interventionism preach market failure but do not address the likelihood of government failure. And yes, government failure is always a possibility for foreign policy too, as Boudreaux condemns the right of ignoring. A more rational view of government explains why Kelliher ignores the distinction of pure public goods -- private benefits to one's political supporters are often more efficient in building a winning coalition in a democracy than are public goods. The pure public good can waste resources acquired through confiscatory taxes by conferring benefits on political opponents. The DFL is smart enough to recognize that waste.

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Tuesday, July 01, 2008

A pleasant exchange, an uphill battle 

I must comment briefly on the salutary exchange between Dane Smith and Craig Westover in today's PioneerPress. �Both are good people, arguing their positions with a minimum of obfuscation or ad hominem attacks. �Would that the StarTribune promote such exchanges!

A retired colleague once wrote a manuscript entitled "To Promote the General Welfare". �That is of course a clause in the preamble to our Constitution. �The preamble is merely a context for the document; it does not carry the force of law. �Still, I thought it was useful to understand the context of what progressives wish, and I take from Smith's writing that he views "to promote the general welfare" as a legitimate function of government.

It also appears in Article I, section 8, in describing the powers and duties of Congress. �That link to Wikipedia includes a discussion of the battle between Alexander Hamilton and James Madison over whether the general welfare clause was expansive or to be taken in the narrower context as understood at the time (via the Articles of Confederation which the Constitution was to replace. �And the interpretation of this has been fought almost from the beginning, and regrettably to the Westover side (with which, unsurprisingly, I have greater sympathies) the battle has been uphill for almost 200 years.
The subject is the execution of those great powers on which the welfare of a Nation essentially depends. It must have been the intention of those who gave these powers to insure, so far as human prudence could insure, their beneficial execution. This could not be done by confiding the choice of means to such narrow limits as not to leave it in the power of Congress to adopt any which might be appropriate, and which were conducive to the end. This provision is made in a Constitution intended to endure for ages to come, and consequently to be adapted to the various crises of human affairs. To have prescribed the means by which Government should, in all future time, execute its powers would have been to change entirely the character of the instrument and give it the properties of a legal code. It would have been an unwise attempt to provide by immutable rules for exigencies which, if foreseen at all, must have been seen dimly, and which can be best provided for as they occur. To have declared that the best means shall not be used, but those alone without which the power given would be nugatory, would have been to deprive the legislature of the capacity to avail itself of experience, to exercise its reason, and to accommodate its legislation to circumstances. �(McCulloch v Maryland (1819))�
However much we may wish to put that genie back in the bottle, we cannot. We argue in essence for a status quo ante, a very difficult place on which to stand even when you are right. �

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Saturday, June 28, 2008

The anti-captalistic mentality 

After a week of debate where it appeared the saner members of Congress would keep their colleagues from looking like fools, the House passed HR 6377 just before leaving on Fourth of July recess last night, instructing the Commodity Futures Trading Commission to "curb immediately the role of excessive speculation" in energy futures or swaps and
(2) eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations or unwarranted changes in prices, or other unlawful activity that is causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for energy commodities.
The bill, introduced by Minnesota Congressman Collin Peterson, passed overwhelmingly, with only 19 nays. I've already written this week about speculation, but some further comments seem justified.

Congress has heard lots of testimony from 'experts' contending that the price of gas would fall to $2 if we could just get those nasty speculators out of the market. The testimony most have focused on is that at the top of the article, by Michael Masters. Here that is. The focus is on index speculators, who are now buying futures contracts almost equal to the entire increase in demand for oil from China. This however does not reduce the supply of oil unless someone takes delivery of the contract. Krugman hints at this very same point; see also Craig Jones. Most futures contracts are going to be closed out by writing the opposite contract as one reaches expiration. (Futures basics.) You might keep your long position by buying another future, but that does not remove oil from supply.

Now that doesn't mean that the price isn't influenced by what is going on in futures markets. Prices have been rising in part by expectations of the future, but it was ever thus since the beginning of asset trading. The key question is, at what point does speculation become excessive? And the reaction of politicians and everyday people, in my view, is emotional rather than economic. Excessive speculation occurs, in the mind of the non-economist or Congressperson, when the price of X is driven beyond the point where he or she can afford to own it. To take just one example: A St. Cloud resident is a Green Bay Packers fan. He owns season tickets to Packer home games. He does not use these often, instead selling them for above face value. Is he a speculator? When I ask him why he still gets the tickets, he hopes some day to return to the Land of the Cheese and attend all the games when he retires. He thinks the price will be higher for him to go to games when he returns than it is now, so he is hoarding his spot in the season ticket queue.

He is preventing others from holding that ticket, and therefore is helping drive up prices now. Unlike the index speculators, he actually HAS THE TICKET. But is his speculation excessive, or is it rational? You don't know, I don't know, and the government regulators don't know.

This does not prevent, unfortunately, government from acting as if they did. Sometimes arrogance is a disguise for ignorance, and as a good example this week consider Tim Walz' antipathy to markets, as Andy Aplikowski documents. He quotes a Rochester Post-Bulletin article in which Walz denies the market.
This idea � this red herring � that all of a sudden you�re going to drill and everything is going to be better, as if the market fundamentals are at work here � that�s not happening... These are the same people that are (getting) $40 billion in profit.
"As if" Walz believes profits do NOT motivate drilling. What do you think they do it for, to drop the rocks they drill in the ocean to watch the ripples? There is, in the Walz mentality, a suspicion that people who earned a profit got this from someone, that it's undeserved. For many years we've understood profits as the return to risk born by the residual claimant, the entrepreneur. But instead we get people who believe corporations are reprobates less worthy of our trust than a government that has a monopoly on force.

But that's not the point either. There's no need to believe the government is more immoral than corporations. There's little argument from either side of this debate that corporations are quite willing to co-opt or corrupt government to do their bidding, or that it's easier for them to do so than the hordes of consumers. It is that Walz and the others in Congress do not comprehend how the wealth we live in today came from. In the book with the title that I made this post, Ludwig von Mises stated this well:

Economics is so different from the natural sciences and technology on the one hand, and history and jurisprudence on the other hand, that it seems strange and repulsive to the beginner. Its heuristic singularity is viewed with suspicion by those whose research work is performed in laboratories or in archives and libraries. Its epistemological singularity appears nonsensical to the narrow-minded fanatics of posi�tivism. People would like to find in an economics book knowledge that perfectly fits into their preconceived image of what economics ought to be, viz., a discipline shaped according to the logical structure of physics or of biology. They are bewildered and desist from seriously grappling with problems the analysis of which requires an unwonted mental exertion.

The result of this ignorance is that people ascribe all improvements in economic conditions to the progress of the natural sciences and technology. As they see it, there prevails in the course of human history a self-acting tendency toward progressing advancement of the experimental natural sciences and their application to the solution of technological problems. This tendency is irresistible, it is inherent in the destiny of mankind, and its operation takes effect whatever the political and economic organization of society may be. As they see it, the unprecedented technological improvements of the last two hundred years were not caused or furthered by the economic policies of the age. They were not an achievement of classical liberalism, free trade, laissez faire and capitalism. They will therefore go on under any other system of society�s economic organization.

And thus there is no check on the ability of people to vilify speculators, because of course the oil can be brought to market in any number of ways! It occurs to me that people do not know what the world was like before the Industrial Revolution (or perhaps they want to go back to those halcyon days?) and how recent our gains against disease and starvation and the Malthusian world. Anthony de Jasay writes about how the modern progressive glorifies envy by its ignorance of these gains on the subsistence level:
Most of us react to the decency or otherwise of large incomes and quickly made fortunes by moral reflexes that evolved under the capitalism of a generation or two ago. They have not yet been adjusted to the changes capitalism has since undergone. One such change is the flood tide of pension funds in the Anglo-American type of capitalism which, after all, sets the mode of operation the rest of the world is beginning to imitate. The needs of pension funds and the competition between their managers sets the maximisation of asset values as the primary goal, and the more classic goal of profit maximisation by corporate enterprise tends to become a mere instrument of the primary goal. Socialists whose rejection of the "system" is visceral rather than intellectual, call this "Casino capitalism," run by and for "speculators".
It is that same visceral reaction that lead 402 Congresspersons yesterday to cast aside the gains that result from finding more ways to spread risk in the world to those willing to bear them, gains that allow pensions, homeownership, life insurance, and the development of new technologies -- the very ones the modern progressive says we should trust instead to give us energy rather than tapping the oil deposits we already know exist. Ignorance of that history is a peril to us all.

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Friday, March 14, 2008

The Paulbots' graven coinage 

Someone tipped me to a proposed action posted on the Ron Paul meetup board.
A great opportunity has come into our own backyards. Arthur J. Rolnick, Senior Vice President of the Minneapolis Federal Reserve, and Associate Economist with the Federal Open Market Committee, will be speaking at the University of Saint Thomas on Thursday, April 10th, 2008. Mr. Rolnick is coming at the request of the Economics Department to speak and take questions. This event will be open to the public.

As a liberty activist and student at Saint Thomas, I am urging all those who question the policies and secrecy of the Federal Reserve to attend. This is a unique opportunity to confront a man who is deeply involved in the inner workings of the Federal Reserve.

...I am asking all those who care about our increasingly graven [sic] economic future to attend in solidarity and show our dissent for current policy. By attending and speaking up on April 10th, we the people can make an effective impact on the conscience of Mr. Arthur Rolnick.
The relationship between Ron Paul supporters and Art Rolnick is through NORFED, the group that issued Ron Paul copper coins, sold for a dollar each and caught up in a wire and mail fraud prosecution. You can own one of those coins, but commerce in them as a competing currency is a crime (see this.)

Rolnick was quoted in an undated but certainly recent article out in Montana (the gold bugs have posted it -- I have no independent source for it) in which Rolnick responds to the NORFED claims that the Fed must be removed:
"The way I would respond to NORFED is this: The economy is incredibly productive. There's low inflation. The unemployment rate is the lowest in 30 years. What's broke?"

"These guys are right when they say there is nothing in the Constitution explicitly allowing a national bank. But the Constitution gives Congress the authority to regulate money and the value thereof, and courts have upheld Congress' implied powers."
Even as we head towards or are in recession, Rolnick's critique seems still valid.

"These guys" are the friends of Ron Paul. During my time in hard libertarian circles I saw many people like the poster of this call for action. I know Republicans are hopeful of keeping Ron Paul supporters engaged in its party politics. It might want to look a little more under the hood.

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Wednesday, October 24, 2007

The bundles intertwined 

I was reading Phil Miller's excellent essay on McMansions in Edina and saw that he used the "bundle of rights" approach pioneered by Armen Alchian. Here's an essay by Anthony de Jasay on that point. de Jasay makes a useful point on the nature of rights versus freedoms.

A freedom is a relation between one person and a set of acts. The person is presumed to be free to perform any act in the set that does not breach the rules against torts (offences against person and property) and (a less stringent requirement) the rules of civility. A substantial obstruction of freedom (e.g., gagging or threatening to hit a person to stop him from speaking freely) is a tort or an incivility. As such, it is wrong. To say that a person has a "right to a freedom" is tantamount to saying that he has a right not to be wronged�a redundant and silly proposition. It also implies that he would not have this freedom if he had not somehow obtained a right to it�an implication that is at the source of much false theorizing. You do not need a right to move if your moves stay within the rules�this indeed is what it means to have rules.

In contrast to a freedom, a right is a relation between two persons, the right-holder and the obligor, and an act the obligor must perform at the rightholder's bidding. A right may be created by contract in which the obligor, in exchange for a consideration, surrenders his freedom to perform (or forbear from performing) some set of acts as he pleases, and agrees to perform (or forbear from performing) it as required by the rightholder. Here, both parties enter voluntarily into the right/obligation relation. However, a right may also be created by some authority, such as the government acting on behalf of "society", conferring it upon rightholders and imposing the corresponding obligation on obligors of its own choosing.
There is no right that I see for the homeowner to build, as the building contract is between the owner and the construction company, and to a lesser extent between the owner and the zoning authority. Whether or not someone is free to build a McMansion is, however, a matter where civility does play a role. Suppose St. Cloud did not have a noise ordinance, and you were to play Iron Maiden very, very loud at 3am. You may claim you have a right to do so because the government has not enjoined you from it, and courts might declare your behavior not to be a nuisance (I hear you could get a good ruling about Iron Maiden from Justice Foot) but you do not have the freedom to do so without consequences. It is, among the non-Iron Maiden-loving crowd, uncivil.

I agree with Phil that it's troubling that positional goods are a call for government action which turns the question of freedom into a set of rights (as de Jasay's last sentence discusses.) P.J. O'Rourke's idea of the rules of governance as "keep your hands to yourself, and mind your own business" appeal to me, but a government by the people means the people have to accept those rules first. In the town of Edina, it appears they do not.

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Monday, September 24, 2007

Persuasion, force and the possibilities of private censorship 

I was wandering through Minnesota blogs a few nights ago and stopped by Charlie Quimby's site to see a post titled "Free Market Censorship." I considered that an oxymoron (this is currently Littlest Scholar's favorite word -- a 13-year-old's life apparently gives many opportunities for its use) and said so in his comments. He has responded with a second post that contains a little derision for my view. Allow me to explain this to my readership a little better.

Charlie first complained that when he forwarded email that was "anti-war, pro-environment progressive" to a group of his friends, some did not receive them because "AOL subscribers and users of "free" email services such as Microsoft-Hotmail and Yahoo" were having that email filtered out by those providers. I suggested it was not for him to complain. Those services do not have a duty to him as a sender but have some duty to the recipient, since they are the ones who sign a contract with the service providers. Charlie checked out the AOL contract and thought AOL had a great deal of rights retained to deliver or not deliver mail.

So what? Subscribers have the right to not subscribe. They can go to other sites or buy their own ISP services. The filter on email to this domain is set by me, for example, and the cost of this site is less than the cost of an AOL subscription. People buy AOL, or use Hotmail and Yahoo, because they require less work and knowledge of the internet than buying your own domain. You're free to make that trade or not. And if you are a subscriber, you can choose as well to complain to AOL or Microsoft about their policies. This is an example of Hirschman's concepts of exit and voice to describe dysfunction in a relationship.

But as long as exit is possible, in what sense are you censored?

A little sidetrack: Yesterday in the St. Cloud Times, editorial page editor Randy Krebs announced a new policy on letters to the editor regarding candidates for political office. The new rule:
For submissions that cite an incumbent�s vote on specific legislation, the author must provide documentation from a reputable source that verifies the vote. That documentation can be a newspaper article, minutes from a meeting or even a link from a credible Web site that tracks such votes. (Examples include links to the appropriate files on The Library of Congress or the Minnesota Legislature�s Web sites.)
Who's Krebs to decide what's a "credible web site" or "reputable source"? Well, he's the person designated by the paper's owners to decide what's on the editorial page, that's who. When he sends back a letter and says "I don't think your source on this is reputable", you have no right to demand your letter be published. You may complain, and you may publish it on a blog, and you may denounce the policy. But you don't get to tell a private newspaper what is to be published on its pages. You can't, and because of the First Amendment neither can the government.

(Note: With this policy the Times can no longer really say it publishes all letters, and it has opened itself up to criticism of applying the standard unequally to conservative or liberal letters, to Republican and Democratic letters. That's their problem, though, and I think we can assume they've evaluated that problem versus the problem of unfounded claims in letters and the barrage of responding letters that ensue, and decided this was how to handle that problem. Again, they're a private entity, and that's their right.)

Many years ago I read an essay by Mark Skousen in which he highlighted a passage from Alfred North Whitehead's Adventures of Ideas. In one essay in that book Whitehead argues that persuasion, the respecting of a human's right to choose, is the most fundamental sign of the advancement of society. Using Skousen's excerpt:
The creation of the world -- said Plato -- is the victory of persuasion over force... Civilization is the maintenance of social order, by its own inherent persuasiveness as embodying the nobler alternative. The recourse to force, however unavoidable, is a disclosure of the failure of civilization, either in the general society or in a remnant of individuals...

Now the intercourse between individuals and between social groups takes one of these two forms: force or persuasion. Commerce is the great example of intercourse by way of persuasion. War, slavery, and governmental compulsion exemplify the reign of force.

Charlie's second post is little more than a diatribe against commerce, at least when one of the parties to commerce takes the form of a corporation. Yet the examples of force in his story are not found. You are not forced to accept Hotmail as your email service. You are not forced to take a job with a company that refuses to pay you for overtime. You may do so because you are ill-informed or ill-prepared to explore alternatives, but last time I looked your right was only the right to pursue happiness, not have it delivered to you with a bow on top.

The penultimate paragraph tries to attach to my view something I do not believe:
But I find it extremely comical that an economist can overlook how corporations enjoy the protections of government � particularly through lobbying, political back scratching and the courts.
Good heavens, no. I don't overlook it. I call it "rent-seeking" and I abhor it. Economists have long recognized its existence and the inefficiency of it. Where Charlie and I might disagree is how to cure it. He would argue that there are not enough government restrictions on economic activity and seek political solutions to put more on. I would argue instead that as long as government has the power to place these restrictions on economic activity businesses will seek to control it, so the only solution is a constitution that reduces government's power to write the restrictions in the first place. The original U.S. Constitution was closer to that ideal than the one that we have now with direct taxation; the pre-New Deal executive and legislative branches understood this better than the post-World War II ones, with the notable exception of Reagan (at least in the first term.) This blog is chock full of examples of rent-seeking, and I hold no brief for corporate power.

But a contract for email services is a poor choice for an example of government protection of corporate power because government does not restrict your choices for email service. Government is the source of all coercion; corporations can only bend it to their will if we first allow government to do it. The conservative or libertarian argument is to get government to stop using force, not to use it "in the name of the people." If you fail to understand why, look up the countries whose official names begin "People's Democratic Republic of..."

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Monday, June 11, 2007

I got your belt right here 

Lloyd Garver asks how dare New Hampshirites not have a seat belt law. How dare they!
The first time I saw "Live Free or Die" on a license plate, I knew that it had to be the best slogan of any state. I loved its defiant pride. But now, in the area of seat belts and safety, that spirit of "nobody's going to tell us what to do" just doesn't make sense.

Currently, New Hampshire is the only state that doesn't have a mandatory seat belt law. They do require that restraints be used for children and teenagers, but not for adults. Wednesday (May 31), their state senate is scheduled to vote on such a bill. The New Hampshire Senate Transportation and Interstate Committee voted three to two to recommend that the bill be killed. If it is, obviously some of the people of New Hampshire will also suffer that fate.
The bill failed in the NH Senate.

One member of the committee who voted against the bill, Bob Clegg, says, "I choose not to buckle, and I think it's baloney that the government would tell me that I have to, or else."
I grew up with "Live Free or Die", and with "Ax the Tax" Mel Thompson, Bill Loeb, and the rest of what makes New Hampshire the most libertarian state in the union (this is a test to see if I have Alaskan readers.) We don't use seat belts, but we know how to drive. And there is some evidence that the effects of seat belt laws on traffic fatalities is greatly exaggerated, as having a seat belt changes the behavior of drivers.
It seems to me that this attitude underestimates the people of New Hampshire. Any group that could come up with "Live Free or Die" is not stupid. They're not a bunch of immature adolescents who resent it when their parents say they have to do their homework before they go out, and then don't do their homework and sneak out. We're talking about mature, intelligent adults. Just to be defiant, do they speed up when they see a sign that says "School Zone?" Do they sell liquor to kids because they resent that there's a law against it? Do they go to work naked because they don't feel the government should tell them they have to wear clothes?
No, you idiot. We don't need government to tell us how to be civilized. We don't need government to tell us to be courteous. And we don't need government to tell us to do certain things because it passed a law to take someone else's money to pay for something I would have paid for myself. If I have to do what you say because you paid my bill, then as the George Bernand Shaw line goes, we know what I am, we're just haggling over price.
Some people believe, "If the only one I may hurt is me, why should the government be involved?" Proponents of seat belt laws point out that New Hampshire would get $3.7 million from the Federal government for enacting a seat belt bill, and the state would save an estimated $48 million in medical costs. That money's not "baloney."

Putting money aside, if you are a victim of an accident because you don't use a seat belt, you aren't the only one affected � what about the loved ones left behind? Should they have to suffer because you wanted the government to "mind its own business?"
In a word, yes. Who's in a better position to decide what my family can endure, me or the government? As Winston Churchill once observed, the power of man has grown in every sphere, except over himself. New Hampshirites try to conquer that last frontier, and good for them.

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