Democracy and Liberty

In an update to yesterday’s post, “A Prediction,” I quote Arnold Kling, who quotes Peter Thiel, who says (among other things) that he “no longer believe[s] that democracy and freedom are compatible.”

I have said, for years, that democracy is an enemy of liberty. You could read the ten posts to that effect at my old blog (here, here, here, here, here, here, here, here, here, and here). But I will save you the trouble of doing that by restating, here, the core of my argument against democracy. (What would I replace it with? I’ll answer that question in a future post.)

DEMOCRACY FORCES CONSENSUS WHERE INDEPENDENCE IS NEEDED

Where better to begin that with Friedrich Hayek? Fritz Machlup wrote this summary of a 1961 article (in German) by Friedrich Hayek:

[Hayek] asks why it is that personal liberty is in continual jeopardy and why the trend is toward its being increasingly restricted. The cause of liberty, he finds, rests on our awareness that our knowledge is inevitably limited. The purpose of liberty is to afford us an opportunity to obtain something unforeseeable; since it cannot be known what individuals will make of their freedom, it is all the more important to grant freedom to everybody…. Liberty can endure only if it is defended not just when it is recognized to be useful in particular instances but rather continuously as a fundamental principle which may not be breached for the sake of any definite advantages obtainable at the cost of its suspension…. It is not easy to convince the masses that they should sacrifice foreseeable benefits for unforeseeable ones. [From “Hayek’s Contribution to Economics,” in Essays on Hayek (1976), p. 41.]

James Surowiecki makes a related point in his book, The Wisdom of Crowds, which is a flawed masterpiece. Surowiecki seems to understand how unregulated markets make people better off, but in the end he succumbs to the notion that we can regulate our way to “the common good” through democracy. Surowiecki nevertheless gets it right when he says this:

[A] group of people…is far more likely to come up with a good decision if the people i the group are independent of each other….

Independence is important to intelligent decision making for two reasons. First, it keeps the mistakes that people make from becoming correlated. Errors in individual judgment won’t wreck the group’s collective judgment as long as those errors aren’t pointing systematically in the same direction….Second, independent individuals are more likely to have new information rather than the same old data everyone is already familiar with. The smartest groups, then, are made up of people with diverse perspectives who are able to stay independent of each other. Independence doesn’t imply rationality or impartiality, though. You can be biased and irrational, but as long as you’re independent, you won’t make the group any dumber.

If only Surowiecki had stopped there, on page 41. The point he makes (which he seems to ignore later in the book) is simple but profound: Democracy undoes independence. It imposes on everyone the mistakes and mistaken beliefs of a controlling faction. It defeats learning. It defeats the sublime rationality of markets, which enable independent individuals to benefit each other through the pursuit of self-interest.

What should be private, such as the voluntary exchange of goods and services for mutual gain, democracy has made public by insisting (with help from interested parties) on the burdensome regulation of almost every aspect of commerce. Such massive intervention undermines the general good on the pretext of serving the general good.

All would be well if voters were rational when it comes to voting, but they aren’t.

THE TENDENCY TO VOTE IRRATIONALLY

It is well understood that voters, by and large, vote irrationally, that is, emotionally, on the basis of “buzz” instead of facts, and inconsistently. (See this, this, and this, for example.) Voters are prone to vote against their own long-run interests because they do not understand the consequences of the sound-bite policies advocated by politicians (nor do politicians, for that matter). American democracy, by indiscriminately granting the franchise — as opposed to limiting it to, say, married property owners over the age of 30 who have children — empowers the run-of-the-mill politician who seeks office (for the sake of prestige, power, and perks) by pandering to the standard, irrational voter.

Rationality is the application of sound reasoning and pertinent facts to the pursuit of a realistic objective (one that does not contradict the laws of nature or human nature). I daresay that most voters are guilty of voting irrationally because they believe in such claptrap as peace through diplomacy, “social justice” through high marginal tax rates, or better health care through government regulation.

To be perfectly clear, the irrationality lies not in favoring peace, “social justice” (whatever that is), health care, and the like. The irrationality lies in uninformed beliefs in such contradictions as peace through unpreparedness for war, “social justice” through soak-the-rich schemes, better health care through greater government control of medicine, etc., etc., etc. Voters whose objectives incorporate such beliefs simply haven’t taken the relatively little time it requires to process what they may already know or have experienced about history, human nature, and social and economic realities.

Another way to put it is this: Voters too often are rationally irrational. They make their voting decisions “rationally,” in a formal sense (i.e., not “wasting” time in order to make correct judgments). But those decisions are irrational because they are intended to advance perverse objectives (e.g., peace through unpreparedness for war).

Voters of the kind I describe are guilty of suboptimization, which is “optimizing some chosen objective which is an integral part of a broader objective; usually the broad objective and lower-level objective are different.”

I will come back to suboptimal voting. But, first, this about optimization: If you aren’t familiar with the concept, here’s good non-technical definition: “to do things best under the given circumstances.” To optimize, then, is to achieve the best result one can, given a constraint or constraints. On a personal level, for example, a rational person tries to be as happy as he can be, given his present income and prospects for future income. (Note that I do not define happiness as the maximization of wealth.) A person is not rational who allows, say, his alcoholism to destroy his happiness (if not also the income that contributes to it). He is suboptimizing on his addiction instead of optimizing on his happiness.

By the same token, a person who votes irrationally also suboptimizes. A vote may “make sense” at the moment (just as another drink “makes sense” to an alcoholic), but it is an irrational vote if the voter does not (a) vote as if he were willing to live by the consequences if his vote were decisive and/or (b) take the time to understand those consequences.

In some cases, a voter’s irrationality is signaled by the voter’s (inner) reason for voting; for example: to feel smug about having voted, to “protest” or to “send a message” (without being able to explain coherently the purpose of the protest or message), or simply to reinforce unexamined biases by voting for someone who seems to share them. More common (I suspect) are the irrational votes that are cast deliberately for candidates who espouse the kinds of perverse objectives that I cite above (e.g., peace without preparedness for war).

THE HIGH COST OF IRRATIONALITY

Why is voters’ irrationality important? Does voting really matter? Well, it’s easy to say that an individual’s vote makes very little difference. But those individual votes add up. Every vote cast for a winning political candidate enhances his supposed mandate, which usually is (in his mind) some scheme (or a lot of them) to regulated our lives more than they are already regulated.

That is to say, voters (not to mention those who profess to understand voters) overlook the slippery slope effects of voting for those who promise to “deliver” certain benefits. It is true that the benefits, if delivered, would temporarily increase the well-being of certain voters. But if one group of voters reaps benefits, then another group of voters also must reap them. Why? Because votes are not won, nor offices held, by placating a particular class of voter; many other classes of them must be placated as well.

The “benefits” sought by voters (and delivered by politicians) are regulatory as well as monetary. Many voters (especially wealthy, paternalistic ones) are more interested in controlling others than they are in reaping government handouts (though they don’t object to that either). And if one group of voters reaps certain regulatory benefits, it follows (as night from day) that other groups also will seek (and reap) regulatory benefits. (Must one be a trained economist to understand this? Obviously not, because most trained economists don’t seem to understand it.)

And then there is the “peace–at-any-price–one-world” crowd, which is hard to distinguish from the crowd that demands (and delivers) monetary and regulatory “benefits.”

So, here we are:

Many particular benefits are bestowed and many regulations are imposed, to the detriment of investors, entrepreneurs, innovators, inventors, and people who simply are willing to work hard to advance themselves. And it is they who are responsible for the economic growth that bestows (or would bestow) more jobs and higher incomes on everyone, from the poorest to the richest.

Economic growth is thus much slower than it could be, to the detriment of just about everyone who is not a professional politician.

A generation from now, the average American will “enjoy” about one-fourth the real output that would be his absent the advent of the regulatory-welfare state about a century ago.

And we will become even less able to defend ourselves than we are now.

CONCLUSION

Americans have, since 1932, voted heavily against their own economic and security interests, and the economic and security interests of their progeny. But what else can you expect when — for those same 77 years — voters have been manipulated into voting against their own interests by politicians, media, “educators,” and “intelligentsia”? What else can you expect when the courts have all too often ratified the malfeasance of those same politicians?

If this is democracy, give me monarchy.

A Prediction

It seems likely that General Motors will become a vassal of the United Auto Workers union and the federal government. Which means that GM will survive only because U.S. taxpayers pick up the tab in order to preserve the pensions of UAW members and keep them employed at above-market compensation. Similar arrangements may come to pass in other (effectively) nationalized industries — banking and health care, most notably (but not exclusively).

Nationalization of the auto, banking, and health-care industries (among others) will prove to be the straw that — when piled on Social Security and Medicare/Medicaid — breaks the back of the American economy. How so? The effective tax rate — the true cost of supporting Social Security, Medicare/Medicaid, nationalized industries, and the ever-growing panoply of government “services” — will further (and fatally) deter work, saving, capital investment, innovation, and entrepreneurship. (See, for example, this piece by Lawrence Kudlow.)

The economy, if we are lucky, will muddle along at a rate of growth that is barely positive. And that growth will be phony because it will be attributable to the expansion of the public sector (i.e., government and its wholly controlled subsidiaries). We will then have achieved the Left’s Nirvana: Europeanism.

God help us. It’s unlikely that anyone else will.

UPDATE: Arnold Kling makes a related and equally gloomy prediction:

Cato Unbound this month deals with a core issue. Peter Thiel writes,

I no longer believe that freedom and democracy are compatible…

As one fast-forwards to 2009, the prospects for a libertarian politics appear grim indeed. Exhibit A is a financial crisis caused by too much debt and leverage, facilitated by a government that insured against all sorts of moral hazards — and we know that the response to this crisis involves way more debt and leverage, and way more government. Those who have argued for free markets have been screaming into a hurricane. The events of recent months shatter any remaining hopes of politically minded libertarians. For those of us who are libertarian in 2009, our education culminates with the knowledge that the broader education of the body politic has become a fool’s errand.

I think that perhaps the best positive approach for libertarians right now is to support institutions that compete with government. That means charities, churches, charter schools, clubs, consumer information services, and other sources of public goods. I would count the traditional family as an institution that competes with government.

You are likely to see Democrats under President Obama launch assaults against all of the institutions of civil society. Already, the Washington DC school voucher program is under attack, as is the tax deduction for charitable contributions. As libertarians, our electoral voice is worth little. Our threat to exit is probably too costly to carry out. Promoting institutions that compete with government is the best strategy I can come up with.

I tend to agree that for libertarians the “voice” option is looking bleak. I prefer exit options. But by the same token, I do not want to move to New Hampshire (see Jason Sorens) or to a seastead (see Patri Friedman).

UPDATE 2: The Supreme Court will be of no help to us, if Ed Whelan and I are right about its likely direction. I focus on the long run; Whelan, on the near future. Sadly, I must agree with his assessment:

Don’t be fooled by the false claims that we have a conservative Supreme Court. The Court has a working majority of five living-constitutionalists. Four of them—Stevens, Souter, Ginsburg, and Breyer—consistently engage in liberal judicial activism, and a fifth, Kennedy, frequently does. As a result, the Court is markedly to the left of the American public on a broad range of issues. Indeed, in coming years, Souter’s replacement may well provide the fifth vote for

the imposition of a federal constitutional right to same-sex marriage;

stripping “under God” out of the Pledge of Allegiance and completely secularizing the public square;

the continued abolition of the death penalty on the installment plan;

selectively importing into the Court’s interpretation of the American Constitution the favored policies of Europe’s leftist elites;

further judicial micromanagement of the government’s war powers; and

the invention of a constitutional right to human cloning.

American citizens have various policy positions on all these issues, but everyone ought to agree that they are to be addressed and decided through the processes of representative government, not by judicial usurpation.

Sizing Up Obama

On the one hand, we have FDR II, replete with schemes for managing our lives and fortunes.

On the other hand, we have Carter-Clinton II, ready to: kowtow to those who would bury us, create the illusion that peace will reign perforce, and act on that illusion by slashing the defense budget (thereby giving aid and comfort to our enemies).

Through the haze of smoke and glare of mirrors I see a youngish president exhorting us to “fear nothing but fear itself” while proclaiming “peace for our time,” as we “follow the yellow-brick road” to impotent serfdom.

Fascism with a “Friendly” Face

This is the core meaning of fascism:

Fascism is a system in which the government leaves nominal ownership of the means of production in the hands of private individuals but exercises control by means of regulatory legislation and reaps most of the profit by means of heavy taxation. In effect, fascism is simply a more subtle form of government ownership than is socialism.

A fascistic government — even a totalitarian one — will try to secure broad political support for itself. Scapegoating is a common technique for developing political support. Scapegoating, when successful, fosters the belief that the country’s economic and/or social problems — the ones that the fascistic regime promises to cure — are due to the actions of particular, identifiable groups of citizens. Another common technique is the suppression of dissent, which stifles critical commentary while imparting to the timid masses a lesson in the value of submissiveness to the regime.

Successful scapegoating serves two purposes. First, it turns public scrutiny away from the regime’s mistakes and misdeeds and toward the supposed misdeeds of the scapegoated groups. Second, scapegoating helps to build public support for the regime by identifying it as a force for good, as opposed to the scapegoated groups, which are painted as sources of evil.

Fascism, despite its prevailing image in the popular mind, need not come about through the efforts of black- or brown-shirted thugs. If you will re-read the opening definition of fascism, it should remind you of the present state of affairs in the United States, given that the federal government has assumed de facto control of two leading industries — financial services and automobile manufacturing — the first of which is central to the operations of America’s businesses.*

How did the United States get to this point? Through the “democratic” process, that’s how — without a shot, without a coup, without a foaming-at-the-mouth dictator. The citizens of the United States — enough of them, anyway — have, over the past eight decades, elected the members of Congress and the presidents (and, indirectly, their judicial appointees) who have brought us to our present state. The grinning FDR was a fascist; the smiling Obama is acting like one (see first footnote). Thus “Fascism with a ‘Friendly’ Face” (alternative title: “Bread and Circuses Redux“).

I now turn to the unfriendly face of fascism, that is, to scapegoating and the suppression of dissent. There was scapegoating a-plenty under FDR, as exemplified by his attacks on “economic royalists.” According to FDR, among many other rabble-rousers of the time, “the rich” were to blame for the Depression and were standing in the way of recovery. That FDR’s demonization of “the rich” and his schemes for centralizing power in Washington were the real obstacles to recovery is a fact that eluded his second-rate mind and which still eludes most Americans (even a Nobel laureate). (For much more, you should buy and read FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression, which I own and have read critically. It’s repetitive and a somewhat dumbed-down, but generally on the mark.)

We are seeing, under Obama, a renewal of scapegoating. It is evident in his plans to soak “the rich,” which would (among other things) lead to income redistribution. As if the the recession could be cured by raising taxes on the very group that is most responsible for economic growth. As if very high incomes were the result of some kind of conspiracy and not symptomatic of a dynamic, growing economy. (For more about income inequality, see this, this, this, this, this, this, and this.) Scapegoating also is evident in Obama’s attack on hedge-fund managers who refused (how dare they!) to roll over and allow the holders of Chrysler bonds to suffer for the benefit of the UAW, to which Chrysler owes its (hoped for) demise. (One hedge-fund manager’s brisk and appropriate response to Obama’s attack is here.)

Then there is Obama’s decision to join the Left’s campaign to pin the “torturer” label on the Bush administration, thereby legitimating that campaign. We might yet witness the unprecedented spectacle of an incoming U.S. administration trying members of the previous administration for what amount to political “crimes” against Leftist sensibilities.

Obama’s ascendancy, though achieved by a fairly narrow popular-vote margin, has emboldened the Left (in and out of government) in other efforts to scapegoat conservatives and suppress conservative views; viz.:

this report from the Department of Homeland Security (especially the footnote on page 2) and related commentary (e.g., here, here, here, and here), all reminiscent of 1964, when Barry Goldwater was vilified (successfully) as an extremist because he stood against the concentration of power in Washington;

denunciations of the “tea party” movement (e.g. here and here);

efforts by universities and public officials to suppress dissent (e.g., here, here, here, and here), most notably Sen. Jay Rockefeller’s proposal to give the president authority to shut down the internet; and

a bill in the House of Representatives that would make it a federal felony to use blogs, the web, etc., to cause substantial emotional stress through “sever, repeated, and hostile” speech.

Regarding the suppression of dissent, it is noteworthy that Obama’s has tagged Cass Sunstein (a Chicago crony) to head the Office of Information and Regulatory Affairs in the White House. (See this article for more about the likely direction of OIRA under Sunstein.) My biggest concern about Sunstein, who figures to be a strong influence on Obama, is his embrace of the oxymoronical thing known as “libertarian paternalism.” (For an exposition of its flaws, see this post and its predecessors, linked therein.)

“Libertarian paternalism” is nothing more than a dressed-up version of paternalism, in which the government is used to “nudge” people toward making the kinds of decisions that Sunstein and his ilk would make. That is to say, Sunstein (like too many other bright individuals) likes to believe that he knows what’s best for others. (That conceit is demolished in the posts mentioned at the end of the preceding paragraph and in these posts by an avowed utilitarian.)

“Libertarian paternalism” may seem innocuous, but there’s more to it than a bit of “nudging” (hah!) by the one-ton gorilla in the room (i.e., the federal government). Perhaps the most frightening item on Sunstein’s paternalistic agenda ties into Sen. Rockefeller’s proposal to give the president the power to shut down the internet — which amounts to the power to control the content of the internet. And make no mistake about it, Sunstein would like to control the content of the internet — for our own good, of course. I refer specifically to Sunstein’s “The Future of Free Speech,” in which he advances several policy proposals, including these:

4. . . . [T]he government might impose “must carry” rules on the most popular Websites, designed to ensure more exposure to substantive questions. Under such a program, viewers of especially popular sites would see an icon for sites that deal with substantive issues in a serious way. They would not be required to click on them. But it is reasonable to expect that many viewers would do so, if only to satisfy their curiosity. The result would be to create a kind of Internet sidewalk, promoting some of the purposes of the public forum doctrine. Ideally, those who create Websites might move in this direction on their own. If they do not, government should explore possibilities of imposing requirements of this kind, making sure that no program draws invidious lines in selecting the sites whose icons will be favoured. Perhaps a lottery system of some kind could be used to reduce this risk.

5. The government might impose “must carry” rules on highly partisan Websites, designed to ensure that viewers learn about sites containing opposing views. This policy would be designed to make it less likely for people to simply hear echoes of their own voices. Of course, many people would not click on the icons of sites whose views seem objectionable; but some people would, and in that sense the system would not operate so differently from general interest intermediaries and public forums. Here too the ideal situation would be voluntary action. But if this proves impossible, it is worth considering regulatory alternatives. [Emphasis added.]

A Left-libertarian defends Sunstein’s foray into thought control, concluding that

Sunstein once thought some profoundly dumb policies might be worth considering, but realized years ago he was wrong about that… The idea was a tentative, speculative suggestion he now condemns in pretty strong terms.

Alternatively, in the face of severe criticism of his immodest proposal, Sunstein merely went underground, to await an opportunity to revive his proposal. I somehow doubt that Sunstein, as a confirmed paternalist, truly abandoned it. The proposal certainly was not off-the-cuff, running to 11 longish web pages. Now, judging by the bulleted list above, the time is right for a revival of Sunstein’s proposal. And there he is, heading the Office of Information and Regulatory Affairs. The powers of that office supposedly are constrained by the executive order that established it. But it is evident that the Obama adminstration isn’t bothered by legal niceties when it comes to the exercise of power. Only a few pen strokes stand between Obama and a new, sweeping executive order, the unconstitutionality of which would be of no import to our latter-day FDR.

Where will it all end? As I argue here, the United States already has descended into statism. The further descent into ingrained fascism is but a fine-tuning exercise for the vast, Left-wing alliance, which consists of public-school “educators,” liberal-arts academics, and their sycophantic students; Hollywood and New York celebrities and their hangers-on; “artists” and “intellectual workers” of most stripes; well-educated, upper-income, professionals who live in and around major metropolitan areas; and hordes of politicians (local, State, and national), who foster and benefit from the prejudices of the alliance. This broad alliance patronizes idealistic twenty-somethings, blacks, Latins, and labor-union members — the four groups from which its favored political candidates draw decisive support at the polls.

The Leftist alliance scorns America and its traditional (but largely abandoned) values of personal responsibility and respect for the persons and property of others. The alliance exalts, instead, the politics of entitlement and envy, of class, ethnic, racial, and gender conflict. As a result, the alliance has succeeded in demolishing the long-standing consensus that the main constitutional functions of the federal government are “to establish Justice, provide for the common defence,” and ensure the free movement of goods and persons among the States.**

Where will it all end? Unless we are roused from our Leftist idyll by some-one or some-thing, it will end in an Orwellian nightmare. The state will control our lives, in minute detail, from conception (and the prevention thereof) to death (and the means thereof).
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* For some views about our descent into fascism (even where it isn’t called that), see these posts of mine:
Things to Come
Reclaiming Liberty Throughout the Land
Are We All Fascists Now?

** The preamble to the Constitution also mentions “insur[ing] domestic Tranquillity,” “provid[ing] for the general Welfare,” and “secur[ing] the Blessings of Liberty to ourselves and our Posterity.” These injunctions — aside from a few specific, textual grants of power for dealing with insurrections — merely reflect the Framers’ hopes for the nation’s future under the auspices of the new Constitution.

Controlling the Beast

Professor Randy Barnett, a libertarian scholar of constitutional law, proposes a “federalism amendment” to the Constitution. As Barnett notes,

Article V [of the Constitution] provides that, “on the application of the legislatures of two thirds of the several states,” Congress “shall call a convention for proposing amendments.” Before becoming law, any amendments produced by such a convention would then need to be ratified by three-quarters of the states.

An amendments convention is feared because its scope cannot be limited in advance. The convention convened by Congress to propose amendments to the Articles of Confederation produced instead the entirely different Constitution under which we now live. Yet it is precisely the fear of a runaway convention that states can exploit to bring Congress to heel.

Here’s how: State legislatures can petition Congress for a convention to propose a specific amendment. Congress can then avert a convention by proposing this amendment to the states, before the number of petitions reaches two-thirds. It was the looming threat of state petitions calling for a convention to provide for the direct election of U.S. senators that induced a reluctant Congress to propose the 17th Amendment, which did just that.

There’s always the chance (albeit a slim one) that Congress would allow a convention to go forward. Were that to happen, I would try to drum up support for my version of a new Constitution, which does all that Barnett wants to do with his proposed amendment — and a lot more.

Whither the Supreme Court?

It seems that Justice Souter has yet to hire any clerks for the October 2009 term of the U.S. Supreme Court. Given that and Justice Ginsburg’s recent hint about an impending vacancy on the Court, it may not be premature to speculate on the Court’s direction should Souter resign.

It would be premature to guess about Obama’s replacement for Souter, except to venture that the person he picks will be of the Left. But, thanks to SCOTUSblog‘s analysis of Court rulings for the October 2008 term to date (updated through 04/30/09), it is possible to gauge the effect of Souter’s departure on the Court’s ideological balance. Compare Souter’s record with that of his “liberal” peers in disagreements with the Court’s more conservative members*:

	In disagreement, non-unanimous cases
	Souter	Stevens	Ginsburg	Breyer	Average
Roberts	72%	76%	72%	52%	68%
Scalia	69%	79%	69%	62%	70%
Kennedy	55%	66%	48%	41%	53%
Thomas	69%	79%	69%	62%	70%
Alito	79%	76%	72%	52%	70%
Average	69%	75%	66%	54%

Souter, as it turns out, is more “liberal” than Ginsburg and Breyer, as measured by the frequency of disagreements with the Court’s more conservative wing. (I admit surprise at finding Breyer close to the center with Kennedy — for the Court’s current term, at least. UPDATE: More accurately, Kennedy is left-of-center, along with Breyer. See UPDATE 2 at this post.)

So, if Souter retires at the end of the current term, his replacement is unlikely to shift the Court’s ideological balance — in the near future. Over the longer run, however, the appointment of a relatively young, Left-wing justice would shift the Court’s balance, if that appointee outlasts two or three of the Court’s conservatives, who are then replaced by persons of the Left. (UPDATE: The long run may come sooner rather than later. See UPDATE 2 at this post.)

Furthermore, Obama probably will have the opportunity in his current term of office to appoint two more relatively young, Left-wing justices (replacements for Stevens and Ginsburg), who could outlast all of the Court’s conservatives. That would set the stage for the creation of a solidly Left-wing Court, if Democrats continue to hold the White House and Republicans are unable or unwilling to block the sitting president’s Court nominees.

Incidentally — but perhaps germanely — Republican presidents have fared poorly when it comes to picking justices. Of the 18 appointments by Republican presidents since 1953, seven proved to be closet “liberals” or centrists: Warren, Brennan, Blackmun, Stevens, Kennedy, O’Connor, and Souter. Democrats, on the other hand, have appointed five justices since 1953, only one of whom (White) revealed himself as somewhat conservative.

As for the present Court, Republican presidents selected seven members; a Democrat (Clinton) chose the other two. Clinton’s picks have been reliably “liberal.” The GOP picks break down like this: four conservatives, one middle-of-the-roader, and two “liberals.” Et tu, Brute?

I take the difference between Republicans and Democrats to be symptomatic of the way the parties play the game of politics. Republicans are prone to misguided even-handedness. For Democrats, winning is everything.
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* What passes today for liberalism is so illiberal that I can no longer use the word without enclosing it in quotation marks, as a short way of saying “so-called liberal.” Many “liberals,” knowing that their appellation is tainted, now prefer “progressive,” though “regressive” is a better description of the “liberal-progressive” philosophy. Mike Rappaport of The Right Coast has more to say about the modern meaning of “liberal.”

Secession

Rick Perry, governor of Texas, has expressed sympathy for proponents of the secession of Texas from the United States. “Liberal” commentary to the contrary, current secessionist sentiment arises not from a desire to own slaves, or otherwise to deprive certain groups of their constitutional rights, but from righteous and rightful opposition to the hell-bent-for-fascism-regime now ascendant in Washington.

The question then arises whether Texas could secede peacefully, under the Constitution of the United States. An argument for secession can be found in the Treaty of Annexation between the people of Texas and the United States of America (1844). Article II of the treaty reads as follows:

The citizens of Texas shall be incorporated into the Union of the United States, maintained and protected in the free enjoyment of their liberty and property and admitted, as soon as may be consistent with the principles of the federal constitution, to the enjoyment of all the rights, privileges and immunities of citizens of the United States.

A case can be made (if not won) that the federal government has abridged the “rights, privileges and immunities of citizens of the United States,” including Texans, through various unconstitutional actions. (I will not attempt to detail those actions here, for they are legion. I have written about some of them in many of the posts listed here. Robert Levy and William Mellor have analyzed the most egregious unconstitutional actions of the U.S. Supreme Court in their book, The Dirty Dozen: How Twelve Supreme Court Cases Radically Expanded Government and Eroded Freedom.)

There is, moreover, a general case for secession as a constitutional act. I begin by referring to an anti-secessionist, one Timothy Sandefur of the blog Freespace. Sandefur — a lawyer of wide-ranging abilities and interests — has written “How Libertarians Ought to Think about the U.S. Civil War,” which also instructs us how to think about secession. He avers that “the Constitution does prohibit secession.”

Sandefur’s argument that the Constitution prohibits secession is an inferential one that rests on his conclusion that the action of a State (qua State)

cannot change the nature of the federal Constitution as adopted in 1787: it is a binding government of the whole people of the United States. No [S]tate may unilaterally leave the union.

Actually, Sandefur (and other federalists) to the contrary notwithstanding, the people of each State adopted the Constitution, not the whole people of the United States. And the people of each State were at liberty not to adopt the Constitution. In evidence, I introduce Article VII of the Constitution:

The ratification of the conventions of nine [S]tates, shall be sufficient for the establishment of this constitution between the [S]tates so ratifying the same.

Note, first, that ratification was accomplished State-by-State, not by the people of the United States as a whole. Note, second, that although the Constitution could have gone into effect upon being ratified by the conventions of only nine of the thirteen States, it would have been binding only upon the States whose people ratified it, that is, “between the [S]tates so ratifying the same.”

That all thirteen States did, eventually, ratify the Constitution is beside the point. Four of the States could have remained outside the Union; that is, they could have “seceded” preemptively. I therefore draw the following inference: If a State has the right to decline membership in the Union, it must have the right to withdraw from membership in the Union, inasmuch as the Constitution nowhere proclaims membership to be perpetual.

My inference, unlike Sandefur’s, finds support in the Constitution. I begin with the Tenth Amendment (ratified only three years after the original Constitution), which says:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

The original Constitution contemplates that the government of the United States might have to suppress insurrections and rebellions (see Article I, Section 8), but it nowhere addresses secession. Secession, in and of itself, is not an act of insurrection or rebellion, both of which imply the use of force. Force is not a requirement of secession, which can be accomplished peacefully.

Therefore, given that the Constitution does not require a subscribing State to pledge perpetual membership in the Union, and given that the Constitution does not delegate to the central government a power to suppress secession, the question of secession is one for each State, or the people thereof, to determine, in accordance with the Tenth Amendment. The grounds for secession could be, as stated above, the abridgment by the United States of the “rights, privileges and immunities”of its citizens.

What about Texas v. White (U.S. Supreme Court, 1868), in which a 5-3 majority anticipated Sandefur’s arguments for a mystical bond of Union; for example:

When…Texas became one of the United States, she entered into an indissoluble relation. All the obligations of perpetual union, and all the guaranties of republican government in the Union, attached at once to the State. The act which consummated her admission into the Union was something more than a compact; it was the incorporation of a new member into the political body. And it was final. The union between Texas and the other States was as complete, as perpetual, and as indissoluble as the union between the original States. There was no place for reconsideration, or revocation, except through revolution, or through consent of the States.

Considered therefore as transactions under the Constitution, the ordinance of secession, adopted by the convention and ratified by a majority of the citizens of Texas, and all the acts of her legislature intended to give effect to that ordinance, were absolutely null. They were utterly without operation in law. The obligations of the State, as a member of the Union, and of every citizen of the State, as a citizen of the United States, remained perfect and unimpaired. It certainly follows that the State did not cease to be a State, nor her citizens to be citizens of the Union.

It would have been bad — bad for slaves, bad for the defense of a diminished Union — had the South prevailed in its effort to withdraw from the Union. But the failure of the South’s effort, in the end, was owed to the superior armed forces of the United States, not to the intentions of the Framers of the Constitution.

In any event, the real jurisprudential issue in Texas v. White was not the constitutionality of secession; it was the right of the post-Civil War government of Texas to recover bonds sold by the secessionist government of Texas. Moreover, as Justice Grier noted in his dissent,

Whether [Texas is] a State de facto or de jure, she is estopped from denying her identity in disputes with her own citizens. If they have not fulfilled their contract, she can have her legal remedy for the breach of it in her own courts.

The majority’s ruling about the constitutionality of secession can be read as obiter dictum and, therefore, not precedential.

Perhaps the good people of Texas, if sufficiently riled, will give the Court something more substantial to chew on.

See “The Constitution: Myths and Realities“.

Saving Social Security

Given that Social Security is unconstitutional, regardless of the U.S. Supreme Court’s ruling in Helvering v. Davis (1937), my interest in saving Social Security is merely pragmatic. I would prefer its abolition through a reversal of Helvering v. Davis. Because of the extreme unlikelihood of that event, I will settle for a legislative solution, one that preserves Social Security as a mandatory program, but converts it to a system of private accounts invested in private-sector securities and equities.

Die-hard defenders of Social Security want to preserve its essential character — a mechanism for transferring income from workers to retirees — and will resist any move in the direction of privatization. In fact, I expect the looming deficit in Social Security receipts to elicit calls for the following measures:

Elimination of the cap on the amount of income subject to Social Security taxes.

Reduction of benefits paid to retirees according to the amount of income they receive from other sources.

Increases in the taxes paid on benefits by retirees with income from other sources.

That these measures will cause slower economic growth and therefore yield lower-than-expected Social Security receipts will be of no consequence to welfare-state zealots. Their response will be to redouble the pain, ad infinitum. (We can expect to see a parallel treatment of health-care goods and services, as government control of those markets approaches 100 percent.)

Unlikely as privatization of Social Security may be — especially in light of today’s rush to nationalize anything and everything that involves risk and uncertainty — there are good arguments for privatization, and they must be made on the chance that they will be heeded when the present hysteria subsides. Accordingly, the rest of this post addresses the three main objections to privatization:

The existence of the Social Security trust fund, which (on paper) will not be exhausted for perhaps another 30 years.

The transition cost, that is, the cost of funding private accounts. (It should be noted that the idea of a transition cost suggests, rightly, that the trust fund is not a real asset from which benefits can be paid.)

The uncertain returns to private accounts invested in private-sector securities and equities, given the gyrations of stock and bond markets, as compared with the manufactured “certainty” of returns to traditional Social Security accounts.

These rebuttable objections reflect an underlying bias toward a tax-funded system, especially a “fair” one (i.e., one that does not allow some retirees to enjoy greater benefits “just because” they made better investment decisions). That bias, unfortunately, cannot be overcome by facts or logic. One can only hope that it does not decide the issue of privatization.

The Trust Fund

The Social Security trust fund exists because, for many years, receipts from workers outran payments to retirees. What happened to those surpluses? They were spent by other branches of the federal government. The trust fund, in other words, consists of IOUs issued by government to itself. Therefore, there is no trust fund, that is, no stock of unencumbered assets from which benefits can be paid when outlays begin to exceed receipts. There is only worthless paper or, more accurately, worthless accounting entries.

To understand why this is so, consider the following question. How much wealthier are you when you issue an IOU to yourself? Not a bit — nada, zero, zilch, zip. The same goes for Uncle Sam — a fact of life that not even Congress or the Supreme Court can repeal.

Digging deeper, let us consider the means by which the federal government could convert the IOUs held by the trust fund into benefits for retirees:

Borrow money from willing, private lenders.

Enlist the Federal Reserve in what amounts to a money-printing operation.

Increase Social Security taxes on workers and/or other kinds of taxes (e.g., income taxes).

Sell government assets to private buyers until the sum of such sales equals the nominal value of the trust fund.

This list of options simply underscores the chimerical nature of the trust fund. It can be redeemed only by passing the fiscal buck in one way or another:

Government borrowing from private lenders may crowd out private-sector borrowing and, in any event, has no net effect on governmental indebtedness — it just moves it around. (If your wife is in debt by $1,000 and you borrow $1,000 in order to pay her debt, your family is still $1,000 in debt.)

Printing money fuels inflation, which is a tax on consumers. It’s just a subtle way of shifting the burden.

Tax increases simply push the burden of Social Security onto taxpayers, some of whom are retirees on Social Security.

Government assets, unlike wholly-owned private ones, are encumbered by obligations to perform governmental services — even passive ones, such as conserving land. To the extent that government assets are sold in order to replenish the trust fund, some governmental functions must be curtailed, inflicting material and/or psychic losses on a substantial cross-section of Americans.

The trust fund would be a real, unencumbered asset only if it had been used to buy privately issued securities and equities, thus participating in the real returns that flow from economic growth.

A final defense of the trust fund goes like this: If a government bond (IOU) is a real asset to the individual who holds the bond, why isn’t it a real asset to the branch of government (Social Security Administration) that holds the bond? There are two answers, one of which I’ve already given: As you cannot make yourself wealthier by giving yourself an IOU, so government cannot make itself wealthier by giving itself an IOU. Spent money is gone.

The second answer is more shocking, but nevertheless true: A government-issued IOU is not a real asset, no matter who holds it. Private ownership of a government-issued IOU does not represent a claim on real wealth that has been accumulated by government through the provision of economically useful goods and services. A government-issued IOU merely represents the taking by government of resources that could have been used by the private sector to generate economically useful goods and services. As discussed above, the taking occurs when government borrows (crowds out private borrowers), inflates the money supply, or imposes taxes.

Oh, yes, government could confiscate private businesses and (with luck) run them at a profit, but that is simply the ultimate form of taking: socialism. Government, by its very nature as a taxpayer-funded institution with superior coercive power, can perform only one kind of service that enables economic growth (among other things): defense of the citizenry against predators, foreign and domestic. But such defense is a negative service, one which preserves value and does not enhance it. Moreover, the returns to that service (the prevention of losses to liberty, life, limb, and dignity) cannot be quantified because the service is “purchased” by taxes (i.e., coerced), not freely purchased in market transactions. (Whether it could be and why it should not be are matters for discussion elsewhere — here, for example.)

Transition Costs

Given the foregoing, it should be obvious that there is no free lunch when it comes to Social Security, as it now stands. As long as Social Security remains a transfer-payment scheme backed by phony assets, retirees’ benefits will be extracted from their fellow citizens (and themselves), in one way or another.

One thing is true: If private accounts were established, made mandatory (to satisfy paternalists), and funded by investing workers’ Social Security taxes in stocks and bonds (that is, in ways that contribute to economic growth and yield real returns), there would be a (temporarily) larger gap between receipts and outlays. This larger gap — the so-called transition cost — would have to be filled by higher taxes (or the equivalent in borrowing or inflation). The so-called transition cost would continue until taxpayers are contributing no more to retirees’ benefits than they would have been contributing under the present system. At that point, the transition cost would become increasingly negative, that is, it would be a benefit to taxpayers. That benefit would reach its zenith when there is no longer anyone drawing Social Security benefits under the present system.

It should now be obvious that the so-called transition cost isn’t a cost. Rather, it’s a down payment on a better financial future for retirees and taxpayers. The only real issue is one of timing: how to spread the tax burden so that it doesn’t fall disproportionately on those who pay taxes in the years immediately following the establishment of private accounts.

Here, borrowing becomes a legitimate tool of government policy. The tax burden can be spread more evenly across generations if government arranges to borrow some of the down payment on privatization from willing lenders, who are then repaid with taxes levied mainly after the transition cost has becomes negative.

Returns on Private Accounts

Every time the stock market takes a dive, the die-hard defenders of Social Security point with glee to the negative returns implicit in the recent direction of the Dow Jones Industrial Average, S&P 500, and other prominent stock-market indices. The die-hards conveniently overlook three salient facts (of which most of them are probably ignorant):

Private accounts could be invested in a mix of stocks and bonds, at the discretion of each account owner.

Over the relevant time period (i.e., a working career of 30 years and longer), stocks and bonds have positive returns. For example, the inflation-adjusted return on the Wilshire 5000 (a total-market index of U.S. stocks) was 6.1 percent from February 1979 through February 2009 (when the index hit a low from which it has rebounded). For another example, the inflation-adjusted interest rate on Aaa corporate bonds has been hovering around 5 percent for the past several months.

There is no real return on taxes paid into Social Security, claims to the contrary notwithstanding. Those taxes are either paid out immediately to retirees or spent on unremunerative government programs. The so-called returns on Social Security taxes are illusory — they are nothing more than transfers of money coerced from current workers and other taxpayers (including retirees) and handed to current retirees.

Final score: Private accounts, 5 to 6 percent; tax- and transfer-funded accounts, 0.

Conclusion

Assuming that Americans, in the main, will not stand for complete self-reliance when it comes to retirement planning, the second-best solution is a mandatory system of private accounts invested in securities and equities. It is doubtful whether such a system can be established in the face of the perpetual fear-mongering and disinformation campaign against it. But there should be no doubt that such a system would be superior in every way to the present one.

Modeling Is Not Science

The title of this post applies, inter alia, to econometric models — especially those that purport to forecast macroeconomic activity — and climate models — especially those that purport to forecast global temperatures. I have elsewhere essayed my assessments of macroeconomic and climate models. (See this and this, for example.) My purpose here is to offer a general warning about models that claim to depict and forecast the behavior of connected sets of phenomena (systems) that are large, complex, and dynamic. I draw, in part, on a paper that I wrote 28 years ago. That paper is about warfare models, but it has general applicability.

HEMIBEL THINKING

Philip M. Morse and George E. Kimball, pioneers in the field of military operations research — the analysis and modeling of military operations — wrote that the

successful application of operations research usually results in improvements by factors of 3 or 10 or more. . . . In our first study of any operation we are looking for these large factors of possible improvement. . . .

One might term this type of thinking “hemibel thinking.” A bel is defined as a unit in a logarithmic scale corresponding to a factor of 10. Consequently a hemibel corresponds to a factor of the square root of 10, or approximately 3. (Methods of Operations Research, 1946, p. 38)

This is science-speak for the following proposition: In large, complex, and dynamic systems (e.g., war, economy, climate) there is much uncertainty about the relevant parameters, about how to characterize their interactions mathematically, and about their numerical values.

Hemibel thinking assumes great importance in light of the imprecision inherent in models of large, complex, and dynamic systems. Consider, for example, a simple model with only 10 parameters. Even if such a model doesn’t omit crucial parameters or mischaracterize their interactions, its results must be taken with large doses of salt. Simple mathematics tells the cautionary tale: An error of about 12 percent in the value of each parameter can produce a result that is off by a factor of 3 (a hemibel); An error of about 25 percent in the value of each parameter can produce a result that is off by a factor of 10. (Remember, this is a model of a relatively small system.)

If you think that models and “data” about such things as macroeconomic activity and climatic conditions cannot be as inaccurate as that, you have no idea how such models are devised or how such data are collected and reported. It would be kind to say that such models are incomplete, inaccurate guesswork. It would be fair to say that all too many of them reflect their developers’ policy biases.

Of course, given a (miraculously) complete model, data errors might (miraculously) be offsetting, but don’t bet on it. It’s not that simple: Some errors will be large and some errors will be small (but which are which?), and the errors may lie in either direction (but in which direction?). In any event, no amount of luck can prevent a modeler from constructing a model whose estimates advance a favored agenda (e.g., massive, indiscriminate government spending; massive, futile, and costly efforts to cool the planet).

NO MODEL IS EVER PROVEN

The construction of a model is only one part of the scientific method. A model means nothing unless it can be tested repeatedly against facts (facts not already employed in the development of the model) and, through such tests, is found to be more accurate than alternative explanations of the same facts.As Morse and Kimball put it,

[t]o be valuable [operations research] must be toughened by the repeated impact of hard operational facts and pressing day-by-day demands, and its scale of values must be repeatedly tested in the acid of use. Otherwise it may be philosophy, but it is hardly science. (Op. cit., p. 10)

Even after rigorous testing, a model is never proven. It is, at best, a plausible working hypothesis about relations between the phenomena that it encompasses.

A model is never proven for two reasons. First, new facts may be discovered that do not comport with the model. Second, the facts upon which a model is based may be open to a different interpretation, that is, they may support a new model that yields better predictions than its predecessor.

The fact that a model cannot be proven can be take as an excuse for action: “We must act on the best information we have.” That excuse — which justifies an entire industry, namely, government-funded analysis — does not fly, as I discuss below.

MODELS LIE WHEN LIARS MODEL

Any model is dangerous in the hands of a skilled, persuasive advocate. A numerical model is especially dangerous because:

There is abroad a naïve belief in the authoritativeness of numbers. A bad guess (even if unverifiable) seems to carry more weight than an honest “I don’t know.”

Relatively few people are both qualified and willing to examine the parameters of a numerical model, the interactions among those parameters, and the data underlying the values of the parameters and magnitudes of their interaction.

It is easy to “torture” or “mine” the data underlying a numerical model so as to produce a model that comports with the modeler’s biases (stated or unstated).

There are many ways to torture or mine data; for example: by omitting certain variables in favor of others; by focusing on data for a selected period of time (and not testing the results against all the data); by adjusting data without fully explaining or justifying the basis for the adjustment; by using proxies for missing data without examining the biases that result from the use of particular proxies.

So, the next time you read about research that purports to “prove” or “predict” such-and-such about a complex phenomenon — be it the future course of economic activity or global temperatures — take a deep breath and ask these questions:

Is the “proof” or “prediction” based on an explicit model, one that is or can be written down? (If the answer is “no,” you can confidently reject the “proof” or “prediction” without further ado.)

Are the data underlying the model available to the public? If there is some basis for confidentiality (e.g., where the data reveal information about individuals or are derived from proprietary processes) are the data available to researchers upon the execution of confidentiality agreements?

Are significant portions of the data reconstructed, adjusted, or represented by proxies? If the answer is “yes,” it is likely that the model was intended to yield “proofs” or “predictions” of a certain type (e.g., global temperatures are rising because of human activity).

Are there well-documented objections to the model? (It takes only one well-founded objection to disprove a model, regardless of how many so-called scientists stand behind it.) If there are such objections, have they been answered fully, with factual evidence, or merely dismissed (perhaps with accompanying scorn)?

Has the model been tested rigorously by researchers who are unaffiliated with the model’s developers? With what results? Are the results highly sensitive to the data underlying the model; for example, does the omission or addition of another year’s worth of data change the model or its statistical robustness? Does the model comport with observations made after the model was developed?

For two masterful demonstrations of the role of data manipulation and concealment in the debate about climate change, read Steve McIntyre’s presentation and this paper by Syun-Ichi Akasofu. For a masterful demonstration of a model that proves what it was designed to prove by the assumptions built into it, see this.

IMPLICATIONS

Government policies can be dangerous and impoverishing things. Despite that, it is hard (if not impossible) to modify and reverse government policies. Consider, for example, the establishment of public schools more than a century ago, the establishment of Social Security more than 70 years ago, and the establishment of Medicare and Medicaid more than 40 years ago. There is plenty of evidence that all four institutions are monumentally expensive failures. But all four institutions have become so entrenched that to call for their abolition is to be thought of as an eccentric, if not an uncaring anti-government zealot. (For the latest about public schools, see this.)

The principal lesson to be drawn from the history of massive government programs is that those who were skeptical of those programs were entirely justified in their skepticism. Informed, articulate skepticism of the kind I counsel here is the best weapon — perhaps the only effective one — in the fight to defend what remains of liberty and property against the depredations of massive government programs.

Skepticism often is met with the claim that such-and-such a model is the “best available” on a subject. But the “best available” model — even if it is the best available one — may be terrible indeed. Relying on the “best available” model for the sake of government action is like sending an army into battle — and likely to defeat — on the basis of rumors about the enemy’s position and strength.

With respect to the economy and the climate, there are too many rumor-mongers (“scientists” with an agenda), too many gullible and compliant generals (politicians), and far too many soldiers available as cannon-fodder (the paying public).

CLOSING THOUGHTS

The average person is so mystified and awed by “science” that he has little if any understanding of its limitations and pitfalls, some of which I have addressed here in the context of modeling. The average person’s mystification and awe are unjustified, given that many so-called scientists exploit the public’s mystification and awe in order to advance personal biases, gain the approval of other scientists (whence “consensus”), and garner funding for research that yields results congenial to its sponsors (e.g., global warming is an artifact of human activity).

Isaac Newton, who must be numbered among the greatest scientists in human history, was not a flawless scientist. (Has there ever been one?) But scientists and non-scientists alike should heed Newton on the subject of scientific humility:

I do not know what I may appear to the world, but to myself I seem to have been only like a boy playing on the seashore, and diverting myself in now and then finding a smoother pebble or a prettier shell than ordinary, whilst the great ocean of truth lay all undiscovered before me. (Quoted in Horace Freeland Judson,The Search for Solutions, 1980, p. 5.)

Related reading: Willis Eschenbach, “How Not to Model the Historical Temperature“, Watts Up With That?, March 25, 2018

A Short Course in Economics

In which I begin with pithy statements of principles and work my way toward more complex (but brief) explorations of selected economic issues.

1. Self-interest drives us to do good things for others while striving to do well for ourselves.

2. Profit is good because it entices invention, innovation, and investments that yield new and better products and services.

3. Incentives matter: Just as self-interest and profit drive progress, taxation and regulation stifle it.

4. Only slaves and dupes can be exploited. (Wal-Mart employees are not exploited; they are not forced to work at Wal-Mart. Anti-Wal-Mart activists are exploited; they’re dupes of the anti-business Left.)

5. There is no free lunch, all costs (including taxes) must be covered by someone, somewhere, at some time.

6. The appearance of a free lunch (e.g., Social Security, tax-subsidized health insurance) leads individuals to make bad decisions (e.g., not saving enough for old age, overspending on health care).

7. Paternalism is for children: When adults aren’t allowed to make economic decisions for themselves they don’t learn from mistakes and can’t pass that learning on to their children.

8. All costs matter; one cannot make good economic decisions by focusing on one type of cost, such as the cost of energy.

9. The best way to deal with pollution and the “depletion” of natural resources is to assign property rights in resources now held in common. The owners of a resource have a vested interest (a) in caring for it so that it remains profitable, and (b) in raising its price as it becomes harder to obtain, thus encouraging the development of alternatives.

10. Discrimination is inevitable in a free society; to choose is to discriminate. In free and competitive markets — unfettered by Jim Crow, affirmative action, or other intrusions by the state — discrimination is most likely to be based on the value of one’s contributions.

11. Voluntary exchange is a win-win game for workers, consumers, and businesses. When exchange is distorted by taxation and constrained by regulation, the losers are workers (fewer jobs and lower wages) and consumers (higher prices and fewer choices).

12. Absent force or fraud, we earn what we deserve, and we deserve what we earn.

13. The economy isn’t a zero-sum game; for example:

Bill Gates is immensely wealthy because he took a risk to start a company that has created things that are of value to others. His creations (criticized as they may be) have led to increases in productivity. As a result, many people earn more than they would have otherwise earned; Microsoft has made profits; Microsoft’s share price rose considerably for a long time; Bill Gates became the wealthiest American (someone has to be). That’s win-win.

14. Externalities are everywhere.

Like the butterfly effect, everything we do affects everyone else. But with property rights those externalities (e.g., pollution) are compensated instead of being legislated against or fought over in courts. Relatedly . . .

15 . There is no such thing as a “public good.”

Public goods are thought to exist because certain services benefit “free riders” (persons who enjoy a service without paying for it). It is argued that, because of free riders, services like national defense be provided by government because it would be unprofitable for private firms to offer such services.

But that analysis overlooks the possibility that those who stand to gain the most from the production of a service such as defense may, in fact, value that service so highly that they would be willing to pay a price high enough to bring forth private suppliers, free riders notwithstanding. The free-rider problem isn’t really a problem unless the producer of a “public good” responds to requests for additional services from persons who don’t pay for those services. But private providers would not be obliged to respond to such requests.

Moreover, given the present arrangement of the tax burden, those who have the most to gain from defense and justice (classic examples of “public goods”) already support a lot of free riders and “cheap riders.” Given the value of defense and justice to the orderly operation of the economy, it is likely that affluent Americans and large corporations — if they weren’t already heavily taxed — would willingly form syndicates to provide defense and justice. Most of them, after all, are willing to buy private security services, despite the taxes they already pay.

I conclude that there is no “public good” case for the government provision of services. It may nevertheless be desirable to have a state monopoly on police and justice — but only on police and justice, and only because the alternatives are a private monopoly of force, on the one hand, or a clash of warlords, on the other hand. (See this post, for instance, which also links to related posts.)

You may ask: What about environmental protection? Isn’t it a public good that must be provided by government? No. Read this and this. Which leads me to “market failure.”

16. There is no such thing as “market failure.”

The concept of market failure is closely related to the notion of a public good. When the market “fails” to do or prevent something that someone thinks should be done or prevented, the “failure” is invoked as an excuse for government action.

Except where there is crime (which should be treated as crime), there is no such thing as market failure. Rather, there is only the failure of the market to provide what some persons think it should provide.

Those who invoke market failure are asserting that certain social and economic outcomes should be “fixed” (as in a “fixed” boxing match) to correct the “mistakes” and “oversights” of the market. Those who seek certain outcomes then use the political process to compel those outcomes, regardless of whether those outcomes are, on the whole, beneficial. The proponents of compulsion succeed (most of the time) because the benefits of government intervention are focused and therefore garner support from organized constituencies (i.e. interest groups and voting blocs), whereas the costs of government intervention are spread among taxpayers and/or buyers of government debt.

There are so many examples of so-called public goods that arise from putative market failures that I won’t essay anything like a comprehensive list. There are, of course, protective services and environmental “protection,” both of which I mentioned in No. 15. Then there is public education, Social Security, Medicare, Medicaid, Affirmative Action, among the myriad federal, State, and local programs that perversely make most people worse off, including their intended beneficiaries. Arnold Kling explains:

[T]he Welfare State makes losers out of people who want to get ahead through hard work, thrift, or education. Those are precisely the activities that produce economic growth and social wealth, and they are hit particularly hard by Welfare State redistribution.

The Welfare State certainly has well-organized constituencies. The winners, such as the AARP and the teachers’ unions, know who they are. The losers — the working poor, children stuck in low-quality school districts — have much less political clout. The Welfare State has friends in both parties, as evidenced by the move to add a prescription drug benefit to Medicare.

As the Baby Boomers age, longevity increases, and new medical technology is developed, the cost of the Welfare State is going to rise. Economists agree that in another generation the share of GDP required by the Welfare State will exceed the share of GDP of total tax revenues today. The outlook for the working poor and other Welfare State losers is decidedly grim.

17. Borders are irrelevant, except for defense.

It is not “bad” or un-American to “send jobs overseas” or to buy goods and services that happen to originate in other countries. In fact, it is good to do such things because it means that available resources can be more fully employed and put to their best uses. Opponents of outsourcing and those who decry trade deficits want less to be produced; that is, they want to shelter the jobs of some Americans at the expense of making many more Americans worse off through higher prices.

For example, when Indian computer geeks operate call centers for lower salaries than the going rate for American computer geeks, it makes both Indians and Americans better off. Few Americans are computer geeks, but many Americans are computer users who benefit when they pay less for geek services (or the products with which geek services are bundled). Those who want to save the jobs of American computer geeks assume that (a) American computer geeks “deserve” their jobs (but Indians don’t) and (b) American computer geeks “deserve” their jobs at the expense of American consumers.

See also this, and this, and this.

18. Government budget deficits aren’t bad for the reason you think they’re bad.

Government spending is mostly bad (see No. 15) because it results in the misallocation of resources (and it’s inherently inflationary). Government spending — whether it is financed by taxes or borrowing — takes resources from productive uses and applies them to mostly unproductive and counterproductive uses. Government budget deficits are bad in that they reflect that misallocation — though they reflect only a portion of it. Getting hysterical about the government’s budget deficit (and the resulting pile of government debt) is like getting hysterical about a hangnail on an arm that has been amputated.

There’s no particular reason the federal government can’t keep on making the pile of debt bigger — it has been doing so continuously since 1839. As long as there are willing lenders out there, the amount the amount of debt the government can accumulate is virtually unlimited, as long as government spending does not grow to the point that its counterproductive effects bring the economy to its knees.

For more, see this, this, this, and this.

19. Monopoly (absent force, fraud, or government franchise) beats regulation, every time.

Regulators live in a dream world. They believe that they can emulate — and even improve on — the outcomes that would be produced by competitive markets. And that’s precisely where regulation fails: Bureaucratic rules cannot be devised to respond to consumers’ preferences and technological opportunities in the same ways that markets respond to those things. The main purpose of regulation (as even most regulators would admit) is to impose preferred outcomes, regardless of the immense (but mostly hidden) cost of regulation.

There should be a place of honor in regulatory hell for those who pursue “monopolists,” even though the only true monopolies are run by governments or exist with the connivance of governments (think of courts and cable franchises, for example). The opponents of “monopoly” really believe that success is bad. Those who agitate for antitrust actions against successful companies — branding them “monopolistic” — are stuck in a zero-sum view of the economic universe (see No. 13), in which “winners” must be balanced by “losers.” Antitrusters forget (if they ever knew) that (1) successful companies become successful by satisfying consumers; (2) consumers wouldn’t buy the damned stuff if they didn’t think it was worth the price; (3) “immense” profits invite competition (direct and indirect), which benefits consumers; and (4) the kind of innovation and risk-taking that (sometimes) leads to wealth for a few also benefits the many by fueling economic growth.

What about those “immense” monopoly profits? They don’t just disappear into thin air. Monopoly profits (“rent” in economists’ jargon) have to go somewhere, and so they do: into consumption, investment (which fuels economic growth), and taxes (which should make liberals happy). It’s just a question of who gets the money.

But isn’t output restricted, thus making people generally worse off? That may be what you learned in Econ 101, but that’s based on a static model which assumes that there’s a choice between monopoly and competition. I must expand on some of the points I made in the original portion of this commandment:

Monopoly (except when it’s gained by force, fraud, or government license) usually is a transitory state of affairs resulting from invention, innovation, and/or entrepreneurial skill.

Transitory? Why? Because monopoly profits invite competition — if not directly, then from substitutes.

Transitory monopolies arise as part of economic growth. Therefore, such monopolies exist as a “bonus” alongside competitive markets, not as alternatives to them.

The prospect of monopoly profits entices more invention, innovation, and entrepreneurship, which fuels more economic growth.

20. Stay tuned to this blog.

A Social Security Reader

The good folks at Cato Institute weigh in today with this:

For years, opponents of Social Security reform have told us that there is no need to rush into changing the program because, after all, Social Security is running a surplus today. Well, according to a new report by the Congressional Budget Office, not so much.

CBO reports that the Social Security surplus, originally expected to be $80-90 billion this year and next will shrink to $16 billion this year and just $3 billion next year (essentially a rounding error) as a result of the recession and rising unemployment. And those estimates may be far too optimistic. In February of this year, for example, Social Security actually ran a deficit—spending more than it took in through taxes and interest combined.

And, while CBO expects a return to modest surpluses after 2010, as the recession ends and unemployment falls, that is betting on the success of the unproven Obama economic program. If unemployment stays at current levels, Social Security will begin running permanent cash flow deficits in 2011 (eight years earlier than previously predicted).

Opponents of personal accounts have pointed out recent declines in the stock market as a reason why private investment should no longer be considered an option for Social Security reform. The evidence suggests that, even with recent market declines, private investment would still produce higher returns than Social Security. The new surplus numbers provide yet another lesson: if the economy is in such a mess that it hurts private investment, traditional Social Security isn’t going to be in any better shape.

The case for personal accounts remains as strong as ever.

It does indeed.

To top it off, I (among many others) opine that Social Security is unconstitutional. To find out why, go here.

Here are some other related readings from my old blog:
Why It Makes Sense to Privatize Social Security
P.S. on Privatizing Social Security
That Mythical, Magical Social Security Trust Fund
The Real Social Security Issue
Social Security — Myth and Reality
Nonsense and Sense about Social Security
More about Social Security
Social Security Privatization and the Stock Market
Social Security: The Permanent Solution
Social Security Transition Costs, in a Nutshell
A Market Solution to the Social Security Mess?

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