Does the CPI Understate Inflation?

REVISED AND RE-DATED

A website called Shadow Government Statistics offers an alternative estimate of inflation. According to SGS, “methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.” (Related post, here.) According to a chart at the linked page, year-over-year inflation is now about 9 percent, as opposed to the official government figure of about 2 percent.

The claim by SGS has merit, and not only because the definition of inflation has shifted. Specifically:

Government spending (at all levels) rose by 6 percentage points between 1980 and 2009. (See the graph at this post.)

Most government spending is inherently inflationary.

The inherently inflationary nature of government spending can be grasped by considering the case where government spending is financed by taxes:

Suppose that in the absence of government the GDP of the United States would be, as it is today, about $15 trillion. (Actually, as I show here, GDP would be a lot more than today’s $15 trillion were government to do nothing more than provide defense and justice.)

Suppose, further, that a bunch of governors arrives on the scene one fine day to announce: “You Americans need our services, so we’re going to tax you $5 trillion in order to provide things that we want you to have.” About 20 percent of the $5 trillion — the money spent on defense and justice — will be of value to almost everyone because (among other things) it protects economic activity. But most of the things our governors wants us to have — a hodge-podge of programs and regulations — will be valued mainly by those governors (i.e., politicians and bureaucrats) and narrow constituencies. The hodge-podge of programs and regulations, along with our governors’ habit of taxing success, raises the real price of government to far more than the $5 trillion shown in our national income accounts.

Our governors’ “generous” confiscation of $5 trillion has the same effect as if the producers of $5 trillion worth of real (non-government) goods and services walk off the job. More accurately, it’s as if they walk off the job and begin to vandalize their capital (homes, commercial buildings, computer networks, etc.). Specifically, according to the chairwoman of Obama’s Council of Economic Advisers, tax increases have a multiplier effect of about 3 (i.e., every dollar of a tax increase yields a 3-fold decrease in GDP). Another economist estimates that the supply of labor declines by 1.9 percent in response to a 1 percent cut in wages (a tax is equivalent to a cut in wages). Even transfer-payment schemes (e.g., Social Security) have a negative economic effect because they penalize producers for the benefit of non-producers.

Despite the reduction in real output that accompanies government,our governors pretend that they are producing $5 trillion worth of services, so (1) they levy taxes for those services, most of which taxes fall on the productive sector, and (2) they pay the producers of government services (government employees and contractors) with those taxes.

In sum, government pays the producers of government services in “empty dollars,” which those producers then try to spend on real output. And so we have $15 trillion chasing $10 trillion worth of real goods and services.

That’s real inflation. No deficit spending necessary. And it happens every time our governors commandeer additional resources, thus widening the gap between what the productive sector could produce and what it actually produces.

What if government were to borrow the $5 trillion instead of imposing $5 trillion in taxes? Borrowing doesn’t change the outcome, just the way we get there. There is still $15 trillion chasing real output of $10 trillion.

Now, not all of that government spending is inherently inflationary. The protection of citizens and their property from foreign and domestic predators (defense and justice) is essential to economic growth and the orderly functioning of free markets. Government spending on defense and justice currently accounts for 8 percent of GDP, whereas government spending (at all levels) currently accounts for 36 percent of GDP. Let’s say, for the sake of argument, (1) that the “right” level of government spending is 10 percent of GDP (the level that obtained in the early 1900s), (2) that the 10 percent is funded by a system of taxes which isn’t punitive toward investors and entrepreneurs (e.g., a single, flat, tax rate), and (3) that the 10 percent is not accompanied by burdensome regulations. Even in the absence of punitive taxes and burdensome regulations, the increase in government spending from 10 to 36 percent of GDP caused prices to rise by 25 percent. Inflation of 25 percent, when spread over 80 years and more, may seem inconsequential. But it is real — real theft, that is.

Moreover, the growth of government spending has been accompanied by punitive taxes and burdensome regulations. As a result, real GDP is 68 percent below its potential. In other words, in the absence of the regulatory-welfare state, real GDP would be more than 3 times its present level.

Visible inflation is bad enough; invisible inflation is a real killer.

Physics Envy

Max Borders offers a critique of economic modeling, in which he observes that

a scientist’s model, while useful in limited circumstances, is little better than a crystal ball for predicting big phenomena like markets and climate. It is an offshoot of what F. A. Hayek called the “pretence of knowledge.” In other words, modeling is a form of scientism, which is “decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.” (“The Myth of the Model,” The Freeman, June 10, 2010, volume 60, issue 5)

I’ve said a lot (e.g., here, here, here, here, here, here, here, and here) about modeling, economics, the social sciences in general, and the pseudo-science of climatology.

Models of complex, dynamic systems — especially social systems — are manifestations of physics envy, a term used by Stephen Jay Gould. He describes it in The Mismeasure of Man (1981) as

the allure of numbers, the faith that rigorous measurement could guarantee irrefutable precision, and might mark the transition between subjective speculation and a true science as worthy as Newtonian physics.

But there’s more to science than mere numbers. Quoting, again, from The Mismeasure of Man:

Science is rooted in creative interpretation. Numbers suggest, constrain, and refute; they do not, by themselves, specify the content of scientific theories. Theories are built upon the interpretation of numbers, and interpreters are often trapped by their own rhetoric. They believe in their own objectivity, and fail to discern the prejudice that leads them to one interpretation among many consistent with their numbers.

Ironically, The Mismeasure of Man offers a strongly biased and even dishonest interpretation of numbers (among other things). When a leading critic of physics envy falls prey to it, you know that he’s on to something.

Today’s Wisdom . . .

. . . comes from Tom Smith of The Right Coast:

I find the hostility towards the Tea Parties from libertarians hard to understand. These people appear to generally favor small government. Yes, they have differences on some issues, but they are much closer to libertarians than anyone else.

The only explanation that I can see for the hostility is based on a cultural view of libertarians — most of the libertarians think of themselves as part of a cultural elite and therefore reject the Sarah Palins of the world. (I don’t mean to speak of Sarah Palin in particular, but of the Tea Partiers from her socio-economic group.) Sad, very sad. One would think that liberty would be more important to libertarians than self-image, but perhaps not. Let’s hope I am wrong and the libertarians are warming to the Tea Partiers.

Invoking Hitler

Jamie Whyte is the author of Bad Thoughts – A Guide to Clear Thinking. According to the publisher, it is a

book for people who like argument. Witty, contentious, and passionate, it exposes the methods with which we avoid reasoned debate. Jamie Whyte dissects the ‘Shut up – you sound like Hitler’ and ‘You can hardly talk’ tactics, and explains why we don’t have a right to our own opinion. His writing is both laugh-out-loud funny and a serious comment on the ways in which people with power and influence avoid truth in steering public opinion.

The examples of illogical discourse used in Bad Thoughts are British. There is an Americanized version, Crimes Against Logic: Exposing the Bogus Arguments of Politicians, Priests, Journalists, and Other Serial Offenders, which the publisher describes as

a fast-paced, ruthlessly funny romp through the mulligan stew of illogic, unreason, and just plain drivel served up daily in the media by pundits, psychics, ad agencies, New Age gurus, statisticians, free trade ideologues, business “thinkers,” and, of course, politicians. Award-winning young philosopher Jamie Whyte applies his laser-like wit to dozens of timely examples in order to deconstruct the rhetoric and cut through the haze of shibboleth and doubletalk to get at the real issues.

A troubleshooting guide to both public and private discourse, Crimes Against Logic:

Analyzes the 12 major logical fallacies, with examples from the media and everyday life

Takes no prisoners as it goes up against the scientific, religious, academic, and political establishments

Helps you fine-tune your critical faculties and learn to skewer debaters on their own phony logic

Both descriptions are roughly right about Bad Thoughts (the version I own). It is witty and, for the most part, correct in its criticisms of the kinds of sloppy logic that are found routinely in politics, journalism, blogdom, and everyday conversation.

But Whyte isn’t infallible. Perhaps, someday, I’ll offer a detailed roster of his mistakes. This post focuses on one of them, which is found under “Shut Up — You Sound Like Hitler” (pp. 46-9). Here’s the passage to which I object:

Anyone who advocates using recent advances in genetic engineering to avoid congenital defects in humans will pretty soon be accused of adopting Nazi ideas. Never mind the fact that the Nazi goals (such as racial purity) and genetic engineering techniques (such as genocide) were quite different from those now suggested.

Whyte seems to believe that policies should be judged by their intentions, not their consequences. Genetic engineering — which Whyte defines broadly — is acceptable to Whyte (and millions of others) — because its practitioners mean well. By that standard,

abortion-on-demand is acceptable because abortion is a “right” that enables a woman (and, sometimes, her partner) to escape the consequences of a procreative act;

judges may order the killing of (possibly) terminally ill persons who cannot communicate their own wishes; and

it is all right to use genetic modification techniques to breed children who are “superior” in some respects.

I cannot find a moral distinction between such “benevolence” and Hitler’s goal of racial purity. Allow me to quote myself:

Libertarians who applaud the outcomes of such cases as Griswold v. Connecticut and Roe v. Wade because those outcomes seem to advance personal liberty are consorting with the Devil of statism. Every time the state fails to defend innocent life it acquire a new precedent for the taking of innocent life. (“Law, Liberty, and Abortion“)

* * *

Yes, people say that they don’t want to share Terri Schiavo’s fate. What many of them mean, of course, is that they don’t want their fate decided by a judge who is willing to take the word of a relative for whom one’s accelerated death would be convenient. [Peter] Singer dishonestly seizes on reactions to the Schiavo fiasco as evidence that euthanasia will become acceptable in the United States.

Certainly, there are many persons who would prefer voluntary euthanasia to a fate like Terri Sciavo’s. But the line between voluntary and involuntary euthasia is too easily crossed, especially by persons who, like Singer, wish to play God. If there is a case to be made for voluntary euthanasia, Peter Singer is not the person to make it.

Singer gives away his Hitlerian game plan when he advocates killing the disabled up to 28 days after birth. Why not 28 years? Why not 98 years? Who decides — Peter Singer or an acolyte of Peter Singer? Would you trust your fate to the “moral” dictates of a person who thinks animals are as valuable as babies? (“Peter Singer’s Agenda“)

* * *

Our present world, contra [Will] Saletan, is (relative to the brave new world of genetic engineering) one of freedom and responsibility. To use the example of a baby with Down syndrome (properly Down’s syndrome), parents who choose to abort such a baby (for that is what Saletan means) have every bit as much “freedom” to make that choice (under today’s abortion laws) and are just as responsible (morally) for their decision as they would be if they were to choose bioengineering instead. Genetic engineering simply introduces different “freedoms.”

Thus we come to the real issue, which is the wisdom (or not) of allowing genetic engineering in the first place. For, as we know from our experience with the regulatory-welfare state, once an undesirable practice gains the state’s approbation and encouragement it becomes the norm.

And that is the broad case against allowing genetic engineering: If it gains a government-approved foothold it will become the norm. It will result in foreseeable (and unforeseeable) changes in the human condition. It will cause most of us who are alive today to wish that it had never been allowed in the first place. (“The Case against Genetic Engineering“)

Whyte, in his eagerness to slay many dragons of illogic, sometimes stumbles on his own illogic. Not all invocations of Hitler are inapt, as Whyte seems to suggest. Genetic engineering, Whyte’s primary example, can be Hitlerian in its consequences, regardless of its proponents’ intentions.

I say “can be Hitlerian” because genetic engineering can also be beneficial. There is, for example, negative genetic engineering to cure and treat particular disorders.

I will continue to invoke Hitler where the invocation is apt, as it is in the cases of abortion, involuntary euthanasia, and the breeding of “superior” humans.

What’s in a Name?

From the Associated Press (via WaPo):

A senior House Democrat said Tuesday that senators should fully question Supreme Court nominee Elena Kagan to make sure she supports abortion rights, in light of her previous backing for limiting late-term abortions.In a letter to the Senate Judiciary Committee, Rep. Louise M. Slaughter (N.Y.) said she views as “troubling” a 1997 memo Kagan wrote urging President Bill Clinton to back a ban on all abortions of viable fetuses except when the physical health of the mother was at risk.

Evidently, Ms. Slaughter, originally Louise McIntosh, would prefer open season on fetuses.* She chose well when she opted to take her husband’s name.

__________

* I eschew the term “viable fetuses” because

[t]he argument that a fetus is “inviable” — and therefore somehow undeserving of life — until it reaches a certain stage of development is a circular argument designed to favor abortion. A fetus (except in the case of a natural miscarriage) is viable from the moment of conception until birth as long as it is not aborted. It is abortion that makes a fetus inviable. Abortion therefore cannot be excused on the basis of presumed inviability.

The Omniscient State at Work

For the benefit of Paul Krugman and other worshipers of the all-wise, all-beneficent state, here’s some news from the Associated Press:

WASHINGTON – Despite a top-to-bottom overhaul of the intelligence community after the 2001 terrorist attacks, the nation’s security system showed some of the same failures when it allowed a would-be bomber to slip aboard an airliner, congressional investigators said Tuesday.The Senate Intelligence Committee report at times contradicted the Obama administration’s assertion that the nearly catastrophic Christmas Day bombing attempt was unlike 9/11 because it represented a failure to understand intelligence, not a failure to collect and understand it.

The congressional review is more stark than the Obama administration’s report. It lays much of the blame at the feet of the National Counterterrorism Center, which Congress created to be the primary agency in charge of analyzing terrorism intelligence.

‘Nuff said? Not quite. There’s this, from The Wall Street Journal:

What a fiasco. That’s the first word that comes to mind watching Mahmoud Ahmadinejad raise his arms yesterday with the leaders of Turkey and Brazil to celebrate a new atomic pact that instantly made irrelevant 16 months of President Obama’s “diplomacy.” The deal is a political coup for Tehran and possibly delivers the coup de grace to the West’s half-hearted efforts to stop Iran from acquiring a nuclear bomb.

Full credit for this debacle goes to the Obama Administration and its hapless diplomatic strategy. Last October, nine months into its engagement with Tehran, the White House concocted a plan to transfer some of Iran’s uranium stock abroad for enrichment. If the West couldn’t stop Iran’s program, the thinking was that maybe this scheme would delay it. The Iranians played coy, then refused to accept the offer.

But Mr. Obama doesn’t take no for an answer from rogue regimes, and so he kept the offer on the table. As the U.S. finally seemed ready to go to the U.N. Security Council for more sanctions, the Iranians chose yesterday to accept the deal on their own limited terms while enlisting the Brazilians and Turks as enablers and political shields. “Diplomacy emerged victorious today,” declared Brazil’s President Luiz Inácio Lula da Silva, turning Mr. Obama’s own most important foreign-policy principle against him.

Don’t you sleep better at night with those wonderful folks in D.C. watching out for you? It’s not enough that they’ve screwed up the economy in general, and are in the process of further screwing up our medical care. Now, they’re working toward dismantling our defenses against terrorists and regimes that sponsor terrorism.

Well, you can’t say that I didn’t see it coming (here, here, and here).

A Typical Career Arc for a Batter

It has long been conventional wisdom in baseball that batters hit their peak in their late 20s and go into decline after the age of 30. But inasmuch as this conventional wisdom pre-dates the days of massive computerized databases and spreadsheets, can it be true, or is it the baseball equivalent of an old wives tale?

To answer that question, I went to the Play Index feature of Baseball-Reference.com. I was able to find (thanks to a paid subscription to Play Index) the career OPS+ statistic* for all inactive or retired players from 1901 through 2009 who had at least 3,000 plate appearances. As of yesterday, there were 1,416 such players. I selected 57 of them by the simple (and essentially random) method of picking #1 Babe Ruth (career OPS+ 207) and every 25th batter thereafter: #26 Jeff Bagwell (149), #51 Babe Herman (140, and so on, down to #1401 Bill Kellefer (63). The resulting sample represents great-to-poor batters, players in all eras from 1901 onward, and careers long, short (but not too short), and in between.

I indexed each player’s single-season OPS+ statistics to that player’s career-high OPS+. For example, Babe Ruth’s career looks like this:

Season	Age	OPS+	Indexed
1914	19	50	0.196
1915	20	189	0.741
1916	21	121	0.475
1917	22	162	0.635
1918	23	194	0.761
1919	24	219	0.859
1920	25	255	1.000
1921	26	239	0.937
1922	27	181	0.710
1923	28	239	0.937
1924	29	220	0.863
1925	30	137	0.537
1926	31	227	0.890
1927	32	226	0.886
1928	33	208	0.816
1929	34	193	0.757
1930	35	211	0.827
1931	36	218	0.855
1932	37	201	0.788
1933	38	176	0.690
1934	39	161	0.631
1935	40	118	0.463

After making the same computation for the other 56 batters, I plotted the indexed values for all batters against age, with the following result:

The ages at which the players peaked (index value of 1.00) range from 22 to 36, but the polynomial curve tells the tale: major-league batters tend to improve gradually as they approach ages 29-30, and then to decline gradually thereafter.

That is a broad generalization, based on a random sample of batters. Even within that sample, and certainly across the entire population of batters, there are many-many exceptions. Babe Ruth is a prominent exception. He peaked at age 25, by the measure of OPS+, declined somewhat, improved somewhat, and did not go into his final decline until the age of 37.

In any event, the conventional wisdom stands up to scrutiny, but (like conventional wisdom about many things) it is a rule of thumb, not an iron-clad law of behavior.
__________
* Definition: “OPS+ is OPS [on-base plus slugging percentage] adjusted for the park and the league in which the player played,” where the league average for a given year is 100. Thus “An OPS+ of 150 or more is excellent and 125 very good, while an OPS+ of 75 or below is poor.”

Accountants of the Soul

In a post about two of the founders of modern “liberalism,” T.H. Green, and L.T. Hobhouse, I say

Green and Hobhouse . . . were accountants of the soul. Green’s apparent delicacy in warning of too much intervention [by the state] is overcome, in the end, by his recognition of the British state (embodied in Parliament) as the proper arbiter of human conduct. Hobhouse, more boldly, presumed that he and others of his ilk (but not those who disagree with him) could determine how much of one’s property arose from “social organisation,” how much of one’s property was “held for power,” and how to expand liberty by adopting different forms of coercion than those imposed by social norms.

Once again, we are met with (presumably) intelligent persons who believe that their intelligence enables them to peer into the souls of others, and to raise them up through the blunt instrument that is the state.

It is hard to distinguish the mindset of the “liberal” from that of the “libertarian” paternalist, who does not cavil at the prospect of using the power of the state to “nudge” lesser mortals toward “choices” that he deems in their best interest. “Liberals” and “libertarian” paternalists are alike in their abstract love of mankind and particular disdain for individuals.

Illegal Immigration: A Note to Libertarian Purists

Libertarian purists (e.g., Donald Boudreaux and Bryan Caplan) like to criticize the critics of illegal immigration. In the minds of libertarian purists, national borders are merely statist concoctions. It is anathema to them that the United States exists primarily for the purpose of protecting its citizens and their liberty rights. (Well, it did exist for that purpose originally and for a long time, and it still does to some extent.) Libertarian purists seem to believe that, somehow, defense would be unnecessary and rights would be enforced even if the United States did not exist as a coherent, delimited entity. Good luck with that!

In any event, libertarian purists like to criticize those critics of illegal immigration who claim that (1) the lure of welfare benefits draws illegal immigrants and (2) illegal immigrants add to the burden on tax-paying Americans. My research into those issues may be out of date, so I might decide to update my old findings (contrary to an earlier suggestion that I would drop the subject). For the time being, I am content to note the following:

1. California, with 12 percent of the nation’s population, has 32 percent of the nation’s welfare caseload.

2. California, as of January 2008, was home to 25 percent of the illegal immigrants in the United States.

More to come, perhaps.

The Land of Sunshine: A Parable

This parable is meant to be disrespectful of many things, not the least of them being our rulers and the rules they foist upon us in their disrespect for us and our liberty. It is not meant to be disrespectful of women or persons of color, except for those among them — and their political champions — who believe that past wrongs justify the multiplication of wrongs into the future.

Once upon at time — not so long ago or far away — there was a land ruled by a wise, young king. Well, he was thought wise because he orated in the unctuous, condescending tones, and he was younger than most of the kings who had preceded him. Let’s just call him “the man.”

Now, the man was known for his unbounded compassion. He would do anything for his subjects, as long as it wasn’t at his own expense or the expense of his large, raucous council of advisers. (More about them, anon.) His preferred method of paying for his acts of beneficence was to pretend that they cost nothing — a ruse that he was able to sustain by taking money from his subjects and promising to repay the debt to their descendants. (This scheme had worked well for the man’s predecessors, and so he adopted it as his own — with a vengeance.)

The man’s pseudo-compassionate heart was troubled by the inequality he found in the land. It was upsetting to him was that not all of his subjects were equal in all respects. Some of the man’s subjects were more capable than others, and therefore had higher incomes than others. Although the man was not troubled about the high incomes of lawyers, movie stars, and basketball players, he nevertheless proposed the imposition of higher taxes on high-income persons, just to get even with them.

Other of the man’s subjects were women who could not do everything that men could do, which the man deemed unfair. Although he did not bemoan the fact that men were inferior to women in many respects, he nevertheless proposed forcing employers to hire women for jobs that men could do better.

And there were those of the man’s subjects who went about with pale, sickly white skin, whereas others sported glowing, healthy-looking shades of gold. And so the man proposed to his council of advisers that all pale persons should be made darker (and thus healthier) by allowing them to spend more time in the sun, and by giving them regular doses of a rare, expensive, and effective elixir.

The council of advisers debated the man’s proposals for months on end. The council had no problem with penalizing capable persons and males, for such practices had been accepted for decades, in the name of equality. Nor did the council object to the practice of sending pale persons to work in the sun, as long as it resulted in more indoor work for the golden ones.

The council’s main objection had to do with the elixir, and whether more of it could be produced so that its new consumers could enjoy it without depriving others of its health-giving powers. In the end, the council agreed with the man that it was more important to create the impression of equality than to worry about such trivial matters as the supply of a health-giving elixir. “Trust us, it will all work out,” were the reassuring words of the council’s leaders.

And thus it came to pass that this not-so-distant land was blessed with less freedom, declining prosperity, ill-bred children, more illness, and equality — but one out of five isn’t bad for government work. The only disappointment came when the pale persons acquired red necks instead of turning golden brown.

A Roundup of Crime Posts

A misguided social engineer at work: Mark Kleiman, guest-blogging at The Volokh Conspiracy last year (posts are in reverse chronological order).

Now, for some antitodes.

A breath of fresh air from Bryan Caplan, on the subject of addiction-as-disease as an excuse for anti-social and criminal behavior.

A look at crime and race in New York City, from City Journal.

A series of posts (in reverse chronological order) by Lester Jackson, writing at TCS Daily about the death penalty.

My own contributions:

Does Capital Punishment Deter Homicide?
Libertarian Twaddle about the Death Penalty
Crime and Punishment
Abortion and Crime
Saving the Innocent?
Saving the Innocent?: Part II
More on Abortion and Crime
More Punishment Means Less Crime
More About Crime and Punishment
More Punishment Means Less Crime: A Footnote
Clear Thinking about the Death Penalty
Let the Punishment Fit the Crime
Another Argument for the Death Penalty
Less Punishment Means More Crime
Crime, Explained
Abortion and Crime (from a different angle than the earlier post of the same name)

The Shape of Things to Come

Given the “State of the Union: 2010,” you may wonder how much worse things can get in this land of the once-free. Here are some very real possibilities:

More curbs on freedom of speech, in the name of “protecting” certain groups (e.g., homosexuals, immigrants, Muslims) and “preserving public order” (i.e., protecting government and government officials from criticism).

A complete government takeover of medical services (a U.S. National Heath Service), with no provision for opting-out to private care.

Environmentalism and warmism rampant, with draconian restrictions on everything from where we live, the design of our housing, and the range of products and services we are allowed to buy.

A stagnant economy — crushed by the weight of entitlement programs, environmentalism, warmism, and income equalization — affords a lower quality of life (on a par with the U.S. of the 1950s), and is unable to support a robust defense against foreign enemies.

Further reductions in quality of life, brought about by economic isolation, arising partly out of protectionism, partly out of voluntary withdrawal from overseas interests (in the name of self-sufficiency), and partly out of our unwillingness and inability to defend our overseas interests in the face of superior Chinese and Russian forces.

The erosion of traditional morality — aided by governmental endorsement of moral relativism — leading to the increasing brutalization of the citizenry and an eventual police-state response.

I could expand the list, but it is already depressing enough.

If you cannot participate in the efforts of the Tea Party movement, the American Conservative Union, and the Club for Growth to roll back the forces of oppression in this land, support those organizations with your dollars. Every little bit helps.

Not Conservative Enough

Some pundits were amazed that Sen. Robert Bennett was denied re-nomination by a GOP convention in Utah. After all, they said, Bennett earned an American Conservative Union rating of 84 in 2009. How much more should Utah Republicans expect? A lot more in a State that is staunchly Republican and cast more than 62 percent of its votes for McCain in 2008 (trailing only Oklahoma at 66 percent and Wyoming at 65 percent).

It turns out that Bennett’s lifetime ACU rating (83.63) earned him 27th place among the 40 Republicans who sat in the Senate at the end of 2009:

ACU Lifetime Ratings through 2009: GOP Senators
Rank	Rating	Member	State
1	98.67	BARRASSO	WYOMING
2	98.55	DeMINT	S. CAROLINA
3	98	COBURN	OKLAHOMA
4	97.66	INHOFE	OKLAHOMA
5	96.75	KYL	ARIZONA
6	96	RISCH	IDAHO
7	95.08	SESSIONS	ALABAMA
8	95	JOHANNS	NEBRASKA
9	94.54	BUNNING	KENTUCKY
10	94.37	ENSIGN	NEVADA
11	93.82	VITTER	LOUISIANA
12	93.14	CORNYN	TEXAS
13	92.83	CHAMBLISS	GEORGIA
14	92.82	ENZI	WYOMING
15	92.76	BROWNBACK	KANSAS
16	92.27	CRAPO	IDAHO
17	91	BURR	N. CAROLINA
18	90.8	WICKER	MISSISSIPPI
19	89.77	HUTCHISON	TEXAS
20	89.68	GRAHAM	S. CAROLINA
21	89.66	McCONNELL	KENTUCKY
22	89.15	HATCH	UTAH
23	89.09	ISAKSON	GEORGIA
24	87.97	THUNE	S. DAKOTA
25	86.86	ROBERTS	KANSAS
26	86	LeMIEUX	FLORIDA
27	83.63	BENNETT	UTAH
28	83.5	GRASSLEY	IOWA
29	83.33	CORKER	TENNESSEE
30	81.97	McCAIN	ARIZONA
31	81.9	BOND	MISSOURI
32	80.13	COCHRAN	MISSISSIPPI
33	79	ALEXANDER	TENNESSEE
34	78.68	GREGG	NEW HAMPSHIRE
35	77.26	LUGAR	INDIANA
36	75.43	SHELBY	ALABAMA
37	70.19	MURKOWSKI	ALASKA
38	69.83	VOINOVICH	OHIO
39	49.43	COLLINS	MAINE
40	47.88	SNOWE	MAINE

Derived from American Conservative Union, Congressional Ratings 2009, 2009 Senate Ratings.

Obviously, it would be more difficult — and even foolhardy — for Maine Republicans to eject Senators Collins and Snowe, but there are plenty of firmly-Red States whose GOP constituencies aren’t getting their votes’ worth out of their senators. For example, the following States gave their electoral votes to the not-very-stellar Republican candidates in the last three presidential elections, and yet those States have GOP senators with ACU lifetime ratings below 90:

Alabama — Richard Shelby (75.43 ACU rating)

Alaska — Lisa Murkowski (70.19)

Arizona — John McCain (81.97)

Georgia — Sonny Isakson (89.09)

Kansas — Pat Roberts (86.86)

Kentucky — Mitch McConnell (89.66)

Mississippi — Thad Cochran (80.13)

South Carolina — Lindsey Graham (89.68)

South Dakota — John Thune (87.97)

Tennessee — Lamar Alexander (79.00), Bob Corker (83.33)

Texas — Kay Bailey Hutchison (89.77)

Utah — Orrin Hatch (89.15)

I’ve used bold type to highlight the weakest of the lot, though I’m certainly not enamored of the rest — several of whom (e.g., Thad Cochran, Lindsey Graham, Orrin Hatch, and Kay Bailey Hutchison) hold safe seats and could earn much higher ACU scores, if they chose to do so.

By the way, I have reviewed the ACU’s positions on the votes considered in rating senators for 2009. As a pro-life libertarian hawk, I find myself in agreement with the ACU’s positions on those votes and in agreement with the ACU’s principles.

The State of the Union: 2010

We are in a state of statism.

Statism, as I have said,

boils down to one thing: the use of government’s power to direct resources and people toward outcomes dictated by government. . . .

The particular set of outcomes toward which government should strive depends on the statist who happens to be expounding his views. But all of them are essentially alike in their desire to control the destiny of others. . . .

“Hard” statists thrive on the idea of a powerful state; control is their religion, pure and simple. “Soft” statists [sometimes] profess offense at the size, scope, and cost of government, but will go on to say “government should do such-and-such,” where “such-and such” usually consists of:

government grants of particular positive rights, either to the statist, to an entity or group to which he is beholden, or to a group with which he sympathizes

government interventions in business and personal affairs, in the belief that government can do certain things better than private actors, or simply should do many things other than — and sometimes in lieu of — dispensing justice and defending the nation.

Hard statists simply reject liberty. Soft statists reject it in fact even as they claim to embrace it in principle. Together, hard and soft statists have harnessed themselves and the liberty-loving minority to the yoke of the state. It is by this tyranny of the majority that America has descended into Europeanism, from which there can be no escape unless the liberty-loving minority begins actively to resist it — as did a similar minority in 1775.

If you are a “fish in water,” and cannot see the extent to which America is in thrall to statism — nationally, regionally, and locally — consider these examples of the ways in which statism grips us:

1. Compulsory public education has been used by statists to inculcate statism. Higher education — especially the so-called liberal arts — is dominated by the products of statist inculcation.

2. “Free enterprise” and freedom of personal action are barely more free than they were under Hitler or Mussolini. If you doubt that, consider the hundreds of thousands of pages comprised in the U.S. Code, its implementing regulations, and the statutes, codes, and ordinances of States and municipalities.

3. “Private property” has gone by the wayside, in company with “free enterprise,” thanks to the same enactments. If you doubt that, think about compulsory unionism, smoking bans, the continuing misuse of eminent domain, and various restrictions on the sale and use of personal and business property.

4. Productive Americans, on the whole, pay about half of their income to their governments, for the purpose of supporting the counterproductive activities of those governments and their clients. Some of those productive Americans endorse and support this confiscatory regime because (a) they don’t understand its costs and consequences; (b) it makes them feel good; and (c) they subscribe to the Nirvana fallacy, in which an all-good, all-knowing government can (somehow) do the “right” things and do them “right.” The persistence of the Nirvana fallacy owes much to compulsory public education (point 1).

5. Our prosperity, such as it is, waxes and wanes with the whims of the Federal Reserve, which has the power to inflate, to feed bubbles, to cause depressions, and to fund government’s profligate spending (where taxation is insufficient or politically unpopular).

6. Incentives to work and save — to be self-reliant, in other words — have been diminished by the establishment of welfare “rights,” Social Security, Medicare, and Medicaid. To this list has been added the expansion of Medicare-Medicaid known as Obamacare.

7. Affirmative action, equal lending opportunity, equal housing opportunity, and other “preference” schemes penalize the more-capable at the expense of the less-capable. In a single stroke, such schemes enable advancement based on personal characteristics instead of merit, while destroying freedom of association and freedom of contract.

8. Various legislative, executive, and judicial acts have led to a kind of perverted legality that requires prisoners to be released when prisons become “overcrowded”; allows unborn and partially born human beings to be killed on a whim; stifles the free expression of political views for which the Founders fought and suffered; and treats foreign enemies as mere criminals with the same jurisprudential rights as the American citizens whose lives and property they would destroy.

There is much more, but that is all I can bear to acknowledge in a single post.

Is it any wonder that the Tea Party movement enjoys strong support, that Barack Obama (our statist-in-chief) merits strong disapproval, or that we must resort to civil disobedience if we are to enjoy a smattering of liberty?

Have a nice day!

The Mind of a Paternalist

The April 2010 edition of Cato Unbound, “Slippery Slopes and the New Paternalism,” is about “libertarian” paternalism and whether it deserves to be called libertarian, without the scare quotes. Richard Thaler, of whom I have written extensively (e.g., see this, this, and this), is a key contributor to the colloquy and a fierce defender of his ideas, which have had their fullest exposition in Nudge: Improving Decisions About Health, Wealth, and Happiness. The co-author of Nudge is Cass Sunstein, which should be enough to tell you that “libertarian” paternalism is about paternalism, not liberty. (Even The New York Times Magazine can’t disguise Sunstein’s arrogance.)

Thaler’s method of defending his position is to insist, repeatedly, that it is “libertarian,” even as he oozes paternalism. Consider one of his entries (“The Argument Clinic“) in the Cato Unbound colloquium, where he says the following:

[S]ince the word paternalism is what seems to give [the colloquium’s lead essayist Glen] Whitman fits, let’s re-label our policy “Best Guess”. “Best Guess” is the policy of choosing the choice architecture that is your best guess of what the participants would choose for themselves if they had the time and expertise to make an informed choice.

If that isn’t pure, presumptive arrogance, I don’t know what is. It conveys a presumption of omniscience on the part of the “best guesser,” along with a presumption that the “best guesser” ought to be making decisions for others.

Here’s another passage from Thaler’s post:

In many domains we [paternalists] can drastically improve on what is customary. Consider organ donations. In most states in the United States, to make your donation available you have to take some action such as sign the back of your driver’s license and get two witnesses to sign it. In some countries such as Spain they have switched to an “opt out” system called presumed consent. In Nudge we endorse a third approach, in this domain called “mandated choice.” It also happens to be used in my home state of Illinois.

Under this plan, when you go in to get your drivers license picture retaken every few years, you are asked whether you want to be a donor or not. You must say yes or no to get a license. About two thirds of drivers are saying yes, and lots of lives will be prolonged as a result. This is a great example of libertarian Best Guess in action. Although a large majority of people say in polls that they would want their organs harvested, many never get around to opting in, and a vocal minority in the United States object strenuously to the idea of presumed consent. So it is worthwhile to find a policy that gets many of the benefits of presumed consent without while honoring the preferences of those who object to having to opt out. Mandated choice has some other advantages in this context, namely that families are less likely to overrule the choices of the donor if that choice has been made actively rather than passively.

Let me count the assumptions: (1) Organ donation is the government’s business. (2) The government should deny a driver’s license to a person does not wish to say whether or not he wishes to be an organ donor. (3) This oppression of an individual is justified by the supposed fact that “a large majority of people . . . say that they would want their organs harvested.” Why give the government yet another excuse to intrude into private matters? The obvious answer to that question is that Thaler can’t resist the urge to lead others toward the decisions that he wants them to make. If, when you renew your driver’s license, you’re asked if you want to be an organ donor, your likely (politically correct) response is to say “yes,” even if you don’t really want to be an organ donor. This is not freedom of choice; it is subtle coercion.

Thaler stretches hard to discredit Whitman’s objections to “libertarian” paternalism; for example:

One of the examples we discuss in Nudge is an innovation by the city of Chicago on a dangerous curve on Lake Shore Drive. The city painted horizontal lines across the road that get closer and closer together as the driver approaches the apex of the curve. As we recently posted on our blog, this innovation has reduced accidents by 36%. Does Whitman think this is bad because it was implemented by the government? Should only private toll roads be allowed to think creatively? And notice that the “customary” signage in this location, which included a reduction in the speed limit to 20 mph, was less effective than the nudge.

What does this have to do the subject at hand? The government of Chicago is already in place as the paternalistic provider of Chicago’s streets — having usurped voluntary private decisions about the placement, construction, upkeep, and regulation of those streets. Given that the government is the provider of Chicago’s streets, it has assumed the duty of making those streets “safe” for their users, without the benefit of market feedback about users’ preferences as to the the tradeoff between safety and other attributes (e.g., speed). The government merely adopted an innovation (the horizontal lines), which replaced (or supplemented) another innovation (a speed-limit sign). Horizontal lines are no more or less paternalistic than speed-limit signs, merely different in their effectiveness along one dimension of street-users’ preferences.

In the examples I have given, Thaler simply assumes that government is “the answer.” Instead of arguing that decisions are best made in by private, voluntary actors, he too readily accepts the role of government and, instead, seeks ways to embed it more deeply in our lives by making it seem more effective. That is one path down the slippery slope toward serfdom — a slope that Thaler denies, even as he pours intellectual lubricant on it.

Thaler’s invocation of the Lake Shore Drive innovation is especially revealing. Only a hardened paternalist (if a closeted one) would stretch so hard (and fail) to find something non-paternalistic about one of America’s most paternalistic institutions: the government of Chicago.

As Goes Greece . . .

. . . so goes the United States? Well, maybe the dependents of our welfare state won’t riot. But, riots aside, the U.S. has much in common with Greece: a huge and rising burden of government (accompanied by a huge and rising burden of government debt), leading to economic stagnation.

As for how the burden of government stagnates an economy, I’ve said plenty. See especially this and this. For more evidence, I turn to statistics and projections available from the Organization for Economic Cooperation and Development (OECD), which has 31 (mostly Western) member nations:

Derived from tables 1 and 32, available at OECD Economic Outlook No. 86 Annex Tables — Table of Contents. The debt-burden statistics represent gross government debt for 1995-2010. The changes in GDP are for 1996-2011.

How fares the debt burden of the United States? Not well:

Derived from OECD annex table 32. I use gross debt because net debt understates the debt burden. For example, it treats the federal government’s IOUs to the Social Security Trust Fund as if they were legitimate assets, which they are not.

All Euro zone countries are represented by the wide, gold line. Greece is a Euro zone country, but I have plotted its debt burden separately to highlight its plight. Japan, the most burdened OECD country, is infamous for its economic stagnation. And there’s the U.S. (wide, blue line) moving ahead of the Euro zone, and not far behind Greece. What’s worse is that the outlook for the U.S. beyond 2011 is deeper debt.

Here’s Robert J. Samuelson’s (correct) analysis of the situation:

What we’re seeing in Greece is the death spiral of the welfare state. This isn’t Greece’s problem alone, and that’s why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven’t fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies. . . .

The welfare state’s death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day — no one knows when — doubt governments’ ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.

Greece illustrates the bind. To gain loans from other European countries and the International Monetary Fund, it embraced budget austerity. Average pension benefits will be cut 11 percent; wages for government workers will be cut 14 percent; the basic rate for the value added tax will rise from 21 percent to 23 percent. These measures will plunge Greece into a deep recession. In 2009, unemployment was about 9 percent; some economists expect it to peak near 19 percent.

If only a few countries faced these problems, the solution would be easy. Unlucky countries would trim budgets and resume growth by exporting to healthier nations. But developed countries represent about half the world economy; most have overcommitted welfare states. They might defuse the dangers by gradually trimming future benefits in a way that reassured financial markets. In practice, they haven’t done that; indeed, President Obama’s health program expands benefits. What happens if all these countries are thrust into Greece’s situation? One answer — another worldwide economic collapse — explains why dawdling is so risky.

How to Respond to the Census-Taker

UPDATED BELOW (05/09/10, 05/13/10, 03/31/11)

The census-taker has been to my door. He left a “notice of visit,” which includes a request to call him to arrange a time for my “census interview . . . it generally takes about 10 minutes.” His phone number isn’t in my local calling area, so a call to arrange an unconstitutional “interview” will cost me money. That’s adding injury to insult.

I won’t call him, of course, so he’ll drop by again. If he happens to catch me at home, I will be tempted to give him my 10-minute lecture about the unconstitutionality of the census, as it is conducted these days. The lecture addresses each of the 10 questions on this year’s census form, and the justifications for the various questions. Here’s the lecture:

The Constitution authorizes the census for the purpose of apportioning membership in the House of Representatives among the States. And it says in the Constitution that “the actual Enumeration . . . shall be made . . . in such Manner as they shall by Law direct.” But the operative word is “enumeration.” It follows that Congress’s power to direct the “manner” of the enumeration is restricted to such matters as when and at what cost the enumeration shall be made.

Of the ten questions asked on this year’s census form, only question 1 is relevant to the constitutional purpose of determining the number of persons living in each State. The other nine questions are irrelevant, not to mention intrusive. If the right to privacy includes the right to kill an unborn or partially born human being (see Roe v. Wade, et seq.), surely it includes the right to refuse to answer unconstitutionally intrusive questions posed by the government.

I am therefore honoring the Constitution by answering question 1, and only question 1, which asks for the number or residents at my address on April 1, 2010.

The Census 2010 website offers reasons for asking questions 2 through 10. Here are my views about those questions:

2. This question – about persons not included in the answer to question 1 — does not apply to me. In any event, there would be no need for question 2 if question 1 were posed correctly.

3. Now you want to know about the ownership of my house. Why? Because the question has been asked since 1890 and the information is “an indicator of the nation’s economy” and “the data are . . . used to administer housing programs and to inform planning decisions.” As I will point out several times, the longevity of a question does not make it a legitimate one. Moreover, (1) the question has nothing to do with the constitutional purpose of the census; (2) decennial home-ownership data is practically meaningless, except possibly as an excuse for the government to underwrite risky mortgages and trigger yet another financial meltdown; and (3) there is no constitutional basis for the federal government’s involvement in housing programs. (Regarding this and several subsequent questions, I refer you to the Constitution, with which you may be unfamiliar. You should take special note of the powers of Congress, which are enumerated in Article I, Section 8.)

4. You want my phone number so that you can contact me if some of the information I provide is “incomplete or missing.” Well, you don’t need my phone number because I’ve answered question 1, which is the only information required for the constitutional purpose of the census.

5. Now you’re asking for names. One ostensible reason for the question is to help the respondent remember the number of members of a large household. But that’s just an excuse for unconstitutional prying, given that the instructions for question 1 could suggest that the respondent for a large household could work from a (private) list of names when answering the question. The other ostensible reason is “if additional information about an individual must be obtained to complete the census form.” The problem, of course, is that an enumeration for the purpose of allocating seats in the U.S. House of Representatives doesn’t require information about individuals; it simply requires a count of them.

6. The census has been asking about gender since 1790. So what? The federal programs and laws cited as justification for the question are as unconstitutional as the question. And since when is it the job of the federal government to collect data for “sociologists, economists, and other researchers”?

7. You’ve asked for age and date of birth since 1800. Again, a big “so what?” – does my age affect how many of me there are? And, again, you refer to federal programs for which the data are required; all of them – including Social Security and Medicare — are most assuredly unconstitutional.

8. Am I Hispanic, Latino, or of Spanish origin? More unconstitutional stuff, mainly designed to enable (or force) various governments to discriminate for certain racial/ethnic groups.

9. My race? Yeah, it’s been a question since 1790, but that was when a slave counted for 3/5 of a white person. The question has been irrelevant since the ratification of the Thirteenth Amendment in 1865. Regarding the various programs and laws cited as justification, see my comments about question 8.

10. Do I sometimes live or stay somewhere else? Well, you wouldn’t have to ask if you framed question 1 more precisely. In any event, what does the question have to do with the enumeration of the number of persons at my residence on a certain date?

I would, of course, assure the census-taker that he’s a good fellow, toward whom I harbor no ill will. And I would explain to him that I’m just sharing with him the views that I will impart in writing to the head of the Census Bureau and various members of Congress. I will wish him well, and express my hope that he is able to find a good job at the end of his stint as a census-taker. But I will answer only question 1.

UPDATE (05/09/10 @ 3:59 p.m.)

Well, the census-taker dropped by while my wife was working outside, so she handed him off to me. I spared him the 10-minute lecture and gave him the bottom line: the answer to question 1. I told him that I’d send the Census Bureau an explanation of my refusal to answer the rest of the questions. End of discussion. What will happen next? Stay tuned.

UPDATE (05/13/10@ 10:08 a.m.)

Do not — I repeat, do not — respond to the census-taker in this manner:

Williamson County [Texas] sheriff’s officials have charged an attorney with aggravated assault with a deadly weapon, saying she fired five shots when a U.S. Census Bureau worker visited her home Saturday [May 8, 2010], court records show.

Carolyn M. Barnes, 53, could face up to 20 years if convicted of the second-degree felony. She was being held in the Williamson County Jail on Wednesday afternoon with bail set at $50,000 .

Williamson County sheriff’s office Sgt. John Foster said the census employee, Kathleen Gittel, went to Barnes’ home on Indian Trail, just north of Leander, about 5:40 p.m. to collect information.

After Gittel identified herself as a census worker, Foster said, Barnes came outside with a handgun and told Gittel to get off the property.

Gittel “was apparently not getting off of her property fast enough, and Ms. Barnes decided to shoot five rounds in her direction,” Foster said. He said Gittel was not injured.

. . . fortunately.

The census-taker is just doing a job for money. He or she probably has no views about the constitutionality of the census, as it is conducted, and is not responsible for the questions on the census form. It is wrong and counter-productive to loose your wrath on the census-taker.

As for Congress, the president (and his minions), and the courts, express yourself in votes, words, nonviolent deeds, and contributions to the defenders of liberty (the Tea Party movement, the American Conservative Union, and the Club for Growth).And do it while you can.

UPDATE (03/31/11 @ 11:00 a.m.)

So far, so good. It has been 12 months since I refused to submit the questionnaire for Census 2010, and almost 11 months since I refused the 10-minute interview. Not a peep from the Census Bureau or a federal marshal.

Can Markets Force Fiscal Discipline?

Today’s market meltdown was triggered by the fear that Greece’s financial problems will spread to other European governments, and then to the United States. Greece’s problems can be described simply: The government cannot afford to pay the debts it owes because it has expanded the welfare state at the behest of its ignorant, greedy citizens. Moreover, the problems of Greece will spread to other Euro-zone nations if and as they incur debt in order to bail out Greece. (Recommended reading: “The Mother of All Bubbles.”)

Now, change “Greece” to the “United States” and you have a perfect description of what is likely to happen in this country if “our” government continues to drive us along the road to Europeanism.

The question of the day is whether the strongly negative response of financial markets to the situation in Europe will cause Europe’s “leaders” — and our own — to re-think their commitment to fiscal profligacy. Or, as seems more likely, will those “leaders” be so fearful of reneging on their irredeemable promises to their political constituents that they fall back on the time-honored “remedy” known as hyperinflation?

Hyperinflation — which is easy enough for central bankers to engineer — “solves” the problem of debt by smothering it under a mountain of new money. The problem with that “solution,” of course, is that it affects not just a government’s creditors but every economic actor. Real economic activity grinds to a near-standstill as vendors raise their prices to unaffordable levels in anticipation of facing even higher prices for their factors of production. Entrepreneurs give up on business formation for the same reason. In the end, a vibrant economy based on money and credit is reduced to a stagnant, near-subsistence economy based on personal relationships and barter.

Which way will Europe and the United States go? I have little confidence that our “leaders” will choose the path of fiscal discipline. They are especially unlikely to choose the path that encourages economic growth by shrinking the welfare state.

Good Riddance (I Hope) to Bad Rubbish

The Washington Post Company has announced its intention to sell Newsweek, the 77-year-old magazine which the Post has owned for 49 years. The magazine’s editor, Jon Meacham, had this to say in an interview with Jon Stewart:

“I do not believe that Newsweek is the only Catcher in the Rye between democracy and ignorance, but I think we’re one of them,” Meacham said. “And I don’t think there are that many on the edge of that cliff.”

Asked by Stewart about today’s free flow of information – including news consumption – Meacham struck a foreboding tone. “We have to decide, ‘are we ready to get what we pay for?’ If you’re not going to pay for news, then you’re going to get a different kind of news,” he said.

Meacham’s “reasoning” is in keeping with the wrong-headedness of Newsweek‘s cheerleading for all things statist. For starters, he poses a false dichotomy of democracy vs. ignorance. Democracy, in fact, thrives on ignorance: the ignorance of the masses that enables demagogues and charlatans to impoverish the masses while claiming to enrich them.

Meacham then resorts to the statist’s all-purpose “we” — arrogating to himself intimate knowledge of what the masses want — when he says “We have to decide, ‘are we ready to get what we pay for?’” The thrust of his statement is that the news provided “free” over the internet is inferior to the opinions masquerading as news in the pages of Newsweek and other print media. This is nonsense, for two reasons. First, news is not provided “free” over the internet; it is supported by advertisers. Second, this “free” news flows, in large part, from media sources like Newsweek; that is to say, it consists of kernels of news smothered in layers of leftist opinion.

Meacham has more to say, but you get the idea: With “great thinkers” of his ilk at the helm, it is no wonder that the likes of Newsweek are doomed. I say “doomed” because the Post is unlikely to find a buyer for Newsweek, which eventuality will allow the Post to fold the magazine. If the post does find a buyer for Newsweek, I would expect it to fold outright or to be merged with the buyer’s other failing properties.

In any event, it will be good riddance (I hope) to bad rubbish.

Discounting and “Libertarian” Paternalism

Richard Thaler is a leading proponent of “libertarian” (or “soft”) paternalism. But there is nothing “libertarian” or “soft” about paternalism, no matter what it’s called. (See this, for example.)

Thaler’s embrace of paternalism springs from arrogance — the presumption that he knows how others should lead their lives. A sign of that arrogance, and one that finds its way into Thaler’s rationale for paternalism, is the identification of well-being with wealth-maximization.

The surest route to wealth-maximization — for the Thalers of this world — is to evaluate alternative courses of action by discounting projected streams of revenues (income) or costs (expenses). Consider the following passage from an old paper of Thaler’s:

A discount rate is simply a shorthand way of defining a firm’s, organization’s, or person’s time value of money. This rate is always determined by opportunity costs. Opportunity costs, in turn, depend on circumstances. Consider the following example: An organization must choose between two projects which yield equal effectiveness (or profits in the case of a firm). Project A will cost $200 this year and nothing thereafter. Project B will cost $205 next year and nothing before or after. Notice that if project B is selected the organization will have an extra $200 to use for a year. Whether project B is preferred simply depends on whether it is worth $5 to the organization to have those $200 to use for a year. That, in turn, depends on what the organization would do with the money. If the money would just sit around for the year, its time value is zero and project A should be chosen. However, if the money were put in a 5 percent savings account, it would earn $10 in the year and thus the organization would gain $5 by selecting project B. (Center for Naval Analyses, “Discounting and Fiscal Constraints: Why Discounting is Always Right,” Professional Paper 257, August 1979, pp. 1-2)

More generally, the preferred alternative — among alternatives conferring equal benefits (effectiveness, output, utility, satisfaction) — is the one whose cost stream has the lowest present value:

the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk.

It is my view that economists seize on discounting as a way of evaluating options because it is a trivial exercise to compute the present value of a stream of outlays (or receipts). I should say that discounting seems like a trivial exercise because the difficult tasks — choosing a time horizon, choosing a discount rate, and translating outlays into future benefits — are assumed away.

Consider the choices facing a government decision-maker. In Thaler’s simplified version of reality, a government decision-maker (manager) faces a choice between two projects that (ostensibly) would deliver equal benefits (effectiveness, output), even though their costs would be incurred at different times. Specifically, the manager must choose between project A, at a cost of $200 in year 1, and equally-effective project B, at a cost of $205 in year 2. Thaler claims that the manager can choose between the two projects by discounting their costs:

A [government] manager . . . cannot earn bank interest on funds withheld for a year. . . . However, there will generally exist other ways for the manager to “invest” funds which are available. Examples include cost-saving expenditures, conservation measures, and preventive maintenance. These kinds of expenditures, if they have positive rates of return, permit a manager to invest money just as if he were putting the money in a savings account.

. . . Suppose a thorough analysis of cost-saving alternatives reveals that [in year 2] a maintenance project will be required at a cost of $215. Call this project D. Alternatively the project can be done [in year 1] (at the same level of effectiveness) for only $200. Call this project C. All of the options are displayed in table 1.

(op. cit, pp. 3-4)

Thaler believes that his example clinches the argument for discounting because the choice of project B (an expenditure of $205 in year 2) enables the manager to undertake project C in year 1, and thereby to “save” $10 in year 2. But Thaler’s “proof” is deeply flawed:

If a maintenance project is undertaken in year 1, it will pay off sooner than if it is undertaken in year 2 but, by the same token, its benefits will diminish sooner than if it is undertaken in year 2.

More generally, different projects cannot, by definition be equally effective. Projects A and B may be about equally effective by a particular measure of effectiveness, but because they are different things they will differ in other respects, and those differences could be crucial in choosing between A and B.

Specifically, projects A and B might be equally effective when compared quantitatively in the context of an abstract scenario, but A might be more effective in an unquantifiable but crucial respect. For example, the earlier expenditure on A might be viewed by a potential enemy as a more compelling deterrent than the later expenditure on B because it would demonstrate more clearly the government’s willingness and ability to mount a strong defense against the potential enemy.

The “correct” discount rate depends on the options available to a particular manager of a particular government activity. Yet Thaler insists on the application of a uniform discount rate by all government managers (op. cit., p. 6). By Thaler’s own example, such a practice could lead a manager to choose the wrong option.

For a decision to rest on the use of a particular discount rate, there must be great certainty about the future costs and benefits of alternative courses of action. But there seldom is. The practice of discounting therefore promotes an illusion of certainty — a potentially dangerous illusion, in the case of national defense.

The fundamental problem is that Thaler presumes to place himself in the position of the decision-maker. But every decision-maker — from a senior government executive to a young person starting his first job — has a unique set of objectives, options, uncertainties, and risk preferences. Because Thaler cannot locate himself in a decision-maker’s unique situation, he can exercise his penchant for arrogance only by insisting that each and every decision-maker adhere to a simplistic rule of thumb — one that obtains results favored by Thaler.

In the context of personal decision-making — which is the focal point of “libertarian” paternalism — the act of discounting serves wealth-maximization (a favored paternalistic objective). But, as I have said,

[t]here is simply a lot more to maximizing satisfaction than maximizing wealth. That’s why some people choose to have a lot of children, when doing so obviously reduces the amount they can save. That’s why some choose to retire early rather than stay in stressful jobs. Rationality and wealth maximization are two very different things, but a lot of laypersons and too many economists are guilty of equating them.

The 34-year-old Richard Thaler of 1979 was arrogantly wrong about government decision-making. The 65-year old Thaler of 2010 is — and has been — arrogantly wrong about personal decision-making.

I will have more to say about Thaler’s wrong-headedness. In the meantime, read this post and follow the links therein.

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