Defense as an Investment in Liberty and Prosperity

Drawing on GDP statistics provided by the Bureau of Economic Analysis, I constructed the following graphs. The red bands indicate years in which U.S. armed forces were fighting wars: WWII, 1942-1945; Korean War 1950-1953; Vietnam War, 1965-1973; Gulf War, 1990-1991; Afghanistan and Iraq, 2002-2011.

Source: Derived from Table 1.1.5, Gross Domestic Product (then-year dollars).

Source: Obtained by averaging two estimates. The first is a top-down estimate, which applies the percentages displayed in the preceding graph to the estimate of constant-dollar GDP given in Table 1.1.6, Real Gross Domestic Product, Chained Dollars. The second is to construct a chained 2005 dollar estimate of defense spending from Tables A, B, C, and D, which cover overlapping periods (1929-1947, 1942-1962, 1962-1982, 1977-1997, and 1995-2011), and to divide the resulting “double chained” values by the top-line estimate of GDP given in table 1.1.6.

The point of the second graph is that defense spending should not be thought of as a “share” of GDP but as the cost of protecting Americans and their interests from the world’s evil-doers, who are always in plentiful supply. If the real cost of defending America in the 21st century approaches the real cost of fighting World War II, so what? The threats are what they are; today’s enemies (actual and potential) have access to weapons and technologies that far outstrip the relatively primitive weapons and technologies used in WWII.

Moreover, critics of defense spending to the contrary, the object of defense is not to have “just enough” for a “fair fight”; the object of defense is to deter enemies and, if deterrence fails, to defeat them. It is ludicrous to say — as some pundits have said — that the U.S. has “too many” aircraft carriers because their number exceeds the number owned by the rest of the world’s navies. That is a plus, not a minus; Americans should take comfort in such superiority and demand it across the board. America’s enemies do no discriminate between left-wing appeasers and right-wing zealots; we are all targets.

In any event, here are my “takeaways” from the graphs and the history that lies behind them:

Capsule history
Low defense spending and anti-war fervor in the 1930s					German and Japanese aggression lead to WWII.
Hasty demobilization after WWII					N. Korea invades S. Korea after U.S. declares “lack of interest.” The Korean War is a proxy war for the USSR, which finds U.S. wanting in resolve.
Buildup of strategic forces in the 1950s					Nuclear war does not ensue.
Buildup of conventional forces in the early 1960s					Domestic opposition leads to a faltering (and eventually failed) U.S. effort to counter Communist aggression in Vietnam.
Post-Vietnam drawdown in the 1970s, followed by Reagan buildup in the 1980s					Nuclear war does not ensue. Conventional superiority enables the U.S. to score an easy win in the defense of Kuwaiti oil from Saddam (who, mistakenly, is allowed to remain in power).
Post-Gulf War drawdown in the 1990s (Clinton balances budget on the back of defense.)					Drawdown and other signs of U.S. weakness encourage 9/11; subsequent campaigns to stabilize hotbed of terrorism hindered by domestic opposition.

Lessons
Incorrect:					Correct:
The availability of armed force leads to war.					The appearance of weakness encourages aggressors.
The U.S. is a war-like nation.					The U.S. reluctantly prepares for and fights wars.
Defense is a huge drain on the economy.					Defense protects Americans and their vital overseas economic interests. As the economy grows, peacetime preparedness and regional wars take an increasingly smaller share of GDP.
Defense takes money away from vital social services.					Defense is the most vital of social services; it keeps Americans alive, free, and prosperous.

Irrational Rationality

Economists have given “rationality” a bad name. Mario Rizzo explains:

[T]he axioms of rational choice were supposed to shed light on how people actually made choices. Then a sleight of hand occurred. It was claimed that they shed light on how rational individuals would choose – without addressing the issue of whether people were in fact rational in the sense of the axioms. Finally, it was alleged – in the face of empirical evidence that people often did not choose rationally – that the axioms defined the norms of choice. They told us how rational individuals should choose. More than that. Since being rational is taken as “good,” they show us how people should behave – full stop….

The behavioralists may well be correct that people do not act in accordance with … rationality axioms. But they are surely wrong in claiming that they ought to behave in this way. The problem is not with deficient individuals. It is a problem of deficient rationality standards.

It is an old story. Pseudo-scientific economists, suffering from physics envy, strive to reduce the complexity of human behavior to simple-minded metrics, according to which they judge human rationality. When humans fail to hew to the simple-minded preferences of economistic thinkers, it is evident (to those thinkers) that humans must be nudged toward “doing the right thing.”

When economists cross the line from theorizing about economic behavior to judging it, they put themselves on the same low plain as “liberals.” The latter, at least, are honest about wanting their own way … just because … and do not resort to cheap, pseudo-scientific tricks. They simply enforce their preferences through statutes and regulations. Why “nudge” when you can coerce?

Lay My (Regulatory) Burden Down

UPDATE 02/05/17: The website of the Office of the Federal Register has eliminate or very cleverly hidden the source of statistics summarized in the graph below. Alternative sources, as of this date, are here and here.

The Office of the Federal Register, undoubtedly proud of its role in the imposition of rules on Americans, publishes a statistical summary of its handiwork, from which I derived the following graph:

Source: Go to OFR page headed Tutorials, History, and Statistics and under Statistics click on XLS. Number of pages of rules for 1936-1975 estimated from the relationship between the number of pages of rules and the total number of pages in the Federal Register for 1976-2010.

Not all of the rules adopted since 1936 are still in effect, of course, but the graph gives a good indication of the growth and weight of the regulatory burden that hampers Americans and their enterprises. Do not take solace in the slower growth of rule-making pages since 1976; the page count continues to rise. Any number greater than zero represents the foreclosure of consumers’ and producers’ options — the further diminution of liberty, in other words.

How bad is it, economically? A report issued under the aegis of the U.S. Small Business Administration (yes, an arm of the central government) concludes that

the annual total cost of all federal regulations in 2008 was $1.752 trillion. Of this amount, the annual direct burden on business is $970 billion. Economic regulations represent the most costly category, with a total cost of $1.236 trillion, and with $618 billion falling initially on business. Environmental regulations represent the second most costly category in terms of total cost ($281 billion), and the cost apportioned to business is $183 billion. Compliance with the federal tax code is the third most costly category ($160 billion), and the cost of occupational safety and health, and homeland security regulations ranks last ($75 billion). (Nicole V. Crain and W. Mark Crain, Lafayette College, “The Impact of Regulatory Costs on Small Firms,” for SBA Office of Advocacy, September 2010, p. 48; cited and summarized on SBA’s website, here)

In other words governmental impositions in 2008 — a regulatory burden of $1.75 trillion and spending of $5.02 trillion — accounted for 47 percent of that year’s GDP ($14.29 trillion, in current dollars). As I have shown in other posts (e.g., here and here) the cumulative effect of governmental impositions is far greater than that.

Related reading: Henry I. Miller, “Red Tape and Pink Slips: Obama’s Imaginary Regulatory Reform,” The American, February 2, 2012

Are the Natural Numbers Supernatural?

Steven Landsburg writes:

…It is not true that all complex things emerge by gradual degrees from simpler beginnings. In fact, the most complex thing I’m aware of is the system of natural numbers (0,1,2,3, and all the rest of them) together with the laws of arithmetic. That system did not emerge, by gradual degrees, from simpler beginnings….

…God is unnecessary not because complex things require simple antecedents but because they don’t. That allows the natural numbers to exist with no antecedents at all—and once they exist, all hell (or more precisely all existence) breaks loose: In The Big Questions I’ve explained why I believe the entire Universe is, in a sense, made of mathematics. (“There He Goes Again,” The Big Questions Blog, October 29, 2009)

* * *

The existence of the natural numbers explains the existence of everything else. Once you’ve got that degree of complexity, you’ve got structures within structures within structures, and one of those structures is our physical Universe. (If that sounds like gibberish, I hope it’s only because you’re not yet read The Big Questions, that you will rush out and buy a copy, and that all will then be clear.) (“Rock On,” The Big Questions Blog, February 8, 2012)

With regard to the first quotation, I said (on October 29, 2009) that

Landsburg’s assertion about natural numbers (and the laws of arithmetic) is true only if numbers exist independently of human thought, that is, if they are ideal Platonic forms. But where do ideal Platonic forms come from? And if some complex things don’t require antecedents, how does that rule out the existence of God … ?

I admit to having said that without the benefit of reading The Big Questions. I do not plan to buy or borrow the book because I doubt its soundness, given Landsburg’s penchant for wrongheadedness. But (as of today) a relevant portion of the book is available for viewing at Amazon.com. (Click here and scroll to chapter 1, “On What There Is.”) I quote from pages 4 and 6:

…I assume — at the risk of grave error — that the Universe is no mere accident. There must be some reason for it. And if it’s a compelling reason, it should explain not only why the Universe does exist, but why it must.

A good starting point, then, is to ask whether we know of anything — let alone the entire Universe — that not only does exist, but must exist. I think I know one clear answer: Numbers must exist. The laws of arithmetic must exist. Two plus two equals four in any possible universe, and two plus two would equal four even if there were no universe at all….

…Numbers exist, and they exist because they must. Admittedly, I’m being a little vague about what I mean by existence. Clearly numbers don’t exist in exactly the same sense that, say, my dining-room table exists; for one thing, my dining-room table is made of atoms, and numbers are surely not. But not everything that exists is made of atoms. I am quite sure that my hopes and dreams exist, but they’re not made of atoms. The color blue, the theory of relativity, and the idea of a unicorn exist, but none of them is made of atoms.

I am confident that mathematics exists for the same reason that I am confident my hopes and dreams exist: I experience it directly. I believe my dining-room table exists because I can feel it with my hands. I believe numbers, the laws of arithmetic, and (for that matter) the ideal triangles of Euclidean geometry exits because I can “feel” them with my thoughts.

Here is the essence of Landsburg’s case for the existence of numbers and mathematics as ideal forms:

Number are not made of atoms.

But numbers are real because Landsburg “feels” them with his thoughts.

Therefore, numbers are (supernatural) essences which transcend and precede the existence of the physical universe; they exist without God or in lieu of God.

It is unclear to me why Landsburg assumes that numbers do not exist because of God. Nor is it clear to my why his “feeling” about numbers is superior to other persons’ “feelings” about God.

In any event, Landsburg’s “logic,” though superficially plausible, is based on false premises. It is true, but irrelevant, that numbers are not made of atoms. Landsburg’s thoughts, however, are made of atoms. His thoughts are not disembodied essences but chemical excitations of certain neurons in his brain.

It is well known that thoughts do not have to represent external reality. Landsburg mentions unicorns, for example, though he inappropriately lumps them with things that do represent external reality: blue (a manifestation of light waves of a certain frequency range) and the theory of relativity (a construct based on observation of certain aspects of the physical universe). What Landsburg has shown, if he has shown anything, is that numbers and mathematics are — like unicorns — concoctions of the human mind, the workings of which are explicable physical processes.

Why have humans, widely separated in time and space, agreed about numbers and the manipulation of numbers (mathematics)? Specifically, with respect to the natural numbers, why is there agreement that something called “one” or “un” or “ein” (and so on) is followed by something called “two” or “deux” or “zwei,” and so on? And why is there agreement that those numbers, when added, equal something called “three” or “trois” or “drei,” and so on? Is that evidence for the transcendent timelessness of numbers and mathematics, or is it nothing more than descriptive necessity?

By descriptive necessity, I mean that numbering things is just another way of describing them. If there are some oranges on a table, I can say many things about them; for example, they are spheroids, they are orange-colored, they contain juice and (usually) seeds, and their skins are bitter-tasting.

Another thing that I can say about the oranges is that there are a certain number of them — let us say three, in this case. But I can say that only because, by convention, I can count them: one, two, three. And if someone adds an orange to the aggregation, I can count again: one, two, three, four. And, by convention, I can avoid counting a second time by simply adding one (the additional orange) to three (the number originally on the table). Arithmetic is simply a kind of counting, and other mathematical manipulations are, in one way or another, extensions of arithmetic. And they all have their roots in numbering and the manipulation of numbers, which are descriptive processes.

But my ability to count oranges and perform mathematical operations based on counting does not mean that numbers and mathematics are timeless and transcendent. It simply means that I have used some conventions — devised and perfected by other humans over the eons — which enable me to describe certain facets of physical reality. Numbers and mathematics are no more mysterious than other ways of describing things and manipulating information about them. But the information — color, hardness, temperature, number, etc. — simply arises from the nature of the things being described.

Numbers and mathematics — in the hands of persons who are skilled at working with them — can be used to “describe” things that have no known physical counterparts. But that does not privilege numbers and mathematics any more than it does unicorns or God.

Liberty, Negative Rights, and Bleeding Hearts

Liberty rights are represented in the Founders’ trinity of “unalienable Rights“: “Life, Liberty, and the pursuit of Happiness.” These really constitute a unitary right, which I simply call liberty. The liberty right is unitary because liberty (as a separate right) is meaningless without life, and liberty implies the latitude to pursue happiness.

Libertarians, for the most part, think of liberty as the enjoyment of the negative right to be left alone in one’s peaceful pursuits, that is, the right not to be robbed, attacked, murdered, and so on. But in a society or polity that values and enables liberty, the right to be left alone is only half the story.

The right to be left alone is the negative sub-rule of the Golden Rule, a good formulation of which is “One should treat others as one would like others to treat oneself.” That formulation implies a positive sub-rule, which could be stated as “Be kind and charitable to others, and they (or most of them) will be kind and charitable to you.”

The positive sub-rule is prudential, not mandatory. But that does not lessen its importance, for liberty cannot prevail absent widespread observance of the positive sub-rule. Such observance creates the conditions of mutual trust and respect that foster mutual forbearance, that is, leaving others alone in their peaceful pursuits. (For more in this vein, see Richard Epstein’s refutation of the view that libertarianism is all about “me” in “No ‘Sachs Appeal’,” Defining Ideas (a Hoover Institution journal), January 24, 2012.)

Let me be clear about the applicability of the Golden Rule in an ideal libertarian society or polity: Both sub-rules — negative and positive — are to be observed voluntarily. But one of them — the negative sub-rule — may be defended by force. Observance of the positive sub-rule may not be coerced, however, because that would violate the negative sub-rule.

The negative sub-rule must be defended because negative rights will not always be respected, human nature being what it is. On the issue of how to defend negative rights, libertarians split into two camps: anarchists and minarchists. These two camps differ about the necessity of the state, which is an independent entity and not an agent of particular members (or groups of members) of a society or polity.

Anarchistic libertarians maintain that negative rights can and should be defended without the intervention of a state. In the anarchistic view, individuals and groups of individuals can contract with each other about rules of interpersonal behavior, and can empower agents to enforce the rules.

Minarchistic libertarians (or this one, at least) maintain that the existence of agents who are empowered by various members of a society or polity is nothing more than warlordism, wherein might makes right. To say that no one would use force to do more than defend one’s negative rights is to make a patently false claim about human nature. (Anarchists, after all, acknowledge the necessity of self-defense.) Minarchists therefore believe that a state should be created and empowered specifically, and exclusively, for the purpose of defending negative rights. Such a state must be generally accountable to the populace, and it must have no power other than to protect the populace from harm. (For more about anarchists, minarchists, and the inevitability of the state, go here.)

Minarchists, nevertheless, tend toward a superficial view of the state’s minimal role, namely, that the job of the state is to see that everyone is left alone, as long as his pursuits are peaceful. That is, the job of the state is to enforce the negative sub-rule of the Golden Rule. So far, so good. Even an anarchist might go along with the idea of such a state.

But here is the rub. What are peaceful pursuits, that is, pursuits which do not harm others? Who defines them? It cannot be everyone for himself; A’s peaceful pursuit may be a nuisance (or worse) to B.

In sum, harm cannot be defined willy-nilly by individuals, nor is it the abstraction that most libertarians make it out to be with their simplistic invocation of the “harm principle.” Rather, the definition of harm must reflect broad agreement about the rules of interpersonal behavior: social norms. Those norms are not mere abstractions; they are specific rules about permissible and impermissible acts. (Caution to readers: Do not mistake state-imposed rules for social norms, though some state-imposed rules may reflect social norms.)

Like it or not, evolved social norms constitute the foundation of a libertarian society based on mutual trust and respect. And if those evolved social norms specifically proscribe such “libertarian” causes as abortion and homosexual “marriage,” where does that leave the typical “libertarian”? It leaves him wanting to repudiate or overturn social norms, without regard for the effects of doing so on social comity. (See this and this, for example.)

But the ranks of “libertarians” also number a strange breed, often self-described as left-libertarian. These “libertarians” actively root for the violation of negative rights in the cause of “social justice.” What is “social justice”? The short answer is that it is whatever anyone wants it to be, but it is never restricted to the enforcement of negative rights. The term “social justice” may be taken confidently as code for the enforcement of positive rights by a coercive state.

Left-libertarians will jump through hoops, turn somersaults, and stand on their heads to deny that they favor the enforcement of positive rights by a coercive state. But they do. A post by Kevin Vallier (one of the Bleeding Heart Libertarians) exemplifies their acrobatics:

Libertarians Great and Small (LGS): At some point in the future a group of committed libertarians establish a libertarian free zone called Libertarian Paradise. In LP, all property is acquired and transferred in line with traditional self-ownership political theory. Deviations from these norms are quickly corrected by private and non-profit legal organizations (call them the Cops).

…Due to LP’s unbridled capitalism, its economy booms, making its inhabitants spectacularly wealthy, so much so that charity easily provides for its poorest citizens.

However, through no one person or group’s deliberate action, prosperity ebbs. Perhaps because of resource depletion, climate change or natural disaster, a class of individuals becomes systematically deprived of basic resources (call them the Small). But while they are regularly hungry, they do not starve. And while they cannot secure many basic health resources, they do not die from easily preventable diseases. However, their poverty substantially sets back their well-being.

But the trouble in LP strikes the best-off as well (call them the Great). They too grow poorer, though they remain very well-off, more than wealthy enough to maintain a high standard of living. Yet they no longer feel secure enough to donate to charity. While the Great continue to donate to charity, LP’s charitable institutions no longer have sufficient resources to adequately provide for the Small….

At first the Small petition the Cops to require the Great to pay higher service fees and to use the proceeds to provide a social safety net. But the Cops reject the Small’s petitions for fear of offending their Great clientele.

Eventually the Small grow tired of petitions and begin to occupy local banks, demanding that a small portion of the fortunes of the Great be used to provide the Small with enough food and medical care to be able to get on with their lives. The Small do so non-aggressively, organizing a poor people’s campaign to nonviolently resist LP’s property regime.

But the Great are frustrated. After all, they still give to charity and they too have grown poorer. So the Great demand that the Cops coercively remove the Small from their local banks on the grounds that the Small are violating the self-ownership principle. The Cops comply.

The Small resent the coercion and complain that it is unjustified because they are merely trying to secure basic resources for them and their children. The Cops, acting on behalf of the Great, violently prevent the Small from securing a minimally decent future for themselves and their offspring.

Vallier maintains that

Traditional libertarianism solidly endorses the coercive actions of the Cops. The Cops and their Great clients may be insufficiently benevolent but they act justly.…

But social justice libertarians (Strong BHLs) have a different reaction. On their view, the Small are not criminals. In fact, their demands are justified. First, the Small have only occupied local banks after petitioning the Cops to charge higher fees. Second, by occupying local banks, the Small are merely asking the Great to provide them with a very mild safety net that, if institutionalized, would in no way prevent the Great from leading excellent lives.

The social justice libertarian can go further and argue that the property claims of the Great are illegitimate. Their claims are illegitimate because the coercion required to maintain them cannot be justified to the Small given that their well-being is substantially set back by a lack of basic food and healthcare. On the social justice view, the Small’s complaints provide legitimate grounds to revise the property rights recognized in LP to permit (and perhaps require) the Cops to provide a safety net out of the proceeds of legal fees paid by the Great.

…In this case, I’m with the Small. How about you?

And, in an effort to seal his case, Vallier adds

Pre-emptive Remarks:

(1) Please don’t respond with “That will never happen.” The purpose of LGS is to draw out your intuitions about what makes coercion and property regimes morally legitimate. That is why it is a thought experiment.

(2) Please don’t respond with “You’re a statist.” Nothing in LGS assumes that a state controls LP or that the Small want a state. These disputes are possible in a market anarchist social order and can be remedied in the name of justice through polycentric legal organizations.

(3) Please don’t respond that the Small aren’t really being coerced. Many libertarians want to determine what counts as coercion entirely by whether property claims are made in line with the self-ownership principle. But that’s implausible. Even private police forces have to use coercion to protect legitimately held property. Just because a piece of property is rightfully yours doesn’t mean your security forces don’t use coercion to protect it.

(4) Please don’t respond with a slippery slope argument. I was extremely circumspect about the sort of justification the Small employ. They reject as unjustified the coercion used against them because it requires that they remain impoverished through no fault of their own when the Great can easily aid them without any significant risk to their life prospects. To side with the Small, you don’t have to adopt any strongly prioritarian or egalitarian distributive principle.

Remark (1) is unexceptionable; I take LGS as a thought experiment, though a failed one.

As for (2), Vallier should read what he has written. When the Small petition the Cops to force the Great to come across with more money for the Small, it is evident that the Small consider the Cops to have state-like power. That is, the Small want the Cops to act like agents of the state by taking up against their own “clients,” the Great. Further, it is clear that Vallier wants the Cops to assume state-like power when he says that “the Small’s complaints provide legitimate grounds to revise the property rights recognized in LP to permit (and perhaps require) the Cops to provide a safety net out of the proceeds of legal fees paid by the Great.”

Vallier resorts to doublespeak in (3) when he says that “the Cops coercively remove the Small from their local banks.” The Cops (as agents for the Great) are employing force in defense of property rights — rights that the Small had acknowledged by virtue of their membership in the Libertarian Paradise. If there is any coercion in the scenario painted by Vallier, it is committed by the Small, when they occupy the banks in an effort to compel the Great to cough up more money. Vallier’s use of “coercively” is gratuitous and does not belong in the phrase quoted above.

Remark (4) is slipperiness itself. Having misapplied “coercively” to the Cops defensive actions (as agents for the Great), Vallier recycles it in the statement that the Small “reject as unjustified the coercion used against them.” (As Lenin said, “A lie told often enough becomes truth.”) The Small may “reject as unjustified” their removal from private property, but that does not make their removal unjustified. (See my comments about (3).) Moreover, it is clear that Vallier adopts some kind of “distributive principle,” other than the libertarian principle upon which LP was founded, when he writes that the Small will “remain impoverished through no fault of their own.” The implied principle is that those who are better off owe something to those who are worse off. How much they owe, and under what circumstances is, of course, determined arbitrarily by “social justice” libertarians like Vallier and out-and-out statist redistributionists like Barack Obama. Their principles are the same, they just articulate them differently.

It is understandable the Vallier roots for the “little guy,” most people do; but the “little guy” is not necessarily the “good guy.” In any event, a libertarian society is impossible if the fundamental tenets of libertarianism can be overthrown simply because the “little guy” wants more than the “big guy” is willing to give. It is not as if the Greats have insisted on a narrow, “leave me alone,” kind of libertarianism; their embrace of the positive sub-rule of the Golden Rule is evident (and realistic). Vallier — like any statist — simply wants to enforce his preconceived notion of how the positive sub-rule should be applied. But the enforcement of any such notion, however well intended, is incompatible with liberty. Moreover, as I have shown, the end result of confiscation through taxation and regulation is general impoverishment; the “have nots” suffer, along with the “haves.”

Left-libertarianism is not libertarianism. And its unintended consequences are dire because slippery slopes are real. State power erodes the societal bonds upon which liberty depends, because — as subjects of the state — individual develop the habit of looking to the state for guidance about proper behavior, instead of consulting their consciences and their fellow men. One misuse of state power leads to another, eventually destroying the fragile bonds of mutual respect and forbearance that undergird liberty. (Regarding the reality of slippery slopes, consider how much the contemporary interpretation of the Constitution diverges from its real, original meaning because of accretion of wrongful interpretations; see especially “Our Perfect, Perfect Constitution,” by Michael Stokes Paulsen, University of St. Thomas School of Law.)

For proof of this, one need look no farther than America. America’s slide into statism began in earnest with with Teddy Roosevelt’s “Square Deal,” accelerated with Franklin Roosevelt’s “New Deal,” and has been compounded since through the steady accretion of power by the central government.

All in the name of “social justice.”

“Men’s Health”

I learned something new today. The provision of contraceptives as a “right” under employer-sponsored health-insurance plans is a “women’s health” issue. Fancy that. I had always thought of contraception in a different way. To put it delicately, contraception is like playing with fire without getting burned. “Health” has nothing to do with it.

Anyway, if women can use the power of the state to force others to pay for their contraceptives (via higher insurance premiums), men certainly should be able to use the power of the state to acquire goodies that are essential to “men’s health.” I therefore demand that the Obama administration force insurance companies to cover the following items:

free tickets to sporting events

beer, whiskey, and wine on demand

free premium sports packages on cable or satellite TV

Mondays and Fridays off, with full pay

provocative clothing (intimate and otherwise) for one’s “partner”

free subscriptions to various forms of lascivious entertainment

I’m sure there are many other things that are essential to “men’s health,” but that’s a good start.

The Real Multiplier (II)

Incorporated in this page.

Bonds for the Long Run?

Interest rates in the low tier of investment-grade corporate bonds (Baa-rated by Moody’s) have exceeded the dividend yield on the S&P Composite Index since the 1950s:

Sources: S&P Composite dividend yield is from Robert Shiller’s data set for Irrational Exuberance. Baa rate is from the Federal Reserve Board’s monthly series of Baa rates.

The more interesting value is the spread between the real yield on the S&P Composite and the real rate of interest on Baa-rated bonds:

The spread, in this instance, is measured by subtracting the real S&P yield from the real interest rate. The spread was at or above 5 percentage points most of the time from 1969 to 2009. For reasons I will come to, this led to a significant narrowing of the gap between real, long-term returns on stocks and bonds:

Key assumptions: Current dividends are reinvested in the S&P Composite Index at the current value of the index. Current interest payments are reinvested in new issues of Baa-rated bonds at the then-prevailing interest rate on such bonds. Bonds mature at the end of the 30-year holding period. That holding period was chosen because, according to the St. Louis Fed, “Moody’s tries to include bonds with remaining maturities as close as possible to 30 years. Moody’s drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.”

The graph indicates that the “risk premium” for stocks (relative to corporate bonds) has not disappeared, but it has become markedly smaller since the mid-1950s. Why? Because dividend payouts have not kept up with stock prices, and so yields have dropped. This, in turn, has caused stock prices to rise less than they would have had yields not fallen.

Why should falling dividend yields have affected stock prices? The long-run return to stock ownership has two components: price movements and dividends. (By contrast, the bond holder who is in for the long haul expects only to redeem his bonds at face value when they mature.) As dividend yields have shrunk relative to interest rates on corporate bonds, stocks have become somewhat less attractive relative to bonds. The net effect, over the years, has been to reduce the demand for stocks and thus to compound the effect of smaller dividend payouts by causing downward pressure on stock prices, albeit subtly and invisibly.

Yes, stock ownership (on paper) still seems to be a more attractive long-run proposition than bond ownership. But a prudent, risk-averse investor who is willing to buy bonds and hold them to maturity can do quite well without riding the stock-market roller coaster.

Legislating Morality

As noted here, I am belatedly watching Prohibition, a production of Ken Burns and Lynn Novick, which first aired on PBS in October. A main theme of the second episode is that “you can’t legislate morality.” Well, morality can be legislated — and is legislated — but enforcing it is another thing. And that is the real lesson of Prohibition in the United States, the “noble experiment” that lasted from 1920 to 1933.

When I say that morality can be legislated, I mean simply that a moral precept (e.g., “Thou shall not kill.”) can be memorialized in formal law, thus enabling the state to prosecute persons who violate the precept. Diligent prosecution reinforces the precept by punishing those who violate it and deterring would-be violators.

An important lesson of the “noble experiment” is that the ability of the state to prosecute violations of a formal law depends on the degree to which the law’s underlying moral precept is accepted among the population. Killing — when not done in the course of war or self-defense — is one thing; drinking alcohol is quite another. The one is an irrevocable harm; the other is not harmful, in itself, except possibly to the imbiber. (Yes, it is true that drinking was not banned, but the drastic reduction or cessation of drinking was the clear aim of the Eighteenth Amendment’s prohibition of “the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes.”)

Even if a formal law is not squarely grounded in a moral precept, the law may be widely observed if (a) it is prosecuted rigorously and (b) the penalty for violating the law effectively deters the routine violation of it.

Take speeding, for example. Speeding does not, in itself, violate a moral precept. But speeding can be the proximate cause of a violation — the taking of a human life, for instance. This, in turn, can result in prosecution for vehicular homicide. There is, in other words, a moral distance between speeding and an actual wrong. Accordingly, the observance of speed limits usually depends on the likelihood of being caught and on the penalty attached to the particular instance of speeding. That is why most drivers observe the speed limit in a school zone, even before school has been dismissed and after students have left the scene. And that is why highway speed limits seem made to be broken. To put it another way, the “real law” for school-zone speed limits is not the same as the “real law” for highway speed limits. School-zone speed limits are usually obeyed because they are enforced more stringently than highway speed limits. Highway speed limits are not enforced stringently, and (except in speed-trap jurisdictions) are usually 10 miles an hour above posted limits. Given that, and the less-stringent enforcement of highway speed limits (except around certain holidays), the result is widespread disobedience of posted speed limits on highways.

It seems to me that to most Americans outside the “Bible Belt” — and to not a few within it — Prohibition was not akin to the imposition of a speed limit but to a ban on driving. Restrictions on speeding are understandable (if not always observed) because an automobile is a lethal weapon, but think of the hue and cry if driving were banned. And yet, the intent of Prohibition was to ban the use of a product that is inherently less dangerous than an automobile. Alcohol is a lethal weapon only when it is wielded by an alcoholic — and then it is a means of committing suicide, not murder. In most instances, and for most persons, the consumption of alcohol does not lead directly or indirectly to the violation of moral precepts. (Laws against drinking under a certain age reflect the norms that most adults would impose on their own children and are therefore generally acceptable.)

In sum, Prohibition did legislate morality, but it was the morality of a politically effective minority of Americans. Because of that, the legislation could not be enforced effectively because its moral premise was not widely accepted. In fact, it was widely ridiculed and resisted, even by many of the persons who were sworn to enforce it. And a lot of them had no compunction about breaking the law and actively helping law-breakers, often for a price.

Prohibition is a leading example of the collusion of “bootleggers and Baptists.” This is a term coined by Bruce Yandle in “Bootleggers and Baptists–The Education of a Regulatory Economist,” which appeared 29 years ago in Cato Institute’s Regulation (Volume 7, Number 3). As Yandle explains in the article,

the pages of history are full of episodes best explained by a theory of regulation I call “bootleggers and Baptists.” Bootleggers, you will remember, support Sunday closing laws that shut down all the local bars and liquor stores. Baptists support the same laws and lobby vigorously for them. Both parties gain, while the regulators are content because the law is easy to administer. Of course, this theory is not new. In a democratic society, economic forces will always play through the political mechanism in ways determined by the voting mechanism employed. Politicians need resources in order to get elected. Selected members of the public can gain resources through the political process, and highly organized groups can do that quite handily. The most successful ventures of this sort occur where there is an overarching public concern to be addressed (like the problem of alcohol) whose “solution” allows resources to be distributed from the public purse to particular groups or from one group to another (as from bartenders to bootleggers).

In the case of Prohibition, the regulation of alcohol proved difficult to administer because the amount of money at stake fostered criminal activity and corruption.

Like most regulations — which are meant to proscribe specific activities without regard for ancillary effects — Prohibition had costly, unintended consequences. The unintended consequences of Prohibition were greater violence and widespread disrespect for the forces of “law and order,” which were either corrupt, ineffective at maintaining the peace, or dedicated to the enforcement of a morally baseless regimen.

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