A Prediction

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

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

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

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

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

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

I no longer believe that freedom and democracy are compatible…

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

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

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

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

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

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

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

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

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

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

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

the invention of a constitutional right to human cloning.

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

Saving Social Security

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

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

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

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

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

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

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

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

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

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

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

The Trust Fund

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

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

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

Borrow money from willing, private lenders.

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

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

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

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

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

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

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

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

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

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

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

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

Transition Costs

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

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

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

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

Returns on Private Accounts

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

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

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

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

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

Conclusion

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

A Short Course in Economics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

14. Externalities are everywhere.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

17. Borders are irrelevant, except for defense.

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

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

See also this, and this, and this.

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

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

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

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

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

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

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

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

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

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

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

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

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

20. Stay tuned to this blog.

A Social Security Reader

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

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

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

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

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

The case for personal accounts remains as strong as ever.

It does indeed.

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

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

Are We All Fascists Now?

David Henderson of EconLog thinks so; that is, he thinks we’ve become the subjects of a fascist regime:

[President Obama] has already, in less than 100 days, moved the U.S. economy further towards fascism. Sean Hannity and other critics keep criticizing Obama for his socialist leanings. But the more accurate term for many of his measures, especially in the financial markets and the auto market, is fascism.

Here’s what Sheldon Richman writes about “Fascism” in The Concise Encyclopedia of Economics:

Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest”–that is, as the autocratic authority conceived it. (Nevertheless, a few industries were operated by the state.) Where socialism abolished all market relations outright, fascism left the appearance of market relations while planning all economic activities. Where socialism abolished money and prices, fascism controlled the monetary system and set all prices and wages politically. In doing all this, fascism denatured the marketplace. Entrepreneurship was abolished. State ministries, rather than consumers, determined what was produced and under what conditions.

I agree wholeheartedly with Henderson and Richman. But I must say that Obama’s latest moves only confirm our long drift to fascism, which is a particular form of statism. As I wrote about 18 months ago:

We were, for decades, poised on the brink of the abyss of statism, which is outright state control of most social and economic institutions (e.g., medicine, notably but far from exclusively). I have concluded that we have gone over the brink and slid, silently and docilely, into the abyss.

Statism may be reached either as an extension of communitarianism or via post-statist anarchy or near-anarchy, as in Stalin’s Russia, Hitler’s Germany, and Mao’s China. We have come to statism via communitarianism, which leads inevitably to statism because the appetite for largesse is insatiable, as is the desire (in certain circles) to foster “social (or cosmic) justice.”

I was once optimistic that our transition to all-out statism would lead, in turn, to overthrow of statism:

[S]tatism is an easier target for reform than communitarianism. The high price of statism becomes obvious to more voters as more facets of economic and personal behavior are controlled by the state. In other words, statism’s inherent weakness is that it creates more enemies than communitarianism.

That weakness becomes libertarians’ opportunity. Persistent, reasoned eloquence in the cause of liberty may, at last, slow the rise of statism and hasten its rollback. And who knows, perhaps libertarianism will gain adherents as the rollback gains momentum.

My optimism has vanished, as I have come to understand that politicians their enablers (voters and contributors) are profoundly irrational. They prefer statism to liberty, regardless of what they say. They (most of them) mean to be benign, but statism is not benign. Statism may seem benign — as it does to Europeans, for example — but it is dehumanizing, impoverishing, and — at bottom — destructive of the social fabric upon which liberty depends.

UPDATE

Megan McArdle takes exception to David Henderson’s observations. She writes:

How is this helpful? Has clarifying the distinction between fascism and socialism really added to most peoples’ understanding of what the Obama administration is doing? All this does is drag the specter of Hitler into the conversation. And the problem with Hitler was not his industrial policy–I mean, okay, fine, Hitler’s industrial policy bad, right, but I could forgive him for that, you know? The thing that really bothers me about Hitler was the genocide. And I’m about as sure as I can be that Obama has no plans to round up millions of people, put them in camps, and find various creative ways to torture them to death.

If he does, look, I take it all back. Use the F-word freely. Hell, I’ll hide you in our spare bedroom when the state police squads come looking for you. But until then, can we stick to less inflammatory terms? Surely creative and intelligent adults can find ways to critique Obama without pointing out that Hitler was also a very effective speaker.

It is helpful. Anything that might cause Americans to reject Obama’s policies is helpful. If it takes scaring them by invoking the F-word, I’m all for it. After all, it is fair to say that Obama is a fascist (e.g. this and this), just as it is fair to say that FDR was one, in spades. (Does “Obama youth” ring a bell?)

Fascism is a bad thing. Therefore, why should anyone refrain from calling a fascist a fascist, when the target is a fascist? Leftists and outraged adolescents (much the same thing) like to pin the fascist label on libertarians and conservatives, but in doing so they merely demonstrate their petulance and ignorance of the word’s meaning.

Yes, Hitler was malign compared with Obama, but that doesn’t make Obama benign. In fact, Obama’s policies with respect to embryonic stem-cell research and abortion are steps in the direction of Hitlerian eugenics. If you don’t agree, read this post and all the posts listed at the end of it, plus these:
Singer Said It
The Case against Genetic Engineering
A “Person” or a “Life”?
A Wrong-Headed Take on Abortion

Substantive Due Process, Liberty of Contract, and the States’ Police Power

Judge Raymond Randolph, in a speech to the Federalist Society’s National Lawyer’s Convention on November 11, 2005, had much to say about substantive due process:

. . . Substantive due process is the idea that the Due Process Clause of the 14th Amendment protects rights even if they are not set out specifically in the Constitution.

The Due Process Clause states simply that ““nor shall any State deprive any person of life, liberty, or property, without due process of law.”” Given the theme of this conference, one must ask about the original meaning of these words. The 14th Amendment due process clause is identical to the due process clause in the Fifth Amendment, applicable to the federal government. Two current Justices — you may guess who they are –– think the phrase ““substantive due process”” is an oxymoron. Process means procedure, not substance –– and that is what it meant historically. That the due process clause ever came to apply to legislation, as it did for the first time in the infamous Dred Scott case, is strange enough. What is the process due from a legislature? A quorum? An accurate vote count? There is something else I find quite odd about this concept. In many of the substantive due process cases the Court has stated that ““fundamental liberties”” are protected. Roe v. Wade is an example. Freedom of religion is, by all accounts, a fundamental liberty. Are we to suppose that freedom of religion is a right the state can take away so long as it does so with due process? That would be protecting a civil right in one amendment, the First, only to allow it to be taken away through another.

The Framers were smart people; they could not have intended such an absurdity. And they did not. History shows that the meaning of ““liberty”” as used in the 5th and 14th Amendments is simply freedom from restraint — that is, imprisonment. This explains why the Framers placed the due process clause in the Fifth Amendment, which deals almost entirely with criminal proceedings. Learned Hand, found the historical evidence supporting this interpretation clear beyond — in his words –– any ““reasonable doubt.” Yet the chances of the Supreme Court going back to the original understanding are, I think, slim to none.

But the Fifth Amendment does not deal exclusively with criminal proceedings, the Fourteenth Amendment has nothing to do with criminal proceedings, and both do explicitly prohibit the taking of life, liberty, or property without due process of law. Given the Due Process Clauses of the Fifth and Fourteenth Amendments, it is unconstitutional for a legislature to enact a law that allows a “taking” of liberty or property, unless such a “taking” is specifically authorized by the Constitution.

By the same token, it is unconstitutional for a legislature to enact a law that the Constitution specifically prohibits. Article I, Section 9, of the Constitution says explicitly that “No Bill of Attainder or ex post facto Law shall be passed” by Congress. That’s why the Constitution in Article I, Section 10, says explicitly that “No State shall . . . pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts. . . .”

The Framers (who were very smart people, indeed) understood that obligation of contracts (a.k.a. liberty of contract or freedom of contract) is both a matter of liberty and a matter of property. The Framers understood that legislative interference in contractual arrangements is a deprivation of due process because such interference prevents willing parties from employing their labor or property in the pursuit of otherwise lawful ends. That is, the legislature finds them “guilty” of otherwise lawful actions by forbidding and penalizing those actions.

The concept of substantive due process is in bad odor, in large part (as Wikipedia explains) because it

was first applied by the Supreme Court in a subsection of Dred Scott v. Sandford (1856), though it can be argued that the doctrine dates back to Calder v. Bull (1798). Dred Scott was a slave who claimed that passing into territory where slavery was prohibited destroyed his owner’s property rights over him. The court ruled in three parts. First, it argued that Dred Scott was not a citizen of the United States and therefore he had no right to liberty under the Constitution of 1856 — this argument, now harshly repudiated, is not based on the Due Process clause but did establish that the Court considered Dred Scott to be property. Second, the court argued that no Federal law could exist which per se appropriated property without advance notice and opportunity for judicial review — —this was a Due Process argument. Thus, the decision established lack of procedure violates Due Process just as much an unfair procedure. After the Fourteenth Amendment applied due process restrictions to states, the Supreme Court used this same doctrine to protect a liberty of contract by routinely striking down (such as in Lochner v. New York) those economic and labor regulations which restricted particular economic activities per se without opportunity for judicial review.

Lochner v. New York is the 1905 case in which the Supreme Court struck down a State statute that attempted to impose a maximum-hours limitation on bakers. Lochner is a bête noire to liberals because it triggered a wave of Supreme Court decisions deemed “pro-business” (as if business were an enemy). But Lochner and its offspring were decided rightly because they upheld, as a matter of due process, the Constitution’s explicit guarantee of liberty of contract. As Justice Peckham wrote for the Lochner majority,

[t]he [New York] statute . . . interferes with the right of contract between the employer and employees, concerning the number of hours in which the latter may labor in the bakery of the employer. The general right to make a contract in relation to his business is part of the liberty of the individual protected by the 14th Amendment of the Federal Constitution. Allgeyer v. Louisiana, 165 U.S. 578 , 41 L. ed. 832, 17 Sup. Ct. Rep. 427. Under that provision no state can deprive any person of life, liberty, or property without due process of law. The right to purchase or to sell labor is part of the liberty protected by this amendment. . . .This is not a question of substituting the judgment of the court for that of the legislature. If the act be within the power of the state it is valid, although the judgment of the court might be totally opposed to the enactment of such a law. But the question would still remain: Is it within the police power of the state? and that question must be answered by the court.

The question whether this act is valid as a labor law, pure and simple, may be dismissed in a few words. There is no reasonable ground for interfering with the liberty of person or the right of free contract, by determining the hours of labor, in the occupation of a baker. . . .

It is a question of which of two powers or rights shall prevail,-the power of the state to legislate or the right of the individual to liberty of person and freedom of contract. The mere assertion that the subject relates, though but in a remote degree, to the public health, does not necessarily render the enactment valid. The act must have a more direct relation, as a means to an end, and the end itself must be appropriate and legitimate, before an act can be held to be valid which interferes with the general right of an individual to be free in his person and in his power to contract in relation to his own labor.

Justice Holmes, in his famous dissent in Lochner, said that “[t]he 14th Amendment does not enact Mr. Herbert Spencer’s Social Statics.” Social Statics (as Wikipedia explains) is a “conception of social justice, which emphasized the responsibility of the individual for their [sic] nature and actions.” Holmes, in other words, preferred a paternalistic government, as opposed to the government of liberty and individual responsibility clearly intended by the Framers.

But Lochner — properly understood — is not about enacting Mr. Spencer’s Social Statics, nor (as usually charged) is it about achieving a certain “pro-business” result through “judicial activism.” Lochner is about honoring the Constitution’s explicit guarantee of liberty of contract, and about ensuring that that guarantee is not vitiated by legislative overreaching. It is a violation of due process when a legislature deprives citizens of liberty or property by enacting laws forbidden by the Constitution. And that, in essence, is what the Lochner Court said.

To underscore my point, I quote from an article by Richard Epstein in The Heritage Guide to the Constitution (pp. 171-5):

What is clear . . . is that in the antebellum period the Obligation of Contract Clause was the only open-ended federal constitutional guarantee that applied to the states. . . .

Everyone conceded that the clause applied to ordinary contracts between private persons, including partnerships and corporations. . . .

. . . At this point, one way to read the clause is to hold that its prohibitions are prospective but are not absolute. The state may later the rules governing future contracts only in ways that offer just compensation to all contracting parties in the form of greater and stability in their contractual obligations. The three legislative reforms that arose most frequently in the early debates — a statute of frauds, a statute of limitations, and recording acts — are all measures that meet this standard.

By refusing to give the clause any prospective role, Ogden [1827] opened the gateway to partisan legislation that limited the ability of some parties to contract without imposing similar restrictions on their economic competitors. . . .

Liberty of contract nevertheless survived Ogden, for 107 years. The Court upheld it in Bronson v. Kinzie (1843). According to The Oxford Guide to United States Supreme Court Decisions (Oxford University Press, 1999, p. 33),

Chief Justice Roger B. Taney held that [a] legislative attempt to modify the terms of [an] existing mortgage was an unconstitutional impairment of the obligation of contract. Taney agreed that a state could alter the remedies available to enforce past as well as future contracts. He nonetheless emphasized that such changes could not materially impair the rights of creditors. In broad language Taney extolled the virtue of the Contract Clause: “It was undoubtedly adopted as part of the Constitution for a great and useful purpose. It was to maintain the integrity of contracts, and to secure their faithful execution throughout this Union.”

The Oxford Guide continues, however, by outlining the death of liberty of contract:

The Court long adhered to the Bronson rule, invalidating state laws that interfered with contractual rights in the guise of regulating remedies. The decision was effectively superseded, however, by Home Building and Loan Association v. Blaisdell (1934), in which the justices ruled that contracts were subject to the reasonable exercise of state police power.

Just what is “reasonable exercise of state police power”? In Home Building and Loan Association, according to Chief Justice Hughes, writing for the Court, it is this:

We come back, then, directly, to the question of impairment. As to that, the conclusion reached by the court here seems to be that the relief [from mortgage foreclosures] afforded by the [Minnesota] statute does not contravene the constitutional provision because it is of a character appropriate to the emergency and allowed upon what are said to be reasonable conditions.

That is, the Court simply decided to uphold a Minnesota statute that altered the terms of a contract because it wanted to do so, not because it had constitutional authority for doing so. The Constitution doesn’t forbid States to impair contracts except in emergencies or to exercise their “policing power.” No, the Constitution flatly forbids States to impair contracts.

As for States’ so-called police power, an article at FindLaw tells this tale:

[I]deas embodying the social compact and natural rights, which had been espoused by Justice Bradley in his dissent in the Slaughter-House Cases, 43 had been transformed tentatively into constitutionally enforceable limitations upon government. 44 The consequence was that the States in exercising their police powers could foster only those purposes of health, morals, and safety which the Court had enumerated, and could employ only such means as would not unreasonably interfere with the fundamentally natural rights of liberty and property, which Justice Bradley had equated with freedom to pursue a lawful calling and to make contracts for that purpose. 45

So having narrowed the scope of the state’s police power in deference to the natural rights of liberty and property, the Court next proceeded to read into the concepts currently accepted theories of laissez faire economics, reinforced by the doctrine of Social Darwinism as elaborated by Herbert Spencer, to the end that ”liberty,” in particular, became synonymous with governmental hands-off in the field of private economic relations. In Budd v. New York, 46 Justice Brewer in dictum declared: ”The paternal theory of government is to me odious. The utmost possible liberty to the individual, and the fullest possible protection to him and his property, is both the limitation and duty of government.” …

To the State was transferred the task of demonstrating that a statute interfering with the natural right of liberty or property was in fact ”authorized” by the Constitution, and not merely that the latter did not expressly prohibit enactment of the same.

In 1934 the Court in Nebbia v. New York 52 discarded this approach to economic legislation, and has not since returned to it. The modern approach was evidenced in a 1955 decision reversing a lower court’s judgment invalidating a state statutory scheme regulating the sale of eyeglasses to the advantage of ophthalmologists and optometrists in private professional practice and adversely to opticians and to those employed by or using space in business establishments.

In a single year (1934) the Supreme Court demolished liberty of contract and created out of whole cloth what amounts to an unlimited “police power” for the States — liberty and property be damned.

It is long past time for a return to the substantive due process epitomized by Lochner, that is, a defense of constitutionally guaranteed liberties against legislative usurpations of those liberties.

The Perils of Europeanism

Charles Murray speaks eloquently in opposition to our Europe-ward drift; for example:

….If we want to know where America as a whole is headed–its destination–we should look to Europe.

Drive through rural Sweden, as I did a few years ago. In every town was a beautiful Lutheran church, freshly painted, on meticulously tended grounds, all subsidized by the Swedish government. And the churches are empty. Including on Sundays. Scandinavia and Western Europe pride themselves on their “child-friendly” policies, providing generous child allowances, free day-care centers, and long maternity leaves. Those same countries have fertility rates far below replacement and plunging marriage rates. Those same countries are ones in which jobs are most carefully protected by government regulation and mandated benefits are most lavish….

I stand in awe of Europe’s past. Which makes Europe’s present all the more dispiriting. And should make its present something that concentrates our minds wonderfully, for every element of the Europe Syndrome is infiltrating American life as well.

We are seeing that infiltration appear most obviously among those who are most openly attached to the European model–namely, America’s social democrats, heavily represented in university faculties and the most fashionable neighborhoods of our great cities. There are a whole lot of them within a couple of metro stops from this hotel. We know from databases such as the General Social Survey that among those who self-identify as liberal or extremely liberal, secularism is close to European levels. Birth rates are close to European levels. Charitable giving is close to European levels. (That’s material that Arthur Brooks has put together.) There is every reason to believe that when Americans embrace the European model, they begin to behave like Europeans.

Europeanism rests on the fallacy of the “free lunch.” The state, which produces nothing, somehow underwrites the benefits listed by Murray — as well as “benefits” like socialized medicine and month-long vacations. All of these supposed benefits must be paid for, of course; the only question is how they will be paid for.

The illusion of free benefits is a disincentive to work: Why work harder when the state will ‘give” you child care, health care, etc.? The cost of those “free” benefits is a disincentive to hiring, business formation, and capital investment, thus penalizing those Europeans who are willing to work and take the business risks that lead to job creation.

Because of these disincentives, most European nations have long experienced low growth and high unemployment. There is even more of that in Europe’s future (and in ours).

Why? Because the “free” benefits enjoyed by Europeans are not free; they come at a high price. And that price will become even less affordable because of the low birth rate among Europeans. The low birth rate means that future European generations (like our own future generations) will find it harder to bear the burden of supporting their elders (whose numbers will rise disproportionately) while paying for their own “free” benefits.

Europeans are able to enjoy “free” benefits, in part, because they are taxed lightly (relative to Americans) for defense; Europe is a free rider on America’s military strength. As our military budget is tapped to pay for our own adventures in Europeanism, the free ride will end for Europeans. They will then have to pay the price of defending themselves from, say, an aggressive Russia or they will have to succumb to Russia’s territorial and economic demands.

Europeanism, in sum, is a prescription for economic stagnation, unrest, demagogic despotism (as the likely response to unrest), and surrender.

Economic Growth since WWII

Revised and updated, here.

Mr. Greenspan Doth Protest Too Much

UPDATED BELOW

Alan Greenspan, former chairman of the Federal Reserve, disputes the assertion — made by many, including John Taylor of Stanford University — that

had the Federal Reserve from 2003-2005 kept short-term interest rates at the levels implied by [the] “Taylor Rule,” “it would have prevented this housing boom and bust. “

Mr. Greenspan continues:

Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have “prevented” the housing bubble. All things considered, I personally prefer Milton Friedman’s performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: “There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind.”

It is unseemly for Mr. Greenspan to invoke Milton Friedman in this matter, given that Mr. Friedman died in 2006 and, therefore, did not live to see the debacle in the mortgage market.

More to the point, it is impossible to “decouple” financial markets from one another. Imagine trying to decouple the price of gasoline from the price of crude oil. The federal funds rate is determined by the Fed’s open market operations, that is, through the Fed’s expansion or contraction of the money supply. It is true that the only immediate effect of the federal funds rate is on the rate of interest at which banks borrow from and lend to each other. But those rate changes and the underlying changes in the money supply have ripple effects throughout financial markets.

Rates on long-term instruments, such as mortgages, “decouple” from the federal funds rate only when there is a shock to the market for those long-term instruments. The shock, in the case of the mortgage market, was a drop in the value of real-estate, followed by a squeeze on borrowers (primarily on sub-prime borrowers), followed by a jump in the incidence of defaults, followed by a sudden drop in the value of sub-prime mortgages and the derivatives created from them, etc., etc., etc.

But before that shock, the mortgage rate (like the rates of other financial instruments) had tracked the ups and downs of the federal funds rate:

Source: Federal Reserve Statistical Release H.15, Selected Interest Rates (annual data)

The recent divergence between the federal funds rate and the mortgage rate did not occur until 2008, that is, until after the collapse of the real-estate bubble — a bubble that was caused in large part by the Fed’s easing of interest rates from January 2001 to June 2004.

UPDATE: For corroboration of my analysis, see Robert Murphy’s “Greenspan’s Bogus Defense” (published April 8, 2009).

UPDATE 2: Now, Secretary of the Treasury Geithner avers that “monetary policy around the world was too loose too long.” Notice how Geithner tries to take the heat off the Fed by focusing on “the world.” But, as the WSJ piece (linked above) points out, Geithner is

still too quick to pass the buck from the Fed to other central banks. The European Central Bank was much tighter than the Fed throughout this period. The Fed was by far the major monetary player because much of the world was on a dollar standard, with its monetary policy linked to the Fed’s. That was true of China, most of Asia and the Middle East.

The Fed’s loose policy from 2003 to 2005 created the commodity and credit bubbles that made these countries flush with dollars. Given their low domestic propensity to consume, these countries then recycled those dollars back into dollar-denominated assets, such as Treasurys and real-estate-related assets such as Fannie Mae securities. The Fed itself had created the surplus dollars that kept long rates low and undermined for a substantial period its belated attempts to tighten.

Mr. Geithner’s concession is important nonetheless because before he moved to Treasury he was vice chairman of the Fed’s Open Market Committee that sets monetary policy. His comments mark a break with the steadfast refusal of Fed Chairmen Alan Greenspan and Ben Bernanke to admit any responsibility. They prefer to blame bankers and what they call the “global savings glut,” as if the Fed had nothing to do with creating that glut.

UPDATE 3: John Taylor links to more evidence for the Fed’s influence on interest rates.

In the Long Run We Are All Poorer

The title of this post is a play on John Maynard Keynes’s famous line, “in the long run we are all dead,” which was not a defense of government spending during the Great Depression. The line comes from Keynes’s Tract on Monetary Reform, which he published in 1923, years before the Depression. Keynes was in fact writing about the need for government action against inflation.

This post, as its title may suggest, complements an earlier post, “Are We Mortgaging Our Children’s Future?” As I say there, Obama’s economic plan (if it can be called that)

doesn’t simply “mortgage our children’s future.” It does a lot more than that. Like all government spending that isn’t undertaken for the protection of Americans from foreign and domestic predators, the [Obama plan] mortgages our present, our future, our children’s future, and their children’s future, ad infinitum. The real problem isn’t the size of the national debt, it’s the size of government….

…Obama[‘s] initiatives…will stimulate a massive growth in the size and intrusiveness of government.

Here, I begin with links to three papers about the multiplier effect of government spending:

“Is Government Spending Too Easy an Answer?” (N. Gregory Mankiw)

“Government Spending Is No Free Lunch” (Robert J. Barro)

“New Keynsian versus Old Keynsian Government Spending Multipliers” (John F. Cogan, et al.)

The bottom line: Increases in government spending probably have a much smaller multiplier (stimulative) effect than claimed by the administration; the effect may well be negative. That is, increases in government spending probably will crowd out private consumption and investment, both in the near term (when spending increases are supposed to spur private consumption and investment) and in the long run (as the increases become permanent).

Next, I offer a baker’s dozen links to commentary about Obama’s economic policies and their implications:

“Stocks Hate Obeynomics” (Forbes.com)

“The Left’s Grip on the American Economy” (Forbes.com)

“Obama’s $646 Billion Cap-and-Trade Green Tax” (James Pethokoukis)

“The Obama Revolution: Paid for by the people” (Opinion Journal)

“The 2% Illusion: Take everything they earn and it still won’t be enough” (Opinion Journal)

“Obama Proposes a European U.S.” (Charles Krauthammer)

“Federal Outlays as a Percentage of GDP” (N. Gregory Mankiw)

“Obama Lied; the Economy Died” (Tony Blankley)

“The Great Non Sequitur: The sleight of Hand behind Obama’s Agenda” (Charles Krauthammer)

“Neither Moderate Nor Centrist” (Peter Robinson)

“Obama’s Radicalism Is Killing the Dow” (Michael J. Boskin)

“Even Worse than the Great Depression” (Donald Luskin)

“Obama’s Left Turn” (Stuart Taylor)

Taylor sums it up, thusly:

…I now worry that [Obama] may be deepening what looks more and more like a depression and may engineer so much spending, debt, and government control of the economy as to leave most Americans permanently less prosperous and less free.

Precisely.

There is a bit of hope, in the unlikely form of public opinion. Obama’s approval index (percentage of respondents strongly approving minus percentage strongly disapproving) has gone from a high of +30 on January 22 to a low of +6 (as of March 9). If economic logic doesn’t sway Obama, perhaps he can be swayed by public opinion — though I very much doubt it, given his long-standing adherence to economic and political extremism. (For example, his voting record as a senator placed him among the most “liberal,” i.e., statist, members of the U.S. Senate.)

Where are we headed then? The stock market — for all of its exaggerated swings — does a pretty good job of reflecting expectations about the country’s future economic performance. Witness the performance of the S&P 500:

Real S&P 500, updated Real S&P price index derived from annual closing prices of the S&P 500 Composite Index, as reconstructed by Global Financial Data, Inc. (no longer publicly available), and GDP deflator (Louis D. Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?” MeasuringWorth, 2008. URL: http://www.measuringworth.org/usgdp/).

The now-enviably stable post-Civil War trend was broken in the early 1900s, when the “progressive” agenda began to take hold — most notably with the passage of the Food and Drug Act and the vindictive application of the Sherman Antitrust Act by Theodore Roosevelt. It has been all downhill since, with the ratification of the Sixteenth Amendment (enabling the federal government to tax incomes); the passage of the Clayton Antitrust Act (a more draconian version of the Sherman Act, which also set the stage for unionism); World War I (a high-taxing, big-spending, command-economy operation that whet the appetite of future New Dealers); a respite (the boom of the 1920s, which was owed to the Harding-Coolidge laissez-faire policy toward the economy); and the Great Depression and World War II (truly tragic events that imbued in the nation a false belief in the efficacy of the big-spending, high-taxing, regulating, welfare state that we now “enjoy”).

Yes, stock prices have continued to rise, on the whole, but they have fluctuated wildly around a trend that is about 50 percent below the trend that prevailed from 1870 to the early 1900s. Such is the destructive power of the regulatory-welfare state.

The reaction of the stock market to Obama’s ascendancy since May 2008 — when he locked up the Democrat nomination — suggests that we have entered an era of even-lower stock prices. I have indicated the onset of this new era by plotting the values for 2008 and 2009 (to date) in red. Lower stock prices would be bad enough, in and of themselves, but what they betoken is the looming economic catastrophe that surely will result if Obama and his ilk persist in their oppressive program of spending, taxing, and regulating.

Eugene Fama and Kenneth French (distinguished financial economists at the University of Chicago) get it almost right:

Government intervention affects the market in two ways. First, it affects the level of expected future profitability, which has direct effects on stock prices. Second, government intervention and uncertainty about the government’s future actions change the risk of expected future profits, which affects stock prices by raising or lowering the discount rates for expected future profits, and thus raising or lowering expected stock returns. Our view is that the rhetoric and sweeping initiatives of the new administration have lowered market expectations of future profitability, and the uncertainty about government policies has increased the risk of expected future profits. Both effects have contributed to the lower stock prices we have seen as the policies of the new administration have unfolded. If the market has it right (that is, if the market is efficient) all this is built into current stock prices, and expected returns are higher going forward.

Future returns may be positive, over the long run, but those returns — and economic output — will be lower than they would have been, absent Obamanomics.

Positive Rights and Cosmic Justice

POSITIVE RIGHTS

An understanding of positive rights begins with negative rights. The classic formulation of negative rights is given in the Declaration of Independence:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

Life, liberty, and happiness are negative rights, to the extent that each of us does nothing in our pursuit and enjoyment of them to impinge on the life, liberty, and happiness of others. That my life, liberty, and happiness might make you unhappy because you are hateful, spiteful, or envious is your doing, not mine. Negative rights, therefore, are those which each of us can enjoy without imposing costs on others.

Yes, a tax-funded state must exist for the protection of negative rights — for reasons that I will address in future posts. But as long as the state protects negative rights evenhandedly, and imposes the costs of doing so evenhandedly, its citizens are better off than they would be if there were no state to protect their negative rights.

Positive rights arise when the state goes beyond the protection of negative rights; that is, when it grants benefits to some citizens — benefits that must, inevitably, come at the expense of other citizens. Affirmative action is one example of a positive right. Through affirmative action, some persons obtain jobs and promotions at the expense of other, better-qualified persons and, therefore, to the detriment of employers and consumers. There are so many positive rights that an exhaustive list of them would run to hundreds of pages. A short, alphabetical list of examples will have to do:

Agricultural subsidies
Bailouts for auto makers
“Fair housing” laws
Funding for the “arts”
Legalization of strikes
Licensing to restrict entry into certain occupations and businesses
Medicaid
Medicare
Minimum wage
Social Security
Tax-exempt status for certain organizations
Tax-supported stadiums

It is ironic, but predictable, that many positive rights have negative consequences for their intended beneficiaries, in addition to the negative consequences they have for the rest of us. Given the plethora of positive rights, perhaps we all suffer their consequences equally, but that those consequences are negative ones I have no doubt.

COSMIC JUSTICE

Believers in positive rights seek “cosmic justice” (though they may not realize it). What is cosmic justice? I like this example from Thomas Sowell’s speech, “The Quest for Cosmic Justice“:

A fight in which both boxers observe the Marquis of Queensberry rules would be a fair fight, according to traditional standards of fairness, irrespective of whether the contestants were of equal skill, strength, experience or other factors likely to affect the outcome– and irrespective of whether that outcome was a hard-fought draw or a completely one-sided beating.

This would not, however, be a fair fight within the framework of those seeking “social justice,” if the competing fighters came into the ring with very different prospects of success — especially if these differences were due to factors beyond their control….

In a sense, proponents of “social justice” are unduly modest. What they are seeking to correct are not merely the deficiencies of society, but of the cosmos. What they call social justice encompasses far more than any given society is causally responsible for. Crusaders for social justice seek to correct not merely the sins of man but the oversights of God or the accidents of history. What they are really seeking is a universe tailor-made to their vision of equality. They are seeking cosmic justice.

In an earlier post, I say:

The seekers of cosmic justice are not content to allow individuals to accomplish what they can, given their genes, their acquired traits, their parents’ wealth (or lack of it), where they were born, when they live, and so on. Rather, those who seek cosmic justice cling to the Rawlsian notion that no one “deserves” better “luck” than anyone else. But “deserves” and “luck” (like “greed”) are emotive, value-laden terms. Those terms suggest (as they are meant to) that there is some kind of great lottery in the sky, in which each of us participates, and that some of us hold winning tickets — which equally “deserving” others might just have well held, were it not for “luck.”

This is not what happens, of course. Humankind simply is varied in its genetic composition, personality traits, accumulated wealth, geographic distribution, etc. Consider a person who is born in the United States of brilliant, wealthy parents — and who inherits their brilliance, cultivates his inheritance (genetic and financial), and goes on to live a life of accomplishment and wealth, while doing no harm and great good to others. Such a person is neither “lucky” nor less “deserving” than anyone else. He merely is who he is, and he does what he does. There is no question of desert or luck.

As Anthony de Jasay writes in “Risk, Value, and Externality,”

Stripped of rhetoric, an act of social justice (a) deliberately increases the relative share…of the worse-off in total income, and (b) in achieving (a) it redresses part or all of an injustice…. This implies that some people being worse off than others is an injustice and that it must be redressed. However, redress can only be effected at the expense of the better-off; but it is not evident that they have committed the injustice in the first place. Consequently, nor is it clear why the better-off should be under an obligation to redress it….

There is the view, acknowledged by de Jasay, that the better-off are better off merely because of luck. But, as he points out,

Nature never stops throwing good luck at some and bad luck at others, no sooner are [social] injustices redressed than some people are again better off than others. An economy of voluntary exchanges is inherently inegalitarian….Striving for social justice, then, turns out to be a ceaseless combat against luck, a striving for the unattainable, sterilized economy that has built-in mechanisms….for offsetting the misdeeds of Nature.

Most seekers of cosmic justice simply claim that they want only what is “fair” for those who “deserve better.” They overlook or simply choose to ignore the evidence that the quest for cosmic justice harms those whom it is intended to benefit. I address that matter in the section “Does Redistribution Work?.”

Then there are those who claim that redistribution can be made to work because it is possible to calibrate well-being across individuals, thereby maximizing “social welfare.” I address that claim in the section “The Roots of Redistribution: Class Warfare and Arrogance.”

But, first, some arguments for and against positive rights.

POSITIVE RIGHTS, ROUND ONE

Philosopher and Mill scholar Joe Miller (formerly of Bellum et Mores) supports positive rights:

…I still hold on to one core insight of liberalism: respect for autonomy means more than just non-interference. I can have all sorts of freedoms from various things, but those freedoms don’t mean a damn thing if I’m too cold/sick/hungry/stupid/isolated to exercise them. And I remain convinced that, at least for right now, the only way to ensure that everyone has the shelter, medicine, food, education, and access needed to enjoy his/her freedom is through some form of redistribution. Insisting that you redistribute part of your wealth is no more a violation of your autonomy than is insisting that you refrain from hitting me in the nose. Both hitting me in the nose and refusing to help those too poor to exercise their freedoms are violations of autonomy.

Joe is far from alone in his views, of course. His co-believers are legion. Consider, for example, George Lakoff (about whom I have written here). Lakoff, too, is a proponent of positive rights, which he propounds in Whose Freedom?: The Battle over America’s Most Important Idea. Anthony Dick, writing at NRO Online, reviews Lakoff’s book:

“Freedom is being able to achieve purposes,” [Lakoff] writes, “either because nothing is stopping you or because you have the requisite capacities, or both.” He elaborates with a barrage of italics: “Freedom is the freedom to go as far as you can in life, to get what you want in life, or to achieve what you can in life.” This, he explains, means that freedom has a significant positive component: “Freedom requires not just the absence of impediments to motion but also the presence of access….Freedom may thus require creating access, which may involve building.” What Lakoff is describing, in other words, is a type of “positive freedom,” in the sense that it requires the provision of certain goods and services to citizens to ensure that they have the capacity to achieve their goals. On this view, you aren’t “free” unless you have been provided with what you need in order to be successful….

Lakoff’s conception of freedom is thus in direct conflict with that of the Founders. When government seeks to provide entitlements for some in the name of “positive freedom,” it must necessarily interfere in the lives of others. This is because all government action is predicated on taxation and coercion, which by definition entail infringements on liberty. The state can’t give a welfare check to one person without taking money from someone else; it can’t fund a Social Security system without forcing people to pay into it.

People who don’t have food or health care or education have not been deprived of freedom. What they lack is not freedom but material goods and services. This is a matter of vocabulary, not ideology. The court of common word usage simply rejects Lakoff’s claim that being free means having the capacity to achieve one’s aims.

Roger Scruton, in the “Philosophical Appendix” of his The Meaning of Conservatism, says this:

What, then, is meant by the ‘freedom of the individual’? I shall distinguish two kinds of liberal answer to this question, which I shall call, respectively, ‘desire based’ and ‘autonomy based’ liberalism. The first argues that people are free to the extent that they can satisfy thier desires. The modality of ths ‘can’ is, of course, a major problem. More importantly, however, such an answer implies nothing about the value of freedom, and to take it as the basis for political theory is to risk the most absurd conclusions. By this criterion the citizens of Huxley’s Brave New World offer a paradigm of freedom: for they live in a world designed expressly for the gratification of their every wish. A desire-based liberalism could justify the most abject slavery — provided only that the slaves are induced, by whatever method, to desire their own condition.

Joe Miller’s defense of positive rights could be dismissed simply by noting — as does Anthony Dick — the contradiction inherent in the concept of positive rights. It is simply illogical to say that “Insisting that you redistribute part of your wealth is no…violation of your autonomy.” Such insistence, at the behest of the state, can be nothing other than a violation of “your autonomy,” that is, the autonomy of the person whose wealth (or income) is being redistributed. Joe’s formulation also could be dismissed simply by noting — as Roger Scruton suggests — that an agenda of positive rights means that the state can enslave (or at least enthrall) its subjects by dictating the conditions of their existence.

POSITIVE RIGHTS, ROUND TWO

In response, Joe Miller essays another defense of positive freedom:

I might even go so far as to hold that positive freedom is more important than theoretical (or, in philosopher-speak, negative) freedom. This is not to say that I don’t value negative freedom; rather, positive freedom entails negative freedom. After all, I can have X as a member of the set of things I can actually do if and only if no one is using a gun (whether figurative or literal) to prevent me from doing X.

Why positive freedom rather than negative? Or rather, why positive freedom rather than only negative? I’m not sure that I’ve anything more than a deep-seated intuition. It strikes me as somehow empty and hollow to walk up to someone wasting away from disease and say, “Hey, you know, you’re free to do anything you’d like.”…

As with any sort of fundamental disagreement over basic terms, this one has serious implications. One of those implications is that liberals and libertarians often talk past one another. In academic philosophy, for example, the term “autonomy” is used to refer to positive freedom. Libertarians, however, frequently use the term, “autonomy” as a synonym for negative freedom. Because we use the term in different ways, liberals and libertarians often end up with the frustrating feeling of having beaten their respective heads against the wall when they interact.

When I say, “Of course redistribution is consistent with autonomy,” I mean that it’s consistent with a notion of positive freedom. Forcing you to give your money to someone else is no different from forcing you to stop hitting the person. Failure to provide certain of his basic needs is exactly as wrong as clubbing him over the head. Both violate his autonomy.

To which the libertarian responds, “Redistribution is obviously a violation of autonomy. After all, you’re using a gun to force someone to give up his money. How could that not be a violation of his autonomy.”

The fact is, both claims are right. But they are both right only because the interlocuters are, in effect, equivocating on the word “autonomy”. If the term means positive freedom, then the liberal is right. If autonomy means only negative freedom, then the libertarian is right.

Joe doesn’t really advance a new argument. Rather, he restates his old one, but in a way that better exposes its flaws. Here is Joe’s argument, with all of its assumptions made explicit:

1. Autonomy is necessary in order to do as one will toward one’s ends, though one may not do harm to others in the service of those ends.

2. Autonomy is not possible unless one possesses some minimal degree of health, wealth, income, etc. “Minimal” must be defined by someone, of course, and liberals stand ready to do the job.

3. But autonomy is not served by having too much wealth or income — or the things they can buy, such as health. “Too much” must be defined by someone, of course, and liberals stand ready to do that job, as well. (This is how liberals, in general, square their lip service to the harm principle with the actual doing of harm in the name of autonomy — which is done by taking wealth and income from some persons and giving it to others.)

4. Liberals’ arrogant willingness to play at being gods — by defining “minimal” and “too much,” and by ignoring the harm done to some for the benefit of others — rests on these deeper (and usually unacknowledged) assumptions:

One person’s well-being can be measured against another person’s well-being through interpersonal comparisons of utility.

There is a kind of cosmic justice — or social welfare function — that is advanced by harming some persons for the benefit of other persons. That is, a benefit cancels a harm — at least when the benefit and harm are decided by liberals.

Taking wealth and income from those who have “too much” does not, on balance, harm those who have “too little” by dampening economic growth and voluntary charity. (That it does do those things is a point I will address in a later part of this series.)

(The first and second assumptions enable Joe to assert that “positive freedom entails negative freedom.” To Joe, there is one big “welfare pie” in sky, in which we all somehow share — despite the obvious fact that A is made worse off when some of his wealth or income is confiscated and given to B.)

5. Given the foregoing, liberals see it as necessary and desirable to redistribute wealth and income from persons who have “too much” to persons who have “too little” — or “too little” of the things that wealth and income can buy. Otherwise, those who have “too little” wealth or income (or the things they can buy) would enjoy only “theoretical” freedom. But the use of the word “theoretical” is a rhetorical trick, a bit of verbal sleight-of-hand. It implies, without proof, that anyone who does not enjoy a certain “minimal” state of health, wealth, etc. — as “minimal” is defined by a liberal — simply lacks the wherewithal to strive toward ends that he or she values. And that brings us back to point 1.

The liberal argument for redistribution, therefore, is really a circular argument intended to justify liberals’ particular sense of fitting outcomes. Liberalism is paternalism run rampant, with these implications and consequences:

Everyone is both a potential beneficiary of and contributor to positive freedom. Whether one becomes a beneficiary or contributor depends on liberals’ arbitrary and capricious criteria for deservingness.

Liberal control of the apparatus of the state therefore results in myriad abuses of state power in the name of “compassion” — cheap compassion paid for by taxpayers, to be sure.

On the whole and over the long run — the effect of liberalism is to harm rather than help its intended beneficiaries.

DOES REDISTRIBUTION WORK?

The redistribution of income (and thus of wealth) is an integral function of the regulatory-welfare state (i.e., big government). Redistribution not only harms those who are taxed for that purpose but it also does not lastingly help its intended beneficiaries. In fact, it works to their detriment in the long run.

Liberals are unable to grasp that reality because they, more than most Americans, suffer from economic ignorance. Because of economic ignorance, liberals are unable to grasp the subtle, corrosive effects of big government on those things that drive economic progress: invention, innovation, entrepreneurship, the saving that funds those activities, and the hard work that enables the rest.

We Americans are far better off materially than our antecedents of a century ago — but very few of us (especially liberals) understand how much better off we would in the absence of big government. In this post, for example, I assessed how much worse off Americans will be a generation hence because of big government. The bottom line (all GDP estimates are in year 2000 dollars):

Had the economy continued to grow after 1907 at the 1790-1907 rate, real GDP in 2006 would have been $32 trillion, vice the actual value of $11 trillion.

Thus my earlier work, linked above, vastly understates the deadweight loss owed to big government: I had estimated that loss at 40 percent of potential GDP; it was, in fact, about two-thirds of potential GDP.

Had the economy continued to grow after 1907 at the 1790-1907 rate, real GDP in 2035 (a generation hence) would be $108 trillion (in year 2000 dollars).

If the economy continues to grow at the 1970-2006 rate, real GDP in 2035 will be $30 trillion (in year 2000 dollars).

However, growth is very likely to be less than 3.1% annually, given the advent of a new New Deal-Great Society under a new, anti-business, pro-regulation Democrat regime.

Thus the average American will “enjoy” (at best) about 28 percent of the income that would be his absent the advent of the regulatory-welfare state.

In sum, redistribution does not work. As part of liberalism’s “package deal” (tax, regulate, spend, and elect) it harms those whom it is supposed to help by undermining economic growth and thus depriving Joe Miller’s “cold/sick/hungry/stupid/isolated” of jobs and (for those who simply cannot support themselves) vast amounts of voluntary charity.

THE ROOTS OF REDISTRIBUTION: CLASS WARFARE AND ARROGANCE

Liberals wage class warfare on behalf of the “cold/sick/hungry/stupid/isolated” and any “oppressed” or “disadvantaged” group (i.e., one that is not white, male, employed without benefit of affirmative action, law-abiding, and heterosexual). It is a wonder that Jews remain, for the most part, in the liberal camp, but that habitual tendency may arise from liberal guilt (see below).

Liberal politicians are abetted in their cause by the votes that they attract from those groups on whose behalf they wage class warfare. Liberals and their constituencies, for the most part, do not understand the undesirable economic consequences of redistribution. There are many, of course, who simply choose not to understand — choosing class warfare over reason.

It is strange that liberals can claim to believe in the benefits of intellectual liberty (the competition of ideas) but not in the benefits of economic liberty. Liberals’ token adherence to intellectual liberty often is hypocritical. (Consider campus speech codes, for example.) In any event:

Liberals prize talk (especially when it is their kind of talk). But talk is cheap. Economic achievement requires action, not talk. The liberal imagination cannot value that which it does not understand.

Rich liberals either don’t understand how they came to be rich (if they did so on their own) and/or they feel guilty about their wealth. They are therefore quite willing to infringe the autonomy of others (through taxation) in the service of their ignorance and their consciences.

Liberals, who claim to prize autonomy, are nevertheless quite willing to tell others how to lead their lives. Witness the decades of regulation and taxation imposed upon Americans by “compassionate” liberals.

Liberals are quite willing to decide precisely who is deserving of “compassion” and who is not. That is, they (and only they) are fit to decide where to draw the dividing lines between those who are “too cold/sick/hungry/stupid/isolated” and those who are not.

In other words, liberals are strong believers in positive rights and, therefore, dispensers of cosmic justice. It is liberals who empower the state to dictate the redistribution of income, even though redistribution is a violation of the very autonomy that liberals claim to value. Liberals are willing and ready to draw arbitrary lines between those who (in their view) deserve more income and those who deserve less of it. And liberals are more than willing and ready to use the power of the state to enforce their arbitrariness.

By the same token, liberals are unwilling to allow free institutions to determine who fares well and who fares poorly. And their unwillingness to do so undermines the ability of those free institutions to enable the “cold/sick/hungry/stupid/isolated” to better their lot by their own efforts, and to care for those who are unable to do so.

Some proponents of positive rights (e.g., Joe Miller) nevertheless defend their position by asserting that they are not drawing arbitrary lines between those who deserve more and those who deserve less. For it is possible (according to Joe, among others) to make valid interpersonal comparisons of utility (hereafter interpersonal utility comparisons, or IUCs). The implication is that the ability to make valid IUCs enables someone (them? bureaucrats? politicians?) to make valid judgments about how to redistribute income so as to foster the maximization of a social welfare function (SWF), that is, to exact cosmic justice. (Joe does not refer to the SWF, but there is no point in making IUCs unless it is for the purpose of increasing the value of the SWF.)

The validity of the SWF, then, depends on these assumptions:

It is possible to make interpersonal utility comparisons (IUCs), that is, to determine whether and when it hurts X less than it benefits Y when the state takes a dollar from X and gives it to Y.

Having done that, the seekers of cosmic justice are able to conclude that the Xs should be forced to give certain amounts of their income to the Ys.

Making the Xs worse off doesn’t, in the longer run, also make the Ys worse off than they would have been absent redistribution. (This critical assumption is flat wrong, as discussed above.)

All of this is arrogant moonshine. Yes, one may safely assume that Y will be made happier if you give him more money or the things that money can buy. So what? Almost everyone is happier with more money or the things it can buy. (I except the exceptional: monks and the like.) And those who don’t want the money or the things it can buy can make themselves happier by giving it away.

What one cannot know and can never measure is how much happier more money makes Y and how much less happy less money makes X. Some proponents of IUCs point to the possibility of measuring brain activity, as if such measurement could or should be made — and made in “real time” — and as if such measurements could somehow be quantified. We know that brains differ in systematic ways (as between men and women, for instance), and we know a lot about the ways in which they are different, but we do not know (and cannot know) precisely how much happier or less happy a person is made — or would be made — by a change in his income or wealth. Happiness is a feeling. It varies from person to person, and for a particular person it varies from moment to moment and day to day, even for a given stimulus. (For more about the impossibility of making IUCs, see these posts by Glen Whitman of Agoraphilia. For more about measuring happiness, see these posts by Arnold Kling of EconLog.)

One answer to such objections is that an individual’s utility must diminish at the margin. (After all, diminishing marginal utility, DMU, is a key postulate of microeconomic theory.) Therefore, the Xs of the world must be “sated” by having “so much” money, whereas the Ys remain relatively “unsated.”

If that were true, why would Bill Gates, Warren Buffet, and partners in Wall Street investment banks (not to mention most of you who are reading this) seek to make more money and amass more wealth? Perhaps the likes of Gates and Buffet do so because they want to engage in philanthropy on a grand scale. But their happiness is being served by making others happy through philanthropy; the wealthier they are, the happier they can make others and themselves.*

Most of us, I suspect, simply become happier as we accrue wealth because. But how much wealth is “enough” for one person? I cannot answer that question for you; you cannot answer it for me. (I may have a DMU for automobiles, cashew nuts, and movies, but not for wealth, in and of itself.) And that’s the bottom line: However much we humans may have in common, each of is happy (or unhappy) in his own way and for his own peculiar reasons.

In any event, even if individual utilities (states of happiness) could be measured, there is no such thing as the social welfare function: X’s and Y’s utilities are not interchangeable. Taking income from X makes X less happy. Giving some of X’s income to Y may make Y happier (in the short run), but it does not make X happier. It is the height of arrogance for anyone — liberal, fascist, communist, or whatever — to assert that making X less happy is worth it if it makes Y happier.

CONCLUSION

There is a liberal urge to exact cosmic justice through positive rights — primarily redistribution in various forms. But redistribution harms those whom it is intended to help because it curtails economic growth and discourages work.

The urge to exact cosmic justice arises from arrogance, that is, from a penchant for dictating economic outcomes (and social relationships) that cannot be justified by pseudo-scientific appeals to interpersonal utility comparisons or the social welfare function.

If there is anything unjust or unfair in this world, it is the effort to exact cosmic justice. Robert Nozick put it this way in Anarchy, State, and Utopia:

We are not in the position of children who have been given portions of pie by someone who now makes last-minute adjustments to rectify careless cutting. There is no central distribution, no person or group entitled to control all the resources, jointly deciding how they are to be doled out. What each person gets, he gets from others who give to him in exchange for something, or as a gift. In a free society, diverse persons control different resources, and new holdings arise out of the voluntary exchanges and actions of persons. (Quoted by Gregory Mankiw in “Fair Taxes? Depends on What You Mean by Fair,” The New York Times, July 15, 2007.)

Greed, Cosmic Justice, and Social Welfare

GREED

We have heard much about “greed” in connection with the current financial crisis and recession. It seems that “greedy” lenders and financial intermediaries granted sub-prime mortgages to persons of low credit-worthiness and then infected the financial system by securitizing those risky mortgages and peddling them around to investors.

Why don’t we hear about the “greed” of the borrowers who entered into those sub-prime mortgages, and who enjoyed (and still enjoy, in most cases) better housing than they would otherwise have occupied. Why don’t we hear about the “greed” of the politicians who (seeking to curry favor and votes from certain groups) pressured Fannie Mae and Freddie Mac (and through them, mortgage lenders) to make mortgages more readily available to low-income borrowers (i.e., to make riskier loans)?

When does the desire to have more (e.g., a bigger house, a higher income) stop being the “American Dream” and become “greed”? Why is it good for a low-income person to inhabit a house that he can’t really afford but bad for a high-income person to inhabit a house that he can afford, and whose investments and entrepreneurship have helped the low-income person strive toward the “American Dream”?

The answer, of course, is that “greed” is whatever a politician, pundit, or other purveyor of economic envy says it is. “Greed” is invoked not to explain financial success but to denigrate those who have attained it (only to lose it, in some cases), as if they had attained it at the expense of those who have failed to attain it (thus far, at least). Except in the (relatively rare) cases of outright theft and fraud, financial success is not attained at anyone else’s expense; economics is not a zero-sum game.

COSMIC JUSTICE

The habit of castigating the motives of the financially successful and then penalizing their success by taxing them disproportionately appeals not only to envy and economic ignorance but also to what Thomas Sowell calls cosmic justice. The seekers of cosmic justice are not content to allow individuals to accomplish what they can, given their genes, their acquired traits, their parents’ wealth (or lack of it), where they were born, when they live, and so on. Rather, those who seek cosmic justice cling to the Rawlsian notion that no one “deserves” better “luck” than anyone else. But “deserves” and “luck” (like “greed”) are emotive, value-laden terms. Those terms suggest (as they are meant to) that there is some kind of great lottery in the sky, in which each of us participates, and that some of us hold winning tickets — which equally “deserving” others might just have well held, were it not for “luck.”

This is not what happens, of course. Humankind simply is varied in its genetic composition, personality traits, accumulated wealth, geographic distribution, etc. Consider a person who is born in the United States of brilliant, wealthy parents — and who inherits their brilliance, cultivates his inheritance (genetic and financial), and goes on to live a life of accomplishment and wealth, while doing no harm and great good to others. Such a person is neither “lucky” nor less “deserving” than anyone else. He merely is who he is, and he does what he does. There is no question of desert or luck.

Such reasoning does not dissuade those who seek cosmic justice. Many of the seekers are found among the “80 percent,” and it is their chosen lot to envy the other “20 percent,” that is, those persons whose brains, talent, money, and/or drive yield them a disproportionate — but not undeserved — degree of fortune, fame, and power. The influential seekers of cosmic justice are to be found among the “20 percent.” It is they who use their wealth, fame, and position to enforce cosmic justice in the service (variously) of misplaced guilt, economic ignorance, and power-lust. (Altruism — another emotive, value-laden term — does not come into play, for reasons discussed here and here.)

Some combination of misplaced guilt, economic ignorance, and power-lust motivates our law-makers. (Their self-proclaimed “compassion” is bought on the cheap, with taxpayers’ money.) They accrue power by pandering to their fellow seekers of cosmic justice. Thus they have saddled us with progressive taxation, affirmative action, and a plethora of other disincentivizing, relationship-shattering, market-distorting policies. It is supremely ironic that those policies have made all of us (except perhaps politicians, bureaucrats, and thieves) far worse off than we would be if government were to get out of the cosmic-justice business. (See this, for example.)

SOCIAL WELFARE

Some proponents of cosmic justice appeal to the notion of social welfare (even some economists, who should know better) . Their appeal rests on two mistaken beliefs:

There is such a thing as social welfare.

Transferring income and wealth from the richer to the poorer enhances social welfare because redistribution helps the poorer more than it hurts the richer.

Having disposed elsewhere of the second belief, I now address the first one. I begin with a question posed by Arnold Kling:

Does the usefulness of the concept of a social welfare function stand or fall on its mathematical properties?

My answer: One can write equations until kingdom come, but no equation can make one person’s happiness cancel another person’s unhappiness.

The notion of a social welfare function arises from John Stuart Mill’s utilitarianism, which is best captured in the phrase “the greatest good for the greatest number” or, more precisely “the greatest amount of happiness altogether.” (See “Adler on Mill’s Utilitarianism” at the Adler Archive of The Radical Academy.)

From this facile philosophy (not Mill’s only one) grew the ludicrous idea that it might be possible to quantify each person’s happiness and, then, to arrive at an aggregate measure of total happiness for everyone (or at least everyone in England). Utilitarianism, as a philosophy, has gone the way of Communism: It is discredited but many people still cling to it, under other names.

Today’s usual name for utilitarianism is cost-benefit analysis. Governments often subject proposed projects and regulations (e.g., new highway construction, automobile safety requirements) to cost-benefit analysis. The theory of cost-benefit analysis is simple: If the expected benefits from a government project or regulation are greater than its expected costs, the project or regulation is economically justified.

Here is the problem with cost-benefit analysis — which is the problem with utilitarianism: One person’s benefit cannot be compared with another person’s cost. Suppose, for example, the City of Los Angeles were to conduct a cost-benefit analysis that “proved” the wisdom of constructing yet another freeway through the city in order to reduce the commuting time of workers who drive into the city from the suburbs. In order to construct the freeway, the city must exercise its power of eminent domain and take residential and commercial property, paying “just compensation,” of course. But “just compensation” for a forced taking cannot be “just” — not when property is being wrenched from often-unwilling “sellers” at prices they would not accept voluntarily. Not when those “sellers” (or their lessees) must face the additional financial and psychic costs of relocating their homes and businesses, of losing (in some cases) decades-old connections with friends, neighbors, customers, and suppliers.

How can a supposedly rational economist, politician, pundit, or “liberal” imagine that the benefits accruing to some persons (commuters, welfare recipients, etc.) somehow cancel the losses of other persons (taxpayers, property owners, etc.)? There is no valid mathematics in which A’s greater happiness cancels B’s greater unhappiness.

Yet, that is how cost-benefit analysis (utilitarianism) works, if not explcitly then implicitly. It is the spirit of utilitarianism (not to mention power-lust, arrogance, and ignorance) which enables Barack Obama and his ilk throughout the land to impose their will upon us — to our lasting detriment.

The Causes of Economic Growth

President Obama proposes (unsurprisingly) to “soak the rich,” which is a flawed prescription for making the government’s ends meet, and yet another insult to the body economic.

The well-being of all Americans is best assured by a vibrant and growing economy, a necessary condition of which is the prospect of ever-greater rewards at the top end of the income scale. Leftists, in their zeal to redistribute income, aim to penalize “the rich” for being richer than the rest of us; the result is to penalize all of us by thwarting economic growth, which has these several causes:

1. Hard work

The tradeoff here is with “non-work” activities, and the tradeoff can be costly. But those who choose wisely in sacrificing non-work activities then acquire additional cash income, which can be used to offset the loss of non-work time and/or to improve the tools of one’s trade.

2. Smart work

Working smarter requires education, specialized training, and on-the-job learning. Today’s workers are (on the whole) more productive than their predecessors because the education, training, and on-the-job learning of today’s workers incorporates lessons learned by their predecessors.

3. Saving and investment

Resources that are saved (not used to produce consumption goods) can flow into investment (services and goods such as pharmaceutical research and development, advanced computer and telecommunications technologies). It is investment that enables the production of new, more, and better consumer goods with a given amount of labor. (Government investment is an inferior alternative to private investment.)

4. Invention, innovation, and entrepreneurship

These are the primary activities through which saving becomes investment, usually via the medium of financial institutions. Inventors, innovators, and entrepreneurs (along with shareholders, creditors, and financial intermediaries) accept the risks associated with failure and the rewards of success. It is the prospect of rewards that encourages invention, innovation, and entrepreneurship — and the benefits they bestow on workers and consumers. (Invention, innovation, and entrepreneurship — like work — are “socially responsible” activities because the pursuit of gain is motivated by the satisfaction of wants.)

5. Trading

If A makes bread and B makes butter — and if both prefer buttered bread — both benefit from trade. Where they produce bread and butter matters not; A and B could be neighbors, live in different parts of the United States, or one of them could live in a different country. In any event, both are made better off through voluntary exchange.

6. Population growth

Given the foregoing, a larger population means more people to work “hard” and “smart”; more output that can be saved and invested; more inventors, innovators, and entrepreneurs whose activities can be leveraged into greater per-capita output; and a multiplication of opportunities for beneficial voluntary exchange.

7. The rule of law under a minimal state

Predation — whether by individuals, mobs, or government — discourages everything that fosters economic growth. The more that government tries to direct the economy, the less it will grow and satisfy human wants.

Further reading:
Why Outsourcing Is Good: A Simple Lesson for Liberal Yuppies
Trade Deficit Hysteria
Brains Sans Borders
The Main Causes of Prosperity
Straight Thinking about Business Cycles
Understanding Economic Growth
The Population Mystery
The Economy Works, in Spite of Zany Economists
What Economics Isn’t
Why Government Spending Is Inherently Inflationary
Understanding Outsourcing
A Simple Fallacy
Ten Commandments of Economics
More Commandments of Economics
Three Truths for Central Planners
Bits of Economic Wisdom
Productivity Growth and Tax Cuts
Zero-Sum Thinking
Economist, Heal Thyself
Liberty, General Welfare, and the State
Monopoly and the General Welfare
Trade, Government Spending, and Economic Growth
Toward a Capital Theory of Value
Things to Come
And much more, here.

Are We Mortgaging Our Children’s Future?

Or, what will the “stimulus package” stimulate?

Congressional Democrats used to depict George W. Bush’s tax-rate reductions as fiscally irresponsible. The real problem, for Democrats, wasn’t that tax cuts might cause the national debt to swell. The real problem, for Democrats, was the prospect of having less money to spend on things that Democrats like to spend money on.

Now that Democrats control the White House and both houses of Congress, fiscal irresponsibility is all the rage (among Democrats). It seems that an increase in the national debt isn’t fiscally irresponsible if (a) it results from Democrat policies and (b) it’s caused not by lower taxes but by huge government spending programs.

Predictably, some Republicans have reverted to the old GOP line that deficit spending mortgages our children’s future (or some such thing). The flaws in this assertion are exposed very nicely here, by professional economists.

However, the suggestion that the national debt represents inter-generational theft does hint at an essential truth. The burgeoning size and influence of government (which is the cause of the burgeoning national debt) amounts to theft — period:

1. Government spending (whether financed by taxes, borrowing, or money creation) commandeers resources that could have been used to produce goods and services in the private sector. Government spending diverts those resources to uses deemed “beneficial” not by producers and consumers but by politicians and interest groups.

2. Some of the commandeered resources are devoted to the payment of government employees for the purpose of making work for them, which includes the writing and enforcement of regulations that hinder economic growth. Other resources are commandeered for the purpose of transferring purchasing power from productive members of society to less-productive and unproductive ones, thus penalizing and discouraging the traits that drive economic growth: hard work, thrift, innovation, and entrepreneurship.

3. The net effect — near-term and long-run — is to reduce total economic output below what it could have been.

In other words, the “stimulus package” doesn’t simply “mortgage our children’s future.” It does a lot more than that. Like all government spending that isn’t undertaken for the protection of Americans from foreign and domestic predators, the “stimulus package” mortgages our present, our future, our children’s future, and their children’s future, ad infinitum. The real problem isn’t the size of the national debt, it’s the size of government.

The best way to stimulate the economy is to reduce the tax and regulatory burdens that stifle hard work, thrift, innovation, and entrepreneurship — words that don’t seem to be in Democrats’ vocabulary. On the contrary, Democrats (Barack Obama, in particular) are bent on increasing the tax and regulatory burdens on Americans, especially those upon whom growth most depends.

As Friedrich Hayek explains, in The Constitution of Liberty,

the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.

The answer to the question asked at the beginning of this post: The “stimulus package” (and other Obama initiatives) will stimulate a massive growth in the size and intrusiveness of government. Greg Mankiw agrees (here and here, for example).

Further reading:
Curing Debt Hysteria in One Easy Lesson
The Real Meaning of the National Debt
Debt Hysteria, Revisited
Why Government Spending Is Inherently Inflationary
Joe Stiglitz, Ig-Nobelist
A Simple Fallacy
Ten Commandments of Economics
Professor Buchanan Makes a Slight Mistake
More Commandments of Economics
Productivity Growth and Tax Cuts
Risk and Regulation
Liberty, General Welfare, and the State
Do Future Generations Pay for Deficits?
The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
And much more, here.

Giving Back

In the latter years of my tenure at a tax-funded think-tank, our CEO established a “community service” program so that our professional staff of well-paid, mostly white, economists, mathematicians, and scientists could “give back to the community.” The “community” to which the aforementioned professionals gave “service” did not, of course, comprise well-paid, white professionals.

I am confident that the targets of our CEO’s “social consciousness” paid only a minuscule fraction of the taxes that funded the nicely appointed offices, high salaries, and generous benefits enjoyed by our professionals. “Giving back” to the “community” that actually supported them would have involved mowing lawns, tutoring, and babysitting for mostly white, middle- and upper-income professionals in other parts of the D.C. area than the one selected by our CEO as the “community” to which to “give back.”

If the services provided by our professional staff in exchange for their splendid offices, salaries, and benefits had been worth their weight in taxes, there would have been no need for those professionals to “give back” to any community. Taxpayers would have received their money’s worth, and that would have been that.

Our CEO either felt guilty about his huge office, princely salary, and obscene benefits or he thought that the think-tank wasn’t giving taxpayers fair value for their money. As he would have been the last person in the United States to admit that the think-tank wasn’t delivering fair value, I can only conclude that his yearning to “give back” arose from feelings of guilt, which he projected onto his employees — many of whom undoubtedly had similar feelings. For, even as the CEO pressed his employees to “give back,” he sought to justify the spending of more tax dollars on better quarters and higher compensation for the think-tank and its employees (himself included, of course).

Feelings of guilt aren’t confined to those who feed at the public trough, of course. CEOs and senior executives of large corporations have a good thing going for themselves — which they owe to their chummy relations with boards of directors — and they know it. Thus the impetus for private-sector “giving back.”

In summary, “giving back to the community” is either an unnecessary act — because “the community” already has received fair value for its money — or it is emblematic of guilt. In the first instance, “giving back” is really an act of charity, which comes at the expense of those who pay for a company’s products (i.e., taxpayers or consumers). In the second instance, “giving back” is really a false act of contrition and an inadequate, misdirected form of atonement for executive avarice.

Having said all of that, I must add this: In the era of bailouts that is now upon us, there is much to be said for “giving back” by bankers, U.S. auto makers, members of the UAW, and defaulting mortgagors — to name a few of the recent and prospective additions to the already vast roster of government clients. That these new clients, like their predecesssors, will not “give back” is, of course, a foregone conclusion.

Moreover, if the present regime has its way there will be some kind of “national service” program which (through tax incentives if not downright conscription) will divert resources from useful (i.e., marketable) ends to “socially conscious” (i.e., government-dictated) ones. “National service,” in other words, is assuredly not a means of “giving back.” It is, rather, a means of taking away — of stealing time and opportunities from those who are conscripted into it, of stealing money from those whose incomes are conscripted (taxed) to support it.

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