Yearly Archives: 2012

To regulate Commerce…

To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes. US Constitution, Article 1, Section 8

This simple phrase (aka “the commerce clause”) has been a bone of contention almost since the day it was penned. Judicial interpretation was necessary as early as 1824. The conflict surrounding this clause speaks more to the general disagreement over the proper role of government rather than to an inability to properly interpret it. That is to say, no matter how one might restate this clause, each side would forever strain to interpret it to mean that which they wish it to mean. The key to understanding it is to not even try to interpret it, but rather to take the plain language at face value within the context of the document in which it is found. The US Constitution is a simple document with simple rules. To understand it, it is necessary to recall that the states were originally separate sovereign entities (that happened to owe allegiance to the British crown). Today we tend to think of states as nothing more than large postal codes, but that was not their original character, nor was that character changed by the Constitution (why join a union that requires you give up all your authority to the new central authority?) The citizens of those states believed they would be more secure by joining together (“the United STATES”) while still remaining sovereign within their respective borders. Whenever humans come together they need rules to define the relationship so everyone knows where they stand. That is all the Constitution does. It simply says: (Articles 1-3) there are three branches of government and here is what each can do (enumerated powers) and cannot do, (Article 4) here are the responsibilities of the states to each other and the responsibility of the government to the states, (Article 5-7) general housekeeping with respect to modifying and ratifying the document itself and matters relating to clarifying jurisdictional supremacy.

So, the commerce clause, taken in the context of being part of the rules that govern the relationships among the states, is simply saying that the federal government can do what is necessary (regulate) to prevent the states from interfering in commerce (trade). It simply supplants their prior authority with a single authority so that they would not be fighting amongst themselves in endless pissing matches over who has ultimate authority in relation to trade. To be clear, it is only the states and the federal government, not the citizens, which are governed by the Constitution. This makes sense if you think about it. The Constitution was written by the citizens (“We the People…”) in order to define the role and limits of the government they desired. Yes, the government may make laws that govern the citizens but only via the authority granted in the Constitution to make such laws. If there is no authority for a law in the Constitution then it is de facto “unConstitutional” no matter how “good” we might think it is. The problem occurs when the proponents of a law want to make it “Constitutional” by redefining and broadening terms used in the Constitution so as to facilitate an interpretation conducive to their desired goal.

One of the more egregious cases of twisted logic and Constitutional redefining came into play in the seminal case of Wickard v Filburn 317 U.S. 111 (1942). The Supreme Court found that Roscoe Filburn was engaged in interstate commerce and therefore fell under the jurisdiction of the Agricultural Adjustment Act of 1938, which granted the government authority to regulate agricultural output in order to maintain price “stability”. They found that he was growing “too much” wheat on his farm – even though the wheat was entirely consumed on his farm and was never sold – and thus he had no need to purchase additional wheat. The logic being that had he not grown “too much” he would have had to buy what he needed and such purchasing would have tended to increase the interstate demand and hence price for wheat. So, not buying something is, by government logic, equivalent to engaging in interstate commerce.

Based on this precedent one might conclude the current court has no choice but to rule in favor of the individual mandate of the PPACA as its supporters justify it upon putative commerce clause grounds, i.e. not buying insurance affects the price of insurance for everyone else. However, there is a subtle wrinkle here. Mr. Filburn was engaging in activity (growing wheat), which resulted in inactivity in another arena (buying wheat). In that case the government exerted its right to regulate his ACTIVITY of growing wheat, not his INACTIVITY of not buying wheat. The AAA said he could not grow more than such and such amount. It did not say he MUST buy wheat if he needs it or face a penalty. In the current case the government is asking the court to assert that the commerce clause goes even further than in Wickard v. Filburn and can grant the government authority to compel an individual to act (buy insurance). In other words, it now wants the authority to regulate inaction by redefining inaction as a type of action.

But whether the PPACA is overturned or not is not the important issue. The critical issue is the very nature of the Constitution. Article 1, Section 8 of the Constitution lists these things called “enumerated powers.” That means, it is a list of those actions, and only those actions, that Congress may undertake. If it is NOT on the list, they may not do it. It is improper to interpret the Constitution with a mindset of “Well if they didn’t want us to do that they would have specifically said so.” They did say so, if it is not enumerated it may not be done. But even disagreement over what the enumerated powers authorize is not so important. Reasonable people can disagree about the extent to which they think government should have certain authority. The important issue is that (hopefully) there will always be agreement that there must be some limits on government. The disagreements we have today are simply about where that point is, not whether or not it should exist.

If the Supreme Court finds that the commerce clause can be used to compel citizens to do or not do something because it might tangentially affect commerce, then there is in practice no limit whatsoever on the powers of Congress and it simply makes a mockery of the enumerated powers. It would make no sense for the framers of the Constitution to say “you can only do a, b, and c, and oh by the way you can also do anything else you can possibly think of.” Why would this remove all restraint from government powers? Think about it – whenever we are doing something we are also not doing a million other things. Government would now have the authority to identify the things we are not doing but that it thinks we should be doing and codify laws that compel us to do those things. How hard is it to imagine that in the midst of a new economic downturn Congress passes a Minimum Economic Activity Act which would require all citizens to spend a certain percentage of their income on goods and services in order to keep the economy going? Or how about a law requiring a minimum level of exercise, since not exercising makes us less healthy and that means rising health care costs. Congress would now have unlimited power to order us to do any number of things we aren’t doing. What’s to stop them? Inactivity is regulated by the commerce clause.

It is naïve to comfort oneself with the thought that just because today no one is abusing that power we have nothing to worry about.

 

What law would Jesus pass? None.

Although Georgia has a long history of having one foot in the dark ages when it comes to certain “blue laws” such as the ban on Sunday alcohol sales, it was encouraging that last year Governor Nathan Deal signed into law legislation that would allow local communities to vote on the matter. It is also heartening to see that our local governments are permitting us the opportunity to vote on this matter (as the new legislation did not require such a vote). We should be grateful the governing bodies of the state of Georgia have deigned to permit us the opportunity to have our say on this bizarrely anachronistic ban.

 

Blue Laws are not in conformity with Jesus’ message

 

Although proponents of blue laws (laws that ban a range of activities from occurring on Sunday: alcohol sales, automobile sales, shopping, working, etc) often claim there is no religious basis to these laws, history suggests otherwise. The overriding goal of these laws is clearly to restrict activity on one day of the week and oddly that day is always Sunday, the traditional day of worship for Christians. These laws have included both the mandatory closure of all business and in some locales the prohibition of personal work or “non-spiritual” behavior (e.g. arrests for fixing wagon wheels or playing cards are known). Over time the total ban on Sunday commerce inconvenienced even those that had passed such laws. So rather than wholesale repeal they chipped away at these laws, making exceptions for some goods (the ones they wanted on Sunday) but keeping bans on others. And so we end up with a bizarre hodgepodge of restricted goods. For example in Texas up until 1985 laws banned the sale of house wares such as pots and pans. Currently in several states the sale of automobiles and hunting is still banned on Sundays.

Given that there is a clear Christian motivation behind these laws I am perplexed by the rationale employed. I’m not alone. Jesus had no qualms about violating those Old Testament commands that are putatively upheld by blue laws. He is derided by the synagogue leaders for “working” on the Sabbath (Luke 13:13-15). Furthermore the aversion that some Christians have for alcohol is quite odd given that Jesus himself turned water into wine on more than one occasion (John 2:1-10, 4:46).

The motivation behind these laws can be summarized as a general knee jerk reaction of “we must keep things ‘holy’ on Sunday.” However that is not only misguided but is also actually not in conformity with Jesus’ message. Jesus led by example, by words and deeds. Had he desired to forcefully apply God’s laws to the world he would have done the very thing the Jews had expected their Messiah to do: establish himself as a king and militarily conquer the world thus ensuring that his ideals as king were spread throughout the world by the force of royal decree. His inaction in this regard speaks volumes. It says we must willingly follow Him and if we do not it must be our choice. As in the story of the rich man who could not give up his possessions to follow Jesus (Mathew 19:21), Jesus told the man what he must do and allowed him to choose. He did not command him or threaten him with punishment if he did not follow him. In the same way it is extraordinarily un-Christ-like to pass laws that attempt to mold or coerce the behavior of others in a way that you believe to be in line with Jesus’ message. Following the logic of the blue laws it would be acceptable to lock everyone in prison for their whole life as that would 100% prevent any possibility of sin.

There is no virtue in not sinning if it is impossible to sin. You can’t make someone believe as you believe by coercion. Lead by example.

 

Playing the “roads” card

Tax discussions invariably devolve to a point where one side finds it necessary to resort to the “roads” card. The assumption with this rejoinder is that “roads” are a major and necessary function of government. Setting aside the “necessary” aspect for now, let’s address the “major” assumption. At first glance it would seem something as ubiquitous as roads must carry a heavy cost burden: they are everywhere after all. But first glances are seldom correct. Let’s look at the numbers. In the state of Georgia the FY2012 budget allocates a mere 0.03% of the budget to transportation. The proposed Federal FY2012 budget allocates only 2.8% to transportation. Hmmmm… how can this major function of government be such a minor expense? The US contains approximately 4 million total miles of all road types. We could repave all of it EVERY YEAR and it would only cost roughly $400 billion (1/10th of the budget).

Tax discussions invariably devolve to a point where one side finds it necessary to resort to the “roads” card.

As I’m sure most are aware, the GA Department of Transportation has been busy around town the past few weeks, most notably with the repaving of the Hwy. 441 Bypass. This is a prime example of resource misallocation. This repaving was not necessary. I drive this stretch everyday. There was not a thing wrong with it and believe me I know bad roads! I lived in Indiana for several years where the roads were subjected to snow, ice and salt. They were rough, pot-holed and frost-heaved. They were only repaved when the cost of annual maintenance exceeded the cost of repaving. Our “old” Georgia roads would be the envy of any Hoosier! Why are we doing this? Jobs. The seen. We see the workers working; certainly this is good for the economy? What we don’t see are the jobs not created, the goods not purchased, all because present (taxes) or future (progeny taxation) funds have been redirected towards work that wasn’t even necessary.

Yes, roads need to be maintained, but absent any economic incentives (prices) bureaucrats have no way to efficiently allocate resources. Resources (money) get allocated based on personal whims and connections. I have no doubt somewhere in Georgia there are some beat up old roads that do need work (Fieldcrest Lane in east Morgan comes to mind!) but they are not political priorities.  Politicians waste money on pet projects and then have the audacity to put their hat in hand the following year asking for even more so they can accomplish what they failed to do the first time. And we give it to them, because we’re too busy with our own lives to care. We hear the President pontificate on our crumbling infrastructure. Nobody bothers to as ask why governments, the supposed stewards of our roads and bridges, were not setting aside funds all these years to properly maintain these depreciating assets. That’s what any good business does (good meaning one that does not go bankrupt due to mismanagement). With our revolving door governmental representation there is no accountability; 236 years of “the next guys problem” is the legacy we are left with. Concentrated benefits and diffuse costs perpetuate the problem.

So yes, we all love a nice new smooth road, but let’s consider the cost, in the end someone must pay. Let’s not spend money we don’t have.

Freedom from hard choices is no right

The testimony by Sandra Fluke before a House Democratic Steering and Policy Committee on February 23 sparked a firestorm from the right which precipitated an avalanche of rhetoric from the left. As with most “controversies” both sides miss the point entirely as they would rather try to denigrate their opponent by casting them as being in opposition to the simplistic two word slogan each chose to rally behind (“women’s health”, “religious freedom”).

To the Right: This is not about religious freedom or any kind of “attack” on religion. The issue is one of freedom period. Freedom means not having the government force choices on people.

To the Left: This is not about women’s health or reproductive rights. Lack of insurance coverage does not proscribe someone from obtaining those services particularly in this case where the cost is nominal relative to other monthly consumer expenses. If government wanted to actually help women they could do so by rolling back regulations and allow contraceptive pills to be sold over the counter – this would dramatically drive costs down by removing an unnecessary barrier to a safe and common drug.

The case Ms. Fluke makes is not novel. Her argument is the one used by all those who perceive the world to be misbehaving. The thought flow is this: 1) Some aspect of the world is not behaving as I want therefore (2) I will co-opt the power of the state to force my worldview on those that are not currently conforming to it. Both sides do it: minimum wage laws, blue laws, drug laws, vice laws, business regulation, etc. They are all the same: force Party A to behave as Party B desires. The Orwellian justification for such interference? Freedom. But in this government double-speak world, freedom doesn’t mean being free from forceful influence, rather it means exerting forceful influence on some in order that others may have the freedom from making hard choices. The justification of force rests on the false proposition that individuals are trapped (lacking in freedom) by their circumstances and thus are not free. The irony is that the entity which claims to guard our freedom (government) is the only entity that truly has the power to restrict freedom. Ironically, government restricts the freedom of some and justifies its actions by falsely claiming the party against which it aggresses is guilty of the very thing it itself is doing. The truth is that (within the limits of government restrictions) we do still have choice. Exercising that choice is not always easy, but it can be done. To suggest one has no choice because some choices are difficult is to suggest we have no free will and thus no accountability i.e. “I’m not responsible for my actions because I simply followed the choice-path of least resistance – I had no choice.”

To suggest one has no choice because some choices are difficult is to suggest we have no free will and thus no accountability i.e. “I’m not responsible for my actions because I simply followed the choice-path of least resistance – I had no choice.”

Absent outside interference our collective choices would transparently reshape the world to be the one we collectively desire rather than the one that a minority who has co-opted government is able to impose on us. If employees don’t like working conditions they can all quit and thus that company will change or go out of business. If we don’t like ABC Co we can all stop buying their products and they will either change or go out of business.  Think this can’t work? Witness Apple, routinely criticized by Greenpeace for years, they have now made changes to their products that earn them kudos by that same group. Additionally they have responded to criticism of working conditions in their Chinese manufacturing partners by joining the Fair Labor Association.

Her testimony only serves to highlight that not choosing is a choice. Her first argument centered on cost in an attempt to elicit feelings of sympathy for the plight of these women and married couples who cannot afford contraception. “Women … have no choice but to go without contraception,” she says. Wrong. They have a choice and they made their choice. Their choice was that they value other goods and services (e.g. cell phone, internet, dining out, cosmetics, latest fashions, subscriptions, etc.) more highly than contraception or paying for an individual policy that does offer contraceptive coverage. And that’s ok. We all have our own value scale of prioritizing how we spend our money. The problem is expecting someone else to foot the bill for the thing you want but put at the bottom of your value list. You’d look pretty stupid if you decided to forego your cell phone plan in order to pay for contraception but then insisted your auto insurance provide free cell service. But somehow if the reverse is done it is ok? Requiring insurance coverage for voluntary routine expenses is simply government-mandated subsidization (those not engaging in an activity paying for those that do). Claiming it is “free” is disingenuous. Nothing is free, those costs are simply passed onto all policyholders.

In a further attempt to elicit sympathy for the “high cost” of contraceptives she then overstates the cost burden with a little slight of hand. She claims $3,000 is the total 3-year cost (3 years is standard for law school and is what we must assume since she does not specify the time frame) and that cost is “practically an entire summer’s salary” IF one is on a “public interest scholarship”. Setting aside for a second the irony of complaining that the free money one is being paid to go to school is in insufficient to pay for this other thing you think should also be free, we see that what she is saying is that the TOTAL cost of $3,000 over 3 YEARS is a disproportionately large percentage of 1 YEAR of stipend salary. That’s like saying the $30,000 I spend in electricity over 10 years is 100% of my 1 year salary and thus that undue burden is justification for me to expect someone else to pay for it.

Her next appeal is to evoke outrage in the listener by citing extreme examples as though they are the norm. But again the example backfires if one actually considers what she is saying. The examples include multiple stories wherein women who had a true medical need for contraceptive pills were denied coverage and thus negative consequences ensued because they weren’t willing to buy the pills on their own. If it was medically necessary, then yes, of course it should have been (and in most cases is) covered. But tales of insurers trying to avoid paying claims is nothing new. What is new is her revelation about the complete lack of priority these women gave to this supposedly essential medication. As mentioned previously, if it was really that important they could have reorganized their priority scale so that they did not go without the medication they needed. The figures cited ($83-$100/month) are quite inflated over actual contraception costs ($20-$50) but even these inflated figures are “doable” by even someone making minimum wage. It’s not like the pills are $10,000/month.

Lastly she then paints a false dichotomy of it being wrong that a woman would have to choose between a “quality education and our health” in response to the question of “You knew what Georgetown’s policy was when you came there – if you don’t like it, go somewhere else.” So, apparently there are no other non-Catholic laws schools in the entire country that are on parity with Georgetown in terms of quality? I guess she’s never heard of Yale, Stanford or Duke. But to answer the question she did not answer: Yes, she was aware of Georgetown’s policy prior to coming there, but rather than accept the consequences of that choice she’d rather the government step in and force her will upon those running the school.

Insurers should be free to offer plans that have contraceptive coverage and plans that don’t. Consumers should be free to choose whichever plan they want. And employers should be free to offer or not offer whatever insurance they want. That’s what freedom is, the freedom to make your own decisions, even if it is a hard one.

Now, enjoy this little video done by Reason.tv 😉

All the world is a game…

Perhaps one of the best metaphors for the free-market and good governance is that of team sports. I recently came upon this revelation as I was watching my eldest son’s soccer team playing. Two teams on the pitch are a microcosm for society. Markets are represented by the presence of both competition (between teams) and cooperation (within teams). Any player not acting in the best interests of the team is rapidly replaced so that the efforts of the team are not affected. Governance is represented by the presence of simple rules understood by all and which are enforced through the mutual consent of all via the arbiter of said rules (the referee). All players are governed by these rules and any transgression results in an equivalent punishment (equal protection) for all. However not all players are equal in skill. Even on this elite team there is a bell-curve distribution of natural skill and earned abilities. On an elite (non-rec) non-professional team ability is rewarded with that which is most sought by these young players: playing time. In other words, playing time is the currency that all seek to maximize.

Two teams on the pitch are a microcosm for society.

Let us now test proposed policies on our model to see the outcome. To test “minimum wage laws” we will propose a minimum playing time rule whereby a coach is not required to play an individual but if he does they must play a minimum amount. What effect would this have? The weakest players (those this rule was trying to help) would never be played because the team could not “afford” to have such a weak player on the field for that long. All other players would then have greater playing time (same time but fewer players).

Now test income redistribution in the name of “fairness”: Let us propose a “player equalization” (aka “maximum skill”) rule. Since we can’t “take” skill away we will artificially limit skill to a maximum level by using weights, elastic restraints, etc. What effect would this have? Would it make the less skilled players better players? No. It would slow the game down thus making it less productive (fewer goals per game). It would also decrease any incentive a player has to improve his skill set beyond the maximum mandated level.

Now, onto governance: Let us propose that the referee be granted absolute authority to conjure up any new rule he desires and enforce it in any way he desires (remember the referee embodies all branches of government) which is what we see today with lawmakers completely ignoring the constraints on power found in the Constitution. The referee could write up hundreds of new rules. Rules as arcane as “players may only wear green socks” are strictly enforced even though they have absolutely no relevance to the game. The referee feels he knows best because green socks will cut down on grass stains therefore he feels it is in everyone’s interest that this rule be enforced for the “good of all.” A rule of “all players must pay the referee” whatever sum the referee deems necessary would not be far behind (remember he has absolute authority on the field in ALL matters). Anyone who questions the magnitude of said fee would be targeted with the straw man argument of “you do not value the service I perform” even though it is not the service being performed but the size of the fee being demanded that is questioned (i.e. “fair share” is whatever I say it is).

If an issue can be sufficiently abstracted such that it can be applied to this “team” model and the outcome is obvious at the team level then it logically follows that the same result will occur in the larger sphere of society from which it was abstracted. People are people and incentives will be followed no matter the scale.

Off budget

This is rather scary. Using figures directly from the IRS we see than in 2008 (the latest year for which there are figures and which represents most accurately pre-recession income since the recession did not start until the very end of the year) the total personal income was $8.3 trillion. Further we see that the income for all corporations in 2008 was $0.9 trillion for a total of $9.2 trillion. Due to the down economy it would not be expected to be significantly greater than that value by 2013. Obama’s proposed 2013 budget is $3.8 trillion.

In other words the President believes it is entirely justified that the federal government alone consume $41 out of every $100 earned.

In other words the President believes it is entirely justified that the federal government alone consume $41 out of every $100 earned. When you add in state and local taxes then all government spending consumes at least half of all income from the entire economy. Half. And we aren’t even paying for all of it right now. The 2013 budget has a deficit equal to 100% of all corporate income ($0.9 trillion). Obviously corporations can’t be taxed at 100% so clearly the bulk of the eventual tax increases will be from the $8.3 trillion in personal income rather than from a paltry $0.9 trillion in corporate income. Since we can assume that Obama will continue the current tax policy whereby 50% of all Americans pay no income tax that means the income taxes on everyone else (people and corporations alike) would necessarily have to double to close the gap. Double. Have any other expenses in your life doubled in the last year? Didn’t think so. And for those that believe everything government does is so essential we (or rather “they”) must simply be willing to fork over one out of every two dollars that we earn then consider this: From the founding of this country until the passage of the 16th Amendment in 1913 the government got by just fine with no income tax and consuming only 3% of GDP  as tax revenue from other sources. For 125 years somehow this country did not succumb to anarchy, chaos or mass starvation while operating on a mere 3% of GDP. Today 3% of GDP would be a budget of only $0.4 trillion (1/10th the current budget). That budget is entirely “doable” today if government was only concerned with its core focus of defense and judiciary. If 90% of that $0.4 trillion were devoted to national defense it would equal the defense budget we had in 2000. I don’t recall any outcries of America being woefully militarily vulnerable in 2000.

In closing I’d like to share a simple yet hard hitting illustration of this countries’ current budget problems. This has been going around the Internet recently and is really an excellent way to relate to the enormous sums of money discussed (numbers modified to reflect 2012 values).

US Budget 2012 (http://goo.gl/Ad9CD)

• United States Tax Revenue:              $2,468,599,000,000

• Federal Budget:                                $3,795,547,000,000

• New Debt:                                        $1,326,948,000,000

• National Debt:                                $15,400,000,000,000

• Recent budget cut:                               $38,500,000,000

Remove 8 zeros and pretend it’s a household budget.

• Annual family income:                                         $24,686

• Money the family spent:                                      $37,955

• New debt on credit card:                                      $13,269

• Outstanding debt on credit card:                         $154,000

• Total budget cuts:                                                   $385

There are only two candidates proposing any kind of serious budget cuts to solve this nightmare. Ron Paul, Republican and Gary Johnson, Libertarian ($1 trillion and $1.3 trillion respectively in 1 year, not 10 years). We finally have a real opportunity to fix this. Let’s not blow it.

Playing the odds…

Is insurance gambling? It feels like we have “won” if we suffer a loss and it is covered. In point of fact, insurance is not gambling. In gambling you start in a position of low probability of a loss (money safe and secure in your wallet) but move to a high probability of loss (once you lay your money down the odds are very good you will lose it). You move from a “more-sure” to a “less-sure” state. With insurance, however, you move from a “less-sure” to a “more-sure” state. Without insurance you have a non-zero chance of a bad event occurring (less-sure state) that will result in a loss, but with insurance you have reduced that non-zero chance of a loss to zero – so you have moved from a less-sure position to a more-sure position.

Health insurance in its current form (laden down by numerous government mandates) is not insurance anymore but rather is simply prepaid consumption.

Likewise the insurance carrier is not gambling because they actuarially know for a given number of insured that they will experience losses of $x/year, so they simply set rates high enough to ensure all claims can be paid and they can still make money and thus build up a reserve for those years where the predictions are off. Insurance costs scale directly with the likelihood and magnitude of a covered loss. That’s why a several million dollar liability policy can be had for only a few hundred dollars per year but a health insurance policy costs several hundred dollars per month and pays only a fraction of what the liability policy would pay. Health insurance in its current form (laden down by numerous government mandates) is not insurance anymore but rather is simply prepaid consumption.

For an event to be insurable it must be statistically unlikely (e.g. theft, fire, being sued, etc). Health insurance covers events that are statistically guaranteed (routine exams, drugs, contraception, pregnancy, etc). Why are routine events 100% covered? Government mandates. For example, as we have all learned recently, Obamacare requires 100% contraception coverage. <sarcasm> Apparently women who desire contraception are unreasonably barred from obtaining this essential human right due to a burdensome $30/month cost barrier </sarcasm> and so it is mandated that all of society must subsidize this cost. This and many other mandates drive up cost. A catastrophic health policy would be relatively inexpensive. For example last year I investigated the cost of a non-group health plan for my family and discovered that simply removing pregnancy coverage cut the cost of the policy in half! But a group plan cannot remove this coverage and thus most pay for a coverage they can never use. As an employer I’m not even allowed to offer more than three health plans. Why? Government mandates.

Individualized prepaid consumption (saving) is an effective method to address intermittent but regular events. However aggregated and shared prepaid consumption is a terrible method. It has the effect of actually raising costs. In order to understand this, just imagine that we had “food insurance”. The premium would be equal to the total of all money spent on food in a given time frame divided by the population. For some the premium would be more than they would have spent on their own. In those cases there would be an increase in consumption (so as not to get short changed). That increase in consumption increases demand, and hence prices. Additionally, the “food insured” won’t be directly paying for any of their food thus they’ll have no inclination to restrict their intake (why buy ground beef when you can get grade A sirloin). This overall increase in demand will drive up prices. Insurable events can’t be “over consumed” because they rarely occur. Prepaid events can be over consumed because they occur regularly and thus there is ample opportunity. Just imagine what would happen to auto insurance costs if the government mandated that it had to cover the cost of oil changes, brake pads, and other routine maintenance.

Who will speak for me?

All too often violations of liberty by our government upon its citizens occur silently, sheltered from the bright lights of the Fourth Estate as it were, because the victims are singular. Abner Schoenwetter was sentenced to 8 years in federal prison for violation of the Lacey Act because he imported seafood from Honduras in plastic bags rather than cardboard boxes. Civil asset forfeiture incidences are on the rise, such as the case of the Motel Caswell in Massachusetts wherein the local police are attempting to seize an entire hotel from its owner under federal law (the police get to keep 80% of the value of seized property under federal law but only 50% under state law) because over the last 20 years 0.05% of guests had been arrested for drug offenses. These repugnant violations of civil rights occur every day as a consequence of the over bearing government that now exists in this country. The president can laugh all he wants about “spilt milk” but these are real people with real lives that are destroyed due to the passage of thoughtless laws whose “unintended” consequences could have clearly been seen by Ray Charles.

If you’re going to point a gun at someone you can’t cry foul when they grab that gun and point it back at you.

Oh, but I must chuckle when I hear the howls and screams from the large indignant organizations who have recently become ensnared in the briar patch that is our Federal government. Oh, the humanity! We cannot permit such violations of our basic freedoms (because now those violations affect us!) A few weeks ago it was the SOPA flap. Nearly the whole country stood arm in arm with the big Internet companies (Google, Wikipedia, etc.) to fight back against government intrusion. Why? Because it affected them. When government violates other people’s rights nobody cares, but when it affects us, well that we cannot stand for! Likewise the Catholic Church was rather upset that Obamacare will force them to provide health insurance that covers contraception. This requirement would force the church to violate one of its core beliefs. I would argue it is not so much a 1st Amendment issue as it is rather an issue of “the government has no right to tell anyone how to spend (or not spend) their money.” The Church is right in their opposition. But what is humorous is that the church in the US was a proponent (3/23/10) of Obamacare  (except as it related to coverage for abortion). What’s the saying…“If you dance with the devil, you will get burnt.”

Although both groups are absolutely correct in their stance in proclaiming that the government is violating their rights, they are both somewhat hypocritical (and please don’t accuse me of Catholic bashing, I’m Catholic, all right). The internet companies are all too happy to push for “net neutrality” regulations that employ government force to compel others to behave the way they want, yet they don’t like it when such force is turned on them. Likewise the Catholic Church is equally happy to endorse laws that restrict civil unions or outlaw state recognition of homogender marriage, yet they don’t appreciate that same force being turned on them by people who find their stance on contraception as archaic. If you’re going to point a gun at someone you can’t cry foul when they grab that gun and point it back at you.

When violations of liberty are perpetrated we must all stand together at all times, not just when it affects us. The lessons of political apathy were summed up well in the words of Martin Niemöller (a German pastor who initially supported Hitler but then opposed him and was jailed for that opposition) – “First they came for the communists, and I didn’t speak out because I wasn’t a communist. Then they came for the trade unionists, and I didn’t speak out because I wasn’t a trade unionist. Then they came for the Jews, and I didn’t speak out because I wasn’t a Jew. Then they came for me and there was no one left to speak out for me.”

 

Bubbles…

The higher education bubble will soon burst. Like the popped housing bubble, higher education prices are being distorted by massive government subsidization. Subsidization causes prices to increase at a rate dramatically above what they would have otherwise increased absent subsidization. It is true that bubbles can occur “naturally”, but these are called “crazes” or “manias.” The most well known example is the “Tulip mania” in Holland in 1636-37. It is the first recorded example of a speculative bubble, but it lasted only 6 months. These “natural” bubbles are limited in scope and size by the limited savings of those involved. Government bubbles are different. The earliest government influenced bubbles were the bank “panics” of the 19th century. They were the result of legalized embezzlement otherwise known as fractional reserve lending (it was thought that a Central Bank (The Fed) would solve these panics but it only made them worse (e.g. the Great Depression and every recession since then)). Government bubbles grow quicker and longer than natural bubbles. Government bubbles can grow over decades because they have no built in monetary constraints. Governments are free to tax, borrow and print as much money as they desire.

Government has no feedback mechanism to limit the bubble because they “have no skin in the game”, that is, it’s not their money.

To understand why prices go up in a government induced bubble we must first understand how normal economic transactions occur. Actor 1 (Buyer) wishes to obtain a good or service from Actor 2 (Seller). What Seller can charge is constrained by the willingness of Buyer to pay (max price). Likewise, how much Buyer can purchase is constrained by the willingness of Seller to sell (min price). A pricing equilibrium is maintained through the efforts of both parties to maximize their self-interest. However, when government gets involved (Actor 3) they insert themselves in the middle of the transaction. Actor 3 now pays Seller for what Buyer wants (typically by stealing from Actor 4). The shackles of price restraint are severed and thus Seller is free to perpetually escalate pricing because (a) Buyer doesn’t care about price because Buyer isn’t paying and (b) Actor 3 doesn’t care about price because it’s not their money. Likewise nothing inhibits Buyer from limiting their consumption because (a) price increases don’t affect Buyer and (b) Actor 3 doesn’t care because it’s not their money. In a free market an increased demand by Buyer upon Seller would drive prices up, however that would attract new providers who, through competition, would drive prices down. However with the presence of Actor 3 this feedback is disrupted. Increased prices do attract more providers however not for purposes of competition. They are joining everyone else at the government trough of largesse.

Government has removed the price barrier to education by providing grants and guaranteed loans. Students don’t worry about price because someone else is paying for it right now, and the schools have no constraint on limiting price increases because they know the government will subsidize whatever tuition is charged. College education costs have gone up at nearly 5 times the rate of inflation. To put that in perspective, health care costs have gone up “only” about 3 times the rate of inflation.

To underscore the point that costs are driven by government subsidization – cosmetic surgery, which is not subsidized nor paid for by insurance – has actually gone DOWN relative to inflation.

Education costs are doubling about every 10 years. In 2011-12 the average cost of tuition and fees for in state four-year college was $8,244/year. Private college tuition and fees average $28,500/year. Based on present trends I predict the education bubble will burst around 2025-2030. So clip and save this article so that you may impress your friends with your ability to predict the future… it will happen, just as the tech stock and housing bubbles burst, so too will the education and healthcare bubbles burst. Apparently the old aphorism is true, “Those that fail to learn from history are doomed to repeat it.”

Do carts push the horse?

President Obama remarked in the recent state of the union address that he is “proposing that every state require that all students stay in high school until they graduate or turn 18.” A laudable goal (for students to finish school) however the idea that this goal must be forced upon the student by the state is a symptom of how some confuse cause with effect. The effect they wish to see is a “successful” adult and they mistakenly assume that completing school causes this. Motivated individuals will complete schooling just as naturally as a fish swims in water (it is inherent to their nature). Forcing unmotivated individuals to graduate will no more make them successful than does teaching a man to swim make him a fish. Besides, what is the plan here? Jail or fine the student or parents if the kid doesn’t graduate?

Before college tuition costs had ballooned out of control it was only students that had a genuine interest in expanding their knowledge and skills that went to college. These individuals were naturally driven to be successful; going to college was simply a way station on the road to success. Those in government looked at the statistics and saw that successful people had gone to college and thus they confused correlation with causation. Government enabled more and more to attend college each year and thus the floodgates opened to not only ever increasing tuition costs but also a new generation of students where college is no longer viewed as an opportunity to grow one’s knowledge and skills but rather a rite of passage that one is obligated to endure in order to assure “success”. Those that simply endure it exit with a degree and a slightly greater perspective on western culture than your average high school graduate, but that’s about it (oh, and the morale crushing debt burden).

The ultimate goal of government subsidization of college education is nothing short of 100% college education for every citizen. But it should be obvious that were this to be achieved nothing will be gained. If everyone has a college degree then how is that supposed to lead to a high paying job? Salaries depend directly on the number of people capable of performing the desired task. That’s why janitors don’t make much money (everyone can clean) and brain surgeons make a lot. If everyone has a college degree then you’re competing with everyone… that’s a lot of people! So wages will go down for jobs that formerly required a college degree (over supply of labor). Wages will remain high for those that excelled in college (constrained supply of labor). But those were the people that used to be the only ones going to college. So nothing will change, wage disparities will remain since wages are driven by supply and demand. If you don’t believe me then just look at the unemployment levels among recent college graduates, the stories of college grads living with their parents, or college grads working at low paying jobs because they can find no other work. These are all symptoms of oversupply, in this case one that is artificially driven.

It’s not the student’s fault. They’ve been duped by promises of the moon if they can just cross the finish line. So they waste their time on useless (for real world jobs) degrees (i.e. anthropology, women’s studies, etc) that have no value to an employer. However, as with most government policies, the unintended consequences of subsidizing college education are coming home to roost. Turns out there is a large labor shortage in this country: a shortage of skilled trade labor. Because culturally and governmentally we look down on such trades there are fewer and fewer capable of performing these jobs. I suppose when a plumber makes as much as a lawyer the tide will turn naturally, but the point is this “bubble” of unemployable college grads would not exist if government had not meddled in the higher education market.