Category Archives: Big government is the problem

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.


A Wasted Protest

The “Occupy <insert city name here>” protestors are certainly an eclectic bunch. From what I can gather they blame “the wealthy” and “corporate greed” (whatever that means) for a myriad of the problems this country faces, not the least of which is that they don’t have a job. Give me a break. If they have time to travel across the country and camp out in a park for weeks on end, then they have time to find a job. The protestors have one slender thread of a justifiable grievance: the “too big to fail” crony capitalist policies of our political system. The problem is that they should be protesting the government that bailed out big businesses (the financial and auto sectors). Those businesses made risky investments because they knew Uncle Sam would back them up if things went south. Ask yourself, if you could go into a casino and gamble as much as you wanted knowing that any losses would be repaid to you, would you really restrain yourself from not simply gambling as much and as fast as you could?

This protest is a wasted opportunity to raise national awareness of what really ails this country: big government. The protestors are simply too ignorant of basic economics (“let’s just get rid of all money” said one) and the nature of free-market capitalism (as distinguished from crony-capitalism) to advance any kind of legitimate, useful agenda. For example, some constructive demands would be:

1) end the Fed and the ability of the government to print money: this brings an end to the “business cycle” which is an artificial result of government money manipulation

2) end all government subsidies: this would lower taxes by eliminating corporate welfare

3) repeal all government regulation of business: this would put all the lobbyists out of work and would then create a boom in new businesses and new jobs (as regulations are the tool that big business uses to raise the barrier to entry by new competitors)

4) repeal all business taxes: a lack of income tax would create a huge increase in rate of return on invested capital thereby attracting thousands of US and foreign companies to the US which would in turn create millions of new jobs.

But you won’t hear any of the protestors calling for such reforms. Their solution to “income inequality” is not to raise those on the bottom up (by promoting an environment conducive to job creation) but rather to cut those at the top down (by promoting punitive taxation under the mantra of redistribution following a misguided appeal to “fairness.”) Income inequality is a natural consequence of being human. It is the same as inequality in a foot race. In fact the statistical distribution in both a race and income is identical: a handful are wealthier or faster than everyone else, a large portion are average and a handful are very slow or poor. Government mandated redistribution of wealth is no different than forcing the fast runners to carry sandbags on their back, so as to remove their “unfair” advantage over slower runners. Capitalism is like the foot race; those that come in first do not gain their speed by sapping the speed of the slower runners.

To insist that income must be equal for all or have a very narrow distribution is to tilt at the windmill of biology: we all have equal natural rights but we are not created with equal abilities. Those with skills in high demand or low supply (doctors, lawyers, actors, sports stars, etc) will always earn much more than those with skills in low demand or high supply. That’s life, get used to it. The solution the protestors should be seeking is to improve their skill set rather than promoting government-sanctioned solutions that use threat of violence (taxation) in order to “right” their perception of a “wrong.”

 

Privatize Regulation and Relief

The mainstream media misunderstands the role of the federal government as outlined in the US Constitution. They routinely ask questions to the libertarian leaning Republican candidates (Ron Paul, Gary Johnson) that betray this ignorance. For example, of the seven questions MSNBC asked Ron Paul at the last debate (Sept 7, 2011) four of them focused on this.

The questions presuppose that we need the federal government to provide a cornucopia of services that (mistakenly believed) the private sector could not provide. The underlying accusation in these questions is that if you don’t think the government should do these things then you must think no one should do these things and you are clearly a heartless SOB. To highlight the lack of imagination the questioner (Brian Williams) actually suggested that if the government did not run air traffic control then the only alternative would be that pilots would be doing it themselves in their planes! If he had employed a little investigative journalism he would have easily discovered that Canada actually privatized their air traffic control system in 1996 and has consistently received higher marks than the antiquated government run US system.

In short, the answer to this question is that just because one doesn’t believe the government should be providing a particular service doesn’t mean it should not be done. There is NOTHING that the government does that the private sector can’t do better. Not because somehow the individuals in the private sector are somehow magically smarter and better people. Rather because the private sector is constantly receiving feedback through the profit/loss system. Companies that provide things their customers want receive money and stay in business, companies that don’t lose money and go out of business. What remains are those companies best suited to provide the service. Government has no such feedback; failure is simply an excuse to ask for more money since obviously the failure was entirely due to a lack of money.

For those that believe “some things are just too important to let the private sector run them” and that therefore government must run them, then ask yourselves this: Why doesn’t the government nationalize our food industry? Why aren’t all farms and food processing and distribution government run? Why isn’t food allocated “equally” to local government grocery stores with “fair” prices? Surely food, that product without which we would all die, is important enough that we couldn’t possibly trust the market to handle it? Yes, government does stick its nose into agriculture quite a bit but certainly nothing on the scale of a nationalized government run monopoly of food distribution. Yet somehow the market, with no central planner, is able to magically make food available to everyone in this country. So if we allow the market to handle food (the most important of all goods), why then are we not willing to allow the market to handle other goods, such as education? Retirement? Air traffic control? Health insurance? Product regulations?

But what about drug safety, surely we need the government to handle this? No, we don’t need a monopoly on drug safety. We need several “FDAs” competing with each other. Those that do a good job evaluating drug safety and efficacy will stay in business, and the ones that do a poor job (like the FDA that approved drugs that killed people, but for which they have no accountability) would go out of business. How would this work? We already have an existing model: Underwriters Laboratory. UL is a private organization that is not affiliated with any government. The UL inspired private regulation model is simple and works with any product or service. Here’s how:

Companies sell products. The products might cause harm so companies buy insurance. Insurance companies want to ensure against losses so they require companies be certified by a private certifying agency. If the certifying agency does a good job (preventing damaging products) they make money. The insurer is happy because they aren’t paying out claims. The company is happy because they aren’t getting sued. If the certifying agency does a poor job (allowing damaging products to be sold) then the insurer has to pay claims and the company is sued. That agency goes out of business because no one wants to use them anymore. The good agencies remain, the bad ones go away. It is a positive feedback loop of ever improving self-imposed regulations.

What about national disaster relief? Even easier – ever hear of the Red Cross? I think Ron Paul said it best – “What happened before 1979? We didn’t have FEMA.” Before 1979 did people just lay down and die because there was no federal aid? No, organizations like the Red Cross provided assistance as well as local groups that know their areas much better than the feds. FEMA has created a moral hazard that provides an incentive for people to not take responsibility for themselves (i.e. not buying flood insurance, building fancy homes on hurricane prone beaches, etc.). Private organizations like the Red Cross have a vested interest in seeing their efforts only go toward those that truly need help as they must answer to their donators. Donators don’t want to see their money wasted or swindled away as has happened with FEMA. Unhappy donators = no donations. FEMA answers to no one (or rather it answers only to a bloated government bureaucracy that can’t keep track of the waste, fraud and abuse).

We who believe in liberty of the individual are sympathetic towards our fellow man. We recognize the need for oversight of goods and services. We simply do not accept the proposition that government is the only way to provide such relief or oversight. We think it is the least efficient way to do so. The private market is more efficient due to inherent incentives that provide continuous positive feedback.

Stimulus: Bread and Circuses, Part II

Government bread (stimulus) attempts to misdirect the citizenry into believing “something” is being done. Tragically, the bread is hollow. Inherent self-interest problems with government spending ensure that such spending is less efficient in terms of goods received per unit of money. In other words if government spends $1 they get 10 apples. If I spend the dollar I’ll get 15 apples. But there is another inherent problem with government stimulus – sustainability.

Government projects are always short term in nature (e.g. roads, bridges, etc) and when the project is done, that’s it. Those workers are out of work again… until we need some more bridges. Are we supposed to build bridges forever to keep the economy moving? Government spending is akin to a circus coming to town. Money is drawn into a community temporarily, and for awhile everything is great for local merchants. But clearly the circus is a bubble, it can’t stay in town forever. So it is a foolish business that expands based on the sales receipts generated while the circus is in town. When the circus leaves such a business collapses. It pleads for support from the government – the only thing they can do is bring the circus back. As long as the circus is there all is good. But clearly the circus is an unsustainable event, it was never meant to sustain an economy forever.

When people ask for government stimulus they are asking for “circuses” to maintain the status quo. Stimulus is supposed to spark some new more permanent venture, but exactly how can it do that? It simply reinflates the old bubble industries at their unsustainable bubble levels. Those industries can only be sustainable at their new post-bubble levels. Stimulus prevents this equilibrium from being achieved. Sustainable economic growth comes from industries responding to the direct desires of CONSUMERS. If consumers want it then a market will grow and that’s where the jobs will be. Consumer demand will not disappear overnight as can government spending. Consumer desires can change over time but it takes years for these changes to occur which is sufficient time for an economy to absorb the slowly shifting moods of consumer demands.

So this begs the question of why we had such a rapid change in the economy recently. If you’re astute you will have a good idea why. That’s right, it was a government-stimulated bubble inflated by loose fiscal and monetary policy and then popped by a reversal of that policy. It is these policies combined with the moral hazard of “too big to fail” that encouraged the RISKY behavior that is blamed for the crash. We must look beyond the risky behavior itself and ask what encouraged that behavior if we’re serious about preventing such things in the future. The solution is not to add more 20-20 hindsight regulation that attempts to prevent risky behavior but rather to remove the root cause that encouraged said behavior, namely the “too big to fail” policies of our crony-capitalist-big-government state. These polices are the manifestation of what government busybodies thought was the “right” thing (“home ownership for all!”) but sadly unintended consequences always come home to roost in a tragic mess. Treat the disease, not the symptoms.

Stimulus: Bread and Circuses, Part I

The “cuts” in the recent budget deal have renewed mutterings of the “dangers” of decreasing government spending in a down economy. Somehow this “government spending as the path to prosperity” myth will just not die. The idea is that when government spends money it magically reaps greater economic benefits than when private parties spend money. Not only is this wrong, it is completely backwards! We’ve spent trillions in stimulus and it hasn’t “fixed” the down economy. No consideration is given as to why that might be, it is simply assumed that (a) we didn’t spend enough or that (b) it would have been worse absent stimulus. Argument A simply dumps us in an infinite loop from which there is no escape, akin to an old computer program like

10 RUN STIMULUS

20 IF STIMULUS FAILS, GOTO 10

Argument B is a sign of intellectual laziness as it relieves the arguer of a duty to supply any data to support their claim – just speculate on what might have been and call it a day.

Well, I’ll call that bluff. Using logic we can rationally discern a reasonable outcome of a lack of government spending.  Let’s address the “multiplier effect” part of this myth first. In short no such effect exists. This “effect” is simply the relabeling of a normal function in the economy and claiming it is an inherently unique attribute of government spending. It has a more common name – trade.  If I buy something then that enables the person I spent the money with to go buy something, and that person to do the same and so on. This happens everyday – if government rather than individuals spend the money it doesn’t magically transform the process into something else. When government stimulates by purchasing, the theoretically BEST possible outcome is no better than if the government did nothing.

All government spending by definition must come from the citizens. So in other words we are simply moving money from the left pocket to the right pocket of society. Citizen A had $1 and can spend it on X OR now government has taken the $1 of Citizen A and given it to Citizen B to spend it on Y. Citizen A does not have his $1 anymore so does nothing. Citizen B has the $1 and spends it. As Frédéric Bastiat explained, the “seen” benefit is what Citizen B bought; the “unseen” harm is what Citizen A did not buy. All we have done is shift the preference of goods that are being purchased in the economy. No net economic change has occurred.

But this assumes 100% efficient spending. Government has no inherent self-interest to efficiently spend money it distributes ($1000 hammer anyone?). Although the same AMOUNT of money is spent the goods and services received in return will always be fewer than had it been spent by someone with a vested interest in maximizing what they get for their money (i.e. the original owner). This net decrease in goods received per unit of “government” money spent lowers the overall standard of living and productivity of the economy over time.  This obfuscation of the citizenry by government “bread” (i.e. handing out things that appear to be beneficial and good to some) is a vain attempt to do “something”. Next week we’ll continue with the “Circus” part of the stimulus equation.

Math 101

Let’s do some simple math.

2011 Federal Budget: $3.8 Trillion

2011 Federal Revenue (est): $2.6 Trillion

so

$3.8 – $2.6 = $1.2 Trillion Deficit

100% of all personal income above $200,000 per year = $1.2 Trillion.

So there you go, I guess the President is right after all. The solution to our deficit problem is so simple: take ALL of the income of the “wealthy” above $200,000 per year (in addition to the taxes they already pay on the amount below $200,000 which would effectively be an 83% total (not marginal) tax rate).  I guess “fair share” or “shared burden” is code for “no one should make more than $200,000 per year”.

And just to disabuse anyone of the notion that corporations are where the real money is: the combined income of everyone making more than $200,000 per year exceeds the combined income of EVERY corporation in the country ($2 Trillion vs $1.2 Trillion – and no I’m not double counting, these are C-Corporations only). Indeed, the combined AGI of every US Citizen is $7.5 Trillion vs only $1.2 Trillion for every corporation. Why is individual income so much more than corporate income? Payroll is the single biggest expense for corporations. Median profit is only 5% of revenue whereas Payroll is 18%. That’s right, companies pay more to their workers in salaries than the company itself retains as profits.

So what is my point? Obviously I’m not actually advocating 83% absolute tax rates on the “wealthy” (hopefully I haven’t given the Democrats any ideas!) My point is that spending is the problem, not revenue. Even returning to the much-touted “Clinton era” tax rates would not even begin to make a dent in the federal deficit. The rate of increase in the federal budget from 1980-2000 was a consistent $60 billion/year, but starting in 2001 the rate of increase jumped to $150 billion/year and in 2009 jumped even further to $240 billion/year. Clearly Bush got us off course spending wise and Obama has made it that much worse.

If we were to return Federal spending to the 20 year trajectory it was on when we got off course in 2001 the Federal Budget for 2011 would be a “mere” $2.4 Trillion. That’s right, we’d actually be in surplus EVEN with the Bush tax cuts. For a detailed outline of how this could be achieved please see this Reason article. The Cliff notes version is this: no sacred cows, EVERYTHING (defense, social security, Medicare, entitlements, etc) must be cut.

All values obtained at: www.irs.gov/taxstats/ and are for the latest years with available data.