Wednesday, December 05, 2012

Fiscal Cliff or Deficit Scissors?

All the political talk about a "fiscal cliff," and a post by Peter Boettke, has led me to begin reading Democracy in Deficit by Buchanan and Wagner.  I think the opening paragraph in the first chapter of Democracy in Deficit suggests a very simple way of thinking about the fiscal issues front and center in the news today:
In the year (1776) of the American Declaration of Independence, Adam Smith observed that "What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom."  Until the advent of the "Keynesian revolution" in the middle years of this century, the fiscal conduct of the American Republic was informed by this Smithian principle of fiscal responsibility: Government should not spend without imposing taxes; and government should not place future generations in bondage by deficit financing of public outlays designed to provide temporary and short-lived benefits.
In other words, government should generally operate without running a deficit.  Government should generally pay for its activities each year with annual tax revenues.

If you agree this is a reasonable idea, then perhaps you will wonder about the so-called fiscal cliff that the President and members of Congress are bickering over these days.  The idea of the fiscal cliff is that Congress and the President have "bound" themselves by past actions in ways that will, on January 1, result in (1) an increase in income tax rates (for every taxpayer), and in (2) automatic across the board cuts in government spending.  If you haven't been paying attention to politics lately you might wonder why the President and Congress would take action in the past that would bind them to (1) and (2) today.  The answer seems to have something to do with the fact that the President and Congress have been borrowing quite a lot of money to finance their activities of late.  I will show you how much borrowing in two charts below.  It seems that the President and members of Congress recognized in the past that they really aren't very good with budgets and fiscal responsibilities, and thus they concluded that if they wanted to start borrowing less money they would have to bind themselves to (1) and (2).  There must be some truth to the idea that they aren't very good with budgets because we are now less than a month away from (1) and (2) happening, and what are the President and members of Congress bickering about?  Yep, unbinding themselves from (1) and (2) so that they can borrow more money.

How is it that we are now facing a "fiscal cliff?"  Maybe our political leaders see this as a cliff because they can't face up to the idea that they should be more responsible than they are with the budget of the United States.  Or it may be that our political leaders and others see a cliff because they believe that more tax revenue and less spending will mean a new period of recession for the country.  Or, it may be that our fearless leaders are hoping to deflect our attention from the mountain of loans they have been taking out lately by telling us to pay attention instead to the cliff that is (1) and (2).

Given all the public bickering and finger pointing, I'm thinking the last alternative makes a lot of sense.  After all, if the President and Congress have been borrowing too much money in the past few years, then it seems that the quote from Democracy in Deficit would suggest they need to get out a pair of deficit scissors and cut the size of their borrowing.  What would deficit scissors be?  Well, pretty much something like (1) and (2).  One blade of the deficit scissors would be more tax revenue while the second blade would be cutting what they spend each year.

Should the President and Congress get the deficit scissors out?  You'll have to decide for yourself, of course.  But, after showing you some numbers that I found in the FY 2013 Budget Proposal of President Obama, I'll tell you my answer.  These numbers come only as close to the present fiscal year as FY 2011 because that is the last year for which actual information is available.  I do not present estimates.  The first chart shows the historical record of U.S. Government receipts and outlays as percentages of GDP.  Outlays are shown in red, and thus for any year that the red trend line is above the blue trend line the U.S. Government ran a deficit, i.e., Congress and the President borrowed money.  It looks like the President and Congress began to borrow more each year, compared to the past experience, from around 1970 on.  There is an exception which is shown by the
four years of surplus around the end of the Clinton presidency.  In most of the years after those four years of budget surplus the President and Congress borrowed pretty heavily.  The last three years in the chart show very heavy borrowing. 

I don't think it is really easy to understand the meaning of a government deficit when expressed as a  percentage of GDP.  The next chart shows the deficit in terms of the cents borrowed out of every dollar spent by government in each year.  For any year in which government's budget was in surplus 

the cents borrowed is shown as zero.  The information in this chart begins in 1900 and ends with the 2011 FY.  Notice that outside the years that involve either a world war or the Great Depression, the US Government seldom borrowed more than 20 cents of every dollar it spent.  It also appears that over the period of years since WWII the US Government's reliance on borrowing increased early in the decade of the 1970s.  The US Government's willingness to borrow seems also to have increased recently.  In the 2009 FY it borrowed 40 cents of every dollar it spent, in 2010 FY it borrowed 37 cents of every dollar spent, and in 2011 it borrowed 36 cents of every dollar spent.

I suggest that the President and Congress have borrowed far too much money in recent years.  Borrowing thirty to forty cents of every dollar spent is far too much.  I also suggest that if you look again at the first chart, it is reasonable to conclude that the last three years in the chart display a significant increase in the spending habits of the President and Congress.  Yes, there was also a decrease in tax revenues during the last three budget years, which is of course what happens with recession.  Given the proclivity of the red spending trend line to be above blue revenue line since around 1970, it seems to me the borrowing problem of the President and Congress results from their proclivity to spend too much.  

In any case, except for relatively unusual circumstances (e.g. a world war), it seems to me that the President and Congress should be budgeting for a surplus, or for a very small deficit (perhaps five or ten cents for every dollar spent).  The fiscal cliff looks to me like deficit scissors that are really needed at this point to begin to get the President and Congress to be fiscally responsible with our money and the money of future generations.  My preference is for the President and Congress to spend less rather than raise tax rates on any of us, but I suggest ending the unjustified borrowing is the greater priority at this time.

What do you think?  Should we fear the fiscal cliff, or should we get out the deficit scissors?

Tuesday, November 20, 2012

The Ethics of Voting

I just started Jason Brennan's The Ethics of Voting, and it looks very interesting.  Why?  Consider:
At base, democracy is just a decision-making method.  In politics, democracy is a method for deciding when and how to coerce people into doing things they do not wish to do.  Political democracy is a method for deciding (directly or indirectly) when, how, and in what ways a government will threaten people with violence.  The symbol of democracy is not just the ballot--it is the ballot connected to a gun.
Democracy is good because liberal, constitutional democratic governments perform well compared to the feasible alternatives.  People living under liberal, constitutional democratic governments tend to have higher standards of living, greater educational levels, longer life expectancy, higher exposure and access to culture and diversity, greater reported happiness and life satisfaction, more freedom of all kinds, and more wealth than people living under alternative regimes.  From a humanitarian point of view, liberal constitutional democracy is a clear winner, at least compared to the alternatives we have tried.
I like both these paragraphs, and I suspect students in just about any of my courses will find these views familiar.  I'm especially fond of the clarity about the nature of government expressed in the idea that "democracy is not just the ballot--it is the ballot connected to a gun."

I also think I like Brennan's ideas about what ethical voting means.  Here are the propositions he says he argues for in his book:

  • Citizens have no civic or moral obligation to vote.
  • Citizens can pay their debts to society and exercise civic virtue without being involved in politics.
  • People who lack certain credentials (such as knowledge, rationality, and intellectual virtue) should abstain from voting.
  • Voters should not vote for narrow self-interest.
  • It can be permissible to buy and sell votes.  It is not inherently wrong to do so.
Perhaps by the end of his book I will decide against these views, but they seem right to me at this point.  I especially support the idea that a person does not have a moral obligation to vote, but if a person chooses to vote, then I think a person has a obligation to vote in support of an informed, justifiable view of  what is in the common interest.

I even like the last idea that it is not inherently wrong to buy and sell votes.  After all, it would be unusual for an economist not to support the idea that there was no better means of aggregating individual preference than voluntary exchange. 

Wednesday, September 05, 2012

Allocation, Distribution & Fairness

Peter Boettke:
The juxtaposition of the exchange approach to economics with the approach to economics that emphasizes optimal society allocation and just distribution as products of a benevolent social planner sets the stage for Buchanan's distinction between economics and politics, as well as the emphasis on rules and the institutional framework.  Questions of  "just distribution" are never about particular distributions of resources but instead always about the choices over the rules of the game which engender a pattern of exchange, production, and thus distribution.  Fairness is about rules, not outcomes; justice is about process, not end-states. [Living Economics, p. 50]

Monday, September 03, 2012

Congress shall make no law. . . .

You might be interested in an interview of Hayek done by James Buchanan. Hayek made the following suggestion about the Constitution:
Well, among the Founding Fathers, there were some who very clearly saw the very point I am making.  And I believe they did try, by the design of the American Constitution, to achieve a limit on their powers.  After all, the one phrase in the American Constitution, or rather in the First Amendment, which I think most highly of is the phrase, "Congress shall make no law. . . "  Now, that's unique, but unfortunately [it goes] only to a particular point.  I think the phrase ought to read, "Congress should make no law authorizing government to take any discriminatory measures of coercion."  I think this would make all the other rights unnecessary and create the sort of conditions which I want to see.
I like the idea.  If you are interested in Hayek's analysis that leads to this suggestion, then you will want to read Law, Legislation, and Liberty (all 3 volumes), and perhaps The Constitution of Liberty as well.

Wednesday, August 29, 2012

Humankind's Natural Propensities

Peter Boettke:
I often tell students that humankind has demonstrated two natural propensities--to truck, barter, and exchange (as Adam Smith taught); and to rape, pillage, and plunder (as Thomas Hobbes taught us)--and which propensity is pursued is a function of the institutional framework within which individuals find themselves living and interacting. The life experience can be a virtuous cycle of wealth creation and healthier and wealthier lives, or it can be a nasty and brutish hell on earth.  So while economics cannot give us exact point predictions, it can, as a science, inform us of tendencies and directions of change as well as the wealth-creating or wealth-destroying capacity of the political economic system. [Living Economics: Yesterday, Today, and Tomorrow, p. 385]

Friday, August 24, 2012

The Doings of Man

Peter Boettke:
If we fail as economic educators, then we fail in our job as economists. . . .The wealth and poverty of nations is at stake; the length and quality of life turns on the economic conditions individuals find themselves living within.
The discipline of economics illuminates all walks of human life, and as such it is an ambitious science.  It explains the doings of man, whether in the marketplace, the voting booth, the church, the family, or any other human capacity.  The economic way of thinking is not just one window on the world; it is the only window that deals with man as a human actor.  This may sound arrogant to the casual reader, but economics also teaches humility.  As F.A. Hayek put it, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." [Living Economics, p. 383] 

Tuesday, August 14, 2012


Nicholas Quinn Rosenkranz has recently published a very interesting, and dare I assert important, paper in The Stanford Law Review. He opens his paper with this very interesting idea:
"Two centuries after Marbury v. Madison, there remains a deep confusion about quite what a court is reviewing when it engages in judicial review. Conventional wisdom has it that judicial review is the review of certain legal objects: statutes, regulations. But strictly speaking, this is not quite right. The Constitution prohibits not objects but actions. Judicial review is the review of such actions. And actions require actors: verbs require subjects. So before judicial review focuses on verbs, let alone objects, it should begin at the beginning, with subjects. Every constitutional inquiry should begin with a basic question that has been almost universally overlooked. The fundamental question, from which all else follows, is the who question: who has violated the Constitution?"
Perhaps because I come to study the constitution from the conceptual view of an economist this idea makes perfect sense to me. After all, I recognize that, like Mises, I study human action. Like the neoclassical economist, I study the choices made by an individual.  So, it seems to be in my nature to understand that if the Court declares a statute unconstitutional, the Court is really saying that Congress took an action it did not have the constitutional power to take.  Still, I have to agree with Mr. Rosenkranz that it does seem to be the case that Court opinions, law school faculty, politicians and voters tend to say that it is the statute in question that has some fault.

Is it really important to emphasize who violated the Constitution? I think it probably is very important. Surely it is a good idea for voters to think about the actions of the people they vote for and against. Personally, I can read the Constitution, and when I hear my representative argue publicly that he or she has a power I do not see enumerated in the Constitution I usually vow to vote against that representative in the future.  It seems to me, after all, that when a member of Congress votes to use the power of government in a way that is unconstitutional, that member of Congress is abusing the power of his or her office. 

I think our republican form of government would be improved if our representatives believed it was their personal responsibility to act in a constitutional way.  It seems to me it is possible to hide from this attitude if you are a member of Congress that thinks: "Bummer man, the Court said that law I voted for was unconstitutional."

Consider also that Article VI requires an oath of office for members of Congress. The Oath of Office which is taken by both members of the House and Senate is as follows:
I do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter: So help me God.
It seems to me that a member of Congress cannot defend, nor bear true faith and witness to the Constitution if they think it is the statute that is unconstitutional and not their action that is unconstitutional. It is the obligation of each member of the House and the Senate to read the Constitution they take an Oath to defend and be faithful to, and then to act within the bounds of the specific, and enumerated, Constitutional powers granted to their office.  In other words, it seems to me the oath of office makes it the responsibility of each member of Congress not to abuse the power of the office by voting in support of legislation that is inconsistent with the Constitution.

The President also takes a similar oath of office: "I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States."  It is not just members of Congress who can act unconstitutionally.  A President that signs a law which is inconsistent with the Constitution is not only violating the constitutional oath of office but is abusing the constitutional power of the office.  I've even read that James Madison believed Presidents would see it their duty to veto Congressional measures that were unconstitutional.  Of course, that doesn't happen today because vetoes are about politics and not about the Constitution.  But why should vetoes be about the Constitution, since it is the job of the Supreme Court to decide which laws, or which parts of laws, are unconstitutional.

It seems to me that by thinking a law is unconstitutional, rather than thinking government is acting to use power in ways that are unconstitutional, we have all come to take the questions of constitutionality too lightly.  Saying "unconstitutional" really should be saying that someone in government, or perhaps many someones, has chosen to abuse the constitutional power of his or her office.

Monday, August 13, 2012

Our Founders and Adam Smith

I guess it has always seemed likely to me that people like James Madison and Thomas Jefferson were influenced in their views of government by the work of Adam Smith.  Perhaps it was the coincidence of the 1776 publication dates for both the Wealth of Nations and The Declaration of Independence.  Or perhaps it was the similarity in conceptual ideas about liberty.  In any case, I just read an interesting article by Samuel Fleischacker which provides evidence that this intuition of mine was not ill-founded:
Adam Smith's influence was thus deeply present in the founders' thought.  This influence was complex, in part because the founders actually read Smith's tome rather than treating it as a hieroglyph for a free trade slogan.  Smith's influence can be seen in James Madison's subtle notion of the relationship between interest and virtue, in the remarks Madison and others made about the link between economic occupation and moral character, and in the trust in ordinary people's judgment that Madison shared with James Wilson, Thomas Jefferson, and some of the other founders.  Smith's importance to American political thought in the 1780s should be taken much more seriously than it has been.  It is remarkable that America has a Constitution that, in the functions it gives to government, the structure its provides for the military, and the strict separation it proclaims between religious and secular powers, fits Smith's conception of politics better than any government of his day.  When this remarkable fact is combined with evidence of significant interest in Wealth of Nations among America's political elite--several years before it received much attention elsewhere--it must be concluded that the relative inattention of historians to the influence of Wealth of Nations on the American founding is an oversight badly in need of correction. ["Adam Smith's Reception among the American Founders, 1776-1790," The William and Mary Quarterly, Third Series, Vol 59, No 4 (Oct 2002), 924-924]
I also found it interesting to realize that Adam Smith was especially interested in what was going on in the Colonies and in America.  He apparently thought this was the most likely place for his ideas to take hold.

Wednesday, August 08, 2012

The Politics Of Friends & Enemies

While in the tribal society the condition of internal peace is the devotion of all members to some common visible purposes, and therefore to the will of somebody who can decide what at any moment these purposes are to be and how they are to be achieved, the Open Society of free men becomes possible only when the individuals are constrained only to obey the abstract rules that demarcate the domain of the means that each is allowed to use for his purposes.  So long as any particular ends, which in a society of any size must always be the ends of some particular persons or group, are regarded as a justification of coercion, there must always arise conflicts between groups with different interests.  Indeed, so long as particular purposes are the foundation of political organization, these whose purposes are different are inevitably enemies; and it is true that in such a society politics necessarily is dominated by the friend-enemy relation.  Rules of just conduct can become the same for all only when particular ends are not regarded as justification for coercion (apart from such special passing circumstances as war, rebellion or natural catastrophes). [The Mirage of Social Justice, p. 143]

Thursday, August 02, 2012

Hayek On Social Justice

Here are a few insightful and interesting quotations that I think are relevant to understanding "social justice" from Hayek's The Mirage of Social Justice:
. . . the importance for the functioning of the market order of particular prices or wages, and therefore of the incomes of the different groups and individuals, is not due chiefly to the effects of the prices on all of those who receive them, but to the effects of the prices on those for whom they act as signals to change the direction of their efforts.  Their function is not so much to reward people for what they have done as to tell them what in their own as well as in general interest they ought to do. [pp. 71-72]
It is not good intentions or needs but doing what in fact most benefits others, irrespective of motive, which will secure the best reward. [p. 72] 
The most common attempts to give meaning to the concept of 'social justice' resort to egalitarian considerations and argue that every departure from equality of material benefits enjoyed has to be justified by some recognizable common interest which they differences serve.  This is based on a specious analogy with the situation in which some human agency has to distribute rewards, in which case indeed justice would require that theses reward be determined in accordance with some recognizable rule of general applicability.  But earnings in a market system, though people tend to regard them as rewards, do not serve such a function.  Their rationale (if one may use this term for a role which was not designed but developed because it assisted human endeavour without people understanding how), is rather to indicate to people what they ought to do if the order is to be maintained on which they all rely.  The prices which must be paid in a market economy for different kinds of labour and other factors of production if individual efforts are to match, although they will be affected by effort, diligence, skill, need, etc., cannot conform to any one of these magnitudes; and considerations of justice just do not make sense with respect to the determination of a magnitude which does not depend on anyone's will or desire, but on circumstances which nobody know in their totality. [p. 80] 
I think it is very important to understand that the prices that emerge in the world of voluntary exchange (or, we might say, in The Political Order of a Free People) are signals that can be useful  with respect to choices about future individual human actions as well as future social interactions.  The world of human action is dynamic and evolving, and the prices that emerge with the market process are signals that help people figure out effective ways of adapting to ever changing conditions.  Thus government actions in the name of social justice will amount to introducing force into the political order in a way which necessarily interrupts the function of prices as such signals.

Wednesday, August 01, 2012

Commerce Clause

Justice Thomas's opinion in the health care case:
I dissent for the reasons stated in our joint opinion, but I write separately to say a word about the Commerce Clause.  The joint dissent and THE CHIEF JUSTICE correctly apply our precedents to conclude that the Individual Mandate is beyond the power granted to Congress under the Commerce Clause and the Necessary and Proper Clause.  Under those precedents, Congress may regulate "economic activity [that] substantially affects interstate commerce."  I adhere to my view that "the very notion of a 'substantial effects' test under the Commerce Clause is inconsistent with the original understanding of Congress' powers and with this Court's early Commerce Clause cases."  As I have explained, the Court's continued use of that test "has encouraged the Federal Government to persist in its view that the Commerce Clause has virtually no limits."  The Government's unprecedented claim in this suit that it may regulate not only economic activity but also inactivity that substantially affects interstate commerce is a case in point.
Right on target!

Tuesday, July 31, 2012

Order & Power

The ultimate justification of the conferment of a power to coerce is that such a power is required if a viable order is to be maintained, and that all have therefore an interest in the existence of such a power.  But this justification does not extend further than the need.  There is clearly no need that anybody, not even the majority, should have power over all the particular actions or things occurring in society. [The Political Order of a Free People, p. 6]

Monday, July 30, 2012

Not Every Legislative Act Is Law

Justice Matthews for the Supreme Court in Hurtado v People of the State of California, 110 US 516, 535-36 (1884):
But it is not to be supposed that these legislative powers are absolute and despotic, and that the amendment prescribing due process of law is too vague and indefinite to operate as a practical restraint.  It is not every act, legislative in form, that is law.  Law is something more than mere will exerted as an act of power.  It must be not a special rule for a particular person or a particular case, but, in the language of Mr. Webster, in his familiar definition, ‘the general law, a law which hears before it condemns, which proceeds upon inquiry, and renders judgment only after trial,’ so ‘that every citizen shall hold his life, liberty, property, and immunities under the protection of the general rules which govern society,’ and thus excluding, as not due process of law, acts of attainder, bills of pains and penalties, acts of confiscation, acts reversing judgments, and acts directly transferring one man’s estate to another, legislative judgments and decrees, and other similar special, partial, and arbitrary exertions of power under the forms of legislation.  Arbitrary power, enforcing its edicts to the injury of the persons and property of its subjects, is not law, whether manifested as the decree of a personal monarch or of an impersonal multitude.  And the limitations imposed by our constitutional law upon the action of the governments, both state and national, are essential to the preservation of public and private rights, notwithstanding the representative character of our political institutions.  The enforcement of these limitations by judicial process is the device of self-governing communities to protect the rights of individuals and minorities, as well against the power of numbers, as against the violence of public agents transcending the limits of lawful authority, even when acting in the name and wielding the force of the government.

Friday, July 27, 2012

Conquering Ignorance

In one sense the saying that our civilization rests on the conquest of ignorance is of course a mere platitude.  Yet our very familiarity with it tends to conceal from us what is most important in it: namely that civilization rests on the fact that we all benefit from knowledge which we do not possess.  And one of the ways in which civilization helps us to overcome that limitation on the extent of individual knowledge is by conquering ignorance, not by the acquisition of more knowledge, but by the utilization of knowledge which is and remains widely dispersed among individuals. [Rules and Order, p. 15]

Thursday, July 26, 2012

Selection and Society

It is simply not true that our actions owe their effectiveness solely or chiefly to knowledge which we can state in words and which can therefore constitute the explicit premises of a syllogism.  Many of the institutions of society which are indispensable conditions for the successful pursuit of our conscious aims are in fact the result of customs, habits or practices which have been neither invented nor are observed with any such purpose in view.  We live in a society in which we can successfully orientate ourselves, and in which our actions have a good chance of achieving their aims, not only because our fellows are governed by known aims or known connections between means and ends, but because they are also confined by rules whose purposes or origin we often do not know and of whose very existence we are often not aware.   
Man is as much a rule-following animal as a purpose-seeking one.  And he is successful not because he knows why he ought to observe the rules which he does observe, or is even capable of stating all these rules in words, but because his thinking and acting are governed by rules which have by a process of selection been evolved in the society in which he lives, and which are thus the product of the experience of generations. [Rules and Order, p. 11]

Wednesday, July 25, 2012

Economic History of the World

Here we have the economic history of the world in one picture, as summarized for us by Gregory Clark in A Farewell to Alms:
The basic outline of world economic history is surprisingly simple. . . . Before 1800 income per person--the food, clothing, heat, light, and housing available per head--varied across societies and epochs. . . . the average person in the world in 1800 was no better off than the average person of 100,000 BC.  Indeed in 1800 the bulk of the world's population was poorer than their remote ancestors. . . . Life expectancy was no higher in 1800 than for hunter-gatherers: thirty to thirty-five years. . . . average welfare, if anything, declined from the Stone Age to 1800.  The poor of 1800, those who lived by their unskilled labor alone, would have been better off if transferred to a hunter-gatherer band.  The Industrial Revolution, a mere two hundred years ago, changed forever the possibilities of material consumption.  Incomes per person began to undergo sustained growth in a favored group of countries.  The richest modern economies are now ten to twenty times wealthier than the 1800 average.  Moreover the biggest beneficiary of the Industrial Revolution has so far been the unskilled.  There have been benefits aplenty for the typically wealthy owners of land or capital, and for the educated. But industrialized economies saved their best gifts for the poorest. [Introduction, pp. 1-3]
In other words, for most of human history and in most places in the world, almost all people lived very near subsistence.  But, something happened around 1800 in some places, and the masses of people in those places began to break away from subsistence living and to prosper.

This is the Great Fact of history, as Deirdre McCloskey refers to it in Bourgeois Dignity.  This Great Fact seems to be something most people are unaware of, even among the people who are living in those places in the world where most people live far from subsistence.  It is a fact which seems to be missing from the curricula materials in our schools.  It even seems that this missing fact contributes to many people taking our own prospering for granted.  So, I suppose it should be no surprise that many people seem to believe ideas that are inconsistent with the explanation for why, in some parts of the world, the masses of people began to prosper and continue to prosper today.

What explains the Great Fact of history?  I was reminded of this question earlier this morning while finishing Hayek's The Political Order of a Free People:
However little it may often appear to be true, the social world is governed in the long run by certain moral principles on which the people at large believe.  The only moral principle which has ever made the growth of an advanced civilization possible was the principle of individual freedom, which means that the individual is guided in his decisions by rules of just conduct and not by specific commands.  No principles of collective conduct which bind the individual can exist in a society of free men.  What we have achieved we owe to securing the individuals the chance of creating for themselves a protected domain (their 'property') within which they can use their abilities for their own purposes. [pp. 151-152]
There are lots of specific details we might pay attention to in answering this question, but the simple bottom line seems to me just what Hayek writes here, i.e., individual liberty.  Unfortunately, our system of political economy today seems to move farther and farther away from a society of a free people.

Tuesday, July 24, 2012

Unlimited Democracy

The true value of democracy is to serve as a sanitary precaution protecting us against an abuse of power.  It enables us to get rid of a government and try to replace it by a better one.  Or, to put it differently, it is the only convention we have yet discovered to make peaceful change possible. . . . In its present unlimited form democracy has today largely lost the capacity of serving as a protection against arbitrary power.  It has ceased to be a safeguard of personal liberty, a restraint on the abuse of governmental power which it was hoped it would prove to be when it was naively believed that, when all power was made subject to democratic control, all the other restraints on government power could be dispensed with.  It has, on the contrary, become the main cause of a progressive and accelerating increase of the power and weight of the administrative machine. . . . As everything tends to become a political issue for which the interference of the coercive powers of government can be invoked, an ever larger part of human activity is diverted from productive into political efforts . . . . In other words, we have under the false name of democracy created a machinery in which not the majority decides, but each member of the majority has to consent to make bribes to get majority support for his own special demands. [The Political Order of a Free People, 137-138]

Tuesday, July 17, 2012

Political Incentives

People who hope to be re-elected on the basis of what their party during the preceding three or four years has conferred in conspicuous special benefits on their voters are not in the sort of position which will make them pass the kind of general laws which would really be most in the public interest. [The Political Order of a Free People, p. 28]

Sunday, July 01, 2012

Roberts & No Reason

Justice Roberts in the health care opinion:
The Framers gave Congress the power to regulate commerce, not to compel it, and for over 200 years both our decisions and Congress's actions have reflected this understanding.  There is no reason to depart from that understanding now. [p. 24]
I agree with the first sentence.  Congress does not have the constitutional power to compel commerce, either interstate or intrastate.  This should be thought to be the case regardless of Congressional actions in support or to the contrary.

I find the conceptual view implied by the second sentence to be of concern.  The second sentence seems to me to imply that if Justice Roberts did believe there was a reason to depart from "that understanding," then he might have been willing to make that departure by way of the Court's opinion at hand.  If this is not implied, then it seems to me Justice Roberts would have chosen to leave this sentence out of his opinion.  I wish he had.

So, why is this of concern?  I think the conceptual view implied by this sentence is that, when useful, the Court should change the way the Constitution is understood by way of Court opinions.  Of course, the proper, constitutional way to change the meaning of the Constitution is to amend the Constitution.  Article V specifies the proper way to change the meaning of the Constitution, and the proper way does not include a grant of power to the Court to do so.

The Court should make the constitutional view clear, nor murky as I think this sentence does.  If it seems appropriate to point out there is no reason to depart from the historical understanding of the Constitution now, then I suggest that Justice Roberts should also add: "and if there was reason to change this understanding, then the Court cannot and will not attempt to do that.  If there is such reason, then the constitutional way of changing the meaning of the Constitution is to carry out the requirements found in Article V."

Sadly, for me, it seems that long ago most of the Justices have come to see their constitutional role in the conceptual way implied by this quote.

Hayek on The Value of Science

Hayek in Rules and Order:
There is another related misconception about the aim and power of science which it will be useful also to mention at this point.  This is the belief that science is concerned exclusively with what exists and not with what could be.  But the value of science consists largely in telling us what would happen if some facts were different from what they are.  All the statements of theoretical science have the form of 'if  . . . , then . . .' statements, and they are interesting mainly in so far as the conditions we insert in the 'if' clause are different from those that actually exist. . . . the chief value of all science is to tell us what the consequences would be if conditions were in some respects made different from what they are. . . . Fruitful social science must be very largely a study of what is not: a construction of hypothetical models of possible worlds which might exist if some of the alterable conditions were made different.  We need a scientific theory chiefly to tell us what would be the effects if some conditions were as they have never been before.  All scientific knowledge is knowledge not of particular facts but of hypotheses which have so far withstood systematic attempts at refuting them. (p. 17)

Friday, June 29, 2012

The Court & The Commerce Clause

Reading a Court opinion, as I am doing this morning, I am some times bored, some times entertained, some times nauseated, and some times I'm just baffled.  Consider the following tidbits from Chief Justice Roberts in the health care opinion announced yesterday:
1. The Federal Government "is acknowledged by all to be one of enumerated powers."
2. The enumeration of powers is also a limitation of powers, because "[t]he enumeration presupposes something not enumerated.
3. If no enumerated power authorizes Congress to pass a certain law, that law may not be enacted, even if it would not violate any of the express prohibitions in the Bill of Rights or elsewhere in the Constitution. 
4. The Constitution authorizes Congress to "regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."
5. We have recognized, for example, that "[t]he power of Congress over interstate commerce is not confined to the regulation of commerce among the states," but extends to activities that "have a substantial effect on interstate commerce." 
I'm baffled.

Of course these quotes come from what Justice Roberts has written over several pages.  Quotes 1-3 summarize the meaning of our Constitution of enumerated powers.  Quote 4 is the enumerated power in our Constitution which is known as the commerce clause.  Quote 5 is a good statement of what the Court has come, over the years, to actually think about the Constitution's commerce clause.

I don't understand how quotes 1-4 can fit with quote number 5.  The last quote says that Congress has been granted more power over commerce, specifically it has been granted power to regulate intrastate commerce, than the power we find granted to Congress when we read the words actually written in the Constitution.

I do like the Justice's choice of words "not confined."  I think this is telling.  I think it is inconsistent with quote 2 which says our Congress is a legislature of limited powers.  It seems to me reasonable to suggest that "not confined" is pretty much the opposite in meaning to "a limitation of powers."

It also seems to me reasonable to conclude that over the years the Court has come to change the meaning of the commerce clause.  But, in doing that, the Court has done more.  It seems the Court has turned a constitution for a government of limited powers into a constitution for a government that is "not confined" to expressly enumerated powers.

And, if so, it seems reasonable to conclude that the Court, over the years, has essentially amended the Constitution.  Of course, if you read the Constitution, you will not find that the Court has the constitutional power to amend the Constitution.

Perhaps it is time to put away the Court's commerce clause jurisprudence and end the contortions the Court must go through in presenting it's opinions to convince us that a written constitution for a limited government can also be a constitution for a government that is unconfined?

Thursday, June 28, 2012

ACA, Court, & Constitution

I've hardly had time to read any of today's Court opinion, but my sister called earlier and asked if I was surprised.  Well, no surprise on my part.

One reason is that for quite a number of years now many justices seem to be operating on the premise that their job is to encourage every one to believe that it is constitutional for Congress to infringe upon economic liberty.  Of course, there are several ways in which the ACA infringes individual economic liberty.  Perhaps for many justices the details of the infringements don't much matter since the Court's jurisprudence over the past several decades has mostly rested upon the proposition that economic liberty is not one of the liberties protected by the Constitution.  In principle, then, today's opinion is no surprise.  Still, prior to the opinion I had hoped there would be enough justices on this Court who would be hard pressed to concoct a reason for why a constitutionally limited government could force people to participate in interstate commerce so that Congress could then regulate what it forced.  This take me to the second reason I was not surprised.

The second reason I was not surprised is that decades ago members of the Supreme Court came to the opinion that the fact that Congress had the power to tax meant Congress could use the power to tax to do what it otherwise could not constitutionally do.  I don't remember exactly, I think this was an opinion that said Congress could create Social Security even though there was no enumerated constitutional power to do so, but I'm not going to look this up right now.  In any case, without having read the opinion yet, this seems pretty much what this Court opined.  That is, the statute's mandated commerce is not constitutional, but since Congress has the power to tax, Congress can impose a tax on a person who does not purchase health insurance.  Therefore, Congress has the power to impose the mandate after all.  I know, I'm making the whole darn mess sound so circular.  But, that's what it sounds to me like what the Court has decided today.  Congress can do what it doesn't have the power to do.  I suppose this will surprise some, but at least one previous Court has reasoned in just this way.  So, no surprise on my part.

All of this reminds me of perhaps a third reason I should not be surprised, and this is because of one of my economist heroes is Friedrich A. Hayek.  Specifically, Hayek opened Rules and Order with:
When Montesquieu and the framers of the American Constitution articulated the conception of a limiting constitution that had grown up in England, they set a pattern which liberal constitutionalism has followed ever since.  Their chief aim was to provide institutional safeguards of individual freedom; and the device in which they placed their faith was the separation of powers.  In the form in which we know this division of power between legislature, the judiciary, and the administration, it has not achieved what it was meant to achieve.  Governments everywhere have obtained by constitutional means powers which those men had meant to deny them.  The first attempt to secure individual liberty by constitutions has evidently failed.
Constitutionalism means limited government.  But the interpretation given to the traditional formulae of constitutionalism has made it possible to reconcile these with a conception of democracy according to which this is a form of government where the will of the majority on any particular matter is unlimited. . . .
In other words, by 1973 when this was published Hayek was specifically pointing out that our constitutionalism had failed to limit government and protect individual liberty.  So, no surprise when, today, the Court again fails to see in our Constitution the protection of individual economic liberty.  Perhaps this failure of constitutionalism is because so many on the Court over the years have failed to carry out their part in the separation of powers?  That is, for decades now many on the Court seem to have seen their job as saying what Congress does is constitutional because Congress did it.

Monday, June 25, 2012

Books That Shaped America

The Library of Congress has a list of Books That Shaped America.  I think there are 88 books on the list, but only 15 of these have shaped me, and 2 were because I saw the movie.  Do you suppose this helps explain why I seem to find so few others who share my love of liberty?  I mean, why are John Locke and Adam Smith not on this list?  At least Atlas Shrugged is on the list, but I liked The Fountainhead better.

Thursday, June 21, 2012

Pervasive Externalities

Elizabeth Anderson posts a short essay in which she writes:
Externalities, asymmetrical information, and other collective action problems are even more pervasive in economic life.  Countless ways of conducting business reap gains for some while imposing unjust costs on others. Create a cartel. Stuff rat feces in sausages. Engage in insider trading. Dump toxic waste in rivers. Market useless medicines. Withdraw renewable resources at unsustainable rates. Stuff insurance contracts with obscure loopholes, collect premiums from customers, and then deny their claims. Fill corporate boards with cronies who reward top managers with huge bonuses even when they fail to meet contracted performance requirements. Rig the terms of a complex loan to trap financially unsophisticated borrowers into spiraling debt and fees. Get rating agencies to certify worthless assets as AAA. Use leverage to reap profits from self-generated asset bubbles, sending the global economy into financial collapse when they burst. Without extensive regulation, markets happily accommodate such negative-value-added business plans. Tomasi sometimes acknowledges this fact. But he puts a heavy thumb on the scales against regulation by describing economic activity in general in terms of “self-authorship” and “economic liberty.” Such descriptions cut no normative ice with respect to destructive or predatory business plans. Nor should judges, who lack the expertise to assess economic regulations designed to stop such abuses, use such exalted abstractions to strike them down."
The point of the essay is to offer a critical review of Tomasi's Free Market Fairness.  I've not read Tomasi's book yet, so my comment here is about the conceptual view in this quotation.

It seems to me the first two sentences in the quoted paragraph are making use of the normative framework of economic efficiency.  Specifically, reference is made to what sounds like a negative externality because it is asserted that there are ways of conducting business that are thought to impose unjust costs on others.  While this sounds like a negative externality, and thus a market failure, it seems well off the efficiency mark to me.

I will admit that many economists have used the phrase "imposed costs" when discussing negative externalities, and this has been done for quite a long time now.  I think there have also been not just a few economists who have told negative externality stories by talking about "the victims" of imposed external costs.  However, such ideas are not really expressing the conceptual conclusions that fall out of negative externality models.

The problem of negative externality market failure is not that businesses, or consumers, "impose" costs on others.  The efficiency problem is not that there are victims of the actions of businesses, or the actions of consumers.  The problem, pure and simple, is that the allocation of resources that characterizes the market equilibrium (for a perfectly competitive market) is inefficient when a negative externality is associated with the market.

From the normative point of view of efficiency there are no victims and no one is at fault.  When there is a negative externality the market simply fails to achieve an efficient allocation of resources when a market equilibrium is reached.  If this doesn't seem to be correct to you, then consider the way in which the negative externality market failure can be corrected.  The correction is of course a Pigovian tax, or an excise tax, which is equal to the marginal external cost at the efficient quantity of output.  The idea is quite simply that a market fails to allocate resources efficiently when there is a cost which is "externalized," or that is to say, a cost which is not internalized in the choices taken by buyers and sellers.  To fix the efficiency problem the troublesome costs have to be internalized through the use of a Pigovian tax.  No one needs to be punished, no personal fault needs to be assessed, and no one needs to be compensated on efficiency grounds.  The correction involves a bit of "tweaking" to "fix" the market by internalizing the marginal external costs.

Note also that since on efficiency grounds there are no victims and there are no persons to fault for efficiency transgressions, there seems to me no meaningful concept of "unjust" external costs.  There may well be "unjust" costs associated with the economic activities of people that lead to air pollution, but such costs have to be called "unjust" on normative grounds other than economic efficiency.

Moving on the what comes next in the quoted paragraph, consider whether any of the actions in the list of suspect business practices and plans are associated with negative externalities.

The creation of a cartel is not a negative externality.  It would result in a monopoly market failure.  Efforts to create a cartel are associated with "collective action problems," but not from the social point of view, only from the point of view of the "collective" which in this case is the cartel.  As Mancur Olson explained in The Logic of Collective Action we should expect very few cartels to exist without the force of government helping to hold the cartel together.  Of course this also means that if we think we see a cartel within the United States it is probably the result of government policy.

Stuffing rat feces in sausages is not a negative externality because there is no third party, only a buyer and a seller.  It is certainly a bad business practice, but it does not result in an inefficient allocation of resources.  I can suggest at this point a pretty handy way to decide if there is a negative externality involved.  Assume there is a negative externality and consider the Pigovian tax that would be needed to correct the inefficiency.  In the case of rat feces stuffed in sausages, we would ask government to impose a Pigovian tax so we achieved the efficient amount of rat feces in sausages (don't forget now that the efficient quantity of rat feces is zero only in very special cases).  If the policy response seems silly, like it does in this case, then there probably is no negative externality!

Dumping either toxic or nontoxic waste in a river is probably the classic illustration of a negative externality.  So, here is the case that perfectly fits my explanation above that the efficiency problem is not associated with victims or with the unjust imposition of costs.  The problem here is that without a means of internalizing the marginal external cost the equilibrium allocation will have an inefficiently large amount of toxic or nontoxic waste in the river.  Perhaps government compulsion can get the efficient amount of waste in this case, perhaps not.

I shouldn't think that insider trading was a negative externality efficiency problem.  Just that word "insider" suggests otherwise, don't you think?  Don't misunderstand, I can be convinced that insider trading is something of a policy concern, but not on the grounds of negative externality, or even on the grounds of efficiency concerns associated with asymmetric information.  Insider trading seems to me to be associated with the specific rules and regulations governments have created over many years because of the earlier government action to allow the formation of corporations with limited liability.  And, the policy concerns may well be efficiency concerns, but I'm inclined to say these efficiency concerns are a classic illustration of government (efficiency) failure.

Well, I could go on with the rest of the list, but I'm getting a bit tired of this exercise, and I suspect you are as well.  I just thought I could write a few things down that would help my future students understand what the concepts of efficiency, market failure, and negative externalities really mean.  Plus, if former students take the time to read this, I'm hoping they will be reminded of why I've urged them to: JUST SAY NO TO EXTERNALITY ABUSE!

Tuesday, June 19, 2012

McCloskey on Markets & Government

Deirdre McCloskey has posted a wonderful short essay over at Bleeding Heart Libertarians.  You should read the entire piece because there is far too much good stuff in the essay for me to make not of here.  However, I will make note of her summary of the master narrative of High Liberalism:

The story is, in a few brief mottos to stand for a rich intellectual tradition since the 1880s: Modern life is complicated, and so we need government to regulate. Government can do so well, and will not be regularly corrupted. Since markets fail very frequently the government should step in to fix them. Without a big government we cannot do certain noble things (Hoover Dam, the Interstates, NASA). Antitrust works. Businesses will exploit workers if government regulation and union contracts do not intervene. Unions got us the 40-hour week. Poor people are better off chiefly because of big government and unions. The USA was never laissez faire. Internal improvements were a good idea, and governmental from the start. Profit is not a good guide. Consumers are usually misled. Advertising is bad.
McCloskey finds this narrative to be factually mistaken.  I agree.  So, now, click through to the essay and read her defense of the conclusion that this narrative is mistaken.

You should also read the interchange of comments to follow the essay.  She writes some remarkable responses there are well.  Here is one response I especially like:
Dear Jason, Your sober and sophisticated words are correct. As I said, some state action is desirable. I lived in England in 1959 as the laws against soft-coal burning were taking effect, and there is no entity but a state that could have achieved such a good compulsion. But good compulsions are much rarer factually than people think who talk of "services" or congresspeople who talk of "programs," and that's most people these days. It is why I lean against. It is wrong to put the issue at the "cosmic" level. That after all was my point: let us get down to the facts, if facts is what we are assuming. But this much is true in the cosmos: states have monopolies of violence, and use them; markets and gifts do not. Of the three realms of state, market, and grace, I want every time, acknowledging in the style of Ronald Coase that we can't do this analysis on a blackboard, to see the actual evidence that violence is necessary before I sign on to using it to achieve "actual consequences." I have a bias towards markets and what Boulding called the grants economy ("grace" I am calling it here, theologically speaking: caring for children, loving your friends, feeding the poor), and I have a bias against monopolies of violence, so easily tempted to be used to enrich ones friends and tyrannize over the poor and weak. I repeat what I said to Brian: I do not understand the reflex to defend the massive modern state. As Hayek said, the more complicated the society the worse is the argument for top-down Reason as the way to organize it. Sincerely, Deirdre McCloskey
I tell my students all the time that when thinking about government and public policy it is important to recognize that social interactions involve either voluntary behavior and cooperation or they involve force and compulsion.  Government operates in the realm of force and violence, while the market process is what emerges from the realm of voluntary human interactions.  I suggest that the way McCloskey has described the use of government force in this comment is the best way to think about government and policy issues.  I too have a bias against the use of violence and a bias toward the use of markets and grace.  I suggest that voluntary social interactions should be the normative default position, and to move away from the default position should require some good evidence that a proposed act of government violence is necessary.

Monday, May 28, 2012

Presidents & Budgets

Recently President Obama drew attention to Presidents and their budgets with the following comments:
"I'm running to pay down our debt in a way that's balanced and responsible.  After inheriting a $1 trillion deficit, I signed $2 trillion of spending cuts into law," he told a crowd of donors at the Hyatt Regency. . . . "I just point out it always goes up least under Democratic presidents.  This other side, I don't know how they've been bamboozling folks into thinking that they are the responsible, fiscally-disciplined party. They run up these wild debts and then when we take over, we've got to clean it up."
The President was apparently relying on an analysis by Rex Nutting to support his comments.

I decided to take a look at the US budget for myself.  I suggest we can get a reasonably good idea about the President's assertions without all the detailed assumptions and calculations of Mr. Nutting.  I think the charts presented above and below are most useful in this regard.

Let me start by noting that the President only proposes a budget.  Congress is not required to pass the President's budget.  Congress could create and pass it's own budget.  However, Congress has not passed a budget at all since, I believe, fiscal year 2008.

President Obama's budget proposal for the 2013 fiscal year was made public on February 13, 2012.  The 2013 fiscal year begins in October 2012, and Congress is statutorily required to pass a budget by April 15 prior to the start of the new fiscal year.  Of course, budget or not, Congress and the President still spend money.

Since the President proposes and Congress chooses, subject of course to the President's veto pen, I think it is interesting to compare the President's annual proposal for spending with the amount actually spent.  I am interested in making comparisons between proposed and actual spending across as many Presidents as I can by using data available online.  Unfortunately, the information I was able to find online only went back as far as President Clinton's last six budgets.  What I found is presented in the charts above and below. Click on either chart to get a larger version to look at.  The information in these charts comes from Table 1-3 in the Historical Tables for each budget year.  Note that the number for actual FY 2012 spending is still an estimate in the Historical Tables.

Notice that the President's proposed outlays are never the same as the actual outlays, and that for most years proposed and actual do not seem very far apart.  It also seems that actual outlays were roughly flat for the first four years of the Clinton presidency presented in this chart, and that for the last two years of Clinton's presidency, and certainly by the Bush presidency, Congress and the President were choosing to spend at a quicker pace over time.

Notice also that for FY 2009 the actual outlays are significantly greater than the spending proposed in February 2008 by President Bush.  In addition, note that President Obama's first two budget spending proposals were significantly greater than the actual spending in FY 2010 and FY 2011.  Perhaps President Obama has signed $2 trillion of budget cuts into law, but given the size of his proposed budgets for FY 2010 and FY 2011 it seems to me likely that these budget cuts were chosen by Congress and not by the President.

FY 2009 seems unique among the fiscal year comparisons in the chart.  For FY 2009 there was a significant increase in spending beyond the amount requested by President Bush.  I think it is important to recognize that President Bush made his request for FY 2009 in February of 2008.  President Obama was elected in November of 2008, one month after FY 2009 began.  President Obama took office in January 2009, three months after the beginning of the fiscal year.  Although President Obama did not present his first budget, which was for FY 2010, until February 26, 2009 the President asked Congress to spend quite a bit of money for FY 2009.  For example, President Obama's first "stimulus package" was signed by him in February 2009, and this would have been part of the actual spending number for FY 2009, and not part of President Bush's budget request.  Perhaps President Obama did "inherit," so to speak, a $1 trillion deficit for FY 2009, but it seems fair to say that a significant part of this deficit resulted from proposals made to Congress by President Obama himself.

Consider the chart presented below which shows each President's proposed budget deficit versus the actual budget deficit.  The first thing I notice is that there are four years of actual deficits that are above the zero line which means there are four years of actual budget surplus shown in the chart.  Each of these budget surpluses happened during the Clinton Presidency.

Of course the most obvious aspect of the proposed versus actual deficits chart is that from FY 2009 on the size of the government's deficit has been very large compared with any of the earlier years.  President Obama asserted: "They run up these wild debts and then when we take over, we've got to clean it up."  There are some "wild" deficits shown in the chart, but they are found within the Obama years, and it seems to me that as late as February of this year, there has been no budget proposal that fits with the idea of cleaning any of it up.

Saturday, May 19, 2012

Mill On Liberty

Here are a couple of quotes from J.S. Mill on the meaning of liberty:

The object of this Essay is to assert one very simple principles, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion.  The principle is, that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection.  That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.
The only freedom which deserves the name, is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it. 

Thursday, May 10, 2012

Appreciating Hayek

I think the most important insight of Hayek was to understand that knowledge in any large society is decentralized. The most important function of social institutions is to mobilize this knowledge in such a way that it can been used by individuals in making their decisions. Thus: the impossibility of rational calculation under socialism (a conclusion Mises came to in a somewhat different way), the importance of the rule of law, the importance of cultural-social rules, and so forth. Compare that with, in my view, the misguided trivality of Paul Samuelson’s behaviorist theory of revealed preference or Richard Kahn’s mechanical multiplier or Maynard Keynes’s contributions to economic policy guided by his elite hand. I could go on. In just about every class I teach I tell students about the meaning and the significance of Hayek’s idea of the decentralization of knowledge in society. This idea alone has the power to change minds dramatically. One student told me it changed her life. I do not care if students remember the Weak or Strong Axiom of Revealed Preference or the necessary conditions for perfect competition if they remember Hayek’s ”The Use of Knowlege in Society.”

Friday, May 04, 2012

North or South, What's The Difference?

I took this image from Google Earth.  I think it is interesting because of the contrast between the "north" half of the picture and the "south" half of the picture.  The upper portion of the picture seems to me to depict a standard of living that is much greater than the standard of living in the lower portion of the picture.

Can you guess where this is?  Can you guess what explains the difference between the upper and the lower portions of the picture?

I hope you won't cheat and check out the following links before trying to answer these questions.  Daron Acemoglu and James Robinson can help you understand the difference.  So can Mancur Olson.

Or (shameless plug), if you live close to Colorado Springs you can take my course next Fall Semester to learn the answer.

Wednesday, April 04, 2012


Ludwig von Mises:
He who believes the formation of prices to be arbitrary easily arrives at the demand that they should be fixed by external regulation. [A Critique of Interventionism, p. 97]

Monday, April 02, 2012

Individual Mandate: What Would James Madison Say?

From a letter Madison wrote in 1829:
Yet it is very certain that it grew out of the abuse of the power by the importing States in taxing the non-importing, and was intended as a negative and preventive provision against injustice among the States themselves, rather than as a power to be used for the positive purposes of the General Government, in which alone, however, the remedial power could be lodged.
In other words, the power to regulate commerce between the states, in Madison's view, was to give Congress the power to knock down state government barriers to interstate commerce.

Hmm.  That means Congress has the power to stop state government barriers to citizens within their states purchasing health insurance from sellers in other states.  That would certainly seem to help reduce the cost of health insurance.  Alas, Congress has not been interested in such action.

I do believe Madison would say the health insurance mandate is unconstitutional.

I believe I'm a Madisonian.  I wonder if there are any people in government today who would be Madisonian?

Blame Capitalism

Ludwig von Mises:
It is popular today to blame capitalism for anything that displeases.  Indeed, who is still aware of what he would have to forego if there were no "capitalism"?  When great dreams do not come true, capitalism is charged immediately.  This may be a proper procedure for party politics, but in scientific discussion it should be avoided. [A Critique of Interventionism, p. 53]
Unfortunately, it seems these days the most of what people think they know comes to them through the lens of party politics.

Thursday, March 29, 2012

Individual Mandate 101

The Washington Post has a piece that explains the individual mandate.  Unfortunately, I think the explanation must be incorrect.  Here is the reason given for the mandate: 
Where the policy came from: The individual insurance mandate was the brainchild of conservative economists, as a way to address “free-riding” in healthcare without going all the way to a single-payer system.
The conceptual problem here is the assertion that the mandate is about fixing the problems associated with free-riding behavior.

The reason I think this must be incorrect is because free-rider behavior is one of the reasons for concluding that a public good is a source of market failure.  A public good has two characteristics: (1) nonrivalry in consumption and (2) nonexcludability.  Health care is both rival (we each consume our own units of health care) and excludable (a person can be physically excluded).  Health care goods and services are private goods, not public goods.  Private goods do not have the free-rider problem.

The problem of adverse selection with respect to insurance is really what the mandate is supposed to be about.  The problem of adverse selection is seen in recognizing that individuals at greatest risk will be more likely to seek to purchase insurance than will individuals at least risk.  A business trying to earn a profit by supplying the ability of others to pool risk may find that it is difficult to do this without having a risk pool with both high risk and low risk individuals.  The consequence may be that insurance businesses offer insurance at premiums that many of the people facing higher risks find too expensive, and perhaps the market will fail to supply efficient risk pooling.  This also suggests a sort of vicious circle.  When the insurance businesses discover the need to increase premiums this will also decrease the incentives for low risk individuals to think insurance is worth the price.  If so, then even fewer low risk individuals will choose to pool risk by purchasing the insurance.  The policy answer that is typically suggested is to force both low risk and high risk individuals to be in the insurance risk pool.

I suspect the idea that adverse selection is a market failure is incorrect.  The reason is that I suspect the conceptual analysis of adverse selection assumes knowledge that no one can know.  We cannot know, given that people differ with respect to their preferences to accept risk, which people would be willing to pay for insurance at the efficient price.  Surely it cannot be efficient to force everyone into the risk pool.  For efficiency we would have to be able to identify which individuals would choose to join the efficient risk pool. This we cannot know in practice, even though we can certainly do conceptual analysis assuming we actually know all the relevant information.

This also suggests, it seems to me, that the insurance mandate in the ACA does not fit the conceptual efficiency concerns found in the model of adverse selection.  After all, this mandate compels all individuals to purchase insurance, and there is no effort to discover the efficient risk pool.

My last comment on the quotation above is about the idea of a "conservative economist."  I wonder what the definition of "conservative economist" is?  Most of the economic analysis of public policy these days relies on the normative framework of pareto optimality, a.k.a. efficiency.  It seems to me that economists of all political stripes do efficiency analysis.  Both free rider behavior and adverse selection come from efficiency analysis, and thus I'm thinking an economist is an economist.  If it makes sense to refer to a "conservative" or a "liberal" economist, then I think it is likely that economist is acting politically and not as an economist.

Wednesday, March 28, 2012

ACA Oral Argument

There were many interesting things said in oral argument before the Supreme Court yesterday with respect  to whether or not the Affordable Care Act (ACA), a.k.a. Obamacare, is constitutional.  At issue is whether the enumerated constitutional power of Congress to regulate interstate commerce includes the power to compel a person to purchase health insurance.

Very early on Justice Kennedy asked the Soliciter General, who was arguing in support of the constitutionality of the health insurance mandate, the following question: "Can you create commerce in order to regulate it?"  The answer was: "That's not what's going on here, Justice Kennedy, and we're not  seeking to defend the law on that basis."

I wish Justice Kennedy had asked his question in the following way: "Can Congress compel commerce in order to regulate it?"  I think this is a better, more precise, way to put the key constitutional question with respect to the health insurance mandate.  The action of Congress is actually not to "create," it is to compel many individuals to do something they would not choose to do on their own volition.  It seems to me that the constitutional power of Congress is the power to regulate voluntary exchanges between a buyer and a seller located in different states.  It seems obvious that the power to regulate exchanges (commerce) cannot include the power to compel exchanges.

Of course, Justice Kennedy's question seems very close to my question, but I think that there are many potentially different implications that follow from using "create" rather than "compel."  I suggest that using "create" makes the action of Congress seem much more benign than it truly is.  A definition of "create" at suggests the Justice was asking: "Can you cause commerce to come into being in order to regulate it?"  Certainly, put in this way, the action by Congress under Court review seems almost a good thing.  After all, "creation" is generally a good thing, and in the realm of economic affairs it seems to be generally accepted that more economic activity is better than less.

So, I fear, that asking the question in the way Justice Kennedy did, makes it conceptually pretty easy to decide the answer is yes.  After all, if the action of Congress is to create commerce that is "good for everyone" then it could seem to make sense for Congress to create commerce in order to regulate it.

However, we should conclude that Congress cannot create commerce.  Congress might participate in commerce, but it cannot create commerce.  Searching online dictionaries provide a couple of useful definitions of "commerce" in this regard:
an interchange of goods or commodities
the buying and selling of goods.
These definitions suggest that my definition of interstate commerce, i.e., a buyer and a seller located in different states, is on target.  It also suggests that we should not think that commerce is created.  Commerce emerges through the voluntary actions of different individuals. Commerce is not created by the actions of either a buyer or a seller alone.  Commerce emerges from the actions of a buyer and seller in an interaction between the voluntary actions of each.

Consider that Congress can engage in commerce by being either a buyer or a seller, but of course it cannot be both buyer and seller.  What would we say if Congress attempted to "create" commerce by either (a) telling a person she must buy something from the US Government, or (b) telling a person she must sell something to the US Government?  On the surface either (a) or (b) might appear to be commerce because we could observe a "buyer" and a "seller," but neither would be commerce.  Both (a) and (b) involve an action by Congress to compel either a buyer or a seller to act as the government commands.  Congress cannot "create" commerce, or create an exchange between a buyer and a seller without using force to compel one or the other individual, or perhaps even both, to act in a way that would not otherwise be chosen for themselves.

I suggest the appropriate question to evaluate the constitutionality of the health insurance mandate in the ACA is: Does Congress have the power to compel a person to purchase something she would not otherwise purchase?  The answer, of course, is NO.

Tuesday, March 27, 2012

Police Power & The Health Care Mandate

Yesterday I wrote about the interstate commerce clause which grants Congress the constitutional power to regulate interstate commerce. My analysis did not involve the way the Supreme Court has come to understand the interstate commerce power over time. I think any citizen should be able to read his or her Constitution and have a chance to understand what Congress has the power to do and what it does not have the power to do.

Unfortunately, the constitutional jurisprudence of the Supreme Court has, over time, allowed Congress to regulate almost any (and every) aspect of economic activity. It is as though the Court has amended the words of the interstate commerce clause. In order to understand the Constitution these days, a citizen probably will have to become an expert in Supreme Court opinions.

If according to past Court opinions Congress has the power to regulate almost any aspect of economic activity, is it possible within this body of Court opinions to conclude the health insurance mandate is unconstitutional?

I listened to an interview of one of the attorneys in the case on a morning radio show. Apparently, it is thought that a fundamental conceptual way to decide that the health insurance mandate is unconstitutional is not to directly confront the enumerated commerce power, but instead to consider the meaning of the police power which is supposed to be a power reserved to the states by the 10th Amendment.

This police power contention may have some relevance but I think it is likely to rely on an incomplete understanding of the meaning of the police power.

Let's take it for granted that in fact the police power is a power reserved for state governments and that Congress does not have police power. The way in which this fact might be related to the question of the health insurance mandate is to consider the attributes of the police power. Specifically, the police power is a power that applies to every individual. For example, murder is prohibited by state governments constitutionally through the police power. Any person who commits murder has committed a crime. Every person is prohibited, by the police power of state government, from murdering another. There is no exception. 

How might this aspect of police power be related to the health insurance mandate? The mandate requires every person to have health insurance. This attribute of the mandate is an attribute of the police power, not an attribute of the commerce power. The idea of the commerce power is that, as I wrote yesterday, Congress has the power to regulate exchanges between people. If a person chooses not to engage in a regulated exchange, then the power of Congress cannot reach that person. If Congress regulates commerce in wheat, then a person who does not touch wheat cannot be subject to the regulation. The health insurance mandate is applied to persons regardless of their choices or their actions. This is an aspect of police power, not the commerce power.

This makes some sense to me because it is a conceptual idea that suggests that Congress cannot compel a person to engage in an exchange so that Congress can then regulate the person's exchange that it forced. If this action by Congress is allowed as a part of the constitutional power to regulate interstate commerce, then indeed any aspect of a person's life would seem subject to regulation by Congress.

However, the police power, properly defined, has another important attribute. The police power is the power to prohibit. The police power involves the power of government being used to prohibit actions by people that will harm the person or property of another. Consider various crimes such as murder, theft, assault. Each of these is an action that government prohibits under the police power, and each of these involve actions by a person that harms the person or property of another. So police power has at least two attributes. One is that it applies to every person, and the second is that it prohibits actions that harm the person or property of another.

The health insurance mandate involves Congress asserting it has the power, not to prohibit harm to another, but to compel a person to help another. It seems to me that whether this power to compel applies to everyone or not, it cannot be, properly defined, a power that resides within the police power. So, I suspect this path to arguing that the mandate is unconstitutional will not work with the Court.

It seems that the Court has yet to confront the question of whether Congress has the power to compel commerce under the interstate commerce clause. It seems to me the best approach to this issue is to indeed say the Court has not confronted the question in the past, and therefore, there are no Court opinions that provide a precedent the members of the Court might feel they must follow in deciding this issue.

Perhaps there is an idea from the first commerce clause opinion, penned by Chief Justice Marshall, that justices today might find of central importance. Justice Marshall wrote that however interstate commerce is defined it cannot be defined in a way that implies there is nothing Congress cannot regulate. The insurance mandate, if declared constitutional, would imply there is nothing Congress cannot regulate in our lives. While it seems to me that many members of Congress, and many of those who have been our Presidents, already believe there is nothing in our lives that cannot be constitutionally regulated by Congress, I think the very idea of our Constitution would be voided by such an opinion by the Supreme Court.

It seems to me the constitutional issues in the health insurance mandate should be simple. The Court should opine that regulating commerce, by definition, means regulating exchanges that people voluntarily choose to engage in. Congress does not have the constitutional power to compel commerce because the action by Congress to compel is not, be definition, the same thing as the action by Congress to regulate.