Wednesday, August 31, 2005

The Transition to Behaving Like Criminals

According to another Associated Press report, "A giant new Wal-Mart in New Orleans was looted, and the entire gun collection was taken, The Times-Picayune newspaper reported. 'There are gangs of armed men in the city moving around the city,' said Ebbert, the city's homeland security chief."

Why does this occur?

Gov. Blanco "acknowledged that looting was a severe problem but said that officials had to focus on survivors. 'We don't like looters one bit, but first and foremost is search and rescue.'" Private property is not being adequately protected by the owners or by law enforcement because the cost of protecting it would come at the expense of human life. When we have to allocate scarce resources, we try to do so in the most effective manner, putting the resource to its best use. This means there is a tradeoff. We can't protect everyone and everything, so we deal with the cost of not protecting things that we'd like to.

When property rights are not enforced, people do not respect those rights (aside from any moral foundation they personally hold). The effect that we observe is as though property rights do not exist. If property rights do not exist, anything is for the taking and there is no price system for exchange. Instead, those who are able to obtain items and keep them by force become the 'owners.' Thus, we can expect the use of violence to become the primary means of acquiring scarce goods and this is exactly what we see in the aftermath of Hurricane Katrina.

Thinking Like a Criminal

Criminals engage in the same economic reasoning as anyone else. They look at costs and benefits to their actions. This is why we observe certain behavior among them. One might say that the only differences between law-abiding people and criminals are that criminals attribute a low cost to engaging in immoral behavior and that they believe their likelihood of being caught or harmed is low. The cost of engaging in immoral behavior includes a feeling of guilt or remorse, future punishment by a higher being, the potential for going to jail, etc. When the cost of immoral behavior is perceived to be low, and the payoff of immoral behavior is high, people have little regard for behaving morally.

This is why we see news stories such as this one from yesterday, Looting Takes Place in View of La. Police. If we read into the story a bit more, it becomes clear why looting is so rampant. 1) People believe the moral cost of looting is low. People who may have behaved morally prior to the hurricane are now rationalizing their theivery by saying it is "all about survival" or as one looter said when asked whether the items he carried came from his own store, "no, that's EVERYBODY'S store." 2) Other costs associated with stealing from homes and stores are no longer present. There is no store security, no guards to stop them, no cameras to catch their actions and confirm their identity, and even though law enforcement officers are present, they aren't stopping them. As the report says, "With much of the city flooded by Hurricane Katrina, looters floated garbage cans filled with clothing and jewelry down the street in a dash to grab what they could. In some cases, looting on Tuesday took place in full view of police and National Guard troops ... Looters filled industrial-sized garbage cans with clothing and jewelry and floated them down the street on bits of plywood and insulation as National Guard lumbered by." 3) There are benefits to looting, and those benefits are higher in cases where people are hungry or sick.

In this situation, price is not used as a means of rationing because the monetary cost from stealing is zero. However, people still value the items at a value greater than zero and will "pay" for the goods in other ways: by swimming through floods, by using violence, by enduring some level of guilt, sacrificing moral beliefs, etc.

Non-criminals and criminals think alike. The difference is in how they perceive costs and benefits to criminal behavior.

Tuesday, August 30, 2005

Applying Principles

Judging from the comments on my last post, Sheltered from Reality, I decided to write a follow up to illustrate how the example of disallowing weapons in the Superdome illustrates one-sided thinking and, as I stated in my conclusion, does not address total costs. Sadly, many of the comments I read did not address the costs either. Many overlooked the principles surrounding this example.

Nowhere in my post did I address whether the officials had a right to restrict people from bringing weapons into the Superdome. I did not claim that those who decided to seek shelter in the Superdome had the right to bring whatever they wanted. Everyone who has said that no one was forced to seek shelter in the Superdome is correct; the people did so with full knowledge of the terms of their acceptance: to stay in the Superdome, they had to leave their weapons at home. Obviously those people felt that it was in their self-interest to abide by the restriction in order to have shelter.
(Note: the Superdome restrictions were imposed by city officials and not by private individuals; the case could be made that because it was public, officials did not have the right to restrict the type of possessions, only volume and usage, as one commenter suggested.)

However, I still hold that deciding to disallow weapons in the Superdome is based on irrational fear rather than an assessment of the full costs and benefits. Do you believe that officials considered the negative consequences of their decision? Did they for one second consider that the weapons left unattended in people's homes might be subject to looting and end up in the hands of criminals? Did they consider that there was a higher likelihood of the looter using the unattended weapon to harm someone than the likelihood of someone in the Superdome using his weapon to harm someone?

A proper framework for making a decision examines both costs and benefits. But we also have to look at who bears the costs. Did the officials bear any costs for their "no weapons" policy? Other than the inconvenience of searching everyone, probably not. This cost was borne by those who might have had items stolen from them, who lost their weapons to Hurricane Katrina or to looters, and those who will be harmed by criminals who obtained the unattended weapons by theft. The news was already reporting looting while people were standing in line outside the Superdome, so we already knew that unattended weapons would end up in the hands of looters. Whose hands would you rather see them in: the hands of the rightful and lawful owners, or the hands of criminals who have no moral objection to stealing from someone else's home? Which people are more likely to use the weapons properly? If the goal of the "no weapons" policy was to make people safer overall, it failed. The issue here is not whether officials had the right to disallow weapons, but whether it was the right decision. These are two distinct and separate issues.

Monday, August 29, 2005

Sheltered from Reality

An estimated 20,000 - 25,000 are in the Lousiana Superdome waiting out Hurricane Katrina. As I listened to the news reports on my way home from Delaware yesterday, the news channels talked about how they were searching entrants to the Superdome and ensuring that they had neither alcohol nor weapons, and a no-smoking policy would be in place. You can make a reasonable justification for disallowing smoking or drinking in exchange for receiving shelter. The secondhand smoke could bother others or harm those with asthma and it could be said that drinking too much alcohol results in unruly behavior. But barring people from bringing weapons is not a smart idea.

What do people generally bring with them when they are evacuating their homes in preparation for a storm that may destroy their belongings? Their most valuable items. The value may be monetary, sentimental or a combination of both. Expensive jewelry, antique heirlooms, small electronics are probably all there, and all unprotected. Such a large crowd with people all carrying their prized items and no weapons is a pickpocket's paradise.

A bigger problem is the homes that have been evacuated, that contain items of little value, expensive items that were too large to transport, and unattended new and old firearms. Unattended homes containing expensive firearms are a looter's paradise. If I were a criminal (and New Orleans has plenty of them), I would certainly take the opportunity to obtain a few free firearms, that I could not otherwise legally obtain. Meanwhile, those in the Superdome who inherited or paid hundreds, sometimes thousands of dollars for new and antique firearms, and obtained them legally, are deprived of them.

Those who make decisions for everyone else should think about the costs. This is an instance where someone thought 'no weapons' sounded like a good idea, envisioned a perfect society enclosed in the Superdome, and failed to take anything else into account. We may be able to seek shelter from storms, but there is no shelter from reality.

*Editor's note: a new report indicates that there may be only 10,000 in the Superdome, much fewer than previously reported.

Saturday, August 27, 2005

Insuring Health or Promoting Unhealthy Risks?

Which is better: to have health insurance or to not have health insurance?
If you have health insurance, which is better: high deductibles or low deductibles?

You probably answered that it is better to have health insurance and have low deductibles. That way you are more likely to go to a doctor when you need one and it won’t cost you hundreds or thousands of dollars. This answer is wrong. It may be better to have health insurance and low deductibles, but this answer does not address the costs involved.

How much does it cost you to have health insurance? Aside from the premium that you and generally your employer pays, there is another more hidden cost to having health insurance. For illustrative purposes, we can ignore the premium and assume that health insurance is given to us by someone else.

Economists often say that the number of doctors’ office visits will go up if people have health insurance that covers their monetary cost of seeing a doctor. Opponents of this argument often point out that the monetary costs might be a lesser factor in comparison to their opportunity costs and discomfort of having to be at the doctor’s office. Nevertheless, when the cost goes down, we can safely say that the quantity demanded will rise to some extent, given a downward sloping demand curve.

However, the number of doctors’ office visits will rise for another reason. People, knowing that they do not bear the full costs of their actions if they engage in behavior that risks their health, will engage in risky behavior. They won’t take care of their bodies as much as they might normally. They might put off disinfecting cuts and scrapes rather than tending to them immediately to avoid infection. They might not brush their teeth at least twice a day to avoid cavities and gum disease. They might not be so diligent at applying sunscreen to prevent melanoma. They might be more careless drivers, knowing that if they are in an accident, their health insurance will cover any resulting injuries. Why? The cost that they bear to engage in preventative care exceeds the cost of going to the doctor’s office to correct the problem. The time and effort that they would have to spend disinfecting cuts, brushing their teeth, applying sunscreen, and driving carefully over the course of a year, for example, is higher than the time and effort it takes to reduce that preventative care and simply go to a doctor a couple times a year.

On the other hand, those who are without health insurance or who carry only insurance for catastrophic events (e.g. $5,000 deductible and a low premium with no coverage for annual checkups) will make an effort to take care of themselves properly to avoid illness. They might not have the luxury of going to the doctor for every cough or every cut, but they won’t be so quick to eat unhealthy food, skip brushing their teeth, or neglect to wash their hands.

Next time you hear headlines saying “Millions of Americans Uninsured” and think it is a terrible crisis, remember, simply having health insurance is not an inherently good thing.

Friday, August 26, 2005

Hawaiian Economics

In a repeat of legislative history, Hawaii has shown that its politicians are neither historians nor economists. As of Wednesday, price controls on gasoline were instituted in Hawaii.

First, they contradict themselves, saying on one hand that they would like incentives for new sources of energy to be developed. Then, on the other hand, they would like for oil to be cheaper. Rather than allowing market forces to negotiate the optimum levels, those supporting the price controls believe that they are the most qualified to make such decisions. Another example of central planning at its best.

Secondly, they contradict themselves again, saying one one hand that they want for gas prices to be more affordable. Next, they ignore the effects of price controls -- that they make the total price much higher by causing shortages and increasing the time that people must spend waiting in line for gasoline. They do not allow bargaining between consumers and suppliers to negotiate a mutually beneficial exchange in which the consumer does not waste his time in line and the producer may profit. Such bargaining, even though both parties benefit, is illegal in a price control system.

There has been some talk of other states adopting Hawaii's policy and instituting price controls of their own. I should hope that the shortages of the 70s are recent enough for most politicians to remember. However, Don Boudreaux at Cafe Hayek looks on the bright side: the recent example of Hawaii will make teaching the economics of price controls much easier.

"Unfettered Property Rights"

I've seen the phrase "unfettered property rights" used in the comments section of a few posts. Understandably, the phrase is used by those who disagree with me about the nature of property rights. I would imagine that the same people who use the term "unfettered property rights" advocate "fettered property rights." Fettered by whom? Government, undoubtedly. Might there be a contradiction between a government that is designed to protect rights and a government that believes its role is to restrict rights?

"Unfettered property rights" is redundant. A right, by definition, is absolute. To say that I have the right to property means that someone else is not allowed to take my property from me without my consent. To fetter this right is to make it no longer a right. If I advocate fettered property rights, I am saying that someone else is allowed to take my property from me without my consent. The two are mutually exclusive; my right to property and the right of another to take my property are in conflict and cannot simultaneously exist.

Rights are only 'limited' by the rights of others. In other words, you have rights only to what you own: your life and property, and by extension, liberty. You do not have rights to what anyone else owns. Should you choose to violate the rights of another by committing murder, theft, vandalism, assault, fraud, etc., you have automatically given up your rights. Your actions would demonstrate that you had no regard for rights and therefore rejected your own rights.

Property rights need no boundaries. Property rights themselves are absolute boundaries between one person and another. Property rights are essentially restrictions; to "restrict property rights" is absurd.

Thursday, August 25, 2005

To Hedge or Not to Hedge ...

... is not the question. Everyone hedges their risks to some extent based on their belief in what the market for any product will be and their belief in how likely their expectations are to be wrong. Whether they buy or sell derivatives or whether they make long term changes to their habits, consumers attempt to mitigate their risk based on their perception of future price changes.

Every investment faces risk. In spite of popular belief, locking money securely away (as opposed to investing it in the stock market or interest-bearing investment) also carries risk. The value of your money will go down if there is inflation and if there is an opportunity cost of not investing in a higher yielding investment. There are risks associated with spending and not spending your money as well. You may spend your money on a good that generally appreciates in value (land, paintings, etc.) or on a good that generally depreciates in value (cars, computers, etc.). On the other hand, you might choose to save your money now, but you will lose out on any benefits you may have reaped from owning the good in the present. Let me illustrate with an example. Suppose you have a room but no bed. You decide that saving your money is better than spending your money so instead of purchasing a bed for $500 now, you decide you will buy one in a year. For now, you'll sleep on the floor and lock $500 away to buy a bed in a year. For that year, you have to live with the discomfort of sleeping on the floor, so you are not reaping the benefits of owning a bed for that period of time. If the price of beds drops to $400, you may consider that a reasonable tradeoff. But if the price of beds rises to $600, not only have you sacrificed the comfort of sleeping in your own bed for a year, you have sacrificed the $100 gain in value had you purchased the bed a year ago and kept it locked away instead of the $500.

CNN reported on a company that is allowing small investors to hedge their risks in gasoline prices, mortgages and inflation on a mini futures exchange market.

HedgeStreet operates a kind of futures exchange in which customers can take a position on where they believe gas prices, mortgage rates and inflation, and other indicators are headed by buying contracts called "hedgelets."

As its name suggests, San Mateo, Calif.-based HedgeStreet aims to provide tools for investors to hedge, or reduce risk, in their portfolios.

For instance, if your daily commute requires you to fill up at the pump often and you want to reduce your exposure to rising gas prices, you can take a "yes" or "no" position on whether gas will exceed, say $2.32 a gallon by the end of the month. If you make the right call, you take home a fixed payout of $10 for each hedgelet you own; if you make the wrong call, you lose your original investment.

Some experts say such contracts can be dangerous for those who don't understand the principles of investing.

But according to Mark Longo, a trader and former member of the Chicago Board Options Exchange, these products offer everyday investors insurance against market risks, such as a housing bubble or interest rate hike

Whether people purchase derivatives or not, they are always taking some position in the market, evidenced through their purchasing (or saving) habits. It is quite ironic that investing in derivatives is characterized as risky and likened to gambling, when derivatives are a tool for reducing risk that consumers already take. The above story comes after this one, on how consumers are dealing with high gasoline prices. Read some of the stories, "'I moved to a new apartment so that I could walk to work, and shorten my wife's drive. We've gotten our daily mileage down from 80 to 20, but we live in a more dangerous and noisy neighborhood.' -- Doug M." Doug is obviously making a bet that the price of his commute will remain sufficiently high as to warrant his move to a more dangerous neighborhood, and taking that risk -- a much higher risk than purchasing a more liquid investment such as derivatives -- in hopes of mitigating another risk: the possibility of continually rising gas prices.

Every decision indicates a particular preference and expectation of the market. Before you think of any financial decision as 'risk-free,' remember to consider the possibility that your market expectations could be wrong.

Wednesday, August 24, 2005

This Isn't a Global Gun Control Mission

On August 8th, the headline was this: Iran Resumes Uranium Conversion. The story read, "Iran has restarted work at a nuclear facility, saying it is for peaceful purposes only, and flatly rejected a European offer aimed at ensuring the nation does not seek nuclear weapons."

Now the headline is this: Iran uranium trace tied to equipment bought in Pakistan: U.S. officials admit find dispels the evidence of a weapons program. This story read, "U.S. officials have privately acknowledged for months that they were losing confidence that the uranium traces would turn out to be evidence of a nuclear weapons program. A recent U.S. intelligence estimate found that Iran is further away from making bomb-grade uranium than was previously thought, according to U.S. officials."

I don't profess to know what Iran's intentions are for any nuclear program they are or are not developing. The latest findings do not provide strong evidence to conclude that Iran is a threat or that it is not. While it may be good to know the weapons capabilities of other countries, this is not the sole determinant of whether we label the country friend or foe. Finding "weapons of mass destruction" is not an end goal.

From a strategic standpoint, ignoring any moral arguments - however valid, finding significant weaponry that is not typically used in a defensive manner has some strong implications. It does not prove that the country plans to attack the U.S. or other countries, but that is possibility that should be considered strongly and weighted against other factors. Some main factors are the likelihood, or perceived likelihood, that the country will be invaded, the motives of the country's leaders (or likelihood that they will invade other countries), and the amount spent on weapons programs. The amount that the government is willing to spend indicates, to some extent and on a relative basis, the value placed on having weapons. This value is influenced by its perception of neighboring countries and corresponding value of being perceived as a potential threat by would-be aggressive nations. It is also influenced by what the country might gain from invading another country. Distinguishing between defensive and offensive intentions requires further analysis. While the motives are at least partially reflected in the choice of weapons, the means to commit a crime is nothing without the accompanying desire to.

Likewise, the lack of "weapons of mass destruction" does not prove by default that a country is friendly. Stalin had no "weapons of mass destruction." Neither did Hitler. Dictators have slaughtered millions of people without the aid of nuclear and biological weapons. The most threatening weapon of mass destruction is the dictator himself, or any oppressive government, who suppresses dissent and imposes his will on the people through force.

Tuesday, August 23, 2005

Constitutions and Freedom

The Constitution of the United States is unique in that it was framed by people who realized firsthand the capabilities and destructiveness of a powerful government, understood that in the absence of government coalitions of forces can more easily take their lives, liberty and property, and could envision a government that had limited power. The founders anticipated what problems might arise in the new government and corrected for them as much as possible. They too, realized that a Constitution that lacked enforcement would be ignored.

Lacking in the Iraq constitution is the right to keep and bear arms. Instead, one is allowed to keep, bear, buy and sell arms only with permission via licensure and other laws. You might effectively argue that this is identical, in practice, to the United States. While our Constitution guarantees the right of the people to keep and bear arms and makes no mention of licenses, permits or registration, to sell firearms as a business requires a license, to carry firearms in a manner which makes them less visible to others requires a permit. In one sense, you might argue that the Iraq constitution is consistent with the inevitable. However, the Iraq constitution is internally inconsistent, containing the right to property and liberty on one hand, then removing any written assurance that the government will not take either away.

Monday, August 22, 2005

Cancer Funding

Lance Armstrong lobbied for more federal funding for cancer research on a 17-mile bicycle ride with President Bush this weekend.
Lance Armstrong said he set a one-day record during his bike ride with President Bush - not for cycling but for lobbying. During their two-hour ride on Bush's ranch Saturday, Armstrong pushed the president to spend more federal money on cancer research. "I've never asked someone for so much money before," the seven-time Tour de France winner and cancer survivor told ABC's "This Week" for its Sunday broadcast.

Like many Americans, Lance Armstrong believes it is the job of the federal government to provide cures for cancer and other ailments. They believe that government is able to give "free handouts" and that those handouts can somehow be more effective and efficient than private donation. When we filter money through government bureaucracy we waste a fair percent of it in the costs to collect and allocate it. Direct contributions are a much less wasteful process. Curious as to how generous Americans are and how much they support cancer funding, I made a quick call to the American Cancer Society to find out just how much they receive in donations in a year. The latest data was from the fiscal year ending August 2003 and totaled $752 million. The amount is only for donations to the American Cancer Society, and as such does not include the amount spent by companies on developing their own cures or other monetary and non-monetary support for cancer patients.

There is a positive, causal correlation between higher income and more donations. Were taxes lower, there would be a greater inclination for those who are not currently contributing to do so. Any moral obligation they might feel to donate is quickly eliminated in knowing that "government is taking care of it for me," or, "I'm already 'donating' through taxes." Regardless, contributions of any kind should be voluntary and government's role is not as a charitable institution. As James Madison stated in a speech to the House of Representatives on January 10, 1794, "The government of the United States is a definite government, confined to specified objects ... Charity is no part of the legislative duty of the government."

Sunday, August 21, 2005

Laws that Kill

The Endangered Species Act and Convention on International Trade in Endangered Species have made it illegal to own or sell any endangered species. In these provisions, the laws have destroyed any market for the rare species, and have destroyed any incentive for humans to protect them out of choice. Instead, regulations have substituted for market incentives to own and protect one's property to making these species public goods by law. The tragedy of the commons should tell us that any measure to outlaw private ownership and make goods completely public will inevitably lead to a shortage. Those who push for more environmental regulations eliminating the "taking," i.e. ownership, of wildlife are later faced with greater shortages of their beloved endangered species. What occurs next? More laws that outlaw any harvesting of the endangered species, disturbing natural habitats, or any activities disrupting their feeding or breeding habits. These laws are ineffective and impose a cost much higher than is necessary to protect the endangered species. People who might normally be inclined to allow bald eagles, sea turtles, endangered snails, and other animals to reside on their property recognize that a high cost will be imposed on them for doing so (see Regulatory Takings for examples). Although people might want to protect those animals, it is not worth the cost to them. Wildlife does not have to be a public good. Private ownership is the most reliable and most efficient way to protect endangered species. We never worry about running out of cows, chickens or sheep, yet millions of them are killed each day. Why do we know that more will exist tomorrow? Because people own them, people depend on their existence for their living and are willing to care for them and replenish their populations. Can the same be said for any species on the endangered list?

Once abundant in the Cayman Islands, green sea turtles and other marine turtles used to be of high economic value in the islands. The green sea turtle was the major export of the Cayman Islands, providing sustenance, material from the shell of the turtle, and high grade oil obtained from the fat for use in cosmetics and for other purposes, locally and around the world. In the 1970s, the Convention on International Trade in Endangered Species[1] made it illegal to sell any sea turtle products because the wild sea turtle population was low due to predators, overfishing, and natural reasons. However, this also eliminated the market for the sea turtles that had been raised and protected in the Cayman Turtle Farm, an organization which bred and sold turtle products and released their captive bred turtle hatchlings into the wild. Prior to 1979 when the U.S. stopped all sea turtle imports, the Cayman Turtle Farm was the main exporter and employer on Grand Cayman.[2] It was precisely those who owned the turtles that also protected them and maintained their population. Throughout other areas of the world, the sea turtles were endangered, but they were abundant in the Cayman Islands. However, as soon as the international market for sea turtle products was eliminated, the population of sea turtles declined in the Cayman Islands and worldwide due to lack of resources and decreased profitability of increasing the sea turtle population. The very laws that were supposed to protect the sea turtles only endangered them further. If we want to truly help endangered species, we must allow a market for them to exist. The way to eliminate the tragedy of the commons is to make the commons private. Shifting the status of wildlife from purely public goods to private ownership is the best and only way to ensure their future existence.

[1] Cayman Islands Hatches Scheme to Export Endangered Sea Turtle Products
[2] Cayman Turtle Farm - Scientific Papers - Sea Turtles of the Cayman Islands

Saturday, August 20, 2005

Rewriting History

When I was homeschooled, I was very interested in history and frequented used bookstores to find old history books. There is a stark difference between history as it was written in the 1950s versus the way it is written today. Today's history books are written like Power Point presentations. They have little content, but lots of bullet points and irrelevant graphics. The newer history books, generally speaking, fail to draw causal connections between events. They speak only of politician's stated motives, failing to note the effects of their laws. They devote more room for photos of women's fashion, boxing matches, wartime recruiting posters and commentary on "social and economic reforms," at the expense of content and conceptual history lessons.

Let me provide you with the closing statement of one of my favorite history books, published in 1952, entitled "The Hope of the Nation." The section is entitled, "Don't Vote Freedom Away."

And never forget that Freedom can be voted away just as surely as it can be torn from you by violence.

Keep prominently in mind, too, the heartening fact that political parties in our country want to keep you Free. But you must recollect that they need your active encouragement and support. Why? Because their leaders are under continual pressure from groups who, knowingly or perhaps blindly, are moving toward the elimination of your Freedom.

But those among them who promise you something for nothing should be shunned like the plague. Always ask yourself in regard to any such proposal: What will this cost me, and my children after me, in taxes? Will this add to or detract from my personal freedom and my opportunities to be self-reliant?

Keep ever before you the fact that a government produces nothing. When a government gives it must first take from someone -- and that someone is pretty certain to be YOU.

All history books should keep these principles in mind rather than repeating the rhetoric of politicians.

Friday, August 19, 2005

Regulatory Takings

The comments section of Protected Species = Endangered Property contains a link to an article written by Walter Williams. He lists some excellent examples and makes points worth repeating:
John Taylor, of Mount Vernon, Va., was ordered not to build a small house on his lot to accommodate his wheelchair-bound wife. The FWS [U.S. Fish & Wildlife Service] says it would harm a bald eagle nest located 90 feet away.

Oregon's Board of Forestry has forced Alvin and Marsha Seiber to set aside 37 acres of their 200-acre commercially harvestable land to protect the northern spotted owl ...

Holding title to private property, all by itself, doesn't mean very much. For example, suppose the government recognizes that you can hold title to your house but forbids you from living in it. The fact that you hold title to the house would be meaningless because the government has restricted your options. By decree the government has reduced the value of your property, and as such it is a "taking" of property without just compensation in violation of the U.S. Constitution.

Let's look at Oregon's Board of Forestry forcing the Seiber family to set aside 37 acres of their 200-acre plot to protect the northern spotted owl. It just might be that protecting the spotted owl is vital to the national interests. But the burden and cost of protecting the spotted owl should be borne by all Americans, not fall on particular Americans -- Mr. and Mrs. Seiber. Justice and fairness require that the Seibers be compensated for the loss in value of their property from having to set aside 37 acres.

Regulations restricting the use of property, even when the original owner still holds title to the property, amount to a taking. As I explained in Giving in a Capitalist System, the bundle of legal rights with regard to ownership has six elements. You may possess the property, control the property, enjoy the property, exclude others from any right to your property, encumber, or lessen, one's rights of ownership, and dispose of the property. In fee simple ownership, the highest level of ownership of real property, these elements are unencumbered and unconditional. When any of the rights are denied, a valuable level of ownership is taken. This is not simply an abstract matter; although value is subjective, value is quantifiable and the existence of value is undeniable. If we look at identical parcels of land and vary the degree of ownership, the higher level of ownership sells for a higher price than the lower, restricted level. When the property is purchased, the purchaser is buying all of the rights associated with the level of ownership he purchases. Even worse than eminent domain, regulatory takings are a much more subversive tactic as they take a purchased property right without just compensation.

Thursday, August 18, 2005

Protected Species = Endangered Property

I dabble in real estate and look for good investment properties from time to time. Recently a property located in Virginia was brought to my attention, not because it was a good investment, but because of its inhabitants - a nest of bald eagles.

Apparently bald eagles may have the government take away all use of your property without any compensation -- not even the meagre "just compensation" the government decided is fair in the Kelo v. New London case. Had the Founding Fathers known that bald eagles had such blatant disregard for property rights, I'm sure they would have gone with Ben Franklin's suggestion that the turkey be adopted as the national bird.

Following is a handful of the regulations concerning the protection of a bald eagle's nest on your property, containing restrictions on both the primary and secondary management zones, covering all year round and during the breeding/nesting season.

"Primary Management Zone:
This is defined as the area 750 feet (229 meters) in radius around an occupied nest. The precise size of this zone should depend on site conditions and the individual eagles’ tolerance for human activity. The following activities within this zone should not occur at any time:
· land clearing, clear cutting, mining, and other habitat modification activities;
· development of residential, recreational, agricultural, commercial, or industrial structures, power lines, roads, trails, or any other construction activity;
The following activities should not occur during the breeding/nesting season (December 15 - July 15), unless the nest is determined to be unoccupied in a particular year (VDGIF usually has this information after March 31):
· maintenance of existing buildings and roads;
· use of motorized vehicles and heavy equipment;
· aircraft flyovers within 1000 vertical feet of the ground;
· human entry and activities, including recreation, such as hiking, camping, picnicking, hunting, fishing, boating, jet skiing, etc.;
· loud noise generating activities, including blasting.
· use of chemicals toxic to wildlife, such as pesticides and herbicides."[1]

Oh, so you wanted to walk through your property? Sorry, that is illegal. Since you can't build a house on it or maintain your existing home, you'll sleep on the ground? No, can't do that -- that would be camping. No picnics either. All use of your property is gone, because a bald eagle found that tree you left standing to be an attractive home.

Why do we need to protect bald eagles, or any endangered species? Proponents of environmental laws typically cite that a considerable amount of development has already taken the natural habitats of the endangered species. Yet the people who have developed their property and did not leave any trees that might be attractive homes for a bald eagle, are not held responsible for "destroying the eagle's natural habitat." Instead, those who have made the decision to preserve a small part of the environment on their own property are those whom the law targets. The unintended consequence of such regulations is that in areas with high concentrations of bald eagles, people will be sure to make their property as unattractive to a bald eagle as possible, thereby diminishing more of the bald eagle's natural habitat.

If it is truly the people's desire to preserve the habitat of bald eagles, those people should individually or collectively purchase property containing eagles' nests, instead of lobbying the government to take the property with no remuneration at all.


Wednesday, August 17, 2005

New London's "New Low"

Thanks to Marginal Revolution for bringing this story to attention. The Kelo v. New London case, which I commented on here and here, has sunk to a new low.

The City of New London used its powers of eminent domain to confiscate the property of citizens residing in Fort Trumbull to transfer to companies who would generate higher tax revenues for the city. After a five year battle to keep their homes, the homeowners eventually lost. Now the city is claiming that it is owed back rents, while the city is only paying the "market rate" from 2000.

NLDC's lawyers wrote, "We know your clients did not expect to live in city-owned property for free, or rent out that property and pocket the profits, if they ultimately lost the case." They warned that "this problem will only get worse with the passage of time," and that the city was prepared to sue for the money if need be ...

One of his neighbors, case namesake Susette Kelo, who owns a single-family house with her husband, learned she would owe in the ballpark of 57 grand. "I'd leave here broke," says Kelo. "I wouldn't have a home or any money to get one. I could probably get a large-size refrigerator box and live under the bridge."

The burden of proof should not have been on the homeowners to prove why their property should remain their property. The burden of proof, and all costs associated with it, should be on the government organization responsible for the taking. The threat of having to pay back rent will only force future victims of eminent domain into submission, in hopes of cutting their losses. This amounts to not-so-cleverly-disguised extortion.

As disappointing and outrageous as this is, I am not surprised. The government, the paternal central planner with whom we have trusted our lives, our retirement, our health decisions, does not always have our best interests as heart. Is charging back rent what we refer to as "just compensation?" A few years ago, those benevolent politicians claimed to want nothing more than to help the homeless. Now they create homelessness.

No Guarantee on Social Security

In a discussion with a friend yesterday, I mentioned the debate ensuing in the comments section of my last post and, in particular, the misconception that Social Security is guaranteed. The stated purpose of the Social Security Act of 1935 was to "provide for the general welfare by establishing a system of Federal old-age benefits, and by enabling the several States to make more adequate provision for aged persons, blind persons, dependent and crippled children, maternal and child welfare, public health, and the administration of their unemployment compensation laws; to establish a Social Security Board; to raise revenue; and for other purposes." In this single act, government took over the role of charity for all time. However, it made charity no longer charity, but an obligation, creating a debt on the part of all future workers and a claim on the product of future workers' labor by all current workers. Hence, the Social Security system itself is in constant debt.

Compare Social Security to a voluntary retirement program, such as a 401(k). I've heard the argument that a 401(k) is not as good as Social Security because it is a defined contribution plan, rather than a defined benefit plan. This argument is uninformed and simplistic at best. You can borrow against a 401(k), i.e. a 401(k) is deemed by creditors to be a valid security on their loan to you. Try going to the same creditor and ask to borrow against the Social Security you plan on drawing when you reach 65. It won't happen.

Social Security does not have as high returns as other investments and is at least as risky. Your Social Security payments depend on wealth that has not yet been generated by people who have no express desire to give their earnings to you. While some choose to rely on the empty promises of Social Security and claim the earnings of others to whom they have provided no product or service, it is a much less risky venture to invest your money yourself and bear the full costs and benefits of your investment.

Tuesday, August 16, 2005

Redefining Moral Obligations

Rep. John Salazar (D, Colorado) believes "we have a moral obligation to stand up and protect Social Security for the next 70 years and beyond." He claims that "changing the Social Security system to drain the trust fund and cut benefits simply does not make sense."

Rep. John Salazar must be forgetting where Social Security money comes from. The "trust fund" he speaks of is you, me, and every other taxpayer. Unlike us, the government does not save. It does not set aside money. It does not earn money. It spends it and gets more by reaching into the pockets of productive people. Any "trust fund" the government has is the future tax dollars it must collect to fuel its spending. When Rep. Salazar claims that changing the Social Security system will "drain the trust fund," he ignores that the Social Security system itself, an unfunded liability that draws from future earnings of workers, already drains the "trust fund." I see the drain on the "trust fund" every time I receive my paycheck. The only way to stop draining it, is to stop Social Security completely.

In eliminating Social Security completely, we run into a problem. While I'd be willing to take a loss on the 12.4% I've paid each year for the last 7 years (The employer matches my 6.2% --> 6.2%*2 = 12.4% = my actual loss, not including my expected return on the money over the 7 years), it does not seem fair for someone who is now retiring to have lost 12.4% yearly for 30+ years and receive nothing.

Our "moral obligation" is not to save Social Security. It is to eliminate it. Like a bandage that has been left on too long, we must remove it as quickly and painlessly as possible.

Monday, August 15, 2005

Prices Now, Prices Later

Recent news about rising gasoline costs has a lot of people worried about an impending oil shortage and indefinitely rising prices. In the news today, you might read stories such as this one, Nationwide Gas Prices Set Another Record, with images of cars lined up outside a gas station in Oregon and an image of a sign advertising $3.09/gallon of regular gasoline.

The average price for all three grades rose nearly 20 cents to $2.53 in the three weeks ending Aug. 12 ... In the same three-week period, crude oil price futures rose about $8.21. A barrel of oil produces about 42 gallons of gasoline, resulting in a price increase of 19.6 cents per gallon - nearly identical to the 19.8 cent rise in the price of gas at the pumps, Lundberg said.

I'm not worried. We're not running out of oil. Prices rose due to unsubstantiated fears of energy shortages, resulting in part from some difficulties refineries had been facing. In financial news today, futures prices for oil have dropped.

U.S. light crude was trading at $66.41 a barrel at 1009 GMT, down 45 cents having surged more than $1 on Friday to touch a record $67.10. London Brent crude was down 28 cents at $66.17.

Geoff Pyne, energy consultant for Standard Bank, said much of the recent rise was caused by fear and speculation. "The price run-up is not fundamentally supported," he said ...

Some refining units at U.S. oil facilities have finally returned to service from a spate of shutdowns since late-July, which propelled U.S. gasoline to historical highs.

I'm not rushing to the gas station to fill up my half-full tank. My bet: prices will stay about the same and drop by some amount in about a month. The current rate of increase will not continue indefinitely because there are no valid, long-term reasons for its sudden increase.

Sunday, August 14, 2005

Contributing to Government

The United States began as a tax revolt against a very small tax, but one that the founders thought was unjust, labeling it a form of slavery. Refusing to be tax slaves, they started their own government. The problem then becomes: who pays for it? Can you have a government in which money is not forcibly taken from citizens? How would you simultaneously fund government and not steal from the people?

Let's suppose I start an organization that provides a basic service -- defense, for example. In order for people to want to be in my organization, they must believe that they are receiving a quality service and it must not be too expensive. In short, I must meet the needs for which they are willing to pay. However, if I do not force everyone in my area to pay, there are a few of them who might not. Some may find that their need for defense is low since they are bigger, stronger, or better equipped than most. If they choose not to pay, that's ok. Others may believe that even though they don't pay, someone else will. So unless everyone feels a strong moral obligation to pay for benefits of defense, there will be at least one free rider. Much ado has been made about the free-rider problem. Those who advocate an involuntary tax system argue that public goods such as national defense will be undersupplied by the market if people are not compelled to pay for them. Without making a case to contradict this argument, one must ask, which is better? Is it better to have the problem of undersupplied public goods, or better to have an ever-expanding government fueled by involuntary taxes?

Many organizations receive voluntary contributions each year. Why do people contribute to them? Because they feel that the organization provides a quality service and it is worth it to them to contribute their money. Not everyone contributes the same amount, and some do not contribute at all. But organizations that provide quality services stay around and are subject to the pressure of demonstrating that they are indeed providing an important service. When taxes are forced from citizens, government is no longer subject to the pressure of efficiently using those tax dollars to provide quality services. Instead, elected officials spend at whim and taxes continue to rise. This is the tax slavery that the founders spoke of, and it is far worse than any free-rider problem.

Friday, August 12, 2005

Let's Be Consistent, Ms. Sheehan

We've already heard the reports of Cindy Sheehan, the woman whose son, Army Spc. Casey Sheehan, was killed in Iraq on April 4th, 2004. Outside President Bush's ranch in Crawford, TX, Ms. Sheehan has been protesting the Iraq war, saying that Bush is to blame, that he doesn't care about her loss or the loss of other mothers whose children have been killed, etc. We've also heard how she changed her tune from her original statement about the president, "I now know he's sincere about wanting freedom for the Iraqis. I know he's sorry and feels some pain for our loss. And I know he's a man of faith ... That was the gift the president gave us, the gift of happiness, of being together." When I say, "let's be consistent," I'm not referring to her changing her position. She has every right to change her mind. I'm referring to the inconsistencies in her current position.

No more tugging at the heartstrings with pseudo-analogies such as these,
"Some have compared Cindy Sheehan to Rosa Parks, and I certainly agree. But Cindy also powerfully reminds me of the little child in Hans Christian Andersen's famous story, The Emperor's New Suit."[1]
Let's not invoke some ancient mysticism,
"Casey Sheehan lives in his mother's being, and that's why Cindy Sheehan can't stop, won't stop."[2]
We might also invoke logical criticisms of the President, rather than empty rhetoric,
"If only we had a leader. If only he had a heart. The wounds that have killed, maimed and injured thousands of American soldiers in Iraq have been ripped open again deep in a heartless part of Texas."[3]
Let's stop substituting gut feelings about a person for well-reasoned argument,
"Even though we were talking via cell phone -- and had a crummy, staticky connection at that -- her authenticity and passion reached through the receiver and both touched my heart and punched me in the gut."[4]

Instead, let's see what Cindy Sheehan really has to say. First, she claims that President George W. Bush is to blame for her son's death, as evidenced by an interview in which she was asked, "Your son Casey died April 4 in Iraq. Whom do you hold responsible for your loss?" She answered, "George W. Bush." Why? The basic argument goes, "It was George Bush's war. He was the one who wanted it. He just wants the fame and the legacy. He's probably after oil too." Let's go back in history for a minute. Did George W. Bush singlehandedly send the military into Iraq? The record says otherwise. On September 18, 2001, Congress authorized the use of military force in response to the September 11th attacks, even providing that, "the President has authority under the Constitution to take action to deter and prevent acts of international terrorism against the United States."[5] In 2002, Congress made a joint resolution allowing the President to specifically use the military against Iraq, citing that, "in 1998 Congress concluded that Iraq's continuing weapons of mass destruction programs threatened vital United States interests and international peace and security, declared Iraq to be in 'material and unacceptable breach of its international obligations' and urged the President 'to take appropriate action, in accordance with the Constitution and relevant laws of the United States, to bring Iraq into compliance with its international obligations.'"[6] Even Congress did not act alone, but in accordance with the United Nations Security Council. Why does Cindy Sheehan blame only the President? To be consistent, shouldn't she also blame every one in Congress who voted to authorize the use of military force? But why not hold those who killed her son directly? In assigning responsibility for Casey Sheehan's death, his mother blatantly overlooked the person or people who actually killed him, those who attacked his unit with rocket-propelled grenades and small arms fire.[7]

Who really sent Casey Sheehan to Iraq? Did the government take him against his will and send him to Iraq? Or had he joined the military of his own accord? As much as we sympathize with those who have lost their children, we seem to forget that we no longer have a draft and those who don't want to go to war don't have to. Compare this to Vietnam or World War II. Even those whose religious convictions prohibited them from engaging in warfare were drafted and went to war or went to jail. Had we seen a grieving mother demanding that politicians killed her son by sending him into war via the draft, I would be behind her 100%. This is simply not the case with Cindy Sheehan's son. For whatever reason, love of country, glory, college tuition assistance, patriotism, sense of duty, or skills for the workforce, he made the decision to assume that risk. If Cindy Sheehan did not want him to take that risk, she should have spoken up sooner.

[1] Bob Fertik, Cindy Exposes the Emperor's New Clothes
[2] Tom Hayden, Cindy Sheehan Can't Stop, Won't Stop
[3] Rep. Jim McDermott, An Open Wound
[4] Arianna Huffington, Cindy Sheehan Steps Into the Leadership Void
[5] Public Law No. 107-40, 09/18/2001

Checks & Balances

There are more checks and balances in a free market than in government.

The U.S. government is set up with an intricate system of manmade checks and balances. Government is composed of three branches: executive, legislative and judicial. Each, in theory, should act to limit the scope of the other branches. Although each branch has the power to act as a check on the others, we still see a gradual increase in power and erosion of rights. The capability is there, but strong incentives for each branch to limit the power of the other branches do not exist.

Compare this to the free market. The market is composed of billions of transactions, all created by people with competing interests. There is no explicit list of checks and balances. There is no need for any. The seller wants to obtain the highest price for his goods; the buyer wants to pay the lowest. The rules for the transaction are simple: both sides have to come to an agreement for a transaction to take place. Their agreement assures that the trade is fair.

Forced takings do not have the same outcome. They do not create 'balance' because one person's interest is sacrificed in the interest of the other. Instead of the mutual benefit that takes place in a free market transaction, we observe the benefit of the few at the expense of many when government asserts its role in the marketplace.

Government doesn't need to assure 'fair trade' except to punish fraud and other violations of property rights. Government's attempts to provide 'balance' only result in imbalance. Let the effective checks and balances in the free market do their job.

Thursday, August 11, 2005

Everyone Else is Doing It

Why do so many lobbyists have little or no reservations about asking the government to steal from others to give to their organization? Why do politicians, who might not rob someone on their own, find themselves constantly using government as a tool to take the property of others? Is it because they can hide among all of the other people doing the very same thing? Or is it because if others are taking their money, they ought to take the money of others? Either way, this is a case of "every one else is doing it."

We defend their organized plunder in the same manner. "Neighborhood A just received funding for new roads; as a members of Neighborhood B, we believe we should receive funding for new roads too!" None of us necessarily want to be the recipients of subsidies, but when we are subsidizing others, the moral objection we originally held disappears.

Some amount of rationalization is necessary too. The way in which we phrase the motivation behind our actions reflects this thought process, "to benefit the community," "to help the disadvantaged," "for the public good," "for the children." We also rationalize our actions by saying, "everyone else is doing it." For example, many people have no objection to download music, arguing even that it is their right. Yet those same individuals would not go into a music store and steal a CD, demanding that it should be allowed because record labels charge too much.

Another part of this behavior is attributable to group mentality and the ability to hide within the group. Individuals don't lobby directly for themselves; rather, individuals lobby on behalf of a larger organization. We don't see IRS employees deciding which houses have more material goods and stealing from them; yet the same individuals work for an organization that takes the earnings of individuals every day. Why would the same individual, who would be unwilling to steal from others directly, have no moral objections to using the government to steal from others and give to his group? Hayek explains some of this phoenomenon,“To act on behalf of a group seems to free people of many of the moral restraints which control their behavior as individuals within the group.” Tell a secretary that she is to lie and say you are out of the office and no one would fault her for following your instruction. Perhaps we believe that it is wrong to steal on an individual level, but what about when we ask the government to take the hard earned money of others so we may have our subsidized education and other handouts?

Wednesday, August 10, 2005

Look No Further

Everyone knows that politicians cave in to special interests. What everyone might not know is that politicians make little attempt to hide this fact. Instead, sometimes they even tell us that they are spending our money to help special interests!

In another taxpayer funded shopping spree, President George W. Bush signed the $286.4 billion highway bill today. I won't speculate too much as to whether he actually read the more than 1,000 page document he just signed -- I suppose it is easier to spend $286.4 billion of someone else's money without reading the fine print. I found a few passages from this story more interesting.
The setting for Bush's bill-signing ceremony and speech was a plant operated by Caterpillar Inc. ... which makes road-building equipment ...

President Bush's own words are even more telling,

"I'm here to sign the highway bill because I believe by signing this bill, when it's fully implemented, there's going to be more demand for the machines you [Caterpillar, Inc.] make here."

Interesting -- Caterpillar, Inc. never asked me for donations.

The Economy

I am always a little wary when I hear people, especially politicians, talk about "the economy," or the economy as a whole. To personify the economy as if it were independent of individual human actions is to mischaracterize it as a mysterious and independent force, or a giant, collective bundle of data. Such mischaracterization of market functions ignores the fact that the economy is simply the result of billions of voluntary transactions which allow both parties to the transaction to better meet their needs. Such mischaracterization justifies the use of force to control the economy, which is really to control the voluntary transactions taking place. Such mischaracterization may be responsible for quotes like these, all taken from the same article referenced above, "we're more concerned about energy prices and health care prices ... Those are the two areas that we see as having a greater effect on ... the future of economic growth," "there's still some challenges to the economy," "his [the President's] handling of the economy" and, "the economy created 207,000 jobs in July."

The economy is not something that politicians need to watch over, as all of the above quotes suggest. I agree that, "The economy of the United States is strong and the foundation for sustained growth is in place," but the foundation is economic freedom, not additional regulation.

Tuesday, August 09, 2005

Manufacturing an Energy Crisis

Under the guise of encouraging "more affordable and reliable sources of energy," the President signed the energy bill into law yesterday. In this CNN story, George W. Bush is quoted as saying, "This bill is not going to solve our energy challenges overnight." He's right. It's not going to solve any energy challenges at all.

Not every point in the energy bill is bad, as I explained in Good Energy Bill, Bad Energy Bill; however, the premise that "if the government doesn't force short-sighted consumers and suppliers into finding alternative sources of energy we will have an 'energy crisis'" is flawed. To base national policy on an assumption contrary to economics is dangerous.

A brief financial explanation of the current energy situation: let's just assume that the supply of oil is diminishing rapidly (we'll ignore that OPEC attempts to limit supply to raise the price of oil and ignore that we have untapped oil resources in the U.S. as well). What would we expect to observe? We know from basic economics that when the price of one good (oil) increases, the price of its substitutes (alternative sources of energy) also increases because the demand for the substitute increases as the quantity of oil demanded decreases. If I'm a good financial analyst and I genuinely believe that the price of oil is going to rise as its supply decreases, I'm going to perform an analysis of the present value of the future cash flows I can expect from the sale of alternative sources of energy. (In non-financial terms, I'm seeing if the amount I will get in the future is worth the investment today). For any large project, a financial analysis examines the expected future cash flows (the amount I am going to get over the years, discounted for time), any margin of error in the forecasts for future prices (risk level), and the cost of the project. If I am fairly confident that my expected future cash flows exceed my cost, I approve the project. Government doesn't need to be involved at all -- greedy entrepreneurs and financial analysts like myself are always looking for profit opportunities and will find those alternative sources of energy on their own - if the need arises. They are already taking into account that the profit may not be immediate. That is why they use present value analysis of future cash flows. Most of the population can be short-sighted if they so choose, but there will always be those who want to invest for the long term if there are profits to be made.

Another rule in economics is that a profit maximizing firm will produce until its marginal revenue equals its marginal cost. This means that the firm should not stop production if there are gains to be made from producing one additional unit. Government does not need to tell the firm when it is no longer in its interest to continue production. Likewise, government does not need to tell the consumer of oil when it is in his interest to stop consumption. To stop consumption of oil well before the marginal utility of oil consumption equals the marginal cost is to throw away the gains from continuing consumption of oil.

Through the energy bill, the government is immediately imposing huge costs but is not and cannot provide any real benefits. No long-run strategy needs to be adopted by the government - long-run strategies are already being adopted by profit-seeking entrepreneurs.

Monday, August 08, 2005

Freedom & Prosperity Agenda

The Freedom & Prosperity Agenda contains 11 planks, details of which may be found here. One which is of high importance is redefining, or defining more clearly, the phrase, "public use." The Supreme Court's approval of the expansion of "public use" in the recent Kelo v. New London case poses a threat to property owners throughout the United States. Defining public use on a state level helps to protect homeowners from having their home condemned and confiscated, then transferred to more politically powerful individuals or businesses. Contrary to popular belief that Kelo represents the first time government has used its power of eminent domain to transfer property from one individual to a private company, an article at the Virginia Institute for Public Policy website by Donald J. Kochan, J.D., addresses a case in Virginia in 2003, two years prior to the Kelo decision:
In Ottofaro v. City of Hampton, the Virginia Supreme Court heard a case in which the City of Hampton condemned the property of private landowners, Frank and Dana Ottofaro. A small portion of the condemned property was to serve as a road. The residue of the land was to be transferred to the Hampton Industrial Development Authority, a political subdivision of the Commonwealth of Virginia. Two months after the condemnation decision was made, the Development Authority entered into an agreement with a commercial development project for the use of the former Ottofaro land as part of a retail shopping center ... the court nonetheless upheld the condemnation of the Ottofaro property against a challenge that it constituted an illegitimate “taking” for private use.

Alabama recently passed a law prohibiting any county or municipality from condemning property for any commercial development purpose. It would be wise for Virginia, and other states, to follow Alabama's lead and protect the property rights of homeowners from unjust takings within their states.

If you live in Virginia and are interested in supporting the Freedom & Prosperity Agenda, find out how at this site or send me an email.

Saturday, August 06, 2005

Creating Jobs and Creating Wealth

First, the government's job is neither to create jobs nor to create wealth. It is not qualified to do either; jobs and wealth are not created through force. Force only serves to transfer wealth from one individual to another, not create new wealth. When government institutes tariffs on foreign goods in order to "save jobs" in similar U.S. industries, it is merely taking from the people who would have paid less for the foreign products and requiring them to pay more to the U.S. companies for the same product. The money that would have been saved by allowing purchase of foreign goods goes to the U.S. company, at the expense of the U.S. people and other U.S. companies. No wealth or jobs are created or saved, only transferred from one company to another, or one person to another.

Secondly, jobs are not a resource. The language that we use to describe jobs is deceiving. When we say someone receives a "job offer," we are saying that they will purchase that person's labor. The job is the labor you will have to give up, or your cost, and the compensation you will receive in the form of salary or other benefits is your benefit. You don't go to work for the sole purpose of going to work, but to earn the things you need to sustain your life and to make it better. If you only considered the utilization of your labor as the benefit, you would volunteer. When we say "fewer jobs were created this quarter," we are saying that employers did not demand additional hours/workers to be productive.

Finally, Arnold Kling at EconLog explains why there is no need to worry about job scarcity, in his Aug. 5 post, "Jobs Are Not Scarce Resources." Human wants are unlimited and people will continue to demand better and better products and services to make their lives more enjoyable. Although we may be able to maintain the same productivity with fewer jobs, when people are driven by the chance of earning a profit and can find ways of continually making other people's lives better through invention of new products or providing quality services, they will continue to be employed.

Human needs and wants create jobs. Human invention creates wealth.

Friday, August 05, 2005

Foundations In Tax Revolt

Should we stop whining about how much we pay in taxes? Sure, it's a lot, but we get roads, police, national defense, public education and other services. The argument against taxes that we usually hear is that they are excessive, government is inefficient, and we're paying in more than we're getting back.

The United States started as a tax revolt against what the colonists claimed were oppressive taxes imposed by the British Empire. Just how 'oppressive' were these taxes that started this revolution?

In Massachusetts, Pennsylvania and Maryland, taxes amounted to 22 cents per person per year, in New York, 15 cents per person per year, in Connecticut, 13 cents per person per year, and in my home state of Virginia, 10 cents per person per year.[1] Salaries in the colonies ranged from $60-100 per year -- a high salary compared to the rest of the world. Colonists paid only 1/3 of a percent (0.33%) in taxes at most! In Virginia, the tax burden was around 1/10 of a percent of a typical yearly salary.

Compare this to the taxes paid in Great Britain, $5.76 per person per year, and Ireland, $1.47 per person per year.[2] Why didn't they revolt against oppressive taxes? The people of Great Britain paid over 26 times the taxes of the highest paying colonists and the people of Ireland paid at least 6 times the amount the colonists paid.

Were the colonists receiving less than the people of Britain or Ireland? The per capita maintenance expense for the colonies was 95 cents per person, so this was not the case; in fact, British and Irish taxpayers were subsidizing the colonies, not the other way around!

Why were the colonists the ones to revolt? The reason cannot be explained through economics -- the colonists weren't paying in more than they were getting. They objected on principle. They considered the tax system itself to be illegitimate.

[1] Palmer, R., The Age of Democratic Revolution, Princeton University Press, 1969, p. 155.
[2] Ibid.

*Note: I am out of town for the next few days, so posts may be sporadic.

Thursday, August 04, 2005

Should Politicians Do Nothing?

An astute commenter wrote, "It sounds to me as if you've created every incentive for a politician NOT to introduce laws and sponsor Bills." He is absolutely right. I won't claim to have created every incentive, but I've tried! The title of my posts alone (Stunting Leviathan's Growth and its continuation) should tell you that my objective is just that: to reduce the rate at which government grows.

I don't put my faith in short-sighted politicians and their ability to write laws that don't violate my rights. I don't believe for a moment that they care more about my well-being than I do. But every incentive that currently exists has the opposite effect of the system of incentives I propose. Rather than encouraging politicians to carefully introduce laws that are genuinely in my interest and do not breach the provisions in the Constitution, the system of incentives that exists encourages politicians to write as many laws as possible, as quickly as possible, and hope that no one has the time to notice the erosion of basic rights that follows. There are so many laws, you can't possibly know which are Constutional or not. You can't possibly even know most of them exist. Don't believe me? The IRS tax laws alone account for nearly 50,000 pages. If you were to read them at a rate of 200 pages per day, five days per week with no vacation, it would take you over a year to complete. Imagine reading an extremely boring novel every day for the next year. That's only the tax portion of the law. You still would need to catch up on the hundreds and sometimes thousands of pages of law passed each week and all the other laws already on the books.

"In framing a government ... you must first enable [it] to control the governed; in the next place oblige it to control itself."[1] Government never ceases to control the governed, but controlling itself requires either extreme self-discipline or serious consequences in the event that it does not. I trust serious consequences over extreme self-discipline.

[1] James Madison, Federalist No. 40, 1787

Wednesday, August 03, 2005

Stunting Leviathan's Growth (continued)

We asked in previous posts (see Stunting Leviathan's Growth) if there were more effective ways of restraining government and reducing the incentives of politicians to violate the Constitution.

In addition to my previous recommendation that a maximum of one law per week (26 laws per year) be introduced and prominently displayed in the Sunday paper, I received another good suggestion (from Russ Nelson) that each law should be read aloud and only those who were present during the reading could vote on it. Here's another thought to ponder.

We've all heard the phrase "too many cooks spoil the broth." Just as each cook adds a little bit of salt, each politician adds a clause here or there to help the special interests who support him. Once enough politicians add to a bill, instead of being the original law, it is filled to the brim with clauses supporting special interests. No one can be held responsible for the content of the law because everyone has contributed to it, just as no one cook can be held responsible for ruining the broth. How can incentives for politicians to act responsibly exist if no politician may be held accountable for a law?

In addition to the limit on the number of laws to be introduced, the twenty six laws must each be sponsored by a single politician, not two or three or more. This politician will be solely responsible for its content. No other politician will be allowed to add to it, although others may make suggestions for changes to it before it is introduced. Should the Supreme Court rule at any time that the law is unconstitutional, the sponsor will be immediately removed from office. This creates the incentive for the politician to first make sure the law is constitutional and consult all sources available prior to sponsoring a bill. Legislation will not be introduced in haste, in response to a tragedy that people think the government should have prevented, without first demonstrating that the new law will accomplish its goal within the bounds of the Constitution.

The obvious problem with this system is that the Supreme Court then has the ability to declare laws of one party unconstitutional and allow the laws of the opposing party to hold. Therefore, it is important to allow the state to elect new representation to replace the politician removed from office and it would be advisable to allow reinstatement by a majority of Congress and executive approval to ensure a balance of power.

Over the long run, it may be impossible to completely restrain Leviathan; however, measures to slow its growth allow a longer period of truly limited government to exist.

Tuesday, August 02, 2005

CNOOC Withdraws Unocal Bid

After much political controversy surrounding the bid for California based Unocal, the Chinese company, CNOOC, has withdrawn its $18.5 billion bid ($67/share). CNOOC is reported to have explained the withdrawal directly resulted from the political environment in the United States, posing "a level of uncertainty that presents an unacceptable risk to our ability to secure this transaction." The high risk levels resulting from political and economic control deter both foreign and domestic investment in the U.S.

Good Energy Bill, Bad Energy Bill

The 1,724 page energy bill overwhelmingly passed the Senate yesterday. It's a mixed deal, with a fair number of good points, and more than a fair share of pork barrel spending and subsidies.

The good points:
  • Repeal of the Public Utility Holding Company Act of 1935 - this act prevented non-contiguous mergers, so a utility could not merge with another utility whose geographical area was not adjacent. With its repeal, the barriers to merging with a distant company will be from the market rather than an arbitrary ruling from 1935. (Editor's note: PUHCA not only prohibits the non-contiguous mergers, but also prohibits non-utility companies from owning utilities, or utility companies from owning other unrelated businesses. For example, a large coal company would not have been allowed to own an electric utility, although that would allow the benefits that might come from such vertical integration.)
  • Elimination of some minor regulations that have caused an artificial increase in the price of certain sources of energy.

The bad points:

  • Subsidies, subsidies, and more subsidies! It was easy to hide a lot of taxpayer dollars in those 1,724 pages with enough going to varying special interests to ensure its passage. The things the subsidies encourage are generally good; however, if they were economically feasible on their own, you wouldn't need a government subsidy to make them happen. If we truly are facing an "energy shortage," the market price would rise sufficiently high to warrant finding alternate sources of power. Where are the subsidies going? Some will go to support exploration, some to encourage nuclear power, and some to cleaner burning coal technology. A better thing to do would have been to remove some of the government-created barriers to nuclear power development. The permitting process for a nuclear plant represents the greatest risk (cost) to nuclear power, not to mention the cost the entrepreneur might face as a result of future legislation. Again, reduced emissions resulting from clean coal and nuclear power sounds like a great idea, but it has to be considered in light of the costs and by those who bear them. To alter this cost structure reduces the accuracy of the price signals that indicate scarcity in the energy market.
  • The bill is estimated to cost $12.3 billion, conservatively. The estimate does not take into account the regulatory costs or the costs of the heightened demand for subsidies that will ensue. Additionally, tax breaks are purported to amount to $14.5 billion.
  • Provisions in the bill allow for the federal government to approve sites and to override opposition by local governments. Presumably, if the federal government has the ability to override local opposition, it has the ability to voice opposition of its own to local approval.

What was left out:

  • The provision for drilling in the Arctic National Wildlife Refuge was taken out of the bill prior to its approval. It would have allowed for exploration affecting approximately 2,000 acres of an area the size of South Carolina (approx. 19 million acres). More than 90% would remain intact and would yield billions of barrels of oil. If the goal of the energy bill is to find alternate sources of energy, reduce dependency on foreign oil, and reduce prices, this was the way to go. The removal of this provision is a big disappointment.

My overall analysis: the energy bill is expensive and unnecessary, although off to a good start with the repeal of the Public Utility Holding Company Act. It increases government interference in some regards and decreases it in others. But, like the politicians we vote for, it's a bundled deal and unfortunately we couldn't pick the good points and filter out the bad.

Monday, August 01, 2005

Zero-Sum Games

News of oil prices jumping to over $62 per barrel today reminded me of the zero-sum game that does exist in capitalism: options and forward contracts.* An option gives you the right, but not the obligation, to buy or sell a certain number of shares of stock at over a specific time period at price, P. A forward contract binds you to buy or sell at the determined forward price, F, on a specified date. Similar to gambling, in an options or a futures contract, you have a winning side and a losing side. Both options and forward contracts are used to speculate or to hedge risk.

Options and forward contracts, although thought of as a zero sum game, yield benefits to both sides because they are still voluntary contracts. Each side recognizes a potential benefit to entering the agreement. The farmer who cannot afford to risk that the price for his crops might be low may sell a forward contract to the speculator who believes she may have a chance to make a profit by accurately predicting a price increase. In purely monetary terms, options and forward contracts are zero-sum games. For every dollar that one party gains, the other has lost a dollar. Overall, however, speculation acts as an insurance policy for those who wish to reduce their risk and as a mechanism for profit for those willing to bear the risk for them.

* Futures contracts are forward contracts on an organized exchange

What Is A Well Regulated Militia?

The Second Amendment to the Constitution of the United States reads, “A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed.”

Throughout the Federalist Papers the term ‘well-regulated militia’ is discussed. This militia they spoke of was to be composed of all the people, and not of an organized military as some have suggested. Alexander Hamilton is said to have written that a man should be allowed to own a cannon if he wished. Madison and Hamilton wrote in the Federalist Papers: “They [the Swiss] have no common treasury, no common troops, even in war, no common coin, no common judicatory, nor any other common mark of sovereignty. They are kept together by the peculiarity of their topographical position, by their individual weakness and insignificancy, by the fear of powerful neighbors…So far as the peculiarity of their case will admit of comparison with that of the United States, it serves to confirm the principle intended to be established.”[1] That is, the Swiss, who had a civilian militia and still do to this day, were to be a model for the United States. Patrick Henry stated that, “the great object is that every man be armed.”[2] Additionally, George Mason, co-author of the Second Amendment, wrote in his Fairfax County Militia Plan: “A well-regulated militia, composed of the Gentlemen, Freeholders, and other Freemen was necessary to protect our ancient laws and liberty from the standing army…and we do each of us, for ourselves respectively, promise and engage to keep a good Fire-lock in proper Order & to furnish Ourselves as soon as possible with, & always keep by us, one Pound of Gunpowder four Pounds of Lead, one Dozen Gun Flints, and a pair of Bullet Moulds, with a Cartouch box, or powder horn, and Bag for Balls.”[3] Samuel Adams said, “The militia is composed of free Citizens.”[4]

Our Declaration of Independence incorporated the idea that citizens should be able to overthrow the government if necessary, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed. That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government …”[5] The Second Amendment to the Constitution was, without a doubt, meant to ensure that people had not only the right, but the ability, to alter or abolish a destructive government.

[1] Federalist Papers, pp. 132-33
[2] Debates and Other Proceedings of the Convention of Virginia, convened at Richmond, on Monday the 2nd day of June 1788.
[3] Halbrook, Stephen. That Every Man Be Armed. p. 61
[4] LaPierre, Wayne. Guns Crime and Freedom, taken from Writings III, by Samuel Adams, HarperCollins, 1995.
[5] The Declaration of Independence, 1776.