The Freeman | Ideas On Liberty

White House Sees Signs of Congressional Mutiny

Sheldon Richman — Fri, 20 Nov 2009 13:42:47 +0000

“Growing discontent over the economy and frustration with efforts to speed its recovery boiled over Thursday on Capitol Hill in a wave of criticism and outright anger directed at the Obama administration.” (Washington Post, Friday)

The quest for reelection outweighs all loyalties.

FEE Timely Classic
“‘Deliberative Democracy’ Dementia” by James Bovard

Feds Still Backing Shaky Home Loans

Sheldon Richman — Fri, 20 Nov 2009 13:38:30 +0000

“In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default.” (New York Times, Friday)

Déjà vu.

FEE Timely Classic
“Can the Feds Save the Housing Market?” by Robert P. Murphy

The Mandated Health Insurance Outrage

Sheldon Richman — Fri, 20 Nov 2009 09:00:25 +0000

With the introduction of Senate Majority Leader Harry Reid’s 2,074-page health insurance nationalization bill, we can be thankful for one thing at least. It will most likely be the last bill of its kind introduced this year. Who’d have time to wade through another?

This doesn’t mean there is anything in the bill to be thankful for. Like its Senate predecessors and House counterpart, it should offend any advocate of liberty and good economic sense.

First and foremost among its defects is the individual health insurance mandate: Every individual would be forced to buy government-defined comprehensive medical coverage (or to have it bought by one’s employer). A fine up to $750 awaits anyone who defies the mandate.

As Shikha Dalmia points out in Forbes this week, the individual insurance mandate is the major outrage in the whole “health care reform” scam. I would say it’s the keystone. Remove it and most of the rest crumbles to the ground.

Who do these politicians think they are? Our lives are not theirs to dispose of.

Politicians love to sugarcoat their threats of force. So the Reid bill calls the mandate “shared responsibility.” To those who wonder by what authority the government can make us buy insurance against our will, the bill alludes to the Constitution’s Commerce Clause, which gives Congress the power to “regulate … commerce among the several states.” (For a fuller story on the clause, see this.) The bill says, “The individual responsibility requirement provided for in his section . . . is commercial and economic in nature, and substantially affects interstate commerce.”

How would an insurance requirement affect interstate commerce? The bill says that since without the requirement people wouldn’t buy insurance until they are sick, it therefore “will minimize this adverse selection and broaden the health insurance risk pool to include healthy individuals, which will lower health insurance premiums. The requirement is essential to creating effective health insurance markets in which improved health insurance products that are guaranteed issue and do not exclude coverage of pre-existing conditions can be sold.”

In other words, for the sake of making the insurance market work better, we must be forced to buy coverage. How’s that for a justification?

It’s amazing how many fallacies can be stuffed into one argument. To begin, medical insurance isn’t really interstate commerce. One of the few sensible things proposed during the public discussion on medical care is that the federal ban on interstate purchase of coverage be repealed. Residents of California are not free to buy less-fancy, less-expensive policies offered in Arizona. They are stuck with policies made more expensive by California’s overbearing regulatory regime. Interstate sales would increase competition and lower prices, but the ruling party shows no interest in that idea. So how can this be about interstate commerce?

There’s more that is wrong with the argument. Typically, the Commerce Clause has been invoked against barriers to the free flow of interstate commerce. The Supreme Court has occasionally upheld the prohibition of activities (such as growing wheat for one’s own use in violation of an acreage-allotment program or dispensing medical marijuana) that were said to adversely affect interstate commerce. But the insurance mandate would represent the first time that individuals were compelled to buy product or service in the name of making interstate commerce more effective. The Congressional Budget Office calls it “unprecedented”: “The government has never required people to buy any good or service as a condition of lawful residence in the United States.”

Even under the most expansive reading of the Commerce Clause, how does compelling the purchase of insurance qualify as regulating interstate commerce?

The nub of the bill’s argument is that if healthy people are not forced to buy coverage, the insurance market won’t work properly. Why not? Because same bill would compel insurance companies to accept all applicants for coverage, sick or healthy, without price discrimination. That is, the bill creates the incentive for people to opt out of insurance until they are sick. Obviously, that would not be good for the insurance market.

Self-Caused Problem

The individual insurance mandate, then, is a solution to a problem the bill itself would create. The authors invoke the Commerce Clause to protect interstate commerce from a threat they themselves pose to it. They could avert the threat simply by not imposing guaranteed-issue on insurers.

But of course the advocates of nationalized medicine wouldn’t do that. Guaranteed issue is at the center of their scheme. They want to proclaim that they brought universal coverage to America. Freedom must take a back seat to their objective, which is to disguise a welfare program as insurance and put us on the road to government-administered rationing.

The “reformers” are quick to point out that people without insurance go to emergency rooms for medical care and sometimes don’t pay their bills, shifting the costs to the rest of us. But Shikha Dalmia notes that uncompensated care accounts for less than 3 percent of the country’s total medical bill. To save $40 billion a year, we should spend more than $100 billion a year and lose more liberty? No thanks.

One reason for uncompensated care is that emergency rooms are forbidden to turn away patients (even in non-emergencies) who have no means of payment. Who imposed that prohibition? The government, of course. That may sound humane, but one unintended consequence is a likely contraction of charitable care. Why set up facilities for the indigent if they can turn up at any emergency room?

Again we see Mises’s Law at work: Intervention begets intervention. Government action creates problems that politicians then use to justify more government action. Undoing the first intervention would help solve the problem, but politicians have little incentive to move in that direction.

Government has suppressed the free market in medical care both on the supply and demand sides. As a result, medical services and insurance are artificially expensive, pricing many people out of the market. Instead of removing the interventions and letting the free market—including mutual-aid associations and philanthropy—lower prices and create more widespread coverage, the politicians propose to pile on more market-suppressing measures. Freedom is the first casualty. But we can also anticipate an aggravation of the current system’s worst features.

Forcing individuals to buy insurance is an intolerable assault on our liberty—not to mention a massive subsidy to the insurance companies. (They’re mad the penalty is not greater.) How many more usurpations can we be expected to tolerate?

CBO Says $849 Billion Senate Health Care Bill Will Cut Deficit

Sheldon Richman — Thu, 19 Nov 2009 13:21:44 +0000

“Senate Majority Leader Harry Reid on Wednesday unveiled a sweeping health care bill that would expand health insurance coverage to 30 million more Americans at an estimated cost of $849 billion over 10 years. Reid and other Senate Democrats cited an analysis by the nonpartisan Congressional Budget Office for the coverage and cost figures. The CBO estimates the proposal would reduce the federal deficit by $130 billion over the next 10 years, through 2019. Any effect on the deficit in the following decade would be ’subject to substantial uncertainty,’ but probably would result in ’small reductions in federal budget deficits,’ according to the CBO.” (CNN, Thursday)

And the tooth fairy collects children’s teeth.

FEE Timely Classic
“The Right to Medical Care” by Sheldon Richman

Administration Seeks Palatable Way to Continue TARP Bailout

Sheldon Richman — Thu, 19 Nov 2009 13:18:15 +0000

“The Obama administration is poised to extend the life of the highly unpopular $700 billion financial bailout and, to display a commitment to fiscal responsibility, is planning to use much of the leftover funds to reduce the national debt, government sources said.” (Washington Post, Thursday)

Didn’t they borrow the TARP money?

FEE Timely Classic
“Our Presidents and the National Debt” by Burton W. Folsom Jr.

Financial Legislation Heads toward Finish Line

Sheldon Richman — Thu, 19 Nov 2009 13:17:08 +0000

“As lawmakers on Capitol Hill inch closer toward overhauling the nation’s fractured financial regulatory system, each hour of debate, each tweak of legal language, each tedious roll call carries the potential to generate colossal changes in the relationship between Washington and Wall Street.” (Washington Post, Thursday)

But it’s not the relationship we need.

FEE Timely Classic
“Regulation Will Stop Future Madoffs? It Just Ain’t So!” by Chidem Kurdas

The Dangers of the Myth of Merit

Steven Horwitz — Thu, 19 Nov 2009 05:01:30 +0000

In his various chapters and essays on the “mirage” of the concept “social justice,” F. A. Hayek makes a claim that is very often overlooked by those who support the market. He argues that markets generally do not reward “merit.” That is, the people who become wealthy in the marketplace do not do so, for the most part, because they are somehow “better” people than those who are not as wealthy. The wealthy are not necessarily more intelligent, more moral, or even harder-working than the rest of us. However meritorious we think those attributes are, they are not what the market rewards. The market rewards the creation of value in the form of providing goods and services that other people want. Period, end of sentence.

Frequently those who succeed in the market do so because they were lucky or simply in the right place at the right time with the right idea. They need not be especially smart or hard-working; rather they just need to be able to figure out what people want and to get it to them in a cost-efficient way. They also need to be able to adjust on the fly as conditions in the market change. Here, too, the typical notions of merit need not apply.

A critic of markets might respond with “Aha! If you’re right that entrepreneurs aren’t any better than the rest of us, why can’t we just replace them with government bureaucrats?” A fair question! The answer is that the effectiveness of markets does not rest mainly on the qualities of the individuals involved, but rather on the institutional environment in which people operate. Entrepreneurs are able to figure out what people want and how best to produce it not because they are especially intelligent, but because they act in the market, where signals such as prices and profits help them learn what others want and how to produce it.

It’s not that markets do things well because entrepreneurs are smart; rather, entrepreneurs are able to do things well because markets are “smart” in that they are able, through prices and profits, to make more knowledge available to entrepreneurs than political processes do to bureaucrats. This feature of markets is what Nobel Laureate Vernon Smith calls “ecological rationality.”

Forgetting this point and believing in the “myth of merit” poses two dangers for defenders of the market. First, it can seduce us into arguing for markets based on the personal characteristics of entrepreneurs versus bureaucrats. This is an argument we will lose. People are people, and there’s no necessary reason that people who become entrepreneurs are inherently better or smarter than bureaucrats. Many successful entrepreneurs have gone to work for government or have been elected to office and failed miserably. Of course, as Hayek recognized, expanding the political realm may tend to attract into it those who are less moral in the sense of respecting the rights of others, but that is due to the ecological irrationality of politics.

Second, believing the myth of merit can lead us to slide from being “pro-market” to “pro-business.” If one believes that businesspeople are somehow more deserving than bureaucrats, one might be tempted to support government policies that benefit business at the expense of markets, such as the bailouts. It’s not that the managers of GM are inherently smarter or more moral than members of the Obama administration. It’s that in the absence of distortion, the market provides them with knowledge that bureaucrats would not have and couldn’t use as well as entrepreneurs can even if they had it.

Bailing out firms cuts off the profit-and-loss learning process and makes those running the show less able to act efficiently, not to mention creating incentives for them to be more concerned about politics than products.

In days like ours, when the line between businessperson and bureaucrat gets ever more thin, maintaining the distinction between “pro-market” and “pro-business” is more important than ever. Accepting the “myth of merit” risks overlooking that distinction.

The End of Prosperity: How Higher Taxes Will Doom the Economy–If We Let it Happen

George C. Leef — Wed, 18 Nov 2009 18:31:06 +0000

If you were to believe spokesmen for the Obama regime and its allied pseudo-economists, there is no tradeoff between the size of government and our standard of living. On the contrary, they would like people to believe that the bigger the government gets, the more it can “stimulate” the economy and solve all sorts of alleged social problems, like the need for “affordable” health care. In their Alice-in-Wonderland world, government is the source of prosperity.

Opposing that view are numerous writers who understand the simplest of economic concepts—that scarcity imposes tradeoffs. The more government grows, the more it consumes and directs resources that would otherwise have been put to use by individuals, firms, and other voluntary organizations. Government has no wealth and creates no wealth. All it can do is redirect wealth, employing it in ways chosen by politicians rather than the ways consumers would have chosen. Once you understand that political choices are dominated by short-run, vote-buying concerns that impede productivity, you see that the bigger government gets, the less prosperous the people will be.

Among the writers who understand this are the authors of The End of Prosperity, three advocates of the supply-side theory, which says that when taxes are too high, the government strangles the incentives for investment and productivity. Their book, published before the 2008 election but clearly anticipating the victory of Barack Obama and the dominance of demand-side economic thinking (the notion that the more the government spends, the stronger the economy will be), explains why the high-tax, big-government approach always puts the economy on downers. Laffer, Moore, and Tanous provide a good survey of our last several economic decades for Americans either too young or too forgetful to know that there is an inverse relationship between government and prosperity.

It’s a useful history going back to the 1960s that connects our economic ups and downs to what they call “The Four Killers of Prosperity”: trade protectionism, tax increases and profligate spending, regulations that increase government intervention in the economy, and mistakes in monetary policy. We had big doses of all of them in the late 1960s and throughout the ’70s, when the nation was socked with the Nixon-Ford stagflation and later the low-productivity, high-interest-rate economic malaise under Carter. Then we experienced somewhat less of the Four Killers in the Reagan years and the economy improved considerably.

The authors might have done more to explain how the current economic debacle (especially the housing bubble) was caused by policy blunders, but at least they debunk political insiders’ arguments that the economic crisis was due to laissez-faire. “As if we ever had that,” they write. The Obama economic policy agenda, they show, is a disastrous concoction of those prosperity killers, and if it goes through we will face the end of prosperity.

That’s all good, but the book has a serious weakness. Like most writings by people in the supply-side camp, it overemphasizes tax policy and underemphasizes the need to reduce government spending. Worse, it repeatedly says that one of the reasons to favor tax cuts is that they can increase government revenues. But increasing government revenues just means more spending on military adventures, failed social policies, and special-interest group handouts.

As Milton Friedman used to point out, government’s true burden on the economy is measured by its spending not its taxing. It has to get the money one way or another: taxation, borrowing, or printing money.

The problem we face is how to keep Leviathan from destroying what is left of liberty and property rights. That being the case, the authors missed an opportunity to drive home the point that the federal budget must be put on a crash diet.

Our real problem isn’t so much getting tax policy right; it’s persuading people we should radically downsize government. If we can do that, how it collects tax revenue isn’t very important.

The Unitary Executive: Presidential Power from Washington to Bush

Joseph R. Stromberg — Wed, 18 Nov 2009 18:25:57 +0000

Steven G. Calabresi and Christopher S. Yoo count as founding fathers of the much-debated unitary executive theory (UET), which they named in 1992. In this large book they argue that every American president has subscribed to the theory, and that along with constitutional text and structure, this continuous presidential practice makes the law.

Briefly, UET asserts that a great thing or shapeless blob is granted in Article II: “the executive power.” (We naïve folk thought it just named a job.) Presidential power to remove subordinates (at will) follows directly. “Departmentalism” is another implication. This finds the executive to be a coequal interpreter of the Constitution along with Congress and the Supreme Court. (The states need not apply.)

The authors, both law professors, undertake a Maoist Long March through 43 presidencies, turning up many uses (and abuses) illustrating presidential power. It all amounts to a revealing, power-centric history of the United States. The authors purport to adduce “solid antecedents” for their view, such as James Wilson’s ruminations during the Pennsylvania ratifying convention.

Calabresi and Yoo’s key evaluative tool is how much a given president improved and empowered the mighty office. First up, George Washington supervised, removed, controlled all prosecutions (just like George III), called out militia, and granted pardons. Thomas Jefferson executed an embargo and bought Louisiana. Andrew Jackson was a Bonapartist (my term), who somehow embodied The People. Lincoln deployed, suspended, censored, “repelled” attacks, and invented presidential war powers by wedding the commander-in-chief clause to the “Take Care” clause. In fact, say the authors: “The Civil War was fought over the issue of the president’s authority to take care that the laws be executed in the South.” This is a peculiar focus indeed.

Much later, President McKinley’s foreign policy and war strengthened the office. Teddy Roosevelt had no war but nevertheless issued numerous executive orders to expand the reach of the presidency. Woodrow Wilson, war in hand, did much more. Under Franklin Roosevelt, “power exploded,” as he controlled, executed, and issued innumerable orders. Harry Truman got us into Korea with unitary fervor. When he unitarily seized certain steel mills, the Supreme Court declared that while the president has much unspecified power, it wasn’t quite as much as Truman asserted.

Leading largely by stealth, President Eisenhower removed officials, delegated authority, ordered federal troops into Arkansas, and expanded claims of executive privilege to thwart Senator McCarthy. The ill-starred John Kennedy issued numerous orders and had federal troops invade Mississippi. Lyndon Johnson pushed presidential power well beyond Kennedy, and Nixon stalwartly asserted yet more executive powers. The upward trajectory continued on through Reagan, Clinton, and the Bushes.

Other presidents weigh less in the unitary scale. James Buchanan, the authors’ “worst president,” failed to bring on war and grab power. Andrew Johnson at least defended the office against congressional Radicals. Hoover was only so-so but did much executing of Prohibition and issued the Stimson Doctrine. Even Jimmy Carter, called the “nadir” of executive power, at least ordered the freezing of Iranian assets. They also serve who only keep presidential powers intact. Naturally, this reduces the normal (“historically correct”) charges against them.

War meets with awkward treatment in this book. Popular wars or those too ancient to stir controversy may be mentioned, mostly as an arena for presidential heroics. The Mexican War squeaks by and the “Civil War” and World Wars I and II are noticed. The Spanish-American War gets an allusion. Oddly, the word “Vietnam” hardly intrudes on the discussion of Kennedy, LBJ, and Nixon. Neither would we ever learn here that anything warlike happened under George H. W. Bush or Bill Clinton. After all, an office best suited for getting us into wars might seem less lustrous if all the wars were reckoned in.

Now it comes out that there are two flavors of UET. Our authors only claim that whatever executive powers really exist belong to the president alone. They are quite reasonable and do not believe in certain “inherent” powers that George W. Bush asserted. But with so many undefined and nebulous powers so moderately claimed, how can the “moderate” UE theorists spy the “excessive” ones?

Much like Hobbes’s Leviathan, this is a good book: It shows us what is at stake. Is the case made? Should enemies of the UET concede? It might seem so, but there is a problem. It would be easy enough to write a lengthy work proving that for 200 years prominent American burglars have firmly asserted their “right” to break and enter. This would neither put our minds at rest nor establish the “right.”

So it is with the American executive. This interesting book demonstrates that most American presidents have been unwilling to abide by constitutional limits on their power, but not that their power was meant to be almost limitless.

Biography of the Dollar: How the Mighty Buck Conquered the World and Why It’s Under Siege

John Tamny — Wed, 18 Nov 2009 18:00:52 +0000

Think of the various dollar-denominated bills in your pocket. They surely represent value, but with the dollar backed by nothing beyond trust in the United States and its Treasury, the greenback’s success as a worldwide store of value is something of a marvel.

Wall Street Journal reporter Craig Karmin’s Biography of the Dollar helps us to understand the dollar’s role in the world economy. Karmin’s book provides fascinating statistics about the dollar, not to mention lively writing that takes us everywhere from the trading floor of a currency hedge fund, to the building where dollars are printed, to countries such as Ecuador that have made the greenback their own currency.

The dollar figures in about 90 percent of all trades in the $3.2 trillion foreign exchange market, Karmin writes. Nearly two-thirds of the world’s central-bank holdings are also denominated in dollars. And of the $760 billion worth of dollars in circulation at the time of publication, two-thirds of those bills were in the hands of individuals outside the United States.

That statistic alone is a reminder that the Fed cannot control the quantity of dollars within the country. If the Fed tries to prevent inflation by draining the U.S. “pond” of dollars, other dollar ponds from abroad will spill greenbacks into our own to make up for the Fed’s perceived tightness.

Karmin notes that before 1971, when President Nixon stopped redeeming foreign-held dollars in gold, currency markets and trading were largely nonexistent because the dollar was defined as one thirty-fifth of an ounce of gold and the world’s currencies were pegged to the dollar. Since then, currency trading has skyrocketed. From 1989 to the present, the currency markets have grown sixfold, given the globalized nature of the economy, which requires that all transactions be hedged to account for floating units of account. What Karmin misses here is the unseen: How many brilliant innovators did ours and the world’s economies lose to Wall Street and other centers of finance? Nothing against Wall Street or finance, but currency trading is a form of economic facilitation, as opposed to productive economic activity.

Karmin correctly notes that “there is no such thing as a bull or bear market for foreign exchange” since currencies only “strengthen or weaken relative to one another.” True, but he leaves out the important truth that currencies today are uniform in their lack of definition. As such, currency strength or weakness can be a mirage. Indeed, if the dollar and yen are stable with regard to one another, the alleged stability could mask two currencies in decline. That’s why it’s unrealistic to discuss currencies without an objective benchmark such as gold to measure their true value.

The gold question is where I found the greatest disagreement with Karmin. He argues that Nixon’s decision to leave gold was a “crucial step toward unlocking the dollar’s full potential to mobilize the global economy at the end of the twentieth century.” That’s a well-worded platitude, but it’s impossible to see how giving the federal government a free hand to inflate did anything to help mobilize the global economy. Doesn’t Karmin know that international trade expanded greatly under gold in the nineteenth century?

On the inflation front, Karmin seems torn. While he acknowledges that price inflation is the result of falling currency values, he also engages in discredited Phillips Curve thinking, which suggests that economic growth itself causes a rise in the price level. Just once I would like Phillips Curve adherents to reveal any evidence supporting the notion that growth is inflationary.

Despite my disagreements with Karmin over his economic analysis, Biography of the Dollar is informative and well worth a read.