Was it worth it?

Yes, in many ways, says author Ann Coulter. No, says Reason magazine editor Matt Welch.

“There’s no reason at all that the bureaucratization of security is going to make us any more safe,” Welch said. “All we have to do is go on an airplane . . . to see that there’s a difference between security and security theater, between federalizing a problem and actually solving the problem.”

Coulter thinks the government got lots of things right.

“Whatever liberals screamed bloody murder about was very important on the war on terrorism,” she said. “I think Iraq was a crucial part . . . .” Welch dissented.

“We’re on the verge of bankruptcy. . . . We are at the sort of tipping point of imperial overstretch.”

Imperial overstretch? Welch has a point. Politicians talk about tight budgets, but National Defense Magazine recently ran this headline: “Homeland Security Market Is Vibrant Despite Budget Concerns.” I fear this is the military-industrial complex President Eisenhower warned us about. Military contractors collude with politicians to keep the money flowing.

I blame the politicians. The contractors just do what they’re supposed to do. The politicians are supposed to spend our money well. They don’t.

After 9/11 the Senate voted 100 to zero to federalize airport security. Then-Sen. Tom Daschle said, “You can’t professionalize if you don’t federalize.”

Nonsense. Before the TSA was created private contractors paid airport inspectors not much more than minimum wage. They weren’t very good. Now we spend five times as much, and they’re still not very good.

Today even the TSA knows that private security is better. In one of its own tests its screeners in Los Angeles missed 75 percent of the explosives planted by inspectors. In San Francisco, one of the few cities allowed to have privately managed security, screeners missed 20 percent.

In a reasonable world the government would disband the TSA and move to a private competitive system.

But we live in a Big Government world.

The Health of the State

Randolph Bourne, who opposed U.S. entry into World War I, said, “War is the health of the state.” He meant that in war, government grows in power and prestige—and freedom shrinks. As Freeman columnist Robert Higgs of the Independent Institute documents in Crisis and Leviathan, government never recedes to its prewar dimensions.

Shortly after September 11, Sen. Charles Schumer declared that the “era of a shrinking federal government is over.” This was more nonsense. The government hadn’t been shrinking. But for politicians like Schumer 9/11 was an excuse to take more power. Price was no object.

I can’t tell you what Homeland Security does with your money. Much of its spending is secret. Certainly much is wasted. The department made a big fuss over its color-coded airport security system, then scrapped it because it provided “little practical information.” The department spent billions on things like special boats to protect a lake in Nebraska, all-terrain vehicles for a small town in Tennessee and 70 security cameras for a remote Alaskan village.

That’s what politicians do. Members of Congress say, “You want my vote? You’d better give my district some cash.” And when people are scared, they let bureaucrats spend.

This played into Osama bin Laden’s hands. In one videotaped message he talked about “bleeding America to the point of bankruptcy.”

The attacks on 9/11 were largely a failure of government. Our so-called “intelligence agencies” knew nothing about the plot. The Immigration and Naturalization Service, charged with keeping track of foreigners who overstay their visas, did not pay attention to the 19 hijackers. And as Rep. Ron Paul points out, history did not begin on September 11. Part of the failure was America’s interventionist foreign policy, which needlessly made enemies.

So government failed on 9/11, and yet the politicians’ answer to failure is always the same: Give us more money and power. And we do. When will we learn?

“The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing ‘imperfect’ institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.”

A common form of the fallacy is rejection of the imperfect free (or freer) market in favor of (presumably) omniscient, omnipotent, and omnibenevolent government regulation. A “flawed” but achievable arrangement is set against an (alleged) ideal, though it is left unestablished whether the ideal can in fact exist. The problem here should be obvious. If the ideal is not available, then the comparison is worthless. If the rejected option were compared to other achievable—also imperfect—alternatives, it might well be judged superior.

A recent example of the Nirvana Fallacy comes from Sen. Charles Schumer of New York. Asked how the Obama administration will prevent another financial crisis, Schumer said:

“You’re gonna find a different system of regulation. . . . So like when Bear Stearns began to run into trouble, they’re gonna call the heads of Bear Stearns in and say, ‘All right fellas, you’re getting rid of those two hedge funds; you’re gonna raise more capital—even if it means you have lower profitability. . . . [Y]ou do it or we’re gonna take sanctions against you.’ . . . You need a tough, strong regulator, unified—no holes in the system— . . . who . . . sees the problem ahead of time, so they have complete transparency, they know exactly what’s going on. . . .” (emphasis added)

We see at once that Schumer assumes what he must demonstrate: namely, that the regulator can overcome the Hayekian “knowledge problem,” the limits posed by the fact that the most critical economic information is not readily obtainable statistical data but rather is diffused and often unarticulated knowledge, including know-how.

Look at what I’ve highlighted in his statement, and ask yourself what Schumer apparently has not asked himself: How will the regulators “know exactly what’s going on”? Spotting Bear Stearns’s specific hedge-fund problems “ahead of time” would have required insights and hunches that only entrepreneurs with money at risk could be expected to have—and even those might not have been enough. Fortune-telling is not a widely distributed skill. It’s not a matter of toughness or access to Bear’s books but, at the very least, of entrepreneurship (not to mention luck), which is profit driven. Bureaucratic regulators bring no such talent to their jobs. More likely, they’d be enforcing formal (possibly outdated and irrelevant) rules, looking for a repeat of the last problem, while missing the next one entirely. As Nassim Nicholas Taleb might say, it’s the next black swan, not the last one, that bites you.

Schumer’s fallacy is actually worse than the standard Nirvana Fallacy. He doesn’t compare his unrealizable regulatory vision to the free market but rather to our corporatist economy replete with government bailouts, moral hazard, easy credit, and all the other ways of disabling market forces.

The closest we can get to what Schumer says he wants is through the discipline—that is, the regulation—imposed by the unfettered market. That includes bankruptcy’s Sword of Damocles and the freedom of traders to sell short—that is, to profit by betting that a company’s stock is overvalued and communicating that information to the market early. Predictably, the government is planning to restrict short selling. Bad regulation drives out good.

* * *

Advocates of big government claim they learned lots of lessons from the New Deal. But here’s something they missed: The post-1929 economy began to rebound before FDR’s programs could have taken effect and even before he took office. Jim Powell explains.

Government spending is said to be indispensable to recovery from a recession thanks to the magic of the “multiplier.” Is there really more bang from the government-directed buck? James Ahiakpor debunks the myth.

But surely the government is good at creating productive jobs when it spends money, no? Larissa Price, applying Bastiat’s lesson, throws cold water on that hope.

By now you may have bought some of those funny-looking spirally light bulbs after hearing they use less energy and save you money—only to find that they can’t hold a candle to the old incandescent bulbs. Thanks to Congress and former President George W. Bush, though, soon you won’t have a choice. Michael Heberling has the unfortunate details.

Last spring’s G-20 economic meeting called for a crusade against tax havens, places where people can protect their wealth from greedy politicians. Daniel Mitchell comes to their defense.

Can there be freedom when the state sees itself as Robin Hood? Carlos Rodríguez Braun shoots an arrow into the heart of that belief.

Land has been at the center of conflict from time immemorial. Even so-called capitalist countries have been blemished by land monopolies, government-sponsored speculation, and feudal-style interventions, such as property taxes. Joseph Stromberg conducts a tour of the great land question.

Our columnists again serve up an intellectual feast. Lawrence Reed writes about perseverance in the face of adversity. Thomas Szasz further documents psychiatric slavery. Burton Folsom takes a critical look at an economic interpretation of the Constitution. John Stossel examines the “fatal conceit” of interventionists. Walter Williams defends school choice. And Robert Murphy, encountering a free-market advocate’s case for government monitoring of derivatives, responds, “It Just Ain’t So!”

Our reviewers render verdicts on books about World War II, libertarianism, early globalization, and the Constitution.

In 1969 economist Harold Demsetz identified an important flaw in much public policy analysis, the “Nirvana Fallacy.” We would do well to keep it in mind as we think about solutions to the current economic problems.

The rest of TGIF is here.

The case for free trade is based on the British economist David Ricardo’s principle of “comparative advantage”—the idea that each nation should specialize in what it does best and trade with others for other needs. . . .

However, when Ricardo said that free trade would produce shared gains for all nations, he assumed that the resources used to produce goods—what he called the “factors of production”—would not be easily moved over international borders. Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today’s case, to a relatively few countries with abundant cheap labor. In this situation . . . some countries win and others lose.

For many advocates of liberty, the primary argument for free trade is a moral one, succinctly captured by FEE founder Leonard Read in the title of his book Anything That’s Peaceful. They contend that if two people voluntarily enter into an exchange of goods, then no one else has a right to aggressively disrupt it. The moral status of such interference does not depend on whether the people live in different countries.

But those who argue for free trade on moral grounds are usually pleased to hear that it also leads to prosperity. Furthermore, there are many people who are swayed chiefly by utilitarian arguments: Will policy A make their nation’s residents better off than policy B? Therefore it’s worth examining the claim that, under modern economic conditions, Americans are being hurt by free trade with low-wage countries such as China.

Schumer and Roberts assert that they are not “old-fashioned” protectionists. They favor free trade in goods. But Roberts claims that there is a fundamental economic difference between an American’s purchasing clothing from a Chinese manufacturer and his purchasing it from another American who has opened a factory in China. In the first case only the clothing moves internationally, while in the second case capital also moves.¹

However, if China is more suited to clothing production than America is and if there is free trade in goods, then capital value will move to China, however mobile American capital is. Clothing-related capital goods in China will increase in value while those in America will decrease. The difference between Roberts’s two cases is who will own the appreciating capital goods.

When an American capitalist moves a factory to China, factory jobs do leave the country, but the profits still return to the United States. Not only does the American capitalist benefit, but so also might many other Americans. It is true, as critics of free trade often point out, that some of the beneficiaries may hold low-wage service jobs, such as gardeners, maids, waiters, and nannies. While their pay may not be impressive by American standards, they no doubt appreciate having a job. In fact, many teachers, engineers, and managers from poorer countries eagerly seek such jobs here. Furthermore, the American capitalist is also likely to employ higher-wage workers, such as accountants, architects, massage therapists, chefs, and chiropractors.

If American capitalists are denied opportunities overseas, foreign capitalists will take advantage of them. If, say, a Swiss capitalist does so, those jobs will be in Switzerland instead of the United States. How, exactly, would that benefit Americans?

Resource Immobility

Schumer and Roberts are wrong in contending that the case for free trade depends on productive resources being relatively immobile between countries. As Ludwig von Mises said in Human Action:

People cavil much about Ricardo’s law . . . [because it] is an offense to all those eager to justify protection . . . from any point of view other than the selfish interests of some producers. . . .

It has been asserted that Ricardo’s law was valid only for his age and is of no avail for our time which offers other conditions. [But] if one assumes that capital, labor, and products are movable . . . then it is superfluous to develop a theory of international trade as distinguished from national trade. . . .

The teachings of the classical theory of interregional trade are above any change in institutional conditions.²

In other words, international trade is different from trade within a nation only when national borders restrict the movement of productive resources. But Ricardo’s law of comparative advantage applies among all people, whether or not they live in different countries. Mises preferred to call it “the law of association,” since it is the foundation of all interpersonal exchange.

Because each person differs from everyone else in his relative ability at different tasks, any individual will always have some comparative advantage over any other person. Therefore, any two individuals always have some mutually beneficial way to cooperate. And since trade between nations always boils down to trade between individuals living in those nations, any two countries also will have mutually beneficial trade available to them.

Of course, Schumer and Roberts are not merely imagining that some Americans are having a difficult time because of the greater ease with which certain jobs, such as high-paying high-tech jobs, can now be moved overseas. An honest advocate of free trade must admit that there will often be people who are made worse off, at least in the short run, by the freedom to trade internationally. But the same is true of trade within the borders of a country: If you open a restaurant near to and better than mine, my business will suffer.

It might be pleasant to live in a world of unlimited resources, where everyone who wanted to run a restaurant could do so without having to compete for customers’ scarce dollars. But since we don’t, the fact that my situation might worsen because of your business activities is an unavoidable consequence of the freedom to buy from and sell to whomever one wishes. If we try to prevent all such unpleasant outcomes, we will eliminate the market economy and regress to a hand-to-mouth existence.

Those who find that scenario enticing are welcome to retreat to the wilderness and live that way today, without trying to impose their vision on others. The rest of us should realize that freedom necessarily means that we can’t pre-arrange social affairs to guarantee every outcome we desire. The result of voluntary interactions among free people will not always be to the liking of every interested party. The alternative to a market economy is not an economy in which someone can control all outcomes, but a “non-economy,” or, as Mises called it, “planned chaos.”

Notes

1. Paul Craig Roberts, Mises.org Blog,  http://www..mises. org/blog/archives/2004_01.asp
2. Ludwig von Mises, Human Action, Scholar’s Edition (Auburn, Ala.: Ludwig von Mises Institute,     1998), pp. 160–63.