Sunday, August 30, 2009

Conscience, What Conscience?

This afternoon, I got an email from friend to liberty, Benjamin Lee. Lee is the man behind this devastating compilation of Paul Krugman quotes back in June. He is also a main source in my blog post, "Krugwatch 2009: An Exposed Fraud".

He's at it again. This time, Lee uncovers another New York Times article from 2003 entitled A Fiscal Train Wreck, by none other than Paul Krugman. Unlike today's Krugman, for whom a $9 Tillion deficit is nothing to be concerned about, the Krugman of the Bush years was much different... I'll let Ben take it from here:

* * * * *
Anyone who regularly reads Paul Krugman, our latest “Nobel Prize winning economist”, knows that his position on inflation that it is not a threat to the economy at all. He has regularly been a defender of large fiscal deficits and expansionary monetary policy claiming that it is our road to salvation from our so called deflationary spiral.

We’ll ignore the fact that the deflationary spiral involves six straight months of price increases and regular complaints from Mr. Krugman himself about the skyrocketing costs in health care. He recently stated in an article that deficits saved the world, with a little help from his former boss at Princeton, Ben Bernanke. However, in 2003, when Alan Greenspan and the Bush administration were busy destroying this country’s balance sheet, Krugman was scared to death about inflation for good reason. The rest of this article references several paragraphs from Mr. Krugman’s March 11th, 2003 article, “A Fiscal Train Wreck”, which can be found in his New York Times archive.
"With war looming, it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits."
I’ll ignore the fact that he was crazy enough to sign an adjustable rate mortgage in the first place. Since 2003, the dollar has not only lost purchasing power, but the inflationary pressures that existed then have grown like a cancer. Our deficits are bigger and our economy is weaker. Meanwhile, Ben Bernanke has run the printing presses at full speed and has given no indications that he will slow them down.
"Last week the Congressional Budget Office marked down its estimates yet again. Just two years ago, you may remember, the C.B.O. was projecting a 10-year surplus of $5.6 trillion. Now it projects a 10-year deficit of $1.8 trillion."
So, in eight years, the deficit projection went from a $5.6 trillion surplus to a $9 trillion deficit. That’s a $14 trillion swing. Let us do ourselves a favor and stop acting like any of their projections are realistic. If Vegas were taking bets, the point spread would be another $7 trillion. As far as the CBO goes, Mr. Krugman says himself:
"The Congressional Budget Office operates under ground rules that force it to wear rose-colored lenses."
We are royally screwed when a $9 trillion budget deficit is put forth through rose colored glasses. Maybe we should be preparing for $16 trillion.
"...that the 10-year deficit will be at least $3 trillion… So what? Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don't matter. But we're looking at a fiscal crisis that will drive interest rates sky-high… But what's really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government's solvency. That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 — make that 3, O.K., maybe 4 — percent of G.D.P. But that misses the point."
If Paul Krugman was worried about a $3 trillion budget deficit and a debt to GDP ratio of 4 percent six years ago, a $9 trillion budget deficit and a debt to GDP ratio of 40 percent should have him preparing for financial Armageddon. The reality of the situation is that it is financial Armageddon.
"Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen." So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest."
This is exactly what most sane economists are saying today. Ironically, Mr. Krugman now likes to conveniently ignore those Social Security and Medicare liabilities that he was so frightened about in 2003. Let’s not forget, he conveniently ignores our newly pledged liabilities to Fannie Mae and Freddie Mac as well.
"But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar."
His point here is 100% correct and crucial. The government, now under Barack Obama has officially entered the stage of printing money to pay its bills and inflate away the debt. The problem is, Mr. Krugman now denies that such actions (printing money) are even occurring and he is cheering the quantitative easing performed by Ben Bernanke with a megaphone. He also attacks any person that even mentions the possibility of interest rates rising.
"I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that "a fiscal crisis threatens our future standard of living"."
Obviously, Mr. Krugman was 100% fearful of inflation throughout this entire article, which is why he was so eager to convert his mortgage to a fixed rate. He wanted his nice home in Princeton to be paid off with funny money from the Federal Reserve. Don’t worry Paul, you’re getting your wish.

The key message is that in the article that Mr. Krugman wrote in 2003 was a great article with an incredibly accurate picture of the financial health of the United States at the time. There is no question that George Bush was the worst president we ever had. There is also no question that Alan Greenspan was the worst Federal Reserve Chairman we had. The current problem is that everything Mr. Krugman now writes entirely contradicts this article, despite the fact that every single problem the economy faced six years ago is now much worse. Mr. Krugman has no issues with Barack Obama and Ben Bernanke committing the same atrocities. Obama has ramped up every budget, including the military while Bernanke runs the presses faster than Greenspan ever had.

Mr. Krugman has consistently stated throughout this year that there is no danger of interest rates rising and the budget deficit is not disastrous by comparing the numbers to the 1940s United States and Japan in the late 1990s. The problem is, our GDP consists heavily of government spending and a consumer based service sector economy, which is apparently a non-issue in the mindset of your typical Keynesian crackpot. The problem with GDP is that it severely overstates our nation’s productive capacity and is no measure of economic strength. How can a country that produces so little have a high Gross Domestic “Product”? After World War II, the United States was a creditor nation. Japan is currently a creditor nation. The present day United States is a debtor nation, the largest one we have ever seen. Our debt is held externally while the 1940s United States and 1990s Japan were held internally. In the past, we financed our debt through 30-year bonds, as did Japan. Today, a large portion of our debt is financed through 2-year bonds.

What happens if those interest rates do creep higher? The US must turn to the printing press to avoid default.
"...investors still can't believe that the leaders of the United States are acting like the rulers of a banana republic. But I've done the math, and reached my own conclusions — and I've locked in my rate."
Listen here Paul, we are officially becoming a banana republic, no matter how many times you tell us on TV that we are not Argentina. You made a wise choice in 2003 to convert your mortgage to a fixed rate over the course of 30 years. Why on Earth would you recommend that the entire nation take out debt financed in 2-year bonds? America is essentially signing up for a sub prime mortgage and we are assuming that we can simply refinance before the rates reset. Do us all a favor, stop lying to the American people. When interest rates rise and inflation skyrockets out of control, millions of Americans are going to wonder why you told them it wouldn’t happen. Either you care, or you don’t. With every word you write, I wonder how big that conscience of a liberal really is.

* * * * *

I think Ben really said it all right there, but I just feel compelled to repeat one thing.

Krugman, in 2003 says:
"...politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt."

Now why can't Paul Krugman wake up and realize that that's precisely what politicians are doing now?? 2009 Paul Krugman bears little to no resemblance to 2002-2006 Krugman... The reality is, Krugman could care less about irresponsible government - his only concern is that the "winning" team is wearing blue.

All that said, Krugman still managed to be wrong about something in 2003: Interest rates haven't gone up - they went down to perpetually historic lows! - and it seems to me nearly impossible that they ever will again. At least not significantly... The thing Krugman didn't take into account about that is that raising interest rates would require a Federal Reserve that was actually interested in a stable currency, which I think my chart has decisively proven, has never existed. Ben Bernanke doesn't have the stones to raise interest rates, and at this point it would do nothing at all to stop the massive levels of inflation we're headed towards.

Saturday, August 29, 2009

Rise & Fall of the US Dollar: 1800-2009

Jeffery Tucker was kind enough to post this at the Mises blog today, for all to see.

To see the full-sized chart at the Ludwig von Mises Institute website, click the link HERE.

As I said in my distribution email to friends and family:
"I just had this info-graphic published over at the Ludwig von Mises Institute blog - please check it out. Look at the value of the dollar over the last 200 years. Most importantly, look at the way our government (and others throughout history) have used inflationary monetary policy as a tool for expanding and financing the activities of the state. I have no doubt that without "taxation without legislation", as Milton Friedman called inflation, the number of harmful wars and disastrous domestic policies of the United States in the 20th Century could have never happened. Likewise, the various bubble economies and subsequent recessions are not possible without expansionist monetary policy.

We would all be far richer (around 20 times richer on a dollar baseline) had we never adopted such a disastrous monetary system or allowed politicians to print money whenever the government has been unable to pay its sizable tab. We have been robbed of untold levels of productivity, and most people aren't even aware of how it happens. I'm just doing what I can to help change that.

If anyone would like to republish, please let me know! Thanks."

Hopefully, more and more people will start waking up to the problems going on. But just knowing isn't enough. As my roommate asked, when I showed her the chart; "What can we do about this?"

Step one is to end the Federal Reserve system once and for all. Andrew Jackson was right in 1832, and Ron Paul is right today. As I pointed out the other day, of course - when Andrew Jackson stopped the 2nd Bank of the United States from renewing its charter, dozens of miniature versions of fiat-currencies came into play instead. That was a bit of a hazard, clearly - and can be avoided by having a transition directly into commodity based representative money. This could, and probably would be a return to a gold standard, for obvious reasons... But unfortunately the lost ground we've made in the last century is - for now anyway - just gone. Any return to a gold standard would require that virtually all of the current M1 or M2 money supplies in the United States be apportioned against gold by weight. This would probably significantly bump up the price of gold in the short term, but eventually - as we return to a solid currency and get our balance sheets back in order, I have every confidence that we can get back up to 1800 levels, and ultimately 1900 monetary value and beyond.

There is no good reason why prices shouldn't be coming down year after year.

Under an inflationary system, wages lag behind the rise in prices. As a result, you don't earn anymore money - but your dollar is worth less, in kind of a perpetual feedback loop until things come to a serious head.

The remaining competitive/Capitalist elements in the US economy has fortunately been enough to keep people from starving to death, but with the same level of production - and no inflation, or even deflation... It's not hard to imagine the massive standard of living increases we could have seen as a result. More stuff being chased after by the same amount of money is an incredibly good thing.

And sure - over time, wages will come down too (meaning that it's a bit hyperbole to say that everyone gets 20x the purchasing power, since people's salaries would be lower) but the beauty of an essentially deflationary monetary system is that wages will still lag behind the shift in currency value, so instead of constantly chasing after higher and higher prices with stagnant wages, you'll be enjoying the benefits of lower and lower prices for goods as your wages change more slowly. This is a great thing... Think about a world where instead of whining about needing a raise to cope with the increase in the cost of living - your cost of living keeps going down, and your boss has to be the one to ask you to lower your salary instead!

The current system is beyond insanity... It's time to stop destroying wealth and start creating some.

Sunday, August 23, 2009

Seasteading? Not so sure...

I might be going to the Seasteading Institute's "Ephermerisle" weekend event in a couple months... The annoying financial sitch is making that less a possibility at the moment, but I have to admit, I find the prospect intriguing. Not just the party and the meeting of a bunch of people with whom I ostensibly share some values, but the idea of Seasteading itself.

That said, I have some serious concerns with the Seasteading Institute's direction.

To explain a little of their goals, essentially they would endeavor to build a platform in the Pacific Ocean, about 20 miles off the coast of San Diego. On this platform, they'd build a residential community of anarcho-capitalists and live peacefully in a stateless society. Sort of a zionistic plan indeed... But also, I fear, incredibly unrealistic.

The numbers aren't looking good... They have about $500,000 in the bank (according to their website), and for a 400' x 400' platform in the middle of the ocean, including a residential/hotel structure and all the safety/security requirements, the amenities and everything else, they are estimating at a total cost of $114,333,000.........

Seems a bit low, right?

Yeah. So I had a chat with my brother the other day, who is a knowledgable and rather successful project manager who has spent the last 5 years of so building high-rise apartment buildings in Manhattan, NYC. I was curious about the size of rooms and some basic figures for designing a large hotel. He said that essentially you'd want to plan on 800 square feet per room at a minimum. So I posed the idea of a 12 story hotel with a footprint of 25,000 square feet. That's about a 158' x 158' square. Considering you'll need some walking space, you'll need to leave room for other structures like movie theatres, grocery stores, clothing stores, bowling alleys, office spaces (physical production facilities/factories?) and whatever else people are going to want to actually do living out in the middle of the ocean, then using 15% of the total area of the platform on the foot print for living quarters seems like a reasonable amount.

I should also note that based on the "ClubStead" engineering specs, the bulk of the weight would need to be situated over the 30' diameter pillars rooted down on the ocean floor.

At any rate, a 12 story structure in the middle of the ocean is about equivalent to a moderately sized cruise ship, so I doubt very much the structure could support anything more than that. Sooo... Assuming 800 sf per room, minus the first two floors (which would naturally be facilities & lobby, etc.), a 12 story structure with a 25,000 sf foot print winds up being 31 rooms per floor at 10 floors, or 310 rooms total. This also assumes relatively small rooms, unfortunately.

Now, after that conversation, I had a chat with my father - who is a professional designer of Airports and various other development engineering projects. I proposed the idea as potentially a casino and asked what one might expect the costs to be... Ya know what his response was?

$1,000 per square foot.


25,000 sf x 12 floors
= 300,000 sf x $1,000
= $30,000,000 just for one structure.

Furthermore, I learned that the design costs are typically around 10-12% of the building cost. So, the Seasteading Institute would be looking at dropping about $3,000,000 for the design work. And that's not for the platform, mind you, but for just the "hotel" we put on it.

On top of all that, my dad's estimate was for land-based structures. Surely the engineering cost of something that will be on the water and need to withstand erosion, rough waves, tsunamis and sea-monsters - and be 100% waterproof all over - will be much much more than $1,000 per square foot.

For something like this to work ever, any anarcho-capitalist or libertarian should know that it has to be a commercial venture. As far as I can tell, the only thing that will really work to make a Seasteading project functional is if it's a resort hotel & casino open to any number of travelers... I actually think there's a really smart opportunity here if done right. Cruise ships run in and out of San Diego all the time, they are also required to stop at a non-American port between docking at their home port... Right now most of them go to Mexico. Holland America's ships stop at Ensenada. Stopping instead at a unique resort instead might be a really interesting experience - especially since at least on the San Diego/Hawaii runs the stop in Ensenada is only a few hours, and about 2-300 miles out of the way. The cruise lines would save gas (a giant expense for them) and the passengers would get a really interesting experience.

But for that to work, you need more than just 12 stories of hotel.

You need casinos, concert venues, an array of restaurants, and you need entertainment facilities of all kinds. You need shopping, and of course, everything that everyone hates to think about like garbage, recycling, HVAC, communications people, and all the rest. If I had to guess, between restaurants and venues and the hotel - not to mention the platform itself - we'd be looking at well over $300,000,000 for the bare minimum, and if we're honest... Probably more than that.

310 tiny rooms with nothing else around really won't cut it.

By contrast, the MS Amsterdam - one of the cruise ships who's instrumental entertainment I was responsible for while working with Stiletto Entertainment - holds about 1,200 passengers and nearly 700 crewmen.

The Seasteading people are estimating a 200 room hotel with a 70 person staff. 70 staff?

Two things are quite clear to me. The Seasteading Institute people are grossly underestimating costs. They are also thinking on a scale which cannot possibly be profitable, and by extension cannot possibly work.

I'd really like to see "liberty in [my] lifetime". I think the overall mission of the Seasteading project is brilliant. But unless they start acting less like a non-profit and more like Steve Wynn, I just don't see how it's going to work. The project needs major investors, it needs a very serious business plan and it needs to start thinking more things through.

A Tale of Two Burgers

The state of California might as well have invented the Hamburger.

In truth, it was probably invented by a half a dozen people simultaneously throughout the Northeast & the Midwest, but let's be honest - the burger isn't just a sandwich... It's a whole experience of Americana. It's not some 1895 food-cart! It's drive-ins, roller skates, milk shakes and roadside diners.

Having lived all over the United States, I have to say... Nobody does that like Los Angeles.

We've got In & Out, Fatburger, Astroburger, Counterburger, Carl's Jr., A&W, and can even claim the very first McDonald's. We've got so many wonderful options out here that it's tempting to think that they just fall from the sky.

But alas, we live in the real world, not magic land where goods & services rain down on us from rainbows. The reality is, we don't have enough hamburgers to feed every single person in the United States (not to mention the whole world) at once. But fortunately, we do seem to have enough for people who want them... But all that gets me thinking, as things of this nature often do.

Why is it that I can saunter away from my house in any direction within 4 blocks and acquire a delicious cheeseburger which is not only of a quality that is quite to my liking and at a cost which is quite easy to bear? And more to the point, why don't certain other industries work that way?

As it turns out, when we apply just a little bit of sound reasoning coupled with a decent foundation in economic thinking - the answers to both questions are quite clear.

So let's start with why there's a seemingly endless supply of burger joints, all of which are accessible, perfectly safe and cater to a wide array of tastes. To do that, let's imagine that you've just opened a brand new burger stand.

(Pink's Hotdogs - about 1 mile from my house on La Brea... This is a small mid-day crowd - no kidding!)

Now that you've opened this burger stand, let's imagine 2 different worlds, based on 2 different sets of governing philosophies.


You make some great burgers, and you managed to find a little corner of the city that has hardly any competition and more than enough enthusiastic patrons to keep you going. In fact, once you've perfected the burger the way your customers like it - they start lining up out the door and down the block (see above).

If you're smart - this phenomenon isn't just an ego-boost, but it also tells you several incredibly valuable things about your business.
  1. People love what you're doing.
  2. So many people love what you're doing, in fact, that you cannot possibly serve all of them in a day - which tells you that you could easily sell even more burgers than you are currently.
  3. Your prices are quite possibly even below the maximum most people are willing to pay.
  4. You need to make more burgers!
These little pieces of information are great for any entrepreneur. They might very likely propel you to take action... Though specifically what actions you take may depend very much on your individual goals, there are a few obvious things you might want to do immediately.

For example: You might expand your existing location, this way you serve your customers more quickly, lines don't get backed up and your productive capacity increases. You might raise your prices - this may lower some of the customer volume, but if your burgers are so great 100s of people are lining the blocks and waiting in long lines just to get them, this seems unlikely. You might even consider simply opening a new location entirely.

Which of these things you do will be up to you, and largely a process of trial and error. If you raise your prices and you lose 100 customers a day, your loss in revenue will tell you quickly that changing the price was a bad choice. So instead of changing your prices, you might try hiring an extra cook and using some of your ample profits to buy a new grill. That in turn reduces your lines and encourages even more customers to show up each day... Your increase in revenue as a result lets you know that that was a good choice.

In either case, however - the great thing about your success is that customer demand and the bold profitability of your business has given you very specific signals to produce more burgers.

But, let's introduce a new player, me, to this little equation... After all, it's not only you who sees the writing on the wall! I am a lover of delicious burgers as well, and I am an investor looking for a new business opportunity to boot. Every day, I drive by your burger joint and see the long lines of hungry people waiting to buy some of what you're selling.

So I think to myself;
"I bet I could convince a few of those hungry souls to come eat my burgers instead!"
I have the money, the time and desire, so I open my very own burger joint just across the street from you. This is a game changer, to be sure... Especially if I do it before you have a chance to open a second location yourself.

Now. I know people love your burgers and merely copying you won't get anyone over to my side of the street - if I'm offering the exact same thing, why go to the new guy when they know how great the original is, right? So in an attempt to differentiate my own hamburger stand I offer some unique changes.

I start by selling my burgers just a few cents less than what you're charging, hoping that the price will entice a few of your customers across the street. Then, I add a few menu options that I know you don't have... I sell milkshakes and onion rings with my burgers when you're still only doing fries & soda. And it with a little luck, it works! I've managed to get some of your customers... and now there are TWO thriving hamburger stands..

More people get fed, more people have more options, there are more jobs available, cheaper burgers and more prosperity for all. Now pass the mustard!

* * * * *
Of course, you say - this is a silly example which we've seen thousands of times. We all already know that inevitably if you see a McDonald's, a Burger King isn't far away. And if not that, then a Jack in the Box, a Wendy's, a Carl's Jr. or an In and Out... Often across the block just like the hypothetical burger joints you and I opened. So why bring it up at all? Who cares?

Well... You should.

The real trick here is to dig a little deeper and realize what all this has meant to the broader economy in the first scenario:

  1. It was success - as defined by profits - that encouraged expansion and production of more hamburgers. The more money people were willing to spend, and the more people lining up each day signaled to both of us (as burger-stand owners/investors) that the demand for burgers was far greater than our current supply. As a result, we responded by boosting our productive abilities; you by hiring more staff and adding on another wing to your restaurant - and me by opening a brand new restaurant just across the street. The net result of course, is that:
  2. The world of Scenario A has more burgers! After you expanded and I opened a new restaurant, there were more burgers available for everyone. Price naturally went down some (we are now competing for people's patronage after all) in response to the increased supply, but more importantly more people are now getting fed more quickly, and much fewer have to wait in line to get their fix. This is the most important aspect to understand for the world at large - outside of these hypothetical situations.
  3. While less vitally important than the giant increase in the supply of available food, by my opening of a restaurant across the street and my desire to siphon off some of your customers by offering something different, people now have greater choices than they had before with just you. This means that more people for whom your burger wasn't quite what they were looking for (but no doubt still delicious), now have another option to get exactly what they want.

And so we continue making profits, we continue expanding our lovely little burger factories until eventually the average consumer will have been somewhat saturated with places to eat. At that point, economists would call this a market equilibrium. Prices come down, quality goes up, more people get served what they want. That's a big 3-way WIN for consumers!

It's also not a bad thing for you and me... In Scenario A, we've both been able to make quite a good living and expand our operations. Even while our respective profit margins have fallen some from the early days (especially yours before you had any competition), we're still making more money than ever before on the volume of our business.

That's the "theory" anyway... And surprise, surprise; the reality (in the field of hamburger joints) is identical. High prices and/or profitability encourages new entries into the market, and that competition results in higher levels of production, better quality & lower cost to the people who are buying the product... In this case, people who love a tasty burger, like me!

In short - and to paraphrase Ludwig von Mises - Consumers are king. (Side note: It's inconceivable that the phrase; "the customer is always right," could have developed outside a market economy... Ponder that one for a bit.)

That said, this reality assumes that transactions are voluntary. You were free to open your stand and sell your products, as was I, and no one was required to buy from either of us. If they didn't like burgers or didn't like our burgers, they were of course free to make other arrangements. People bought our food did so not because we required it, but because they freely chose to do so based on their own enjoyment.

Fortunately, in the restaurant industry in real life - transactions as such ARE voluntary. There are relatively few restrictions (though there are a few of course, like health codes, zoning & such) on who can join the market, so it's easy for me to start my own hamburger stand and compete with yours if I want. There are also no restrictions (that I'm aware of) on which restaurants people might choose to go eat at. That is to say, I've never heard of a situation where anyone was forced to go eat at McDonald's if they didn't want to. No one has been thrown in jail for failing to patronize TGI Fridays...

The voluntary nature of these transactions is crucially important to the signals provided in a market economy though - this way we know that if customers come and patronize our respective restaurants, we can be sure that their preferences are real and meaningful. If they were forced by some individual or some government, individual preference is necessarily being negated - and at that point, who knows what goods people really want? For governments and other criminals of course, the individual preference of the victim is hardly of any concern.

This is not true for many other industries in the real world, however!

As such, let's contemplate another world entirely, but still use the model of the burger-stand...


Imagine an alternate world where you've opened that same, incredibly popular, hamburger stand... But where instead of a free-enterprise system, we suddenly (and after the fact) implement a government-controlled system.

Imagine further that the government decides that it's such a shame not everyone can get your burgers, in fact, it's downright unfair(!) so to rectify this heinous crime against human rights, burgers should be made free to everyone. To have and consume a hamburgers is now an established "human right". Heck, let's even give them the benefit of the doubt and suggest that they were able to legitimately add the Right to a hamburger as a citizen of this city/state/nation as an amendment to the Constitution.

Thus politicians decide that government shall pay for all hamburgers hence-forth - no one should have to go without, and no one should be denied access based on ability to pay.

Of course, implementing a program like this is going to be costly and they definitely want to get their money's worth - the taxpayers will revolt if it seems like the program is just wasting their hard-earned income. So the politicians say the following to you - the only current supplier of hamburgers in your region;
"Because we're going to be the only one paying, and we're going to be buying up your product in bulk... You are going to give us a discount. It's your patriotic duty, and if you don't - we'll find some other maker of hamburgers who will and you won't have any business after that at all. So here's the "deal": We'll only pay 87% of what you were charging before, and in exchange we offer to write a law that makes you the only supplier of hamburgers in your district by law - no one will be allowed to compete with you. You will be the only one we deal with from now on and you'll get all the business you've ever imagined."
Well, as a result of this deal, I - the savvy investor/restaurateur who saw how busy & profitable your place was - have been disallowed from opening a competing stand across the street.

Government managers already have *you* to supply their estimated burger needs. I am now locked out of the picture... At least in your local area. (I might find a similar deal with government in the next town over and establish my own little local monopoly there... Of course, I also realize the deal with the devil you just made and think maybe now's the time for me to retire or consider another, less dangerous business opportunity anyway.)

So what happens next? Now that government has made your burgers free to anyone who wants them, and you're the only possible supplier suddenly your lines have doubled.

Not only that, but people who were once ordering only your standard cheeseburger are now demanding the double cheeseburger deluxe, with chili-fries and a drink. It's free now, so there's no reason for your customers not to get as much as they can on each visit. They no longer have to balance their financial position with their needs and prioritize what's really important to them.

Of course - with no competition, and a seemingly-endless pool of government money from which to draw, it doesn't matter to you all that much. In fact, at first, it's amazing! You have twice the customers you've ever had and by all appearances your business has never been better.

However, you haven't been reimbursed by the Treasury you send the bill over to the government and excitedly wait for the cash to roll in.

Finally (and just 3 weeks late!) the massive check for your services arrives... Only, it isn't quite as massive as you'd expected. Government isn't paying you quite enough per unit to really get ahead. Suddenly you remember that whole 87% rider in your deal. You aren't profiting very much anymore... Now the next time your fryalator breaks down you'll have to cut into your profit margin to pay for it when before you were maintaining a separate fund for repairs. Cutting into your profit margin is fine for now... It just means fewer nights out for you and the family - and maybe putting off that new car another year. Not the end of the world, right?

As things progress though, bigger problems arise. It started out just with you struggling to keep up your repairs and maintenance costs... As a result, you've not been able to really even consider much in the way of actual expansion. Now that your customer base has gone up quite a bit, but you are still just running the one little stand it's bit of a problem that you can't really afford to hire more employees, much less buy more grills for them to use.

As already established in this scenario; remember that I am not legally allowed to build my own place across the street, so my attempts at profit-seeking won't be alleviating any of the pressure of high demand from you. You haven't forgotten though... And so you start to realize that you may be in over your head.

Now, just as all this is coming to a boil, the same government who's beefed up demand and prevented any additional suppliers from joining the market also decide that they need to ensure the safety of the food you're selling, and if you want to offer any new products - a chocolate shake for example - it will need to undergo a rigorous testing process first.

Both you and your suppliers are suddenly faced with a large increase in costs. Now, before you made this deal with the government, if your costs increased, you were able to increase your prices as necessary to make sure that you were able to afford everything you needed to run your business properly, not to mention pay back your investors and actually take a vacation every now and again. But the price you get paid per burger is now fixed by law. You can lobby for an increase of course - but that only costs more money & time hiring lawyers, which may be necessary now but whichonly further cuts into your resources. Unfortunately - your attempts to get your per-unit payment increased fails anyway. You see, the politicians who created this program think it's too new to risk it looking like a mistake, and they certainly can't afford to be seen giving out more of the tax-payer's money... And it would be terribly bad PR if it seemed that you, the benevolent providor of the now-"public good", were seen as a greedy profit-seeker.

So you're out of options. You now make 0% profit on your business, and as a result are no longer able to even make basic repairs and maintain your existing facilities - much less expand to meet the immense demand for your business. Your business is running month-to-month, soon there-after, so are you.

As all this is happening, you've only been able to save costs by buying the lowest grade, cheapest beef & cheese allowable, by reducing the size of each of your burgers and even buying discount bread. Worse, you've fired your chef and instead promoted the 22-year old fry-cook to his position, because he costs you half as much. The once beloved quality of your burgers has been ruined.

Now imagine this situation persists unchanged for a few years. Try as you might, you've never been able to keep up with demand. Even though burgers are free and "everyone" is supposed to be able to get one whenever they want, you are completely incapable of providing as many burgers as everyone wants. So some people will wait in line for hours and hours, and even still some of those get turned away each day. Your machinery is deteriorating, the quality has declined, and your once-proud little hamburger stand has become a laughing-stock of the town.

People who used to say, "Go there if you want the best burgers in the state!", now lament; "Go there if you want to wait in line an hour for a tasteless lump of meat... but hey, it's free!"

* * * * *

Of course, you say - this is all silly too, right?

No government would stop people from opening a competing hamburger stand! And of course, no one thinks that hamburgers are so important to humanity that it should be a basic human "right" to have them whenever you need one for free (paid by the government via taxation).

Naturally... We rightly see them as a luxury item... A juicy double cheeseburger is one of life's great pleasures, assuming you're a carnivore and a Real American. They bring us back to our youth, they remind us of barbecuing outdoors and dad standing over a charcoal grill. For some they even remind us of the halcyon days of 1950's suburbia and cross country road trips with the family. And perhaps if you're ancient enough they might remind you of a World's Fair (or even a county fair at this point). But they aren't a necessity.

Of course not.

And as a result - we let freedom work. We let markets work. And virtually no one who ever wants a burger has to go without. They are abundant, they are cheap, and yet most of them are delicious.

Even better, there's a dozen different price points on which you are free to decide based on your own values, financial situation and needs. Sure you can get the $40.00 Kobe Steak-burger from the fancy steakhouse prepared by a trained chef or the $20.00 one with sides from Applebee's. Or you can get the $12.00 double cheeseburger from the nostalgic 50's dining car all decked out in neon & aluminum with waitresses on roller skates. Or if you don't care for nostalgia and service, but still want a decent meal you've got $5-10 burgers from any number of local joints... And if you just want to stuff your face with something greasy, cheap and tasty - you've got In & Out or one of it's myriad competitors. And if even that is too expensive for you... National chains like Burger King & McDonald's still offer cheeseburgers for $1.00.

But you get to decide.

You have almost endless option, and that lets you balance the hundreds of values going on in your mind whenever you sit down to eat. Are you really hungry? Do you want something that tastes amazing? Do you want great service or to be left alone? Do you have an hour to eat or only a few minutes? What can you afford?

That's such a tiny spectrum of the factors influencing your decisions on a daily basis, and with something as trivial as the hamburger Governments and most people (except the disturbing surge in fat-hating food nannies of course) don't care what you choose. So they don't set up special 3rd-party payer systems. They don't assert some magical "right" to have a burger for free anytime you want, and they certainly don't often limit the number of suppliers allowed to join the market place. As a result... We see the wide array of ubiquitous choices in food everywhere we go. It doesn't matter what city you're in, not only in the United States, but just about anywhere in the world!

But in other industries - health care & education being the prime examples - in which Scenario B is the norm, this is hardly the case! Those resources are getting more scarce, not less - and the demand for them continually increases.

In both Scenario A & B, I used rhetoric to explain the theory... As silly as it seems to center it around burger stands, the truth is - both theories are in play in reality... Just in different industries. In both cases, the theory does describe reality (which is good, as they'd be pretty awful theories if they didn't). It may seem counter intuitive, though I assure you in truth it is not, but the more people use the force of government to provide services - the less available, and poorer quality those services will be.

It is no less ironic, however, that it's only the trivial industries that are left alone and thus which market forces are allowed to work free from much of any coercion - and so provide us with completely adequate supply of just about anything you might never really need. And yet, the things that are so crucially important, like health care and (quality) education are distorted beyond all recognition and wind up being incredibly expensive and inaccessible to much of the population. If government's are going to meddle endlessly in the voluntary affairs of normal people, I often think it would be best just to restrict them to things that don't really matter at all, like burger stands and baseball games.

On that note... It's time for lunch!

Thursday, August 20, 2009

Stossel: "ObamaCare's Inevitable Logic"

John Stossel writes yet another fine op-ed on Health Care at today... I'm glad someone with more clout than I have keeps plugging away at explaining the basic logic of this crap. Stossel writes:
"Therefore, if demand for health care services increases—which is Obama's point in extending health insurance—prices must go up. But somehow Obama also promises, "I won't sign a bill that doesn't reduce health care inflation."

This is magical thinking. Obama, talented as he is, can't repeal the laws of supply and demand. Costs are real. If they are incurred, someone has to pay them. But as economist Thomas Sowell points out, politicians can control costs—by refusing to pay for the services.

It's called rationing.

Advocates of nationalization hate that word because it forces them to face an ugly truth. If government pays for more people's health care and wants to control costs, it must limit what we buy.

So much for Obama's promise not to interfere with our freedom of choice."
Obviously, I've been saying this repeatedly. It's shocking to me how people don't realize that reality dictates what options we have. We don't get to magically eat the cake and still have the cake.

In my regular discussions & debates with proponents of ObamaCare, there seems to be a willful ignorance on the meaning of the word "ration". To be fair, economists really need to strike the term "price rationing" from their lexicon as it not remotely similar to the way most people conceive of the term "ration" and obsfuscates the difference between actual rationing - where a central & monopolistic authority controls the supply of a good and aribtrarily apportions allotments to a population - and price allocation. But boy, oh boy to liberals get hysterical about the term. I suppose I should be amused, but to be hysterical over something you're completely ignorant of is always more obnoxious and embarrassing I think.

Anyway... the basic laws of supply & demand are going to win this and every other round. Until politicians can stop meddling and let free enterprise do it's job as unparalleled mass-producer, we will see nothing but the continued increase in cost as more and more people chase after fewer & fewer resources.

Wednesday, August 19, 2009

Andrew Jackson & the Second Bank of the US

One of the things that the Austrian school of economists remark on quite frequently is the interesting relationship that fiat central banking has with financing government through inflation. Most especially, many from the school - probably most notably Murray Rothbard - have pointed towards a disturbing, but incredibly strong link between a central bank and War. As paranoid as that might seem, Rothbard's conclusion is hardly the first time anyone's thought of this before...

For example, when 7th President of the United States, Andrew Jackson made a case for the abolition of the Second Bank (Alexander Hamilton's rather obnoxious yet successful attempt at imposing a debt-based monetary system on the infant nation), some of his primary reasons included:

  1. It concentrates the country's finances in only one institution
  2. It enables foreign banking interests to control the US government
  3. The central bank itself weilds too much control over members of Congress
  4. It favored northeastern states over the southern & western states (of which Jackson was a citizen) - more to the point, the central bank favored investment to industrial interests at the expense of agriculture
  5. It served mainly to make the rich richer
I should note also, that Jackson campaigned (and obviously, won) on these issues. He also believed - rightly - that the central bank was the primary cause of inflation. So... In 1832, he managed to veto the Bank's charter renewal.

For whatever reason, this chunk of history has been widely omitted in most people's education. I have said many times before that I was fortunate to have a few phenomenal history teachers - between my AP US history prof in high school and Dr. Patrice Berger in college, I had an excellent starting point for a lot of this stuff. But look at Jackson's list...

Now think about the Federal Reserve as we have it today.

It does only serve to make the rich richer, it does contribute to inflation (and how!), it does concentrate the finances of the nation into one entity which - when it screws up, it screws EVERYBODY up (see: 2008-2009)... And while I would say that it's no longer an issue of "industrial" vs. "agricultural", the central bank clearly favors bigger and bigger corporations and major players. Part of this is making the "rich richer", of course, but fundamentally the Federal Reserve supports massive behemoth investment banks like Goldman Sachs, at the expense of the American public and the value of the dollar. And as if that weren't bad enough, we are now essentially owned outright by China.

Andrew Jackson is & was 5 for 5. He simply could not have been more right... And that was almost 200 years ago.

You'd think we'd have learned some lessons... But history, it seems, is condemned to repeat itself.

Incidentally - Jackson made a pretty serious mistake in the way he dismantled the Bank, instead of reverting to a gold-backed system, many smaller banks flooded the market with their own fiat currencies which were allowable as legal tender - and as a result, a temporary, but painful monetary inflation occurred, which was eventually reigned in by a return to a gold standard. So, I guess, that's another lesson we need to learn - transitioning back to a sane monetary system will be a bit painful in any case, but the severe problems can be avoided by learning from the mistakes of the past.

Let me restate that... Severe problems can be avoided by learning from the mistakes of the past.

Tuesday, August 18, 2009

Richard Vedder on Reason.TV

Matt Welch interviews Ohio University Economist, Richard Vedder on the high cost of college educations the other day. Vedder notes that the high cost is largely a result of government funding by pumping up demand.

Watch his talk after receiving the Adam Smith Free Enterprise award from the American Legislative Exchange Council:

Part 1:

Part 2:

I've mentioned this quite a few times obviously, in this blog and everywhere else - but I bring it up now because it bears repeating, and it also is a direct parallel to what we've done with Health Care as well.

I know I wind up saying the same things over and over, but it's quite simple: If you artificially boost demand by using the power of government force + bottomless pit that is "taxation", and you don't have any way to boost supply at all - or worse, you actively work against it through restricting licensing and erecting barriers to market entry.... you get high cost!

Shouldn't be a surprise, but for whatever reason.......... The general public still seems baffled.

Tuesday, August 11, 2009

U1-6 Unemployment...

From the Bureau of Labor Statistics, this is how we calculate Unemployment... Note that U3 is the "official" number - which currently stands at 9.4%, however, this is at least in my opinion rather misleading. I fit into the U6 category... I am what you would call "underemployed", working part time when I was originally expecting full-time, and at a wage considerably less than I was anticipating, with virtually no way of increasing that in the near future.
  • U1: Percentage of labor force unemployed 15 weeks or longer.
  • U2: Percentage of labor force who lost jobs or completed temporary work.
  • U3: Official unemployment rate per ILO definition.
  • U4: U3 + "discouraged workers", or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.
  • U5: U4 + other "marginally attached workers", or "loosely attached workers", or those who "would like" and are able to work, but have not looked for work recently.
  • U6: U5 + Part time workers who want to work full time, but cannot due to economic reasons.
If you use the U6 number, the United States unemployment rate is 16.5%.

Sunday, August 9, 2009

"Nudge" This!

Back in early 2008, the University of Chicago professor team of Richard H. Thaler & Cass R. Sunstein wrote a book called Nudge: Improving Decisions About Health, Wealth, and Happiness.

After the financial collapse (which it unsurprisingly failed to even remotely predict - and I'll get to why in a bit), they created an updated edition, which was purchased by my parents, read, and then sent to me.

My folks claimed that the book was written by a "couple of libertarians", but also that it was about how to "nudge" people into making "the right" choices. What the authors actually claim, is that they are a bunch of "libertarian paternalists", whatever that means! I don't really want this to turn into a "No True Scotsman" issue, but as I explain what they're really talking about here I think it will become quite clear that these are hardly advocates of anything any true libertarian I've ever met would subscribe to... I know I don't. American libertarianism is fundamentally oppositional to "paternalism" period, so it's a bit oxymoronic to mash the terms together. I think the authors do understand that.

That said, the policy prescriptions they advocate are vastly more benign than most of the "command and control" style restrictions on freedom that have encroached on every aspect of American life in the last several decades.

The book is about preserving choice, which I applaud. However, these are not supporters of laissez-faire. These are "behavior economists", which is a field that has cropped up relatively recently - sort of in tandem with the resurgence in more "empirical" versions of psychology like cognitive/neuropsychology & evolutionary psychology. Personally, I find some of this to be a little strange since Ludwig von Mises covered a lot of Thaler & Sunstein's "revolutionary" explanations of human behavior with Praexeology WAY back in 1949's Human Action.

Also, I figured out that people respond to incentives and the like explicitly (and in many of the same terms) by the time I was 14-15 years old. It's not exactly news.

The truly unfortunate part about the book is that the authors never figure out the distinction between a government using "nudges" - which are intrinsically backed by force (police, guns, jail), and private individuals and businesses using similar means of persuading people to engage in different behavior. In addition - the authors spend a great deal of time at the top of the book explaining the various ways in which human reasoning can fail and err (all true and important to be aware of), but then somehow we are expected to believe that politicians don't make the exact same errors in reasoning. Worse still, in many instances, it would appear that in the world of Sunstein and Thaler, the addage "power corrupts, and absolute power corrupts absolutely" isn't even a consideration - to the contrary, politicians aren't at all influenced by special interests, selfish concerns or even experience the lust for power.

Businesses, which in a free market succeed or fail (like most businesses do every day) only in the extent to which they serve their customers in pleasing ways, are the really scary ones apparently. And in our non-free, quite corporatist market, Thaler & Sunstein have a point. But much like so many individuals, they confuse cause & effect. Any casual observer should realize that the more power government has grabbed over the past century, big business has only gotten more powerful. They never bother to address why. Few people do of course, but if any government was actually something that was designed to "reign in" business interests and protect consumers, the United States government - which is the biggest, most expansive & most powerful government in the history of the world - would have accomplished this. But in reality, the bigger government gets, the more businesses need to focus their attentions on lobbyists and currying favor with power-seeking public officials. The more power public officials have - the more command they have over the economy, the more incentive everyone has to try to influence them.

The root of the problem is the concentrated power. Not the business.

I'm not particularly convinced Thaler & Sunstein actually understand that. And if you don't at least get that, you should probably quit refering to yourself as "libertarians". Even if you follow it up with "paternalists".

Ultimately, my biggest complaint about the book is not that the things that the authors are saying are fundamentally wrong, or even that their policy prescriptions are so terrible. In fact a few are great (they are Friedman-style advocates of school choice & vouchers, getting marriage entirely out of the hands of the government, and actually promote the idea - however briefly - of allowing markets for organs!). If their "nudges" were implemented right now instead (key point) of the freedom-crippling destruction of the Bill of Rights generously called "legislation" in modern America, I would be a pretty happy guy.

The goal of the nudges is at least to preserve choice. I can get behind that, but we've seen time and time again that for most governments, "nudges" will never be enough.

Ironically, all businesses can do is "nudge" but the book still manages to make them seem more dangerous than the people who's nudges invariably turn into fines, then into jail, and in the extreme turn into jackboots.

At any rate, as I was reading, I compiled a series of notes - some good, some not-so-good about the book and I wish to share them with you all here:

Page 47:
"For example, smokers might benefit from cigarette taxes, which discourage consumption without forbidding it."
First off, there is nothing "libertarian" about sin-taxes. It's nothing more than nannyism at it's most banal, and it's none of the government's business whether or not a person chooses to smoke. Social engineering is not libertarian.

As a minor side note, I do find one really interesting thing about sin-taxes... Sin-taxes are as clear an admission as you'll ever get that politicians fundamentally understand that raising the price of something decreases demand (and conversely that lowering the price increases it). But they're inconsistent! They are counting on the fact that an increase in a consumption tax on specific goods can discourage their use, but they pretend that the same is not true for increases in things like the minimum wage (which is an artificially increased tax raising the cost of labor). If higher cigarette prices discourage cigarette use, than why politicians think that raising the cost of labor doesn't discourage employment is impossible for me to understand.

Page 48:
"Note: Three-quarters of Americans get refunds when they file their taxes... If these refunds were described as interest-free loans to the government, they probably would not be so popular."
A good friend of mine (shoutout to Bill) and I had a discussion about this very thing ages ago. The government actually puts our tax money into a wide array of interest bearing accounts... So if they take more from you over the year than you actually owe, you are simply giving them free money on which to earn interest. When you realize that you could have been earning interest on that same money... Well, it gets rather irritating to me. However Thaler & Sunstein's point was that these are basically forced savings accounts for many people. This may be true, they they're pretty crappy ones. Even the paltry 1-2% being offered by most savings accounts, or the 4% you might get with a CD or government bonds is better than zero percent! But obviously, the way things are done now is rather beneficial to the government, isn't it? Course they'd never have a system set up that works against the people's interest...

Page 57:
"On the other hand, social scientists generally find less conformity... when people are asked to give anonymous answers."
Something to think about anytime legislation like Card Check the "Employee Free Choice Act" comes up, huh?

Page 61:
" is a possibly comforting thought: they [other people] aren't really paying as much attention to you as you think."
Something I've said for a long, long time. The quote I like to use much of the time is "Anytime you worry that people are thinking badly of you, stop and realize that they're not thinking about you at all."

This is also a reason why in the vast majority of cases, Occams Razor should always lead us to the conclusion that some perceived slight against us is almost always caused by carelessness, and not maliciousness. This is also rather optimistic... The world is filled with very few actually bad people, just a lot of occasionally thoughtless ones.

Page 65:
"Candidates... do the same thing; they emphasize that 'most people are turning to' their preferred candidates, hoping that the very statement can make itself true. nothing is worse than a perception that voters are leaving candidates in droves."
...No kidding. And how did the media treat Ron Paul as a presidential candidate again? Ohhhhh yeah. They said he was a crank & a crack pot and George Stephanopoulis said, point blank that he had no chance of winning. He remains the only guy who ran or who is saying anything in government today who has the slightest clue, and yet the media & his opponents easily created the perception that he had no shot. From there, we've all heard the term "cascading" referencing this kind of thing as well. Or in marketing terms "band-wagon" comes to mind. This sort of thing has really helped to make the Republicans & Democrats firmly committed to running media-savvy, but otherwise completely useless candidates for elective office. UGH.

Page 69:
"...those households that consumed more [energy] than the norm received an unhappy "emoticon..." :(
I highly doubt that this would work consistently over the long term since I know I at least would simply ignore the stupid thing, but in either case it's nothing but ridiculous nannying BS! There are a thousand circumstances which might require someone to use more or less energy than the average individual. Central planners have no way of knowing how much is the "right" amount for any individual. I myself have 2 computers and a host of electronics that I use for working on music projects - my roommate is the same for video editing. We use electronic equipment much more than most... Do we deserve a constant scolding from some bureaucrat who only has access to one metric of information about our lives? I'd say not.

Regardless, the solution to any energy problem is not to "conserve". Conservation is no answer. Better, more efficient and just more production period is. If we were producing 10 times the amount of energy we actually "needed", just think of what new and exciting things we could accomplish for the benefit of the world.

Page 82:
"But if some of the consumers are Humans who sometimes make bad choices (as judged by themselves, of course) then all of us may have an interest in which set of firms wins the battle."
Excuse me for being just a might skeptical of their generous statement that the correctness of people's choices are to be "judged by themselves" when virtually the entire book is devoted to judging other people's decisions as good or bad and nudging them to make the externally-defined "good" ones.

Page 99:
"If you're a Democrat, and you like books that fit your predilections, you might want to see what Republicans think, no party can possibly have a monopoly on wisdom."
But apparently both parties can have a monopoly on abject stupidity...

Page 100:
"Many markets (and choice architecture systems) are replete with with incentive conflicts. Perhaps the most notorious is the U.S. health care system."
There is some implication here that we actually have anything remotely functioning or "free" market in health care! There's nothing of the sort - which obviously I have written extensively on - and the entire history of medical care from World War II on in the United States has been replete with the very nudges that this book is essentially advocating. It's also yet another story of where government has gone with "nudges" and when they produced unintended results, it just snowballed into the kinds of "command & control" legislation that destroys any form of choice.

You can read about this in other chunks of my writing, but it bears repeating that the only reason we have employer-paid health care in the US is because companies needed a way to compete for good workers after FDR imposed wage controls in 1943. Eventually, as a result of corporate lobbying & meddling politicians, tax breaks & other small incentives were passed to make it easier for employers to provide that benefit, which firmly ensconced it as the way health care is provided in the United States. Since they didn't pass equal tax-reductions for individual health insurance, it's significantly more expensive to pay for it yourself... And now, in 2009, we no longer expect (or want) to have the same job for our whole lives! So anytime we quit or move, which is common, we lose our insurance. This is obviously a huge problem, but who caused it!? NOT the market.

Wanna talk HMO's? Government created! Wanna talk high cost of care? That's what happens when government subsidizes something! Thaler & Sunstein acknowledge that cheaper prices result in increased demand. (Duh!). So when government makes health care cheap or even "free", they do nothing but encourage massive over use - which puts a strain on available resources. And then what do you think happens? COSTS SKYROCKET!

The exact same thing happened with college tuitions too.

And that's not even factoring the other layers of idiocy in health care, like letting the AMA (with government backing) dictate the number of doctors allowed to be licensed at any given time, creating a shortage of doctors - again driving up the price per MD, not to mention depriving people (especially in rural areas) of much needed medical care providers.

In a book called "Nudge", the authors seem to meticulously avoid discussing all of those playful little shoves.

Pages 129/130:
"...we must acknowledge that a nonlibertarian argument can be made for limiting the percentage of an employee's retirement portfolio that is held in company stock - say, to 10 percent."
"By giving company stock this odd preferential treatment, existing law actually encourages the inclusion of company stock in 401(k) plans."

So, here's a perfect example of my major complaint with not only "Nudge", but virtually all people arguing for more government intrusions into people's right to freedom of association & choice (the market).

The authors say that we can make a case for "intervention" while on the very next page noting that it was earlier intervention which caused the problem to begin with! And what's worse, yet again, the problem wasn't exactly created with "command & control" but with a simple "nudge". I get a little irritated eventually because the authors keep ignoring that much of the principles of their book have been employed in the US for years. And inevitably - the first nudges create problems that are unanticipated - which require more nudges, which create more problems, which require stronger pushes, which create even bigger problems which lead to command & control and the inevitable loss of liberty.

Page 139:
"But market forces did not prevent the problem from occuring, so there have been calls for more intervention. Some demand an end to predatory lending, but because loans do not come stamped "predator," it's hardto implement any such ban without depriving many deserving but high-risk borrowers from any source of financing."
First: Exactly a case in my point.

The government intervened in dozens of ways prompting the reallocation of resources into the housing sector... There are many great books on the topic, including Tom Woods' Meltdown, Thomas Sowell's The Housing Boom & Bust, and even Johan Norberg's soon-to-be released, Financial Fiasco: How America's Infatuation with Home Ownership & Easy Money Created the Financial Crisis. I won't get into all that much of it here, (because I covered it all here) but between stuff like the Community Reinvestment Act and Clinton & Bush's obsession with pushing home ownership, the FDIC and FNMA & FDMC, we had no end to government interventions leading up to the crisis.

...and then... OF COURSE... when things got really screwed up - we call for (you guessed it) more interventions to fix the disastrous consequences of the earlier ones!

But more to the point, every bit of this whole section in the book is undermined by the authors' avoidance of discussing the biggest "nudge" of them all: THE FEDERAL RESERVE.

Because the Fed controls interest rates and the money supply, it literally has "control" of whether or not people save or spend, invest or borrow. When rates are the at historic lows, that encourages people to borrow & spend... The Fed's "nudge" turned on the spigots of money full blast, and people lapped it up - as any sensible person predicted they would.

As Peter Schiff likes to say; "President Bush said that Wall Street got drunk, but who supplied the booze??"

Pages 140/142:
"Students typically try for a federal loan because they are cheaper..., then look at private loans if necessary."
"One might wonder why lenders are so eager to get the student loan business that they are willing to engage in practices that are at least sleazy and possibly illegal. The answer is that the combination of loan guarantee and subsidy by the government makes these loans exceptionally profitable, so lenders compete hard to get the business."
...Indeed. And, just like in health care, and in the housing market, the government has skewed demand for college way, way over supply can bear and costs shoot up.

(Also, finally the authors mention "rent-seeking" and actually sound like libertarians for a moment!)

Page 148:
"If we were to pick a single phrase to characterize the design of the Swedish plan, it would be 'pro-choice.'"
Note: In the "democratic socialist" land of Sweden, the things that they've done to successfully make their systems work invariably involve market liberalization.

Here's more Johan Norberg:

At least in terms of retirement/Social Security - Sweden is more "free market" than the United States. Shocker...

Page 156: Authors Thaler & Sunstein explicitly demonstrate that they are not, in fact laissez-faire supporting libertarians, but instead "behavioral economists". To the uninitiated, perhaps the distinction is hard to understand since they are attempting to preserve choice - but it's disingenuous for them to call themselves libertarians and it's frustrating to me personally because so few people actually understand the principles involved as it is. It's not enough to want to preserve choice merely for practical reasons (of which there are many!) but also to understand that fundamentally a human being is autonomous and a self-owner - in other words, you have no right to control what other people do unless it specifically hurts you or infringes on your right to control your own actions.

Chapter 11: Organ markets.

I have almost nothing bad to say about this chapter what-so-ever. Although most of this has been criticisms, Thaler & Sunstein get full support for this one. Dr. Walter Block (one of my favorite economists - and certainly one of the most entertaining) has written on this topic and once gave a great lecture where by simple show of hands in the class he asked how many people were already organ donors (only a few) and how many people would agree to become organ donors at $100, $1,000 and $10,000. By the end, the entire class had raised their hands.

When we suffer from shortages of all sorts organs and thousands of people die each year waiting for livers, kidneys, hearts, lungs & everything else... Why in the world don't we just allow insurance companies & private individuals to offer some compensation! Demand is high, supply is limited and government-mandating that organs be "free" is clearly setting the wrong price.

I have a minor complaint that they claim that "a few interventions" may be needed - since, the actual problem is that we have existing government interventions preventing organ markets from developing, but I do especially like two of their proposals (although not their nannying bits):

1. Change the default presumed consent rule to "yes" instead of "no". It's arbitrary either way, and as long as we have a default setting - make it the one that actually saves people's lives.
2. As an interim step between organ sales being illegal and allowing an actual market in organs to take place (which would actually solve the supply problem and save many thousands of lives), setting up a system where people could "trade" for organs within a given network of blood types voluntarily would be a really good start. "Paying" for organs would still be illegal (unfortunately), but at least we could set up a great way for people to save lives and have their own lives insured.

Moving on...

Page 195:
"Take one example from the hotel business... When the key is removed, the lights and air conditioning go off, but the power to the clock radio does not. Why are rooms designed this way? Because the hotel company has to pay the utility bills , and managers know that customers have no incentive to turn tout the lights."
The Tragedy of the Commons: Why "public-ownership" of goods and the means of production - i.e. Socialism - is the worst idea ever conceived by mankind. Inevitably, owners have incentive to be careful, prudent & economically efficient with their resources. Governments (and smaller-scale collectivist communes) have no such incentive.

Page 209:
"Our principal claim here is that patients and doctors should be free to make their own agreements about that right. If patients want to waive the right to sue, they should be allowed to do exactly that. This increase in freedom is likely to help doctors and patients alike, and to make a valuable, even if modest, contribution to the health care problem."
Yes... YES! This is one of the best ideas in the entire book.

Annnnnd........................ All the way at the end of the book, we get:

Page 214:
"Of course, we are libertarian paternalists, not libertarians "full stop."
Finally a little actual honesty on this point. I know to some this may seem like a semantic issue not worth discussing, but it goes to what I said at the beginning of this. These guys are not libertarians - primarily because they fundamentally avoid the entire question of morality and the choice of non-aggression one must make to understand the philosophy itself.


Page 232:
" sensible choice architect would design the current income tax system, which is famous for its complexity... Ordinary people and the Internal Revenue Service would benefit even more if the process could be made more automatic."
I suppose I have two points to make about this.

1. Taxes are the involuntary taking of money from the people upon threat of force (arrest/jail). Taking money from someone against their will is called theft. Theft is theft, regardless of whether or not it's taken at the beginning of the year, the middle of the year, the end of the year or 100 times a day. And although, yes, it would probably make it "easier" and by extension result in slightly less theft (hopefully), merely making it so that the theft is automatic versus requiring people to fill out forms & write checks doesn't make it not theft...

2. ...Unless you're Harry Reid. If you're Harry Reid than you would believe that, because we have deductions and withholding, and then have to forcibly write a check to the government at the end of the year, the United States tax system is "voluntary". Although he "recognizes" that you can't "cheat" and not pay, or the IRS will take you to court and send you to jail (and probably destroy all of your assets in the process)...... Even though you have to pay, it's still "voluntary" because you have to fill out complex forms at the end of the year and mail in your return instead of having it automatically filed for you.

I wish I was joking... But I'm not. Watch for yourself:

Taxes are not voluntary and Harry Reid should be unemployed by the United States.

* * * * *

That covered all of the notes that I took while reading the book... As you can see, I'm quite skeptical. The very notion of "libertarian paternalism" strikes me as inconsistent right from the start. On top of that, I have a great many (well founded) objections to the very field of Behavioral Economics itself. Ultimately, it is impossible to know the full complexity of an individual's values or what will make him happiest - so judging people's behavior as "irrational" or mistaken - without knowing their internal thoughts - is simply untenable. Mises & Hayek knew this extremely well. So did the University of Chicago's most important contribution to Economics: Milton Friedman...

At any rate, admittedly - on the scale of things - libertarian "paternalist" is a vastly superior position to "authoritarian idiot"... But how do Thaler & Sunstein actually expect choice to be maintained when they're actively given power-seekers the tools with which to destroy it??

To be fair, the authors do address some "objections" in the update at the end. The most salient of these is the one I've been making this entire time: These "nudges" merely become the testing ground for governments to exert more control on their citizens. The authors dismiss this essentially by saying that governments are going to do something anyway (just give up trying to combat tyranny now, folks!) and that it's really just a "slippery slope" argument that doesn't carry much water.

The truth is however, I think I've shown repeatedly above that in fact, it does carry water. Not only that, but that pointing to any slippery slope objection with this stuff now is way, way too late! The proverbial horses ran away from the barn decades ago and Thaler and Sunstein are just now getting around to closing the barn-door.

Governments have been using "nudges" forever. They're almost always effective (albeit the secondary & tertiary consequences are virtually never considered and almost always a nightmare that requires even more nudges...). But a lot of times they are so buried in dense legal-ese within 1,000+ page legislation that ordinary people don't even realize they're being influenced. That, combined with the fact that if you don't abide by government's "nudges" you go to jail or get fined, and I think we should all be concerned about that, all the time. Especially when our benevolent "planners" have turned out to be woefully wrong time and time and time again with horrendous consequences.

Doctor shortages, water shortages, rolling power black-outs, booms and busts in housing & finance, and even now - ruinous economic "bailouts" and idiotic car destruction schemes... All a result of government nudges. And that's only the tip of the iceberg for central planners. Certainly anyone who has heard of central planner, Robert Moses, would know how much damage they can do...

And yet the book spends the vast majority of it's pages fretting about private sector nudges that everyone already knows about and which are obvious like advertising. People trying to sell you their products are hardly a massive threat, even if they're good at it. If you don't like what they have to offer, or if you don't get the results you're looking for you can try somebody else or something else, or nothing if you choose - no harm, no foul and most of the time you can even get your money back... And you actually get treated like an important person because most companies realize that they need to make you happy in order to stay in business. In the occasional instance that you get defrauded or swindled, you can typically sue the company and win and you can always make enough noise to get others to boycott.

But try suing the government! And even if you succeed in suing, which is nigh-impossible to begin with, what then? It's not like they're going to go out of business from bad management, production & customer service, now are they? Of course not. When government nudges screw up - government officials merely pass the buck around the world a few times and keep on taking your money year after year.

As professors, it's quite possible that Thaler & Sunstein's luke-warm treatment of the market (which actually preserves and enhances choice all the time in accordance with their professed goals) and completely whitewashed ignorance of government as interventionist ultra-nudger was just a way for them to avoid incurring the wrath of their colleagues for saying anything nice about market liberalism... But for anyone claiming a libertarian moniker, they should be ashamed.

I think I've made my point... possibly too much so... But I'll leave you, and myself, with this:

Any book called Nudge on economics that does not contain even a single instance of the words; "Federal Reserve System"... FAIL. If nothing else, I just wish Thaler & Sunstein would have taken the time to learn from their own research and apply it to their understanding of policy.

(Note: Reason Magazine published a review of this book late last year, which I avoided reading until after writing this: Why Opting Out is No "Third Way": The perplexing banality of "libertarian paternalism")