The Liberal Order

Happy Halloween!

Here is my pumpkin this year.

The Glass Is Half Full

It's all in your perspective.

A quarter of all respondents led by Malaysians said they were glad the world had an economic crisis as it has helped them realize what's really important in their lives.

Nearly 60 percent said they would try their best to keep a tight rein on their spending so that it doesn't go back to what it used to be before the downturn, and over two-thirds are more interested in boosting their savings than reducing their debt.

"The credit crunch has been felt, and it has reinforced the family values of Malaysians, helping them to appreciate what they have rather than continually strive for more," said Steve Murphy managing director of Synovate in Malaysia, Steve Murphy.

Alan Greenspan on "Too Big to Fail"

“If they’re too big to fail, they’re too big,” he said earlier this month. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

Does the same apply to government as well?

Decentralization is a natural corollary to a firm that becomes too big, takes on too much risk and begins making bad bets. Unfortunately, it was the Federal Reserve under Greenspan that repeatedly bailed out investors, banks, and foreign central banks around the world that made bad bets, arguing that contagion would bring about international and intranational economic collapse. Consequently, it was partly Greenspan who institutionalized the idea of too big to fail.  

Greenspan at least credits the Hayekian knowledge problem.

Setting up government agencies to hunt for threats to the entire system before failures actually occur will "create a bias toward regulatory solutions, and risks that we allow political judgments rather than economic judgments to prevail" since regulators are rewarded for being aggressive, he said.

The regulators “will find, 10 times more potential risks than really exist and that’s where the danger lies,” he said. As a result, financial innovations that could help the efficient flow of “our scarce capital” would be stifled.

Though it can be easily measured when bubbles expanding and when risk is being underpriced, virtually no one can see when the bubbles will burst and what the fallout could be.

When problems arise in plain view, the markets almost immediately correct the issue, he said. For example, earlier this decade, most investors expected the next crisis would be triggered by the nation’s trade and investment deficit, and the collapse of the U.S. dollar. As a result, traders sold the dollar off. The crisis went away on its own.

Hayek On Central Planning and Its Relation to Health Care Reform

Thinking more about health care reform, I thought about Hayek's great quote from The Fatal Conceit.

The lesson to be learned from the failed experiments of collectivism and socialism that was rooted through most of the twentieth century is that living standards of a society do not improve at the whim of politicians and bureaucrats.

With that, read David Harsanyi's analysis of Pelosi's health care reform bill.

Why I Oppose Current Health Care Reforms

Paul Krugman offers the following challenge:

I won’t try to psychoanalyze the “naysayers,” [to currently proposed health care reforms] as Mr. Orszag describes them. I’d just urge them to take a good hard look in the mirror. If they really want to align themselves with the hard-line conservatives, if they just want to kill health reform, so be it. But they shouldn’t hide behind claims that they really, truly would support health care reform if only it were better designed.

Here's CNN on the most recent proposal by the House Democrats:

The nearly 2,000-page bill -- a combination of three versions passed by House committees -- would cost $894 billion over 10 years to extend insurance coverage to 36 million uncovered Americans, according to House Speaker Nancy Pelosi.

However, the bill's total cost, including Medicare changes, is expected to be higher and could push the price tag over $1 trillion, according to an initial CNN analysis.

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Pelosi's office said the bill would cut the federal deficit by roughly $30 billion over the next decade. The measure is financed through a combination of a tax surcharge on wealthy Americans and spending constraints in Medicare and Medicaid.

Let's just start with this rosy projection: "the bill would cut the federal deficit by roughly $30 billion over the next decade." Is this something the Democrats really want to cheer about? $3 billion annually out of a $1.4 trillion current deficit? 2/10ths of one percent? And entitlement spending on Social Security and Medicare are set to explode! This $30 billion reduction won't - it can't - happen.

Worse still, does anyone actually believe these figures? The government's track record on proposed expenditures is always to underestimate . . . by a long shot.

The current problem with health care is that consumers are not responsible for the health care they consume. I reject all of these proposals because they do not address this fundamental problem. In fact, according to the CNN story:

The bill guarantees that 96 percent of Americans have coverage, Pelosi stated. The claim is based on an analysis by the non-partisan Congressional Budget Office.

Among other things, the bill would subsidize insurance for poorer Americans and create health insurance exchanges to make it easier for small groups and individuals to purchase coverage. It would also cap annual out-of-pocket expenses and prevent insurance companies from denying coverage for pre-existing conditions.

The House bill will only exacerbate the problem by expanding health care consumption and reducing even further individual responsibility for paying the health care we all consume. And let's not forget that forcing coverage for pre-existing conditions will simply serve to keep healthy people from maintaining health care insurance until they require extensive medical treatment.

Only one of two, or both, things can happen with the current proposals: health care expenditures increase dramatically or quality of care decreases dramatically. Which of these two options does Krugman support? Or does he support both; they're both likely to happen under the current proposals.

Then again, proposals for health care reform by progressives have never really been about containing costs and making health care more affordable; they're seeking a completely egalitarian health care system.

With regards to Medicare, the proposed cost reductions are not going to happen. It is politically infeasible to reduce Medicare expenditures given the political clout of current special interests and more to emerge. There is no will nor will any government agency be able to eliminate the waste and fraud that is ubiquitous in Medicare expenditures.

Horizontal Integration Gone Too Far?

HT: Failblog.org

Creative Destruction In the Music Industry

Earning economic profits in the long run requires constant innovation to ward off competitors for your profit. There is a new entrant in the online music business that just may make Apple's iTunes obsolete.

The app allows users to buy the right to stream songs from a digital locker forever for just 10 cents each. The song quality is lower than what Apple Inc.'s iTunes offers, but "intelligent caching" lets the tracks load and play in seconds, with playback possible even outside of cell phone coverage.

An existing iTunes library can be synchronized with one's Lala account, meaning a person doesn't have to repurchase songs to listen to them within the app.

Quality will indeed have to improve to have a large impact, but at about one-tenth the cost of an MP3 from iTunes, Lala is likely to be a formidable competitor to Apple's dominance in this market.

GMAC Seeking More Bailout Money

This is not a surprise.

The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government's 35.4% stake in the company could increase if existing shares eventually are converted into common equity.

The willingness by Treasury officials to deepen taxpayer exposure to GMAC reflects the troubled company's importance to the revival of the auto industry. Founded in 1919, GMAC has $181 billion in assets and is a major financier for 15 million borrowers and thousands of General Motors and Chrysler car dealerships in the U.S.

This will also never end. The federal government's stake in GMAC is about 35% (see graph below), which means that this company should already have failed, but will remain viable only after repeated infusions of cash from the treasury. This, of course, to appease the labor unions affiliated with the domestic automakers.

Like bears that are fed by passing tourists, GM and GMAC have become dependent on these cash infusions for their survival. It is now part of their corporate culture and they will expire should they be forced to survive again on their own.

The Imminent Decline of the UAW

Rank and file members of the United Auto Workers union at three Ford plants have rejected the contract recently negotiated between Ford and UAW management. 

Wright said workers opposed the freezing of entry-level wages and benefits, consolidation of skilled trades and the no-strike clause in the agreement that would subject bargaining impasses to binding arbitration until 2015.

Market competition drives away economic rents. Wages of autoworkers will decline to the opportunity cost of the employed workers. This is the reason why the "fair trade" initiatives fail to raise the wages of labor in developing countries. Once others see the economic rents earned by, say, coffee growers in Brazil, others enter the coffee market and compete the rents away.

The autoworkers can voluntarily make concessions today, or have them involuntarily made for them later.

More W.O.W. = ADD

Or is it ADD = more W.O.W.? It's so confusing.

Researchers collected data from 51 Iowa State undergrads ages 18 to 33, about half of whom reported playing less than a couple hours of video games a week, and about half of whom reported playing an average of 43 hours a week.

Researchers monitored brain activity while participants performed the Stroop Task, a standard measure to determine attention levels. Participants had to identify the color of a word when the color and word matched, and when they did not match. (It typically takes longer to indicate the color when the word does not match.)

They found that the ability to pay attention reactively (i.e. when prompted by a trigger, such as being shot at) is similar across both types of gamers, but brain wave and behavioral measures of proactive attention (i.e. anticipating a mechanism, such as collecting pots of gold) are significantly diminished in the 43-hour-a-week gamers.