The Liberal Order

Keynes v. Hayek, Round II

Munger is great; John Papola John Papola's father looks eerily like Fed Chairman Ben Bernanke.

 

The More Things Change, The More They Stay The Same

But with three exceptions--the Mercedes-Benz S550, Smart Fortwo and Nissan Titan--all of the cars on this year's list of the Worst Cars on the Road are (still) made by domestic companies. That includes the Dodge Dakota, Chevy Tahoe Hybrid and Chrysler Town & Country. The only American car company with zero vehicles on the list? Ford. (MS: Emphasis mine.)

Is this really a surprise? So much for recouping taxpayers investment in bailout of GM and Chrysler. If only there were a way to get people to buy more Chevy Volts. 

 

David Friedman on Sustainability

David Henderson points to the following posts by David Friedman. In these posts, David speaks out against the sustainability movement, arguing that it is a) based on predicting the needs of future populations, of which we have no idea today what they will be (think of what the world would be today if in 1900 the sustainability movement protected horse production etc.); and b) sustainability proponents today call for reduced rates of population, but that runs counter to our actual needs.

Read the posts.

Hubris Trumps Your Fifth Amendment Right

Although each of the ten amendments that make up the Bill of Rights are important, the Fifth Amendment is unique in that it stipulates legal procedures to protect us from overzealous government officials.

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Bolded is the part that protects you from incriminating yourself in a crime. But you give up this right if you tattoo on your chest a detailed murder scene that implicates you in a previously unsolved murder. 

FYI - Follow this link and watch these two important videos explaining why you should NEVER talk to cops without a lawyer present. The videos include lectures by law professor James Duane of Regent University and George Bruch, an officer with the Virginia Beach Police Department.

Even in the closest of elections . . .

. . . your vote is not decisive.

[C]andidates Melinda Meisenheimer and Tanya Flanagan tied for second place in last month's [North Las Vegas] Ward 2 council primary, receiving 328 votes apiece. Yet only one candidate could advance to June's general election.

Since neither candidate requested a recount, local officials were forced to adhere to an obscure 1965 state law, which says tied races in the state must be determined by drawing lots. The rule, which hasn't been exercised in at least 14 years, usually means candidates pick cards out of a standard playing deck. The person who draws the highest card wins.

I guess you could argue that without your vote, which resulted in a tie, your preferred candidate would have definitely lost and that your vote enabled them to push it to a 50:50 chance of winning a post election draw. 

Was $10 Trillion of Wealth Really Destroyed in 2008?

Suppose I purchased a home for $100,000 in 1985. I put 20% down and financed the remaining $80,000. My monthly mortgage and interest payment for this 10% 30-year loan was about $704.50. In 2005, and after twenty years of paying my mortgage, I decide to refinance to take advantage of the lower rates. Since my home is now worth $550,000, the subprime mortgage lender I'm working with tells me that I can pay off the $53,190.88 balance and cash out the remaining $496,809.12 in equity. After paying closing costs, I walk away with $490,000 in cash.

I lead an extravagant life for three years before realizing that the value of my home is suddenly worth $350,000. I am now underwater with my mortgage to the tune of about $146,809.12.

Did I really experience a $200,000 loss of wealth from this? Had I not blown the cash I took out of the home at refinancing and instead invested it, I would have $490,000 plus interest. I would then have had the money to buy down my mortgage, leaving me with $53,000 in mortgage debt, what I owed on the home before refinancing. But whether I spent the money or not, no wealth was destroyed.

It's also why I don't agree with bailing out homeowners underwater on their mortgages; too many of those who defaulted on their mortgages or are currently underwater on their mortgages were exactly as I describe my fictitious situation above.

In the past, more than 70 percent of subprime originations were refinances of existing loans, at least some of which were prime mortgages. 

It's why the banks and mortgage lenders should not have been bailed out, or at least have been required to take on larger losses.

Understanding the Difference Between Money and Wealth

Students would do themeselves a favor by reading some of the posts (arguments) by economists in response to Steven Landsuburg's initial post of how taxing a rich millionaire who consumes nothing and simply spends his time parking and re-parking his cars in the driveway does not adversely affect the rich man. Instead, given Landsburg's assumptions, it is a tax on current consumers of goods and services. Tabarrok; Mankiw; DeLong; Krugman

Landsburg, in response to a journalist's opinion, argues accurately that taxing some idle rich heir to some fortune to the tune of his total money holdings of $84 million does nothing to adversely affect him, but instead will adversely affect anyone whose current consumption will be altered by the government's use of that money to purchase goods and services.

Let me explain. First, think of fiat money as a claim on goods and services only. In other words, it has value in exchange only; there is no value in use. Therefore, it is not wealth, but simply a claim on wealth. Second, Landsburg is arguing that, given the millionaire is not exercising any of his claims on current consumption (i.e., he's not buying anything, just parking his cars like some idle rich schlub), should the government confiscate his dollars (i.e., claims on current consumption) and begin exercising those claims for its own consumption, then the prices of the goods and services that the government purchases will increase, ceteris paribus, making consumers of those goods and services - not the millionaire - bear the incidence of the tax. We consume fewer resources because the government is using the rich man's money to exercise claims on current resources. And, since we can't have it all, by default someone else must consume less.  

This may not seem realistic, but let me make it so. Suppose a rich millionaire hoards loads of cash - $100 million worth stashed in his closet and he rolls around in it every night. (It could be in the bank, which brings up different scenarios, none of which alters Landsburg's argument, but let's keep it simple.) This millionaire is a lonely and isolated old man who never had a wife and kids, and all of his immediate family died long ago. Let's say that he suddenly and unexpectedly dies in his sleep, leaving his stash of cash to no one. If the government now taxes all the dead rich man's money and uses it to increase current government consumption, purchasers of goods and services that the government is now competing for using the dean man's claims are made worse off in the form of higher prices and therefore reduced consumption. The dead man is not affected at all.

Landsburg's argument is premised on the fact that the journalist considered it a benefit to the rest of us if the government confiscated all of the idle rich man's money (his claims) that she reported he never spends and spent it. She assumes that, much like residents of Florida benefit when that state's legislature imposes taxes on out-of-state travelers to that state to fund new roads, schools, and other government goods, taxing this rich guy provides us all free goods at the expense of the rich guy. 

What this reporter fails to understand is that just because the idle rich man's claims are confiscated, it's not apparent that we benefit. Those claims, which by the reporter's assumption, had been sitting idle and not competing with you and me to purchase things like gasoline, wood, metal, food, clothing, etc., will now be exercised by the government to increase consumption on current goods and services. Consequently, the prices of goods and services that we currently consume privately will be driven higher. We, not the idle rich man, bear the incidence of the tax in the form of higher prices. Therefore, the government "stuck it" to us, not the idle rich man. 

Given the way government wastes resources, we would all have been much better off to instead burn the money in a large bonfire, therefore it will never compete with me for the purchase of goods and services I presently buy and consume.  

Lastly, this is important to consider when you hear or read things like "America Lost $10.2 Trillion In 2008." We didn't.

Insofar as houses totaling $10.2 trillion did not all of a sudden vanish, no wealth was lost, at least in the aggregate. Wealth was certainly transferred from some people to others, but it was not "lost." If I paid $500k for a home in 2005, and the value of that home fell to, say, $300k by 2008, either that home was never worth $500k (i.e., the opportunity costs of the land and other resources used to build the home always totaled $300k) and the seller of that property made off with a $200k bonus from me, or the home is still worth $500k. In either case, no wealth was destroyed.

If I sell the home today for $300k, the buyer either pays $300k for a home with a replacement cost of $300k, which means the seller from whom I purchased the home benefitted by $200k, or this new buyer pays $300k for a home worth $500k, therefore realizing a $200k surplus. No wealth was lost, at least not in the aggregate.

I would argue, however, that there was indeed a loss of wealth due to the housing boom, but for a different reason. Artificially low interest rates produced a supply of new homebuilding with a value that was far less than the opportunity costs of the resources used to build those homes. Obviously, consumers valued the resources used to build those homes, now and into the future, less for homes today than for other uses of those resources, including uses into the future. (i.e., Think of trees and land that were cut down and cleared to build homes and produce new developments that now sit idle and empty.) The loss of wealth is in the fact that scarce resources were diverted from other uses, including future uses of those resources, to build homes today. The opportunity cost of these resources exceeds the value of the homes built, but this was concealed by artificially low interest rates, which skewed people's time preferences for use of available resources.  

One More On Government Failure

The Washington Post's David Fahrenthold describes a few government programs that never die.

Other often-criticized programs have also survived without much debate. One of them, intended to clean up abandoned coal mines, sends millions every year to states that are finished cleaning up their highest-priority sites.

The Republican Study Committee has called for cutting this program. So did the bipartisan debt commission. So did Obama, starting in 2009.

“We cut $115 million from a program that pays states to clean up mines that have already been cleaned up,” Obama said the next year, as he laid out the reductions he planned in his budget.

It didn’t happen then. And it didn’t happen this year. The program, which state governments say they still need, was not altered by Congress.

Also unchanged: a program that pays cotton and peanut farmers to store their bales and bushels in warehouses. The idea is to let farmers keep their crop off the market while prices are low. The federal government will still budget $2 million a year, despite criticism from Obama and before him George W. Bush.

And once again, this is why we won't see significant changes in the budget. Without a sound philosophical understanding of the proper role of government, anything goes. Without limits on what we can acheive through the political process, then I want the government to fund my pet/special project at little cost to me. Once in place, I never want it repealed. It is why the Constitution is such an important concept, but it's only as valid as it is respected by those who live under it. 

Further Evidence for Why Collectivism Doesn't Work

Don't ever forget Bastiat's "Government is that great fiction by which everyone endeavors to live at the expense of everyone else." In the following clip, Ben Powell, a fellow GMU alumnus, explains the public choice argument for why the budget deficit won't change and why voters agree with spending cuts in the abstract, but reject the specifics.

 

Oh, and just to make your day a little happier, let me also include this great quote by Sir Alex Fraser Tytler, an 18th century Scottish jurist and historian.

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.

The average age of the world's great civilizations has been 200 years. The nations have progressed through this sequence: from bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance; from abundance to selfishness; from selfishness to complacency; from complacency to apathy; from apathy to dependency; from dependency back again to bondage. 

It's Why Collectivism Doesn't Work

The Republicans pass Paul Ryan's budget proposal to reduce (not eliminate, mind you) the current budget deficit. President Barack Obama uses this as a springboard to demagogue Republicans. Today, the Washington Post publishes the results of a poll revealing that Americans do not fully understand the budget problem, at least enough for any meaningful legislation that will actually cut the deficit. This is why I wrote this last November. 

So it will be an interesting two years for Republicans. Yes, voters voted against big government in the abstract, but voters also reject the specifics when it comes to cutting government spending. Russ Roberts' explains the problem well in his great piece, "If You're Paying, I'll Have Top Sirloin." Big government spending as a whole may not benefit the disgruntled voter, but try eliminating their preferred spending program and see how they react. Government programs are nearly impossible to eliminate.