Destruction Is Not Profit

"What would become of the glaziers, if nobody ever broke windows?"

Frederic Bastiat addressed this common question in 1850, exposing the fallacy at the core of the argument. Still, we see it all the time today. It's thus worth the time to read what Bastiat wrote over 150 years ago and see how well truth and reason stand the test of time. What follows is the crux of his arguments pulled from the larger work:

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? ... every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation - "It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions. [And still does! --C. A.]

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade - that it encourages that trade to the amount of six francs - I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

...

When we arrive at this unexpected conclusion: "Society loses the value of things which are uselessly destroyed;" and we must assent to a maxim which will make the hair of protectionists stand on end - To break, to spoil, to waste, is not to encourage national labour; or, more briefly, "destruction is not profit."

The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention.

• One of them, James B., represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two.
  
• Another under the title of the glazier, shows us the producer, whose trade is encouraged by the accident.
  
• The third is the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause.
  

It is this third person who is always kept in the shade, and who, personating that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favour, all you will find will be the paraphrase of this vulgar saying - What would become of the glaziers, if nobody ever broke windows? [all emphasis added]

Destruction, even the partial destruction by restriction, does not net a positive. And this argument, taken to its logical conclusion, shows that restrictions such as taxation, regulation, and government "spending" are just so many partial (or full) destructions of value, making all of society worse off than it was before by violating the individual rights of citizens all along the way.

Breaking windows does not stimulate the economy; neither does taking a pane of glass from one man's window to fix another's. The glazier profits, but others lose, and the net result is "Society loses the value of things which are uselessly destroyed." Wealth redistribution is not profit. Stimulus spending is not profit. Destruction is not profit.

"I can't work in this country"

My wife and I attended a benefit on Saturday night, dressed in our finest, drinking wine and enjoying the fruits of civilization during Earth Hour. But before the benefit, we attended a pre-party at a neighbor’s house. One of the couples who showed up is relatively new to the neighborhood, having recently moved from Canada. I spent a fair bit of time talking to E. and his wife, P., and our conversation provided a fascinating comparison and contrast between life in Canada and in the States.

What started off the whole discussion was an unexpected answer to a standard cocktail party question I asked. I already knew that E. came to Massachusetts to work for a biotech firm, so I asked P. what she does for a living. Her answer? “Nothing. I can’t work in this country.”

My mouth dropped open. It simply hadn’t occurred to me, but as I learned, the family is in the U.S. on a special visa, and the only one able to work legally is E.

I was immediately outraged on her behalf, and stated that the borders should be open with no restrictions on who can come in and work in the U.S. Both of them started to say that some protectionism is needed for a country, that the borders couldn’t be completely open, but I stopped them short when I said, “One of the main reasons people are against open immigration is the fear that moochers will come in and live off the welfare state. But what if there were no welfare programs to mooch from?” That generated a chuckle from P., who proceeded to tell of how big of a problem perpetual welfare families are in Canada. They’re born on the dole, and their kids go on the dole, and it’s a never-ending cycle.

I then made a joke about the other protectionist bugaboo, and said to E. in mock tones that I was angry that he was in our country stealing our jobs. He laughed and said, “You joke, but I’m applying to change my visa to a green card so that P. can work too, and in order to do that, my company has to post my job for six months and then prove that there was not a single qualified American candidate who could do it.” Again, my mouth dropped open. He continued, “Of course, the company simply makes the job description so specific that they can game the system, and I’m the only one who fits.” How absurd that these are the lengths productive people and companies need to go through to get around the irrational regulations of the U.S. government. What a perfect example that the government is the problem, not the solution.

“As bad as that is, though,” E. went on, “it’s still better here than in Canada. Here you get to keep so much more of your money.” He told of how much higher the income tax is, and on top of that, there is a sales tax of 15% on everything, including homes.

“And do you know what’s the most expensive of all?” E. asked? “Free universal health care.”

I laughed and said, “Yup, it’s free, but you can’t get any care, right? Unless you drive across the border for your MRI.”

“Funny you should mention that,” he said. “I injured my knee two years ago and the pain kept bothering me. I saw my doctor and he gave me pain meds and a prescription to get an MRI, as he assumed it was a ligament injury. But he said it was a six month wait, and that in reality, they would just keep pushing my appointment back because I didn’t have a life-threatening problem. So I just didn’t get any treatment at all. Then I moved here, and a few weeks ago I went to the chiropractor. While I was there I mentioned that my knee was also bothering me. The doctor said that he’d write me a prescription for an MRI, and when I went to the desk for the referral, the receptionist said that there was an MRI clinic about 5 minutes away and they might have an opening for me. I asked when, and she said, ‘Tonight or tomorrow.’ I couldn’t believe it. The next day I went to the clinic, got the MRI, and found out it was a slight tear to the ACL and damage to the meniscus. I have laparoscopic surgery scheduled next month.”

He also told of how small private clinics are popping up in Canada to meet the demand for care, and that while they are illegal, the government is in such dire straights that it looks the other way. I said that, in effect, it's a black market for health care, just like Cuba pretends not to notice small private restaurants and other businesses operating from people's homes.

I commented that, even though we have a horribly mixed economy, when the free market is left alone to work, amazing things happen, and they both agreed. I mentioned that there may soon be nowhere to go for an MRI, if Obama’s plan goes forward. I told them about the Massachusetts “mandatory health insurance” debacle, and that Obama wants to follow that example. I said that it was already costing the state ten times what they had planned, and that people on the state plan couldn’t get appointments for routine visits. Then I asked, “Do they have group physicals in Canada?”

“No, I don’t think so,” said E. “What is that?”

“It’s where a number of people see their primary care doctor in the same room at the same time.” He looked at me in astonishment. “The doctor talks to and examines everyone, but of course no one takes off their shirts.” E. could barely believe me. It’s an unfortunate foreshadowing of bad things to come that someone from a country with socialized medicine could be surprised at the effects of the Massachusetts plan.

As we were all preparing to head to the benefit, E. mentioned that people he knew in Quebec had questioned his decision to come to the U.S., mainly because his kids would lose their “French roots,” and reminded me that they speak and teach French in all the schools there. He said, “But I don’t see how they can think that. What’s losing a bit of the language or culture when you compare it to the incredible opportunity my kids and I have here?”

America is still the Land of Opportunity. Though it’s limping along, trying its damnedest to abandon that essential nature, it’s still one of the last places in the world for productive men and women to come seeking relative freedom and opportunity. Our society thrives on brainpower, on productive achievement, and rather than pushing it away with irrational regulations and restrictions, we should be welcoming it with open arms. My chance encounter with a recent immigrant reminded me of how great this country still is and how much better it could be if we simply had more of the one critical element: freedom.

Cass Sunstein's Bogeyman -- The Internet as a Threat to Democracy

I recently watched a short speech by a young British Member of the European Parliament (MEP), Daniel Hannan, in which he ripped into the statist policies of the Prime Minister. Mr. Hannan has a blog, and in the following day's post, he describes his sudden Internet celebrity. (The video is spreading like wildfire.) He writes:

The internet has changed politics - changed it utterly and forever. Twenty-four hours ago, I made a three-minute speech in the European Parliament, aimed at Gordon Brown. I tipped off the BBC and some of the newspaper correspondents but, unsurprisingly, they ignored me: I am, after all, simply a backbench MEP.

When I woke up this morning, my phone was clogged with texts, my email inbox with messages. Overnight, the YouTube clip of my remarks had attracted over 36,000 hits. By today, it was the most watched video in Britain.

How did it happen, in the absence of any media coverage? The answer is that political reporters no longer get to decide what's news. [bold added]

This is an interesting perspective from someone who has something to say, but is regularly ignored by the mainstream media.

Switching tracks for the moment, I have been intrigued lately by a particular pet issue of Cass Sunstein, legal scholar, professor, author, and soon-to-be "regulatory czar" in the Obama administration. I recently read a short article in Harvard Magazine, called "The Internet: Foe of Democracy?" which was about a talk Sunstein gave. A quick Google search will show that Sunstein has written at least 3 books on the topic, perhaps a dozen journal articles, and countless other articles and essays. I point you to this summary article because it's a good encapsulation of nearly a decade of his work.

Click here for more on Cass Sunstein, libertarian paternalism, and behavioral economics

In all seriousness, thousands of pages of his writing boil down to the following: "The Internet is good, giving people more information than they've ever had, but it could also be really really bad because it lets them pick what they want to read." Now, I suppose you need some context for this to make sense.

Sunstein holds that our country is at core a democracy (not a republic -- a defense of individual rights is not something you'll find in his work) and that one of the most important functions of government, and presumably private institutions as well, is to make sure that "democracy runs well." This seems to have a vague, hard-to-pin-down meaning, but hopfully you'll get the picture. The opening to an interview of Sunstein on Salon.com sets the stage for this whole thing rather well:

Freedom of choice is not always good for democracy. This observation is at the heart of University of Chicago law professor Cass Sunstein's book "Republic.com 2.0" (an update of "Republic.com" in 2001), which argues that our country's political discourse is fracturing in the information age. Sure, the Internet has been a boon to democracy in all sorts of ways, Sunstein acknowledges -- but if new technology gives us unprecedented access to information, it also gives us more ways to avoid information we don't like. Conservatives are increasingly seeking only conservative views, liberals are seeking only liberal views, and never the twain shall meet.

What gets lost in these polarized times, Sunstein writes, are traditional civic virtues like civility, self-criticism and open-mindedness. ... A central problem, Sunstein argues, is that Americans now think of themselves more as consumers than as citizens. When it comes to the Internet, we demand the right to reinforce our own beliefs without embracing the responsibility to challenge them. [bold added]

So, the Internet is good, but maybe too good, and therefore bad, he argues. Maybe. Note the last phrase in the quote, "the responsiblity to challenge" our beliefs. Key to understanding Sunstein's conception of democracy is that we have a duty, as members of the society, to seek out competing views and challenge our ideas.

If only everyone would deliberate with everyone, making sure to have "unplanned encounters" with competing viewpoints, our democracy would be great. He even calls on the Founding Fathers for support (from the Harvard piece):

The Internet, argues Cass Sunstein, has had a polarizing effect on democracies. Although it has the capacity to bring people together, too often the associations formed online comprise self-selecting groups with little diversity of opinion, explains the Frankfurter professor of law. This confounds the constitutional vision of the founding fathers through a perversion of the notion of free speech. Such environments reinforce preexisting viewpoints, undermining the constructive dialogue that promotes progress in democracies. [bold added]

You may be, like I was, a little confused at the language used here, or you may wonder what the fuss is all about. A "perversion of free speech" because it's too free? And it undermines "the constructive dialogue that promotes progress?" What does that even mean? I had the profound sense that Sunstein and his like-minded friends were using a very specialized language that relied on core assumptions and ideologies that I didn't know enough about to evaluate his arguments.

If the Internet is too free and is thus a threat, what should be done about it? If you read Eric Daniels' excellent and biting review of Sunstein's book, Nudge, you'll have a sense of the type of "soft regulation" that Sunstein advocates to get people to make the right decisions. This view, that the government should "nudge" people for their own good, and the good of the society, pervades all of Sunstein's thought. It's no different with his Internet/Democracy obsession.

In an early book on the topic, Republic.com, he described the threat he saw, and proposed what amounts to a Fairness Doctrine for the Internet. Imagine things like mandating that a conservative blog must have at least 20% of its links pointing to liberal sites. He backed away from this in the sequel, Republic.com 2.0, after getting a lot of criticism. But he is still afraid of the freedom of the Internet.

Why? What is the real reason behind the fear? Because for all the talk about "polarization" and "social fragmentation", the "threat to democracy" argument never rings true, and is never fully substantiated.

Back to our young British MEP, Daniel Hannan. In the blog post quoted above, Hannan concludes:

Breaking the press monopoly is one thing. But the internet has also broken the political monopoly. Ten or even five years ago, when the Minister for Widgets put out a press release, the mere fact of his position guaranteed a measure of coverage. Nowadays, a politician must compel attention by virtue of what he is saying, not his position.

It's all a bit unsettling for professional journalists and politicians. But it's good news for libertarians of every stripe. Lefties have always relied on control, as much of information as of physical resources. Such control is no longer technically feasible. [bold added]

This seemingly offhand comment, a pithy way to end an article, has answered the question that has perplexed me for weeks: what is Sunstein after? "Lefties have always relied on control," Mr. Hannan writes. That's it!

The expression (not perversion) of free speech on the Internet is not a threat to democracy, but to the people in power (of which class Sunstein is now a part) and their ability to control what people read, what they say, what they know. "Such control is no longer technically feasible," Mr. Hannan says. "Not unless I can nudge the people's choice architecture," Sunstein seems to be saying.

Sunstein is now the Head Nudger In Charge in Obama's administration. His office in OMB oversees the rule-making for all executive agencies such as the FCC and the EPA. I predict we will soon see what a real threat to the republic looks like.

Obama's grassroots volunteers lost battle, but are they preparing for war?

Last week, I warned readers to be on the lookout for Obama volunteers knocking on their doors over the weekend. According to news reports, it's extremely unlikely that anyone I or you know actually saw one of these people.

First Question: Who Are They?
The group doing the organizing is called "Organizing for America" and is an arm of the Democratic National Committee. It's an evolution of the "fifty state strategy" of the campaign's Obama for America. As Ari Berman of The Nation wrote in mid-December last year,

Obama's advisers are debating whether to create a separate organization to house the valuable assets from the campaign--particularly the coveted 13 million-name e-mail list, which is likely to grow--or to fold the Obama network into a quasi-independent entity within the DNC (think of a vast, Obama-centric MoveOn.org, tentatively known as Obama for America 2.0).

Obviously, the second scenario is what happened, and the new OFA is run by David Plouffe, who also ran Obama's campaign. The volunteers who are doing the outreach are a subset of the same 13 million-name e-mail list that was touted as one of Obama's keys to victory.

Second Question: Does Obama Know Anything About It?
Short answer: yes. According to CNN,

The first priority for organizers is the president's proposed budget. This petition drive is part of an effort by the White House and Democrats to help push it. In a video e-mailed to supporters this week, Obama lobbied for it, acknowledging that "passing this budget won't be easy" and saying "that is where you come in."

He urged supporters "to head out this Saturday" and "stay involved in the days ahead" by writing letters and making phone calls.

Third Question: How Effective Was Last Weekend's Effort?
Reports vary on the number of canvassing groups that mobilized, how many total volunteers went out, and what the nature of their activities was. NPR quoted a DNC spokesman, who said "there are 1,000 door-to-door canvassing efforts scheduled 'in all 50 states.'" The Nation said "more than 1,100 canvasses were scheduled in 50 states." CNN reported even higher numbers, saying "volunteers met in 1,200 to 1,300 locations across the country, organizers said."

Estimated numbers of actual volunteers at each of these meetings ranged from 8 to "nearly two dozen". Many of the groups just met and talked with each other, but didn't actually go out and knock on doors. The CNN piece described it this way, "In some, participants discussed the president's agenda. In others, they set out to homes, subway stations and farmers' markets," and said that one meeting in Washington D.C. drew "about 16 people," and of those, "about half of that group set out to seek signatures at subway stops."

Still, organizers claimed that "supporters knocked on an estimated 1 million doors in all 50 states." Even accepting this number -- though it's difficult to tell with any accuracy due to all the spin -- most of the articles linked here noted that the grassroots effort was a bust.

President Barack Obama's army of canvassers fanned out across the nation over the weekend to drum up support for his $3.55 trillion budget, but they had no noticeable impact on members of Congress, who on Monday said they were largely unaware of the effort. "News to me," said Rep. Lloyd Doggett, D-Texas, a House Budget Committee member, of the canvassing.

Fourth Question: Why?
Commenter Brendan astutely asked,

What I'm wondering is, why are they bothering with this campaign? They've shown that they're willing to ram these spending bills down our throats, even when (as was true with the bailout bill) 80% of the phone calls to congressmen are against passing it.

Stated reasons for the effort vary, but in most stories they revolved around drumming up calls to Congress members and collecting signatures in support of passing the budget. As was shown, this was largely a failure. But it's important to remember that the vote on the budget won't be for weeks or months.

Instead, this effort was likely just a trial balloon and a field exercise. From The Nation:

More importantly, it was an opportunity for OFA to get the rust off, keep its volunteers active (and hopefully recruit more) and see how voters in communities across the country were responding to Obama's agenda. ... OFA, a subset of the Democratic National Committee, is gearing up to hire field organizers across the country who will constitute the next phase of the DNC's modified 50-state strategy.

... Asking people to sign a form is a relatively inconsequential task, but OFA wants to prep its network for the legislative battles and elections in 2010 and 2012 that lay ahead. [bold added]

In the title of this post, I asked "are they preparing for war?" The answer appears to be "yes." So even though you may not have witnessed any of the canvassing efforts last Saturday, don't be surprised if you haven't heard the last of them.

I previously compared OFA to a brownshirt movement, but that's an overstatement. Right now, it's essentially an e-mail list, mostly made up of people who are no longer active because they signed up to help a political campaign, not push for legislation. But the concern over this effort by Obama and the DNC to continue and expand the community organizing model still lingers for at least two reasons:

1. The whole thing smells like a populist pressure group doing the bidding of the executive. It would be one thing if it was truly grassroots, organized and run by regular citizens to speak out on issues--no matter that I vehemently disagree with their ideas, I just as strongly support free speech. But this is a centralized, organized effort by one branch of government to pressure another branch. It's a troubling thought.
2. There is a big difference between standing at a subway station or in front of an Ikea and asking people to sign pledges, and going door-to-door with names and addresses, lists and laptops. The first is completely voluntary and anonymous if a person so desires. Simply walk on by if you don't want them to know anything about you. But the second is anything but anonymous. How far of a stretch is it to think that vocally negative responses might be ticked down on a list? What are people to do if they disagree with Obama's policies and are questioned at their front door? They are no longer anonymous, and may wonder about the consequences of saying the "wrong" thing.

Are we at the point where I think the administration will be compiling blacklists? No. But the machinery being put into place combined with the breathtaking scope of disastrous actions already taken (nationalizations, power-grabs, you name it), and the prospect of prolonged economic hardship in which government and the people seem ready and willing to throw principle out the window, just when they need it most... It is worrisome. Most worrisome.

Coming Soon... An Inconvenient Truth II -- The Re-Truthinating

Bookstores, airwaves, and the Web will soon be awash in all things Al Gore again. He will releasing a new book, the sequel to An Inconvenient Truth, on November 9, 2009.

The new book, Our Choice, "will lay out a 'blueprint' for solving the climate crisis," according to a press release posted on the Huffington Post. Why publish a sequel (other than to satisfy Gore's need for the spotlight)?

Said Vice President Gore, "An Inconvenient Truth reached millions of people with the message that the climate crisis is threatening the future of human civilization and that it must and can be solved. Now that the need for urgent action is even clearer with the alarming new findings of the last three years, it is time for a comprehensive global plan that actually solves the climate crisis. Our Choice will answer that call." [bold added]

I'm not clear about what alarming new findings there have been in the last three years. I know that more and more scientists are publicly questioning the fantastical claims of the alarmists, that sun activity is thought to be the main factor in any warming, and that a decrease in sun activity is expected, along with a continuing of the cooling trends we are seeing now. Is that the crisis to which Mr. Gore refers?

Expect this book to ratchet up the hysteria, as the environmentalists frantically try to convince the world that the "science is settled" and drastic measures are needed.

Prepare for a Knock on Your Door

You may get an unexpected visitor this weekend. Not a Jehova's Witness or a guy selling Verizon FIOS, but one of Obama's brownshirts. Obama Backers Return To Streets To Push Plans, says a story at NPR.org. What are they pushing? Obama's disastrous economic policies.

President Obama's grass-roots political machine has been reactivated for a weekend door-knocking crusade designed to sell the administration's economic plan — and its record-busting $3.6 trillion budget.

But the task for the "Organizing for America" volunteers — tapped from Obama's prodigious campaign e-mail and donor lists — is expected to be markedly more difficult than it was to sell the candidate before last November's election.

Will it be one of your neighbors from down the street, a person you only wave to as you drive home from work, but who you will now have to painfully engage in a conversation about the rights-violating, economically unsound actions of their chosen prophet? Or a crunchy college kid with loads of unchallenged premises, who can't fathom how you could disagree with The One?

Be warned. Your house number is on a list somewhere, and you just might get a check mark next to your name in a database. It might not be a friendly face at your door next time.*


-------
*Note: Just because I'm paranoid, it doesn't mean they aren't out to get me.

Drowning in a Flood of Fed Paper

The Federal Reserve announced yesterday that it is effectively doubling the amount of money in the financial system by injecting the massive sum of $1.2 Trillion. The current monetary base is approximately $1.5 Trillion. According to the Washington Post:

The new purchases come with risks. They will balloon the value of the assets the Fed holds by about 50 percent, to more than $3 trillion. That could make it tricky for the central bank to draw that money out of the system once the economy starts to recover. The Fed would probably find it difficult to sell such massive volumes of assets, and if it doesn't handle the task adeptly, the nation could face high inflation because too much money would be in circulation.

Another blogger pointed to the St. Louis Fed's own data recently, showing this startling graph of the historical growth of the money supply. Note how George Hoover Bush kicked off the recent flood before the election. (the gray bars are periods of recession)
Today, I modified the graph to include the Consumer Price Index as well, just to get a sense of how inflation has tracked with the money supply. I used a log scale on the Y-axis to get a better sense of the comparison:
The money supply and the CPI track pretty well over time, especially since the abandonment of the gold standard. But look at the spike in the money supply recently, one that hasn't yet had time to have an impact on the CPI.

If we go back to a regular scale Y-axis (the billions of dollars in the system), and then do a simple projection based on yesterday's news, we're left with:
Scary, isn't it?

An article in The Economist spells out the potential consequences of this rash act by the Fed:

Taking the added step of buying Treasuries made some inside the Fed uncomfortable. It amounts to monetising government debt—in essence, allowing the government to finance its spending with newly printed money rather than by borrowing or through higher taxes. That raises two fears: that it would eventually lead to inflation, or even hyperinflation, and that it would compromise the Fed’s independence. [bold added]

The concern over hyperinflation -- picture Germans in the mid-1930s with wheelbarrows full of paper money hoping to buy bread, or more recently, what is happening in Zimbabwe -- is hopefully as remote as The Economist makes it out to be. But it does mention that the Fed "sees some risk that inflation could persist for a time below [its preferred rate]." The Economist also makes a good observation:

The plans are awe inspiring in their scale, but they are different only in degree rather than kind from the steps the Fed has already taken.

The Fed is staying true to its script, just like the Obama administration. The mantra that is repeated endlessly in Washington is "we have to do something!" and the only guidance anyone there has is Pragmatism. Don't look at history, don't do what is right; just do something, anything! that might work right now. What will happen in 9 months? Who cares? As an economist from Credit Suisse was quoted in the Washington Post article, "When the house is burning down, you put out the fire. If in the process you get the furniture wet, you worry about that later."

I could be wrong, but that analogy just makes me think of putting the entire U.S. economy on the block in a fire sale. Not to worry, though. Good old John Maynard Keynes gave us the guidance we need when he said "In the long run, we'll all be dead." Indeed, Johnny. Indeed.

AIG Bonuses and Retention Contracts -- A Proposed Solution

This morning on NPR's radio program, All Things Considered, host Steve Inskeep spoke with a law professor about the legal arguments in support of AIG's claim that they must honor the controversial 2008 retention bonuses. The key points raised were that

1. they have a binding contract to pay the bonuses,
2. retaining essential employees is crucial as they try to get out of the mess they are in,
3. letting people go could send a negative message to the market and make it harder to bring in other good people, and
4. one possible result is that losing key people can give customers a legal option to withdraw all of their funds, thus pulling the rug out from under AIG at the worst possible time.

It was even mentioned that the point of the retention bonuses is to keep the brainpower in the company.

The arguments on the other side -- in support of the government's contention that they should be able to keep AIG from paying bonuses -- essentially amounted to the fact that it's caused a political firestorm and looks really bad.

So AIG and the government are at loggerheads. The government feels that it can't allow the bonuses to go through because the "taxpayers are hoppin' mad," but AIG has to keep its key people, even if it could get out of its contract to pay them. What are they to do?

It struck me as I listened to the interview that there is a very easy solution: Force the AIG employees to stay in their jobs! Compel the best minds, under the threat of imprisonment, to stay at AIG and keep working. It's perfect! The bonuses can be "recouped", the politicians can save face, and AIG can keep its key people.

The first iteration of this new rule -- let's call it Directive 10-289 -- will have just two points, and should do a great job of keeping AIG in place and the politicians happy:

Point One. All workers, wage earners and employees of any kind whatsoever shall henceforth be attached to their jobs and shall not leave nor be dismissed nor change employment, under penalty of a term in jail. The penalty shall be determined by the Unification Board, such Board to be appointed by the Bureau of Economic Planning and National Resources. All persons reaching the age of twenty-one shall report to the Unification Board, which shall assign them to where, in its opinion, their services will best serve the interests of the nation.

Point Two. All industrial, commercial, manufacturing and business establishments of any nature whatsoever shall henceforth remain in operation, and the owners of such establishments shall not quit nor leave nor retire, nor close, sell or transfer their business, under pentalty of the nationalization of their establishment and of any and all of their property.

I wouldn't presume to tell people like Barney Frank what they should do, as I'm sure he has already thought of this measure and has his people working on a draft bill, but I thought I'd raise this option all the same.

How to Fix the Economy While Standing on One Foot

Many others have linked to this excellent interview of Dr. Yaron Brook by The Objective Standard's Craig Biddle, but the following few sentences got me so pumped that I just had to write a quick blog post. Here's the bit, converted into bullets to show how simple it could be:

• Americans must learn that the solution to the crisis is not to give up on freedom, but to expand freedom.
  
• We need to liberate the economy from the regulatory shackles that led banks to make unsound loans.
  
• We need to slash taxes and government spending, and start to rebuild capital.
  
• We need to end the bailouts, the nationalizations, and stimulus bills that are delaying recovery by propping up businesses that need to be liquidated.
  
• We need to end the Federal Reserve’s attempts to engineer the economy and, eventually, abolish the Fed altogether.
• But more than anything else, Americans need to understand the philosophical roots of this crisis. They need to know that freedom cannot coexist with altruism.
  
• And they need to know that there is a rational alternative to the destructive ideas that dominate America today: Ayn Rand’s philosophy of Objectivism.

There you have it. Seven bullet points, typed up while I was standing on one foot.

Housing Glut? Open the Borders

One of the key problems that is keeping the economy from rebounding (over and above the many blunders of the Obama administration) is that the housing market has a surplus that can't clear. The surplus keeps prices down, even driving them lower, and the actions of the government to try and keep risky homeowners in houses they can't afford -- forcing loan restructuring on lenders, giving judges the capability to wipe out "excess" debt when a loan is under water, putting a moratorium on foreclosures -- just prolongs the agony. If the government "buys" up the bad loans and/or the foreclosed properties at very low prices ( the thinking goes "they are using taxpayer money, so they should get the best deal, right?") then all that does is depress the market even more.

What is one surefire way to clear the market surplus of housing without depressing the market any further? Let immigrants buy them in exchange for permanent resident status, say Richard LeFrak and Gary Shilling in the Wall St. Journal.

A better idea [than having the government buy homes] is to offer permanent residence status to the many foreigners who are clamoring to get into the U.S. -- if they buy houses of minimal values (not shacks). ... Their temporary resident status granted upon purchase would become permanent after, perhaps, five years, if they still owned the houses and maintained clean records. The mere announcement of this program might well stop the ongoing collapse in house prices, especially in cities such as Las Vegas, Miami, Phoenix and San Francisco, where prices are down 40% -- but where many foreigners like to live. {bold added}

Any mention of allowing more immigration tends to incite protectionist fears, especially in traditional conservative camps, and even more so in a recession. One of many unfortunate aspects of the mainstream conservative mantra is that it views immigration as a leech on the welfare state. While they are rightfully indignant that immigrants could sneak past the border guards and start living off our taxes, this view misses the broader point that there should be no welfare programs for anyone, immigrant or citizen, to mooch from. And it misses another key point, specifically in reference to those immigrants of means and education who would legitimately buy excess housing stock:

These people tend to be highly productive. In 2006, foreign nationals residing in the U.S. were listed as inventors on 25.6% of the patent applications filed in the U.S., up from 7.6% in 1998. A Council of Graduate Schools survey found that in the fall of 2007, 241,095 non-U.S. citizens were enrolled in graduate programs. Some 55% were in engineering and the biological and physical sciences, compared with only 16% of U.S. citizens. In 2007, more people on temporary visas received doctorates in physical sciences and engineering than U.S. citizens.

There is a high correlation between education and incomes, and in today's uncertain economic climate, many wealthy foreigners desire U.S. resident status just as a number in Hong Kong secured residences in Singapore and Canada before the British handover to China in 1997. They rapidly became over a quarter of Vancouver's population, and brought in billions of dollars to buy houses and make other investments.

We could benefit from such an influx. Merrill Lynch estimates that in 2007 there were 10.1 million individuals in the world, 7.1 million outside the U.S., with at least $1 million in financial assets that totaled $29 trillion. If new immigrants bought the 2.4 million excess houses at today's $184,000 median price with funds from abroad, they would bring untold billions. The immigrants would also buy consumer goods, pay taxes, and start many new businesses. {bold added}

Despite the growing amount of socialism in our tragically mixed economy, the U.S. is still one of the last remaining beacons of freedom and entrepreneurialism. The core of this is the freedom to produce, and to keep the fruits of one's productive efforts. Throughout our history, we have benefitted immensely from the immigration of the men of the mind, the men of talent and drive, who have come to America to create their fortunes. We need them now more than ever. And perhaps even more fundamentally, we all need the freedom that their presence would imply.

Let these future innovators come and buy houses, build businesses, and make their and our lives better.

Happy Blogiversary to Me

It's hard for me to believe, but it's been just over a year since I started this blog. The real date was March 6th, 2008, and seeing Stephen's post at One Reality (his 1-year date was March 11th) reminded me that I completely missed my blogiversary. I forget holidays and birthdays too, including my own.

I have gained immense value from blogging. It has allowed me to formalize my thoughts on issues -- both political and philosophical -- on a daily basis, digging deeper and fleshing out my arguments more than if I wasn't writing. I have benefited from the wisdom of many new friends, co-bloggers, and commenters. And I've had a lot of fun in the process. Special thanks go to Rational Jenn for pestering me inspiring me to undertake this endeavor, and the advice and example of Gus Van Horn for how to get started.

The number of visitors to the blog is modest--roughly 1,500 per month--but it's more than I ever imagined, and I'm happy to see it continually trending upward.

I have a couple of goals for my blogging in the coming year, including more short "I saw this random thing and thought it was interesting" posts, as well as more substantive articles. To be frank, the election and subsequent crashes took a lot out of me, mentally. I think one of the problems has been that I've been focused too much on the political, and with the hectic run up to the election and the subsequent realization (and more) of all the dire predictions, I ran out of new things to say. "I told you so" gets old.

So I will attempt to increase my output of in-depth investigations into the ideas that are at the root of the political mess we're in, and intersperse them with more shorter pieces. Hopefully this will give me the time to spend on the bigger things, while not stagnating the blog with days and days of dead air.

However it takes shape, I'm looking forward to another year.

Greenspan Points Finger

What? Me? I did it? No, it was "global forces beyond... control" that did it.

In a Wall St. Journal op-ed this morning, Alan Greenspan tries to protect/resurrect his reputation by telling us whom we should blame for the current economic crisis:

How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal.

If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue.

Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being. But the growth path of highly competitive markets is cyclical. And on rare occasions it can break down, with consequences such as those we are currently experiencing. It is now very clear that the levels of complexity to which market practitioners at the height of their euphoria tried to push risk-management techniques and products were too much for even the most sophisticated market players to handle properly and prudently. [emphasis mine]

Things just spun out of control. The global forces were so, um, global, and complex that "domestic monetary policy makers" (read... Alan) couldn't handle them. (Note: he's right. No one could, or should.) But it is clear, Greenspan notes, that the "market practitioners" and "players" were euphoric -- recalling his "irrational exuberance" quote from long ago -- and risky and it's all their fault.

So what should be done? Cast off all regulation, finally, and let loose the free market? Or plunge the country (further) into statism? No. We don't need more or fewer regulations, Greenspan says. We need the right ones.

Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions. [this sounds so pleasant and helpful! - c.a.]

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows.

Wait. Is he going to say that government should leave the markets alone, that it can't "manage" the economy? Of course not. Alan giveth, and he taketh away...

Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.

The old dog is back to his old tricks. The right regulations are the ones that Alan thinks are right, and despite his and statism's (not the free market's) spectacular failure, he clings to the idea that if someone is just smart enough, with enough data, they can "fix" everything. And it sounds like Alan thinks he still has the right stuff. I'm sure Geithner has him on speed-dial for when things get really tough.

Don't Poke Your Head Above the $250K Line

In an excellent post, Shock and Awe: Obama’s First Forty Days, Stephen Bourque describes the unbelievable power-grab that the Obama administration has pulled off, and says that they have "pursued the decapitation of America," and likens it to a military "shock and awe" campaign. Does that sound over-the-top? A little too extreme? Bourque later explains his use of language:

In the first sentence of this post, I accused the Obama administration and Congress of pursuing the decapitation of America. I use the word “decapitation” not in the typical military parlance meaning to kill or dethrone the head of state. Rather, I mean that the federal government is directly attacking productive minds. [emphasis his]

This is right on the money, and evokes a powerful image that really gets the point across. (Note that he supplements it with a line drawing that really drives the point home.)

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In a tangentially related post, Get Ready For the Unintended Consequences, Dr. Paul Hsieh alerts us to some comments from another doctor who plans to avoid being decapitated by Obama's proposed $250,000 "soak the rich" tax line.

He quotes the other physician describing how he and his wife are partners in a private practice, employing 7 people and grossing $400,000 per year. But because they have young children and employ a nanny as well, they are planning on shrinking the practice, laying off at least 3 employees and the nanny, and the wife will stay home with the kids. By then staying under the $250,000 ceiling, they will net only $10,000 less income per year.

So Obama's plan will ultimately result in putting these lower wage earners out of work and decrease the supply of physicians. And the unintended consequences go further if some sort of coercive government medical monopoly -- er, "single-payer" health care system -- is implemented, as Hsieh concludes:

In Massachusetts' universal system, some patients are waiting up to a year for a routine physical exam.

Is this a taste of the future for the rest of the United States?

ObamaTax discourages some physicians from working as many hours or working at all, just as ObamaCare causes wait times to increase dramatically. That future leaves a bad taste indeed.

Most Depressing Search Referral Ever of the Day Today Ever

Today, at 3:42 pm, someone from Alamogordo, New Mexico arrived at my blog via searching Google.  The search phrase he used was "was the great depression before the civil war."

He landed on my post, Great Depression II and/or Civil War II?, which apparently didn't satiate his crucial and penetrating thirst for knowledge, because he spent zero seconds there.  I wonder now if I should go back and edit that post to clearly state the timeline relating the Great Depression and the Civil War so as to satisfy the demand for such information.  Perhaps it's my duty to the public school system to help out.

Who's #1? The Founding Fathers Ranked

Get thee to Powell History Recommends for the first in a series ranking the American presidents.  In this installment, Scott Powell ranks the Founding presidents.