Blackstone in America

2009-05-17T11:31:00.002-04:00

New York Times Reviews Judge Posner's Failure of Capitalism

The New York Times has published an excellent review, by Jonathan Rauch, of A Failure of Capitalism. This is the best review of the book I've seen so far, and also the best short summary of the book's contents. (It's much better than, for example, Nobelist Robert Solow's cranky, condescending review in the New York Review of Books.)

Highly recommended.

2009-05-14T09:00:00.002-04:00

Reactions to Judge Posner on U.S. Conservatism

"Cervantes" has posted an excellent summary of various responses to Judge Posner's critique of the recent course of conservatism in the United States, which I blogged about on Tuesday.

2009-05-13T12:49:00.003-04:00

How Much Do We Know about the Phenomena That Economics Purports to Explain?

As I've pointed out elsewhere in this blog, Judge Posner argues in A Failure of Capitalism that depressions are poorly understood, and that where hard data is in short supply, preconceptions will fill the void.

That argument came to mind today when I read Judge Posner's latest post on his "Failure of Capitalism" blog. He is describing the causes of possible "aftershocks" of a depression:

The government has created a great deal of money, and borrowed a great deal of money, to finance the bailouts and the stimulus package and increase the amount of money in circulation (to help push down interest rates). If when demand rises the banks lend their $800-plus billion in excess reserves, the ratio of money in circulation to the output of goods and services is likely to rise--and this will mean inflation. The ratio will rise further if the government decides to finance some of the huge additional debt that it is incurring as a result of its anti-depression expenditures by increasing the money supply, that is, by inflation, which is a form of taxation--taxation of cash balances. A low rate of inflation is manageable and does little economic harm, but a high rate is very harmful, and can be broken usually only at the cost of a sharp recession (consequent upon a sharp rise in interest rates in order to reduce the amount of lending and hence the amount of money in circulation). And the recession might (as in 1937) disrupt a recovery from the depression. These costs have to [be] balanced against the benefits of the anti-depression programs; unfortunately only guesses are possible.

The last point -- "only guesses are possible" -- leads one to wonder how we should choose between the "guesses" of Keynesian economists and the "guesses" of "conservative" economists. Both sides make plausible arguments that rely partly on hard research but also partly (largely?) on naked reasoning. What would be worse -- a deflationary spiral (assuming the absence of bailouts and stimulus spending would have resulted in one), or post-depression inflation, or a double-dip depression? Not to mention permanent growth in the scope of government. Whose bogey is more likely to be real? Whose would be worse if real?

UPDATE: After posting this, I noticed that economist Arnold Kling has a post today touching on what appears to be the same uncertainty. He passes along the Three Iron Laws of Social Science: (1) "Sometimes it's this way and sometimes it's that way." (2) "The data are insufficient." And (3) "The methodology is flawed."

2009-05-12T11:59:00.002-04:00

The Decline of "Intellectual" Conservatism

Judge Posner -- at his other blog -- has a fascinating post on the recent history of conservatism in the United States. He argues that, today, the intellectual underpinnings of conservatism are "weak." Conservatism now has no one filling roles comparable to those of William F. Buckley, Milton Friedman, et al. It has grown "strident and populist."

Judge Posner puts this in autobiographical terms:

By the end of the Clinton administration, I was content to celebrate the triumph of conservatism as I understood it, and had no desire for other than incremental changes in the economic and social structure of the United States. I saw no need for the estate tax to be abolished, marginal personal-income tax rates further reduced, the government shrunk, pragmatism in constitutional law jettisoned in favor of "originalism," the rights of gun owners enlarged, our military posture strengthened, the rise of homosexual rights resisted, or the role of religion in the public sphere expanded. All these became causes embraced by the new conservatism that crested with the reelection of Bush in 2004.

* * *

By the fall of 2008, the face of the Republican Party had become Sarah Palin and Joe the Plumber. Conservative intellectuals had no party.

The reactions to Judge Posner's A Failure of Capitalism demonstrate his point. So far, no one on the right, as far as I know, has engaged the book's arguments regarding market failure and re-regulation. Conservative magazines seem not even to have acknowledged that the book exists. It does not fit the conservative conventional wisdom and therefore must be either ignored or shouted down.

2009-05-07T12:18:00.002-04:00

Book and Blog Combo

Richard Posner continues to, in effect, revise and enlarge his latest book, A Failure of Capitalism, by posting timely short essays on his blog of the same name. His most recent entry, posted last night, evaluates the government's various responses to the depression so far. I'm pleased that, among other things, he takes the President to task for "leading the attack on the resistance of Chysler's secured creditors (whom he referred to unhelpfully as 'speculators,' when the government is desperate to encourage lending, including by lenders who will not lend without collateral that gives them a favored position should the borrower go broke)...."

This is the first time I've made intensive use of a book-blog combination. It works especially well here, because the book appeared in the midst of a crisis that is not yet ended and will have ramifications far into the future. Hearing Judge Posner's views on the changing situation is fascinating. They enhance the usefulness of having read the book, by causing me to employ what I picked up from the it. And the background knowledge provided by the book enables me to fit the blog updates into a larger argument.

2009-05-06T11:57:00.002-04:00

Auto Bailouts and Bankruptcies

Today's post (really, late last night's post) on Judge Posner's Failure of Capitalism blog discusses the auto bailouts, the second stimulus package (which was passed after he finished the book), and bank stress tests.

In the book, Judge Posner argued that the auto bailouts were necessary simply to keep the major auto companies from collapsing when uncertainty about the course of the depression was highest. Their utility lay in delaying bankruptcy, not in making the companies viable again.

Today, some five months later, Judge Posner observes that the bailouts "worked." They kept the companies from failing at the height of public fear, when there was the greatest risk of a deflationary spiral. But by the end of March, the generalized, public fear had largely subsided. Thus, the bankruptcy of Chrysler and likely bankruptcy of GM do not raise the same concerns they did in December.

Although Judge Posner does not say this, it would therefore appear that there is now no emergency that could justify the administration's efforts to strong-arm Chrylser's bondholders.

Hat tips to Volokh Conspirator David Bernstein and to Instapundit.

2009-05-05T20:30:00.002-04:00

Blasts from the Bully Pulpit

In an short, amusing post, law professor David Bernstein dramatically compares the cynical rhetoric of Presidents Obama and George W. Bush.

2009-05-05T09:27:00.002-04:00

Update to Judge Posner's Failure Blog

The second post on Richard Posner's new blog about A Failure of Capitalism is now up. It is the first of three promised posts on the federal government's responses to the current depression. Today's post looks at the Fed's "easy money" response, Treasury's effort to partner with private investors to buy mortgage-related assets from banks, and planned legal changes to give relief to underwater mortgagors.

Of particular interest to me is the paragraph explaining why nationalization of "bad banks" would be a wrong step. Nationalization would be much more complicated, time-consuming, and unpredictable than it at first sounds: Because the bad banks are not worthless, their current owners would need to be compensated in any takeover. And then the government would face the question of what to do with the banks it would now own.

2009-05-04T17:38:00.002-04:00

Richard Posner's New Blog Is Up & Running

As promised in his latest book, A Failure of Capitalism, Judge Posner has launched a new blog in which he will expand upon the book's argument as events unfold. The first post appeared today.

He observes that events since February, when he finished the book, have not "alter[ed] the basic analysis and conclusions in my book." He cites data showing that the economy is continuing to decline, "but there is evidence that the rate of the decline has slowed" (his emphasis).

He refuses to speculate on whether we have hit bottom. My own (very impressionistic) sense is that we have, and that we're seeing more and more signs of impending recovery. I hope I'm right about that.

2009-05-04T12:25:00.002-04:00

The Wall Street Journal on A Failure of Capitalism

The WSJ today has a positive opinion piece on Richard Posner's Failure of Capitalism (may be gated). The author appears to agree with the book's argument and concludes:

Even capitalism's staunchest supporters recognize that it cannot function unless government plays its proper part. If all the players, including regulators and bankers, can accept their rightful share of blame and responsibility, we can begin to prevent future failures.

New regulations will inevitably come out of the current economic crisis. And they will inevitably be bad regulations if "capitalism's staunchest supporters," especially those with finance-industry know-how, do not participate in the process with a good attitude.

2009-05-01T09:26:00.002-04:00

Posner's A Failure of Capitalism -- XIII

This post concludes my ongoing review Failure, which I finished reading last night. The last chapter of the book, "The Future of Conservatism," is followed by a "Conclusion" that is (by design) nothing more than a summary of the entire argument.

Judge Posner's hope is that both conservative and liberal preconceptions can be sufficiently loosened that "pragmatic, apolitical, nonideological solutions to economic crises" can be considered. The Republican "coalition" of economic, security, and social conservatives has been shaken by recent events, each component pulling away from the others. The Democratic Party, meanwhile, came out on the winning side of the "competence gap" during the presidential campaign. But both conservatism and liberalism have "substantial" histories of failures.

Judge Posner realizes that politics cannot be banished from economic policymaking. ("There are conflicts within society that can be resolved only by political competition.") The current crisis, however, has given rise to a spirit of pragmatism among economists that with luck will result in better policy-making once the current crisis has passed.

2009-05-01T08:22:00.002-04:00

Posner's A Failure of Capitalism -- XII

Chapter twelve of Failure (entitled "The Way Forward") discusses measures that could be taken to help prevent future depressions. In keeping with his view that systemic reforms should not be attempted or even devised until after the depression has ended, Judge Posner here offers an open-ended array of changes to consider, not a fully worked out program. Among other things, we need to see first what "the new, bound-to-be activist regulatory regime . . . can do within the existing regulatory framework."

Almost nothing is off the table. Possible (but not necessarily recommended) changes include consolidating the various federal and state financial regulatory bodies; forming an "international regulatory authority"; capping credit-card and mortgage debt; further restricting the extent to which debt can be discharged in bankruptcy; changing compensation arrangements for credit-rating agencies, to reduce conflicts of interest; "forbidding proprietary trading by banks (that is, trading of their equity capital, which puts that capital at risk)"; changing bank reserve requirements; regulating hedge funds more like banks and credit-default swaps more like stocks; "and even resurrecting usury laws." Controlling executive compensation through income taxation, and increasing income taxes generally to finance the anti-depression programs, are other suggestions that will surprise readers accustomed to thinking of Judge Posner as a libertarian.

Judge Posner devotes several pages to the difficulties that will be faced in trying to regulate well. We could, he notes, return to the regulatory framework of the 1960s, but we don't know how much value on net is added by having a deregulated financial industry. Consequently, we're unable to compare the costs and benefits that would be associated with various forms of re-regulation. (Judge Posner's description of everything that will need to be taken into account for regulations to be of benefit left me wondering where we can find the Solons capable of meeting the challenge.)

2009-04-30T09:36:00.003-04:00

Posner's A Failure of Capitalism -- XI

In chapter nine of Failure (entitled "Apportioning Blame"), Judge Posner explains that his thesis -- viewing the current depression as a market failure -- "doesn't let the government off the hook." This chapter thus overlaps to a considerable extent with chapter seven, "What We Are Learning about Capitalism and Government."

The argument here focuses on the government's failure to keep a recession from devolving into a depression. Recessions are frequent, and it's "unrealistic" to expect the government to prevent them. But the government should be able to prevent depressions, especially given our experience with the Great Depression "and the tools forged then and later to prevent a repetition."

The "seeds" were sown and nurtured in the gradual deregulation of banking and credit, which began in the 1970s. This process included repeal of the Glass-Steagall Act and the decision not to regulate credit-default swaps and other innovative financial products. The experts in charge in the '90s -- Greenspan, Rubin, and Summers -- "allowed the head of steam to build up."

But a depression might still have been avoided were it not for "the Bush Administration's mismanagement of the economy." Judge Posner notes that Paulson's predecessors as Secretary of the Treasury weren't "financial experts." President Bush also erred in "firing" Lawrence Lindsey as chair of the National Economic Council in December 2002. None of Lindsey's successors as chair (until President Obama's appointment of Larry Summers) was an economist.

Other mistakes under President Bush were the budget deficits and increase in the national debt, and a philosophy of lax enforcement of financial regulations. Judge Posner also spends several pages helpfully explaining why, in his view, the decision to let Lehman Brothers fail in September 2008 is "the single biggest blunder to date in the response to the gathering storm." Aside from the financial fallout, the episode and its aftermath shattered confidence by making it "increasingly obvious that the government had no game plan." This was exacerbated by President Bush's apparent lack of engagement with the crisis and abdication of leadership to Bernanke and Paulson, "neither of whom has the communication skills that the emergency required."

Congress is likewise to blame, for its "squabbling and grandstanding and demagoguery" in an effort to use the crisis to advance political agendas, such as its "eagerness to promote unionization in a depression."

Greenspan and, to a lesser extent, Bernanke are also culpable for their actions as chairmen of the Fed. Greenspan did not use the opportunity afforded by his "tremendous prestige" to arrest the housing bubble's growth. Bernanke shared Greenspan's misapprehension that any recession caused by the eventual bursting of the housing bubble could be "neutralized by lowering interest rates."

Finally, Judge Posner explains why he is not being harder on private actors: Although private actors are "responsible" for the depression in the sense that their rational market behavior primarily caused it, they (unlike the government) are not morally culpable "any more than one can blame a lion for eating a zebra." Judge Posner therefore criticizes journalists and politicians "and some who should know better, like . . . Paul Krugman," for directing their ire at Wall Street. "They have the wrong target."

2009-04-29T19:36:00.002-04:00

Posner's A Failure of Capitalism -- X

Chapter eight of Failure tries to answer the question why economists did not anticipate trouble. Aside from a few outliers (Judge Posner mentions Nouriel Roubini, Raghuram Rajan, Paul Krugman, Martin Feldstein, and Robert Shiller), economists "whether in academia, the government, or business" gave warnings too late or not at all.

In Judge Posner's opinion, this failure to see what was approaching arose not from "obtuseness" (he acknowledges that "the leading macroeconomists and finance theorists are brilliant people"), but from "disbelief" that we were facing anything more than another manageable recession. Likewise, the failure to warn did not result from over-reliance on "abstract mathematical models." Many of the economists under consideration had real-world experience with financial markets.

One cause that Judge Posner offers is something he has mentioned before: "an overinvestment . . . in a free-market ideology that opposes aggressive governmental interventions in the operation of the economy." Yet he is quick to add that free-market leanings are not confined to conservatives -- "economists can be liberal in the sense of being egalitarian and favoring redistributive policies without wanting to regulate corporate practices."

He also notes that depressions are not well understood; they're hard to model and occur rarely, in disparate settings that are not readily comparable. Consequently, a preference for one theory over another will be more than usually influenced by "preconceptions." The public and politicians have no basis for crediting one position or another -- they "wander in an untracked wilderness."

Nonetheless, current experiences add to our stock of data. Judge Posner offers Ben Bernanke as an example of a "conservative economist" who has "come to doubt that a depression can be averted or cured by monetary policy alone." Unspoken is that Judge Posner himself, while not by profession an economist, could be added to the list of those who have altered their views based on events.

2009-04-29T12:26:00.003-04:00

Posner's A Failure of Capitalism -- IX

Chapter seven addresses "What We Are Learning about Capitalism and Government" from the current depression. Here, Judge Posner revisits his claim that the depression was not caused by government action. Rather,

As far as one can judge on the basis of what is known today (obviously an important qualification), the depression is the result of normal business activity in a laissez-faire economic regime -- more precisely, it is an event consistent with the normal operation of economic markets.

He obliquely supports this claim by examining the government's conduct in the years leading up to the depression. The government's role in the rise of risky mortgage lending, he finds, "was one of permission rather than of encouragement." In other words, government allowed the rational self-interest of private actors to pursue, in the aggregate, a course that was harmful.

The government's permissivenes, or inaction, is exemplified in the SEC's failure to investigate the Madoff scheme, notwithstanding Harry Markopolos's repeated efforts over several years to alert the SEC to what was going on. Judge Posner rejects "conservatives'" interpretation of this episode as an example of government incompetence. Instead, he proposes, "the emphatically pro-business philosophy of the Bush Administration made the SEC too trusting of the securities industry."

He concludes that "there undoubtedly was a grave government failure as well as a market failure" in the run-up to the depression. He predicts that the government's response will be, as usual, "regulation and reorganization." Reorganization is the easier move and the less effective. Regulation or reregulation is more likely to do good, but it should not be attempted until the depression is at an end.

2009-04-29T11:52:00.002-04:00

Posner's A Failure of Capitalism -- VIII

Chapter six of A Failure of Capitalism -- entitled "A Silver Lining?" -- somewhat quickly reviews possible beneficial effects of the current depression.

These include: The bursting of the housing bubble, which had to happen eventually, and having it happen when it did is preferable to having it happen, say, a year later, when it would be that much bigger. The exposure of fraudsters such as Bernard Madoff, who, again, would have done still more damage the longer the bubble lasted. Increasing the efficiency of business enterprises' use of labor and capital, since the drop in revenues requires that "slack" be taken up. Inducing federal, state, and local governments to increase their efficiency, since tax revenues drop. (But, on the other hand, the depression will also likely cause government to grow in size.)

More beneficial effects: "The depression may give the Administration and Congress pause concerning measures to strengthen unions, such as the proposed Employee Free Choice Act[,]" since unions can cause "an increase in wages, and a reduction in the efficiency with which labor is utilized." An increase in taxes (once the depression is over) will not "necessarily" be a bad thing. Increased unemployment will lead to an increase in the general level of education, since the opportunity costs associated with spending more time in school have been temporarily lowered. The depression has taught the banking industry "a great deal . . . about the risks of leverage and the downside of complex financial instruments intended to reduce the risk of default more cheaply than by traditional means." The public has learned "about the dangers of speculating on housing prices and investing the rest of one's savings in the stock market."

Still more: "The depression has shown that privatizing social security -- that is, allowing recipients to invest in the stock market some or all of the money in their social security retirement accounts -- would have been calamitous." The depression has caused commodity prices to drop, especially with oil. The level of carbon emissions has fallen as business activity has slowed. Lower oil prices have reduced the wealth of many nations that are "either hostile to the United States . . . or politically unstable." The depression will free up to pursue other work a lot of "brilliant people" who were formely employed in the financial industry. "The depression is a wake-up call to the economics profession." And the depression may lead to "a durable increase in the personal savings rate."

2009-04-28T17:44:00.002-04:00

Posner's A Failure of Capitalism -- VII

This is the second of two posts on chapter five of Failure.

As I noted in the preceding post, Judge Posner asks, after reviewing the stimulus program, whether it is "an $800 billion mistake?" He answers this question in a roundabout way.

He acknowledges that much of the "stimulus" will not be aimed primarily at stimulating economic activity but will instead be an enactment of President Obama's legislative agenda. Judge Posner then proceeds through a lengthy discussion of the "monetarist" and "Keynesian" views of the Great Depression and of solutions to depressions generally. The monetarist solution (in which the Fed increases the money supply through the banking system in order to stimulate economic activity) is problematic because, as previously mentioned, the current situation is so bad that banks are mainly "hoarding" the additional money in order to build their reserves, not lending it. To get beyond this hoarding, the Fed would have to pump so much new money into the banks that, when the depression finally ends and the Fed starts to contract the money supply (as will be necessary to prevent wild inflation), "a severe recession will be unavoidable." Thus, Judge Posner concludes, the monetarist solution alone will not remedy the depression "at a tolerable cost."

The fear in the background, as he explains in this chapter, is that the economy will enter a deflationary spiral. Deflation is a situation in which the general level of prices persistently decreases. This frightens economists because deflation makes it economically rational not to spend money. Since prices are dropping generally, money gains in value simply by being stuffed in a mattress for a few months. People don't need to put their money to work in order to earn a return. Accordingly, the economy contracts and contracts.

After painting this bleak picture, Judge Posner observes that "[e]ventually deflation will bottom out. As income shrinks, consumers will cease to be able to hoard cash; they will have to start spending everything they have." This will start a "virtuous cycle" of increased spending, increased production, and increased employment. "But the progress of recovery will be protracted because it will begin from a very low level."

Judge Posner now comes back to his question whether the stimulus is a mistake. He has concluded that the monetarist solution is not likely to prevent a deflationary spiral "at a tolerable cost." As a result, Keynesian deficit spending (i.e., the stimulus program) is also needed to prompt economic activity. Although he doesn't use these words, he in effect says that we have no choice.

He further points out that, even if the stimulus "will do nothing to speed recovery from the depression, there would still be a compelling argument for it. . . . "

Suppose that President Obama were to tell the American public: "We're trying to avert or ameliorate a depression by pumping up the money supply, but it may not work, in which event we'll find ourselves in a deflationary spiral that may resemble what happened to the United States in the 1930s and Japan in the 1990s. And then we'll just have to tough it out because our toolbox will be empty." (This is what, in effect, some conservative economists would like him to say.) His statement would guarantee a severe depression, because people would react by curtailing their consumption further, accelerating a deflationary spiral that would carry the economy to a lower level and keep it there for years.

The government must instead, for psychological reasons, express optimism and be seen to be doing something.

I don't have the time to review other interesting passages in this chapter, other than to mention them. Judge Posner argues that the monetarist solution "is potentially more socialistic" than the Keynesian one, because under the former, the Fed has found itself needing to buy stakes in businesses. He also looks at Congress's attempt to reduce the number of residential foreclosures by amending the bankruptcy code. In his view, that is not a good plan. Instead, while his preference would be no mortgage relief at all, he suggests a moratorium on foreclosures or a Columbia-devised plan in which certain lien-holders would be compensated with government funds for consenting to modification of mortgage terms.

2009-04-28T08:21:00.006-04:00

Posner's A Failure of Capitalism -- VI

In chapter five -- by far the longest chapter in the book -- Judge Posner examines the efforts the federal government has made so far to combat the current depression.

I will blog this chapter in two parts, this being part one.

By this point, his arguments will already have alienated libertarian and conservative readers. This chapter will now alienate readers on the left. Judge Posner has no illusions about the political nature of what the Obama administration is undertaking. At one point he suggests that the stimulus program perhaps "should be called the 'half stimulus-half New Deal' program," and notes that "[t]here is a legitimate concern that Keynesian depression-fighting theory is being used as a fig leaf to disguise a program of massive government expenditures based on a liberal ideology that a majority of Americans may not subscribe to -- at least not yet." (That closing "at least not yet" is apparently a reference to an argument earlier in the chapter that wealth-transferring programs are very hard to remove once they have been put in place, because they create their own constituencies of supporters/dependents.)

He identifies five phases that the government's response has so far moved through or into, not necessarily in sequence. The first three phases together form the "bailout": (1) the attempt to use TARP funds to buy "sick" mortgage-related assets from banks, (2) direct government investment in large banks in exchange for preferred stock, and (3) loans to GM and Chrysler in December '08 "to head off the bankruptcy of these companies or at least defer it." The fourth phase Judge Posner calls "easy money" -- the Fed's purchase of $800 billion of private debt (as opposed to buying back debt issued by the federal government). The fifth phase is the stimulus program, which had not become law at the time Judge Posner completed the book, in February '09, though he correctly assumed that it would be enacted.

Judge Posner explains the economic rationale behind each of the above phases, the political complications associated with them, and their likelihood of being effective on balance. The first phase, as he discussed in a previous chapter, failed because it was based on the faulty premise that the illiquidity of the "sick" assets resulted from uncertainty as to their value. (It turns out that they're just not worth much.) The second phase did help stabilize banks, but it did not have much immediate effect on the depression because banks needed funds so badly that they added much of the invested money to their reserves rather than loaning it out and thereby boosting economic activity.

The third phase (the second shoe of which is dropping now) was, in Judge Posner's view, more successful than is generally allowed. There was never any chance that the government could remake those companies or the auto industry as a whole. But, he argues, the main benefit of the loans to GM and Chrysler was simply to help them survive until the depression is over. In "normal" times, their bankruptcies would not be a problem. But the failure of such large firms "just as the nation was sliding into a depression" would have dangerously accelerated the cycle of lowered spending / lowered production / increased unemployment / lowered spending / etc.

After discussing the above, Judge Posner turns his attention to the stimulus program. The stimulus was planned (at the time he was writing) to consist of three elements: tax cuts, transfer payments and "other social-welfare expenditures," and public works. Conservatives prefer the tax-cut solution because, of the three, it's the only one that promises to make government smaller instead of larger. Tax cuts alone, however, are unlikely to increase economic activity much, because most people view tax cuts as temporary and therefore tend to save, not spend, the additional money they get to withhold from Uncle Sam. (And people who are so poor that they must spend all the money they have are also so poor that they pay little, if any, income tax in the first place.)

As for transfer payments and social programs, that "component of the proposed stimulus is also questionable, though politically irresistible." On the plus side, this component puts money directly into the hands of the poor, who are the ones most likely to spend it soon -- what we want a stimulus program to accomplish. On the negative side, this component is most likely to create permanent new "drains" on the federal government.

In that regard, the public-works component of the stimulus is superior, because public-works projects are, by their nature, more likely to be temporary. They are also more likely to result in real benefits to society aside from the benefit of helping to end the depression. To an extent, they also accomplish the same thing as the second component, since some of the money spent on public works finds its way to individuals who also spend it. (Relatedly, Judge Posner mentions the Keynesian "multiplier" that is supposed to capture the extent to which government spending results in additional spending down the road. He acknowledges that some estimates put the multiplier at 1.4, but "this is one of the roughest of rough estimates and some economists think the multiplier is less than [1.0].")

The problem with public-works spending is that public-works projects need a long lead time. Judge Posner's solution is to focus the spending on infrastructure repairs, and on projects (whether state or federal) that have already been started but have stalled for lack of funds.

At this point, Judge Posner ask if the stimulus program is "an $800 billion mistake, as the economist Martin Feldstein has called it?"

2009-04-26T19:09:00.002-04:00

Posner's A Failure of Capitalism -- V

Chapter four of Failure focuses on why government did not pay attention to warning signs that the housing market was hugely inflated and that the inevitable bursting of the housing bubble would trigger widespread bank failures. Judge Posner reviews the warnings that were given by Nouriel Roubini, The Economist, and others during the 2000s, along with the collapse of several mortgage hedge funds in 2007. He also discusses possible reasons why the warnings were ignored or underappreciated, and why governing officials in general lack incentives to take precautions against low-probability catastrophic events. "Until the biggest financial ninepins started falling in September 2008, the magnitude of the crisis was largely invisible to government, the business community, and most economists, even specialists in financial economics and macroeconomics."

Among the reasons Judge Posner offers for this lack of comprehension are a reliance on faulty pro-non-interference preconceptions when facing uncertainty, the political costs associated with using Fed policy to preemptively pop the bubble, the uncertainty of whether the social costs of preemptive action will be less than the costs of letting things run their course, and the sheer size of the mass of data from which one would have had to sift out reliable warnings.

Notwithstanding his recognition of those countervailing forces, Judge Posner feels that the Fed and Treasury should have known to take action after the Bear Stearns collapse:

It is the passivity of the Federal Reserve between Bear Stearns' collapse in March 2008 and the calamitous collapses in September, and the failure (for which the Fed was jointly responsible with the Treasury Department) to avert Lehman Brothers' bankruptcy, that merit strong criticism.

2009-04-26T13:32:00.002-04:00

Posner's A Failure of Capitalism -- IV

Judge Posner devotes chapter three to a fuller explanation of a point he made briefly in chapter one: that systemic forces led bankers and others to take risks -- notwithstanding some perceived threat of catastrophic failure -- that were excessive. This is a key component of his argument that the current depression resulted from market failure. I.e., if people were for the most part acting rationally in the run-up to the depression, then we cannot expect market forces alone to prevent depressions.

As Judge Posner explains, executives, private investors, and home buyers were acting in their rational self-interests in making the decisions they did over the past nine years. The depression was not the result of irrational exuberance or bad motives "such as 'greed' (whatever that means)." He lays out the various circumstances (including some conflicts of interest in the financial world) that caused the rational course of action to be largely what people did.

The problem -- and the reason why this was a market failure -- was that decisions that were rational on an individual basis were irrational, and harmful, for the economy as a whole. Government action is therefore needed to prevent actions that are harmful in the aggregate:

Rational indifference to the indirect consequences of one's business and consumption behavior is the reason the government has a duty, in regulating financial behavior, to do more than prevent fraud, theft, and other infringements of property and contract rights, which is the only duty that libertarians believe government has. Without stronger financial regulation than that, the rational behavior of law-abiding financiers and consumers can precipitate an economic disaster.

Judge Posner acknowledges that not all market failures should be prevented. If the regulations needed to do so would cost more than the "social cost" of the failure, then trying to prevent it would be a net waste of resources. But depressions, he argues, are not of this type. The Great Depression "inflicted horrendous costs," including "the excesses of the New Deal," and possibly Nazi Germany and World War II. The current depression could likewise result in far-reaching costs, such as over-regulation, dependence of business on government handouts, etc.

2009-04-26T10:10:00.002-04:00

Posner's A Failure of Capitalism -- III

In the second chapter of Failure, Judge Posner enlarges upon his discussion in chapter one about how the current depression particularly involved the financial industry. Throughout the book, he uses "banks" to refer to all financial-intermediary firms, because by the 2000s, the regulatory restrictions on what non-bank intermediaries could do had been so eroded that they were all involved in "banking."

He recounts the rise of securitization of mortgage obligations -- how interests in baskets of mortgages were sold far and wide -- although he believes that securitization may not have been integral to this depression. He also explains (i) credit default swaps, which banks entered into in a (not irrational) effort to insure against losses on their mortgage and mortgage-securities holdings, and (ii) that insurers and credit-rating agencies lacked the history of dealing with these products in order to realistically calculate their riskiness.

When the housing bubble burst and credit froze, the Fed initially believed that banks were afraid to lend because their mortgage-related assets were illiquid. They were illiquid (not readily salable) because, it was thought, no one was confident of their precise value. The Fed's initial plan was therefore to buy the illiquid assets. However, it soon became evident that the problem was not merely uncertainty about the assets' value, but an absolute lack of value in such assets. In other words, the value of the mortgage-related assets was in fact very low.

The Fed then changed its plan. Instead of buying the mortgage-related assets, it would invest directly in the banks in exchange for preferred stock. The hope was that the cash invested by the Fed would then be loaned out, unfreezing credit. However, banks were so overleveraged, that a lot of the invested cash had to be retained simply to get the banks solvent (in banking terms), before any thought could be given to loaning some of it out. The Fed tried to persuade banks to lend rather than "hoard" the invested cash, but banks' problems were simply too great at that point.

Along the way, Judge Posner explains the policy behind some of the older banking regulations. Put very simply, banks stay in business by loaning out a large portion of the funds deposited with them. Thus, if all of a bank's depositors simultaneously decided to withdraw their deposits, the bank would fail -- it could not meet all such demands at once. Federal deposit insurance (under the FDIC) was created by the federal government in order to assure depositors that their deposits, up to a certain amount, would be safe even if the bank failed. This removed the incentive of despositors to "run" on the bank in order to get first dibs on the limited funds whenever a bank was rumored to be in trouble.

Next, in order to keep the now-insured banks from taking excessive risks with depositors' money on the Fed's dime (a "moral hazard" problem), regulations were imposed on the banks. Such regulations required that banks not make as risky loans -- and so offer as high interest rates -- as non-bank intermediaries could. Therefore, non-bank intermediaries had to be kept from taking advantage of the limits on banks and thereby drawing deposits into uninsured accounts. Accordingly, additional regulations put in place to prevent non-bank intermediaries from encroaching on the functions of banks.

2009-04-25T20:00:00.003-04:00

Posner's A Failure of Capitalism -- II

The first chapter of Failure lays out the standard theory of what causes depressions and how governments should normally respond, and then discusses what about our financial industry makes the current depression unusual.

Judge Posner's explanation of depressions seems (to me) to be basically Keynesian: A "shock" to the economy causes the value of individual savings to drop, which causes people to reduce their spending in an effort to rebuild their savings, which causes demand to drop, which causes producers to produce less, which results in layoffs, which makes individuals still more nervous and more inclined to spend less, which causes the pattern of contraction to continue. If banks were overextended when the shock occurred, "cascading" failures will make it harder for the pattern to be broken.

The government's tools for dealing with this situation are increasing the money supply through the banking system and, if that fails, to increase spending by spending more itself or by cutting taxes.

The shock to economy in this instance, as in the 1930s and in the late 1990s, was the bursting of an investment bubble. The bubble started in the housing industry and spread to the financial industry as a result of "low interest rates, aggressive and imaginative marketing of home mortgages, auto loans, and credit cards, diminishing regulation of the banking industry, and perhaps the rise of a speculative culture[.]"

Judge Posner then discusses how banking has changed in a way that helped bring about the depression. "[T]he regulatory barriers separating the different types of financial intermediary have eroded to the point where [for present purposes] all financial intermediaries can be regarded as 'banks.'" Restrictions on risky lending were eroded, and subprime lending increased.

Banks do not have enough incentive to avoid the risk because the rewards outweigh their exposure to a disaster that (they think) is of low probability. "A depression is too remote an event to influence business behavior." Hence government regulation is needed to prevent excessively risky lending.

Moreover, Americans' saving rate was so low in the 2000s that many now have little set aside to enable them to keep spending at the pre-downturn levels. The Fed's easy money policy in the 2000s (as it attempted to correct for the bursting of the dot-com bubble) enabled lending to continue even as people saved less.

2009-04-25T07:53:00.003-04:00

Posner's A Failure of Capitalism -- I

Yesterday I received my copy of Richard Posner's new book, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression. My plan is to blog the book here as I read it.

Last night I just had time to read the preface (completed in Feb. '09) and the first half of Chapter 1. Judge Posner begins by arguing that we are in a depression, not just a recession. It's not a "Great" depression like that of the 1930s -- the current indicators are nowhere near what was seen then -- but this is more than a recession, "especially if, as may well happen in the present instance, a 'successful' effort to avoid a repetition of the Great Depression will impose enormous long-term costs on the economy."

He then states his thesis, which was unexpected from someone with Judge Posner's reputation as a libertarian:

Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government's myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, be in a depression. We are learning from it that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience -- the self-healing powers -- of laissez-faire capitalism.

This is strong stuff, almost shocking, in view of who's written it. Many libertarians believe that there is, or very nearly is, no such thing as market failure. In other words, they believe that market forces, if left to themselves, will (almost) always bring about the optimal situation.

Even those who agree that market failures can sometimes occur nonetheless deny that regulation, especially federal regulation, is needed for the financial industry. Judge Posner clearly has rejected that view (if he ever held it). "Our model of a capitalist economy" needs regulation.

Judge Posner also explains that this book is divided into two main parts: the first five chapters deal with how the depression came about and what the government is doing to try to remedy it, and the remaining six chapters deal with the lessons we can learn.

He acknowledges that it may seem "premature" to write about this depression, since it may not even have bottomed out. (I think it has.) He thinks his effort is useful now because "hindsight will rewrite history" once the depression ends. In addition, he promises to launch a blog one week after the book's publication to provide weekly updates to the book. I have not yet checked to see whether this blog -- to be called "The Posner Economic Crisis Blog" -- is up.

2009-04-24T13:13:00.002-04:00

Where Do Thriving Businesses Come From?

When progressives talk about business, I often get the feeling that they think successful enterprises just pop up naturally, like weeds in a vacant lot. They forget (or were never aware of) the talent, energy, and risk exposure that are entailed in creating and maintaining a thriving business, whether it's a mom-and-pop store or a publicly traded corporation.

Vice Chancellor Leo Strine, of the Delaware Court of Chancery, understands the challenges that entrepreneurs must overcome in trying to build the businesses that we all rely on for providing goods and services we need, as well as our livelihoods. In an opinion that Vice Chancellor Strine issued yesterday, he held that a company will not be judicially dissolved "merely because [it] has not experienced a smooth glide to profitability or because events have not turned out exactly as [its] owners originally envisioned[.]" We have to assume that many businesses will face financial trouble:

[S]uch events are, of course, common in the risk-laden process of birthing new entities in the hope that they will become mature, profitable ventures.

I love the metaphor he uses here -- comparing the creation of a business to childbirth and child rearing. The process is risk laden. Dedicated, intelligent nurturing is needed for the new entity to become a mature venture that creates value.

(The case is In re Arrow Investment Advisors, LLC, C.A. No. 4091-VCS, slip op. at 6 (Del. Ch. April 23, 2009).)

2009-04-23T20:13:00.002-04:00

"Civilization without Instrumentalities!"

Over the past year, I've seen a number of things that have amazed me -- the Treasury Department buying stakes in private corporations, the president pressuring the CEO of a car company to resign, Congress authorizing $700+ billion in spending to bail out companies nearing insolvency, etc.

Today I saw something that is amazing in a good way.

According to the Washington Post (may require registration), two toy companies -- Mattel and Uncle Milton -- are preparing to release in the fall games that use brain waves to move objects. Yes, just like a science-fiction story:

You slip the wireless headset on. It looks like something a telemarketer would wear, except the earpieces are actually sensors, and what looks like a microphone is a brain wave detector. You place its tip against your forehead, above your left eyebrow.

A few feet away is a ping-pong ball in a clear tube called the Force Trainer. The idea is to use your thoughts alone, as recognized by the wand on your forehead, to lift the ball. Your brain's electrical activity is translated into a signal understood by a little computer that controls a fan that blows the ball up the tube. Levitates it. As if by magic. It's mind over matter.

All you have to do is concentrate.

The Post website also has a video in which different Post personnel successfully use the device. I have to admit, I found it thrilling. I'm planning to buy one.

I can imagine games being devised in which multiple players try to gain control of a ball or something similar, with the "strongest" brain winning. I could also imagine the technology being developed into silent communication devices. And into devices to test intelligence or to test certain types of mental aptitudes (attention to detail, flexibility, etc.). Very, very exciting.

Hat tip to Hit & Run.

2009-04-23T17:35:00.002-04:00

Achievements of a Businessman

In our society, politicians are remembered and eulogized and idolized out of all proportion to their accomplishments. Businesspeople, especially, get the short end of the stick when it comes to recognizing contributions. At worst, they are viewed as parasites; at best, as necessary evils.

I was therefore pleased to come across U.S. Supreme Court Justice Joseph Story's dedication of his 1845 treatise on the law of promissory notes. The treatise is dedicated to the wealthy merchant Thomas H. Perkins and includes the following:

You justly stand at the head of our commercial community; and you have achieved this enviable distinction by a life of successful enterprise, in which one knows not which most to praise, the skill, and intelligence, and integrity which have deserved that success, or the liberal spirit and unostentatious hospitality which have constantly been its accompaniments.

Interestingly, while Justice Story notes Perkins's generosity (his "liberal spirit"), the dedication contains no pieties about "giving back to the community" or being a "public servant" in his spare time. Instead, Perkins's success in business is itself a sufficient reason for honoring him.

2009-04-21T11:51:00.003-04:00

US News Law-School Rankings

US News & World Report issued its 2009 law-school rankings yesterday, according to the Volokh Conspiracy here and here.

For better or for worse, the US News rankings are one indicator of how hard it will be for law students at a given school to find a job. (The other main indicators being law-school GPA and whether one was on law review and/or a moot-court team.)

I interview a lot of candidates for positions with my firm as summer associates or first-year associates. The rank of one's law school matters to us partly out of self-defense -- we receive thousands of resumes and talk to dozens of candidates, and most of the people we interview are pleasant and articulate with decent grades. Since we can't hire all of them, we need some other way of sorting to help us find the individuals who are most likely to succeed in our practice areas.

But law-school rank matters for two other reasons. First, the business of law is largely brand driven. Law firms work hard to establish strong brands and work hard to maintain their brands once they've been established. A lot of practitioners could do what the big-name firms do, very nearly as well and for a much lower rate. Clients pay a premium for big-name-firm service because they want the assurance of good work that comes with the big name. And one way in which firms build and maintain their brands is by hiring attorneys from law schools with strong brands.

Second, graduates of higher-ranked schools are, on the whole, more likely to be successful lawyers. Now, I hasten to add that there are many counter-examples. I know a few graduates of top schools who really struggled in practice, and I know a few graduates of fourth-tier schools who are brilliant practitioners. But when big numbers are taken into account, it appears that you have a better chance of finding great talent at the higher-ranked schools.

Still, small differences in rank do not matter much. I think most practitioners probably view law schools as falling into the following rough divisions: Yale, Harvard, Stanford; the rest of the top 10-20; the "second tier" (i.e., from ~20 to ~100); the "third tier"; and the "fourth tier." Also, most practitioners know the rankings of only a small fraction of schools. They know which schools are "top," they know where their own schools fall, and they know the ranking of a random assortment of other schools. For the rest, they frequently consult US News.

UPDATE: Law professor Brian Leiter's take on the rankings here.

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2009-04-21T11:21:00.002-04:00

Rasmussen Poll on the Tea Parties

Rasmussen has reported that, according to a poll it conducted on April 16-17, 32% of the sample had a very favorable impression of the tea parties, 19% had a somewhat favorable impression, 15% had a somewhat unfavorable impression, 18% had a very unfavorable impression, and 15% were not sure. Thus, more people had a favorable impression than an unfavorable one. I think that's good news, insofar as it may represent a widespread dissatisfaction with big government.

In addition, 25% of the sample said they personally knew someone who had attended a tea party.

Hat tip to Power Line.

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2009-04-20T18:09:00.002-04:00

How Will E-Books Change Us?

Today's Wall Street Journal has a long article (may be gated) about the Amazon Kindle and how e-books in general will change our world. Of course, the Kindle is now well over a year old, but the recent release of version 2.o has prompted a new wave of media interest.

The article's author, Steven Johnson, describes the "aha" moment most Kindlers have when they first buy a book on-line:

A few weeks after I bought the device, I was sitting alone in a restaurant in Austin, Texas, dutifully working my way through an e-book about business and technology, when I was hit with a sudden desire to read a novel. After a few taps on the Kindle, I was browsing the Amazon store, and within a minute or two I'd bought and downloaded Zadie Smith's novel "On Beauty." By the time the check arrived, I'd finished the first chapter.

For Johnson, this "aha" moment was when he realized how sweeping are the changes we can expect from the rise of e-books. He goes on to describe them. One in particular struck me:

... an infinite bookstore at your fingertips is great news for book sales, and may be great news for the dissemination of knowledge, but not necessarily so great for that most finite of 21st-century resources: attention.

Because they have been largely walled off from the world of hypertext, print books have remained a kind of game preserve for the endangered species of linear, deep-focus reading. Online, you can click happily from blog post to email thread to online New Yorker article -- sampling, commenting and forwarding as you go. But when you sit down with an old-fashioned book in your hand, the medium works naturally against such distractions; it compels you to follow the thread, to stay engaged with a single narrative or argument.

As Johnson points out, the future of e-books is connectivity, as we've already seen with on-line content. That means more and more temptation to jump around.

I already have this problem with the web. If I'm reading a book within reach of my computer, it's all too easy, and too tempting, to jump on-line to follow up on some question the book has planted in my head. That may be good from an information-gathering perspective, but it's not good from a deep-reasoning perspective. The ability to stick to one line of thought and work it out is not something that will survive without practice.

2009-04-20T11:56:00.002-04:00

Happy Fifth Anniversary, Cafe Hayek!

Cafe Hayek passed the five-year mark yesterday. The two economists who write Cafe Hayek -- Don Boudreaux and Russ Roberts -- are clear, direct, consistent, principled, authoritative, and passionate. I have been following them from the beginning, back when comments weren't enabled and before Don adopted his excellent practice of posting on the blog his letters to the editors of various newspapers.

As their blog's title suggests, they are proponents of the economic theories of Friedrich Hayek. They favor individual choice over government management, and take a public-choice view of politics.

Here's one of Don's posts (from June 23, 2005) that hit me like a splash of cold water in the face when I first read it. Its title has stuck with me like few other phrases.

The contribution by Russ that has stuck most in my mind was an Econtalk podcast in which he spoke with economist Mike Munger. If I recall correctly, this was the podcast in which Russ asked us to consider, What kind of person would want the job of being a politician?

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2009-04-20T11:48:00.002-04:00

More Tea Party Links

- Mike Moffatt has a follow-up on the tea parties.

- Reason magazine's Hit & Run blog offers several links.

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2009-04-18T09:10:00.005-04:00

Discounting the Tea Parties

Yesterday, I had an interesting discussion with econ blogger Mike Moffatt in the comments section of EconLog. We were both commenting on economist David Henderson's post about the tea party he attended.

My question, posed to no one in particular, was why many people assert that the tea parties were meaningless because the people attending them (supposedly) did nothing to protest the growth in spending under the Bush II administration. In my view, if the federal government is currently spending too much, it's good that people protest against that conduct, regardless of whether they did or didn't protest sooner.

Mike's explanation (at least as far as he is concerned) was that (1) Republican administrations have been more fiscally irresponsible than Democratic ones; (2) all but a tiny fraction of the tea partiers were Republican partisans; (3) participation in, or promotion of, the tea parties thus amounts to lending support to the Republican party; and therefore (4) participation in, or promotion of, the tea parties is likely to make the federal government more fiscally irresponsible.

That explanation is rational, if one accepts the premises. I can see how someone who believes that a Republican administration is bound to be worse than a Democratic one would not want to do anything likely to increase the chances of having a Republican administration, even if he thinks that the current Democratic administration is doing some things that should be criticized.

To my way of thinking, however, protest against a bad policy is never out of order. I suppose one could imagine a scenario in which one would not want to join a particularly despicable group (neo-Nazis, for example) in protesting something one is also opposed to. But aside from such extreme examples, I can't see the good in withholding criticism only because one doesn't approve of the beliefs of others who are making the same criticism. Being too particular about my co-protesters would result in my silent acceptance of things that are harmful.

2009-04-18T09:02:00.003-04:00

The Coming Broad Tax Increases?

Economist Tyler Cowen notes that the "not-at-all-right-wing [economist] Lane Kenworthy" demonstrates how higher taxes on the rich alone will not be enough to pay for all of President Obama's programs. Kenworthy's prediction is heavier taxing of the middle class, such as a consumption tax.

2009-04-16T10:23:00.009-04:00

Tea Party Coverage

- John Hinderaker at Power Line has posted a video (which I have not yet viewed) and some nice photos he took at the tea party in St. Paul.

- I happened to be in the car this morning later than usual and caught the first 30 minutes of Glenn Beck. He played audio of his speech at a tea party in San Antonio, where his statement that the Republican party "sucks" got just as big a cheer as his statement that the Democratic party "sucks." He also played audio of an unbelievably tendentious "interview" of a tea-party participant by a CNN personality.

- Today's Wall Street Journal has an opinion piece today by Karl Rove (may be gated) on the political significance of the tea parties. I could not detect any other coverage of the tea parties in today's issue, however.

UPDATE: Here's a youtube video clip of the same CNN "interview" that Glenn Back played, although Beck's audio included some additional back-and-forth before the reporter walked away, in which she pointed out that Illinois, "the land of Lincoln," would receive a large amount of stimulus money.

UPDATE: Here's a longer youtube video clip with all the CNN material that I heard this morning on Beck's radio show. (Plus another protester with Obama = Hitler material that is over the top, needless to say.)

UPDATE: Here's the New York Times' story, which seems to be pretty fair. It describes the turn-out as "moderate," whatever that means.

The LA Times' story, by contrast, is noticeably slanted, portraying the parties as a "Republican" event. The opening paragraph:

Republicans sought to ignite a popular revolt against President Obama on Wednesday by staging "tea party" protests across the nation to demand lower taxes and less government spending -- but the tactic carried risk for the party. [Emphasis added.]

UPDATE: Wikipedia entry including information on yesterday's protests and lots of links.

UPDATE: Reason magazine's Hit & Run blog discusses claims about who/what was behind the tea parties.

UPDATE: A balanced article from today's Christian Science Monitor. One participant is quoted as follows: “On the one hand, I feel optimistic to see so many people coming out, . . . But I’m also pessimistic because I think it’s too late. I think both parties in this country are bent on repressing the individual rights the Founders worked so hard to craft into the Constitution.”

UPDATE: Economist David Henderson has posted his thoughts on the Monterey tea party he attended.

2009-04-15T19:06:00.002-04:00

I Arrived a Little Too Late

I tried to attend my local tea party this afternoon. I finally got away from the office at 5:35, making my way to the party a little after 6:00. Unfortunately, it was breaking up just as I arrived. Since the weather here was cold, windy, and rainy, I'm not surprised that people were heading briskly to their cars. As for how many attended, I have no idea -- all I can say is that there was quite a traffic jam getting away from the location.

2009-04-15T12:59:00.002-04:00

Financial Deregulation, Malregulation, and Reregulation

The Freakonomics blog at the New York Times has an interview with Richard Posner about his forthcoming book, A Failure of Capitalism. This paragraph caught my eye, about what the future holds:

There will be more regulation of financial institutions, and that is probably a good thing, though most of the goals of tighter regulation could probably be achieved just by more assiduous enforcement of existing regulations; regulatory laxity was a particularly marked characteristic of the Bush administration’s economic philosophy. The United States was capitalistic when banks were tightly regulated, and it will still be capitalistic if they are again tightly regulated. My fear is that the rush to re-regulate will produce more than the usual quota of dumb regulations. Since there is not going to be another housing and credit bubble in the next year, I would urge that the proposal of new regulations be deferred for a year, to provide time for a calm and thorough appraisal of the regulatory options.

2009-04-15T11:23:00.002-04:00

Could It Get Any Worse?

I didn't vote for McCain in the 2008 election because, among other reasons, I couldn't imagine how a Democratic administration could be any more irresponsible than the outgoing Republicans in running up deficits. (I voted for the Libertarian candidate, Barr.) Well, apparently the Democrats can be a lot more irresponsible.

This graph from The Heritage Foundation (not new, and widely reprinted) sums up the situation so nicely that I'm linking to it here for ease of reference.

2009-04-15T09:15:00.002-04:00

Further Memorable Thoughts on Health Care Spending

Two commenters at EconLog ("John Thacker" and "Matt") posted comments yesterday that I think are well worth repeating:

From Matt:

As someone who works in the medical industry, I can attest to the fact that health care consumers want to have their cake and eat it too. There is simply no way to reduce health care costs without some form of rationing.

The fact is we do ration health care in favor of the elderly in this country. An earlier poster, Neil, brought this up and anyone who works in health care can tell you this. Medicare, which at current levels of payout, will overtake the majority of the US budget as the baby boomers start taking benefits. When you turn 65 in this country, you enjoy a bottomless pit of medical expenses. It is not uncommon for an obese smoker on Medicare to consume well over a million dollars of health care in a year. If you are an unemployed pregnant 20 year old you get the bare minimum - that is if you get enrolled into Medicaid. You can forget about experimental cancer treatments. Not to sound conspiratorial but the AARP has a lot to do with this sorry state of affairs.

A lot of great ideas are being thrown around like Computerized Medical Records and More Research. I can tell these people don't work in health care. These reforms will save money, but its just nibbling around the edges of the problem. The "meat" of the problem is the inherent high cost of medical care that will never go away no matter how much efficiency you introduce to the system. Medicine is not like other businesses. Costs continue to rise as we are able to treat more and more diseases.

Doctors are expensive. Nurses are expensive. MRI machines are expensive. Don't get me started on malpractice insurance (grrr!!!) Do you think these costs will go away if the Government takes over medical insurance?

From John Thacker (slightly edited down):

Medicare spends considerably more on over 65s than universal health systems in other countries spend on over 65s. Other apples-to-apples comparisons, such as comparing health care costs among people file for Medicare early, or among people who have private insurance (such as UAW retirees) instead of Medicare after 65, or simply comparing costs among people 63-64 who are just barely not under Medicare with people 65-66 who have just signed up, show no significant difference. Medicare does not save money; nor does it spend less on health care treatments. Medicare and Medicaid "look like" the US's private insurance health care system, from treatments to cost, much more than they look like the universal health care systems in other countries.

[Commenter Dan Weber wrote]: "I would very willingly put my health decisions into the hands of a group that said 'we won't try any radical treatments, and we won't try super-hard to save your life once you are over 60.'"

[John Thacker replies:] You say that now, and perhaps you mean it. However, I feel that many people would say that and change their mind in the actual case. Still, your argument remains the most plausible one-- that government will somehow have the ability to force through even stricter rationing, of the kinds imposed by HMOs in the early 1990s that people politically rebelled against, and manage to grant itself sovereign immunity to the inevitable lawsuits that would occur against private insurers.

And once again, there seems to be a lot of people who regard the idea that insurance companies engage in rationing as some kind of trump card. Certainly they do, but the argument from universal health care proponents is that they don't engage in enough rationing, and that we need to go back to early '90s HMO you can't choose your doctor style rationing and other savings. And that just seems to me to be politically impossible.

I see nothing that changes my opinion that universal health insurance in the US will be like Medicare and Medicaid, not like other countries'. The experiences of TennCare and Massachusetts do nothing to change that. Spending and premiums in Massachusetts are rising much faster than the national average, as political pressure groups ensure that everything must be covered.

There are some savings from forcing the young and healthy to get insurance and subsidize the sick, but it's not clear that that actually leaves the young better off. (And President Obama, when a candidate, specifically denied that he would mandate coverage.) If OTOH the deal is sweetened sufficiently that all young and healthy choose to sign up, then there are no savings.

2009-04-14T20:13:00.002-04:00

"The Virtue Called Economy"

Discussing the extraordinary meeting of the Assembly of Notables called by Louis XVI in 1787, Thomas Jefferson wrote:

The government is said to want eighty millions of livres revenue more than they have. They propose to give to the people provincial administrations, and to make other improvements. It is a pity they had not more of the virtue called economy, of which we have something to spare.

(from a letter to Richard Peters dated Feb. 26, 1787, written from Paris)

2009-04-14T12:07:00.002-04:00

When Money Is No Object

Arnold Kling has another great post today on the economics of healthcare. He explores some of the reasons why it will be hard to bring down Americans' healthcare spending, with a story about how he would react if his daughter had cancer:

Imagine it were my daughter. What would be my attitude? I imagine that I would be walking into the oncologist saying, "Look. There has to be something you can try. I don't know whether it's bone marrow transplants or stem cells or some clinical trial somewhere. But we can't just sit here and watch her die. Either you give us something that has a chance of working, or we'll find another oncologist who will."

Next, imagine that the best hope is a treatment that costs $100,000 and offers a chance of success of 1 in 200. Would I want her to get that treatment? Absolutely.

But look at the issue from a rational, bureaucratic perspective. You have to treat 200 patients at a cost of $100,000 each in order to save one life, for a cost per life saved of $20 million. Is that what a rational bureaucracy would do?

Arnold's point here is just to show how hard it will be to get most Americans to accept any arrangement in which they are not more or less guaranteed the utmost that can be done, while paying out of pocket only a fraction of the cost.

Since I'm a lawyer in private practice, discussions like this always put me in mind of how Americans handle legal emergencies. The legal analogue of contracting a life-threatening disease is, I suppose, being charged with a crime. We don't have legal "insurance" comparable to healthcare "insurance" for such situations. No one assumes that an insurance company paid by one's employer will provide whatever legal help one needs, with at most a relatively modest "co-pay."

Instead, families shoulder the costs themselves. They use their life's savings, mortgage their homes, borrow from relatives, and so on. They do whatever they must in order to get the best defense lawyer they can afford. Those who don't have any resources fall back on the safety net of a court-appointed public defender.

We find it unconscionable that anyone could be denied medical care regardless of cost, but we have little problem accepting the absence of comparable coverage for legal needs. I think this is merely a result of conditioning. We've become used to medical coverage as part of our employment compensation or government-provided retirement benefits. We're just not accustomed to such coverage in the realm of law.

It could be argued that law is different because being charged with a crime usually involves some fault on the defendant's part, whereas one can become ill through no fault of one's own. But the difference is not as great as it might seem. Faultless people are sometimes charged with crimes, and sick people have often knowingly done things that greatly increased the chances of becoming seriously ill.

"Free" healthcare is something we're used to. Any other arrangement strikes us as inhumane. Yet we're comfortable with privately paid legal representation. How real, then, is the perceived "inhumanity" of expecting most people to arrange to pay their medical expenses on their own?

2009-04-14T11:47:00.002-04:00

Democrats Pandering to Teachers' Unions

Mary K. Ham, at the blog run by the Weekly Standard, recounts the steps taken by the Democrats in Congress to kill the school-voucher program in Washington, D.C. The program has been popular with parents and appears to have worked well. So what's the problem?

The problem is that voucher programs threaten the unions' stultifying grip on teacher evaluations, promotions, and pay. And since teachers' unions are among the most reliable sources of votes for Democratic candidates, the incumbents need to pay the unions back by ending the voucher program in the one jurisdiction where Congress can have a direct impact.

Hat tip to Hit & Run, which also offers some choice remarks on this despicable behavior.

2009-04-13T12:24:00.002-04:00

"Health Insurance" Is a Misnomer

Arnold Kling, author of the wondeful Crisis of Abundance, has an excellent post today briefly exploring the difference between what most Americans call "health insurance" and what health insurance would consist of if it really were "insurance." Some highlights:

Let me offer two choices:

(a) Health insurance is the collective provision of all health care.
(b) Health insurance is the sharing of extreme risk in health care spending.

In my view, (a) represents what most people think of as good health insurance. For example, I have a friend who says her health insurance is great because she can get new eyeglasses every year for everyone in her family for a co-payment of only $10.

We have never observed (b). (b) would mean something where you only make a claim when your expenses are going to run into the tens of thousands of dollars. Claims would be rare and large, as in fire insurance. Premiums would be low, as in fire insurance.

* * *

. . . if you believe that government can save significant money on health care, then by the same token you have to believe either:
(i) our current mix of medical services is optimal, and we could deliver it much more cheaply;
(ii) our current mix of medical services is far from optimal, with too many cost-ineffective services provided.

Most people who can do arithmetic realize that (i) is not the answer. The standard bogeymen of drug industry profits and insurance company overhead are not big enough to make a major difference. Moreover, the evidence for (ii) is broad and overwhelming.

The bottom line is that what we think of as health insurance is not going to survive if we are going to get control of health care costs. Either health insurance is going to become very intrusive about our choices of medical services (the top-down, government option, under the guise of "health care quality"), or we are going to see much higher deductibles and co-payments (the bottom-up option).

2009-04-13T12:10:00.002-04:00

Why Do So Many Businesses Incorporate in Delaware?

This topic came up (indirectly) at Cafe Hayek today. I posted the following two comments. (I copy them here because this is something I get asked so often.)

That Delaware corporate law is not "pro-management":

As a practitioner of Delaware corporate law, I've noticed this for years. The reason, based on my own observations, is that Delaware doesn't have a lot of powerful native industries (du Pont notwithstanding). Instead, a huge part of the state's economy, and of the state government's revenues, is based on the state's ability to attract entities. Delaware is selling a legal regime. Now, many have reasoned this far and then concluded that Delaware therefore caters to management. But the legal regime governing an entity must be attractive to more than just management -- it must be attractive also to the investors that management plans to draw. Thus, Delaware corporate law has for decades pursued a balance between directors'/managers' authority to run the business and investors' authority to protect their stake. Delaware corporate law is a product shaped by the wants of the people buying it -- both managers and investors.

Reasons for the pre-eminence of Delaware corporate law:

Some other states have in fact copied Delaware's corporate law (Nevada is the most aggressive example). However, they have not been able to make much of a dent in Delaware's market share for three reasons:

First, Delaware has about a century's worth of court decisions expanding upon its corporate law and how it applies in different factual situations. This makes it much easier to predict how Delaware law will be interpreted and applied when one is trying to decide on a course of action. Other states can (and sometimes do) SAY they will follow Delaware law, including its court decisions, but people will have a lot more certainty that Delaware law will be applied as expected by a Delaware court than by a court in another state. (In other words, you might as well go to the source, as long as the source is not charging too much in taxes and fees.)

Second, Delaware has an excellent judiciary. All Delaware judges are appointed, not elected, and the bar and governor realize how important it is that smart, knowledgeable practitioners be on the bench. Moreover, unlike most states, Delaware has a court of chancery that (1) does not use juries, (2) is willing to move quickly on important matters (such a whether to prevent an impending merger), and (3) focuses on business litigation (i.e., very little family-law cases, no criminal cases, no products liability / personal injury cases). The Chancellor and Vice Chancellors in Delaware are almost all distinguished former corporate-law practitioners.

Third, the state government derives so much of its revenue from corporations formed in Delaware that it is motivated to make its systems as user-friendly as possible. You can file papers by fax, you can get same-day service, the rules are easy to understand and follow, etc. Most other states are Kafka-esque by comparison.

2009-04-11T09:33:00.002-04:00

The Punitive Economics of Thomas Piketty

Thomas Piketty is a French economist who believes, among other things, that all income above 1 million euros should be taxed at 80%. As discussed in this post at Reason, he appears to acknowledge that such a high marginal rate will not increase government revenues much. His goal, rather, is simply to hold down the incomes of top earners.

Why do his views matter in the U.S.? Because his analysis of income distribution forms a basis of the Obama administration's economic policies, as pointed out in a March 12 opinion piece in the Wall Street Journal:

"A New Era of Responsibility: Renewing America's Promise. The President's Budget and Fiscal Preview" (Government Printing Office, 141 pages, $26; free on the Web) . . . is the U.S. budget for laymen, and it's a must read.

Turn immediately to page 11. There sits a chart called Figure 9. This is the Rosetta Stone to the presidential mind of Barack Obama. Memorize Figure 9, and you will never be confused. Not happy, perhaps, but not confused.

The [chart] on page 11 is attributed to "Piketty and Saez." . . .

Thomas Piketty and Emmanuel Saez, French economists, are rock stars of the intellectual left. Their specialty is "earnings inequality" and "wealth concentration."

As described in Mr. Obama's budget, these two economists have shown that by the end of 2004, the top 1% of taxpayers "took home" more than 22% of total national income. This trend, Fig. 9 notes, began during the Reagan presidency, skyrocketed through the Clinton years, dipped after George Bush beat Al Gore, then marched upward. Widening its own definition of money-grubbers, the budget says the top 10% of households "held" 70% of total wealth.

Turn to page five of Mr. Obama's federal budget, and one may read these commentaries on the top 1% datum:

"While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not."

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected."

"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few. . . . It's a legacy of irresponsibility, and it is our duty to change it."

Mr. Obama made clear in the campaign his intention to raise taxes on this income class by letting the Bush tax cuts expire. What is becoming clearer as his presidency unfolds is that something deeper is underway here than merely using higher taxes to fund his policy goals in health, education and energy.

The "top 1%" isn't just going to pay for these policies. Many of them would assent to that. The rancorous language used to describe these taxpayers makes it clear that as a matter of public policy they will be made to "pay for" the fact of their wealth -- no matter how many of them worked honestly and honorably to produce it. No Democratic president in 60 years has been this explicit.

2009-04-10T14:07:00.002-04:00

(Non-) Events in Europe

Reason writer Michael Moynihan provides a handy round-up of political trends in Europe. While left-liberals in this country continually point to European social democracy as the ideal ("they do it there, why can't we do it here?"), citizens in European countries have responded to the global financial crisis by, if anything, moving rightward.

2009-04-10T10:35:00.002-04:00

Your Tax Dollars at Work: Government Cracks Down on Homemade Pies

Today's Wall Street Journal has an article (may be gated) on a Pennsylvania state code-enforcement officer's shutting down the sale of homemade pies at a church in Rochester, PA:

On the first Friday of Lent, an elderly female parishioner of St. Cecilia Catholic Church began unwrapping pies at the church. That's when the trouble started.

A state inspector, there for an annual checkup on the church's kitchen, spied the desserts. After it was determined that the pies were home-baked, the inspector decreed they couldn't be sold. . . .

The problem is the pies are illegal in Pennsylvania. Under the state's food-safety code, facilities that provide food at four or more events in a year require at least a temporary eating and drinking license, and food has to be prepared in a state-inspected kitchen. Many churches have six fish fries a year, on Fridays during Lent. St. Cecilia's has always complied with having its kitchen licensed, so food made there is fine to serve. But homemade goods don't make the cut.

The article also includes a nice little lesson on how "safety" regulations become a weapon that private actors can wield indirectly against their competitors:

Mr. Chirdon [the PA Dept. of Agriculture's food-safety director] says the pie episode has shed light on an often-overlooked aspect of food safety. "I've gotten a lot of letters from churches that are tattletaling on churches down the street that aren't licensed and don't meet standards for food service."

2009-04-10T09:38:00.002-04:00

Inconceivably Big Numbers

The good folks at Reason, the Heritage Foundation, and Americans for Prosperity have put together a frightening little video on the insane amounts of money the federal government is spending, and how they compare to (inflation adjusted) amounts spent in previous crises.

Too bad they can't afford to buy airtime on a major TV network. Every American should see this.

2009-04-09T12:00:00.004-04:00

News Flash: People Spend More When the Government Gives Them a Lot of Money

In an episode of Monty Python's Flying Circus several decades ago, the troupe poked fun at scientific researchers, with a sketch about the comparative intelligence of humans and penguins. A lab-coated researcher addressed the camera about his findings:

Here at the Institute Professor Charles Pasarell, Dr Peaches Bartkowicz and myself have been working on the theory originally postulated by the late Dr Kramer that the penguin is intrinsically more intelligent than the human being. . . .

If we increase the size of the penguin until it is the same height as the man and then compare the relative brain sizes, we now find that the penguin's brain is still smaller. But, and this is the point, it is larger than it was!

This sketch came to mind as I was reading an essay by Lawrence Reed (president of the Foundation for Economic Education) that takes apart a fatuous New York Times article. In the Times piece, the writer argued that Washington's stimulus package is likely to succeed, because the federal funds poured into New Orleans after hurricane Katrina resulted in an increase in construction there:

The Times story notes that the feds have dumped more than $50 billion in money on Louisiana since Hurricane Katrina. “Indicators suggest,” notes ace reporter Nossiter, that “dumping a large amount of reconstruction money into a confined space . . . has had a positive outcome.” It’s an “experiment” that he says bodes well for the flood of stimulus spending Washington is doling out to alleviate the nation’s financial woes.

Lo and behold, guess what has happened to construction in Louisiana? It’s up! (Apparently, not even government can spend $50 billion on construction without yielding some construction.) Nossiter quotes a professor who says this proves that “stimulus can have an effect.”

Apparently, an effect -- any effect -- is enough to make a stimulus worthwhile. What's important is that the penguin's brain is larger than it was!

Hat tip to Cafe Hayek.

2009-04-09T09:12:00.002-04:00

Public Service

In a post yesterday at EconLog, economist David Henderson raised a point that I've often thought myself. Many of us have the idea that some jobs are a "public service," while others are "merely" about making money. A paid job with a government or a non-profit organization is "public service." A paid job with a for-profit organization is supposedly not.

In my view, everyone who makes something that other people want or need, or provides a service that other people want or need, is doing public service. All these people may not be motivated by a desire to benefit "the community," but neither are many people who work in government or non-profits (as I used to do). Most people just want a decent job, and whether it's with the government, a non-profit, or a for-profit is not especially important.

The public service that for-profit workers do is making or providing something that other people want more than the money they part with to get it. That's the essence of adding value, creating wealth in the non-zero-sum activity of free exchange. As Adam Smith said, in a statement that is well known but too poorly internalized, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

2009-04-08T11:49:00.002-04:00

Affording Health Care

Economist Arnold Kling, author of a must-read book on the topic of health-care spending and reform, points out one of the unintended consequences of having our health-care bills paid mostly by third parties:

My view of the American health care system is that it hardly rations health care at all. That is why we spend so much more than other countries. I wish we put more responsibility on individuals. Instead, we have this delusion that we cannot possibly afford health care if we pay for it individually, but of course we can afford it if we pay for it collectively. [Emphasis added.]

Our current system -- where (for the majority of Americans) employers pay for health care -- encourages overconsumption, because the full cost of what we use is spread among our fellow employees. Some people argue that health care won't be overconsumed, because it's different from other services. Since no one wants to be sick, this argument runs, people will only consume as much health care as they need. But there is a lot of difference among individuals as to what amount is "needed." When one more test doesn't cost you much if anything, you're a lot less particular in your calculation of whether the test is really likely to change what you already know.

Here is a short discussion by economist Alex Tabarrok of how a change in incentives in 1984 led to a striking increase in the number of "disabled" in the United States. Here is an article on the much-discussed study finding that a small number of individuals accounted for a hugely disproportionate number of ER visits in central Texas.

I prefer the solution proposed by Arnold Kling in his book Crisis of Abundance (linked to above). Simply put, we would have (1) a government-funded safety net to provide essential care for the truly indigent; (2) private insurance available to individuals for unpredictable, high-cost health problems; and (3) individuals paying out of pocket for everyday health care. In addition, employer-provided health benefits would be treated as a taxable form of compensation, with the result that employers would stop providing them and cash compensation would increase instead. There might also be a tax break for health savings accounts.

(Relatedly: Hit & Run highlights inconsistency on health care reform in the New York Times.)

2009-04-07T08:51:00.003-04:00

Possible Bumperstickers

Scott at Power Line has an interesting post in which he quotes from and discusses a current (gated) article in the National Review on "creeping sharia."

Sharia law bothers me because of its explicitly religious goals, its abrogation of civil rights, and its economic inefficiency. It is inherently inimical to the values embodied in the U.S. Constitution and our state constitutions. It has no more place in governing the lives of non-clergy than Roman Catholic canon law.

But Americans, in our laudable willingness to live and let live on the subject of religion, can be too understanding when Muslims seek to import sharia law. Religious beliefs and rites and policy positions are one thing; law is another. We are not obligated to tolerate the enforcement of laws contrary to our constitutional values.

I think (or hope) this is still a minor issue. My fears for the future have brought to mind some possible bumperstickers:

-- The universal NOT symbol superimposed on the words "Sharia Law."

-- "Our Rights Are Precious / SAY NO TO SHARIA LAW!"

-- "Congress shall make no law respecting an establishment of religion / SHARIA LAW IS UNCONSTITUTIONAL"

2009-04-06T20:11:00.002-04:00

Thoughts on the Recession from a Very, Very Smart Man

Richard Posner, a judge on the federal Seventh Circuit Court of Appeals, is someone who's both brilliant and wise in the ways of the world. He's always worth giving an ear to.

His review of Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism contains some of Judge Posner's observations on the current recession. Here's one passage that particularly struck me:

Cheap credit and soaring house values were the immediate causes of the bubble and of all that followed when it burst. The underlying causes were the deregulation of financial services; lax enforcement of the remaining regulations; unsound decisions on interest rates by the Federal Reserve; huge budget deficits; the globalization of the finance industry; the financial rewards of risky lending, and competitive pressures to engage in it, in the absence of effective regulation; the overconfidence of economists inside and outside government; and the government's erratic, confidence-destroying improvisational responses to the banking collapse. [Emphasis added.]

I've been highly resistant to the "it was deregulation, stupid" story line that left-leaning commentators have been pushing. (In my view, "bad regulation" is much more accurate in the current circumstances than "deregulation.") But Judge Posner is a careful writer and says just what he means. He traces the crisis to a combination of causes, including "deregulation of financial services."

As I've mentioned before, I am really looking forward to Judge Posner's forthcoming book on the recession.

2009-04-06T12:37:00.002-04:00

The Uses of Conscience

Over the weekend, I read The Sociopath Next Door (by Laura Stout), a breezy discussion of sociopathy aimed at general readers. Although I picked up the book because of its title (like most lawyers who practice on the civil side, I'm intrigued by crime and criminals), it ultimately interested me more as an extended meditation on "conscience."

The concept of sociopathy sorts everyone into two groups: those with consciences and those without. What we typically think of as our "conscience" is rooted in our emotional attachments to others. Non-sociopaths -- people with consciences -- are uncomfortable, if not in pain, when they ignore the promptings of conscience. Doing what one's conscience asks can thus be a source of pleasure and fulfillment.

We tend not to think of our conscience as a source to consult when pursuing happiness. (At least, I think people who, like me, aren't actively religious, and thus accustomed to thinking in terms of a universal prescriptive order, tend not to think of conscience as a guide to happiness.) But the presence of conscience, encouraging certain behavior with the tools of satisfaction and un-ease, would appear to require, at a minimum, that any action intended to produce happiness be consistent with the signals from one's conscience. This seems in fact to resemble Aristotle's view of human happiness -- that it results from living in accordance with our function.

2009-04-05T09:03:00.002-04:00

Tyranny vs. Constitutionalism

In his History of England from the Accession of James the Second, Macaulay points up the difference in prosperity between England and France in the late 17th century. When Louis XIV, who was at war with England, learned how much support William III (king of England) had in parliament, he supposedly said, "No matter, the last piece of gold will win." Macaulay then observes:

This however was a consideration from which, if [Louis] had been well informed touching the resources of England, he would not have derived much comfort. Kensington was certainly a mere hovel when compared to his superb Versailles. The display of jewels, plumes and lace, led horses and gilded coaches, which daily surrounded him, far outshone the splendour which, even on great public occasions, our princes were in the habit of displaying. But the condition of the majority of the people of England was, beyond all doubt, such as the majority of the people of France might well have envied. In truth what was called severe distress here would have been called unexampled prosperity there.

[from volume IV, text following footnote 365]

2009-04-05T08:19:00.002-04:00

The Rule of Law and Heavy Regulation

Back in 2002, law professor Todd Zywicki wrote a very instructive article in which (among other things) he surveys thinking on the rule of law. One valuable insight he emphasizes is that too much law can undermine the rule of law just as surely as too little. Too little law -- or too little of the essential laws, such as a constitution -- can allow certain people or groups to set themselves above the law, to act as "a law unto themselves."

But too much law can also allow certain people to act as a law unto themselves. As Prof. Zywicki explains:

Where there is heavy regulation of economic activity, it is fundamentally impossible to realisitcally comply with all the regulatory requirements and to still engage in any economic activity. . . . At that point an aspiring entrepreneur has two options: either to operate illegally or to bribe the relevant government officials to circumvent the formal processes to illegally qualify the entrepreneur to open the business. If the business operates illegally, of course, this simply means that the business is in constant danger of being shut down by the executive branch. In order to prevent this, it will often be necessary to bribe enforcement officials to allow the business to continue operating. . . . Either way, the sheer weight and intrusiveness of a heavy regulatory scheme leads to corruption and unequal enforcement of the law. It is impossible to satisfy all of the requirements; thus, for economic activity to function, it becomes necessary for some government officials to decide which requirements must be satisfied, which will be waived, and which applicants will be the beneficiaries of these waivers.

In other words, there is a point at which laws (regulations) can become so numerous or so complicated that it is not reasonably possible to comply with them. At that point, those with the power to enforce the law (regulators, prosecutors, etc.) become a law unto themselves, because they can decide when and against whom the uniformly disobeyed laws will be enforced.

2009-04-03T12:00:00.002-04:00

Riding the Whirlwind

In an excellent post, Don Boudreaux explores the difference between economists who, like Paul Krugman, think economics will enable specialists to know which buttons to push in order to fix things, and economists who, like James Buchanan or Friedrich Hayek, think economics should be concerned with understanding phenomena, along the lines of the natural sciences. An excerpt:

I challenge you to read [Hayek] and not come away understanding more fully that attempts to 'plan' any economy are childish fantasies -- that the idea of there being any 'buttons' to 'push' is about as absurd a misconception as is possible in the social sciences.

. . . [Economists like Buchanan and Hayek understand] that the chief contribution of economics is to further our understanding of how billions of individuals, no one of whom possesses more than an unmeasurably small fraction of the knowledge required to cause a viable and productive economic order to emerge and grow, interact and mutually adjust to each other.

. . . [They understand] that society is an order to be explained and understood, rather than a machine to be "designed," pushed, pulled, planned, or pummeled into looking like something that any human being imagines it "should" look like.

During the past century, most Americans have come to view the economy as something that is run or managed by the government. We believe presidential candidates who claim they will "create jobs." If the economy grows briskly during a given administration, we give that administration credit. If the economy grows slowly or contracts, we blame the incumbent administration.

But no government manages the economy. The economy existed before the USA was formed, and the USA will be outlived by the economy. The economy is the sum of countless choices, undertakings, and transactions, each of which is managed only by the person or people involved. Those choices, undertakings, and transactions all interact and give rise to our economy.

No one is even certain where our modern Western economy came from. The origins of it in the 17th and 18th centuries are sought and debated by historians. If for some reason it switched back to something resembling the soporific medieval European economy, no one would know how to revive it.

Governments don't manage the economy. They are carried by the economy, like a man "riding" the whirlwind. They think they can direct it here and there with a yank of the reins or a dig of the spurs, but they really have only guesses, at best, as to what effects their actions will produce.

2009-04-02T11:38:00.003-04:00

Adventures in AM Talk Radio

The past few days, I've had to spend a lot of time on the road. I've therefore had the opportunity to hear large amounts of conservative talk radio.

My point of comparison is Michael Smerconish, whom I frequently listen to during my morning commute. Smerconish's program, which at present is not widely syndicated, mixes in about equal measures commentary, interviews, and phone calls. Smerconish himself, a former civil litigator, comes across as a very reasonable man, trying to understand what is happening around him while maintaining values that seem to be moderately conservative and moderately libertarian. He is smart, entertaining, and always respectful to his guests and callers.

The others whom I've now had large doses of are Glenn Beck, Rush Limbaugh, Mark Levin, and Michael Savage.

Of the four, Beck is the only one I would be likely to listen to again. I did find his show entertaining. His jokes were funny more often than not, his satire was effective more often than not, and his outbursts had an overtone of amusement that kept him from sounding insane the way Savage, and to a lesser extent Levin, do. It helped that the things he was acting outraged about are things that, mostly, I also think are worthy of outrage.

After Beck, Limbaugh was a letdown. His humor seemed strained and labored rather than funny. The things he chose to ridicule were not particularly troubling, especially given the vast amount of material one would expect he could draw upon these days. I have trouble understanding his wide appeal -- Beck covers much the same territory in a more entertaining way.

Levin was interesting at first but quickly became boring. He seemed to be rambling on and on about the same handful of points, without anything other than glibness to set him apart from any decently educated and cranky old man. He also had a habit, similar to Savage's but not so extreme, of shouting down, muting, and insulting callers who disagreed with him.

Savage is the (current) nadir, as far as I can tell. Devoid of charm or humor, advocating an incoherent populist agenda, screaming like a crazy person, he was unbearable.

Others' views on Beck et al. can be found here.

2009-04-02T09:16:00.002-04:00

Progressive Corporatism vs. the Resistance

Economist Arnold Kling writes:

I think the key issue in the contest between Progressive Corporatism and The Resistance might be summarized as this:

If you believe that politicians are about solving problems and need more power in order to do so, then you are going to side with Progressive Corporatism.

If you believe that politicians are about power and need problems as an excuse to get it, then you are going to side with The Resistance.

2009-03-27T12:10:00.002-04:00

Fed Tinkering and the Current Recession

Back in August 2007, the economist George Selgin wrote a clear-eyed explanation of how "fine-tuning" by the Federal Reserve created easy credit and, unintentionally, led to the housing bubble:

. . . Why did mortgage lenders earlier this decade start showering credit as if it were spewing from a public fountain? The answer is that credit was spewing from a public fountain – and that fountain was the Fed. In December 2000, the Fed began an unprecedented year-long series of rate cuts, reducing the federal funds rate from over 6 percent to just 1-3/4 percent – a level last seen in the 1950s. By mid-2003, two further cuts had reduced the rate to just 1 percent.

The general aim of these cuts was to keep a mild growth slowdown from getting worse. But they had the quite unintended effect of generating euphoria in the mortgage market by flooding it with funds. Lenders dramatically lowered mortgage rates and kissed old-fashioned lending standards goodbye. . . .

. . . It illustrates the late Milton Friedman's claim that the full effects of monetary policy changes happen only after "long and variable lags," when conditions that motivated the changes have passed into history. The resultis that fine-tuning often ends up promoting business cycles instead of dampening them.

The subprime lending crisis also shows that, while central banks certainly have the power to expand a nation's spending power, they can't guarantee that the extra power gets used as intended, namely, to give a roughly uniform boost to the overall demand for goods. On the contrary: The crisis supports the argument, first developed by Austrian-school economists Ludwig von Mises and Friedrich Hayek, that the techniques central banks employ to increase spending power are bound to distort spending patterns by driving lending rates below their sustainable, "natural" levels.

By injecting the new money they create into credit markets, central banks create an artificially high demand for long-term investments, such as real estate, in which interest costs loom large. . . .

In hindsight, it's easy to say that the Fed blundered. But avoiding similar blunders in the future is another matter. The truth is that the Fed, as presently constituted, faces an impossible task: It can't tell whether its targeted rates are "natural" (and therefore sustainable) except in retrospect, when it's too late; and it will always be tempted to engage in fine-tuning, both because the Humphrey-Hawkins Act of 1978 calls for it to do so, and because a myopic and inadequately informed public rewards Fed bureaucrats for "doing something" even when they ought to stand pat.

Only institutional reform can get us out of this predicament. The Fed must be taken out of the fine-tuning business. Instead, it must observe a strict and unambiguous monetary rule, such as one calling for the Fed to announce and stick to an inflation-rate target.

Thanks to Cafe Hayek for resurrecting this excellent piece.

2009-03-27T09:26:00.002-04:00

Should I Buy an Amazon Kindle?

Tyler Cowen has another post about the Kindle, with a lot of interesting comments. One commenter says, "I can't decide if the Kindle is a right fit for me."

I agonized and researched for a long while before I finally bought my Kindle. But after I'd had it for a few days, I wished I had bought it sooner, so that I would have had that much more time to enjoy reading on it.

Based on my experience, here's a very simple test to decide whether you should buy a Kindle:

1. Do you read a lot?

2. Are the types of things you like to read available in Kindle format? (Go to Amazon and search for what you like in the Kindle Store.)

3. Are you able to take reasonably good care of electronic devices (you don't leave your cell phone on airplanes, you don't spill drinks on your laptop, etc.)?

4. Can you afford it?

If you answer Yes to all of the above, then go ahead and buy one. You will love it.

2009-03-25T17:42:00.002-04:00

Let's Try This Yet Again

Blogger has been giving me trouble today. I wrote two posts that (in my opinion) were outstanding. Both of them disappeared into the ether. (Something to do with highlighting text and then hitting an up or down arrow. . . .)

In any event, here are the short versions:

1. Last night, President Obama said the government needs to "save and invest," but his proposed budget is projected to bring us bigger deficits than anything we experienced during the Bush administration. John at Power Line says Obama's statement was a "bald-faced lie" and provides a helpful chart. Cafe Hayek makes the same point.

2. I love the Amazon Kindle. I've had version 1.0 since August 2008. Reading has been my favorite pastime for as long as I can remember, and the Kindle makes it twice as enjoyable, if you can imagine such a thing. Blogger Steven Berlin Johnson offers a list of pros and cons. His cons don't bother me, but this particular pro is entirely true and not the least bit exaggerated: "Buying a book through the [on-line] store is absolutely magical. One-click, wait thirty seconds, and you're reading."

2009-03-24T12:08:00.002-04:00

90% Bonus Tax as a Bill of Attainder

Ever since the House approved a bill that would tax the infamous AIG bonuses and the like at 90%, numerous people have wondered whether the bill (if it becomes a law, which seems unlikely) would be unconstitutional under the Bill of Attainder Clause in Article I, Section 9 of the federal Constitution. The law professors at Volokh Conspiracy, for example, have offered some thoughtful commentary.

The issue sent me back to my copy of The Heritage Guide to the Constitution, published in 2005 by Regnery. I originally bought The Heritage Guide on an impulse, thinking it might be fun to browse through. But it has since become my go-to source whenever I want some quick learning on a constitutional provision. While I have other, more "professional" sources on constitutional law in my office (including the 6-volume treatise published by West), The Heritage Guide is the best place I've found for an intelligent overview.

On the question of bills of attainder, The Heritage Guide points out, first, that the Constitution prohibits both the federal government (in Art. I, Sec. 9) and the states (in Art. I, Sec. 10) from passing bills of attainder and ex post facto laws. The Guide then explains that, while at common law bills of attainder "condemned specifically designated persons or groups to death" (my emphasis), Chief Justice John Marshall, in the 1810 opinion Fletcher v. Peck, stated that "a Bill of Attainder may affect the life of an individual, or may confiscate his property, or may do both."

In the 20th century, the Guide goes on, the Supreme Court devised a three-part test for determining whether a legislative enactment is a bill of attainder: "such legislation specifies the affected persons (even if not done in terms within the statute), includes punishment, and lacks a judicial trial." Most recent Supreme Court opinions on whether legislation violates the Bill of Attainder Clause have turned on the "punishment" prong of the test. For instance, exclusion from employment has been found to be punishment, but the denial of non-contractual government benefits (such as financial aid) has been found not to be punishment.

This is a broader reading of the clause than I had recalled (if we ever studied this provision in Con Law class, which I doubt). The argument that the 90% tax is a bill of attainder would therefore seem to have some promise.

2009-03-23T20:55:00.002-04:00

Making Sense out of Treasury's Plan

The "self-evident" blog has a great explanation of how the Treasury's toxic-asset plan is supposed to work.

Hat tip to Marginal Revolution.

2009-03-22T09:56:00.003-04:00

The Rule of Law

David Boaz, at Cato @ Liberty, had some choice words earlier this week about the House's 90% tax on bonuses paid by firms receiving stimulus money:

The rule of law requires that like people be treated alike and that people know what the law is so that they can plan their lives in accord with the law. In this case, a law is being passed to impose taxes on a particular, politically unpopular group. That is a tyrannical abuse of Congress’s powers. And in addition, it is retroactive legislation, changing the law upon which AIG and its employees had relied. As James Madison wrote in Federalist 62, “It will be of little avail to the people, that the laws are made by men of their own choice, if the laws . . . undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow.”

Selective taxation is tyranny. Ex post facto legislation violates the spirit of the liberal order, even if a particular piece of legislation can be “structured” to pass constitutional muster.

2009-03-22T08:42:00.002-04:00

Wisdom from Gary Becker on the Past, Present, and Future

The Wall Street Journal published a few days ago an excellent interview with one of the greats, economist Gary Becker. The article is peppered with valuable and sometimes frightening insights:

Becker on the causes of the recession:

Mr. Becker sees the finger prints of big government all over today's economic woes. When I ask him about the sources of the mania in housing prices, the first culprit he names is the Fed. Low interest rates, he says, were "partly, maybe mainly, due to the Fed's policy of keeping [its] interest rates very low during 2002-2004." A second reason rates were low was the "high savings rates primarily from Asia and also from the rest of the world."

"People debate the relative importance of the two and I don't think we know exactly," Mr. Becker admits. But what is clear is that "when you have low interest rates, any long-lived assets tend to go up in price because they are based upon returns accruing over many years. When interest rates are low you don't discount these returns very much and you get high asset prices."

On top of that, Mr. Becker says, there were government policies aimed at "extending the scope of homeownership in the United States to low-credit, low-income families." This was done through "the Community Reinvestment Act in the '70s and then Fannie Mae and Freddie Mac later on" and it put many unqualified borrowers into the mix.

The third effect, Mr. Becker says, was the "bubble mentality." By this "I mean that much of the additional lending and borrowing was based on expectations that prices would continue to rise at rates we now recognize, and should have recognized then, were unsustainable."

Becker on recovery through market forces:

Mr. Becker says that the market-clearing process, so important to recovery, is well underway. "Construction in new residential housing is way down and prices are way down. Maybe 25% down. Lower prices stimulate demand, reduced construction reduces supply."

Becker on counterproductive action by the federal government:

[The government] has done harmful things, and chief among them has been the "inconsistent policies with the large institutions . . . We let some big banks fail, like Lehman Brothers. We let less-good banks, big [ones] like Bear Stearns, sort of get bailed out and now we bailed out AIG, an insurance company."

Mr. Becker says that he opposed the "implicit protection" that the government gave to Bear Stearns bondholders to the tune of "$30 billion or so." So I wonder if letting Lehman Brothers go belly up was a good idea. "I'm not sure it was a bad idea, aside from the inconsistency." He points out that "the good assets were bought by Nomura and a number of other banks," and he refers to a paper by Stanford economics professor John Taylor showing that the market initially digested the Lehman failure with calm. It was only days later, Mr. Taylor maintains, that the market panicked when it saw more uncertainty from the Treasury. Mr. Becker says Mr. Taylor's work is "not 100% persuasive but it sort of suggest[s] that maybe the Lehman collapse wasn't the cause of the eventual collapse" of the credit markets.

He returns to the perniciousness of Treasury's inconsistency. "I do believe that in a risky environment which is what we are in now, with the market pricing risk very high, to add additional risk is a big problem, and I think this is what we are doing when we don't have consistent policies. We add to the risk."

Becker on aiding the economic recovery:

"What can we do that would be beneficial? [One thing] is lower corporate taxes and businesses taxes and maybe taxes in general. Particularly, you want to lower the tax on capital so you raise the after-tax return to investing and get more investing going on."

* * *

Mr. Becker repeats his call for lower taxes, applauds the Fed's action to "raise reserves," (meaning money creation, though he said this before the Fed's action a few days ago), and he says "I do believe one has to try to do something more directly to help with the toxic assets of the banks."

* * *

Mr. Becker is underwhelmed by the stimulus package: "Much of it doesn't have any short-term stimulus. If you raise research and development, I don't see how it's going to short-run stimulate the economy. You don't have excess unemployed labor in the scientific community, in the research community, or in the wind power creation community, or in the health sector. So I don't see that this will stimulate the economy, but it will raise the debt and lead to inefficient spending and a lot of problems."

Becker on mark-to-market accounting:

Mr. Becker says he prefers mark-to-market over "pricing by cost because costs are often completely out of whack with what the real prices are." Then he adds this qualifier: "But when you have a very thin market, you have to be very careful about what it means to mark-to-market. . . . It's a big problem if you literally take mark-to-market in terms of prices continuously based on transactions when there are very few transactions in that market. I am a mark-to-market person but I think you have to do it in a sensible way."

Becker on bank size:

To deal with the "too big to fail" problem in the long run, Mr. Becker suggests increasing capital requirements for financial institutions, as the size of the institution increases, "so they can't have [so] much leverage." This, he says, "will discourage banks from getting so big" and "that's fine. That's what we want to do."

Becker on Keynesianism:

There is also the more fundamental question of whether one dollar of government spending can produce one and a half dollars of economic output, as the administration claims. Mr. Becker is more than skeptical. "Keynesianism was out of fashion for so long that we stopped investigating variables the Keynesians would look at such as the multiplier, and there is almost no evidence on what the multiplier would be." He thinks that the paper by Christina Romer, chairman of the Council of Economic Advisors, "saying that the multiplier is about one and a half [is] based on very weak, even nonexistent evidence." His guess? "I think it is a lot less than one. It gets higher in recessions and depressions so it's above zero now but significantly below one. I don't have a number, I haven't estimated it, but I think it would be well below one, let me put it that way."

Becker on entitlement programs and democracy:

"When you get a larger government, when you have the government taking over Social Security, government taking over health care and with further proposals now for the government to take over more activities, more entitlements, the rational response is to have less responsibility. You don't have to worry about things and plan on your own as much."

That suggests that there is a risk to the U.S. system with more people relying on entitlements. "Well, they become an interest group," Mr. Becker says. "The more you have dependence on the government, the stronger the interest group of people who want to maintain it. That's one reason why it is so hard to get any major reform in reducing government spending in Scandinavia and it is increasingly so in the United States. The government is spending -- at the federal, state and local level -- a third of GDP, and that share will go up now. The higher it is the more people who are directly or indirectly dependent on the government. I am worried about that. The basic theory of interest-group politics says that they will have more influence and their influence will be to try to maintain this, and it will be hard to go back."

Hat tip to Cafe Hayek.

2009-03-21T08:22:00.002-04:00

A Fundamental Flaw in Keynesianism

In this opinion piece, economist Don Boudreaux explains one of the fundamental problems with Keynesianism. According to Keynes, when there's a recession, the government should spend more in order to make up for the reduced spending of private parties. The problem with this is that the reduced spending of private parties is a signal to investors and producers to look for opportunities in areas different from those where they've been investing and producing. Government spending dampens that signal and simply arrests or retards the readjustments that the recession is telling people should be made. As Prof. Boudreaux explains:

For example, suppose consumers’ taste for fish intensifies while their taste for beef weakens. Consumers will then spend more money buying fish and less buying beef. The resulting higher price of fish relative to the price of beef will signal to entrepreneurs, investors and resource owners to produce more fish and to produce less beef. This change in production patterns is precisely what should happen.

Specialized beef producers, though, aren’t so keen on this little piece of economic change. Some workers in the beef industry will lose their jobs. . . . Would it be sound economic policy for government to save those jobs by entering the beef market and buying more beef? Of course not, for to do so would divert scarce resources from other uses more valuable to consumers.

Now suppose that an unusual amount of such economic changes take place at one time. The result will be, and should be, that an unusual amount of economic displacement takes place in the short-run as an unusually large number of workers adjust to the new pattern of consumer demands.

Keynesians, however, misread such events as evidence that total demand is too low and prescribe higher government spending. Politicians, ever eager to justify meddling further into the economy, jump on this Keynesian bandwagon. The result is that the normal corrective adjustments in the market are thwarted and government’s power over the private economy grows dangerously.

2009-03-20T11:47:00.002-04:00

Abuse of Power

Yesterday's passage in the House of the punitive tax on bonuses paid by companies that received TARP funds is, I think, one of the most flagrant abuses of civil power at the federal level that I've seen in my lifetime. (Fortunately, it's just an attempted abuse of power so far. I hope the Senate will show more sense.)

It's important to be reminded that politicians and representative bodies can become bullies every bit as dangerous as power-drunk police or FBI agents. As Chief Justice Marshall pointed out 190 years ago:

That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create . . . are propositions not to be denied.

(from McCulloch v. Maryland, 17 U.S. (4 Wheat) 316, 431 (1819).)

2009-03-19T22:15:00.002-04:00

Scoundrels

A fatuous opinion piece in the Washington Post by one Steven Pearlstein has sparked a glorious outburst by economist and champion of freedom Don Boudreaux. Here are Prof. Boudreaux's final paragraphs, which are not a whit too strong:

The idea that private business persons are "arrogant" if they don't genuflect to the hypocritical and utterly immoral scumbags who work on Capitol Hill is outrageous. The idea that, if government forces a private firm to take taxpayer money, that firm should be grateful and should cooperate with the political theater that plays 24/7 in Washington sickens me beyond words.

And as I predicted here, the notion that only those firms that requested and received government help will be the ones who suffer detailed intrusions by government is naive. The obnoxious collectivism that permeates the "thinking" of persons such as Steven Pearlstein will press as far as it can to assert control over as many private choices as it can get its greedy and officious paws on.

The single greatest instance of intellectual foolishness today is the continuing pretense that politicians are serious people worthy of serious consideration. They are scoundrels, each and every one, regardless of party (although some of them, it is true, are more scoundrelly than others). For any scholar to pretend that these people are disinterested servants of the public welfare -- to pretend that the words politicians utter or send out in press releases are meant to promote any goal other than politicians' own glorification and pursuit of power -- is for that scholar to be duped to a degree that should be more embarrassing than would be the discovery that that scholar believes the earth to be flat or that Big Foot was in league with Lee Harvey Oswald to murder JFK.

2009-03-19T12:10:00.004-04:00

Jurors and Electronic Media

During my morning commute yesterday, Michael Smerconish brought to my attention an apparently growing problem: jurors' use of Blackberries and other electronic devices to do research on the case they're hearing or to communicate about it. For example, according to an AP story:

"Dozens of people a day are sending tweets or Facebook updates from courthouses all over America," said Anne W. Reed, a Milwaukee trial lawyer and jury consultant who writes a blog that follows juries and social networking sites.

While most posts are innocuous, Reed said, a few cases have raised eyebrows — and questions about whether judges need to clarify jury instructions about online communications.

In Arkansas last week, a building materials company and its owner appealed a $12.6 million verdict against them, alleging that during the trial a juror posted Twitter messages that showed bias. Juror Johnathan Powell, of Fayetteville, told The Associated Press that the complainants were "grasping at straws" to try to undo the award.

A federal judge in Florida last week had to declare a mistrial after an eight-week drug trial after learning that no fewer than nine jurors had done online research about the case, according to the New York Times.

It may seem counterintuitive that jurors are not supposed to do independent research when they are hearing a case. Don't we want jurors to be well informed? If, for example, a juror hears a term he doesn't understand, why shouldn't he look it up on the Internet during a break?

The purpose of the rule against independent research is to help ensure that jurors base their verdict only on the evidence that is provided to them, in the courtroom, by each side. Consider a doctor who is defending himself against a malpractice claim. His lawyer, the other side's lawyer, and the judge will work together before the trial to determine whether, for example, the witness the doctor wants to testify about the appropriate standard of care meets the legal criteria for being presented to the jury as an expert.

If jurors then go on-line to supplement what the witness says, they're taking into account "testimony" that has not been vetted by the parties and the judge. It's almost as bad as when a juror has independent knowledge of one of the parties, or a prejudice against one of the parties, but never tells the judge. The verdict is then based, at least in part, on evidence that was unknown to the parties and the judge, was completely outside their control, and cannot be questioned on appeal. It makes the trial that much more unpredictable, that much more a matter of chance -- something the Anglo-American legal systems have been trying to get away from for centuries.

2009-03-18T19:23:00.002-04:00

Debunking the "Deregulation" Myth

John Hinderaker at Power Line has a truly excellent post about today's hearing of the House Subcommittee on Capital Markets. Most of the news coverage has focused on the testimony of AIG Chairman and CEO Edward Liddy. But John picked up on something more significant -- testimony by the Acting Director of the Office of Thrift Supervision. As this testimony makes clear, it wasn't an absence of regulatory authority or resources that caused Thrift Supervision not to rein in AIG. It was nothing more or less than a "mistake" on the part of the regulators.

John draws the moral:

Part of the mythology that the Democrats are trying to create out of the financial crisis is that it is due to a lack of regulation (or, better yet, "deregulation"). In fact, the industries involved are heavily regulated, and I'm not aware of any instances where a lack of regulation, as opposed to a failure of regulation, is to blame for a significant aspect of the crisis. In general, what happened was that regulators and businessmen made the same mistake: they failed to foresee the decline in real estate values and, perhaps more important, failed to understand fully the consequences that would flow from such a decline. . . .

It's never been clear why liberals have so much faith that regulators are smarter or better able to foresee the future than businessmen.

2009-03-18T12:12:00.002-04:00

We Don't Need to Be "Stimulated" out of the Slump

Economist Don Boudreaux uses the story of the automobile to explain why a government stimulus is not needed to end the recession. Two hundred years ago, no one could have imagined what a huge role cars would play in our lives. If you could travel back in time to 1809 and describe to someone what the America of 2009 is like, your listener might very well wonder how such developments could come about without the guidance of a central decision-maker:

[W]hat I suspect they would find most unbelievable is not the progress of technology that automobiles require. Rather, what would be most difficult to comprehend is the fact that such an amazingly complex development and coordination of economic activities can occur without being consciously arranged. After all, it's not just that people in 2009 can easily afford automobiles, but also that whole industries exist to support automobile driving. . . .

Stupendous coordination of millions of individual plans and talents emerged spontaneously -- and not only in the automobile industry. The entire economy is a testament to such spontaneous coordination.
The single greatest fact about capitalist society is that the great bulk of it appears to be the handiwork of a master designer but, in fact, is unplanned and even unimaginable before it becomes real and familiar.

Remember this lesson whenever you hear alleged "experts" insisting that only conscious effort by government to "stimulate" demand can save the economy from its current downturn.
It's true that no one can know beforehand the precise path by which a free market travels to escape the downturn. No one can foresee that, say, entrepreneurs in Texas and Ohio will be especially creative at finding ways to produce things that consumers will open their wallets wider to buy -- and, hence, that these entrepreneurs will succeed at launching profitable firms that hire more workers. . . .

But economics and history tell us that our inability to foresee and predict -- or even to imagine -- how recovery will come in the absence of conscious government stimulus is no reason to conclude that recovery requires conscious government stimulus.

2009-03-18T11:09:00.003-04:00

Populism and Conservatism

As various observers have pointed out, we're hearing a lot of populist rhetoric from Washington these days. Populism, despite the term's democratic sound, is not a good thing:

In the U.S. and Canada, populist movements . . . arose among western (and southern U.S.) farmers in the second half of the nineteenth century. North American populism was less a doctrine or a movement than an expression of discontent directed against those whom the farmers held especially responsible for their problems -- the eastern bankers and railroad interests. Populist parties demanded easier credit, lower shipping rates, agricultural co-operatives, and other forms of public assistance.

(From A Glossary of Political Ideas, Maurice Cranston & Sanford A. Lakoff, eds. (Basic Books, 1969).) The U.S. populist party faded away once the Democratic and Republican parties absorbed many of its goals. As an attitude and a rhetorical stance, however, populism remains a big part of American life.

Among Republican politicians, populism often takes the form of castigating the "Eastern elites." Among Democrats, it often takes the form of what we're seeing today, scolding of "the rich" and "big business." Some public figures -- such as Bill O'Reilly and Michael Savage -- are more populists than they are conservatives or Republicans, since they target all of the above in their attacks and don't try to maintain any kind of ideological consistency.

Unlike conservatism, populism has no intellectual foundation. It's a style of attack that can be used to motivate, distract, or entertain voters.

2009-03-17T21:34:00.003-04:00

Podcast on the Employee Free Choice Act

Richard Epstein, a brilliant legal scholar and self-proclaimed classical liberal, provides a straight-from-the-hip podcast on Cato at Liberty about the Employee Free Choice Act -- what most people refer to as the "Card Check" bill.

This bill, favored by the ruling party, is likely to become law soon. Epstein's bottom line: (1) It maintains the winner-take-all monopoly view of labor relations, as first enacted in the 1930s under the Wagner Act; (2) it will make it easier for unions to organize within a business; (3) it will chill lawful efforts by employers to advocate that workers not unionize, by greatly increasing the penalties for going over the not-very-clear line; and (4) it will increase federal regulators' involvement in labor relations.

The podcast is only 10 minutes long and is packed with information, so you need to listen carefully. But he lays it all out very nicely.

2009-03-17T17:35:00.002-04:00

More about the Limitations of Keynes

Economist Don Boudreaux, in response to comments from readers, explains his views on Keynes's shortcomings as an economist:

I have never disputed that Keynes was a great pioneer in probability theory. I do dispute that he was a great economist.

His ruminations on animal spirits and on the marginal propensity to consume don't come remotely close to being sufficiently micro-theoretic. The important question is how do individual choices interact with each other -- conflict, mesh, adjust, create synergies -- to bring about material prosperity?

Recognizing various psychological properties of individual human decision-making is important, but such recognition remains chiefly in the province of psychology and not economics -- at least not in that all-important species of economics that aims to understand how individual choices create results that are no part of anyone's intentions (such as, say, a production structure that creates pencils).

Economic growth and widespread material prosperity require enormously complex adjustments at very detailed levels. The Austrian notion of capital, of course, is a paramount example of this fact that Keynesians (and monetarists) ignore. Capital, in fact, is not a blob that only grows, shrinks, or remains unchanged in size. It is a hugely vast complex of specifically adjusted relationships, both physical and commercial, that concepts such as aggregative concepts mask.

(This occurs among the comments to the linked post; you'll therefore need to scroll down to find it.)

2009-03-17T11:58:00.003-04:00

AIG Bonus "Outrage"

A lot can be, has been, and will be said about AIG's payment of executive bonuses and the expressions of "outrage" from President Obama and other politicians. Tyler Cowen, for example -- one of the most reasonable people anywhere -- sparked criticism with an uncharacteristically sarcastic post on the topic.

One thing that I think this episode shows is that AIG (not surprisingly) is better than the government at market participation. The bailouts were, in part, arm's-length negotiations between AIG's people and the government's people, over how much AIG would have to give up in exchange for how much government money. This is what businesspeople do for a living; it's not what most government people do for a living. (As just one example, what employer would ever begin a salary negotiation by telling the employee, "My company can't afford to lose you"? And yet that's what the government did in saying that AIG was too big to fail.)

And so, surprise surprise, AIG came out of the negotiations with what appears to be a very nice deal.

Now the government, realizing it got snookered, is trying to divert attention from its own clumsy performance by voicing moral outrage at AIG. "I agree that you can have a dog in your apartment. . . . How dare you have a Saint Bernard in your apartment!"

Update: Minutes after posting this, I saw (courtesy of Russell Roberts at Cafe Hayek) that one of the bonus lamenters (Sen. Dodd) is the person who inserted into the stimulus bill an exception for contractually obligated bonuses agreed on before Feb. 11. In other words, "How dare AIG do what we agreed it could do!"

2009-03-16T11:59:00.002-04:00

Rule Number 1: If You Subsidize Something, You Will Get More of It

Three years after enacting its universal health "insurance"* law, Massachusetts is trying to figure out how to rein in healthcare costs.

To review, the law requires state residents to have health "insurance" and subsidizes premium payments to make compliance possible:

Massachusetts achieved its high coverage rates by mandating in its landmark law that almost every resident have health insurance, and that all but the smallest businesses make some contribution toward their employees’ costs. Those who do not enroll but are deemed able to afford insurance can be fined up to $1,068 in the 2009 tax year.

To make the mandated insurance affordable, the state subsidizes premiums for those earning up to three times the federal poverty level, or $66,150 for a family of four.

By subsidizing premiums, the state made the cost of healthcare lower. Therefore, people have consumed more of it:

The state expects to spend $595 million more on its health insurance programs this year than in 2006, a 42 percent increase. But** about 432,000 people have gained coverage, leaving only 2.6 percent of the population without insurance, according to a recent state survey.

So tell us again, How is universal coverage supposed to save money without limiting what services people can and can't have?

Hat tip to Tyler Cowen at Marginal Revolution.

* As many people have pointed out over the years, "insurance" is a misnomer for what really are third-party-payer health plans.

** An entire book could be written about the editorializing built into transition words like "but." "Costs have gone up, but more people are covered." That's nice, we think to ourselves, the higher costs (a bad thing) are balanced by more coverage (a good thing). To be accurate, however, shouldn't that "but" be a "because" or at least an "and"?

2009-03-16T09:01:00.002-04:00

Emperor Keynes Has No Clothes

Economist Russell Roberts explains nicely why Keynesianism (at least as currently advocated) is "silly pseudo-science":

What did Keynes really mean? It's hard to say. His masterwork is a bit opaque and has been interpreted by many generations of acolytes.

In the current environment, we are told that consumers aren't spending so aggregate demand has fallen. (This is typically discussed as if the reason for this drop is irrelevant). Therefore government must step in as the spender of last resort. This was the defense of the so-called stimulus package of $787 billion. Those who defended it did not defend it on the merits of what was in it, but rather simply on its magnitude. And many of those defenders (including Paul Krugman and Robert Reich) said it was not big enough.

Their basic argument is Keynesian in nature—that aggregate demand, C [consumer spending] + I [investment spending] + G [government spending], must be boosted up to its former level and that this can be achieved through an increase in G. And according to the Administration (and the study it produced written by Jared Bernstein and Christina Romer), every dollar of government spending would produce 1.57 (or was it 1.54?) dollars of income.

The presumption is that it does not matter what G [government spending] is spent on. The most important thing is to get spending into people's hands so that they will in turn spend it and the multiplier will kick in.

The presumption is that the multiplier is a constant. It does not matter how G is financed. It does not matter what G is spent on. It does not matter why C [consumer spending] is down. G just needs to go up. This is silly pseudo-science.

The presumption is that if G goes up, C will stay unchanged. This ignores any possibility that people will be aware that their taxes are going to go up very dramatically in the future and they will do nothing in response.

The presumption is that the borrowing or printing of money to finance the increase in G will have no effect on aggregate demand.

The presumption is that the people who get the money from the government will spend it rather than save it.

These last points are empirical questions. Actual estimates of the multiplier are all over the map. We don't have a lot of evidence on either side that is reliable. Anecdotal evidence is generally restricted to World War II on the encouraging side and Japan's recent experience on the discouraging side.

I have argued that economists generally came down on one side or the other of the stimulus package based not on their economic understanding but on their political and philosophical biases. I still believe that. I think we're in macroeconomically uncharted territory. [Emphasis added.]

2009-03-15T09:15:00.002-04:00

An Excellent Reference Work from ISI

American Conservatism: An Encyclopedia (published in 2006) surveys the intellectual foundations of conservatism in the United States. It focuses on developments after World War II, with entries on key individuals, organizations, and publications, along with essays on the various strands of U.S. conservatism and issues central to conservative thought. The editors, taking a "big tent" view, have included discussions of classical liberalism and libertarianism. The text is well written, insightful, and accessible; the format is reader-friendly; the price is right considering the effort that went into this. Thanks to ISI for making it happen.

2009-03-15T08:40:00.002-04:00

Our Institutions Could Be Different -- and Worse

In his History of England, Macaulay recounts a murder that took place in London in the 1690s. Two men, a lord and a high-born commoner, conceived a grudge against Mountford, a celebrated actor. They went in search of him one night, to take their revenge:

They swaggered sword in hand during two hours about the streets near Mountford's dwelling. The watch requested them to put up their weapons. But when the young lord announced that he was a peer, and bade the constables touch him if they durst, they let him pass. So strong was privilege then; and so weak was law. [from Chapt. XIX]

The pair ultimately killed Mountford, but the young lord was acquitted of the murder by the House of Lords.

Incidents like this help us remember how valuable our legal and cultural institutions of equality are. "We hold these truths to be self-evident: That all men are created equal . . . ."

2009-03-14T20:12:00.002-04:00

This Is Not the Time for Keynes

Economist Don Boudreaux explains, in a concise letter to the New York Times, why Keynesian stimulus spending will hurt rather than help in our current situation:

Paul Krugman insists that the current stimulus plan will fail because it is too small ("Behind the Curve," March 9). We non-Keynesian economists also believe that it will fail, but for very different reasons: the chief problem is less one of deficient aggregate demand than it is one of poor coordination of the plans of producers with the (non-bubblicious) demands of consumers.

Economic prosperity requires that workers whose jobs were created by the bubble be redeployed into jobs that are viable. Stimulus spending does nothing to promote this greater coordination of economic activities -- and, by promising higher taxes or higher inflation in the future, likely interferes with the economy's capacity to coordinate. [Emphasis added.]

In other words, the real-estate bubble caused resources to be over-invested in that and related sectors (including certain kinds of financial services). Now that the bubble has burst, those excess resources need to find their way to different sectors, sectors where they will be productive. The government's giving individuals money to cause more consumption will do nothing to help that necessary reallocation of resources.

2009-03-14T12:00:00.002-04:00

My Mixed Emotions about President Obama

As the 2008 national elections approached, my (faint) hope was that we would get a Democratic president, with the Republicans controlling the Senate if not the House as well. By election day, however, it was obvious that the Democrats would win both the White House and the Capitol. I therefore voted for Barr (the Libertarian presidential candidate) and for Republicans in the other races.

With Democrats in the driver's seat, I feared the worst in terms of social engineering and bigger government. But I hoped that President Obama and his advisers would be wise enough to steer a somewhat moderate course.

That does not so far seem to be in the offing.

I want Obama to be a good president, even while I hope that he does not succeed in having national health insurance or carbon-emission limits adopted. The historic nature of his presidency -- our first African-American (or partly African-American) chief executive -- is still thrilling to me. I want him to do at least well enough that no one can afterwards honestly say African-Americans don't have what it takes to be president. Also, as an alumnus of Harvard Law School, I want him to reflect well on the school. (While many presidents have been Harvard graduates, Obama is only the second president to be a graduate specifically of the law school. The other was Rutherford B. Hayes.)

A Republican majority in either house or both houses following the 2010 elections could be a big help to him. It could call upon his reasonableness (which I believe is there) and encourage prudence.

2009-03-14T11:29:00.002-04:00

"What Oft Was Thought, but Ne'er So Well Expressed"

John at Power Line has finely articulated what a lot of skeptics are thinking -- that the current administration wants us to stay afraid enough to spend lots of money, but not too afraid:

So things aren't as bad as we think, just bad enough to warrant more than a trillion dollars in new taxes, trillions more in deficit spending, radical overhaul of the health care system, a tax on energy that will make American industry less competitive and impoverish every American, and much more. But it all makes sense because the future is rosy and if only we borrow trillions, then economic growth will kick in, starting next year, miraculous "savings" will be achieved, and our deficits will be only a little larger than those we racked up during the Bush administration.

It's a sort of high-wire act, because if things really aren't as bad as we think, then we should scrub these risky if not revolutionary changes, refrain from borrowing trillions, and wait for the economy to turn around over the next six to nine months. Recessions, after all, always come to an end, usually pretty quickly. Even the financial crisis may not be as bad as we thought, with executives from both Citigroup and Bank of America voicing optimism today [i.e., March 12].

So -- things aren't too bad, but just bad enough to require radical measures which, no matter what happens, should be given credit for the fact that things aren't worse. I don't know; maybe someone will buy it.

(The title quote is from Pope's Essay on Criticism.)

2009-03-14T10:41:00.004-04:00

Our Constitutional Right to Procedural Due Process

We Americans tend to take for granted the precious rights guaranteed by our institutions. This passage from Macaulay's History of England from the Accession of James the Second throws into high relief the safeguards afforded us by the rule of law we inherited from England (and subsequently improved):

During the eight years which preceded the Revolution [of 1688], the Whigs had complained bitterly, and not more bitterly than justly, of the hard measure dealt out to persons accused of political offences. Was it not monstrous, they asked, that a culprit should be denied a sight of his indictment? Often an unhappy prisoner had not known of what he was accused till he had held up his hand at the bar. The crime imputed to him might be plotting to shoot the King; it might be plotting to poison the King. The more innocent the defendant was, the less likely he was to guess the nature of the charge on which he was to be tried; and how could he have evidence ready to rebut a charge the nature of which he could not guess? The Crown had power to compel the attendance of witnesses. The prisoner had no such power. If witnesses voluntarily came forward to speak in his favour, they could not be sworn. Their testimony therefore made less impression on a jury than the testimony of the witnesses for the prosecution, whose veracity was guaranteed by the most solemn sanctions of law and of religion. The juries, carefully selected by Sheriffs whom the Crown had named, were men animated by the fiercest party spirit, men who had as little tenderness for an Exclusionist or a Dissenter as for a mad dog. The government was served by a band of able, experienced and unprincipled lawyers, who could, by merely glancing over a brief, distinguish every weak and every strong point of a case, whose presence of mind never failed them, whose flow of speech was inexhaustible, and who had passed their lives in dressing up the worse reason so as to make it appear the better. Was it not horrible to see three or four of these shrewd, learned and callous orators arrayed against one poor wretch who had never in his life uttered a word in public, who was ignorant of the legal definition of treason and of the first principles of the law of evidence, and whose intellect, unequal at best to a fencing match with professional gladiators, was confused by the near prospect of a cruel and ignominious death? Such however was the rule; and even for a man so much stupefied by sickness that he could not hold up his hand or make his voice heard, even for a poor old woman who understood nothing of what was passing except that she was going to be roasted alive for doing an act of charity, no advocate was suffered to utter a word. That a state trial so conducted was little better than a judicial murder had been, during the proscription of the Whig party, a fundamental article of the Whig creed.

from Chapter XVIII

2009-03-13T19:55:00.002-04:00

Is Global-Warming Alarmism a Religion?

It seems there's no topic that will get someone's back up as quickly as global warming. Adults who want the government to limit carbon emissions are apparently unable to discuss their views the way they might discuss their other positions on science topics, such as whether gorillas are capable of using language or whether exposure to high-power lines causes cancer. They reject out of hand any data that conflicts with their belief and dismiss "deniers" as dupes or corporate stooges.

Earlier today, for example, the following was posted by an alarm-sounder on the politics discussion board at IMDb:

The vast majority of studies and models have been independently verified. The only ‘scientific’ dissent is from institutes connected strongly to polluting industries and researchers strongly dependent on their money.

That's the junk science.

In other words, any scientist who does not accept the premises of global-warming alarmism is ipso facto "damned." The creed requires belief in the coming global catastrophe. That is the Truth, in the same way that a given religious doctrine is the Truth for its believers.

2009-03-13T17:18:00.003-04:00

Boost Your Economic Literacy, with the Teaching Company

Since I spend over an hour in the car each weekday, I've become a huge fan of the courses offered by the Teaching Company. Some of their best offerings are in the field of economics. Listening to the following will give you an excellent grounding in basic economics:

Economics, 3d edition -- This is essentially an introductory economics course. The first half is focused on microeconomics, the second half on macroeconomics. It's one of their most popular courses, and rightly so.

Modern Economic Issues -- Each lecture deals with a different issue, including free trade, income inequality, budget deficits, and so on. Excellent, balanced discussions. However, because these were prepared about two years ago, the current recession is a 300-lb. elephant in the lecture room.

Thinking about Capitalism -- A wonderful journey in intellectual history. The professor explores what leading Western philosophers, economists, and reformers have written about capitalism, from the ancient world up to the present.

A word about Teaching Company prices: Their "everyday" prices are extremely, shockingly high. But all of their courses go on sale at one time or another during the course of a year. ("Thinking about Capitalism" is on sale now.) The sale prices are high but not out of line for what you get.

2009-03-13T16:21:00.003-04:00

Why "Blackstone in America"?

Sir William Blackstone was an 18th-century English legal scholar who wrote a four-volume treatise on English law -- known among lawyers simply as "Blackstone" -- that was authoritative for many generations. His writings were, for example, highly influential on the Founders.

Among other things, Blackstone asserted concisely and straightforwardly the value of individual liberty under a constitutional government. For example:

THE absolute rights of man, considered as a free agent, endowed with discernment to know good from evil, and with power of choosing those measures which appear to him to be most desirable, are usually summed up in one general appellation, and denominated the natural liberty of mankind. This natural liberty consists properly in a power of acting as one thinks fit, without any restraint or control, unless by the law of nature: being a right inherent in us by birth, and one of the gifts of God to man at his creation, when he endued him with the faculty of freewill. But every man, when he enters into society, gives up a part of his natural liberty, as the price of so valuable a purchase; and, in consideration of receiving the advantages of mutual commerce, obliges himself to conform to those laws, which the community has thought proper to establish. And this species of legal obedience and conformity is infinitely more desirable, than that wild and savage liberty which is sacrificed to obtain it. For no man, that considers a moment, would wish to retain the absolute and uncontrolled power of doing whatever he pleases; the consequence of which is, that every other man would also have the same power; and then there would be no security to individuals in any of the enjoyments of life. Political therefore, or civil, liberty, which is that of a member of society, is no other than natural liberty so far restrained by human laws (and no farther) as is necessary and expedient for the general advantage of the publick. Hence we may collect that the law, which restrains a man from doing mischief to his fellow citizens, though it diminishes the natural, increases the civil liberty of mankind: but every wanton and causeless restraint of the will of the subject, whether practiced by a monarch, a nobility, or a popular assembly, is a degree of tyranny. Nay, that even laws themselves, whether made with or without our consent, if they regulate and constrain our conduct in matters of mere indifference, without any good end in view, are laws destructive of liberty: whereas if any public advantage can arise from observing such precepts, the control of our private inclinations, in one or two particular points, will conduce to preserve our general freedom in others of more importance; by supporting that state, of society, which alone can secure our independence. . . . So that laws, when prudently framed, are by no means subversive but rather introductive of liberty; for (as Mr Locke has well observed) where there is no law, there is no freedom. But then, on the other hand, that constitution or frame of government, that system of laws, is alone calculated to maintain civil liberty, which leaves the subject entire master of his own conduct, except in those points wherein the public good requires some direction or restraint.

THE idea and practice of this political or civil liberty flourish in their highest vigour in these kingdoms, where it falls little short of perfection, and can only be lost or destroyed by the folly or demerits of its owner: the legislature, and of course the laws of England, being peculiarly adapted to the preservation of this inestimable blessing even in the meanest subject. Very different from the modern constitutions of other states, on the continent of Europe, and from the genius of the imperial law; which in general are calculated to vest an arbitrary and despotic power of controlling the actions of the subject in the prince, or in a few grandees. And this spirit of liberty is so deeply implanted in our constitution, and rooted even in our very soil, that a slave or a negro, the moment he lands in England, falls under the protection of the laws, and with regard to all natural rights becomes eo instanti a freeman.

From Vol. I, pp. 121-23.

2009-03-13T16:00:00.002-04:00

Prediction:

We will see a noticeable, steadily improving trend in the U.S. economy by August 15, 2009.

I first made this prediction on an IMDb discussion board in the middle of February. At the time, I based it on an article in the Wall Street Journal indicating that credit was starting to defrost. In my view, the main cause of the general contraction is that businesses not directly affected by the bursting of the real-estate bubble are nevertheless clinging to their cash, afraid to make any unnecessary outlays. As credit begins to flow again, the economy outside the financial sector will start to return to normal.

2009-03-13T12:11:00.000-04:00

Good News?

The current administration may be showing signs of centrism (from today's Wall Street Journal, probably gated):

In his most aggressive outreach yet to the business community, President Barack Obama told some of the nation's leading CEOs that he is ready to talk about lowering corporate income-tax rates and could compromise on his plan to combat global warming.

Speaking for more than an hour Thursday to the Business Roundtable, a chief executives organization, Mr. Obama made it clear he wants the business community's cooperation to secure his agenda of expanding the federal role in education, overhauling health care and transforming the energy sector. . . .

Of course, this is sort of like having a 10%-off "sale" after prices have been marked up by 20%. But there seems to be a wee cause for hope in there somewhere.

2009-03-13T11:53:00.000-04:00

Bad News

According to an opinion piece in yesterday's Wall Street Journal (might be gated), one goal of the present administration is reducing income inequality, and the preferred means of getting there is taking from the rich:

Let me introduce [President Obama's third book], a book that will touch everyone's life: "A New Era of Responsibility: Renewing America's Promise. The President's Budget and Fiscal Preview" (Government Printing Office, 141 pages, $26; free on the Web). This is the U.S. budget for laymen, and it's a must read.

Turn immediately to page 11. There sits a chart called Figure 9. This is the Rosetta Stone to the presidential mind of Barack Obama. Memorize Figure 9, and you will never be confused. Not happy, perhaps, but not confused.

. . . The one on page 11 is attributed to "Piketty and Saez." . . .

Thomas Piketty and Emmanuel Saez, French economists, are rock stars of the intellectual left. Their specialty is "earnings inequality" and "wealth concentration." . . .

As described in Mr. Obama's budget, these two economists have shown that by the end of 2004, the top 1% of taxpayers "took home" more than 22% of total national income. This trend, Fig. 9 notes, began during the Reagan presidency, skyrocketed through the Clinton years, dipped after George Bush beat Al Gore, then marched upward. Widening its own definition of money-grubbers, the budget says the top 10% of households "held" 70% of total wealth. . . .

Turn to page five of Mr. Obama's federal budget, and one may read these commentaries on the top 1% datum:

"While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not."

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected."

"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few. . . . It's a legacy of irresponsibility, and it is our duty to change it."

Mr. Obama made clear in the campaign his intention to raise taxes on this income class by letting the Bush tax cuts expire. What is becoming clearer as his presidency unfolds is that something deeper is underway here than merely using higher taxes to fund his policy goals in health, education and energy.

The "top 1%" isn't just going to pay for these policies. Many of them would assent to that. The rancorous language used to describe these taxpayers makes it clear that as a matter of public policy they will be made to "pay for" the fact of their wealth -- no matter how many of them worked honestly and honorably to produce it. No Democratic president in 60 years has been this explicit. . . .

2009-03-13T11:42:00.000-04:00

I Can't Wait to Read This Book

The book is A Failure of Capitalism, by Richard Posner. It's due out in May, although Tyler Cowen already has a copy.

Judge Posner is one of the smartest guys around and one of the founders of the law-and-economics "movement." In addition, his years as a judge on the Seventh Circuit Court of Appeals have given him an understanding of real-world economics and society that few other academics can claim.