My biggest worry in the past few days was that the senate would respond to Pelosi's abomination with a modest response, a middle fo the road, "sensible" compromise which could pass the senate. Then, in committee, they could adopt the senate bill, the blue dogs and RINOs could climb on board, and we would get saddled with this compromise, which would create the framework leading to eventual full nationalization. Even worse, it could be worded vaguely enough that the regulators could work through the "moderate" compromise to eventually enact a much more radical agenda. One way or another, any compromise bill would likely lead to much worse consequences.

Either the senate leadership is stupid and greedy, or they have decided Obama's low numbers mean something and they have intentionally killed health care reform. Either way, by passing out of committee a bill only slightly less monstrous than Pelosi's they have pretty much condemned health care reform this session. They might, if they're really lucky, get it through the senate, but I think should that happen, all those house blue dogs with second thoughts will latch on to any changes in the reconciliation of the two versions to jump ship. Far more likely, it is going to die in the senate. But either way, I don't see it making it through this session.

So, I am very grateful that the senate is either stupid or disillusioned, as it seems the worst case may not come to pass this year. Unfortunately Obama has three more. Hopefully Pelosi and Reid don't.

So, when you look about you, see the state in which we find ourselves, see the health care bills creeping through the senate, see the government running wild, who is to blame? I know it is not usually a productive question, it is usually much better to find a solution than place blame. But since politics is all about votes and passing legislation and regulations, it may be useful to ask it, if only so we can avoid putting the same people in charge. So, again, let us ask, who is to blame?

Is it Obama? How could it be? He is only a year in office. You don't remake a government in a year. The Democrats? Maybe, but did spending stop when they were the minority? Washington in general? Well, they do pass the laws, but they serve only at our discretion, we can always replace them.

I know it is unpopular to say so, that we are not allowed to mention it, that our modern culture is all about denying anyone is to blame for anything, but perhaps we are to blame.

Now most of my readers will argue that they are conservatives, they opposed big government, but I think almost all of must admit we may be mostly conservative, but we are not consistent. How many conservatives continue to support their local congressmen, just because they bring back money? Or support smaller government except when it comes to protective tariffs? Or when it comes to capping CEO income? Or punishing greedy bankers? Or Wall Street fat cats? And how many of us have hesitated before raising our voices in defense of unpopular causes? When was the last time you defended unlimited salaries for CEOs? Or the rights of speculators? ("Authoritarian Oil Talk", "Crippling Business", "AIG Nonsense", ""Fair Trade"","Exploited Labor")

You see, we have three big problems. First, right or left we still seem to believe the government should ALWAYS respond. No matter the problem, when something goes wrong, we expect the politicians to react. Even if it is an issue in which government should not be involved, we still demand they do so. No matter our political position, we have far too much faith in the state. ("Doing Something", ""Doing Something" Revisited")

Second, we have a disturbing populist stream on the right. We say we are for small government, but we tend to fall for populist rhetoric about "fair trade" ("Protectionism Right and Left", "Free Trade, Employment, Outsourcing, and Protectionism","Misplaced Blame and A Power Play"), about greedy CEOs and unscrupulous stock brokers ("Beware Populist Deception").We say we don't trust the state, but then give them far too much credence when it comes to issue about which we feel strongly, and most are stupidly populist positions, which, taken to their logical conclusion ("Inescapable Logic"), would grant the state almost unlimited power.

Finally, those of us who recognize these truth all too often adopt the "big tent" approach and refuse to speak out. ("The Difficulty of Principle") And, while I normally endorse compromise ( "Cigarettes, Sudan and Abortion"), in this case we are not compromising to achieve our goals, but compromising our very principles, and, even then, are probably not getting what we think. ("Why Shrinking a Party May Be Good") If we were to welcome protectionists on the understanding that they were allies, but that we did not agree with their premises, it may be permissible, but by refusing to point out the problems of their beliefs, by pretending that protectionism and populism are parts of the Republican platform, we give the impression they represent our party, and that ends up moving the party slowly leftward. Not to mention that it provides openings for the left to use our own logic against us.

I know it will likely win me no friends to say so, but the politicians are not to blame, not really. They are only doing what we told them to do. Every time we demand politicians "do something", every time we decry greedy CEOs and evil bankers, and every time the rest of us refused to speak out against such statements, we told the politicians to do exactly what they are doing. ("What We Deserve", "Don't Blame the Politicians","Bad Economics Part 6", "The Inherent Disappointment of Authoritarianism")

Normally when I am vacationing I bother to announce it in advance. Unfortunately I was feeling poorly last night, so I forgot to put up an announcement that I would be away this weekend. Fortunately, I took along a laptop (so my son could play his favorite pirate game before bed) and either the hotel has unadvertised wifi or someone in Luray has poorly secured their network. Whatever the reason, it means I can put up this brief post explaining that roaming around caverns and visiting Dinosaur Land will keep me form posting until tomorrow evening.

There was something I wanted to add, as a comment I received today raised an interesting point about which I want to write soon. You see, I have been thinking about Obama, and I realized that those who try to cover up his errors, inflate his achievements and generally flatter him and plead his case do him quite a bit of harm. I mentioned before that by not asking him hard questions, the press served Demcorats ill by not properly vetting their choices, and by not getting Obama used to real questions, left him ill prepared should some journalist ever find the nerve to ask them. But there is more than that. For example, Obama's legal experience is basically that of a law school graduate. Yes, he has voted in congress, but considering how few bills he has even cosponsored, combined with his many votes of "present", in reality Obama has very little practical legal experience. But, he has been cited many times as a constitutional scholar due to his lecturer position. That sort of flattering position does him no favors, as, when he makes a boneheaded mistake, it seems even worse due to the fact that he is supposedly an expert.

It is a topic I want to examine soon in greater detail. The more I think about it, the more I come to believe the "Obama immune system" does him more harm than good. Unlike the "Clinton immune system" in the media, which basically  adopted the position "yes, he's jerk, but he has good ideas", the Obama boosters try to tell us he is perfection incarnate. And in so doing they make his every mistake and every flaw seem even larger. It is ironic, as the right is often upset by how obsequious the media is, for all that I have been quite upset about it, but, in the long run, the sycophantic media may end up his worst enemy.

It is something to consider, in any case. And I hope to do so tomorrow, when I get home. Or maybe early next week. So, please check back frequently.

NOTE: For some reason this was first posted on "Nation of Whiners" rather than "Random Notes". I have no idea how I made that mistake, but I have now copied it to the proper blog.

Has anyone noticed that Obama & co. have been riding roughshod over our Constitution? No, not the in the usual ways, nationalized health care, cap and trade, and so on. I mean in their constant declarations that Kalid Sheik Muhammad and the others about to be tried are not only guilty but certain to be executed. Were a state executive to say the same about any defendant in any trial, the media and the ACLU would be all over them, calling for investigations into the misconduct of said executive. However, Obama is basically declaring that the executive has presumed guilt, and not a peep.

One other questions comes to mind, if they only try these few because they are sure of guilty verdicts, don't the other detainees at Guantanamo have a fairly good habeas corpus case, arguing that the only reason they weren't granted trials is because the administration is unsure of the verdict? I doubt Obama and company even considered that, but once you start saying terrorists are just criminals who deserve trials, don't you have to do it for all of them? How can he justify trying the "slam dunk" cases and not the rest? Seems a clever lawyer might have a nice little case there.

Of course there is the final worry. Despite Obama's, and Holder's, claims, there is no such thing as a legal certainty. You can have DNA and a bloody glove and still lose the case. And as the administration has pretty much admitted Bush "tortured" and that treatment Guantanamo was illegally severe, it seems there may be many procedural challenges, not to mention that soldiers do no arrest, and military questioning is not conducted in a manner which meets legal muster, precisely because the military captures, and does not arrest.("Somehow The Media Missed This", "Questions Raised by Boumedine", "Confirmation, If It Is True") So it seems there may be many evidentiary challenges. And, if they succeed, then what becomes of the "slam dunk". And worse, what become of these terrorists?

I wrote before that I thought Nuremburg was a bad precedent ("Goodbye Geneva", "Why Nuremberg?", "Last Thought on the Topic"), as one should not try the losing side in a war, but this is just as bad. You do not try enemy combatants, in or out of uniform, you detain them until the war ends. What if Muhammad is found guilty, but not sentenced to death? Will he be up for parole? Will he eventually walk? And then what? These are the questions I feel Obama is not asking. In his rush to get in the good graces of liberals and European intellectuals, he is putting our country in danger, jeopardizing American lives, and risking the release of the remaining terrorists held in Guantanamo, and he doesn't even seem to realize it.

My last post ("A Strange Industry, or, When the Market "Breaks Down"") reminded me of the many bad laws which have been justified by the argument of "market defects". Now, these don't always take the form I described in the last post, claims that the market is not functioning properly, some also take the form of arguments about "unequal information", as if one side having an advantage is a sign that the market is defective. First, what is apparently an advantage to one side may not always be so, second, even if it is, that does not mean the government needs to intervene, unfairness is not justification to remove the rights of individuals ("Life Is Not Fair - And Trying To Make It So Makes Things Worse"). And finally, intervention, though well intentioned, may cause worse results.

First, let us look at imbalances of information. Every stock exchange, excepting those that are pure gambling, are based upon the traders thinking they know something the other side does not. No, this is not just about "insider information", it can be that each trader's analysis points in a different direction and he thinks he is right. It could be that one has heard rumors the other hasn't. It could be any number of factors, but the fact remains, so long as we do not want the stock exchange to become a large casino, we have to accept apparent imbalances in information, or no exchanges would take place. Of course, we do not know at the time of the exchange which side had the better information, but obviously one side or the other will be proved right in the end.

My second point is likely going to be more controversial, but it makes sense. There should be no restrictions on "insider trading". First, because the term is ill-defined. As some theories define it, anything other than outright guessing would be disallowed. But even using the most restrictive definitions, there is no way it should be disallowed. Yes, firms can write employment contracts to prevent their employees from trading on information aimed through their jobs, but, as a matter of law, there should be no prohibition.

Let me first make the political argument, which will likely not convince anyone. Just because an imbalance of knowledge exists, there is no justification for limiting one's right to contract, which is all a stock trade is. Rights are not contingent upon fairness. One's actions can only be restricted when his actions interfere with the rights of others, and, under no definition does an unfair stock trade constitute a violation of another's rights.

And now to the practical argument. Forbidding insiders from trading on their knowledge prevents the rest of the market from sharing in that knowledge. Yes, the insiders will make a large profit on this information, but all stock trades benefit those with better information, we should not allow envy to prevent us from looking at the other effects*. Once an insider makes a trade two things happen. First, his trade moves the market slightly, giving a sign to traders. Second, traders will notice WHO is selling, and will act on it, as well as informing others. And so, thanks to the actions of the insider, others, who would not normally have this knowledge, can now act, either cutting their losses, or enjoy some part of the gains. And, as the knowledge ripples through the market, either through direct information, or just as others respond to the market trend, the market as a whole can act on this information more quickly and well in advance of a formal announcement. In short, it allows the market to adjust more quickly.

Let me just ask this simple question. Do you think Enron investors would be worse off had Enron insiders been allowed to act on "insider information"? Those who lost everything probably would have still suffered a loss, but having hints much earlier that something was wrong would have allowed them to sell earlier and maybe suffer a smaller loss. Yes, Enron insiders would have benefited, but ask anyone who was bankrupted if they would let Enron middle managers gain a few million if it would give them back their investments, and those who aren't completely consumed by rage or envy would probably answer "yes".

And in the end, that is the best argument for allowing "insider trading". The argument against it always is the "inequity" of having differing levels of information, but allowing insider trading actually acts to equalize the levels of information more quickly. If insiders are prevented form trading, then the insiders are privy to information about which everyone else has no knowledge right up tot he moment of announcement, and they can act on it then to their full benefit. On the other hand, if they can act early, it will allow others to gain this knowledge early, enjoying some part of the benefit, with the knowledge gradually trickling out throughout the market, allowing the market to adjust more rapidly, and without as many sudden shocks as occur when information is dramatically presented.

Now, granted, even with insider trading there may be such sudden shocks. If the CEO of a company dumps every share he owns, likely the market will still react with shock and the stock will plummet. On the other hand, smaller news will likely allow for more gradual adjustments, which will be better for the market.

And there is one additional benefit. Even if companies include clauses preventing trading in their contracts, it is likely employees will find ways around them, using family members or friends. Presently, the illegality of such acts make them less likely. Were they legal, the companies would be well aware that employees could leak unfavorable (or favorable) information at any time, and that would encourage them to make public adjustments to earnings estimates and other financial projections, even without legislation. With the possibility that any unfavorable information might be leaked, companies will be wary of relying on information remaining secret.

Of course none of this is original to me, many who do not obsess on "imbalances" and "unfair competition" have pointed out the same, that allowing free trade, even when information is unevenly distributed helps to level out the information over time and is the most efficient system. In many ways this is similar to the arguments for the free market in general. While many malign the free market  because of inequities of wealth, or ability, or of other positional advantages, the truth is, allowing those with advantage to exploit them actually benefits everyone and tends to levels out advantages over time**.

Perhaps one day I will write something tying all of this together. The arrogance which inspires individuals to call the market "broken" ("A Strange Industry, or, When the Market "Breaks Down"", "Bad Economics Part 2") or to seek to impose their values on the market ("The Inherent Disappointment of Authoritarianism"), the leveling tendency which seeks to eliminate inequities ("Life Is Not Fair - And Trying To Make It So Makes Things Worse"), the utopian trend which refuses anything short of perfection ( "Utopianism and Disaster "), which seek to give control to human whim and arbitrary choice rather than constant principle ( "The Wrong People", ""Empathy" Threatens not "Justice" but Predictability ") and the anti-man perspective which informs so many theories ("Juvenile Intellectuals", "Anti-Man Intellectuals", "The Lie of Environmentalism"). They all tie together in many ways, all have so many features in common, that whenever I write about one I find myself mentioning the others. Yet I have not yet written a more general post explaining how they all relate to one another.

Perhaps when I have enough time that would be an interesting undertaking.

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* The other thing to recall is that insiders are not prevented from acting once the information they have becomes public, so they are likely going to act right at the moment of whatever announcement, making just as much of a killing. Insider trading simply allows the market to get that information early and act more quickly.

** For example, the inherited fortunes many malign are the source form which venture capital is raised allowing new fortunes to be made. If we were to expropriate inherited wealth, we would end up making it harder for newcomers to break into industry. In fact, most measures proposed to "level the playing field" have a similar outcome, reducing everyone to the lowest level, rather than elevating them even slightly. (See "Greed Versus Evil" and "A Great Quote".)

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POSTSCRIPT

As was mentioned in passing above, this post relates to two others. First, "Bad Economics Part 2", which focuses specifically on "destructive competition", one of the more popular versions of "broken free market" arguments (also mentioned in "Saving Us From Lower Prices"). Second, "Life Is Not Fair - And Trying To Make It So Makes Things Worse", which explains the many reasons that trying to even out the inequities of reality does more harm than good. I suppose I should also mention  "Fairness and the Free Market", "Planning For Imperfection" and "Greed Versus Evil ", all of which argue that the free market, by its nature, is best adapted to handling imperfect situations, producing the results most beneficial to all involved, regardless of the inequity of the starting positions. I do not claim it is "fair", in fact I dislike the word "fair" (see "Protean Terminology " and  "A Question of Fairness"), but as reality does not ensure equity, we are forced to deal with that reality, and the free market, starting from that inequitable origin, produces the greatest benefit for all involved. And, if an inequitable situation is unavoidable, isn't the best response to see that that inequity is turned to the general good?

Best of all, though it does benefit everyone, promotes the general welfare, the free market does so by allowing each individual to pursue his own interests. In other words, unlike most solutions promising "general good", the free market does not do so by yoking the stronger for the benefit of the weaker. Instead, it is simply designed in such a  way that while the stronger pursue their own desires, the actions they take benefit the rest. The benefit is not from coerced cooperation, but simply an outcome, the result of their pursuit of their ends.

But that is a point for another essay.

I was watching reality television today, specifically Project Runway, when it struck me, from the point of view of an amateur economist, how bizarre the fashion industry is. The fashion designers make their names from runway designs, some of which are never meant to be worn, and on-off custom designs. However, their income comes mainly from off the rack, ready to wear clothes, which often have almost nothing to do with their high-end designs, as well as fragrances and other secondary products which have even less connection.

The only industry I can imagine coming even close is the auto industry, in which several makers sponsor racing teams which (outside of NASCAR) drive custom vehicles having little relationship to their mass produced vehicles. However, the automotive industry is nowhere near as driven by racing crews as the fashion industry is by the fashion shows, so the analogy is imperfect.

So, why do I mention this?

Two reasons. First, because I am just fascinated by aberrations, and as an amateur economist this interests me. But second because it is a perfect example to show why modern academic economics is so quick to get things wrong.

You see, economists have decided advertising serves two purposes. First the informative function, telling you something is available and what the traits of this particular brand are. The the function of creating desire, convincing you you need this good. And, I would imagine, they would see the runway shows as advertising for clothing. However, as the points I mentioned above are true, the clothes sold have little relation to those shown, and yet demand is established through those shows, they would likely claim the market is "defective". As consumers should buy based upon the utility of the clothes, they should not be swayed by the quality, or popularity, of entirely unrelated clothing which just happens to share a designer. And, from such declarations, statements that in this or that industry the "free market breaks down", we often get regulators feeling justified in intervening. Likely fashion won't be one of those, but it is a great example of the argument.

The problem here, and the basis for many spurious "defective competition" arguments is the implicit assumption of innate value. Not that there is anything new in that belief. Marx's idiocies were based on the labor theory of value. Many utilitarian and utopian socialist theories had the same origin. Once you believe items have some innate value, no matter what the reason or origin, it is not hard to find the market doing "the wrong thing", and you can easily support claims of a "broken" market.

The simple fact is, an item's value is the same as its price. People understand that the price of an object is what someone will pay, but they don't understand that it has no value independent of its price. It may have a utility separate from price, but utility and value are not identical*. There are useful items which have no value in certain contexts. For example, in the days following hurricane Katrina, advanced supercomputer still had utility, but among the refugees, I doubt they had either a price or value, as they simply had no use for them, even if a supercomputer still had the same overall utility.

And that is the mistake of saying the market is broken. What that inevitably means is that the outcome disagrees with the speaker's assumptions. For example, using the fashion industry, the speaker would assume clothing is price by its quality and appearance, but finds instead it is priced by being associated with a designer whose other clothing is well received. But that does not matter. Whether buyers buy because of the inherent qualities of the goods, or the prestige they believe they get from buying them, they still establish the value of those goods. And it is based on nothing but the satisfaction they receive. Some may question why they get satisfaction from prestige rather than value, but that is not our decision to question. People are pleased by what pleases them, it is not the economist's job to ask why. We take valuations as a given and then determine what will give the greatest satisfaction. To do anything else is to court the many problems I described in "The Inherent Disappointment of Authoritarianism".

And that, really, is the root of most claims of "broken" markets and "defective" competition. It is not that the market does not function as it should, but that the speaker disagrees with the outcome, with the valuations which went into that outcome, in short, with the preference sof his fellows. But to say "I know better than them" is to proclaim one's arrogance, so such claims are instead tarted up in economic theory, perhaps some dubious mathematics, maybe littered with a slew of Greek letters, a little formal logic, and then put forth as somehow objective. But all the window dressing in the world will change the fact that such claims differ not one whit from the censors, the prohibitionist, and all the other busy bodies who tell us that everyone is behaving badly. It is not a broken market that upsets many, but the fact that a perfectly functioning market does not result in the outcome they would prefer.

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* I plead guilty to, in casual conversation, ignoring this distinction. If anyone followed my chat with Rich in the comments a few days ago will recall a monetarist who claimed gold and fiat currency both had value only because they were media of exchange. I argued that gold had value independent of its role as currency. I should have, instead, said it has utility, while fiat currency does not, and, in every case I know, that utility gave it value even when not used as currency, while printed paper tends to have value only when declared currency by the state. My compression of the argument into a sort of shorthand resulted in the inexact statement that gold, by being useful, has value. And that is technically incorrect.

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POSTSCRIPT

Yes, I watch Project Runway. My mother was watching it when we started living together and I found myself somehow intrigued. So feel free to mock. (I know not everyone will, but as I knew at least one question was forthcoming, I decided this was easier than answering every surprised comment.)

I know I have been guilty of a running gag accusing Best of the Web of getting all its best ideas by plagiarizing my blog (see "Best of the Web Imitates Me XXII"), but today I just want to praise them. They have put in nice, clear words, the same moral that I put in my "Obama's Christmas Carol - Part III", as well as the running theme of most of my blog. To wit:

If you like the Obama agenda, you probably wish he were more like LBJ. If not, you can be thankful (at least when it comes to domestic policy) that he's such a greenhorn. And if you've found yourself in strong disagreement with any president in the past 40 years, consider that there may be a wisdom in electing men who aren't masters of Congress.

Or, as I tend to phrase it, government changes hands, and whatever power you give to "our guys" will eventually fall into the hands of "their guys". So, unless you would be willing to have it wielded against you, you might want to think twice about the weapon you place into the hands of your party.

I am often confused by the varying ways in which people approach problems. For instance, in some areas of human endeavor, people will automatically look for every implication, every possible repercussion, even worry about the symbolic significance. Then, when it comes to other topics, they will overlook all but the most obvious consequences.

For example, when discussing decriminalization of drugs, not only will those supporting continued criminalization argue the indirect consequences, such as increased health costs and lost labor, but even symbolic costs, saying that it would "be like giving up" and asking "what message will it send our children?"¹ Yet, those same people, when arguing about topics such as our protective tariffs, will not look beyond the immediate impact of a few cents increase one  pound of sugar. Similarly, any restriction on free speech will be parsed for any "chilling effect"², but topics such as the stimulus will be debated, even by critics, in the most superficial terms, concentrating mainly on the cost and the recipients, without even a thought about the long term consequences.

Of course this may be because the average American simply has little interest in economics. In part, I blame the economic profession. Since economists are largely employed by financial institutions, and investors, they have developed a largely quantitative focus, and, as an outcome there have been three unfortunate trends. First, people have come to think of economics as a very math-intensive field. Second, a belief that we can apply quantitative analysis on a macroeconomic scale. And finally, a dreadful ignorance of economic theory, as opposed to quantitative methodology³.

I bring this up because of a post I was intending to write but had to put on hold⁴. In the course of researching it, it occurred to me how little most people think through economic questions.

Let us take, for example, sugar import quotas. These are often used by economists as a perfect example of why special interests have such an easy time passing legislation, while the opponents have such a hard time fighting them. And, superficially, they are right. The sugar companies need such a tariff, they would not exist at all if sugar could be freely imported, as sugar production in the US is just not competitive with production in other nations, even with the cost of transportation. So they have an interest in spending millions to maintain those tariffs. On the other hand, the cost to individuals is small. Even companies using a lot of sugar see a relatively small increase in cost. And, as all sugar consumers are saddled with the same cost increase, there is no real competitive disadvantage from such tariffs, except in competition with foreign foodstuffs, but in that case, other tariffs balance out the advantage.

And there ends the traditional analysis of such tariffs and quotas. They may cost us millions, but are distributed in such a way that no one has a real interest in fighting them, at least not enough interest to invest the money it would take to get rid of them, to counter the money being spent by the sugar industry.

But that analysis overlooks so many details, all the less obvious harms done by these quotas and tariffs. By looking only at the direct cost to consumers, it fails to consider what else might be were the quotas not in place.

For example, it fails to consider the resources tied up in the US sugar industry. Protectionists like to point to the jobs "created" by protective tariffs and quotas, mainly because protectionists are obsessed with jobs⁵. Unfortunately, the traditional analysis seems to share this bias. The truth is, unless there is inflation⁶, or government meddling in the labor market, be it pro-union legislation or otherwise, labor will not remain on the market in a free economy⁷. So, rather than "creating" jobs, what we are doing with such quotas is tying up resource sin sugar production which be more productively used elsewhere. As shown by the fact that sugar would be cheaper to import, sugar production in the US is not efficient, so we would be much wealthier were we to import sugar and use those resources to produce something that is efficient to produce here.

But even that ignores some costs. Not only are resources tied up in a productive venture which is inefficient, but we are also forced to pay a higher price for sugar. While, admittedly, the cost for an individual is small, but when seen in the aggregate, a huge amount of income is spent needlessly on sugar which could have been spent on other goods. While traditional analysis tends to look only at the individual costs, it misses the aggregate loss to the entire economy.As a result, we are impoverished even more.

And finally, by making these ventures profitable, they draw investment funds and loans which could be left available for other ventures. As I discussed in "Anti-Business Businesses ", because existing firms have clout with politicians, and can get protection enacted. As a result, it becomes harder for new firms to start. With funds tied up in on-viable protected ventures, less funding is available for new ventures, and established firms continue despite inefficiencies.

And that may be the biggest problem with protection, it manages to cause the economy to stagnate.Government intervention very rarely favors newcomers, as existing firms have the pull with politicians. As a result protection tends to enshrine the status quo. However, though politicians like to pretend "stability" is a desirable goal, that "protecting" jobs and "preserving business" are to be applauded, in reality, bankruptcies and closures are the sign of a vibrant, healthy economy. We need less stability and more growth, and to have growth, sometimes the old firms need to go away. But with protection that is not possible.

Yet, thoughts of such matters rarely arise when we discuss protectionist measures⁸. While free speech, affirmative action, and so on are always discussed in terms of all the many implications, when it comes to economics we tend to become myopic in our focus. And that is a shame, as a little more broad perspective would make clear just how much damage we do, even through "minor" and "common sense" measures. Once you look beyond the immediate firms and the single issue, you will se just how damaging even small interventions can be.

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1. As regular readers know, I am a partisan for decriminalization on both theoretical and practical grounds. My arguments can be read at "Drug Legalization" and the links contained in that post.

2. At least, at one time speech was so ardently protected. Back in the 1980's, it was the one liberal position I respected, their firm dedication to freedom of speech. But then came the liberal thought police in the form of "hate speech" legislation and campus speech codes, and then the McCain-Feingold incumbent protection act, and it seemed that those who had a commitment to individual liberties were left without a home. The Republicans have some members dedicated to free speech, but also an unfortunately vocal wing of authoritarian social conservatives, and so have to consistent platform in defense of individual freedoms See "The State and Morality" and "A Bit More Explanation".

3. I have often argued that quantitative analysis is a pipe dream, at least beyond very constrained models, such as analysis of individual firms. And even there it provides only an estimate. Yet many have come to believe, thanks to absurd Keynesian theories and the neo-technocrat econometricists, that they can somehow analyze the entire economy with something approaching precision. Nothing of the kind is possible. See  "The Limits of "Scientific" Management", "The Limits of Econometrics" and "The Limits of Technocracy".

4. My post, in case I never complete it, was a look at the total taxes on a gallon of gasoline. Not just the explicit tax, but, as I described it: 

You see, the star-spangled bandit is present at every step of the process. It isn't just the tax on the final sale. The cut that goes to the vendor is taxed as profits. The other part that goes to the oil company is also taxed as profits. And should they turn enough of a profit, the shares held by the public get capital gains taxes as well. But it doesn't even stop there. When the oil is imported, there is a tariff. Should the oil be sold from one company to another, that transaction is taxed, as are any profits. The tanker trucks that transport the oil are taxed, as it the gasoline that fuels them. The salary of the cashier that sells you the gas is taxed. The gas pump from which you get the gas undergoes a mandatory inspection for which a fee is assessed. There are additives and ethanol added to gasoline by law, which increase the cost. The vendor even needs to purchase a business license to just be allowed to sell you gasoline.

It was an ambitious plan, calculating exactly how much tax was involved in buying a gallon of gasoline, but, sadly, the research proved daunting, at least for an amateur writing during down times at work. Perhaps in the future I will find time to do it properly.

5. See  "Jobs, Jobs, Jobs, and More Jobs".

6. See "Inflation and Uncertainty".

7. See  "Exploiting Workers?", "Fairness and the Free Market", "Capital Investment", "Exploited Labor" and "Greed Versus Evil".

8. For an overview of my thoughts on protectionism in general see "Cash For Clunkers Revisited",  "War Stimulates the Economy? Let's Nuke San Francisco!", "Jobs, Jobs, Jobs, and More Jobs" and "Clarfiying My Argument".

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POSTSCRIPT

Oddly enough, I have a feeling some will wonder why I wrote this, as issues such as protectionism and tariffs aren't even on the political radar right now. And, I suppose there is good reason for that, as many more blatantly harmful measures are passing through congress. Still, I think it doesn't hurt to be reminded that many measures, considered relatively harmless are far from it, and that even if we manage to defeat the monstrosities such as health care nationalization and cap and trade, there still remain a host of small interventions which do real damage, yet tend to draw little attention.

POSTSCRIPT II

I had forgotten, as it was quite some time ago, but I made a similar point about interventionism leading to economic stagnation in "Now I Get It!" and "Environmentalism For The Economy?". as I argue there, it is bizarre that environmentalists, who think nature knows best, and believe nature crafts new forms through evolutionary pressures, would acts so strongly to keep evolution from taking place. Similarly, it is odd that liberals who think the status quo is unfair and favors the rich would enact laws that so strong favor preserving the status quo.

Sorry for being so quiet the past two days. Today it was not work, but rather a doctor's appointment and general laziness.

So, by way of an apology, allow me to offer something amusing, an old post that included the "Virtual Moonbat". If you want a real laugh, turn the options up to "stark raving" and "doctoral thesis", using the "options" button. I got the following on my first try:

WE'VE SEEN THIS BEFORE, IN 1985 IN JESUSLAND, WHEN 4,871 TRANSGRESSIVE RAINFORESTS WERE MOLESTED BY THE PETROLEUM INDUSTRY! I SUPPOSE, GEORGE W. BUSH LIED ABOUT THAT TOO!!!!!! (OR IS THAT SUPPOSED TO BE A SECRET!!!!!!!?) THOSE BASTARDS!! YOU UNDERSTAND, WHEN THE RIGHT-WINGERS SAY "SANCTITY OF LIFE," THEY REALLY MEAN "SUPERSTITION"!!!!!!! WHEN THEY SAY "FEDERAL MARRIAGE AMENDMENT," I IMAGINE IT IS JUST A CODE WORD FOR "GUNS"!!!! I REJECT MURDER AND INTOLERANCE!!!!!!!? THE TRUTH IS AT AFRICANAMERICANLATINOSFORDESALINIZATION.ORG!!!!!! IN MY OPINION, IT'S LIKE 1983 ALL OVER AGAIN!! IF YOU AREN'T UNKEMPT AND DISGUSTED ABOUT THE CORRUPTION AND KILLING OF THIS PRESIDENT, THEN LOGICALLY YOU ARE A REPUGNANTAN FUNDIE CHAMBERMAID OF JOHN ROBERTS AND THE INTERNATIONAL MONETARY FUND!!! WE DEMAND THE U.S. GET OUT OF FALLUJAH!!!!!!!! AS A CHICANO FEMINIST, METHINKS I AM MORIBUND!!!!!!! POWER TO THE KITTENS!!!!!!?

On lower settings, the rants are still hilarious, but a bit more coherent (and use some lower case). Either way, I find it terribly amusing.

But try it yourself. You can find it here: "For Your Amusement".

And, for those who want something a bit more substantive, let me say I am about half way through an actual new post, and hope to have something up tomorrow.

POSTSCRIPT

A second sample:

War!!!!!? DON't GET me started!!? BROWNSHIRTS!!! If YOU aren't ACHORDATE about the SUPERSTITION of THIS Liar-in-CHIEF,  YOU are a RECHIMPLICAN!! SAY NO TO EXPLOITATION and OCCUPATION!! THE Boy King's War AGAINST Truth must END now!!!!!

As you can see, there is some pattern to all the posts, or rather 3 or 4 templates it reuses, but then again there are 3 or 4 templates to most liberal debate, so that seems pretty accurate.

My wife and I were discussing the computer information system her hospital is implementing next month. It is interesting as, from talking to my wife and various doctors we know, the system does not really meet most of the needs of the hospital, fails to make it easy for nurses to extract the information they need, does not allow them to print out reports they need, and generally is worse than the patchwork of partial systems they had before. Yet they are still deploying it.

The reason, of course, is the government subsidy for computer information systems meeting certain requirements, as well as the government requirement that hospitals begin providing certain information to the government. It is all part of Obama's grand plan to establish some unified information system. However, it also serves as a perfect example of how government funding can as easily short circuit the free market as government edicts. (See "Public Funding is Government Control" for another discussion of this topic.)

You see, the problem here is akin to the ones discussed in "The Limits of "Scientific" Management" and  "The Inherent Disappointment of Authoritarianism ", there is no single "best" solution. Each hospital, and each department within a hospital, has individual needs. Even though hospitals all perform the same functions, they employ differing people, have differing customers, and have different institutional histories. In addition, they have developed different procedures over time, which require different ways of handling the same information. What may be perfect for one hospital, or one department within a hospital, may be a bad fit for another hospital, or even a different department within that hospital.

Under a free market, likely each hospital would evaluate a number of systems, picking the best fit for their needs. Hospitals with a more responsive management might even implement differing systems for different departments, cobbling together various parts into a hybrid system meeting various needs. Even if they did not do so explicitly, odds are very good that hospitals would eventually find the best fit as they purchased a system, found out it did not work well, and either paid to have it modified, or replaced part or all of it.

But now the government has short circuited that. By paying for a system, but only one of the few commercial systems which meet government reporting needs, the government has basically forced a "one size fits all" solution onto hospitals. Even were there not the threat that hospitals might be forced to adopt such a system for reporting, the hospitals would still likely adopt one of these commercial systems, just because the government subsidy makes it too costly not to. So, rather than adopting a solution which suits their needs, they will choose to buy a system which may be a much worse fit, but which suits the government needs.

Now, I know most people are asking "so what?" And in all honesty this is a small problem. It is a problem, as it will make hospitals and their workers somewhat less efficient, forcing them to use a system which suits them less well, but the impact will likely be small. But it helps to illustrate some bigger problems with government action in general.

You see, as I discussed in  "You Don't Drown in a Glass of Water - Vouchers Revisited", "Why Vouchers are not the Answer" and "Never Ascribe To Evil, A Discussion of Education", many people think that the problem with government programs is bureaucratic management. And it is a problem. (See "The Inevitability of Bureaucratic Management in Government Enterprises") But explicit government control is not the only way government can cause damage. As I discussed with vouchers, the government can interfere simply by funding actions. Because, when it offers funds, it also implicitly defines what is acceptable and unacceptable, and so, even though it is just "helping with cash", it is, in reality, very quietly imposing rules.

You see, when it offers to pay, the government simply cannot hand out a blank check. That only makes sense. But, as soon as it defines what is and is not an acceptable use of that money, the government limits the solutions available, and pushes recipients into a few preselected choices. Where the free market would have allowed a wider range of choices, the choices are now limited. And so, rather than trying all solutions and finding the optimal solution, people are now forced into the government's solutions.

"But" some will ask, "what's the harm? As long as it is the best solution, what's wrong with that?" But, as I discussed in "Reforming Education" and elsewhere, there is no "best" solution. There are as many economic preferences as there are souls, and since economic choices are all about valuations, there is really no "best" solution, nor even a set of "best" solutions. Each individual and each firm will need to find their own best fit. And the free market allows for that, in fact rewards those who work hardest to find the solution which best fits their circumstances. On the other hand, by implicitly assuming there is a "best" solution, the government normally forces many firms into solutions which they find less pleasing, thus reducing their efficiency or satisfaction.

And that is the final problem. Not only does the government solution end up leaving us less happy than the free market would, not only does it restrict choices, but it basically pays a lot of money to make us less efficient and less satisfied. In most cases, whatever the government subsidizes is an activity individuals would do on their own when they possessed adequate resources. By funding this choice, the government basically pays them to do what they would do anyway, but because it limits their choices, it pays them to do it in a way which leaves them, and the whole economy, less efficient and happy than it would have been. In other words, we are spending money to get a worse solution.

And that is something to remember when hearing about the death of the "public option". The government does not need to own an insurance company to meddle with health care. Nor does it need explicit nationalization. It doesn't even need to mandate coverage by statute or regulation. All the government needs to do to impose its will is to offer funding at the right point in the process. Through funding the government can exercise as much control as it can through legislation.

POSTSCRIPT

It does not relate to this directly, but it was interesting listening to my wife an my neurologist speak about how they spend more time writing reports than caring for patients. Some of this is the result of our insane tort system and defensive medicine, but a lot more is the result of medicare/medicaid, which spawned JCAHO, and in turn bred much more paperwork for private insurers as well. The liability lawyers really did have much less impact than government insurance and regulation did. And, with Obama's new push for "information" (think the lead-in to the original series "The Prisoner"), the amount of documentation and time spent on meaningless paperwork will definitely increase yet again.

Yet we are told again and again, this will not cause any decrease in the quality or availability of care, and will not discourage the best and brightest form practicing medicine. And I have a lovely bridge in New York I want to sell dirt cheap...

I know I write these announcements pretty regularly, and then never follow through on at least half of what I promise (see "Coming Soon"), but thsi time I intend to do everything I announce.

First, as Rich has been asking me a lot of banking questions, I think I will move my "Bad Economics" post on "what is inflation" to the next slot in the series, a sit gives me a chance to compare commodity and fiat currency, talk about monetizing debt, look at central banking theory, and all that other boring stuff I find so fascinating. It probably won't be quite as in depth as it sounds, but at least it will touch on all the basics, maybe setting up a few future "Bad Economics" installments, such as "is gold an anachronism?" or "do we need a central bank?" and "does government stimulus work?" But those will be in the future. All I am promising right now is "Bad Economics Part 7" covering the question "what is inflation?"

Second, a post I don't want to explain in great detail as I don't want to give away too much of the surprise. Let us say that it is a new look at the question of why gasoline is so expensive. It obviously is not going to be a "greedy corporate fat cat" type post, but it will cover new ground, things you have seen done in a very cursory way, but I hope to do something no one else has done, so check back for that.

Finally, as promised in "Upcoming Posts", I will look at the unappreciated role expectations play in the economic quagmire (see conservatives can use "quagmire" too!) surrounding Obama's economic measures. Mostly the way that his attempt to inflate out of a crisis are hampered by expectations that he will cause additional economic turmoil with his many reform plans.

Obviously I have other posts I plan to write, such as the remaining three planned "Bad Economics" posts, and a few that have been waiting for quite a while, but these three are the ones I hope to get done today or tomorrow at the latest. The first and second may be delayed a little longer than that, depending on how much detail I include, and how hard research proves for the second, but my hope is to get them finished in the next two days.

But we will see. My ambitions often exceed my abilities. (In the words of Top Gear, "Ambitious, but rubbish.")

I was reading through old posts when I came upon a rule I created in May 2008 and then forgot. Reading it again reminded me why I bother to dig through old posts, and not just the handful I seem to cite over and over again. A few times I had a really good idea that just somehow fell through the cracks. And in this case, I think I have found a perfect example (from "No Child Left Behind"):

As I said before, when both sides are right, but their solutions are mutually contradictory, that is an indication that we may be asking the wrong question.

I developed this rule to cover two situations. First, the debate about No Child Left Behind ("No Child Left Behind") and then a debate between Brent Bozell and the ALA over censorship, one in which, uncharacteristically, Bozell was the one accusing the opposite side of censoring content("My Answer to Bozell and the ALA"). I applied it, though informally, a few other times, such as when discussing the evolution-ID-creation debates in public schools ("Reforming Education"). But I then seem to have forgotten the rule, though I implicitly used it recently when discussing  the shortcomings of public education ("Never Ascribe To Evil, A Discussion of Education","Why Vouchers are not the Answer","You Don't Drown in a Glass of Water - Vouchers Revisited").

Having stumbled across it once more, I think it may be time to revive this concept, as it does seem to offer a pretty good rule of thumb. For example, in the case of national health care, the debate over abortion funding seems to offer a perfect example. One side is right in saying it is improper to fund abortions using the money of those who oppose it, while the other side is right in claiming it makes little sense to exclude a legitimate medical procedure while covering less essential elective operations. That indicates to me that we are involving government somewhere it should not be.

Likewise, it makes sense to say the government can cap CEO salaries and impose other restrictions when those firms are being subsidized by the government. On the other hand, the opposite side is right in saying those firms are still largely privately held and the shareholders have the right to set salaries as they see fit. In addition, capping salaries is likely to lead to poor performance and the inability to hire the top notch talent needed (see "A Really Foolish Idea", "Crippling Business", "AIG Nonsense" and "Living Large During the Good Times" for my arguments in this direction). As both sides make total sense, perhaps it is time for the government to get out of subsidizing businesses as well.

At first I was going to add a "this rule is not absolute" caveat, as I thought of an example with which I disagreed, but after some more thought, I realized that example was valid as well. The example was those who would argue legitimately that it is wrong to take their taxes and use them to invade Iraq when they did not agree with the war. At first that seemed to ruin my principle for me, as I see such activity as legitimate foreign policy.

But after a while, I realized the problem was, as the rule says, I was looking in the wrong place. The error is not in the military policy, but the tax policy. As I have argued for a long time, ideally we should eventually strive for a non-coercive, voluntary tax policy. Provided we pare down the federal government to reasonable size, her eis no problem with funding through state contributions and voluntary federal funding. (Details in the postscript). And, if the states themselves do not perform too many functions, they too could easily be funded through voluntary taxation schemes.

So, oddly enough, by thinking I found an exception, I was actually shown the validity of my concept, as it pointed out to me that I had been asking the wrong question as well.

POSTSCRIPT

I freely confess that I adopted some voluntary tax concepts from the writings of Rand and her successors. In this case,a s in several others, they have a point. Taxation, like all government, should be a voluntary action. Taking my theory of government seriously, there is simply no justification for coercive taxation. I also concede that it will be a long time before the political climate would accept voluntary taxes, or even before our spending is small enough to allow it, but it is an eventual goal. Until then I would be content to see taxation moved back to the states and localities, rather than the feds ("The Benefits of Federalism", "My Vision of Government", "My Vision of Government Part II"), and to see graduated income taxes replaced with flat taxes ("What we need", "Making Taxes Hurt", "An Interesting Analogy"), but my ideal is to eventually see taxation being entirely voluntary.

For now, I won't go into the details of voluntary taxation much, as it is not an important topic now, and is clearly controversial. Two proposals from Rand's writing stick out. First, a fee to file a contract, without which it would not be enforceable in court. If we charged say 0.1% of the maximum remedy (or estimated value for specific performance contracts), it would raise a fortune for both state and federal governments. And voluntary, as you would be free to draw up contracts without the fee, they simply would not be enforceable in court. Second, a federal lottery. If each state can offer $1 million per week, the feds could easily offer $100 million per week. And if you have seen the lines when a state jackpot goes above $100 million, you will realize how much this could net the feds. And if the jackpot grows when no one wins in a week, this massive payout could bring in even more money. And, of coruse, thsoe ar ejust two proposals. Once the principle is established, I am sure others will come up with any number of imaginative, but voluntary, ways to get revenue for the state.

But, as I said, voluntary taxes are far, far in the future. For now I am content trying to move taxes to the states and out of the hands of the federal government. Fighting for voluntary taxation is as bad a strategy as the traditional libertarian misstep of leading with drug decriminalization. There are much more important struggles at present. And, were we to never completley eliminate involuntary taxation, but it were moved to a flat tax administered on the state level, I would not be disappointed. There are other issues much more essential to preserving liberty.

My wife and I were talking about how much pointless, wasteful research takes place today. She was a psych major at one time (actually got a BA in psych and social work, long before getting her RN), and during her time studying she was an assistant to a professor who was conducting an experiment in (I am not making this up) the "walking behavior of snakes"¹. As we talked, it struck me that a lot of what is wrong in academia can, not surprisingly, be laid at the doorstep of the government.

Now, I will grant that to some degree "publish or perish" is an inevitable outcome of the way we conceive education. Because we have made publication the gateway to a doctorate, we have made it over-emphasized. As a result we have universities where publication is more important than teaching, with the result that professors, who are nominally teachers, are selected based on their ability to publish, with the result that real and nominal job requirements are inconsistent² Ask any university student, they can tell you how many professors are "academic superstars" yet cannot teach at all. Their stardom comes not from the ability to impart knowledge or train the next generation, but to conduct research and publish articles.

However, the fact is, the emphasis might have eventually led to our current aberrant situation on its own, but it moved there a lot faster thanks to government intervention. You see, the government funds research, a lot of research, and research grants help fund universities. So, universities have an interest in bringing in those professors who get grants.

Admittedly, grant magnets also give universities prestige, but that would be much less important were there not huge sums of government money attached. It is the huge amount of grants that makes universities so fascinated with researchers, and helps them emphasize research over teaching. And as a result, we end up with universities that are inferior to community colleges³ when it comes to actually imparting basic knowledge to students. Yes, a handful of grad students get to participate in these studies as assistants, and may get benefit, but beyond them the grant recipients often do a very poor job at providing education. There are clearly exceptions, those who bring in grants and take teaching seriously. But, by and large, our emphasis on research has harmed the university goal of imparting knowledge, and, for the most part, government grants are to blame for that emphasis.

I know some may disagree, and will think it natural that universities would want the top researchers on their staff, but if you think about ti for a moment, you will see how counter-productive the current system is. Universities, despite their emphasis on research, still exist primarily to impart knowledge to others⁴. Even research is supposedly conducted to pass on knowledge to others concerning how research is conducted. However, despite the fact that they exist to pass along information, employees are not evaluated based upon their ability to impart knowledge, but rather on the ability to be published or get grants. And so, employees are hired, retained, promoted and fired based upon criteria having nothing to do with their ability to perform the central task.

Let me make an analogy. Imagine if the army hired and promoted based upon your ability to perform comic opera. What impact would that have upon our military readiness? Well, what impact does the focus on publication and research have on the ability of universities to teach?

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1. My wife, sharing my fondness of snakes, was disturbed that the researcher, a pompous, arrogant fellow at the best of times, simply killed off his research subjects after studying their, um, walking...  That was actually the beginning of our chat, as she was upset at the amount of cruelty involved in many pointless animal studies, and I have to agree that it seems rather heartless to torment animals for little or no reason, especially when the benefit of such research is rather dubious at best. One hardly has to be a PETA booster to think a number of these insane experiments inflict a lot of suffering for little or no reason. We are not talking life saving medical research here, we are talking about, well, the walking behavior of snakes.

2. For example, my faculty advisor when I was a chemistry major taught exactly two hours a week, spending the rest of his time on campus locked in his lab. I could not even get hold of him to sign off on my registration forms. He had "office hours", but was neevr in hios office during those times. But, as he was a well know expert on gas chromatography, he brought in a lot of grants and so was allowed to be a thoroughly incompetent teacher and advisor.

3. This is not meant to insult community colleges. In fact, quite the opposite. My thought is that, because they do not focus on research and publication, community colleges, and the handful of 2 year upper colleges (eg. the University of Baltimore which I attended), do a better job at teaching, because they hire based on the ability to teach and love of teaching, rather than the ability to attract money or get published. In my mind, that is what universities should be like, at least at the undergraduate level. Yes, higher level education does require the opportunity to participate in research, and that is also helpful for a part of undergraduate life, but most of undergraduate education has little to do with research, and, even if it did, how many students benefit from the studies of your average superstar grant magnet? maybe five doctoral candidates? If that many. Filling a seat with a grant magnet simply ill-serves the bulk of your students.

4. If universities do not exist primarily to teach, but to research, and teaching is just a sideline, then they should tell that to prospective students, rather than claiming to focus on teaching. It seems universities want to have it both ways. To extract money from students and donors, they claim teaching is their sole focus, but when someone criticizes their teaching, they claim they exist to research, not teach. They cannot have it both ways. They need to decide on one or the other and admit that is their goal. The current practice seems markedly dishonest.

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POSTSCRIPT

This is hardly the first time I have written about the government damaging education. On lower levels, read "You Don't Drown in a Glass of Water - Vouchers Revisited", "Why Vouchers are not the Answer", "Never Ascribe To Evil, A Discussion of Education", "Reforming Education", "Why Private Schools Win", "A Contradiction" and "Skeptics? Really? I Beg to Differ". And for other harm done at the university level, take a look at "The State Versus Universities", "When Help Hurts", "Professional Education" and "The Failure of Peer Review".

POSTSCRIPT II

By the way, I do realize that evolutionary biology suggests snakes would have an atavistic walking behavior. However, is that the proper area of research for a professor in human psychology? What would be the possible benefit of this study to human behavior? To understand how we were influenced by atavistic memories of our atrophied appendix? To understand how our psyches were changed by memories of once having had a tail? It seems a stretch to apply such research to psychology, unless one is a herpeto-psychologist.

DISCLOSURE

In the interest of full disclosure, I must say I am employed by a large university. However, as I am quite critical of universities in this post, it should be clear my job has had no influence upon my thinking on this matter.

Warning: Off color acronym included. So please don't read the first letters of the quoted section if you are overly sensitive.

A note for foreign terrorists. Please, when picking your organization's name, translate it into English first and check out the acronym. I was reading an article about a recent hostage release when I was reminded of an episode fo Red Dwarf where Rimmer suggests forming an organization opposed to shape shifting aliens named "The Committee for the Liberation and Integration of Terrifying Organisms and their Rehabilitation Into Society". The group I saw was not quite that bad, but in the internet age the Moro Islamic Liberation Front still elicits a snicker whenever its acronym pops up.

Please, militants, in the future, think about what silly acronyms you might create. No "Arab Moslem Front". No "Socialist Organization of Brunei". No "Saint Thomas Freedom Union." Just take a moment, think about the acronym, and follow the example of the Farabundo Marti Liberacion Nacional. At least FMLN doesn't mean anything.

Unlike my earlier installments in the "Bad Economics" series, I am not going to begin by describing my topic. I will instead start with a little story, and then a question, and it is best if you know as little as possible when you hear that question. So, bear with me, we will get to all the details soon enough.

Let us suppose an industry were to go to congress and ask for legislative relief. Let us say it is the major movie studios. They explain that their industry is unique. They have  along production cycle, they need to take out massive loans at the start, and only see profits after a very long period. And if they have a bad year, then they may not make enough to cover the loans, and will be forced into bankruptcy. They also argue that, because of their unique industry, there are limited number of firms, and should they being to fail, we may be left with no film companies at all.

To remedy this, they ask congress to subsidize their industry, to provide funds to make sure they are profitable, or maybe just to bail them out when they suffer a loss. As an alternative, they propose congress pass laws establishing minimum ticket prices, so that they will be guaranteed a profit, but theater goers will not blame them for high prices. All of which they describe as a regrettable necessity due to the unique nature of their industry.

Would anyone think this anything other than a self-serving attempt to drain money from the tax payers? Would anyone take this argument seriously? What if it weren't the film makers, but maybe the auto makers? Or the computer hardware manufacturers? Or those running vacation resorts? Or ski lodges? Novelists? Sculptors? Any or all of those could make effectively the same arguments. Almost all firms rely on money borrowed before the production cycle begins, and at some stage almost all firms are but one failure away from bankruptcy. Nor are there many firms that do not have some lag between beginning and ending the production cycle. Maybe not every aspect, but almost every aspect can be applied to firms in any branch of industry.

So, would we accept this argument form any business? Is there some industry out there which should be protected from competition because of the reliance on credit, the long productive cycle, are very sensitive to down years or misfortune, or a variety of other reasons? Is it not the conservative position that the free market produces better results than intervention over the long term? ( "Fairness and the Free Market", "Planning For Imperfection", "Greed Versus Evil ") Is it not our belief that intervention produced worse results, regardless of circumstances? ("The Inherent Disappointment of Authoritarianism ") That the management imposed to meet government obligations is inherently inefficient?("The Inevitability of Bureaucratic Management in Government Enterprises") And that no matter how much it may seem to help, subsidizing failing firms does nothing but harm? ("Subsidizing Irresponsibility and Poor Planning ", "Welfare for Malibu Residents", "When Help Hurts", "Anti-Business Businesses ") Is there any way a conservative could ever argue for bailing out firms which are simply suffering the failures inherent in a competitive market?

Then why do so many nominal conservatives join with the centrists and liberals in supporting various types of farm subsidies?

This is an issue like public education, central banking, medical regulations and drug criminalization¹, one which is not easily defined in terms of the political spectrum². Politicians from all over the political spectrum offer up justifications for these subsidies. And, obviously, there are the less than savory justifications. There is need for anyone with presidential ambitions to support farm subsidies, as Iowa plays a crucial role in the primaries and is unlikely to forgive any opposition to farm bills. There is also the demand from one's home district to bring home pork, whether a district is nominally conservative or liberal³.  And finally there is the ability to use such bills to pay off favored agri-business firms and political allies masquerading as "small farmers".

But what is more interesting is how much support for the policies, be they subsidized loans, buy back programs, price supports,  soil conservation programs, protective tariffs or others, is true, heartfelt support. Perhaps not among the politicians, most probably have at least some additional motives in minds, but among the public at large, they sincerely believe the justifications offered. In this case there is little distrust of politicians. The public really seems to believe there is a need for farm assistance, and, whatever problems there are, is the outcome of corruption, political games or badly formed laws, and, were farm bills written and administered properly, they would be beneficial.

It is my intent to show that, even were they run perfectly, by total saints, and were the parties all gifted with perfect knowledge to match their perfect morals, even were all corruption and abuse to simply vanish, the laws would still do more harm than good. Even under absolutely, impossibly ideal circumstances, there is no justification for such laws. The benefit they confer on some individuals tend to come at a cost much higher than simply paying off farmers an equal amount in cash, and, even for those who appear to benefit, in most cases they end up suffering long term harm greater than any benefit they enjoy.

But that will come later. For now, let us take a look at the many arguments offered in support of these arguments:

1. Virtue - The first argument is a rather nebulous one, an argument more "idealist" than "practical". That is the argument that farmers are "the backbone of the nation". Various individuals define this differently, but the basic premise is that farmers have some innate virtue that demands we protect their interests. I touched on this in "The World's Oldest Myth", but will detail it more below.
2. Essential - This argument is based upon the premise that "food is essential to life", and so needs to be specially protected. This is specially amusing coming from conservatives, as they are currently fighting a variation of the same argument being used to justify health care reform. The argument has one serious flaw, it assumes, but does not prove, that a regulated market provides goods better than the free market. If that is not true, then this is an argument for ending regulation, not adding to it.
3. National Interest - This is a variation on the previous argument advanced by protectionists. It is essentially the same as all their arguments for economic autonomy. Food is essential and if we have a free market, foreign nations could subsidize their exports, causing us to rely on them exclusively, or at least to a dangerous degree, for our food supply. They could then either cut off supplies during war time, or else simply use the threat of embargo to extort money or concessions. So we need to protect our domestic food producers. It is less foolish than some arguments, but still fairly absurd. Especially given the fact that most farm subsidies RAISE domestic prices (which would favor cheaper imports), and that a mostly free market has not resulted in this foreign capture of food commerce.
4. Dangerous Competition - This is the theory I discussed in "Bad Economics Part 2". As was theorized for banks, some argue that a free market in food would drive marginal producers out of business, reducing food supplies below the required level, and leading to some degree of famine. It is economically implausible, but we will discuss that later. For now let me say it makes no more sense for farms than for any other industry. Supply and demand is still the same for foodstuffs as for any other product, no matter how much others assert it is not.
5. Small Farms - A lot of ink is spent arguing about "family farms" being "swallowed up" by "Big Agri-Business". Yet very little ink is expended telling us why family farms should get preferential treatment. Yes, the name is full of loaded emotional content, but outside of special pleading and pulling on the heart strings, there is no explanation why economies of scale don't work for farms, or why farm families should be preferred to families who buy food, so that high food prices are better than low. This is, in many ways, the farm version of the "Small Business Fetish" I described in the essay of the same name, though without even the "job creation" fig leaf the other argument has.
6. Disaster Sensitivity - This argument is based on the idea that farming is somehow especially sensitive to disasters or the randomness of weather. That would surprise those who own ski resorts, beach front businesses, charter boats and a lot more firms. But even ignoring the dubious validity of that argument, the thesis I put forth in "Subsidizing Irresponsibility and Poor Planning " and elsewhere would argue that by indemnifying them against misfortune we encourage them to exercise less prudence, take fewer precautions of their own, and generally to assume more risk as the cost in paid by someone else.
7. General Humanitarianism - This is the catch all I added to include all those nebulous arguments that start "but we just should..." The previous actually may fall in this category, for example. This is hardly unique to farm subsidies, but as it is often part of the argument, I figured I should include it. Whenever discussion of a specific extant aid program arises, someone will mention the hardships that will come from terminating it, and others will point out the good it has done. As these arguments never consider the cost, or the consequences, I figure I will use this section to do just that, so that next time someone says we should help out farmers in a drought because it is "just right", you can offer up a response.

Not that a single individual would offer up all of these arguments. instead, most would offer up a list of three or four of these points, usually a mix of "pragmatic" and "idealist" arguments, many times including several somewhat contradictory ideas. However, as the lists sued normally lack any sort of unifying logic, having no underlying theory to justify them or tie them together, I will not bother refuting any specific set of arguments, but will instead simply rebut each point individually, as it appears in the list above.

Before we start, let us point out something obvious. Whether farmers are essential to the economy or not, whether farmers have a special virtue or not, and whether or not many of these claims are true, there is no point in providing interventionist protections for farming unless we can prove that intervention produces better results than the free market. If the free market provides more and better goods, then, regardless of rationale, it makes little sense to engage in intervention which will only make things worse, while costing us money and reducing our freedoms.

And that is precisely what we have shown over and over, in  "Planning For Imperfection", "The Importance of Error",  "Fairness and the Free Market",  "The Limits of "Scientific" Management", "The Inevitability of Bureaucratic Management in Government Enterprises", "The Inherent Disappointment of Authoritarianism " and "Greed Versus Evil" , as well as many other essays. Which means that, in many of the cases above, the rationale itself falls down simply because the free market performs better than any interventionist or protectionist system.

However, many will simply not accept that basic truth. And even if they did, they would find some reason to ignore that truth and continue to cling to farm price supports and other subsidies. As I have discovered in arguing against public schools, central banks, fiat currency, drug criminalization and a host of other programs often supported by conservatives, despite the inconsistency, people have a way of ignoring the fact that their favorite projects don't work. Once they have invested an existing program with some personal meaning it takes very little effort to convince them to find a justification, regardless of the evidence.

So, let us go back and look at each argument, ignoring the fact that the free market is superior in every way to interventionism. For the moment, let us take each argument at face value and ask whether it makes sense.

1. Virtue - This argument is probably the weakest of the lot. First, regardless of the virtue of those practicing a trade, the purpose of that trade is to produce goods at the lowest relative cost. Whether or not farmers are the most virtuous beings on earth, if they cannot produce food cheaper than we can get it elsewhere, it makes no sense to support them.

But this argument is even more nonsensical than it first seems. You see, we are not even talking here of doing away with all farms, only allowing for the free market to work, allowing some farmers to go bankrupt and others to thrive. So we are not eliminating all farmers, only the least profitable. That may result in a smaller pool of virtuous farmers, but it would not eliminate this supposed font of virtue.

So, even taken on its own terms, this argument is flawed. No one wants to eliminate farmers, simply allow competition to work, which would leave a group of virtuous farmers in place, just different ones than would exist with price controls and subsidies.

2. Essential - This argument is also a weak one, for reasons which should be obvious. First, as mentioned above, it makes the implicit assumption that the free market cannot adequately ensure the supply of an essential good, and evidence from the rest of life seems to indicate that is not correct. We are more than adequately supplied with every form of luxury and recreation, all through the free market. So, why would the mechanism which can provide us with computers, cars, DVDs, movies, shirts, pants, and the rest fail to provide food? It can provide technological marvels, but fail to raise a carrot or ear of corn? That makes no sense.

But ignoring that argument, there are other problems.If the free market is incapable of supplying essential goods, then why retain it at all? Why rely on a defective free market patched with makeshift price supports? If the free market cannot supply essential needs, should we not nationalize food production? What sense is there in relying on the inadequate free market in part if we can't trust it in whole?

Likewise, if the free market fails at supplying essential goods, then why limits supports to food? Water, clothing, and shelter are all essential to life. So is medicine. Why not implement similar price supports and subsidies in those areas? Is it because textile makers lack the political pull of farmers? Or that were shelter and clothing prices to be increased to the degree these programs increase the cost of food, consumers would revolt? That food prices are a small enough percentage of most consumers' income that price supports pass unnoticed, but if applied to shelter, cars or even clothing they would be too obvious? Whatever the reason, it seems illogical to support only one "essential" good and not the rest.

3. National Interest - This argument fails on the point I mentioned in the summary. Were we interested in reducing imports, then we would want to favor consumption of domestic foodstuffs. But by enacting price supports, we make domestic food more expensive and thus favor imports. Similarly, paying farmers not to produce or buying domestic food and holding it off market does nothing to curb the consumption of imports, and instead favors them.

The only programs which encourage domestic consumption are import quotas and tariffs, and those apply to only select sectors of the food market (eg. sugar). For the most part, these laws either create domestic industries where previously there were only foreign sources (eg. sugar, again), or protect inefficient domestic producers against much cheaper foreign sources. Now this does mean we now have a domestic source, so that part of the protectionist worry is resolved, but it also means we have spent more on those goods than we need to, so we have less to spend on other goods. In short, we are now poorer, placing us at a disadvantage relative to other nations.

I won't go into great detail, as I did so many times before ( "Cash For Clunkers Revisited",  "War Stimulates the Economy? Let's Nuke San Francisco!", "Jobs, Jobs, Jobs, and More Jobs" and "Clarfiying My Argument"), but history shows that victors in wars were traditionally not those that encouraged autonomy, but those that were the most wealthy. Germany in World War II lacked many resources, yet faced down most of the world for six years. Venice, at its height, defied essentially every Catholic nation, yet had almost no domestic production. And England, despite a massive colonial empire, lacked many basic resources during both world wars, yet managed to both defend itself and play a major offensive role, fighting nations much better supplied by nature. Finally, the USSR had much better natural resources than the US, or, at least, was our equal, but that did not keep them from losing the cold war and collapsing.

History simply does not support protectionist claims that autarchy⁴ is necessary for self-preservation.

4. Dangerous Competition - This argument is probably the quickest to answer. Many times the idea has been put forth that somehow competition will lead to all firms vanishing in a given sector. Yes time and again reality has shown this simply does not happen. Competition does drive out inefficient firms, but that's it. The remaining firms survive and grow, or are driven out themselves by new competitors. So long as there are no artificial barriers to entry and firms are not artificially propped up and not allowed to fail, competition will never cause all firms to vanish, or even leave us with an inadequate supply.

The final is simply common sense. If, somehow, competition left us with too little food, prices would rise, causing imports to be more attractive and capital to flow into new farms. The imports would keep us going until new farms were available, and then the new farms, created due to high profits, would supply us with enough food once more. The market makes such worries unrealistic.

Then again, I could have just said "Read 'Bad Economics Part 2'."

5. Small Farms - This argument is sometimes tied with the first, suggesting that only small farms produce virtuous farmers, and as small farms are swallowed up by big, we lose that virtue. It is at least a consistent argument, better than the first, but again, in terms of economics this supposed virtue is irrelevant.

Then again, most often this argument is offered without even that thin fig leaf of justification. We are told that without price supports we would "lose family farms", with it being implied family farms are somehow important, though why is never stated. And again, there is imply no economic reason to be concerned with "family farms", or for "big farms" for that matter. Economically, we want whichever size firm produces the best results, whether big or small. Size is not irrelevant, but it is not a constant good or bad thing in every circumstance. And there is nothing inherently good about small farms or bad about big ones.

Even more interesting is the fact that this argument has been shown in the past to be simply false. I don't have citations, but I recall many studies in the 1980's and 1990's that showed this was nonsense. That big farms failed at a rate higher than medium farms in many industries. I recall specifically one study of dairy farms showed free competition ended up favoring mid-sized and slightly smaller farms over both small and large farms. So the worry that small farms and "family farms" would die out seem unsupported by facts. But even were it true, it is economically irrelevant.

6. Disaster Sensitivity - There is no evidence farming is any more sensitive to disasters, to weather, and to other uncontrollable factors than many other industries, such as tourism. But even assuming it were, does it make sense to indemnify them? As I wrote in "Subsidizing Irresponsibility and Poor Planning ", we get more of whatever we pay for. If we encourage people to take no precautions, to accept risks and then expect government aid, we will have people taking more risks and providing for themselves less. By removing all risk, we also do nothing to encourage prudent preparations.

I know many will argue farmers are in no position to take such precautions, but that is not true. We simply have created a situation where they have no incentive to do so. For instance, rather than planting all one crop to maximize profits, but risking all in the event of bad weather, perhaps farmers would plant some acres with drought resistant crops, adequate to pay off loans, but not turn a high profit, allowing them to effectively "hedge" against drought. Or maybe they would not sink every dime in a given year, planting every acre, but instead keep a reserve against disaster, allowing them to come back next year if there is a disaster.

Granted, not every farmer could do so, and not every situation allows for such precautions, but we also discourage them by providing disaster relief. We will never know what clever solutions there are to protect farms against unforeseen disasters, as we remove all cost for imprudent actions, and bail out farms when disaster strikes. And in so doing, we encourage farmers to put no thought into prevention, precautions, insurance and hedges against failure. That is the price of indemnifying against disaster.

7. General Humanitarianism -  And that last section is but a specific application of the general principle here. We often provide aid thinking it will help, but, as my article "When Help Hurts", and others, shows, almost always, our good intentions end up providing short term relief at the expense of long term harm. For example, in another area, welfare may provide for a leg up when one is broke, but because the rules encourage one to adopt practices that work against self-sufficiency, it often make sit harder to get back to work. And, because welfare is assigned by a mechanistic set of rules, it also allows one to remain on welfare for life, providing you can play the game, so our aid ends up not helping out those in need, but creates a permanent dependent class. Similarly, by providing loans to businesses which are likely to fail, and thus could not get private loans, the Small Business Administration, seems to help people by letting them start a business they otherwise could not, but, because such businesses are likely to fail, ends up harming them by putting them deep in debt in order to launch an untenable enterprise.

And that second case is pretty close to some of my objections to farm aid. Aid ends up keeping farms in business which should be allowed to fail, keeping farmers working who should be encouraged to find work in another field, keeping them running up debts and earning too little to truly make a profit.

And, from the perspective of society at large, it is even worse. For one thing, as in industry, it keeps newcomers out of the industry. Farm aid is a complicated process, but tends to favor existing farmers. And so, as I described in "Anti-Business Businesses ", newcomers are partly shut out, or at least face bugger hurdles, entrenching existing farms, despite their inefficiency. This raises prices and lowers output, driving up prices for everyone, even beyond the explicit price increases of price supports.

In addition, by keeping farms running that should not, paying tax money to buy farm products, pay for disaster relief, keep land out of production, and so on, resources are allocated to farming that could be more profitably sued elsewhere, making us all poorer. Without price supports and the lot, we could produce the same amount of food on fewer acres, with less cost, and using fewer people⁵. All these additional expenditures, and extra labor, represents a net impoverishment of the individuals involved, the nation and the world. Considering that people still worry about famine, it seems unconscionable to spend money to ensure that more land is used to produce less food.

Nor is that all. There are environmental costs, and, in this case, very real ones. As some farm subsidies are buy backs, requiring farmers to grow produce the government buys, there is an incentive to over-farm marginal land. As the produce will be bought regardless of demand, and as the price is usually high enough to make it profitable to farm marginal land, farmers in such programs will farm every allowable acre, regardless of impact. And so we end up with soil erosion issues, as farmers exploit the buy back programs when they are excessively generous. Ironically, soil erosion then leads to new programs which pay the same farmers not to farm their land. Of course, while some land is being kept off the market, other farmers are being paid through buyback programs, so while solving soil erosion on one farm, the government encourages it on another, creating an endless cycle of self-created problems and solutions, all costing ever more money.

Finally, by making farming profitable despite market conditions, and thanks to buy backs placing arbitrary floors and ceilings on production for many regions, these programs end up discouraging innovation in farming. Yes, there is agribusiness and genetic modification, but do not be deceived. Whatever innovation we have is just the residual technological improvement. Were farms forced to compete on the open market, fully fighting for every dime, without protections, price supports, tariffs and so on, innovation would be  a much greater factor in farming. Instead, by making farming in part a government make work scheme, we have dulled innovation. As I argued for medicine in "Medical Regulations", government "help" can often lead to the stifling of innovation and the stagnation of an industry, even for industries which are far from nationalized.

And that concludes my arguments against each of the seven rationales. I know I did not go into as much detail for some as others, but some were simply weaker arguments. And a few had been addressed earlier in other posts. Not to mention that many simply disappear once you accept that the free market is superior to intervention in terms of reliability and total production.  And we did not even begin to discuss how much aid goes to agribusiness or pseudo-farmers who earn only $1000 a year⁶, just enough to qualify for aid money.

But we can leave all that aside. The best argument against farm subsidies is simply to describe what they do. "Farm aid takes your money to stifle innovation, keep out newcomers, favor existing firms, reduce the amount of food in the world, ruin topsoil and make food more expensive, all while using more land and labor to produce less, preventing us from using those resources to increase our wealth." Once it is described in those terms, it doesn't really seem so sensible, does it?

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1. I have argued with both liberals and conservative son these issues. For education see "You Don't Drown in a Glass of Water - Vouchers Revisited", "Why Vouchers are not the Answer", "Never Ascribe To Evil, A Discussion of Education". For drug criminalization, "Drug Legalization". For medial regulation "Medical Regulations", "Medical Regulation II", "Medical Reform, An Overview", "Bad Economics Part 5". And for banking, among the countless articles I have written on the subject, the best are probably "Bad Economics Part 3" and "Bad Economics Part 5".

2. Then again, the political spectrum itself is less than ideal. See "The Political Spectrum "

3. See  "What We Deserve", "Don't Blame the Politicians ", ""Doing Something" Revisited" and "The Difficulty of Principle".

4. I do not know when the German/neo-Greek-transliteration spelling "autarky" came into vogue. As English almost always uses "-archy" in this context, I simply cannot write it that way, and find myself always using the older spelling. I don't know if the popular spelling came from objectivists/Austrian school fanciers, who like the Germanic spelling, or from the late-80's shift in the trends in Greek-English transliteration, when "Hector" became "Hektor", "Heracles" (or even "Hercules", if you prefer the familiar Latin version) became "Herakles" and "Achilles" became "Akhileus". Whatever the source, the spelling will always look funny to me. Until we start writing "monarky" and "tetrarky" I refuse to write "autarky". There is no reason to think "K" is "more like a kappa" than "ch" is. Both are symbols representing a hard "K" sound, so why not simply retain the older, more familiar spelling? But I have complained about this many times before, so I will say no more.

5. Some may see this as an argument against the free market. As I described in "Jobs, Jobs, Jobs, and More Jobs" there are those protectionists who think we spend to justify working, rather than working to pay for our spending. With their inverted view, they tend to value "labor" above consumption, and look at wealth in terms of how much work it took rather than what satisfaction it gives to those consuming it. So they would probably argue tht reducing the labor required to produce a given amount of food is a bad thing. For a counter argument, see my satire  "I Have Seen The Light".

6. I may be wrong about this cutoff. My last figure came from the 1980's, so they may have redefined what makes one a "farmer". Still, there are those out there who keep a few sheep, or plant a quarter acre, to just meet the cutoff and cash in on government programs that pay to keep land fallow, or else provide cheap loans or disaster aid.

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POSTSCRIPT

The earlier Bad Economics posts were:

Bad Economics Part 1 - A discussion of how prices disprove theories of resource depletion
Bad Economics Part 2 - A debunking of the many theories based on "defective" or "damaging" competition
Bad Economics Part 3 - An examination of the many absurd claims about deregulation
Bad Economics Part 4 - An examination of problems with economic studies and empirical evidence
Bad Economics Part 5 - An examination of consumer protection and the harm it does to consumers and others

You can also read them in reverse order, starting with part 5, as each post contains links to the previous chapters.

POSTSCRIPT II

My previous writing on protectionism can be found in the following articles:

Exploiting Workers?
The Shortcomings of Pragmatism
Protectionism
War Stimulates the Economy? Let's Nuke San Francisco!
The Theory That Wouldn't Die
Beware Populist Deception
Fear of Trade
The Limits of Econometrics
The World's Oldest Myth
Authoritarian Oil Talk
STOP BIG PORCELAIN NOW!
I Have Seen The Light
Free Trade, Employment, Outsourcing, and Protectionism
When Help Hurts
Pragmatism Revisited
Misplaced Blame and A Power Play
Remember I Predicted It
Inescapable Logic
Smaller Government , Fair Weather Friends and Special Cases
Cheap Lighters, Overseas Dumping and Monopolies
Jobs, Jobs, Jobs, and More Jobs
Capital Investment
Fairness and the Free Market
More Proponents of Protectionism
John Stossel Imitates Me Again
Has No One Heard Of Lord Say?
Retaliatory Tariffs
Clarfiying My Argument
The Limits of "Scientific" Management
The Endless Cycle of Intervention
Exploited Labor
Planning For Imperfection
Protectionism Right and Left
Unfair Advantage and Foreign Trade
"Fair Trade"
More Timely Than I Realize
The Rubber Yardstick
The Political Spectrum
Greed Versus Evil
Inconsistencies in Historical Perspectives
Cash For Clunkers Revisited
The Inherent Disappointment of Authoritarianism
Keyhole Thinking
An Example of Inertia

Please note that some of the above deal with more than one subject. As Keynes is the major modern proponent of trade restrictions, and of monetary inflation, and as he bases both theories on the same bad model, I often had to address both. So if some of the posts above seem more relevant to inflation than protectionism or neo-mercantilism, that is likely the reason.