Nobody Knows How to Make a Pencil or Why Government Locks In Failure

Kevin Williamson has a great article over at National Review Online talking about how in the private sector everything gets better and cheaper all the time, e.g. mobile phones, and how

“We treat technological progress as though it were a natural process, and we speak of Moore’s law — computers’ processing power doubles every two years — as though it were one of the laws of thermodynamics. But it is not an inevitable, natural process. It is the outcome of a particular social order.”

He goes on to show how competitive markets allow for competitors to come and go, rise and fall, and how important it is for failure to be possible as contrasted with institutionalized failure when politics takes over and government tries to pick winners and losers:

“Politics creates the immortal corporation. Amtrak and the U.S. Postal Service are two institutions that would have failed long ago if not for government support — subsidies for Amtrak, the government-chartered monopoly on letter delivery for the postal service. The cost of their corporate immortality is not only the waste associated with maintaining them, but also the fact that their existence prevents the emergence of superior alternatives.”

It comes back to “the knowledge problem” or as Hayek put it, the fatal conceit that a small group of people or an individual can have all the knowledge necessary to direct an entire industry (think healthcare, e.g.) or an economy. This article is one of the best discussions of this I have seen.

Read the whole thing.

How Debt Ruins Systems–Nick Gillespie Interviews Nassim Taleb Over at Reason

Over at Reason Nick Gillespie interviews (video and transcript) best-selling author Nassim Nicholas Taleb, a  former trader and hedge fund manager, and a groundbreaking theorist on risk and resilience. He is also a finance professor at New York University and a research scholar at Oxford. He has some great insights about why systems fail and why decentralized systems are more resilient than centralized systems. An excerpt from the transcript:

Taleb: To cite the great Yogi Berra, a good antifragile system is a system in which all mistakes are good mistakes. And the bad system is one, again to paraphrase Yogi Berra, where you tend to make the wrong mistakes. Let’s compare the banking system to, say, transportation. Every plane crash makes the next plane crash less likely and our transportation safer. Now, with the banking system, [a failure] leads to increased probability of failure of an entire system. That’s a bad system.

reason: What’s the best way to stop that so you’re not allowing the problem to replicate throughout the system?

Taleb: What fragilizes an overall system? Three things: One, centralization. Decentralization spreads mistakes, makes smaller mistakes. Decentralization is where we converge with libertarians. A second one is low debt. The third is skin in the game.

I’ve just acquired The Black Swan and will most likely buy Antifragile when I finish with that. Links to the books below.  I highly recommend reading the interview transcript (or watch the video, 56 minutes. Your choice but I can read faster). Links to the books below.

 

             

Whole Foods CEO John Mackey on the Moral Case for Capitalism

In this Reason TV video Whole Foods CEO John Mackey says we need to change the narrative on capitalism and make the moral case for why it is the best system for bettering humanity. He says the narrative has been hijacked by intellectuals who depict capitalism as being solely focused on profits and self-interest while ignoring the value it creates for not only businesses but everyone that touches that business from suppliers to employees to customers.

Let’s not forget Milton Friedman as well.

Expiring Tax Provisions 2009-2020 - Prepare to Pay

The Congressional Joint Committee on Taxation has a list of expiring tax provisions from 2009 through 2020 available for download in PDF format here. A lot of the expiring provisions are tax credits, e.g., the credit for purchasing an qualified alternative fuel vehicle. I actually think that's a good thing because offering credits for buying something that someone might not choose to buy absent the credit, or might have bought anyway without it but just changed the timng of the purchase to take advatage of it. This just introduces distortions into the market in the name of producing some social outcome of dubious benefit.

A prime example was last year's Cash for Clunkers program which did nothing more than pull forward the purchases of cars that were going to be purchased anyway at a cost of billions of taxpayer dollars and had the perverse side-effect of taking a portion of the  supply of affordable used cars out of the market, making what was left more expensive. And what market demographic buys used cars? Yup, lower income people. Cash for Clunkers subsidized relatively more affluent people to buy cars they would have bought anyway at the expense of the poor and of the taxpayers and was incompetently administered to boot [Ed.; Well what did you expect? It is a government program after all.].

Anyway, all that being said, almost all the expiring tax provisions will result in higher taxes for nearly everyone. To paraphrase a certain barbarian; what will be left in your wallet?

Stephen Green Explains the Grand Unification Theory of Sucking

With a cameo by The Three Stooges too.... Read it all but here's the conclusion:

Add up all the headlines and here’s what you have: The certainty that the government will screw up the markets, and uncertainty as to what new rules the markets will work under. Everyone is too scared to move, and for good reason. So there will be no new jobs, there will be no growth.

Until Team Obama gets its collective head out of our asses, all we have to look forward to is bumbling incompetence and pointless arguments. Which might be entertaining if they didn’t result in taxes, stagflation, and the Francification of a once-great nation.

James V. DeLong: The Coming of the Fourth American Republic

Writing in The American, James V. DeLong lays out the thesis that the United States is about to enter what he calls the Fourth American Republic. American Republics last about 70 years. The first lasted from 1787 to the Civil War, the second from the end of the Civil War to the beginning of the New Deal and the third, which he calls the Special Interest State has lasted from then to now. He expects that it will collapse of its own weight in the not too distant future.

"The needs of the Special Interest State have also come to dominate electoral politics. Both parties have become alliances of special interests. The focus of conflict is on the fact that most people belong to more than one group, and so electoral contests focus on emphasizing one or another group identity. Only a small band of sort-of Republicans holds out—lonely free marketers reading the Wall Street Journal by flames kindled from
old issues of The Public Interest—regarded as amusingly quaint by the other players."

A little further on he continues:

"But it is more likely that the Special Interest State has reached a limit.

This may seem a dubious statement, at a time when the ideology of total government is at an acme, but it is not unusual for decadent political arrangements to blaze brightly before their end. Indeed, the total victory of the old arrangements may be crucial to bringing into being the forces that will overthrow it. In some ways, the grip of the aristocracy on 18th-century France tightened in the decades leading up to 1789, and the alliance-of-states idea could have lasted a while longer had the Confederacy not precipitated the crisis. So the utter triumph of the Special Interest State over the past 15 years, and particularly in the recent election, looks like the beginning of its end."

He goes on to make his case as to why the Special Interest State is going to have to give way to the Fourth Republic and though he isn't sure exactly what shape it will take, he is confident that it will be another democratic republic because it is just in our national DNA.

The article is both worrying (major change is always a little worrying because of all the unknowns involved) but also hopeful because he seems to take the view that whatever emerges will be better that what we have now.

Read the whole thing.

How's Your 401k Doing?

The Obama Bear Market

From an editorial in Investor's Business Daily. Go read it.

The Wealth of Nations

P.J. O'Rourke, author of On The Wealth of Nations: Books That Changed the World, has an article in the Financial Times today, quoting extensively from The Wealth of Nations, written by Adam Smith 232 years ago. It seems things haven't changed much in all that time.

The idea that The Wealth of Nations puts forth for creating prosperity is more complex. It involves all the baffling intricacies of human liberty. Smith proposed that everyone be free – free of bondage and of political, economic and regulatory oppression (Smith’s principle of “self-interest”), free in choice of employment (Smith’s principle of “division of labour”), and free to own and exchange the products of that labour (Smith’s principle of “free trade”). “Little else is requisite to carry a state to the highest degree of opulence,” Smith told a learned society in Edinburgh (with what degree of sarcasm we can imagine), “but peace, easy taxes and a tolerable administration of justice.”

How then would Adam Smith fix the present mess? Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done.

We could pump the banks full of our national treasure. But Smith said: “To attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utensils.” [440]

We could send in the experts to manage our bail-out. But Smith said: “I have never known much good done by those who affect to trade for the public good.” [456]

And we could nationalise our economies. But Smith said: “The state cannot be very great of which the sovereign has leisure to carry on the trade of a wine merchant or apothecary”. [818] Or chairman of General Motors.

What is it that the French say? The more things change, the more they stay the same?

Read the whole thing.

Why Do We Have a Budget Deficit? Look to Congress, Not the President

When it comes to budget deficits, the sitting President usually seems to get the blame for them. In fact, the President can't spend a dime of taxpayer funds that the Congress doesn't appropriate. It's true that President Bush left office with a budget deficit but the deficit President Obama has inherited is mostly the creation of a Democrat controlled Congress. At the end of fiscal 2006, when Republican control of congress ended, the budget deficit was $248 billion. That's bad enough and the Republicans lost control in large part because they forgot why they were sent there in 1994 and acted like Democrats. They spent every thin dime of tax revenue that came into the Treasury and then some. And it certainly didn't help that it took until 2006 for President Bush to find his veto stamp. Perhaps if he'd reined in the Congress, the Republicans might have held onto it.

I expressed hope after the 2006 elections that 1.) the Republicans would learn their lesson and remember that people vote for them because they profess to be in favor of small government and fiscal discipline and 2.) that the Democrats would act responsibly, now that they'd been handed the car keys. No such luck. The deficit for the end of fiscal year 2008 ballooned to $407 billion and that was before the ill-conceived and hastily passed $700 billion TARP. Now President Obama is demanding that the Congress pass an $800 billion to $900 billion "stimulus" bill that will deepen the deficit even further and leave the bill for future generations to foot. Remeber who controls the purse-strings. It's the Congress. The hole may have started under a Republican Congress, but it's the Democrats that have kept on digging. The first rule of holes states that when you find yourself in one, you stop digging.

How do we stop this hole from getting deeper? We have to stop spending more than we bring in. No matter where you set marginal tax rates, receipts to the treasury will not exceed about 19.5% of GDP. Congress is currently spending about 21.5% of GDP. Spending has to be brought into line with GDP and if we want to really increase tax revenues (not rates, revenues) we need to grow GDP and the quickest way to do that is to reduce tax rates. Leave money in the productive economy, i.e., the private sector and we will start to come back. Unfortunately the Democrats are more concerned with punishing the "evil rich" and redistributing wealth than they are with actually solving the problem. They can do a lot of damage over the next two years and the Republicans need to point this out loudly, often and stick together to resist the systematic looting of the private economy by the statist, power hungry monster that is the Democrat Congress.

Free Market Capitalism Isn't at Fault - It Doesn't Really Exist

Via Instapundit, I ran across this post at Notablog. It has become fashionable in certain circles lately to blame unfettered free-market capitalism for the current mess in the banking system. The author of the post, Chris Matthew Sciabarra, argues that it can't be true, because unfettered free market capitalism has never truly existed:

"The current state and the current banking sector require one another; neither can exist without the other. They are so reciprocally intertwined that each is an extension of the other.

Remember this point the next time somebody tells you that "free market madmen" caused the current financial crisis that is threatening to undermine the economy. There is no free market. There is no "laissez-faire capitalism." The government has been deeply involved in setting the parameters for market relations for eons; in fact, genuine "laissez-faire capitalism" has never existed. Yes, trade may have been less regulated in the nineteenth century, but not even the so-called "Gilded Age" featured "unfettered" markets."

I think he has a valid point. This just lends more credence to my own frequent assertions that we are where we are due to politcal interference in the market, which leads to irrational behavior. When the government stops trying to "help", that is when the markets will start to find their equilibrium. That isn't to say there won't be further ugliness. There will be. It just means that they can finally find clearing prices for toxic assets and get back to business without all the uncertainty that political interference breeds, and that markets hate

Read the whole post.

The SEC Is a Paper Tiger

The Wall Street Journal today posted the testimony of one Harry Markopolos who testified in front of Congress today regarding the Bernie Madoff Ponzi scheme. He is a CFA and CFE(Certified Fraud Examiner in the private sector of the financial services industry. Over the past decade he and three similarly credentialed colleagues accumulated a file of evidence that proved Bernie Madoff was a fraud as far back as 2000. They repeatedly went to the SEC with it and even as they gathered more and more evidence, they were repeatedly blown off by the SEC. Even when pointed straight at it, the SEC couldn't comprehend one of the biggest frauds in history. Meanwhile they are investigating Steve Jobs on the basis he isn't sharing the most intimate details of his health problems with the entire world.

This report is quite damning. Four private citizens could have stopped this a long time ago, if only the staff of the SEC had had the good sense to listen to them.

A good summary of why the markets remain so thoroughly paralyzed is on page 28 (printed page) or 35 in the pdf on line. The full report is 65 pages but reads very well. It's worth the time if you are interested in this kind of thing.

Regulatory Statism, (that's Government) Is What Precipitated the Banking Crisis

So says Mike Oliver (Mr. Integrity) guest-blogging at Samizdata:

"The lovers of statism (and of we the people) decided to pull out all the plugs and defend the market at each and every low - to try to fake reality. Instead they super-charged the downside. What would have been a normal correction in the market ballooned into a disaster. Why?

Benanke allowed in summer of 2007 for an asset class never previously allowed to be used as collateral in fed borrowings by financial institutions, and even expanded what institutions could come to the Fed. In effect the Fed was "pricing" this debt (sub prime mortgages, etc.) at a level such that it would not have to hit the market and be priced openly and fairly.. The Fed was apparently afraid of the real consequences of seeing it priced openly. So they in effect took it off the market and froze it at the Fed window as "acceptable collateral" but as an unpriced asset. Hence from that point forward these sorts of assets on bank books were not "priced" in an open and market manner. Hence those who wanted to invest in the bank were uncertain as to the value of these assets. Hence uncertainty arose as to any and all bank valuations."

Read it all, of course.