The recent financial crisis has spurred a multitude of reactionary editorials in the press, mostly calling for increased regulation of the financial sector and a bailout for the auto industry. This reflects economic illiteracy and a misunderstanding of the root causes of our current financial crisis. I think this ignorance is due partly to a reliance on our political leaders as ‘experts,’ when in fact most know little more than the basics when it comes to securities markets, the effects of deflation, or how fractional reserve banking impacts the economy. If they did, they would realize that Fed policy (and a collapse in [artificial] interest rates) made the housing bubble inevitable, that the financial sector needs less regulation, not more , and that a massive public works program won’t get us out of a recession. Instead of relying on our political leaders as economic experts, we should realize that people (including politicians) make decisions based on the incentives they have, and that politicians today have very little incentive to make informed, rational decisions based on facts and logic. This essay will discuss a few reasons why this is so:

1.) The Public (Mostly) Doesn’t Care

A large percentage of the public isn’t much concerned with the decisions made by government until it affects them in some tangible, personal way. Most people are politically apathetic between elections so long as they don’t get laid off, their wages don’t go down, and their elected official doesn’t have an extramarital affair or get caught taking bribes. In fact, a paper written by Ilya Somin, an assistant professor at George Mason University School of Law, shows that political ignorance on the part of the voting public might actually be rational. As such, politicians have free reign to use their voting power as they see fit, and even if they do have the best interests of their constituencies at heart, they often ignore (see #3) or are unaware of the full effects of legislation on the economy, simply because they don’t have the expertise. Good intentions aren’t enough.

2.) Mainstream Media Is Biased

Some people do care. During election periods, the public is bombarded every day with flowery speeches and propaganda filled messages of hope, but many people don’t think to research the true effects of policy proposals, and when they do, they often only find media which gives one side of the story. (For an academic discussion of the relationship between politicians’ incentives to pander and the media, see here. There are a number of studies which have indicated that much of what we see on television, read in newspapers, or see online is influenced by those with strong political ties. As such, many people who follow politics and the impact their decisions have on the economy are left with inaccurate information, and often pass on half-truths propagated by the media as fact. When mainstream media fails to give both sides of the story, the public is less likely to glean a factual understanding of the causes and effects of legislation, and politicians are less likely to be criticized for supporting silly regulatory measures. The most blatant example of this is the media’s inequitable reporting on global warming and the EPA’s push to regulate carbon dioxide emissions.

3.) Politicians Think Short-Term

Because they need to seek re-election every 2/4/6 years, politicians have a huge incentive to pass legislation that has positive short-term effects (such as decreased unemployment), but which may have negative long-term effects (such as inflation, lower real wages, and decreased freedom). When politicians seek re-election they sometimes implement ‘quick-fix’ programs in an attempt to appease and manipulate voters. In addition, candidates seeking office often spend massive amounts of money on advertising, and often their voting history, or lack of it, is swept aside and ignored. Finally, politicians care about their legacy. As a result, they will forgo logic and fact-finding and instead seek popularity.

4.) Accountability Isn’t an Issue

Government agencies like the SEC aren’t held to the same standards as privately owned companies, and their mismanagement results in private sector inefficiencies and costs to investors and taxpayers. In the recent scandal involving Bernard Madoff, the SEC failed to investigate his hedge fund’s highly irregular annual returns, resulting in the loss of billions of dollars to investors. Similarly, Treasury head Henry Paulson provided a great example of moral hazard when he decided that the TARP funds authorized by Congress to buy ‘toxic’ mortgage-backed derivatives would be better off spent elsewhere. It was recently announced that some TARP funds would be used to help American automakers, whose lack of foresight and poor business management has led them to the brink of failure. But who loses when the SEC and the Treasury fail their stated mission? Certainly not government. Thus, in their attempt to appease perceived public and media opinion, politicians have an incentive to ‘act quickly’ rather than analyze the long-term benefits and costs of policy proposals.

5.) Precedence

Our nation’s economic history displays a pattern of periodic growth followed by recessionary contractions. Austrian business cycle theory demonstrates that when the Fed cuts interest rates, consumer spending rises, and that this rise in spending is generally not curtailed by higher interest rates until a contraction is imminent. Thus, excess consumer spending (fueled by the Fed) fosters unsustainable growth and results in the ‘boom-bust cycle’ so often talked about by economists like Hayek and Mises. Central bank policy will never be effective as a tool to help the economy, simply because it’s impossible for the Federal Open Market Committee to consistently manipulate the federal funds rate so that credit conditions accurately reflect the preferences of the market. Government ‘stimulus’ packages, tax-incentives, subsidies, bans on short-selling, and other intermediary measures similarly cause inefficiencies to arise in the market, by encouraging improper resource allocation on the part of firms and investors. However, the mainstream practice of Keynesian ‘demand side’ economic policy makes any deviation from this type of policy extremely improbable. In addition, it’s a virtual certainty that Fed policy and our fiat money system will allow for continued devaluation of the dollar. Non-commodity based currencies make the money supply inherently unstable and the banking system more susceptible to speculative lending practices.

Admittedly, this is a short list. Political ambition, bureaucratic structure, pressure from special interest groups, and a generally uninformed American public are a few more reasons which might explain the failure of politicians to make educated, careful decisions. As we near the swearing in of a new president, it’s important to remember that every President in our history has increased the size and scope of government. Total real government spending has more than doubled since 1965. Despite this, our country is facing unprecedented economic challenges. I would challenge the reader, then, to be more skeptical of government policy initiatives our leaders tell us will ‘fix’ the economy, and to be mindful of the fact that government is run by politicians who don’t always have much incentive to make decisions which are in our best interests.

In a recent letter to the editor in the Democrat and Chronicle one local man suggested we reform our health care system for a very strange reason: to save costs on car production. Would national health care really make producing vehicles cost less money? This person thinks so:

Cutting costs per vehicle is the goal, isn’t it? General Motors said last year that the cost of each car or truck is increased by $1,500 to pay for the medical insurance of the employees. If we had a national health care plan (like Canada, for example), would this not cut the cost of each car? That would go for each hour that each employee works.

It’s funny though, because if national health care could really save money, then why not nationalize the auto industry, too? But why stop there? If the government made everyone’s lunches and drove them to work the employers could really save money. That’s where the error in this logic becomes apparent. Socialized programs are paid for through tax revenue, which comes from workers and companies - which sounds like a zero-sum game at this point. Private individuals paying or the bills getting payed through tax dollars. No difference, right?

Well, until you remember that for every dollar paid in taxes we get about 30 cents in services. Then there’s that whole national deficit part…Take a look at how our tax dollars are actually spent in this cool pie chart.

Oh yeah, then the kicker: it’s unconstitutional. No one seems to worry about the Constitution anymore so I guess we shouldn’t be so concerned about that one.

For a great article on how lower health care costs read this article by Ron Paul. He’s an economist, doctor and politician - which puts him in a good position to know about these things.

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Here’s a little bit longer video that keeps getting taken down from YouTube. Watch it while it remains:

I know some of you out there may think that Ron Paul is no longer relevant, but it’s the ideas that matter. Let’s see how he holds up against president-elect Obama:

Too bad we couldn’t have seen Ron Paul debate Obama directly. If only…

By Ron Paul | informationclearinghouse.info

December 15, 2008 “ICH” — - As the printing presses for the bailouts run at full speed, those in power are no longer even pretending that the new giveaways will fix our problems. Now that we are used to rewarding failure with taxpayer-funded bailouts, we are being told that this is “just a start,” more funds will inevitably be needed for more industries, and that things would be much worse had we done nothing.

The updated total bailout commitments add up to over $8 trillion now. This translates into a monetary base increase of 75 percent over the last two months. This money does not come from some rainy day fund tucked away in the budget somewhere – it is created from thin air, and devalues every dollar in circulation. Dumping money on an economy, as they have been doing, is not the same as dumping wealth. In fact, it has quite the opposite effect.

US consumer price index 1913–2006.Image via Wikipedia

One key attribute that gives money value is scarcity. If something that is used as money becomes too plentiful, it loses value. That is how inflation and hyperinflation happens. Giving a central bank the power to create fiat money out of thin air creates the tremendous risk of eventual hyperinflation. Most of the founding fathers did not want a central bank. Having just experienced the hyperinflation of the Continental dollar, they understood the power and the temptations inherent in that type of system. It gives one entity far too much power to control and destabilize the economy.

Our central bankers have had a tremendous amount of hubris over the years, believing that they could actually manage a paper money system in such a way as to replicate the behavior and benefits of a gold standard. In fact, back in 2004 then Fed Chairman Alan Greenspan told me as much. People talk about toxic assets, but the real toxicity in our economy comes from the neo-alchemy practiced by the Federal Reserve System. Just as alchemists of the past frequently poisoned themselves with the lead or mercury they were trying to turn to gold, today’s bankers are poisoning the economy with accelerated fiat money creation.

Throughout the ages, gold has stood the test of time as a consistently reliable medium of exchange, and has frequently been referred to as “God’s money”, as only God can make more of it. Seeking superhuman power over money in the way alchemists did in ancient times caused society to shun them as charlatans. In much the same way, free people today should be sending the message that this power and control over our money is no longer acceptable.

The irony is that even had the ancient practice of alchemy been successful, and gold was suddenly, magically made abundant, alchemists still would have failed to create real wealth. Creating gold from lead would have cheapened its status to that of rhinestones or cubic zirconia. It is unnatural and dangerous for paper to be considered as precious as a precious metal. Our fiat currency system is crumbling and coming to an end, as all fiat currencies eventually do.

Congress should reject the central bank as a failure for its manipulations of money that have brought our economy to its knees. I am hoping that in the 111th Congress my legislation to abolish the Federal Reserve System gains traction so that the central bank can no longer destroy our money.

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“[These] kinds of incidents our signs of the deaths of your freedoms. And when American freedom dies, what do you think will happen with the rest of the world?”

Well said.

Books

Alongside Night by J. Neil Schulman. I like to think of it is “Atlas Shrugged Lite.” At under 200 pages or so, it’s a readable novel about the way off future of 1999 (don’t worry, it’s not horribly dated) when a teenager has to rescue his economist father who has been kidnapped by the government because he dared speak out against the government’s hyperinflation (by the way, this is a future where the dollar is so depreciated, a cab ride costs about $1,000 and anyone smart enough to keep money keeps it in pure gold). In the process, he gets caught up with the a bunch of agorists. Probably the best introduction to agorist thought and Ayn Rand without the pretentiousness.

New Libertarian Manifesto by Samuel Edward Konkin III. This is perhaps the anarcho-capitalist’s Communist Manifesto. Konkin briefly introduces the idea of agorism (anarcho-capitalism with an emphasis on underground, black market activity) and counter-economics (black market activity as a non-violent method of resisting government interventionism).

Image from Miller Info Commons on flickr.com

The Capitalist Manifesto by Andrew Bernstein. It’s easy to get caught up in how great capitalism is based on economic arguments of efficiency, choice, etc. Bernstein, at least in a brief space of 400 pages or so, also manages to defend capitalism on philosophical and historical grounds (spoiler: it wasn’t capitalism that provoked slavery, imperialism, and war and the Industrial Revolution was a hell of an improvement over how people lived before). Bernstein is an Objectivist so there are some streaks of it in his works, but it’s not too annoying.

How I Found Freedom in an Unfree World by Harry Browne. It’s an awful shame this has been out of print for some years and the only copies for sale go about $40 on the Internet. I strongly recommend reading it, if only from a library. It’s a libertarian self help book, which talks about how Browne found a way he could remain free despite government controls, regulations, and the like and why you shouldn’t let The Man get you down to pursue happiness.

Return to Reason by Paul Lepanto. Another out of print book but I recommend it. It’s a very small introduction to Objectivism, except not written by a Randroid. Even though I personally find some problems with Objectivism, it still does provide a strong philosophical rationale for personal liberty and freedom.

Chaos Theory by Robert Murphy. Two short essays on anarcho-capitalism by Robert Murphy that he wrote as a PhD student. His case for free market law is brilliant, but I think his theory behind a free market defense force needs work. Still recommended though and can be found online at Mises.org.

Films

Amerika. Technically, not a film but a 9 hour TV miniseries from 1987, it’s the story of a Soviet occupied America through the eyes of a prisoner from an American gulag.

Idiocracy. An average Joe (in fact, that’s his name) who participates in a military experiment in 2005 wakes up ala Rip Van Winkle 500 years  later and finds that everyone is…a total idiot. Features Brawndo (IT HAS WHAT PLANTS CRAVE!).

Image from encyclopediadramatica.org

They Live!. Wrestler “Rowdy” Roddy Piper discovers the truth - that zombie-esque aliens are truly the controlling forces in society.

Miscellaneous

Beers of the World. If beer is proof that God loves us and wants to be happy, this place is Heaven. Despite the fact in my 4 years living in Rochester, I never attended the Lilac Festival or seen the Eastman House, I have been to Beers of the World and it is one of the chief reasons I miss Rochester dearly.

Image from Bureaucrash on flickr.com

Bureaucrash . To be honest, I am a bit biased as I do personally know the current “crasher-in-chief” or at least I consider him a good acquaintance, as I do one of the bloggers there. They have a great social networking site for those wanting to meet liberty minded individuals. Also, they do have an awesome store with t-shirts for the liberty minded individual like “Capitalists of the World Unite!” and “ImmiGREAT.”

KoPubCo . Publishers and purveyors of agorists work of literature. For $7.50, you can get an autographed copy of the recommended Alongside Night. They’re the only ticket in town to get back copies of The New Libertarian magazine.

As a disclaimer, I am not receiving compensation for recommending these works, though I really should be.  This is also not an inclusive list - just because I didn’t recommend something doesn’t mean I think it’s bad.

A very Merry Christmas,

And a Happy New Year,

Let’s hope it’s a good one,

Without any fear.

For your enjoyment, here is my favorite Christmas songs, John Lennon’s “Happy Christmas - WAR IS OVER! (If You Want It).” The sad thing is, that song will be timeless as long as there’s war.

Remember - WAR IS OVER! (if you want it).

Note especially the discussion about the magnitude and rate of the temperature change over time.

What do you think about the information presented in these lectures?

Image from Luiz Claudio Pequeno on flickr.com

For those who may not be aware, America has had an embargo policy against Cuba since 1963 (fun fact: Kennedy, a few hours before signing the embargo into law, had one of his staffers pick up a few hundred boxes of Cuban cigars which Kennedy had a strong penchant for). That means no American can do business with Cubans, Americans cannot (freely) travel to Cuba except without a license (which is extremely impossible to get), and many businesses in the world have to decide whether they want to do business with Cuba or the United States (you can guess which country they go for). The idea is that we need to “starve out” the Cubans so they’re forced to accept democratic principles and the free market.

But what is the result of this policy? It’s not that Cubans are begging for democracy as a result. Rather, it’s the Cuban dictatorship claiming “It’s not our fault that a mast majority of people are starving, buildings are falling apart, and everyone still drives cars fron 1959, it’s the American imperalists fault! If we didn’t have an embargo, everything would be just fine!” The embargo is simply a scapegoat, an easy one at that, that the Cuban dictatorship is allowed to use to cover up for its own ineptitude and corruption.

You may be saying “But Champthom, communism is bad! Won’t starving them out cause them to go into submission?” It’s precisely that fact I believe we need to end the embargo once and for all. Look at China - improved Sino-American relations between the two countries, mostly through trade, has helped increase economic freedoms for the average Chinese citizen and they’ve started to demand more personal liberty. Vietnam, after we’ve established trade with them, has now become something far more different and more capitalistic than the communist hotspot we went to war with some 40 odd years ago. Cuba would be no different.

If we abolish the embargo, we’ll let Cuba be open to American goods and visa versa. Cubans will have greater economic freedom and start to press for more personal freedom and the Cuban government will experience far greater pressure as their ineptitude will no longer have an easy scapegoat. Likewise, Americans will truly have the freedom to travel and visit the island of Cuba (I myself dream of the day when I turn on MTV and see a young VJ say “Live from Havana, it’s Spring Break!” with American college students partying in La Malecon) and American businesses will have an additional, untapped market to market their goods towards. Trade is never a zero sum game and abolishing the Cuba embargo would be no different. Cubans would experience a higher standard of living from increased American tourism and American businesses offering goods and services, and Americans would finally know the true joy of Cuban rum (which makes Bacardi taste like cough syrup) and cigars.

I believe President Obama, while it might be the case he won’t straight out abolish the embargo, will at least improve relations, which will be more than what previous administrations have been able to claim. Obama doesn’t seem like he is dependent on the conservative Cuban-American lobby which pushes for the embargo for spite against their former homeland so there is a good chance for some real change. When that day comes, when Obama announces an end to the embargo,  you can be sure I’ll be having a nice, cold Cuba Libre.