Anything the government can do, the free market can do better, part III

Shucks, Mike, your kind words are much appreciated. For a couple of years I haven't blogged as often as I'd like, but I do what I can. I started reading Billy's blog after his first link to me a few years ago. He's taught me a lot, not always directly, but he got me thinking through certain assumptions I clung to, which nearly all young Americans develop in a public education. They essentially boil down to this one: "But at minimum, don't we need government for ___?" It's a problem that many "libertarians" have.

In recent comments I linked to something that I was meaning to blog about for months, but I kept forgetting. I almost never listen to Rush Limbaugh's show, but I had the day off and was driving to meet someone for lunch. He talked about this story of rebuilding Polihale State Park's access road, which was destroyed by flooding. Hawaii's state government said it would cost $4 million and require two years of construction, and there was no money for it. Locals, then, did it in eight days and at their own expense. So much for two years!

Was it all out of charity? No, as the article clearly states. Business owners got involved because repairing the road was to their benefit -- decreased visitors, or none at all, meant they weren't making money. And so what if they had that motive? It was their money. Better that they invest their own, rather than the immoral situation of everyone having to pitch in for something not everyone would equally benefit from.

It's reminiscent of when Donald Trump was so disgusted with the lack of progress in rebuilding Central Park's Wollman skating rink that he spent his own money to do it. Six years and $13 million later, the city government just couldn't get anything right. A big problem was the insistence on using freon, supposedly for energy savings, rather than the salt water systems that have worked so well for years (like at Rockefeller Center, which to my knowledge has never failed to open its rink during the winter).

Trump devoted an entire chapter of The Art of the Deal to this:

I never had a master plan. I just got fed up one day and decided to do something about it....

I knew nothing about building ice-skating rinks, but I did know something about construction. If it took me two and a half years to put up a major skyscraper, surely it was possible to build a $2 million ice-skating rink in a matter of months.

Yet no rational person should be surprised that his project succeeded so well, and the first time around. He had his money and reputation on the line. "If I failed--if I was even one day late, or one dollar over budget--my plan was to pack my bags and take the next plane to Argentina. There was no way Ed Koch or anyone else would ever let me live it down." Trump explained how he asked around to learn who was the absolute best, most trusted company in rink construction. He didn't bother with soliciting bids from contractors.

The city government, on the other hand, knew that even if voters remembered news reports, who could be blamed and ousted? The city commissioned a report that itself took 15 months to complete, and in the end no one responsible for the fiasco was ever named. Trump had already offered to take over the project, always at his own expense, with the promise that any profits would be donated to charity. What was there to lose, and who could lose?

Union workers, that's who could lose, and the city council members who received their generous campaign donations. That's no small reason why public projects are inevitably constructed so slowly and shoddily; the rest is pure incompetence. When I lived in Utah, Syncrete was an infamous example of government's desire to "experiment," since, after all, it's someone else's money being risked.

Syncrete proved to be less than the superior surface it was advertised to be, and the freeway surface began crumbling shortly after the project's completion. In the end the UDOT tore out the syncrete and admitted that the experiment had been a failure.

"Less than the superior surface it was advertised to be"? That's putting it mildly. The stuff immediately started falling apart as if it were styrofoam, for crying out loud. I was young then, but old enough to understand the TV news showing these chunks all over the road. Who knows how many windshields were cracked because some semi kicked them up like any common rock.

By contrast, as I keep mentioning, I come home to a private road so excellently constructed that it's been years -- before I moved into the neighborhood -- since its last paving. Similarly, I don't remember exactly when my neighbor across the street had his driveway repaved, maybe a couple of years ago. I came home from work one day and saw it was just finished. Compare that to the week it takes just to fill in a couple of potholes on the typical public road, or the months it's taken to redo Route 6 in Putnam County.

If you scroll near the end in these comments, I was telling our new liberal troll about the pedestrian bridge near the Metro-North train station at Chappaqua. Since it began last year, I can't help but notice how slowly it's going. Since it's a public project, there's no incentive for it to be done quickly or efficiently.

An example in my county is the Tappan Zee Bridge, the biggest joke in Westchester next to Andy Spano's "governance." The bridge opened in 1955 and, I recall, cost $500 million (approximately $4 billion in today's dollars). It's not even six decades old yet is already falling apart. Even the second London Bridge, surely built with inferior technology and materials, lasted over 130 years before it needed replacing.

Instead of repaving, raised metal plates are used for repairs, such utter crap that they don't even rise to the level of "makeshift" or "jury-rigging." I drive across the bridge once in a while, and I can assure you that 1.5 inches wreaks havoc on your car, no matter what "ramp plates" are claimed to use. The ramps up and down make the surface effectively sinusoidal. The amplitude is relatively small, certainly, but at vehicular speeds it's jarring enough that you must slow down. And that slows down the driver behind you, the one behind him, and so on.

This is a bridge where a simple repair has caused one-hour delays, stretching 13 miles back into Rockland County. The repair crews closed two of the four Westchester-bound lanes just to repair one pothole, and in the middle of the morning rush hour! Oh, and in case you don't notice it from the article, the crew didn't even fill in the pothole: they put another metal plate over it!

Update: look here to see what the plates look like, and here for a picture of them installed. You really have to drive over them to experience how terrible they are. And who is surprised that there are "cost overruns"?

This would have never happened in a free market, which is based on freedom and competition, not politics and favoritism. Someone else would have started building a competing bridge, and the better one would be getting all the business. At the very least, the bridge's owner-operator would have done such a repair only until after rush hour, or late at night, and certainly not by putting another damn metal plate over it.

In a free market, one private party contracts with another, and each side has to eat any "overruns" on his end. Thus it's to both sides' benefit that the contracts is negotiated honestly, with all expected costs and timetables taken into account.

The central planners, though, are as stupid as ever. They're looking to build a new bridge. Of course, it's easy for anyone to advocate building an entirely new one when it's not his money at stake:

Mark Kulewicz, director of traffic engineering and safety service at the Automobile Club of New York (the local affiliate of the AAA), advocated a new bridge as follows:

Instead of spending $1 billion to patch up a bridge that is already straining to handle the region's growing traffic volume, why not avoid all those years of messy construction delays and invest $4 billion in a modern structure that can serve more commuters, and in new ways?

Actually, the plan announced last September was for a $6.4 billion bridge, which tells us we should count on at least $10 billion before it's done.

Ask yourself: what could the free market do for $4 billion? What could it have done for the $286 billion highway bill, which Congressional Democrats are aiming to increase to $400 billion with its successor?

Update: here's a Times article that puts the total cost of a new bridge, plus expanded train and bus lines, at $16 billion:

Officials also looked at the possibility of rehabilitating the current bridge, which was built 52 years ago, but [State Transportation Commissioner Astrid Glynn] said that was a costly and complex project.

And $16 billion for the replacement is not costly?

Anything government can do, the free market can do better, part II

Over at QandO, McQ blogged about New York City forcing a tobacco shop owner to remove its $9000 coffee machine, because the shop doesn't have a food license.

Skorj left a comment, "I think it’s totally reasonable that the government can impose safety regulations, including requiring food handlers’ certs, whenever food would pass between you and a stranger – even in a soup kitchen."

No. Not even that much, as I pointed out in my reply: "Skorj, if you don’t like how someone prepares your food, then you have the freedom not to go there. However, someone else may not mind, so don’t infringe on their freedom to do business with whom they want."

Regular commenters Steverino and looker, for all their talk against big government, don't see that they still don't mind feeding the beast. Being state-worshippers, they advocate standards: government-enforced standards. As I said a few nights ago, you don't have to be Paul Krugman to worship the state. You need only believe the falsehood that we need government to accomplish certain (good) things. Their argument is that the private sector can't enforce standards, which in and of itself is true. The private sector has no power to force a business to close. Private citizens cannot legitimately make a shopkeeper cease business, or imprison and/or fine him if he does anyway.

But their fallacy is that since the private sector cannot do something, then government must. This is not true in the least. They also don't understand my point about not forcing standards on anyone. The private sector's powers are to let competition and consumer choice work unhindered so that standards can come into existence on their own. It would mostly be a matter of trust: sellers would have earned reputations, good or bad. Also, within the private sector, it's perfectly possible for a trusted entity be relied on for judging others, even though it doesn't have the force of government. McQ kindly reminded us of Underwriters Laboratories, and I pointed out McAfee's website certification.

My key rebuttals:

Most establishments are clean enough, but not because of law. It’s because our wealth, courtesy of capitalism, allows us to be clean without much cost, and it’s to a restaurant’s best interest to maintain a reputation — or at least not develop a bad one. Most everyone in New York heard about that KFC with the rat problems. The government didn’t need to shut them down, because they’d have shut down from a lack of business.

...

Cleanliness is a good thing. A government that tries to enforce “cleanliness” via arbitrarily standards is not a good thing. But I already knew you worship at the feet of the state. You might talk a good line on this and that, but in the end you rely on what law provides you.

...

It’s [government] not enforcing standards. It’s the myth that the standards can be enforced all the time. So people grow reliant, and they presume that any place they walk into will be ok. More often than not, they’ll be fine. It’s that occasional occurrence, however, that proves the state’s inability to protect us.

The problem with your reliance on government-set standards is a form of the so-called “market of lemons.” Akerlof’s basic argument applies here in the sense that government enforces — or pretends to enforce — a minimum standard of quality. You’re now expected to assume that any given food handler is clean, however, you don’t really know that. Government has said, “Any used car sold must be in certified good mechanical condition,” but buyers can no longer properly judge what’s worthwhile and what is not. They can’t tell if a seller is pulling a fast one, unless they inspect for themselves.

Look at the outbreaks the FDA failed to prevent. Do you understand now why they occurred? Because people gave trust that was not truly earned, and some died because of it. “The government wouldn’t allow this to be sold if it weren’t safe.” Instead of checking how and where a toy was made, parents bought all the toys with lead-containing paint. The plain fact is that government cannot enforce the “standards” you cling to, which creates (in food, transporation and a host of other things) a false sense of security.

...

In a free market, sellers of goods and services would be too scared to give anything but their best. They wouldn’t dare let anything slide. They would compete not on the basis of meeting some standard set arbitrarily by a government official, but on the basis of reputation: which one is setting the highest standard (service, trustworthiness, etc.) becomes the standard by which everyone else is measured.

My employer is one of the most respected firms in the financial industry, and we exceed every “standard” the government sets for transparency and accountability. That’s because we want to compete so effectively that we’ll be considered THE standard.

But as I said, when you have government supposedly enforcing standards, it can never do so as effectively as the free market. Government’s “standards” are set by politics and ignorance, by the bureaucrats who make arbitrary decisions and/or don’t know the industry. The “standards” are met without too much difficulty by many participants (this truism is proven by modern history), thus making “standard” a very low bar to clear. It might put enough fear into food handlers, but fear of government punishment is never as great as fear of losing your customers. If you really were in the restaurant industry, you’d know that a place needs a helluva track record to be shut down. Otherwise, well, fines may be issued but are rarely publicized more than obscurely.

The Old West is popularly imagined as a violent society, but it was actually a very polite one. If you shoed someone’s horse poorly, no one would trust you anymore unless you redeemed your name, or unless you charged so little that a customer knew he would get what he was paying for. Even then, you might get shot by someone’s friends if your customer got thrown after his horse lost a shoe. There were no “standards” enforced, so every seller of goods and services was extremely careful to do a good job.

There was a lot of dancing around the fundamental issue of freedom, which I brought us back to:

How is it YOUR right, or anyone else’s, to prevent that transaction? You’re being nothing more than a busy-body, trying to save the buyer from himself. It’s his right to be stupid: you can try to persuade him from something that harms himself and no one else, but you have no right to force him.

Looker asked, "who has the authority to tell you to cease and desist in a completely government free market." It's easy to figure that one out. My reply:

The individual has the authority, either by not returning or not going there in the first place.

As an individual, you have the power to shut down any business — to the extent of your own business with it, and that should be the extent of the “authority.” Do you see that what you and Steverino are advocating is that one person or a few individuals can act on behalf of “society,” forcing a business to shut down just because some people don’t think it’s good enough? Neither of you have yet addressed the fundamental question: by what right can you to force people to do business only by your standards and not their own? If they agree to a peaceful, private transaction that harms no one else, what is it to you?

You argue, in essence, that people might not know a place is dirty. What, though, if someone fully knows what he’s buying and wants it anyway? Whether he’s ignorant or deliberate, you can try to persuade him, but do not force him. If he refuses, then what is it to you? It’s not harming you or anyone else. Let him go his own way and don’t lose any sleep.

There are people who can’t sell particular kinds of meat, or even butcher it for their own use, because of “health codes.” Unfortunately it’s been argued on the basis of “religious freedom,” instead of on the basis of freedom, period.

...

Without health codes, people would scrutinize establishments more carefully. They’d rely on newspaper reviews and Zagat ratings, perhaps late night news segments about the latest dirty restaurant.

Do you see the paradox that Michael and I have been trying to tell you? When government enforces standards, it in fact does not make anyone implicitly trustworthy, but rather makes it dubious that any given entity is truthfully adhering to the standards. Government can never be effective in making sure everyone follows the rules. There are health code violators no matter what government tries, just like it can never rid the road of bad (let alone drunk) drivers.

Looker also asked, "Can we really go back, especially in the case where many people can be, for want of a better term, poisoned, to Caveat Emptor?" I replied affirmatively:

We not only can, but we must. It’s the only way for a free people to live. And it won’t be some Stone Age world; you’re just not giving capitalists enough credit. It would be an opportunity for the smart ones to bill themselves as the cleanest operations.

I’ve seen signs in Third World fast food joints touting their “Clean restrooms,” and they were. In fact, they were in better condition than most in the States. We take such things in the U.S. for granted, not because of laws, but because our greater wealth already made possible what laws later mandated.

Now, “caveat emptor” is half inaccurate because it implies that sellers may suffer no consequences. Buyers should beware, but as I’ve been pointing out, a free market has solutions for people who harm others. If you sell me a pie that you advertised as “cherry” but it contains small stones, then regardless of what “warrant of merchantibility” laws are on the books, I regard it as implicit that the pie won’t break my teeth.

I will again quote Bastiat:

Do those worshippers of government believe that free persons will cease to act? Does it follow that if we receive no energy from the law, we shall receive no energy at all? Does it follow that if the law is restricted to the function of protecting the free use of our faculties, we will be unable to use our faculties? Suppose that the law does not force us to follow certain forms of religion, or systems of association, or methods of education, or regulations of labor, or regulations of trade, or plans for charity; does it then follow that we shall eagerly plunge into atheism, hermitary, ignorance, misery, and greed? If we are free, does it follow that we shall no longer recognize the power and goodness of God? Does it follow that we shall then cease to associate with each other, to help each other, to love and succor our unfortunate brothers, to study the secrets of nature, and to strive to improve ourselves to the best of our abilities?

A tale of two thieves

In his unmitigatedly warped notion of "benevolence," George W. Bush signed legislation "to boost availability of student loans." It sounds great, but after you read how it's being done, it's a great deal for students, a great deal for Bush and bureaucrats who will brag about how much they're "helping" people, and a raw deal for the rest of us who pay taxes.

"The measure is intended to inject liquidity into the student loan market by allowing the U.S. Department of Education to buy federally guaranteed student loans that lenders haven't been able to sell to investors." Investors don't want to buy the loans because they're crap investments, relative to what else is available. It tells us something about this "non-crisis economic crisis" (the one the mainstream media wishes the U.S. were in) that, even though these student loans have the guarantee of repayment by the federal government should any borrowing students later default, most investors would still prefer investing in normal markets like stock exchanges!

But this still won't stop Bush and Congress from using our money to buy the loans, touting more of this "injecting liquidity" bullshit that we've heard too much about from the Federal Reserve. The federal government will buy these loans, using money coerced from the rest of us via taxation. If the students default, the federal government will then assume the payments to the loans' owner -- itself. And we won't even see a dime, because the repayments will simply go to the U.S. Treasury.

Such accounting practices in the private sector are called fraud. Bernie Ebbers received a 25-year prison sentence for what amounted to "merely" a few billion dollars. What, then, should politicians deserve when they do this all throughout a budget of $3 trillion dollars?

My Congressman, John Hall (former member of the band Orleans who found religion socialism and went into politics), sent me an e-mail with a subject line, "How to Combat Medicare Fraud Workshops this Friday." New York State spends nearly $48 billion each year on Medicaid, and it's been estimated that a tenth of it is "fraudulent," but the pure fact is that it's all theft. It is not theirs to give by any true sense of moral principle. If David Paterson, Joe Bruno and Sheldon Silver want to be charitable, or George W. Bush, John McCain, Barack Obama, Hillary and Nancy Pelosi and Harry Reid, let them give of their own money and encourage -- not force -- the rest of us to give. South of us, John Corzine would rather tax New Jersey residents every which way he can to fund state programs, instead of giving from his own extreme wealth. You see, when a liberal like Corzine criticizes "excessive executive compensation,"

That article at Empire Center talks about "market-driven reforms," when such a thing is impossible when government is behind it. As I tried explaining last year to my friend JK when talking about Medicare Part D, there is no "market" when government is involved, because government by definition will coerce at least one person into doing something he normally wouldn't do in a truly free market atmosphere. People can talk about "choice" all they want with some new "reform" in a social program, but ultimately it's "choice" at somebody else's expense.

This article talks a bit more about NYS Medicare fraud, and talking about how the New York State Legislature "agreed to only about $700 million in savings" for 2006. That's nonsense. When politicians talk about "savings," it doesn't mean they actually reduced the size of a program, but that they reduced the previously planned growth. The spending still increased. How long could you or I run our households this way when facing a financial crunch? "Honey, we have to cut back. Now, I had previously projected a $700 monthly increase in our car budget if we got that new car. But look, if we get that less expensive new car, it will cost us only $500 more per month. That saves us $200 per month!!!"

Such "logic" seems absurd, but that's how government operates. We normal folk must work for our wages, because we cannot use compel those who hire us or otherwise trade for our goods and services. But because government can take people's property by force, it need not worry about being "worthy" of what it takes. It simply takes, and ultimately it takes from you upon pain of death -- your death. I was starting to read "Your Money or Your Life: Why We Must Abolish the Income Tax" by Sheldon Richman, with a wonderful introduction by Dr. Richard Ebeling. Sheldon and Richard are true lovers of liberty, and I am proud to call them friends.

[Correction: I was blogging on vacation and didn't have the book with me. It was actually Walter Williams who wrote the following in his foreword, not Richard in his introduction.] Williams explains far more eloquently what I've said before, that all taxation is coercion, and so if government takes from you anyway, it's theft. But what do you do if you refuse, believing sincerely that you will not submit to thievery? Well, then the government will "fine" you, which is merely a declaration that if you don't surrender your property, you must give up more. If you resist enough, you must give up your freedom by going to prison. What if you will defend yourself, as is your God-given right against oppressors? Then the government will send in "police" and take you by force, killing you if necessary, all because it says you don't really own what you think you own, because a majority of your neighbors banded together and elected some "government":

Give us what we demand, cried out the multitude, lest we seize it by force.

And the merchant replied, Depart in peace while ye yet can, for ye have no right to my possessions save with my consent, and as I have done no wrong to any man, none of ye have any authority to seize any of my possessions.

Behold, cried out his neighbors with one voice, that we have declared ourselves a government, and as such we have given ourselves the authority.

The merchant replied, Ye have no authority, for one cannot give authority unto oneself.

That matters not, they replied and began to grumble, for we are a greater number than thee and thy family, and because of our greater numbers, we have decided that thou shalt pay us tribute.

Then did his neighbors, armed with swords and staves, seize a goodly portion of the merchant's possessions. The merchant did not consent in his heart, but for the sake of his wife and children, he did not resist in his actions.

Anyway, I'm blogging from Davao, the largest city in the world in terms of area. My fiancee and I were visiting her family here, and this afternoon we're going to Manila. We stayed in Davao longer than planned, because we couldn't get tickets to Bohol. This being "summer vacation" time in the Philippines, all the flights were fully booked. It's probably just as well, because Mindanao and the Visayas have been quite cloudy, and the beaches wouldn't have been as enjoyable.

Yesterday we went to "Paradise Island," a resort on Samal Island, just a few minutes off the coast of Davao. It's beach isn't one of beautiful white sand like Boracay's, and in some places a little pangit with the tide out, but it's a wonderful little getaway if you're in this part of Mindanao. Mr. Tungol, our host, was extraordinarily gracious. He was always checking on us and the other guests, ensuring our comfort. He also brought over the four-piece band to serenade us, inviting me to join in, which I couldn't resist when they did a Sinatra/Bennett/Elvis medley. Victor Heiser, an American doctor who spent a lot of time in the Philippines in the early 20th century, wrote that he believed you could give musical instruments at random to Filipinos and hear sweet music at once. Perhaps an exaggeration, but it was truly amazing to hear what bongo drums, two guitars, a bass and three voices could produce.

Will Krugman ever get anything right?

Paul Krugman, who predicts economic Armageddon after another in the hope he'll eventually be right, did a curious thing in his new op-ed "Partying Like It's 1929": he didn't blame George W. Bush or Republicans, contrary to his norm. But as is his norm, he demonstrated a lack of awareness of real economics and history.

If Ben Bernanke manages to save the financial system from collapse, he will — rightly — be praised for his heroic efforts.

But what we should be asking is: How did we get here?

Why does the financial system need salvation?

The opening is mild enough, if you put aside that Bernanke is hustling along the inflation and deserves no accolades for anything.

Why do mild-mannered economists have to become superheroes?

Those of us who understand Krugman know that here he's not just talking about Bernanke, but about himself too.

The answer, at a fundamental level, is that we’re paying the price for willful amnesia. We chose to forget what happened in the 1930s — and having refused to learn from history, we’re repeating it.

This is true to some extent, but only because Krugman is making generalities. It's not completely true, semantically, because most people today, especially lenders, never understood the problems of the 1930s and hence could never have chosen to forget it.

Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.

As an academic, "one would think" Krugman would know enough to be more precise in his phrasing. (I put "one would think" in quotes because it's a common rhetorical trick Krugman uses, to imply an absolute with which no one can disagree.) Just what does Krugman mean by "defining moment"? It's a ridiculous cliché, and most often used to reference time periods too long to properly be called a "moment." Krugman really wants to reduce two years to a "moment"? Well, when he fudges numbers to prove his agenda, why should we be surprised when he fudges language too?

But let's play Krugman's game, both with his imprecise use of "defining moment" and his assumption that it was "the wave of bank runs." The American economy had already slipped into a recession about in August 1929, but it wasn't quite apparent to the regular American. At the end of October 1929, however, most Americans knew something was wrong. Is Krugman really suggesting that news about the crash, and neighbors jumping out windows, also didn't "define" for Americans (or however he's using "defining moment") that the economy was in trouble, that it was the bank runs that didn't occur for several more months?

Or is Krugman merely trying to correlate modern events with past events, fudging historical details just like he does with numbers and words?

This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.

If Krugman isn't blaming Bush and/or the GOP, it's a safe bet he's at least blaming the free market. Thankfully we had Milton Friedman to tell us that it was the Federal Reserve that directly caused the Great Depression by sparking and fanning the initial financial crisis. The economy was already under strain in the late 1920s; the last thing it needed was a deflationary shock. This isn't natural, mild deflation that my friend Josh Hendrickson has talking about, but a massive slashing of the money supply, far greater than anything possible under the free market during the same period of time, that confuses borrowers and lenders alike, preventing them from making the right decisions.

There was a mild, lesser-known recession in 1927 to which the Fed responded, but in 1928, the Fed already began tightening monetary policy. It "raised the discount rate from 3.5% to 5%. Because nominal prices were falling, the latter translated into a real discount rate of 6%, which is quite high in a year following a recession." Now, some erroneously claim that the Fed was even trying to expand the money supply. That argument ignores that when the Fed "made major purchases of U.S. securities, and cut interest rates from 6 to 4 percent," that still didn't undo that the Fed had previously sold three-quarters of its Treasury holdings, and that interest rates were higher than when the Fed started! So let's not emphasize the bank failures themselves, which are merely a symptom. The cause was the monetary policy that affects all banking operations.

The Fed didn't reveal to the public precisely what it was doing, so its monetary machinations confused buyers and sellers in any market. People knew something was wrong, but everyday people can't readily perceive that there are fewer dollars going around. What people at the time did know was that big layoffs were taking place, and those who couldn't find new jobs in time had to, naturally, tap into their savings. Their expectation was that they can withdraw a dollar at a dollar's value. It's true that banks lend out most of their savings at any given time, but it was more than millions of Americans trying to pull their money out at once. The sum of their claims exceeded what was now there: eventually the Fed's actions reduced the money supply by nearly a third.

If the money supply is cut, most prices can adjust as sellers become aware. Deflation increases a currency's purchasing power, so prices will go down. Wage earners can be paid less, and in fact must be, because sellers must cut prices. This, though, is a problem for borrowers and lenders. Deflation means that as people earn less, they'll find it harder to repay existing loans -- not inherently bad if it's natural, but the deflation of the Great Depression was artificial, not to mention much larger than anything naturally occurring. Today, we just can't conceive the havoc of having to repay loans with a money base only two-thirds of what it was.

You may wonder why I've been talking about this for four paragraphs, to counter just one line, but it's to demonstrate that by a simple examination of history, Krugman is flatly wrong to blame the "free market" for the banking problems.

As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way.

Krugman is correct here, but again, only because he's speaking so generally.

To grasp the problem, you need to understand what banks do.

If there's one thing we've learned from Krugman over the years, it's that we should be skeptical of what he says, especially when he assumes this smug "professor" tone.

Banks exist because they help reconcile the conflicting desires of savers and borrowers. Savers want freedom — access to their money on short notice. Borrowers want commitment: they don’t want to risk facing sudden demands for repayment.

Krugman's explanation is unnecessarily complex. Banks are simply "brokers," middlemen who create a marketplace where buyers and sellers can come together. The sellers are those who wish to lend, and buyers are those who wish to borrow.

Krugman's explanation is also partly wrong. It's based on the liberal myth of "zero-sum" (that if someone gains, someone by definition must lose). The desires of borrowers and lenders are actually no more "conflicting" than a deli's desire to earn money conflicts with my desire to buy lunch. Borrowers wish to borrow money at a certain premium, and lenders wish to get a return on money they cannot touch.

He's furthermore wrong in his explanation of what savers and borrowers want. Savers don't necessarily "want freedom — access to their money on short notice." Savings are often tied up and cannot readily be liquidated at face value, which savers accept when they invest in instruments of a clearly specified duration (CDs, bonds, notes, etc.). Conversely, borrowers do "want commitment" in a way, but when Krugman says "they don’t want to risk facing sudden demands for repayment," it's meaningless because it's obvious. Loans are made on terms, whether mortgages, auto loans, credit card and other revolving loans, even margin calls. What borrowers do want is assurance that they won't have to pay back more than what the contract says, or pay it back earlier than specified.

After spending three short paragraphs explaining bank runs (which is correct because he kept it simple), Krugman praises intervention:

That, in brief, is what happened in 1930-1931, making the Great Depression the disaster it was. So Congress tried to make sure it would never happen again by creating a system of regulations and guarantees that provided a safety net for the financial system.

Indeed! The Federal Deposit Insurance Corporation, coupled with Fed action (to "inject liquidity" however and as it deemed necessary), successfully prevented bank runs. It did not, however, eliminate the fundamental problem of banks making bad loans. The very existence of the FDIC, coupled with the promise of central bank action, created a moral hazard. Banks were hardly discouraged from making riskier loans than if they had to eat the losses, and moreover, the implicit promise of a bailout encouraged them to make riskier if not corrupt loans -- whether the S&L bailouts two decades ago, or the subprime situation now.

Ultimately, "safety net" means that the responsible American is made to pay for the sins of the irresponsible, which is in line with Krugman's collectivism.

And we all lived happily for a while — but not for ever after.

Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.

For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.

Do you see? Like above, Krugman isn't talking about preventing problems, only lamenting that they weren't FDIC-insured, which is the same to wish that "If only the federal government were responsible for bailing these people out."

The Federal Deposit Insurance Reform Act of 2005 and its followup Federal Deposit Insurance Reform Conforming Amendments Act of 2005 set a top limit of the Deposit Insurance Fund at 1.5% of all insured deposits. That means anything over 1.5% is shifted to the American taxpayer. That prompted Congressman Ron Paul to warn about the Reform Act in 2005 from a practical perspective as well as constitutional: "In the event of a severe banking crisis, Congress likely will transfer funds from general revenues into the Deposit Insurance Fund, which would make all taxpayers liable for the mistakes of a few."

As we've seen, though, the federal government didn't need the Act or anything similar to bail out the S&Ls in the late 1980s and early 1990s. Today, Krugman wants it to happen again with those who invested in mortgage-based securities, or at least laments it can't happen by the FDIC? Why should the rest of us pay for the foolishness of others? Anyone who shifted investments to CDOs did so deliberately, and with the knowledge they could lose value. Just like stocks, corporate bonds, etc., CDOs simply aren't covered by the FDIC, and investors knew that every time they looked at a prospectus. If they didn't bother to look at a prospectus, well, that's their fault.

As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.

Until now, I thought even Krugman knew that if you wanted to earn maximum returns, you had to accept maximum risk. Why should collateralized securities be considered "safe" and thus subject to a taxpayer-provided bailout?

In fact, however, we were partying like it was 1929 — and now it’s 1930.

The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.

After talking about the evils of this "shadow banking system," why isn't Krugman happy that people are getting out of it? After all, he shouldn't be calling it a crisis, but a correction.

In fact, Krugman should be delighted that this gives the federal government more money to spend, and that those evil capitalist bankers have less capital available. The rest of us know that the way the federal government spends, our money is far more at risk of being wasted by Washington than being lost in CDO investments.

Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades.

Even if Mr. Bernanke pulls it off, however, this is no way to run an economy. It’s time to relearn the lessons of the 1930s, and get the financial system back under control.

Ron Paul also said when opposing the Reform Act, "Immediately after a problem in the banking industry comes to light, the media and Congress inevitably blame it on regulators who were 'asleep at the switch.' Yet most politicians continue to believe that giving more power to the very regulators whose incompetence (or worse) either caused or contributed to the problem somehow will prevent future crises!"

Similarly, Krugman expects the Federal Reserve and the federal government, the very engineers of the current financial crisis, to "fix things"? It was the Federal Reserve that caused the Great Depression, the stagflation of the 1970s, the 1990-91 recession (look at the rates from the late 1980s through 1990 and tell me what 8% and 9% FFRs will do for economic growth), the 2001 recession, and now the subprime mess. I had the pleasure of meeting Bruce Bartlett a couple of weeks ago, and one thing we talked about was our central bank. As he so well put it, "The Fed always overdoes it." It tightens too much, or loosens too much. I'll add that it creates bubbles and pops them.

Then there's the federal government. Besides the moral hazard of bailouts, it pushed mortgage lenders to lend more money to minorities. Stan Leibowitz wrote an excellent history of how ACORN complained in the 1980s that low-income minorities weren't getting as many loans. The fact that banks rejected loans on the basis of ability to repay, not race, didn't deter Congress and the Clinton Justice Department from using legislative and executive blackmail to force lenders to make less unsound loans. It turned out, not surprisingly to those of us who understand market forces, that banks didn't want to make the loans because of the high risk they wouldn't be repaid. Yet the liberal media turned this into headlines like, "Minorities hit hard by rising costs of subprime loans."

And Krugman really believes that more regulation, more oversight, will prevent crises in the future? Well, I suppose that when you're delusional enough to blame the "free market" for what it didn't do, you're delusional enough to believe the Fed and government will "rescue" us from the financial monster they created.

Give us this day our daily propaganda

I saw a couple of news headlines recently that reminded me that I had an old screenshot I hadn't gotten around to blogging about.



This was from the morning of March 4th, when the Yahoo News editors were stupid enough to put up a headline about February 27th. It was typical mainstream media bullshit about February 27th's market decline, which they'd like to have people believe was a major crash. I debunked that a ways through this post, and let me update the figures. Year-to-date, the DJIA has gained only 0.8%. But if you had bought a Dow Jones Industrial Average index fund on February 28th, the day after it closed at 12216.2402, then your purchase as of April 5th's close would have already gained 2.8% (the DJIA closed at 12560.8301). If you had bought on March 6th, the day after the market "tumbled" to 12050.4102, then your purchase as of April 5th's close would have gained 4.2%. (Below I'll explain why I'm talking about buying on the next day, not that day.)

Well, this is how the free market works. When people are imprudent or desperate enough to dump assets that are declining in value, but the assets are actually worth more (whether at present or in the long term), then smarter people will be happy to oblige by buying. I don't know about the rest of you, but being far smarter than the average liberal, I like living in a reality where smart people are rewarded while stupid people are left behind. This isn't to say stocks always go up after a few months, but in addition to being wise about long-term investments, you can do well by spotting buy opportunities when a bull market dips (which is by definition temporary).

Oh, the article itself? I can't find it anymore, but part of it is reproduced here. The MSM's desired hysteria was over the fact that very heavy trading caused a delay in the recalculation of the DJIA -- but remember that its very name tells us it's an average (a weighted one, actually). Contrary to what the stupid headline implies, the DJIA didn't drop quickly because of a computer error or computer-decided trades. The only thing that happened was that the software calculating the average merely fell behind (which is strange considering there are only 30 stocks in the DJIA), whereas individual securities were fine. Smart investors, let alone the savvy traders on the floor, aren't going to pay attention to an average, no matter how major. Had there been problems with individual securities' prices, then trading would have been halted immediately, but there were no such problems.

Now, that post from a ZDNet blog was particularly stupid:

It will be interesting to see whether the SEC tracks down anyone making large arbitrage gains as the markets drifted further and further out of sync - something some one with early or even advance knowledge of the glitch could have used to make billions.

The fool doesn't know what he's talking about. There's a reason why I talked above about buying DJIA index funds the next day: such index funds are open-ended, meaning their values are based purely on the underlying securities (Net Asset Value). Open-ended mutual funds' values are recalculated only once a day, after the day's trading. Now, close-ended mutual funds are limited in shares, so their prices change with supply and demand, independent of their NAVs, just like they were individual securities. But I've never heard of any closed-ended DJIA funds: there really wouldn't be a point, because you'd spend too much time determining the underlying securities' value relative to the current market price. On a side note, part of my day job involves scrutiny of employees' trading in open-ended versus closed-ended funds.

So in short, such "arbitrage" is impossible with the DJIA, NASDAQ, S&P 500 and other major indexes. Even assuming he's correct, the DJIA was lagging behind, so yes, you could buy when the markets indicated something else. You'd also be throwing away your money, because you'd be buying DJIA index shares when the underlying securities were worth less. You could sell index shares short, but again, the share value is recalculated only once a day, after all trading, so what would be the point?

You can try such a trick with a close-ended fund, which you can buy at "par" (equal to NAV), at a "premium" (greater than NAV), or a "discount" (less than NAV). You just need to find a close-ended fund at a good discount, right? Well, by the time you find one, you might have spent so much in time and other resources that you'd miss out on a solid long-term investment.

All right, for our next piece of daily MSM propaganda:



This was from Thursday, April 5th. Is the first headline supposed to be for news or an op-ed? For crying out loud, who needs Iranian apologists at the UN and Arab League when the mainstream media will do just fine? A while back, the AP reported with an almost cheerleader tone, "U.S. Troop Deaths Show Sunni Resilience."

And of course, one headline is a jab at President Bush for meeting with Russian general Vladimir Shamanov, who has been accused by Human Rights Watch of committing abuses in Chechnya. The White House's official counter was that Bush didn't know of the allegations, which is entirely plausible: do we really expect the President's staff to keep up on what every little "human rights" group says?

On the other hand, where is the outrage about Nancy Pelosi's unconstitutional trip to kiss Bashar al-Asshead's terrorist behind? As our friend McQ of QandO notes, there was a whisper in mainstream media, but it was quickly drowned out. And the headlines read, "Pelosi Shrugs Off White House Criticism."



And then this morning, ah yes, a bunch of mountain climbers -- "some of whom have scientific training" -- talk about melting snow and shrinking glaciers as if they're "proof" that man is behind the Earth's warming. Whether the Earth is warming is not in question. There are very few genuine "climate change skeptics," and I'm not one of them. What I and others are saying is that the Earth has been warming as a matter of natural course, just as it has previously cooled on its own. Even extreme proposals like the Kyoto Protocol, as the NCPA notes the National Center for Atmospheric Research calculated, would reduce global temperatures by 2100 by only 0.19 degrees C at best.

How do markets clear? Valentine's Day edition

Previous:
The rule of law, "overpriced," market clearing, and information in markets
Happy price-gouging day!
How do markets clear?
How markets work with imperfect information

Earlier today I found myself recalling a "Married With Children" Valentine's Day episode where Al and others, procrastinating in buying gifts, scramble for the last few items remaining. The store turns it into an auction where the husbands reveal how desperate they are, and prices reach several times the regular retail price. I won't say anything really new tonight, but I thought for tonight I'd help us guys feel better and post a reminder about why we're spending more.

Even outside of sitcom absurdity, we guys will spend much more for the most prized flowers on Valentine's Day than we would any other day of the year. Those who understand free market processes know there's nothing wrong with that. As I've explained previously, when prices are left free to adjust, then markets will eventually clear, given time. It's dependent on the quality of participants' information, of course, but as the quality approaches perfection, then markets will clear perfectly. In reality, information is not perfect, and because information has a cost, both buyers and sellers will settle on prices where, they judge, the cost of improving information won't exceed the benefit. A common example in the real world is advertising something for sale in additional venues, which certainly improves information for potential buyers, but in the end it may not yield an increased profit as great as the cost of the additional advertising.

Last year, I noted that the high prices also minimize search costs, because prices fundamentally are information about an item's scarcity. You might spend $100+ on a dozen roses, arranged and delivered in glass, but be glad you didn't spend $10 in cash only after spending several hours trying to find the last roses at that price. In the end, buyers and sellers will settle at an equilibrium point where the price reflects the "convenience" of not having to run all over town. Remember the auction toward the end of "Jingle All the Way"? In a real situation, some people would be glad to pay double the price, and much more, so they can stop searching.

Besides, the flower shop, candy store, et al, take the risk of offering a certain quantity of items, counting that they'll all sell (or at least enough to make a worthwhile profit). As risk-bearers, they are particularly justified in seeking whatever profit they can get; they do not force customers to pay the prices.

King of the socialist moonbats, part III

Previous:
He's the new king...of the socialist moonbats
King of the socialist moonbats, part II
What hath the free market wrought?
In Chavez's footsteps
"For wide is the gate, and broad is the way, that leadeth to destruction"

First of all, guess who said the following:

These improvements [in Third World countries] have not taken place because well-meaning people in the West have done anything to help--foreign aid, never large, has lately shrunk to virtually nothing. Nor is it the result of the benign policies of national governments, which are as callous and corrupt as ever. It is the indirect and unintended result of the actions of soulless multinationals and rapacious local entrepreneurs, whose only concern was to take advantage of the profit opportunities offered by cheap labor. It is not an edifying spectacle; but no matter how base the motives of those involved, the result has been to move hundreds of millions of people from abject poverty to something still awful but nonetheless significantly better.

I'll give the answer at the end. The main story is that Venezuela's proto-dictator, Hugo Chavez, is at it again. This time, flanked by his Marxist godfather Fidel Castro, he blamed Latin America's economic troubles on the free market. Apparently their brother-in-collectivism, Bolivian President Evo Morales, wasn't there. We've heard their spiels before, like from Paul Krugman, who blamed Argentina's problems on laissez-faire. Neither could be further from the truth.

There are no economic problems from Mexico to Tierra del Fuego that couldn't be solved by the free market, which, contrary to intellectually bankrupt leftists, does require the rule of law. The free market simply cannot operate without principles like private property rights and the freedom from government coercion. So let's look at private property rights in Cuba...ok, bad example. On second thought, how about property rights in Venezuela? Heavy progressive taxation deprives people of their own earnings, and the oil industry, the country's main source of wealth, is nationalized. What nationalization really does is allow the government to distribute wealth to its leaders and cronies. The masses will get very little, but just enough of a taste so they think el presidente is a hero. And courtesy of the government's education monopoly, they're indoctrinated well enough that few ever consider that they'd be better off with private ownership: maybe you don't own the McDonald's, but working behind the counter is a better alternative to waiting for scraps at the back.

Remember that "nationalized" is just a euphemism for socialized: what's yours isn't officially everyone's, but it could be. Hopefully you don't own something or are involved in an enterprise that is too valuable, otherwise the military will come to seize it. Evo Morales demonstrated that back in June, when he sent in the military to take over the natural gas fields. That, of course, begets the question: if the government can take your wealth at its own discretion, why would anyone bother to do anything that creates prosperity?

How about a comparison of prosperity? The news article says that with Venezuela, "Mercosur [has] a combined market of 250 million people and a combined output of $1 trillion in goods and services annually." Big deal. The article adds, "NAFTA, combining the markets of the United States, Canada and Mexico, has 450 million consumers and a combined gross product of about $14 trillion." Now consider that the 300 million people in the United States accounts for $13 trillion of that. It's not like the United States has that much more natural wealth, nor does it use its military to force other nations into trade. So other than the U.S. accounting for the massive difference between NAFTA and Mercosur, what accounts for the difference between NAFTA and is the difference?

Well, the United States prospers because it is based on the free market. Our various levels of governments may not always act like it, but freedom was always the basis of this country. That includes the freedom of buyers and sellers to engage in commerce on their own terms, ideally without government telling them how to do things (sadly not the case, with all our regulations), and most certainly without the threat that government can just seize people's property (even more sadly not the case, as shown in the Kelo decision that sanctioned eminent domain at a tyrannical level. Things ought to be better, but until we can reclaim real liberty in this country, thankfully we're free enough that we still prosper as a country. If local, state or federal governments could simply seize a Wal-Mart store's inventory to distribute to a town, or "nationalize" financial firms that are at the heart of our wealth, what would that do to our economy? No one would bother to start up companies of any significance, and even if they wanted to, what investors, domestic or foreign, would want to risk their money? So we would all be left that much poorer.

Also, the United States, again for the most part, believes in freer trade with other nations. It's not true free trade, but it is at least liberalized. We will even trade with China, despite it being an ideological enemy that frequently does us no favors, because the benefits outweigh the costs. Both sides have more to gain than enacting trade restrictions, let alone going to war, and like all situations of liberalized trade, both sides are equally dependent. In fact, China has more competitors in producing than the U.S. has competitors in consuming, and its banking system would collapse if it couldn't buy all those U.S. Treasury bonds to use as collateral, so China is actually more dependent on Sino-U.S. trade than we are.

If Latin America wants to prosper, they will trade freely, not selectively. There's no such thing as "excess free trade," contrary to what some anti-globalists say. Why should I buy less food from my local grocer, so that I can purchase my own? The reason I don't is the same reason that part of my rent pays for people to mow the front lawn, or why people of low incomes still don't try to make their own clothes: it's far more profitable to work in what you specialize in, then buy what you want from others. Real economics knows no distinctions between individuals, families and borders, so ultimately there's no difference between buying from your neighbor and buying from someone halfway around the globe.

Did you make a guess as to who said what I quoted at the top? Was it Greg Mankiw, who was unfairly pilloried in mainstream media for pointing out the benefits of outsourcing? Perhaps Milton Friedman? Larry Kudlow, Don Luskin, or another supply-sider? If you guessed any of those names, you were wrong. It was Paul Krugman in a March 1997 article for Slate.

Yes, even Paul Krugman has ardently spoken for free trade to the extent that he defended sweatshops: "Bad jobs at bad wages are better than no jobs at all." I didn't realize until this afternoon that he even conceded their benefits. But there's a big difference between 1997 and now: a Democrat was in the White House then. Instead of pointing out today that large corporations, motivated by greed, have been guided by the Invisible Hand to improving the lives of low-end workers, Krugman has changed channels. Substitute "Wal-Mart" for "multi-national corporations," and Krugman suddenly sounds like those he criticized nine years ago:

There's no reason Wal-Mart couldn't have reasonably high wages...But they choose not to.

But as I pointed out a few nights ago, sweatshops can't pay workers more, because that necessitates increasing the products' prices, and therefore consumers won't buy as many. "Bad jobs at bad wages are better than no jobs at all." It's not a terribly profound or pithy thing to say, but pre-2000 Krugman was correct to say it.

Another difference between Krugman then and now, which I also didn't realize until today:

"But time has not been kind to [John Kenneth Galbraith's] theory [of giant corporations ruling society]. We have not become an economy of GM-sized corporations; in fact, large corporations play a considerably smaller role in the economy now than they did when he wrote his book, and for that matter GM itself is a lot less immune from market pressures than it used to be. Rather than evolving away from a market economy and the constraints it imposes, we are now more firmly ruled by the Invisible Hand than ever before." - Paul Krugman, September 1996

"Krugman noted that General Motors Corp. was the largest American company during the 1960s and paid good wages and benefits to its workers. Today, he said, the country's largest corporation is Wal-Mart Stores Inc., which pays its workers $17,000 a year." - Paul Krugman, June 2, 2006

What a difference a decade makes, doesn't it? Ten years ago, no big deal with GM: it's subject to free market forces like everyone else (though it always was and shall be), and big business isn't dominant anyway. Today, Krugman points to Wal-Mart, now the largest American corporation, as the benchmark for labor. It's no wonder Krugman would have gotten a top economics position had Kerry won the election: they're two flip-floppers made for each other.

To be fair, I've changed positions on various issues, but there's a difference here. I admit it, for one. I don't deny that I was once a protectionist, or that I was pretty Marxist for a short while in my teenage years. Also, I don't emphasize or ignore issues because of my loyalty to one party. Krugman rarely misses a chance to criticize Bush and the GOP, but I'm an equal-opportunity political basher who goes after both parties.

Protectionism by any other name still stinks

Previous:
The error of protectionist economics
Protectionism is for losers
The free market lets the best come out on top
If only protectionists would put all that effort into improving themselves

Protectionism only hinders an economy, but its proponents insist it's necessary to "save domestic jobs." In fact, as we saw with President Bush's steel tariffs, protectionism destroys more jobs than it saves.

Sometimes protectionism comes disguised as an appeal for economic stability, like right now in Chile. Copper prices have been rising dramatically, especially in the last year, which has greatly benefited Chile, the world's biggest copper exporter. The demand has strengthened its peso against many currencies, including the U.S. dollar, because foreigners must exchange their currencies for pesos with which to buy Chilean copper. Exporters of agriculture are very worried, however, because a stronger domestic currency makes exports more expensive for foreigners. They want Chile's central bank to weaken the peso, which will benefit them but harm everyone who buys imports -- in other words, protectionism. My BS sensor kept going off as I read this:

Chile has an enviable dilemma: too much money

SANTIAGO, Chile (Reuters) - Chile's new President Michelle Bachelet is facing her first big political test, one some might envy: too much money from the country's rich copper exports.

Opposition leaders, wine makers and fruit growers are calling on Bachelet to stem a flood of mining dollars that could spell disaster for many exporters, Chile's economic motor, by strengthening the local currency too much....

"We can't just sit around and wait for a disaster to occur, which is going to happen if our agricultural sector continues to be hit by this," Sen. Juan Antonio Coloma, of the opposition right-wing Independent Democratic Union, told Reuters.

Chile, a country of 16 million people and Latin America's star economy, is the biggest world producer of copper, whose price has shot sky high due to heavy Chinese demand for material for buildings and power plants.

Zooming copper income has inundated Chile with greenbacks, making the local peso currency appreciate and handing the government fat budget surpluses and a chance to pay down debt.

That's great for consumers snatching up cheap imported electronics but the strong local currency spells disaster for exporters of wine, table grapes, berries and salmon whose dollar-denominated revenues are worth less and less in pesos.

Wine makers have put the brakes on investment and the billion dollar table-grape industry says thousands of jobs are threatened and that growers will lose more than $1,000 per hectare (2.5 acres) of grapes this year as the peso nears six-year highs.

"We're seeing a total lack of sensitivity by the economic authorities... I don't believe they have any interest in taking more drastic measures to correct the problem," Luis Schmidt, president of the Federation of Fruit Producers, told local media.

Sen. Coloma said the government should get the peso under control by holding copper dollars in offshore investments so they don't enter the country, and by letting let Chile's private pension fund system invest more outside the country.

The government and the central bank are being very cautious about intervening in the foreign exchange market. That is typical of austere, fiscally conservative Chile, which has a law that forces the government to spend in bad times to stimulate the economy and save in boom times to control inflation.

Bachelet says she will not yield to the temptation to go on a spending binge, but she has not said what she will do about the strong peso....

Juan Carlos Sepulveda, another fruit grower leader, said the government must look after the country's 13,800 fresh fruit producers, who provide 420,000 direct jobs compared with 50,000 in mining and whose exports were worth $2 billion last year....

Chileans say the government should spend some of the windfall on education or technological development yet are wary wanton spending stimulating inflation....

Talk about junk economics! First, how can a country have too much money? In this case, it's real wealth, not just more paper currency by the central bank. As we'll see, the problem isn't that Chile is earning too much money from exporting copper -- it's that the agricultural sector is jealous, since it's being left behind due to its own uncompetitiveness.

Second, Chile's government has a law requiring it to spend to stimulate the economy? That's not "fiscally conservative" -- that's Keynesian bunk! What is also bunk is the notion of government running surpluses during good times so it doesn't cause inflation, because its spending will increase the demand for (and hence prices of) goods and services. As Don Luskin so well put it:

But more people wanting wood and cement isn't inflation — it's just supply and demand. Inflation is when the Fed prints too much money, and the price of goods denominated in that debased currency rises in response. But that's not the way some of the econometric gurus at the Fed see it. They believe that rising consumer demand causes inflation. That means they believe that prosperity causes inflation. They believe that jobs cause inflation.

The main theme of the news story, however, is that the protectionists don't give a damn about anyone else, only their own jobs. This is true whether they're the heads of agricultural "associations" (i.e. union bosses) or opposition leaders looking for a major issue on which to criticize President Bachelet (like U.S. Democrats who suddenly became fiscal conservatives). When they talk about saving jobs, they never admit the flip side that imports will become more expensive for everyone else.

A strong peso supposedly threatens the jobs of 420,000 Chileans in fresh fruit production, and there are only 50,000 Chileans in mining. Very well, let's make this a matter of pure numbers. Chile's fresh fruit exports may have been $2 billion last year, but its copper exports for just the first 11 months of 2005 were worth $15.55 billion. In fact, its March 2006 copper exports alone were worth over U.S. $2.75 billion. So what will the Chilean government do, save 420,000 jobs at the expense of 50,000 others, though the smaller group produces over eight times the wealth? Actually, Chile's top politicians probably will do just that. After all, better to lose 50,000 votes than 420,000.

Chile's copper exports grow despite the strong peso. If copper sells for $2 per pound on the New York Mercantile Exchange, and the peso strengthens from, say, 515 to 500 vis-à-vis the U.S. dollar, then Chilean exporters earn fewer pesos. But the global demand for copper has more than offset that. The same is not true for Chilean wines or fruit: when those get expensive, people turn to plentiful substitutes like Argentinian or even Australian wines, and fruit from other South American nations. At the present time, Chile's copper industry happens to produce something that's more profitable and in greater demand. So why should the less-competitive agricultural producers be entitled to "relief," given to them by government, and at the expense of everyone else? Because the nature of capitalism rewards and promotes success, and, to paraphrase what Neal Boortz said at last week's FairTax debate (which I haven't blogged about yet), government punishes the successful when it assumes redistributive powers.

A scary thought is that Chile's government might pull a Franklin Delano Roosevelt and start paying subsidies to the agricultural sector. The budget surpluses would make it easy to justify this, or perhaps the government will levy extra taxes on the copper industry (the old cry of "level the playing field"). Judging by American history, the subsidies would probably be impossible to eliminate, even in times of large budget deficits.

Should we have enacted heavy taxes on the first automobiles, to protect buggy manufacturers, horse breeders and whip-makers? Or have we fallen so far into the absurd trap of protectionism that we're ready to believe the lobbyists, who claim they only want to "save hard-working people's jobs"? Had Edison invented his light bulb under today's circumstances, candlemakers would have gotten the EPA to pass restrictions hindering Edison but not themselves, like requiring proof that the emitted radiation would not be harmful. It never takes an outright ban for a protectionism-seeking industry to win, only enough hurdles for everyone else so that everyone else finds it too expensive to do business.

I personally think Chile's government and central bank should take advantage of the strong peso by paying down debt while it can do so cheaply. It could also buy U.S. Treasury securities (also made cheaper by the strong peso) for its pension system. What it shouldn't do is devalue the peso just for the sake of agricultural interests. The strong peso's big benefit that it makes imports cheaper for Chileans, such as consumer goods, and also high-end manufacturing and technology for industry. Chileans can afford more of these goods because of the income from exporting copper, allowing them to enjoy goods from the world's wealthiest nations. Why is this a problem?

Well, it's a problem for 420,000 agricultural workers, who generate less than one-eighth the wealth that a mere 50,000 in the mining industry do. So they call upon government to protect them at everyone else's expense, not realizing that the mountain will fall upon them too. Don Luskin recently cited the Smoot-Hawley Tariff's role in the Great Depression. Though I first blame the Federal Reserve's sudden tightening of monetary policy, I've cited the Hawley-Smoot Tariff as a big factor in worsening things. Domestic producers got their wish for heavy tariffs...and the result was an economic crash that affected them as much as everyone else.

A conversation about the necessity of government

I previously posted an e-mail dialogue with Tom, who does seem like a nice guy with good, unselfish intentions. He supports the notion of subsidized public transportation, and as a libertarian, I do not. I might accept a government-run transportation system if and only if it could stand completely on its own. However, the New York Metro Transit Authority and Amtrak don't collect enough revenues from selling fares and advertising space, so they need government subsidies. The U.S. Post Office almost always needs subsidies.

Here's Tom's reply from two nights ago:

In an urban area like southern Westchester, existence of usable transit is a necessity, just like fire, police, water, sewer, and garbage service. We saw NYC collapse last week during the transit strike. Parts of Westchester (like downtown White Plains) couldn't fully function if all its transit (bus and rail) shut down. Private transit operators aren't the answer; there were totally private transit systems in the US as recently as the 1970's; each was failing and therefore converted to subsidized operations.

Many people cannot drive--because of age (too young or old), medical condition, or economic circumstances. Saying those people should only work, shop, and go to school within walking distance of home is unrealistic (how many domestics can afford to live in Scarsdale?) and detrimental to the economy. It's hard to imagine a more effective way to ensure that some of the poor never attain middle class status than by virtually restricting them to ghettos 24/7; surely you agree this is unacceptable! Also, transit takes cars off the road reducing congestion for the rest of the people that drive. Increased vehicle occupancy (like transit) is cheapest method of addressing the problem of overcrowded roads and parking lots.

All transportation is subsidized. Do you oppose government spending for roads and airports? Yes, there are gasoline taxes which partially pay for construction and expansion of trunk highways, but minor maintenance (like line painting, street lighting, and snow removal) comes from general revenues. Also, the entire network of local roads (and there are far more miles of local roads than there are trunk highways) comes from general revenues (aka subsidy).

Airlines received massive subsidies after 9/11. They have also had a continuing federal subsidy for air service to small cities. United Airlines is forcing everybody to subsidize its pension systems.

And don't forget the huge subsidy gasoline is getting now by our military presence in Iraq and before that in Kuwait. (Even Rush Limbaugh said the first Gulf War was all about the "free flow of oil".) How many dollars of each fill-up go to corrupt middle-east sheikdoms? While buses & trains use petroleum too, they are far more fuel-efficient than automobiles. (Transit subsidies mainly go toward labor costs.)

Among government services, transit is unique because it gets cheaper (for taxpayers) and better (for riders) with increased use. Because the marginal cost of carrying an additional passenger is almost zero, nearly 100% of the added fare revenue passes through to the bottom line. Increased fare-paying ridership on existing buses reduces subsidy and benefits taxpayers. If ridership grows so much that additional buses must be added, riders benefit from more frequent service. Adding service to eliminate overcrowding shouldn't cost taxpayers anything because an overcrowded bus is a profitable bus. 119 passengers/hour (the largest Bee-Line buses cary up 119 passengers) at $1.75 each (the lowest adult Bee-Line cash fare) far exceeds operating costs for a single bus. The best way to reduce transit subsidies is to increase ridership on existing vehicles.

There are many things in life that I subsidize without ever directly using. I pay for schools even though I have no children. I pay for a fire department even though I (knock on wood!) have never needed them. I pay for Westchester County's golf courses even though I've never golfed. Why should something as vital as transportation be any different? And if highway subsidies are OK, why not transit subsidies (especially when transit can reduce the need for wider, more expensive roads)?

Besides, people living near the Bee-Line subsidize it disproportionately by increased property taxes. Look at real estate ads in the paper. Notice all the ads that say "on bus line" or "walk to train". (I've never seen one boast of NOT being on a bus line.) Living near transit is something for which (some) people are willing to pay a hefty premium. That premium translates into higher property values along bus lines which translates into higher property taxes along those lines. So while all Westchester taxpayers subsidize the Bee-Line somewhat, people living near bus lines support it more through higher property values.

You also might be interested in how many people rode the free Bee-Line buses in May: 3.45 million (free trips) in May 2005 vs 2.41 million (paid trips) in May 2004. As far as I know this increase was accomplished without increasing the operating cost; no additional bus runs were operated. Also, most Bee-Line subsidy comes from NYS, less than half comes from Westchester itself. In 2004 the subsidy figures were Westchester County $13 million, NYS $30 million.

And my reply:

I wouldn't say the city collapsed last week. It lost a not insignificant quantity of economic production, but I don't think it was as bad as some economists predicted. Quite a few people, those who couldn't take vacation or sick days, still found ways to get to work. The Post talked about people driving to work, who would hire three people for $5 each just to ride two blocks beyond 96th Street. It was worth it to get to work. Others walked as I did, or bicycled, or rollerbladed.

Faced with long-term prospects of not getting to far-away jobs, people would find work that they could get to. What you're saying assumes that people can only work the jobs they have today. A shift in the ability to travel would also shift people's comparative advantages. Someone relying on public transportation to get from Yonkers to White Plains might cease working at the Galleria and instead work at a local grocery store. Sure, you would no longer have White Plains as we know it, but that isn't the only option. Instead of one big locus, there will be various smaller loci spread throughout a geographic area. What did people do before long-distance commutes? My father grew up during the Great Depression, and he alloted time to walk to school and work. Sometimes a housekeeper stayed in a small room. Grocery stores operated close to or right in residential neighborhoods, because they had to. And what you might consider unrealistic was very much reality even during the glory days of the 1950s.

Free market economies are remarkably resilient and will adjust themselves. If people cannot travel long distances, for example if I could no longer commute to the city, then I would find another job closer to home. Before people were able to drive, or ride horses, they walked. The economies' physical extent, naturally, was based on the possibilities of travel. Things would simply become more concentrated, but not necessarily smaller. Also, remember that if I pay $x in taxes to subsidize bus routes, that's $x simply disappearing from my wallet. If people take jobs that don't require subsidized busing, then I'll have $x more to spend on the goods and services they provide. It's far more efficient than pouring it into subsidies, which feed the waste in government-run services.

If roads become heavily congested, then the full cost (time) of getting to work will be greatly increase, and people will seek jobs closer to home. Few things encourage you to look for another line of work than being stuck in traffic for a couple of hours, or trying to find a parking spot, which has an incredibly high opportunity cost. People could spend that time working a little more or just enjoying themselves. Economies have lots of unseen self-correcting mechanisms like this. A while back I wrote a bit on congestion, and how people will leave an area that gets overcrowded. Businesses, left to themselves, will find their own balances between higher resource costs (like housing and having things delivered) and lower commute costs. And then there are lots of government policies that exacerbate congestion.

Government creating problems it says only it can fix

I disagree that a lack of transportation reduces people to ghettos. Ghettos are simply symptoms of the people themselves. In fact, in modern times, it's government that creates them. With the best of intentions, it establishes housing projects for the poor and fails to control the criminal element, which concentrates people who have poor comparative advantages with those who don't care and those who are criminals. The way for the poor to improve their economic condition isn't to subsidize their commutes, but for people to improve their skill sets so they can produce goods and services of higher value. Decades of social programs have shown it's futile for government to throw more money into education, because people must care first. They have no reason to care about improving themselves when they can just get by, subsidized by others.

It's interesting you should mention the attempts at private transportation. They failed because had they charged high enough fares to break even, people wouldn't have paid the fares. They worked with subsidies, i.e. coercing people to pay for others' consumption of goods and services. And even if the subsidies are paid for by state taxes and not the county, it's still morally wrong. When it gets to the federal level, we have Robert Byrd taking tax monies from all over the U.S. to fund his pet projects that benefit only West Virginians. There's no incentive for West Virginians to decide what they really need and what they can afford, because they can coerce the money from others.

For the same reason, I opposed the transportation bond act, which as you may know a big majority of Westchester voters loved. They loved it out of pure selfishness, because as Bastiat said, they're living at the expense of everyone else. Their income level and overall wealth didn't matter. I, on the other hand, would rather have all subsidies eliminated, and I'll simply pay whatever fare the MTA requires to stay operational. I take Metro-North into the city all week long, and I ride the subway. There is no reason for someone in the city, Albany or Buffalo to pay for any portion of my transportation, or for any of us to subsidize a project we don't use.

As I said, the problem with subsidies is that they encourage wasteful operations. Amtrak has needed federal money from day one and always will, so long as the umbilical cord is uncut. There's no incentive for it to streamline operations. While I support gasoline taxes (they're a form of user fees), they've grown so much over the last few decades that government has no incentive to spend the money efficiently. How often have you seen the tiniest bit of I-287 construction take months, or a few workers standing around while only one is doing work? And along the lines of what I said before, the idea of using general tax monies is wrong because not everyone uses every road. It's also a bad precedent because government can simply increase taxes to pay for whatever new road it thinks is necessary, instead of carefully weighing costs and benefits.

I fully oppose government subsidies for airports and airlines. They should be left to stand -- or fail -- on their own. I've written about the airlines' woes, most of which can't compete because the fare wars exposed their inefficient operations. American Airlines is still trying to use the power of government to keep Southwest from servicing more passengers with its ultra-cheap but adequate flights. And it's flatly immoral, bordering on evil, for United workers to expect a taxpayer bailout. The pension problems stem from the basic fact that the workers aren't saving enough for their own retirement. It's true that the companies are contractually obligated to provide certain retirement benefits, but the workers need some common sense. I might sign a contract with my bank, who will be obligated to pay me 25% annual interest on a plain savings account, but I shouldn't be surprised when the bank can't perform.

Protecting pensions: not government's responsibility!

Gasoline is actually far from subsidized by our presence in Iraq. While I have supported ousting Saddam (and have since 1990), we're spending hundreds of billions of dollars and have yet to see our military intervention reduce the cost of oil. If we'd really wanted to reduce the price of oil, we'd have simply forged a deal with Saddam and turned a blind eye to his evil.

We send a lot of of dollars overseas for oil, but they do return to us in one way or another. OPEC nations buy a lot of American-produced goods and services, they buy luxury housing all over the U.S. (which generates jobs for us with money we'd just sent them), and the rest they put into Treasury bills. It's quite a benefit for both sides. It expands everyone's economies. When foreigners invest in our Treasury securities, it doubles a small portion of our income for minor interest, and foreigners get to save their earnings in high-quality, virtually risk-free bonds.

You point out that the marginal cost of an increased rider is minimal, but only to an extent before a new bus is required, and not all buses are full. It also doesn't preclude the private sector doing the same thing, and with greater efficiency insofar as calculating routes, how often to run, and the size of buses needed at various times. On the other hand, it's easy for a subsidized transportation company to provide great service when the taxpayers foot half the bill. You're also contradicting yourself: you say that an overcrowded bus is very profitable, but that adding a new bus shouldn't cost anything. Adding a new bus adds another fixed cost and therefore reduces profitability. Riders will benefit, certainly, but at taxpayers' expense. You can't have it both ways.

Don't you think it's morally wrong that you pay for schools when you don't have children? I do. I think it's even worse when parents want to send their children to private schools yet must still pay the same taxes. I oppose every kind of government subsidy to every kind of business, whether it's to golf courses, sugar farmers or transportation. It's morally wrong for government to decide for you how to spend your money, and completely selfish for people to demand that money for their businesses.

Fire and police departments aren't subsidized in the same way that transportation is, however, because they're truly public services. Ben Franklin once ran a fully private fire brigade. If they came to your house and didn't see the medallion indicating you'd paid the fee, they would march back and let your house burn down. It's a little different today with structures being so close.

Personally I favor an elimination of every tax, especially on businesses (because their taxes are simply passed on to us), and replacing them with a flat income tax. That would eliminate any disproportionately greater property taxes from proximity to public transportation. Ideally I'd like a head tax, which forces a very limited government, but most people don't understand that or don't want that. People have become accustomed to paternalist government that makes things cheaper for us, but at everyone else's expense. What most don't realize is how that lower price is offset by the higher taxes we pay.

And his reply last night:

Perry, you didn't say whether you support using general tax revenue (well above and beyond gasoline taxes) for the local road network (every road in the USA other than a toll road or an Interstate, US, or State highway). Are these local roads "true public services" (as you described fire and police departments) and therefore OK to subsidize? Or do you favor turning every county lane into a toll road with EZ-pass transponders everywhere? Should pedestrians be charged tolls too?

As to the head tax you favor, roughly how much would it be? $20 or $2000/head? (The Pentagon budget alone is over $1,000 per capita!) How could the poor be expected to come up with that much money? (And if they can't, what would you do, throw them in debtors' prison?) Isn't that like the property tax on steroids? At least you can move to someplace cheaper to lessen the property tax, but there would be no way (short of death) to avoid an unaffordable head tax.

As to NYC and the subway strike... I went to Manhattan Thursday night to look at Sak's and Lord & Taylor's Christmas windows (I guessed correctly that I would be able to walk right up and look without any waiting). Traffic on the east side was not moving at all--total gridlock even after 6pm. Outside Lord & Taylor, I saw people waiting for buses to Brooklyn (Command Buses were running) and saw jammed buses pass them without stopping. One person walked up to me near tears asking if I had any idea how he could get back home to Brooklyn (other than spending $8 to take the LIRR to Atlantic Ave--not where he needed to go). When I pointed out the bus stop, he said people there had been waiting 3 hours. Lord & Taylor was unable to stay open past 8pm three days before Christmas. People missed life-and-death medical appointments for chemo, radiation, and dialysis. If NYC didn't actually collapse, it came pretty close.

The world you envision with no subsidies (except for those few things somebody deems "true public services") seems pretty unappealing to me. No public libraries, no transportation either within cities or across the country (people who can't drive would just be totally screwed!), no universal education or widespread literacy. Presumably no public hospitals, the poor left to die on the unpaved streets, orphans forced to beg for food (and money to pay their head tax), no sewer subsidies, epidemics (no public health subsidies), no standards regarding food quality, etc. Am I missing something?

My reply tonight:

I completely oppose using general revenues (which should be extremely limited) for roads. The problem with general revenues, whether or not for specific outlays, is that a government quickly realizes it can always raise taxes to get more revenue. Instead of trimming its fat, it bleeds the people a little more. We've seen it with Andy Spano, who may not have campaigned on a lie, but his claim to have "lowered or frozen property taxes for three of the last seven years" is only 43% of the story.

Roads don't have to be toll roads, and the reason we don't tax pedestrians is because their impact is infinitesimal. Gasoline taxes as an indirect type of user fee aren't as specific in targetting like tolls, but overall gas taxes can be more efficient than tolls because time is valuable. There's another self-adjusting mechanism there: if heavy road damage necessitates higher gas taxes for the repairs, then lower-mpg vehicles will be driven less frequently. Those tend to be heavier vehicles that have the hardest impact on road surfaces (other than natural damage like potholes).

Since you see how much money a head tax would cost per capita, you should see my point that it forces a strictly limited government. It's morally wrong for a person to pay just $20 into the system and get $100 that is effectively taken from someone else. It's fair, though, for everyone to pay $20 for the equal benefit of things like police, fire and courts. People of better means can also demonstrate compassion by paying the burden of someone who is in tough times. It's not a stretch considering Americans, for as much as we're taxed, donate $250 billion a year to private charity. It's the same principle by which schools do fundraisers: you've already paid your taxes, but you'll give additional money regardless of how much others put in.

Gone will be all the wasteful social spending (up to $1 trillion a year now) and all the bureaucracies that aren't worth pennies on the dollar. Then people can start to take care of themselves, rather than depending on government taking from Peter to give to Paul. Today only the top half of wage earners pay any income taxes, making it easy for the rest to vote for politicians that promise new spending for every social ill...but the spending never gets us anywhere. For all the trillions we've spent combating poverty, it's been futile because government simultaneously creates successive generations of dependents. Government-built communities for the poor earned such bad reputations that "the projects" quickly gained a bad connotation.

One doesn't have to be a Jude Wanniski disciple, let alone a supply-sider, to see how low tax rates boost economic production. Kennedy and Reagan proved it. And wealth, even if concentrated at the top at its creation, does "trickle down," or more properly put, it does spread through the rest of the economy. If "the rich" have more money, it means they have more to spend or save, which will create more jobs. We might not have a big government that tries to pay for our health care, but it will be a society where people can find work, and where those that work can earn enough to take care of the less fortunate who can't. That's why I support people, of any economic status, keeping what they earn. When they spend it, it supports someone else's job. When they save it, that's money that goes into business loans, auto loans and mortgages, which not only creates jobs but increases wealth. The problem with government spending in general is that there's so much pork, and so much rent-seeking by special interests, that it can't possibly be as efficient as private sector spending. Like the transit union showed, we pay certain government employees far more than what they are really worth.

I'm glad you brought up public libraries. If you've ever tried to get help at the one in White Plains, you'll know exactly why I hate them. Never before have I encountered such incompetent people who ignored me when I had a legitimate complaint, lied to me, then ignored me again. Yet my money is forcibly taken from me to help fund these people's paychecks. In the private sector, I simply stop going to that business.

Regarding the city, it still survived. It did after 9/11 when people had no choice but to walk home to the outer boroughs. As far as gridlock, well, people were warned, and it's not like the FDR, Major Deegan or other major thoroughfares haven't been virtually shut down because of big accidents. Sure, it was tough for a lot of people to get around, and my heart went out to them, but didn't God give us legs? The Post had an article on a one-legged man who, using crutches, walked three miles in the cold. He did what he had to do.

http://www.nypost.com/news/regionalnews/59303.htm

It's true that a lot of businesses made hardly any money, and that will ripple through the economy, but they're a fraction of total businesses. Most people did what they could to get to work, which shouldn't surprise anyone. It's for no light reason that New Yorkers are called the toughest and most resilient people. Some in my office are working longer hours to make up the lost time, if they couldn't use days off, so I don't think the people who lost a full three days of income will be as many as we feared. Those who spent more on transportation will likely to cut back on other expenses, but it's important to note that shifts in spending are not losses. If I spend $10 on a cab ride and then spend $5 on lunch instead of $15, the economy is still the same.

I doubt it will be anywhere near the $400 million per day that some economists claimed. Besides, when people couldn't shop in the city, they shopped closer to home. From the news, friends and co-workers, I heard about malls in the outer boroughs being packed with people, at the expense of the city. If people didn't spend, then they saved their money, which is then borrowed. Either way, it's still zero-sum with no economic loss.

People may have missed scheduled medical appointments, but I haven't heard any news reports of a single person dying because public transportation wasn't operating. If the medical needs were really of an urgent nature, 911 and emergency vehicles were operating. That's partially why Bloomberg ordered a couple of avenues shut down to passenger vehicles. Radiation treatment isn't as time-critical, and a delay of a few days generally doesn't jeopardize a person's life. Dialysis might, but as I said, ambulances were still running.

You talk about my world having no transportation and no educated people, and no sanitation system, leaving the poor left to die on the streets, but why do you think government the only power capable of alleviating those problems? What did we do before government? My father walked to school and work because that was his only option; and the local economy developed and localized around people having to work. One of my friends works full-time yet home-schools his three children, and I know they will get a far superior education than in the terrible public schools. And when the poor died of hunger, do you count the 20 million that Stalin starved, or the possibly 70 million that Mao starved? Those were governments that claimed to have the way, that said they'd take care of everyone equally.

Throughout human history, it's never been government that lifted the poor. It's technology, which was spurred by capitalism, which you can't have without free markets. Now, when the poor died on the streets, it wasn't because government didn't redistribute wealth, but because our agricultural technology couldn't produce enough for everyone. Today our agricultural output is so great that the U.S. is the world's largest food exporter, AND our poor can eat so many calories that they're starting to have an obesity problem. Technology is also what made our food quality standards possible. Such standards are certainly nice, but putting Sinclair Lewis aside, unless the technology to achieve them existed beforehand, government could have mandated the answers like a Marine drill sergeant telling a recruit to defecate little green apples. You can do it till you're red in the face, and he still won't be able to do it.

Things like food standards, clean water and sanitation systems developed for the same reason. They're manifestations of a society that grew wealthier so it could afford such things, not because government sat around and dreamt up a good idea. When a society as a whole advances and gains wealth and technology, people will naturally want higher standards of living, and they'll spend larger portions of their higher incomes to get them. Faced with the demand for these goods and services, companies have an incentive to provide things like better food, or a septic system for your house, because people naturally want it. Then competition comes into play: if you can provide the same product at a higher quality and at the same (or slightly higher) price, you'll get more business. Cafe Hayek recently had a very poignant entry on Frank Perdue, who didn't need the government telling him what to do.

It Takes a Tough Man to Make a Tender Chicken

I'll finish with something that Bastiat said over 150 years ago, which is still extremely profound yet simple. There is really very little government can do that we can't on our own. It's just that for the last several decades, government schools have taught us that we can't do these on our own.

Do those worshippers of government believe that free persons will cease to act? Does it follow that if we receive no energy from the law, we shall receive no energy at all? Does it follow that if the law is restricted to the function of protecting the free use of our faculties, we will be unable to use our faculties? Suppose that the law does not force us to follow certain forms of religion, or systems of association, or methods of education, or regulations of labor, or regulations of trade, or plans for charity; does it then follow that we shall eagerly plunge into atheism, hermitary, ignorance, misery, and greed? If we are free, does it follow that we shall no longer recognize the power and goodness of God? Does it follow that we shall then cease to associate with each other, to help each other, to love and succor our unfortunate brothers, to study the secrets of nature, and to strive to improve ourselves to the best of our abilities?

Tom raised some good points, I will say. It comes down to these questions. Which do you have more faith in, government or people? Is the purpose of government to prevent us from harming each other and otherwise leave us alone, or to protect us from the risks and ravages of life?