The Common Sense Appraisal of Regulation

The way I see it there are only two possible justifications for regulation (aka interfering in other people's private decisions).

1. people are too stupid and/or uninformed to make their own decisions
2. peoples actions have effects (good or bad) on others (third parties) which they do not take into account in their decisions.

When I say "justifications" I do not mean that if they were true then interventions connected with them would be justified. In fact, particularly with 1. I do not see it as a justification at all. But, most people who support regulation fall back (when you boil it down) on either or both of these and nothing else. So it is worth examining them a bit more closely.

Let's consider 1. Is it true? Maybe in part, but not to the extent that most interventionists think. I think most people are more inclined and able to be informed if they are encouraged ("incentivized") to be so. But let's assume it’s true. So what? As most people reading this already know, there is no reason to presume that the regulators know any more than the people they are regulating do, or that, if they do, they can be trusted to do the right thing - the well-known knowledge and incentive problems. Further, there are strong reasons to believe that when acting in their own interests people will do better than regulators acting for them - because they know more about their own preferences and circumstances and because, in acting in their own interests (which includes the interests of those they care about), they have a greater incentive to get it right. The reward for doing so, and the cost of not doing so, is greater for them than for some disconnected regulator. I conclude that this is a bad justification after all - it is an elitist position better served to satisfy the ego and conscience of the elites than of the people they purport to help. 

Let's consider 2. The tired "externality/market failure" argument. Logically this is more resilient to criticism. If it is understood as essentially a question of the lack of property rights, and if it is not a simple matter to establish clear and enforceable property rights, (for example automobile emissions, global warming, protection from foreign invasion) then it might be persuasive to say that some kind of regulation is worth considering. But to be decisive a few questions have to answered affirmatively first. Is the external cost or benefit proven? Can the magnitude be estimated? And, most importantly, can it be decisively shown that regulation to deal with it will work and will be worth the cost in resources and loss of freedom? Every economist knows that to justify regulation it is not sufficient to identify an externality - though it may be considered necessary. In addition it has to be shown that the external effects of the intervention itself is justifiable. Those who support individual freedom and autonomy and distrust big-government initiatives, no matter how well-intentioned, will require a hefty burden of proof, one that can be seldom overcome. The knowledge and incentive problems apply just as much to this justification as to the previous one. 

The public sphere and the private sphere are not neatly compartmentalized spheres of action in which human's act wisely and benevolently in the former and not in the latter. Fallible human beings occupy both spheres. The reason the private sector is so much more successful than the public (government) sector is because it does not rely on the good judgment and good intentions of central administrators, but rather on the simple exercise of self-interest by simple people.

Reflections on Yom Kippur - 2013

We associate the day mostly with sin and repentance, but it is in equal measure about death and how we understand and cope with it.

In its origins it seems to me these two themes were clearly connected because transgressing - לחטוא - (sinning - it does not mean quite the same thing in the English translation) was seen to be something that offended God and for which one could be punished - accumulating to a shortened life.

[Squaring the circle with the view that God foresees and knows everything and, moreover, is the cause of everything, is the irresolvable contradiction of all such world views.]

But, in the way it has evolved down the ages until today, with the myth of the supernatural less powerful, and the imperatives of community coming to the forefront, these two parts (repentance and death) seem less connected - but no less poignant We still have to deal with death. "Though I walk through the valley of the shadow of death, I shall fear no evil" - be comforted.

When hearing the names of the long list of congregants who have died this last year, I had these thoughts. Reminding ourselves of the inevitability of death is like teaching economics - one cannot avoid the (budget) constraints. But, there is comfort in the knowledge that though each of us is  destined to die alone, we need never live alone, but may choose, until our dying second, to live connected to those we care about. Yom Kippur is about living connected lives.

More on the Power of the Tribe

Further to my recent post on this issue (see here): Consider the position of a research anthropologist embedded in the tribe he is researching. I have read books about such people who go, sometimes for years, to faraway places, and, after a period of introduction and initiation, become an accepted member of the tribe. In order to fully understand their laws, customs, mores, rituals, values, etc. the researcher participates as a fully-fledged member of the tribe in all of its life-cycle and day-to-day events. 

The researcher has a reason different from the other tribal members for participating in its religious observances, even carefully adhering to the letter of the law. For him it is not a matter of a shared belief in the religious significance of these practices, these injunctions, prohibitions, prayers, religious actions (like prostrations or sacrifices, the intonation of blessings), etc. all involving the supernatural in some way. For the researcher these are a matter simply of tribal practices, having scientific interest. But in order to gain maximum insight, he  considers it necessary to fully immerse himself in the setting, to see what  they see, to feel what they feel, as best he can.  And, often, in the  process, being empathetic in temperament, he comes to value these practices almost as they do, seeing it as they do, but also, simultaneously, seeing them more detachedly as part of the valuable social-capital of the tribe. He sings with them, he celebrates with them, he mourns with them, and by the time he  leaves, he is sad to say goodbye to his close friends. But he does leave and then he writes his book about his experiences and becomes famous and revered in that other world from which he came.

His position is not much different from that of someone born into and growing up in a strictly religious community, who, on the road to adulthood, no longer shares the belief in the supernatural and the associated practices. He still identifies with his family, friends and other members of the community who retain their beliefs. And, moreover, he has an inside understanding of what the traditional religious practices really mean to those who do still believe. He may see these practices as valuable, or aesthetically pleasing and evocative of pleasant childhood memories. And he may still elect to participate in some of them, even though they do not have the same significance to him as they used to.

I grew up surrounded by religious practice. As a young adult I stopped believing the party line. I went through a brief period of rebellion when I distanced myself from all religious practice – or as much as I could. But then I decided this was silly and I  started to participate in whatever felt good to me – for my own reasons, which were mainly to be with those that I loved, enjoying what we had always enjoyed together, appreciating the music, the poetry, going with the flow. I am not alone. Many of my coreligionist community friends are tribal first and religious second, if at all.

A recent example prompted this blog. I continue to participate in the ritual of the priestly blessing at weddings, and, being of the priestly tribe of Cohanim, if I am asked I to give the bridal couple the traditional blessing, as part of the ceremony under the wedding  canopy, I will do so gladly – and did so recently. I see it as tapping into a beautiful age-old practice. I am under no illusions. I don’t believe I have any special power to bestow God’s blessing, nor do many (most) of those who attend these weddings. What others believe is their business, not mine.

Some of my friends didn't understand this and questioned me about it. They see in it an inconsistency between conviction and practice, a kind of hypocrisy. I don’t agree, and I think they are applying an inappropriate standard of “rationality” to my actions. For me, as I have explained before very clearly (see here) it is part of the aesthetic. I am like the anthropologist in my simultaneous identification and detachment.

Just because a particular practice was born of a particular set of beliefs sometime in the past, does not mean that we cannot transcend its original significance and yet continue to use it, for other reasons. This happens all the time, in very complex ways. Some individual components of the social capital continue to evolve and morph into new combinations of meanings and actions, even while some others get discarded. As Friederich Hayek might have said, our current practices embody more wisdom than we can consciously know. As long as no compulsion is involved, why is this even an issue?

The Importance of Secularization - and the first amendment.

I believe the founders knew something important when they came up with the first amendment. They understood that all totalitarian movements resemble a kind of religion, and that when an established religion is supported by the coercive power of the state, it invariably becomes intolerably oppressive.  Without the power to compel, religion becomes an individual life-style choice, one that offers great support and comfort to some. In the absence of state-power religious leaders must compete for adherents who, being unable to compel the observance of the population, must make the tenets of the religion palatable and attractive if they are to survive. The power to choose, the power to exit, is what makes religion civil; and the absence of this is what makes religion toxic.

This is what I understand to be the enormous benefit of what we call “secularization.” It is the distinguishing element between toxic and civil religion. In other words, it is not so much the elements of the religious teachings themselves, as the context in which they occur, that is pivotal. Consider the three Abrahamic religions, Judaism, Christianity and Islam (in order of their founding). Of the three, Christianity is on paper the least intrusive (which may explain its rapid explosion after its inception). In terms of actions, observances, diet, etc. it requires much less than the other two religions. Faith rather than action is emphasized. Yet, when it became the religion of state we got the puritans, the inquisition, colonial plunder, the crusades, etc. The claim to be the “one true religion” provided license for all manner of coercion and brutality once empowered by the formidable state apparatus. It then became an all-pervasive (hence totalitarian) force reaching into the most intimate cervices of private life. Absent this power, Christianity, though its adherents can sometimes be obnoxious and annoying in their dogmatism, is associated most prominently with universal love rather than universal oppression.

Islam and Judaism are both incredibly intrusive in their teachings. They both preach all manner of severe rituals and observances. They dictate behavior in the workplace, the kitchen, the dining room, the bedroom and even the bathroom. They offer complete instructions for every aspect of life, no matter how seemingly small and detailed. As such, some people (like me) find them unacceptably intrusive taken as a whole. Yet, in civil societies, secularized societies, one is free to take them or leave them; or to take part of them and leave the rest. Pluralism is protected. I often wonder how Judaism might have turned out in practice had it ever gained a foothold as a state religion (we see some of this in the excessive, though muted, power of the religious parties in Israel, the restrictions they have obtained and the others they desire). Many biblical prescriptions are incredibly harsh (even violent). Yet these play absolutely no role whatsoever in modern Jewish religious teachings in civil societies. The rabbis have no coercive power. Over the generations, lacking state power, the rabbis tweaked biblical injunctions and prescriptions to make them more palatable to people who have a choice. Persuasion rather than coercion drove the evolution of the religion. It may also help to explain why Judaism became an inward-looking religion and foreswore evangelism.

So, I can’t help wondering whether this is an element in explaining the absence of a Reformation in Islam. Sharia law is problematic primarily because it claims the power to compel. It is this rather than the fact that it is so comprehensively intrusive, which is at worst obnoxious to those who do not choose it, that makes it so threatening and dangerous. (It is this desire for the power to compel that makes the Muslim Brotherhood unacceptable as a ruling party). If this is true, then the war for hearts and minds to achieve civil society should focus on selling the importance of something like the first amendment.   

The Power of the Tribe

I have been thinking about “tribal identity.” It is everywhere in a myriad of manifestations. It still flourishes in most of the world that is not yet “modern,” where it is probably the most powerful of social bonding forces, trumping even national identity, often to the chagrin of the world’s lofty politicians. And it exists in the world’s advanced societies in interesting transformations – often overlapping with religious choices, but, subtly, not exactly the same thing. Universalist intellectuals (many libertarians among them) don’t like it one bit. They intellectualize about how dysfunctional such irrational affiliations are. Their ideal society would have only individuals, their families and friends – no tribes with their atavistic rites and prejudices.

But anyone who has read Ayaan Hirsi Ali’s infidel  can see the enormous power of “the tribe” as a social organizing entity, a vital form of social capital, an emergent institution, not so easily banished, and certainly not without dangerous unintended consequences as a result of trying. Anyone who knows anything about social-network theory will recognize the many different forms of tribal affiliation and sentiment as strong bonding ties (as opposed to weak ties) very much akin to “family ties.” It seems to me they can be understood as “extended” family ties, weaker than immediate family ties, but nevertheless, very powerful. They have evolved and morphed from old, sometimes forgotten, practices that now manifest in the form of “traditions.”

From the perspective of social analysis in the service of individual freedom, these tribal ties can be seen as variously destructive and dangerous, neutral, and immensely helpful, depending on the details. As extended, sometimes world-wide, coordinating devices, they are remarkable; allowing individuals to navigate in otherwise strange societies with the indispensable help of their fellow tribal members with whom they share “meanings.” As informal mutual-aid societies (sometimes providing just emotional support and companionship), they are unsurpassed. They provide echoes of familiar sounds (language, music), smells and tastes (foods), and practices (rituals for life-cycle events like births, deaths, weddings).  And they continue to do this long after they have lost their connections with ancient founding myths. Like elements of physical capital, they get spontaneously reformed into unintended combinations to suit the times. They embody ancient wisdoms that form part of the tacit knowledge of our present social life. (I realize that Hayek said something similar about religion).

Of course, some very destructive “wisdoms” can and do linger – like those that rest on the racial superiority of the tribe – the hangovers of the zero-sum societies in which they originally emerged and flourished – societies in which predatory power was necessary for survival and in which pluralism was unknown. At times these impulses have surfaced in the religions of modern societies, as with Christianity during its predatory, inquisition phase. And, of course, Islam, has a very complicated tribal aspect to its makeup, much of it potentially violent and destructive, totally inimical to the tenets of civil societies based on individual rights and freedoms. In many cases, disparate tribal impulses within Islam are vying for legitimacy – the strong ties of mutual-aid that could form the launchpad for success in modern complex societies pitted against the anguished impulse to totally reject and work for the destruction of everything that the “poisonous, corrupting” modern secular societies stand for.

This “war” will never be won by military conquest or suppression. Nor will it be won by denying the force of tribal ties and attempting to “educate” them out of society. It will only be won if tribal members who embrace the creative elements of their extended network ultimately win out over those who embrace the destructive ones. Foreign and domestic policies should be fashioned with this in mind.

Complexity and Economic Policy

I am reading a fascinating book by Alan Kirman, titled Complex Economics: Individual and collective rationality Routledge: 2011 – being The Graz Schumpeter Lectures of 2007 (which interestingly had the different and more engaging title: The Economy as a Complex Interactive System: Theory, Empirical Evidence, and Experiments. I know of Kirman’s work over the last thirty years exploring the inadequacies of the “representative agent” in economics; his critique of the lack of connection between the individual agent, who interacts directly with other agents, and the macro outcomes that result. The book is something of a summary of much of the work he has done over the years on this issue and the main chapters are case-studies – of fish markets, financial markets, public goods and segregation in real estate markets (a la Schelling) respectively. His analysis uses mathematical modeling and other ideas from various disciplines that have investigated complex interactive phenomena.

This is a theme that will be familiar to Austrian economists. The Austrians, after all, ever since Menger, have wondered about these questions, and certainly Hayek has been credited with anticipating many of the insights that have emerged. Yet, it is not until his summary concluding chapter that Kirman even mentions the Austrians; but he does so in a very interesting and challenging way. Here is the relevant text (page 214ff).

My idea and aim has been to suggest that we should re-center economics on different themes than the traditional ones of efficiency and equilibrium and that we should place interaction and coordination at the center of our interests. In particular, we should focus on interaction and its consequences for aggregate behavior. … We should accept that individuals are suspended in a web of relations and linked directly and indirectly to others. … one is faced with a system which is in evolution with no special reason as to why it might converge to some stationary state.

This sort of idea as I have said before, is far from new, and it has strong echoes of the Austrian School, which fell from favor because of its ‘lack of rigor’ and also because of its ideological associations. Yet reading Schumpeter on ‘creative destruction’ and von (sic) Hayek on ‘self-organization’ one is struck by the insights which preceded, by far, the appearance of what we are pleased to call complexity theory. The Austrians were not too preoccupied with efficiency or the progress towards efficiency as are modern economists; indeed von Mises argued that it is impossible to determine and meaningless to suggest that the real economy is closer to the final state of rest and therefore manifests a superior coordination of plans and greater allocative efficiency, at one instant of time than it was at a previous instant (Mises, Human Action 245-6). He had a vision of a market in continuous restless movement drifting back towards a state of rest but constantly perturbed by the arrival of fresh information or by the discovery of opportunities by the actors.

Thus von Mises has the idea that individuals look for opportunities but often do not have the information necessary to be able to profit from them. He does not view individuals as optimizing but rather, as opportunistic. Individuals never possess the information necessary to fully optimize but this does not prevent them from trying to seize opportunities as they arise. Out of this constant search and adjustment some sort of consistency of actions arises. This is what von Hayek argued, since he had the view that markets self-organize but, in so doing, make internal adjustments as their participants learn new modes of behavior or simply how to get around the existing rules. Once again, as I have said, learning is important but individuals may be attempting to learn about moving targets, in particular other individuals who are themselves learning. There is no good reason to believe that such a process will converge, as we have seen [from the models he presents].

And here comes the kicker:

But once we recognize this we can put paid to a standard myth. The idea that markets do self-organize has been used to justify the injunction to leave them to their work. The less interference there is the better. Yet since the self-organization may not be stable, such a view is not justified. While there is a constant restructuring of the economy and the relations within it, there is always the possibility that this process will lead to a sudden and possibly catastrophic change at the aggregate level. In the simplified models of financial markets that I presented we saw how the fact that people herd on successful strategies can generate bubbles and crashes. This does not preclude the existence of long periods of apparent stability.

… [our model suggests that] a stock market crash is not the result of short-term exogenous events, but rather involves a long-term endogenous build-up, with exogenous events acting merely as triggers.

He references the work of Hyman Minsky on the ‘disruptive internal processes’ in the economy. He also refers later to the importance of the structures of interrelations between individuals to the networks (qua institutions) these interactions create. And, though he shies away from policy recommendations, he has a few remarks that suggest he rejects government responsibility for the crisis and affirms a particular type of sophisticated intervention based on the informed understanding he is providing.

I found this work to be a fascinating window into the world of a conventionally trained, turned heterodox, but not Austrian, economist – one oriented toward the use of formal quantitative reasoning. It seemed to me a good-news-bad-news story. Here are some reactions.

1.       What I found most surprising (though perhaps I should not have) is how surprising he seemed to think the importance of individual interaction was and would be for the mainstream. I mean how many decades does it take before people wake up? Maybe a lot.

2.       His appreciation of the Austrians is nice, but he doesn’t seem to appreciate the importance of subjectivism consistently applied. Most important, he does not examine the government as part of the society, as part of the social nexus (cf. Richard Wagner). If one cannot go simply from the behavior of individuals in the market to the aggregate outcomes, would not the same apply in those social organizations we group within the sphere of government? Are not the individuals acting within these networks subject to the same complex interactions that render the outcomes unpredictable, sometimes perverse? It seems like such a natural extension.

3.     That being the case, one may wonder about the problems of ideological bias that he sees in the work of the Austrians – their faith in the stability of the market process – and turn to his inability to see instability in the government process. Is this a mental block occasioned by an ideological commitment to the idea of government palliation?

4.      Nevertheless, he does make one important point for Austrians – not a new one, but one that continues to be a challenge. Austrians from Menger to Lavoie affirm that the market process is a complex one that defies reductionist understanding. And they are happy to extend this to the government process. Yet they claim that the market process is stable, more stable than the government process; and that goal-oriented government intervention is likely to fail because of this overall complexity (the knowledge and incentive problems that manifest). This strong policy conclusion is hard to “prove.” (Obviously or else the battle would already be won.)

5.    My own view is that it is possible to make this argument and not simply rely on particular interpretations of historical events – though the latter will of course be the decisive arbiters in the end. One starts with the asymmetry of incentives between market and government (situations in which outputs are sold in markets and those where they are not), and one proceeds to an analysis of the type of interactions that characterize many of the networks we regard as helpful institutions, like the market, the common law, language, conventions, standards, etc. to show how positive feedback produces convergence. By contrast, in situations like central-bank financed government expenditure to counteract recessions the feedback mechanisms from individual interactions between agents of the government, central bank, and large banks are such as to amplify divergence, etc. Network effects deserve more widespread application.  

Why don’t we learn from history?

If life were a seemingly random sequence of unrelated events, it would not be life as we know it, and many of the blessings we now enjoy would be impossible. We see patterns and we categorize. We follow routines day to day. Even over long periods, spanning generations, we are often struck by what we see as situations bearing similarity to what came before. We talk metaphorically of “history repeating itself.” 

For me, as for many of my like-minded friends and colleagues, this Great Recession from which we are struggling to recover, came as no surprise. Nor did the fact that it has been so deep and lingered so long. We see it as a repetition of an old and avoidable folly. We see it as the predictable result of irresponsible monetary and fiscal policies, very reminiscent of the 1920’s, and to some extent also of the 1970’s (see here or here). So the question “why don’t we learn from history?”

I have an answer, a theory [theories are cheap to produce, you will have to decide its market value.]  There are three reasons: Social situations do not provide controlled experiments; memory is very imperfectly transmitted across people and especially across generations; the study of history is neglected.

1.   Social science does not proceed on the basis of controlled experiments that yield unambiguous answers. History does not speak with one voice. This is no surprise. Everyone thinks he is an historian. Multiple interpretations of events and episodes abound. We can neither dispense with, nor feel completely confident in our interpretations. We are dealing with very complex, multiple cause, multiple effect, multiple-multi-layered-multi-directional interactions. Still, when we live through something we get a sense of it – not always accurate, but sometimes (occasionally) the “evidence” is compelling enough to produce a narrowing of interpretations. Such an episode occurred in the 1970’s and 1980’s, leading to the election and reelection of Ronald Reagan (and Margaret Thatcher in Britain). Widespread disillusionment with the preceding decades of Keynesian economics emerged from the experience of “stagflation” – inflation and unemployment simultaneously  – as predicted by the likes of Milton Friedman and before him Friederich Hayek.  I lived through that, and I never imagined that Keynesian economics could ever again gain traction in academe or in policy circles. This is where memory comes in.

2.     Those who were not "there” – indeed were removed from it by a generation or more – did not feel the same sense of conviction that I did. How could they? They learned about it, if at all, from books, or from their parents, or from their grandparents. No matter how much one tries – and probably not many tried very hard – one cannot communicate the sense of what it was like to actually “be there.” In any case, the young tend to discount whatever their parents tell them. It is part of the declaration of independence that accompanies the transition from youth to adulthood. By 2007, not many people actually remembered the excesses of the 1970’s and the stagflation that occurred. We are doomed to have to relearn the lessons of our parents and grandparents by our own experience.

3.     Finally, as unreliable as history (and memory) may be, it is still valuable. The study of history used to be a highly valued component of what was regarded as a well-rounded education, indispensable for good citizenship. It was a proving-ground for critical thinking, for a sense of perspective about the world in which we live. Sadly, the study of history has been devalued at all levels of education, not least, and most significantly, at the college level. [And at the graduate level too – my first year in the Ph.D. program at Chicago they abolished the economic history requirement.] Today’s high school and college graduates are illiterate in historical knowledge. No wonder they are doomed to repeat the mistakes of history.

And being ignorant of our ignorance makes it ever so much more difficult to regain what we have lost. Against the odds, however, with faith in the abiding curiosity of human beings, I remain hopeful.

Conflicting Visions - how do we have a conversation?

Some time ago Thomas Sowell wrote a book entitled A Conflict of Visions in which he contrasts, in broad strokes, two fundamentally opposed conceptual frameworks for viewing the world – a utopian social engineer’s view in which human nature and the world can be designed and molded to achieve a type of perfection; and a “constrained” view in which we are constrained by our limitations as fallible human beings, doing the best we can to cultivate our social, political and natural environments to achieve, not perfection, but progress and improvement.

I thought of this while perusing this month’s New York Review of Books, my reliable guide to what the left-wing intellectual establishment is thinking. I was struck particularly by two articles. The first, by Robert Kutner, is a Krugmanesque analysis of the public debt (“The Debt We Shouldn’t Pay”).  I reproduce here just one sentence. Reading this was like receiving a slap in the face. Here is an example of how conflicting visions produce perceptions in direct opposition, totally exclusive of one another.

Public debt was not implicated in the collapse of 2008, nor is it retarding the recovery today. Enlarged government deficits were the consequence of the financial crash, not the cause.

This was written by a respected public intellectual. In order to believe what he does, you have to see no connection between central bank interest rate policy, the funding of Barney Frank’s vigorous push to expand home ownership in America, the buildup of the public debt and the final arrival of crisis. You also have to be able to quickly dismiss any concerns about the burden of the debt on future generations – which he does by arguing that to reduce the debt and the deficit would destroy the economy, which would be worse for our children than saddling them with the debt-burden. It is truly mind-boggling.

The second article is by Marcia Angell, on the subject of a good life, from the vantage point of someone, like her and like myself, in our later years (“What Is a Good Life?” ). The final paragraph in the article reads:

Nearly everyone over a certain age observes that time seems to pass much more quickly, and I am no exception. So extreme is the acceleration that I wonder whether it isn’t a result of some physical law, not just a perception. Maybe it’s akin to Einstein’s discovery that as speed increases, time slows. Perhaps this is the reverse—as our bodies slow, time speeds up. In any case, the rush of my days is in stark contrast to the magically endless days of my girlhood. I also find it hard to remember that I’m no longer young, despite the physical signs, since I’m the same person and in many ways have the same feelings. It’s particularly disquieting to recall that many people and places I knew no longer exist, except in my memories. Still, although I dislike the fact that my days are going so quickly, that’s the way it is, and I’ve had a good run.

Exactly. I can relate. She and I are on the same page. Well-written, poignant. Makes me sad and contemplative. Yet, the paragraph immediately preceding this reads:

But even though my microcosm is in pretty good shape, I have become much more pessimistic about the macrocosm—the state of the world. We face unsustainable population growth, potentially disastrous climate change, depletion of natural resources, pollution of the oceans, increasing inequality, both within and across countries, and violent tribalism of all forms, national and religious. Dealing with these problems will take a lot more than marginal reforms, and I don’t see that coming. Particularly in the United States, but also in the rest of the world, big money calls the shots, and it is most concerned with the next quarter’s profits. Although I’ve spent much of my life writing and speaking in opposition to the corrupting influence of money on medicine, I find doing so increasingly pointless because it seems futile. Worrying about the world my daughters and grandsons will inhabit is what I like least about aging.

Reading this made me angry, frustrated. The conflict of visions again. Astounding. Every one of the concerns she so passionately nurses is wrong, is based on a flawed understanding of the world, every one. The world’s population is not unsustainable. That is not what poverty is about. And, in any case, population growth has dramatically slowed, to the point that many societies now face a worrying “fertility crisis.”I wanted to yell, “where the hell have you been?” Our natural resources are not being depleted – quite the opposite, we are, every day, discovering new, cheaper ways to produce energy and other things – that is what humans do in market economies. Increasing inequality is not a problem – lingering poverty is the problem. And there are more people living out of poverty now than ever before, and there are signs that parts of the developing world may finally have turned the corner toward development. Violent tribalism is not new and it is not any more of a problem than it has ever been – she also seems confused when she refers to tribalism as religious and national. At best this is a metaphorical extension of tribalism to non-tribal contexts. Religious and national identities are distinct rivals to tribal identities in important and subtle ways. Not to understand this is not to understand much of the social dynamics of our world. But, to be fair, perhaps she meant by “tribalism” only to point to implacable divisions. And finally, there is that tired, old complaint about money and profits ruling the world - if only we could force people to be less greedy and more compassionate and generous. 

How does someone like me even begin to have a conversation with these people? That is what bothers me in my later years as time speeds up. 

Minimum-wages - Ivry Man (IM) asks Dr. Know (DK) for his Opinion

Ivry Man encounters Dr. Know sitting on his usual park bench, feeding the pigeons.
DK	Hello Ivry, how nice to see you again.
IM	You too, Dr. Know, particularly since there is something I wish to discuss with you, to get your estimable opinion on.
DK	Of course there is - why else would Lewin be writing this?
IM	I am sorry, I don’t understand.
DK	Never mind. What did you want to discuss with me?
IM	Well, as you probably know, our president is proposing that Congress enact an increase in the minimum-wage from $7.25 an hour to $9 an hour.
DK	Indeed, I am very much aware of this.
IM	It seems to me this is a very worthwhile initiative, wouldn’t you agree?
DK	Why do you think so Ivry?
IM	Well, there is the recession you know, many workers at the bottom of the pay spectrum are suffering. It seems to me it is tough to live even on $9, never mind $7.25.
DK	You are assuming that poor, low paid workers will benefit from this law?
IM	Yes, of course. That is whom the law is meant to help, isn’t it?
DK	I am not so sure.
IM	(now getting visibly agitated). I might have known you would have an annoyingly contrary opinion. What is your problem with this law?
DK	Well, how is it that you help someone by making it more difficult for them to sell their labor?
IM	What do you mean?
DK	Look, someone who has a job and is being paid $8 an hour, is regarded by the employer as worth at least $8 an hour to him. In other words, the employer judges that the worker adds at least $8 an hour to the revenue of the firm. Otherwise the worker would not be paid that amount. In general, a worker will not be paid more than the amount he is estimated to add to the revenue of the firm. Now if you come along and say to the employer, “if you want to employ this guy, you have to pay him at least $9 an hour,” the employer may not consider the worker worth $9 an hour – so he will have to fire him. How have you helped this poor worker? He had a job that paid $8 and now he has no job.
IM	Oh, Dr. Know that is just silly. I am surprised at you. The worker won’t be fired. The employer needs him in order to produce the product.
DK	Hmm, well yes. Maybe it is silly of me. But I still don’t see it. You say he needs the worker to produce the product. But, Ivry, have you not forgotten that the worker is employed at a loss. He is now paid $9 an hour yet he adds less than this to revenue, say $8 an hour. So the employer is losing $1 an hour by employing him.
IM	Maybe not. Maybe he was always adding even more than $9 to the revenue of the firm and because of competition he was paid less than he was worth.
DK	Ok, that is a possibility. But surely not for all of the workers. Do you want to argue that all those workers currently earning the minimum-wage, $7.25, are really worth $9 or more?
IM	Certainly. Everybody knows how workers are exploited.
DK	This borders on the absurd my friend. But for the sake of the discussion, let me grant this. Still, as a result of imposing the higher minimum-wage, the cost of producing the product has now gone up. Surely the employer-producer cannot afford to produce the same number of units of the product. Less will be produced and fewer people will be employed.
IM	No, not at all. The price of the produce may go up a bit. No big deal.
DK	A higher price means less will be sold, so less will be produced and fewer people will be employed.
IM	No, no, this is just an excuse. Consumers need these products.
DK	Really? So consumers will just pay the higher price induced by the increase in cost of production (as a result of the increase in wage costs)?
IM	Yes.
DK	Does this not mean they will be spending less on something else? So someone else’s production will come down? So employment will fall somewhere else?
IM	No, wages are higher now so they can afford to pay more.
DK	My dear Ivry you are arguing in a circle. You can’t deduce an increase in expenditure as a result of a mandated increase in wages paid. They have to be paid by someone who will have less to spend on something else. You can’t manufacture more spending by mandating an increase in wages paid. This is like squeezing a balloon and arguing that there will be more air in the balloon as a result.
IM	Whatever you say Dr. Know. But anyway, even if consumers will spend less on something else as you say, the main point is that these rich companies can take the increase out of their substantial profits, right? Then we don’t have to worry about a decline in demand. The price of the product can remain the same.
DK	Not at all Ivry, not at all. Let me make three important observations. Firstly, it is not at all clear that firms that employ many workers at or near the minimum-wage are high profit firms. Most are probably not. Many firms may go out of business. Many will not be started. Who knows how many lost jobs this represents? Actually no one knows. It may be very large.  Secondly, even for those companies that have large profits, and, somehow, elect to reduce their profits while keeps their production the same at the same product price (most unlikely!), even for them there are consequences. The reduction in profits means a reduction in the rate of return for investors in these companies, and, over time, this means that funds going to them will decline relative to other investment prospects. So, one way or another, those companies intensive in the employment of minimum-wage level workers will decline relative to those who employ more highly-paid workers. Thirdly, you are dramatically underestimating the effect of an increase in the lowest paid workers. To increase the minimum-wage from $7.25 to $9 an hour is a more than a 20% increase! To argue that this will not seriously affect production is highly implausible, especially if the number of workers earning this wage is significant. But, even if this is a small proportion of the workforce, it will have a wider impact. All firms employing hourly workers have a wage-structure based on seniority, experience, qualifications, etc. Someone already paid $9 an hour, before the minimum-wage increase comes into effect, would need to be bumped up to reflect their relative position on the wage structure once those paid less are brought up to the $9 by the minimum-wage hike. This effect will concertina all the way up the wage-scale. Everyone on the scale would have to have their wages increased! The implication is a very much larger increase in the payroll, and, therefore, in the costs of production.  Bottom line – if the firm does not employ low-wage workers there will be little or no effect. If the firm employs a significant proportion of low-wage workers it will raise the cost of production and result in a decline in size and employment for those firms. You cannot get water out of a stone Ivry. Changing the law to mandate a higher wage does not change the reality of who is productive and who is not and why people are poor in the first place. All it does is take away the power of the least productive workers to compete for jobs by offering to work for less.
IM	As always Dr. Know, your logic is compelling and disturbing. If what you say is true why do we have minimum wages? And what are we to do? Does this mean that there is nothing that can be done to help low-paid workers and poor people in general?
DK	We have minimum-wages, and continue to increase them, probably because the public at large does not know what they really do, and the members of those groups that do know how they work, like labor-unions, use minimum wages as a way of ensuring that workers cannot compete with them by offering to work for less. it is a form of protection for those who already have jobs, and whose wages are higher as a result of minimum-wages and the concertina effect I described.  What can we do about poverty? Look, people are poor in the first place because they lack productive resources, usually human resources – qualifications, production-skills, language-skills, etc. They are not poor because employers capriciously refuse to pay them their worth. Employers will tend to pay as little as they can get away with in a competitive labor market. What protects workers is competition for their productive services, not minimum-wages. Workers will tend to be paid their opportunity cost – what they could earn elsewhere. So the best way to help them is to improve their productive skills.  The best way to help workers – and to generally alleviate poverty, is to create employment opportunities for workers. Thus, economic growth is the key to a long-term cure for poverty. Most discussions about this are not about poverty, they are about inequality of earnings, and one should not confuse the two issues. The best route to increasing earnings of everyone remains economic growth – though this may not satisfy some social engineers who are more concerned about gaps in earnings between people. Some people feel strongly about the existence of a safety-net – providing a minimum-income for poor families. The best way to do this is through a negative income tax. This is a policy that would guarantee a minimum income to families (the details would depend on what tax-revenue could generate and what policy-makers decide is desirable). This minimum would be unaffected by decisions to work – it would be guaranteed no matter how much or how little the family members worked. This is the simplest, least intrusive way to provide a safety-net.
IM	But wait a minute. Does this not provide a disincentive to work? Why work if you are guaranteed a minimum whatever you do?
DK	Yes, indeed. The greatest incentive to work is starvation. So make up your mind. Are we willing to let people starve? If not, a negative income tax has the least disincentive to work, because you do not lose your subsidy by working - you get to keep your net-of-tax earnings over and above the subsidy. (This policy would face the problems that all state policies face - trusting the bureaucrats who administer it to do the right thing and know what to do. I am not optimistic about that. But it would be preferable to the many corrupt and ineffective entitlement programs we now have). I suppose you could strengthen the incentive to work by tying welfare to work as well. President Clinton’s welfare reforms did some of this. Now President Obama is trying to abolish this.  (looks at his watch) One final point Ivry – before I have to go. In the absence of state anti-poverty initiatives there would be many more private charitable initiatives – like there used to be in the past. We should not discount the benefits of this. Now I have to go.
IM	So soon? I wanted to ask you more about tax policy.
DK	No doubt a subject for another day, always a pleasure my friend. Be well, be happy – he rises and walks off in the direction of the … .

What is the debt-ceiling really about?

An interesting public choice question facing us (America) at this time, is the apparent inability to reverse course and undo the establishment of multiple voting and lobbying constituencies once they have been created - many of whose members do not pay taxes (example many entitlement recipients). This is what Romney was referring to in his 47% comment. Once these power groups have been created and receive benefits in excess of the (perceived and actual) payments they make, the likelihood of their members voting to cut expenditures for these benefits diminishes over time. Crudely expressed, when a majority receives benefits from a paying minority (in power terms, if not in numbers), there appears to be no going back if we are to rely on the normal majoritarian democratic process. The article reproduced below from today’s WSJ, suggests something may be missed in the above analysis. It prompted me to think things through to the ultimate implications. 

In essence, a welfare-dependent-majority situation is one that is not static; it gets worse over time and the growing costs, and the hardships imposed on a growing number of taxpayers, must eventually cause some kind of reform – either that or a complete fiscal collapse. To be sure, a welfare majority does make expenditure reform much more difficult. At the very least, it suggests that things have to get pretty bad before any kind of reform initiative is likely to have any traction. Current events in Europe bear witness to this. It is a  consideration of the constitutional status of the debt-servicing, expenditure-appropriation process that clarifies the situation we face.

Contrary to popular conception, entitlement expenditures are not constitutionally entrenched. They can be cut anytime Congress decides to pass legislation to that effect, or anytime Congress fails to appropriate money for them. On the other hand, as explained by the article below, government debt payments (principle and interest) are so entrenched by the 14 Amendment, Section 4 of the Constitution. This means that if Congress fails to raise the debt ceiling, thus preventing new government borrowing, the existing debt still has to be paid. In the absence of being able to borrow in order to pay for its expenditures, the government would then have to prioritize and decide what to cut in order to pay interest and principle due on the debt or increase revenue by raising taxes. So the question becomes, will the Congress continue to approve debt-ceiling increases ad infinitum? If not, then the government will have to face its budget constraint and make cuts or consider even more tax increases – one can imagine the blood that will flow in that debate. Of course, using tax increases to solve this problem also has a limited range of effectiveness. At some point the Laffer curve will kick in – higher tax rates will bring in less revenue as tax-constrained incomes put a crimp in income generation through value-creation. At that point expenditure cuts have to be relied on.

On the other hand, if Congress simply continues to raise the debt-ceiling, the economic consequences will be dire, and bad things will start to happen at an accelerating rate. The deficit and the debit will become a larger and larger multiple of the revenue coming in. A number of things are likely to happen, though the timing and the sequence cannot be predicted. With a greater portion of the debt being financed by the Federal Reserve, bank reserves will continue to rise (even though they stand at unimaginably high levels already). As the economy continues to recover (in spite of the dysfunctional polices of the last four years), the banks will begin making loans, market interest rates will rise, and the money-supply will rise. This, in turn, implies an exploding increase in the interest payment due on newly borrowed debt, and widespread price inflation. Americans are historically very antagonistic to both interest rate increases (which will wallop the stock markets) and, even moreso, high levels of inflation. 

At that point, who knows? Will we have a Carter to Reagan type situation again? Or will it have to get much worse before any pendulum swing-back can be expected? I guess we will find out.

OPINION

Updated January 10, 2013, 7:12 p.m. ET

Rivkin and Casey: The Myth of Government Default

The Constitution commands that public debts be repaid. There is no such obligation to fund entitlement programs.

By DAVID B. RIVKIN JR.
AND LEE A. CASEY

Three false arguments, pushed hard by the Obama administration and accepted on faith by the media and much of the political establishment, must be laid to rest if the American people are to understand the issues at stake in the federal "debt ceiling" debate.

The first is that Congress's failure to raise the debt ceiling—the amount of money the federal government is authorized to borrow at any given time—will cause a default on the national debt. The second is that federal entitlement programs are constitutionally protected from spending cuts. The third is that the president can raise the debt ceiling on his own authority.

To take up the first canard: Contrary to White House claims, Congress's refusal to permit new borrowing by raising the debt ceiling limit will not trigger a default on America's outstanding public debt, with calamitous consequences for our credit rating and the world's financial system. Section 4 of the 14th Amendment provides that "the validity of the public debt of the United States, authorized by law . . . shall not be questioned"; this prevents Congress from repudiating the federal government's lawfully incurred debts.

The original concern of this provision was to guarantee the integrity of federal debts incurred during and immediately after the Civil War (while the debts of the Confederacy were nullified permanently), and to ensure that a newly "reconstructed" Congress—to which the Southern states were readmitted—would not reverse these decisions. However, the amendment's language was not limited to the Civil War-related debts. In Perry v. United States (1935), the Supreme Court made clear that the provision "indicates a broader connotation" protecting the nation's debts as a whole.

This means that a failure to raise the debt ceiling—to prevent new borrowing—does not and cannot put America's current creditors at risk. So long as this government exists, and barring a further constitutional amendment, those creditors must be paid.

Nor are they at risk in practice, since the federal government's roughly $200 billion in tax revenue per month is more than sufficient to service existing debts. If the executive chose to act irresponsibly and unconstitutionally and failed to make any debt payments when they come due, debt-holders would be able to go to the Court of Federal Claims and promptly obtain a money judgment.

These basic facts should inform any credible decisions by credit-rating agencies in establishing the government's creditworthiness. Significantly, these agencies have traditionally acted favorably when heavily indebted countries have not defaulted on their debt but cut deeply their public spending.

Second, despite White House claims that Congress must raise the debt ceiling to pay the bills it has incurred, the obligations protected as "debts" by the 14th Amendment do not include entitlement programs such as Medicare and Social Security. These programs are not part of the "public debt," which consist of loans that are made to the federal government through bonds and similar financial instruments. Entitlement programs are instead political measures that are fully subject to the general rule that one Congress cannot, by simple legislation, prevent a future Congress from making cuts.

This fundamental and vital distinction is clear from both the text and the drafting history of the 14th Amendment's Section 4. The wording of the section was revised before its enactment and ratification to replace the term federal "obligations" with that of "debts," a far more narrow (and manageable) category.

The distinction was recognized by the Supreme Court in Flemming v. Nestor (1960), which involved the power of Congress to modify Social Security benefits. The court noted that entitlements and "contractual arrangements, including those to which a sovereign itself is a party, remain subject to subsequent legislation by the sovereign."

Congress can reduce a wide range of payments to various beneficiaries at any time by amending the statutes that authorize them or simply by failing to appropriate sufficient funds to pay for them. Nor does Congress have any legal or constitutional obligation to borrow money to pay for entitlements.

Third, assertions, most recently made by Nancy Pelosi, that the president can rely on Section 4 as a pretext for raising the debt ceiling by himself are manifestly incorrect and constitutionally dangerous. Section 4 grants no power whatsoever to the president—instead, the 14th Amendment grants Congress the "power to enforce, by appropriate legislation, the provisions of this article."

More fundamentally, this argument—which has been tentatively advanced and then tentatively withdrawn by the White House, both during the 2011 debt-ceiling battle and in the last several weeks—is contrary to the language, structure and history of the Constitution.

Like the British Parliament before it, Congress controls the power of the purse—the authority to raise taxes, borrow money and direct how revenues are spent. In particular, Article I, Section 2, grants to Congress the power "to borrow money on the credit of the United States." There is no similar grant to the president. Any effort by the chief executive to borrow money without congressional action would be every bit as injurious to our constitutional system as presidentially ordered taxation.

True enough, the "debt ceiling" is not a constitutional requirement. Congress could choose instead—as used to be the case during most of our history—to vote separately on the issuance of each federal debt instrument. However, nowhere in the Constitution is the president authorized to borrow or spend money without congressional action, except insofar Congress itself may permit.

Once these false arguments are cleared away, the real issue in the debt-ceiling debate becomes clear: the proper level of federal spending. Should Congress fail to increase the debt ceiling as much as the president wants, the effective result would be major government spending cuts, with payments on public debt excluded.

This is tough medicine and not to be administered lightly. If Republicans are serious about winning this debate, they must strive to convince the American people that such spending cuts are necessary, given President Obama's openly articulated unwillingness to implement any meaningful spending cuts other than defense and his clear preference for limitless borrowing.

Whether they can succeed in this task is unclear. But the public must at least be allowed to ponder these vital issues without being misled by false claims involving debt default, the nature of federal obligations, and which branch of government is in charge of the public fisc.

Messrs. Rivkin and Casey are partners in the Washington, D.C., office of Baker Hostetler LLP and served in the White House and Justice Department during the Ronald Reagan and George H.W. Bush administrations.

A version of this article appeared January 11, 2013, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: The Myth of Government Default.

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