Government Policy Caused and is Prolonging the Recession

Ludwig von Mises and F.A. Hayek predicted in 1927 that government expansion of credit in the 1920's was causing a bubble and would lead to a collapse of an over-inflated stock market.

In 1932 they predicted that this would become the longest recession in history, because it was the first time that the government used monetary expansion and economic socialization to try to "fix it."

In the late 1960's, Hayek specifically predicted the recession and stagflation that struck in the 1970's--again because of credit expansionist policies. And again, he predicted the late 80's credit crunch.

Milton Friedman, Ron Paul, and (god forbid) Pat LaRouche correctly predicted that the housing market was a bubble in the 2000's, driven by the 1993 American Dream Act and the interference of Fannie Mae and Freddie Mac (which together incentivized banks to give risky mortgages). Combined with cheap credit, banks were over-leveraged, and collapse was coming. When the Obama administration published its optimistic 2009 report on the speed of the recovery, Austrians and Monetarists laughed: they knew that the planned government policy would inhibit it.

In Canada and the UK, this banking collapse did not happen! They had much, much higher interest rates, which made banks more conservative and mortgages (and other loans) more expensive. It was too expensive and risky to be over-leveraged, and one made more money saving money and collecting interest. Canada also had regulations that limited how leveraged a bank could be. This wouldn't be strictly necessary if the Federal Reserve was not making money historically cheap, but it helped protect the British and Canadian banking systems from the American collapse (their economies were too small and too integrated with the US to avoid the recession that our monetary policy caused).

All of our major recessions in the modern age have been predicted--both in that they're happening and the mechanisms by which they'd happen--by Austrians and Monetarists. They argue, as I do, that it is not an unpredictable "animal instinct," that the bust of the business cycle is not caused by "greed" (why would "greed" be greater at one time than another?). Overly risky behavior, bubbles, over-leveraging, mal-investment: it is a very simple argument that they are (at the _very_ least) greatly promoted and expanded by artificially cheap credit and cheap money. It's simple supply and demand.

But prolonging it? Before the Great Depression, recessions in the liberal countries (namely the UK and US) recovered _quickly_. Coming out of a recession, growth was _faster_ than beforehand, until the economy continued its normal upward track. Unemployment quickly dropped as the market re-adjusted.

Since the Great Depression, this has not happened. In fact: I see a very strong correlation between the _amount_ of government intervention and the _length_ of the depression and length of persistent unemployment. Why?

Part of the problem is that when larger credit expansion policies cause bigger bubbles and more mal-investment, it will take more time, more pain, and more re-adjustment to ultimately get back on track. Unfortunately, there is no "quick" fix the government--despite its best intentions and desperation to do so--can employ. Keynes tells us that by increasing consumer spending, we fix the problem... but consumer spending in the US is already higher than pre-recession! We're trying to increase consumer spending, encourage loans, and discourage savings by making money cheap. To the Fed's surprise (but _not_ the surprise of a Monetarist or Austrian economist), pumping money into the system ("increasing liquidity") did _not_ cause banks to give loans again... they hoarded it. The economic environment was ultimately toxic due to the mal-investment of the past 10 years, and more paper money couldn't change that.

The other problem is that government policies stunt growth. Increasing consumer spending arbitrarily means there is less savings. This means more resources are turned towards non-durable goods and less towards re-investment. Ultimately, creating more pieces of paper money in the system doesn't mean there are more resources to both consume and invest... the economy only has as many man-hours and as many materials as it has, and the more those are driven to consumption, the less they are driven to investment and durable goods.

This lack of investment in durable goods, new factories, etc, means new jobs aren't produced. Because the old bubble had huge amounts of fat and wasted labor (from cheap money and mal-investment), we can easily create the same amount of consumer goods with less labor. Consumer spending also, of course, means that much of the printed money is exported when we import other consumer goods. But ultimately, directing demand to consumer goods will, predictably, not cause employment to reach the levels it did.

So we've discouraged further investment--especially long-term--through this credit expansion. We're trying to use the "hair of the dog" to cure the hangover, and it's not working. (Hayek called it "using poison to treat the symptoms of the same poison.") Other policies that we've had in place for a long time mean that growth is going to be ultimately slow, no matter what. High safety and consumer "protection" legislation, along with building and zoning codes, safety codes, and other excesses of regulation and paperwork make investment much more expensive. Businesses are citing the coming Obamacare mandate as the reason they prefer part-time to full-time employees. Despite sitting on piles of money, banks aren't finding suitable investment projects.

This seems mad! One would think that a recession would cause a depression in prices that would spur investment, because the IRR of projects would go up. This depression of prices of wages and materials was _exactly_ what caused the free market to quickly deal with any recession before the Great Depression. But government policies add significant costs across-the-board to investment projects for both large and small businesses. It's supply and demand: if the price is too high, the supply (in this case, spare labor and materials) won't be consumed.

I am a bit outraged that the only counter-arguments I've seen here are "excesses of capitalism" and "corporate greed" causing both the recession and its prolonging. The argument here is predicated on the idea that corporate greed goes through ebbs and flows: sometimes corporations are "good guys" that choose to--altruistically!?!?!--pay workers more, invest in durable goods, etc... and when they're "greedy," they pay their workers less, make short-term investments, make riskier investments. It's senseless. We don't attribute "goodness" and "badness" to differences in consumer behavior because we would be laughed out of the room. Very simple economics makes it very clear that when we have a system-wide change in behavior, it is because the systemic conditions are encouraging it!

Keyensians have no alternative explanation: every time we follow Keyensianism, we have longer recessions with slower recoveries than when we don't. Now, we're doing everything Lord Keyenes would want, and every metric is going as he predicted... except for employment and wages! And aren't those the ones that matter?

Our left-wing pundits, hand-wave blaming "greed," "neoliberalism," and whatnot, are guilty of truly despicable levels of unscientific, unrigorous exploration to the causes of current economic conditions. The recessions are much deeper and longer in Europe; unemployment is much, much higher (28% in some countries!). Is this due to greater "corporate greed" here? No. The "greed" argument is an embarassingly foolish line of conclusion that depends on willful ignorance of economic history, of the clear facts in the economy today.

How tragic that, again and again, we blame the "free" market for the flaws of government policy. How tragic that we keep putting our faith in credit expansion when in the last 100 years it has been in _every_ instance a policy of disaster that led to crippling busts and then prolonged them. It's so tempting to blame those making the obscene profits that are being made today for our problems, that due to their personal greed and lack of altruism for their employees, they are rich and we are poor. But it's time for a news-flash, my friends: shareholders, capitalists, owners, board members--whoever you're blaming--are always profit-motivated, they're always just as greedy. Good times are not caused by their mass altruism and their desire to help the economy at their own expense... and bad times are not caused by their sudden mass evil and "excess." This behavior is not an independent variable.

Unfortunately the public is not educated in economics, but they are full of envy, they are prone to find someone to blame for their woes (look to the Great Depression in Europe for the truly ridiculous mass delusions in the public to the causes of the bust!). Who else to look at but those that aren't suffering with us? It's easy and tempting to do. But I implore you: if you wish to _fix_ a broken economy, rather than _punish_ the profitable for being profitable, it's time to let go of repeatedly, universally failed government policy and get back, finally, to the liberal principles that have been the first and only means by which the masses were brought prosperity in the whole of history.

Leftism's Philosophical Retreats

It is a blessedly rare event in the post-Soviet days to see a truly left-dominated country, despite its popular appeal (who doesn't love free money?) and its appeal to the intelligentsia.

But when we do see it in action, I see what I think might be a pattern of "philosophical retreat" on the part of the left as the harsh realities of their policies set in. Idealism turns way eventually towards hatred, vilification, and eventually complete denial.

Let us begin with the ideal: socialism or leftism will bring great prosperity, beyond the failed and ineffective systems of the free market.

When this fails to work: leftism will bring prosperity for the poor, but not the already-rich, rather than the alleged other-way-around of a free market.

This leads to: vilification of the rich that seemed to gain their wealth from philosophically un-approved ways. Profit is a "necessary evil" to incent the greedy to do what is right for the community.

When this fails to work: growth is unnecessary, we have already grown as much as we need. We need only redistribute what we have, for the rich have more than enough.

This leads to: vilification of the rich, period. A belief that excessive wealth is ultimately immoral and bad for the soul. Profit of any sort is vilified as exploitative.

When the economy fails further: we don't need anything beyond what's necessary to live. Prosperity is bad for the soul.

This leads to: vilification of other countries for being more prosperous. A belief that consumerism of any sort is a sign of excess, of a spiritual malaise. Poverty becomes a virtue and comfort a sin. We must rise above our material needs towards a higher purpose (the commune, or the divine).

Finally: money itself becomes evil, and leftism gives up any notion of improving economic conditions. All forms of economic activity become vilified. The sole noble good becomes self-sacrifice.

A Mean Critique on Keynsianism

When Keynsians consider the economy, the activity is often mistaken for the outcome. For example: when we see China building infrastructure at an incredible rate, and we see their economy grow, we are tempted to think that the construction of infrastructure leads to economic growth.

Is this not true? you ask. Alone it is not and this is a very dangerous subtlety to miss.

Let us consider a bridge. If we build a good bridge, the economy improves. But what if we build a hundred in the same spot? Silly. We all know it is wasteful. But why?

The bridge adds to the economy _not for the jobs needed to build it_. In the middle ages, there was no unemployment--almost everyone was involved in agriculture. Everyone had a job. It was only by _eliminating_ jobs in agriculture (and every other industry) that we created wealth. Is it counter-intuitive? No--let us consider the bridge.

The bridge adds to the economy because it reduces the costs of moving people and goods across the river. Trade can occur. Customers can reach new outlets, live in new houses but still make it to their places of employment--many benefits are conferred by the placement of a great bridge. These benefits for our individual lives are the basis of economy.

But would it not have been better if that bridge were placed for free? Indeed. Bridges are valuable for their benefits, not their costs. Just as agriculture--imagine free food, free energy. This would mean no employment in these areas, no jobs created (in fact, jobs destroyed wholesale). But the benefits are still conferred on society and those resources can be used to go create other benefits still (just as in the middle ages they were "tied up" by agriculture and could do no good elsewhere, and thus we were woefully impoverished).

There is an edge case in which super-automation means nobody can compete with cheap AI that do almost everything. Perhaps this is some hundreds of years in the future, and it is a case in which some limited-state socialism will govern an astounding utopia. What a wonderful problem we will need to solve!

But throughout the ages, with every single advancement in productivity, harbingers and doomsayers have sprung forth like locusts to cry the end of capitalism due to a death-spiral of unemployment and shrinking markets (Marx's obvious error here should have meant the end of it). This was the case, of rcertain, in the Industrial Revolution--it was the case in the automation revolution that lasted throughout the second half of the 20th century. When women in the United States entered employment, there was a terror of mass unemployment. It has been a fear of the "flattening" of the world and "outsourcing" in the early 21st century. Every time these doomsayers have gone up against history, they have been astoudningly wrong, and yet we give them incredible credit when they come back! These doomsayers have not the foresight nor the creativity to understand how the market, how science and technology, how entrepeneurship will bring about new frontiers that will crave labor. Just as we laugh at those those in the early 1900s that claimed nearly everything had been discovered in physics or everything invented, we should keep laughing at these doomaysers. You know that you don't know what will be invented next, but that it will be invented--history should teach you the same about labor-hungry industries. In case you're curious: in the US, as IT gets commoditized and goes overseas, the new frontiers will be in biotech, robotics/AI, and alternative resources (from solar power to asteroid mining). If you want to take a bet, let me know and then we'll meet up again in 20 years.

(Digression: how hypocritical is the left wing of the west for badgering the populace that the people of Africa or South Asia or somesuch are poor and we have not fixed it, and then they badger us when we purchase goods from them as we are "losing jobs" here in the West!)

And certainly there were temporary unemployments, and they were painful if not well-managed. Life-long carriage makers and horse-breeders suffered when the car was invented. It is regrettable that not everyone can have everything all the time, but to believe that the more labor-intensive activities of making a car by hand are somehow more economically helpful than creating the same cars with less labor is a belief unfounded in economics, history, or current reality.

The current question that faces us is whether we can prepare this labor. It is certainly not that the country won't be hungry for labor, but we may have unemployment if our labor is incompetent. We will require skilled labor to press forward. Indeed our labor is more skilled than it used to be as a whole, but in the lower reaches of this labor the skill for future jobs is lacking. Already the United States is hungry for 3 million skilled physical labor jobs it cannot fill (despite 7.6% unemployment) and if we do not find a way to inspire our lower labor force to go be trained then we will not be able to fuel these new industries and growth will, sadly, stagnate.

(For more on where this is failing, see my post on China from Foggofwar. This post is inspired in part by Senator Elizabeth Warren's claim that the US needs more infrastructure investment because China is doing it, despite the fact that mal-investment in infrastructure in China is one of the policies that's actually failing there.)

Economic Rant: On Minimum Wage Laws

Our left wing remains baffled at the concept that minimum wage laws might drive unemployment. They see corporations as swollen with profits and thus have money to spare...

Occasionally this is true. It is easy to look at, say, McDonalds, and conclude this.

But even our left wing will agree that consumer goods follow supply and demand laws. B2B goods follow these laws even more tightly... that is, the curve is much less elastic.

There is absolutely no reason that labor is a resource that should work any differently (and, indeed, it does not).

Why is it not a highly elastic resource? At the lower end, if we increase wage rates, there will be many companies that "suck it up" and continue forward.

But, ultimately, profit rates will pinch. For companies without astronomical profits (and that is the vast, vast majority of them), labor-heavy expansions will be much less appetizing... and thus investment in these _will go down_. If these companies do not perform layoffs, they _will_ reduce the amount of labor-heavy growth, and thus job creation, that they perform.

These companies will also be much more tempted to invest in _capital_ (or consulting, in my experience) to _replace_ labor. The capital:labor cost ratio will go down in favor of capital, and thus these companies will invest in replacing this labor. This has become increasingly common in labor-heavy manufacturing, if not as popular yet in service... but it will be. Jobs _will be lost_, and these more labor-efficient processes will persist into the future, reducing job growth.

There will be companies that are "on the margin" of profitability. They exist--I do not know how great a number they are, but they are typically small businesses (which, remember, hire the plurality of Americans!). Some of these will go under and let labor go. Jobs will be killed.

By _all_ economic logic, artificially increasing wage rates will be a job-killer, period.

Left-wingers actually brag that higher minimum wages actually pushes up the wages of those jobs that would be near minimum wage--thus the effect occurs at higher-wage jobs, as well.

Am I in favor of _low_ wages? No, I think it is awful. But high unemployment pushes wage rates down. Again, supply and demand. The higher unemployment is, the more bargaining power the companies have, the lower the wage rates for everyone not benefiting directly from the minimum wage law. And if we are keeping unemployment higher, _which we do by having these wage restrictions_, those wage rates will _never go back up_.

Allowing the market to do its job will mean that rates go down until the labor supply is more-or-less exhausted. When it is exhausted, any further growth in the economy will _necessarily_ push wage rates up. So in the free-market example, we have a temporary period of low wages, replaced by ever-rising wage rates. Excepting immigration, labor (unlike _any other good_) is not a supply that can go up to keep up with demand, and thus the price will rise with labor in a free market unlike any consumer or B2B good.

We see the opposite in Europe--high government intervention in labor means companies are _not hiring_. Young people in France have 40% unemployment; in Italy, it is 60%, and in Spain/Greece it is over 80%. Some of this is the recession, of course, but the US is not experiencing this, Canada is not experiencing this, because they do not have artificially inflated wages and labor restrictions to the extent that these countries do.

Despite our continual denial of this, these simple economic laws will continue to govern labor. The best of intentions (these minimum wage laws and labor regulations ) will continue to drive unemployment and, ultimately, contribute to stagnation and poverty in the countries in which they are employed. The free-marketers, in contrast to the propaganda set against them, do not want to hose the poor in favor of the rich. It is the minimum-wagers that want to hose the unemployed in favor of the employed, and this is working splendidly.

Tragically, we will also blame the "free" market for our woes, increase our minimum wage rates more, and continue the economic death-spirals that we're seeing currently.

"The Night Before Bailmas"

'Twas the day before Chrsitmas, and throughout Freddie Mac
Not a mortgage was paying, not one was on track.
Lobbyists were hung by the Capitol with care,
In the hopes that Ben Bernanke soon would be there.

Executives were nestled all snug in their beds,
While visions of bailout checks danced in their heads.
And Charles with his bonus, and Mike with his cash,
Had just settled down for a big Christmas bash.

When on CNN there arose such a clatter,
They dropped their champagne to see what was the matter.
Away to the tickers they flew with a zip,
To call up their friends, and dish out stock tips.

Reflection from forehead on their rosy-red faces,
Gave the lustre of wealth in their once-dready places.
When what, to their wondering ears surely said,
An endless financial commitment from the Fed!

With a little old driver, both confident and swanky,
They knew in a moment it must be Ben Bernanke!
More rapid than eagles his edicts they came,
And he whistled, and shouted, commanding by name:

"More billions! Guarantees! No fees or interest!
Portfolio reduction, and uncapped blank checks!
Pass right over congress! No need for debate!
Now dash away! Dash away! Save U.S. real estate!"

As dollars that before the recession will fly,
When they meet with a credit crunch, pile up on high,
So up to the top of the market they flew:
The taxpayer money, and the Fed Chairman, too.

And then, in a twinkling, they heard on the news,
That Fannie and Freddie have nothing to lose.
But they sighed great relief when they looked up to spy
The chairman had arrived with a glint in his eye!

He was dressed in a suit, a thick beard 'round his chin,
And his clothes were all lined with new-mint Benjamins.
A bundle of cash he had flung on his knee,
Still warm from the presses, shipped straight from D.C.

His eyes--how they twinkled! his moustache how merry!
The suitcase was leather, the new bills were cherry!
His droll little mouth was drawn up in a grin,
And snow-colored hair was where black had once been.

The embers of finance he held tight in his paws,
And the smoke, it encircled his head like white jaws.
But he wasn't afraid of a fiscal meltdown,
For the lips on his face never met with a frown.

He was smiling and bright, right jolly and tall
Our friends laughed when they saw him, in spite of it all;
The strength of the dollar in the hands of the Fed
Soon gave them to know they had nothing to dread.

He spoke the last word, and went straight to his work,
And filled all their coffers, then turned with a jerk,
And laying a finger on the side of his head,
And giving a nod, he flew back to the Fed.

So Christmas came early for our friends here that night,
So grateful they were for the state's underwrite.
Chuck, Mike, and Bernanke, all shouted with glee:
"No need for financial responsibility!"

A Parody by Erik Fogg
Original, "The Night Before Christmas,"
by Clement Clarke Moore or Henry Livingston.

The Obama Administration's "Money for Everyone" Program

So Mr. Obama has shown that he is in favor of a great many government spendings. He is going to cut taxes for the middle class (when our gov't debt is already spiraling), but that's great, he's pro-middle-class. He's going to bolster education money, medicare, and state infrastructure development, as well as increase unemployment benefits--that's great, though, he's helping the poor and unemployed. In traditional New Deal Liberalism, the rich would pay for all this, and 80% of us would walk away happy, not thinking about whether what we had just pulled was highway robbery--we'd be too busy counting our free money.

But not this time. Mr. Obama does not discriminate--he is not anti-rich, like many of his predecessors, no. Mr. Obama is in favor of not only the current almost-$1Trillion bailout for gigantic finance companies, car companies, mortgage companies, and the like, but he wants more. So these big-businesses, which had far-from-optimal business plans, inefficiency, corrupt practices, and crappy products, are now getting big paychecks--large chunks of which are going to this year's bonsuses for the incompetent CEO's that run the places.

So if Obama's not targeting the rich with these taxes, who's getting targeted? Well, the rich are being targeted--but only some of them. The only people that are going to end up paying for this are those whose businesses are chugging along fine--the successful. It is those who were smart enough, tough enough, dedicated enough to keep from taking a crippling blow from the economy that will be punished. And for those who have suffered and are right on the edge of collapse, too bad--higher taxes, higher minimum wage, higher benefits required. Someone's got to pay for it, right?

But we have reached such a bone-headed age in our history that it is no longer the rich that are forced to pay for the poor, but the successful that are forced to pay for the failures, the clean that are forced to pay for the corrupt, the brilliant that are forced to pay for the incompetent. Success--not wealth--is the new dividing line between those that pay and those that receive. No longer does our society reward those that worked hard, that kept their noses clean, that had good ideas, that were clever--no, we punish them for their success with higher taxes, and we reward the foolish and the incompetent with bailouts, with tax breaks.

So now, we've got the stupidest incentive structure that I can think of. And here's the awesome part: when it all falls apart, we'll blame the Free Market, we'll blame Capitalism, we'll blame Greed, we'll blame Money, we'll blame the owners of those successful companies. We'll hail our politicians for saving us, hail them for punishing the owners of those companies, hail them for telling us that they are fixing things, but the evil capitalists keep breaking things. And we'll listen. And we'll vote for them.

The Draft, and the 13th Amendment

After arguing for a long time over the draft, I've come to the side that the draft is not only a civil rights disaster, but is probably unconstitutional. I cite Amendment 13 of the US Constitution:


"Amendment XIII

Section 1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.
Section 2. Congress shall have power to enforce this article by appropriate legislation. "

The "nor involuntary servitude... shall exist within the United States," seems a pretty damn clear violation of this amendment to me, unless you're one of those crazy feminists that think all men over 18 are definitionally rapists (thus allowing the draft under the punishment clause, in this case for being a man).

And there are still a whole lot of Vietnam Vets, drafted, that are missing legs, that suffer PTSD, that are otherwise miserable and traumatized. I have begun to wonder how they might fare in a class-action lawsuit against the United States of America on the grounds of forcible violation of their 13th amendment rights. In fact, I'm starting to wonder: why the hell haven't they sued the US yet? Or have they, and some court decided that "well, the draft really isn't involuntary servitude, it's more of an involuntary shipping you off to the jungle to get shot?" Any lawyers around, please comment--I'm very curious.

God Damn Hippies

So, to quote one of my favorite free thinkers, Eric Cartmen, "God damn hippies!". The citizens of Boston are all for the preservation of your rights as an American when it comes to the war on terror and illegal wiretaps amid all the other wonderful things the Bush administration has been called out on. And this is part of being a hippy that I'm fine with. What is absolutely unacceptable however, is that they have taken a page from Bush's book and are using public health concerns to push their restrictive agenda in much the same way as the executive branch has done with terrorism. Recently a law was passed that will make it illegal for cigarettes to be sold on college campuses and even more devastatingly that smoking will be illegal in all indoor work spaces come next Monday, Dec 22, 08. These may even sound reasonable. We all know the dangers of smoking and even problems of second hand smoke. However, the clause about "any indoor workspace" includes bars, restaurants, and nightclubs, around 700 establishments total will have to rethink their business plan.

This is an atrocity. America in my eyes is about freedom of the individual, to be able to do things that other people don't agree with so long as your actions aren't trampling on their rights. If someone chooses to never smoke out of concern for their health, or to avoid other people smoking, that is perfectly reasonable. Bars, restaurants, and nightclubs have never been required to let people smoke, it is a choice the owner/manager makes to attract certain clientel and people then have the choice to patronize these establishments based on the environment they are looking for. With the number of bars in this town finding a suitable choice, no matter what your preferences, should not have been a problem for anyone. I refuse to waste my own or your time pontificating about second hand smoke and why in a private establishment it isn't infringing anyone elses' right to make healthy decisions. Either you agree with me or you are too paternalistic to be reasoned with.

Taking that paternalism to a whole new level we have the wonderful world of college, where everyone, young and old, is a dependant of the system, subject to restrictions on freedom of speech, and a myriad of other depressing restrictions. It turns out all the paternalistic coddling that goes along with preventing underage drinking doesn't do shit, so why is changing where you buy your cigarettes going to change anything? Well, it wont. It will just make students who do smoke go out of their way and further inconvenience them. Should be also make students get std checks and submit paperwork everytime they want to fuck? Right now it is a witch-hunt for smokers, I have no idea where they will turn next.

In short, dirty hippies are getting their way and undermining exactly what America stands for. They overlook one very important fact of life and it only contributes to the problems we are going to have over the next few years. That fact is that people need to take personable responsibility for their actions and that their actions do in fact have repercussions concerning their reputation. Reputation and responsibility, two of the most important factors in being a useful human being. Dictating choices for people lets them abdicate their own responsibility over little things like this but sets a trend that is remarkably dangerous. On a similar note, people understand that reputation is important. Look at the international community and the way they view the States right now because of President Bush and his recent tactics. Traveling abroad has recently become much less fun. If someone understands the cost benefit analysis of smoking and their reputation and decides that relaxing with a smoke is worth whatever social ramifications come with it, I sure as hell hope that they are smart enough to make that choice for themselves. I choose to try and keep an optimistic outlook on life, that people are inherently awesome, creative, intelligent beings. Look at all that we have accomplished in the last 5, 10, 100, 1000 years. Those advancements were not made by having one hivemind making everyone's decisions for them, they came from thousands and millions of people all working as autonomous, responsible entities. To see what happens when you let paternalism run a society, look no further than the church; it was known as the dark ages. I, for one, sure as hell would rather live in a society defined by statues of David, theories of helio-centrism and Higgs-Hosons, whether I think they are worthwhile or not, than one defined by Malleus Maleficarum.

On the Market

A friend told me that the internet punditry was telling him that "deregulation" was to blame for some of the recent stock crashes and financial institutional tankings. He asked for my free-market alternative explanation.

Problem is, I agree. But not in the way that much of the punditry would like. Regulation's a tricky thing. When you put regulation down, you place an arbitrary restriction on a system, and the system adjusts to compensate. Think about putting a rock down in a river--it flows around. That's problem one--changing regulation forces changes in the economy. But the second problem is weirder--often, regulation causes perverse incentives or weird economic effects, and more regulation is slapped down on these perverse incentives/ weird economic effects to try to prevent them from happening. A good example is in rent control. Large cities have huge swaths of zoning/safety/health/fire regulation--as well as large property taxes on landowners--for residential buildings in the city. With all these regulations and taxes, the landowner incurs a higher cost, and thus raises the rent. With these increases in rent, poor people can't afford rent, and become homeless. Many city governments deal with this by using rent control--they force rent to go only so high. In most models, they control middle-class or upper-class rent; but wherever they control the rent, it causes some apartments to no longer make money, and thus not rent out. Sometimes, the costs are just higher than the government-approved rent. These apartments won't be used, which reduces the supply of apartments. Without an independent change in demand, prices everywhere go up--the poor get hurt hardest. So then the government started subsidizing the rent for these guys... it keeps going. Anyway.

When you have this massive, complex structure of regulation on a system, suddenly stripping some away is clearly going to create problems. The first problem is that an economy does not change as seamlessly as a river--when you yank the rock back out, the system has to adjust, and sometimes that adjustment is violent. But the other side is that if you yank out some of this regulation, th problems caused by other regulations become manifest, in ways that are extremely complex and difficult to predict. I'm not even going to pretend to know exactly what regulated-market problems caused the recent tank--I've heard a lot of jabber on it, and none of it has made sense.

But if this is an adjustment, then a bailout won't help in the long-term--the new equilibrium is one with fewer financial institutions, fewer investment banks, more modest loaning and investment policy. Bailouts to get these guys back on their feet won't magically create a new equilibrium--it's just a use of tons of energy to force them away from the equilibrium.

Looking for the Stalemate

So we small-government folks often talk about the "stalemate" situation in government, usually between the executive and the legislative branches, but more ideally with even a legislative branch too divided to do much. One of my favorite bloggers, Divided We Stand, is dedicated to just this idea.

Why stalemate? Why not a united government? Well, we generally think a mandate to do wild and crazy partisan things is bad. Itl eads to lots of spending, and new government institutions that don't go away, and use decades of bureaucratic politics to control more of your money and your life.

Look back to the 1990's, we say: people were pretty thrilled. We had a balanced budget. Why? Because a divided government couldn't add new spending to keep up with the growing economy. We had a massive economic boom. Why? Because a stagnation of regulatory behavior meant confidence in long-term stability for investments, and investor confidence rose. Congress was popular. Why? It did nothing at all.

So I say: Seek the stalemate in the next eight years. Put away your idealism--you don't want to hand a junior senator a mandate and a veto-proof majority in congress; a lot will happen that you're going to regret later. You're drunk and lonely, and she's attractive, but there's no one-night-stand in the presidency, only marriage.

For the sake of stalemate, I say vote for Mr. McCain. Don't stress too much about his domestic policy--he won't get to do any of it in office; the Democrats will block him. His foreign policy? Much like Mr. Obama's, except not stupid.

Want to feel good about your government in the next 4 years? Seek the stalemate.