January 11, 2012
"Frequently, demand for government services emerges because of the perception that the private sector has fallen down on the job in that area. This means that the government has been tasked with doing the things that are difficult and unprofitable to do. It is precisely because these government outputs are often so hard to measure that Newt Gingrich’s claims about Six Sigma sound pretty laughable. Even libertarians who want the government to reduce its operations drastically will acknowledge the political risks and costs of trying to execute this plan."

— Dan Drezner, "Governments Are Not Corporations."

November 3, 2011
Illustrating the Firm-Merger Effect Of Free Markets

Mother Jones posts the following graphic which charts the merger paths of four of today’s largest investment banks:

I think this chart illustrates a rather fundamental proposition about free markets: in every free market, there are winners and losers.  When you have a wide field of competing firms, those firms who lose competitive advantages have an incentive to merge with competing firms in order to save what’s left of their business.  That’s not bad in of itself: it saves employees the hardship of interim unemployment, and customers don’t suffer a disruption in service.  There’s also a small efficiency windfall, because as management and departments get consolidated, there’s less administrative overhead.  Yet as you can see, the inevitable result of this pattern is that we end up with a small group of exceptionally large firms that come to dominate the market.  How can a smaller firm, just entering the market, compete with the kind of leverage and capital that these firms bring to bear?

It should be kept in mind that oligarchal markets aren’t inevitably detrimental to the consumer.  Trey Parker and Matt Stone made the observation in an episode of South Park that large firms aren’t necessarily evil: sometimes the reason they get large is precisely because they have a business model that best serves the needs of their customers.  They beat the competition and get bigger precisely because they’re providing the best possible combination of quality and affordability to their customers.

Yet on the other side of the coin, this slow, casual aggregation of assets and marketshare in the hands of a single firm means more risk, liability and leverage are packaged underneath the same tent.  This is precisely how firms become “Too Big To Fail:” they get so large that the failure of a single company could create such a large short-term shock to the economy that intangible economic factors, such as consumer confidence and/or risk aversion, create real and lasting barriers to economic prosperity.  Under those circumstances, the “bailout” is often the lesser of two evils; which is probably why economists on both the Left and Right believed it was the wise thing to do.  Once you have a firm that’s Too Big To Fail, it is, by definition, a bad idea to let it fail.  Although ideally, regulators actually do their job in the after-math and use Anti-Trust laws to break them up.  If being “Too Big to Fail” doesn’t existentially put you in violation of the Sherman Act, I have no idea what possibly could.

The immediate objection to much of this will be along these lines: it is not the rules of the market that cause these mergers, but excessive regulations which create barriers to entry, thus allowing large firms to dominate the marketplace since small firms won’t have the capital to ensure compliance AND competitive prices.  But this leaves out the fact that compliance costs shrink and grow in proportion to a firm’s balance sheets and market share.  To wit: JP Morgan has a lot more paper to push than a small regional competitor.  And the only way around these increased compliance costs is to commit fraud.  So it doesn’t make any sense to say that compliance costs are the problem here.  Large institutional banks need to retain a lot more help than a small regional bank does to ensure compliance.  This is particularly true when you account for the fact that large firms get sued with much more frequency than small firms do; due in no small part to the fact that most large firms are publicly-held companies in which shareholders can bring suit derivatively, as all four of the big banks on the above chart are.  This point is bolstered even further by the fact that it is often the regulators themselves who are doing the suing.  And nobody is subject to more regulatory scrutiny than the big banks; particularly not in these times.

So at the end of the day, the answer to all this is that you need regulators to actually do their jobs and break up large firms before they get too big to fail in the first place.  Libertarian Public Choice theorists may have a point, of course, that moral hazard and human incentives ensure that regulators will tend not to do so.  But Citigroup’s latest $285+ million payout shows that federal regulators are capable of exercising meaningful oversight.  This oversight may not be perfect in all cases.  But to use an oft-quoted phrase, the perfect should not be the enemy of the good.

October 15, 2011
Challenging Milton Friedman On Pencils

Dani Rodrik challenges Milton Friedman’s riff on free markets…[m]ost of the world’s pencils today are produced in China, “an economy that is a peculiar mix of private entrepreneurship and state direction”:

[T]he present-day pencil story would be incomplete without citing China’s state-owned firms, which made the initial investments in technology and labor training; lax forest management policies, which kept wood artificially cheap; generous export subsidies; and government intervention in currency markets, which gives Chinese producers a significant cost advantage. China’s government has subsidized, protected, and goaded its firms to ensure rapid industrialization, thereby altering the global division of labor in its favor. … Given China’s economic success, it is hard to deny the contribution made by the government’s industrialization policies.

September 29, 2011
Libertarians Rejoice! Louisiana Monks Win Right To Sell Caskets Without A Funeral License

Popehat has the rundown:

Last year I wrote about the Institute for Justice and their lawsuit on behalf of the monks of Saint Joseph Abbey of St. Benedict, Louisiana. The monks, you may recall, made beautiful handcrafted caskets, but labored under a ridiculous Louisiana law that required them to become a “funeral director” if they wanted to sell them. As I said then:

Louisiana law purports to require that anyone who is going to sell a casket has to jump through all same regulatory hoops as a full-fledged mortuary operation that embalms bodies. See, selling “funeral merchandise” (including caskets) means you are a “funeral director.” And to be a “funeral director,” you must be approved for “good moral character and temperate habits” by a funeral-related government entity [of course, that’s in Louisiana, but still], complete 30 semester hours at college, apprentice with a funeral director for a year, pay an application fee, and pass an exam. But that’s not all. If you want your facility to sell caskets, it’s got to qualify as a facility for funeral directing, including a showroom and “embalming facilities for the sanitation, disinfection, and preparation of a human body.”

So, to sum up: Louisiana would like the monks of Saint Joseph to take college classes, intern with a funeral director for a year, pass an exam, pay a fee, be approved by a board, and convert part of their monastery into a professional mortuary in order to sell hand-crafted wooden caskets. If they don’t, they are guilty of a crime.

This was classic rent-seeking: a protectionist measure calculated to defend Louisiana’s existing “funeral directors” from competition, so that they could continue to sell over-chromed ass-ugly caskets at an enormous markup.

At the time, I expressed skepticism that the ILJ would succeed in its suit.

Oh, me of little faith. ILJ won:

The Honorable Stanwood Duval of U.S. District Court for the Eastern District of Louisiana ruled, “Simply put, there is nothing in the licensing procedures that bestows any benefit to the public in the context of the retail sale of caskets. The license has no bearing on the manufacturing and sale of coffins. It appears that the sole reason for these laws is the economic protection of the funeral industry which reason the Court has previously found not to be a valid government interest standing alone to provide a constitutionally valid reason for these provisions.”

September 27, 2011

"This economic crisis is like a cancer.  If you just wait and wait thinking this is gonna go away, just like a cancer, it’s going to grow, and it’ll be too late.  What I would say to everybody is: get prepared.  This is not a time right now [for] wishful thinking, that government is gonna sort things out.  Governments don’t rule the world.  Goldman Sachs rules the world.  Goldman Sachs does not care about this rescue package.  Neither does the big funds…in less than 12 months, the savings of millions of people are going to vanish.  And this is just the beginning."

Well.  That was horrifying.

September 17, 2011
In Which Somalia is Better Off Without a Functioning Government



Could anarchy be good for Somalia’s development? If state predation goes unchecked government may not only fail to add to social welfare, but can actually reduce welfare below its level under statelessness. Such was the case with Somalia’s government, which did more harm to its citizens than good. The government’s collapse and subsequent emergence of statelessness opened the opportunity for Somali progress. This paper uses an “event study” to investigate the impact of anarchy on Somali development. The  data suggest that while the state of this development remains low, on nearly all of 18 key indicators that allow pre- and post-stateless welfare comparisons, Somalis are better off under anarchy than they were under government. Renewed vibrancy in critical sectors of Somalia’s economy and public goods in the absence of a predatory state are responsible for this improvement. 

From Page 27-28 of Leeson’s paper:

Recognition of this is not to deny that Somalia could be doing much better. It clearly could. Nor is this to say that Somalia is  better off stateless than it would be under  any government. A constitutionally-constrained state with limited  powers to do harm but strong enough to support the private sector may very well do more for Somalia than statelessness.

The Libertarian community needs to stop using this paper to support the blanket proposition that Somalia is better off stateless.  The author very clearly repudiates that proposition.

(Source: antigovernmentextremist)

September 16, 2011
Regulations: Where They Are Appropriate in a Free Market


As many of you know, I’m not an anarchist. I think government has some role, albeit a small one, in regulating an economy to ensure maximum competition. Note I don’t say promote: to suggest government should promote competition is to say the government should actively intervene in an economy in order to boost the competitiveness of some firms. In plain language, this strongly implies subsidies.

Rather, a free market is the best kind of economy because it is the most effective epistemological device that collects aggregate economic information, filters it, and then disseminates the relevant bits and pieces of that information to each participatory individual. In other words, the free market is like a giant search engine.

However, notice that this means that my conception of a free market rests on a very fundamental assumption: namely that information must be largely accurate and that there must be a sufficient quantity of information for the market to analyze. And sometimes, the natual situation of a market can lead to a situation in which there is an imbalance of information. Some involved parties are not aware, and certain parties do not offer full transparency. This is where, I believe, it is one of the few times for a government to step in to correct the situation, and regulations are a necessary aspect of correcting and preventing this.

My more liberal readers will probably nod their head in agreement, but to the libertarian, you are probably convulsing, foaming at the mouth and saying “WHHHHHHY! WHY REGULATIONS JUSTIN!!!! THAT’S THE GOVERNMENT!” and hiss like rattlesnakes ;)

I kid for humors sake, but on a serious note, some of you may be asking why the market can’t address this issue. Before we get into that though, I want to remind libertarians of one crucial portion of the Non-Aggression Principle that often gets forgotten about: it is immoral to initiate either force or fraud. However, as a minarchist, I realize sometimes it is necessary to use a small bit of force to offset a great ammount of fraud. And if you think fraud is somehow not harmful, then clearly you don’t understand why it is a part of the NAP. Fraud, especially financial fraud, has the power to destroy entire economies. Just look at what happened in 2008, due to the accounting fraud of Bear Stearns, AIG, Merrill Lynch and company. Even to this day, we have entities like Bank of America whose fraud in mortgages is starting to unravel and expose itself. It’s readily obvious why such fraud should be legally prevented.

In a market, I believe that it’s not necessarily in the best interest of a fraudulent company to reveal that they are fraudulent. I mean, this is just sort of common sense: if we already acknowledge that these companies are fraudulent, then by the very definition of what it means to be fraudulent, we implicitly admit that it is in the rational self-interest of these companies to be deceitful regarding their fraud.

And yes, I understand caveat emptor  and all that. But remember, part of our NAP is preventing fraud. And although regulations are certainly not perfect, I think they are an ideal solution to a few financial and economic problems when used judiciously and appropriately. Common-sense notions, such as banks should be forced to disclose the ammount of debt they are in, statistics related to their solvency, etc are quite appropriate to regulate in the sense that these facts need to be made explicitly public and freely available. If we want consumers to make rational decisions, which is one of the things a free market relies upon, consumers must have as much relevant and necessary information as possible in order to make the most rational decision. It is thus in the best interest of every individual to legally force companies to disclose this sort of information and make it publicly known.

(via yung-lysenko-deactivated2014040)

September 16, 2011
Libertarians and Conservatives must choose: Competitive Enterprise or Idolatry of Property

When Adam Smith gets over-simplified into a religious caricature, what you get is “faith in blind markets” - or FIBM - a dogma that proclaims the state should have no role in guiding economic affairs, in picking winners of losers, or interfering in the maneuvers or behavior of capitalists. Like many caricatures, it is based on some core wisdom. As Robb points out, the failure of Leninism shows how state meddling can become addictive, excessive, meddlesome and unwise. There is no way that 100,000 civil servants, no matter how well-educated, trained, experienced, honest and well-intentioned, can have enough information, insight or modeling clarity to replace the market’s hundreds of millions of knowing players. Guided Allocation of Resources (GAR) has at least four millennia of failures to answer for.

But in rejecting one set of knowledge-limited meddlers — 100,000 civil servants — libertarians and conservatives seem bent on ignoring market manipulation by 5,000 or so aristocratic golf buddies, who appoint each other to company boards in order to vote each other titanic “compensation packages” while trading insider information and conspiring together to eliminate competition. Lords who are not subject to inherent limits, like each bureaucrat must face, or rules of disclosure or accountability. Lords who (whether it is legal or not) collude and share the same delusions.

Um… in what way is this kind of market “blind”? True, you have gelded the civil servants who Smith praised as a counter-balancing force against oligarchy. But the 5,000 golf buddies — despite their free market rhetoric — aren’t doing FIBM at all! They reverting to GAR. To guided allocation, only in much smaller numbers, operating according to oligarchic principles of ferocious self-interest that go back at least to Nineveh.

The Libertarian response to this article would be that Corporate aggregation of power on the scale which Liberals/Progressives abhor cannot happen but for the interference and aid of the State.  State-granted monopolies, licensing programs, and heavily regulated industries create barriers to entry that mean only well established, large, capitalized firms can afford to operate profitably, since they are the only ones who can afford the cost, in time and money, of compliance.

This objection has merit.  One way to demonstrate this is to observe the Telcom industry.  It is not uncommon for municipalities to attempt to create a publicly-funded ISP utility which competes with private Telcoms.  (Imagine if all of NYC had publicly-funded wi-fi).  This is the sort of solution that is often desperately sought by municipalities in which laying “last mile” infrastructure is too expensive to be profitable for the Telcoms, leaving rural residents with limited options for internet access, which is increasingly necessary in today’s commercial climate.

Yet when municipalities attempt to do this, what happens?  The Telcoms sue.  Or they lobby the state to pass a bill outlawing it.  And while Libertarians would certainly be against publicly-run utilities, certainly they can appreciate the irony of a town or city, through democratic means, trying to establish a competing ISP service, only to have it banned by State power, or worse, halted by an injunction from a Telcom with pre-existing contracts giving it a monopoly on the area’s Telcom service.

The difference in service is stunning: municipal networks, since they aren’t run for profit, have no incentive to throttle bandwidth, meaning that customers of municipal Broadband can 100 MPS speeds for 20% less cost than private counterparts.  And of course, the Telcoms don’t want this to happen, so they’re running to State legislatures to make laws banning local towns and cities from making municipal networks.  Certainly that is Corporatism at its finest, assuming Libertarian critics can find it in their hearts to admit that outlawing local communities from providing publicly-run alternatives to private ISP’s is a means of banning legitimate competition in favor of large corporations.

Yet what I think Libertarians are missing is the proverbial forest through the trees: take, for example, the AT&T/T-mobile merger.  It was government action alone that halted this merger.  In a purely free market, there would be no mechanism by which to prevent such mergers from occurring.  What would prevent, in a healthy market, a series of buyouts and mergers from taking place in a given industry, such that you end up with one extremely large company?  Competitors would no doubt see the writing on the wall, and respond in kind, resulting once more in the very thing which Libertarians claim isn’t possible in a truly free market: an oligarchical market in which a small handful of very large companies dominate substantial shares of the market.  Private non-compete agreements would undoubtedly be signed (sometimes unspoken), and you end up with the same situation that the Telcom industry is in now: Verizon, Comcast, and Time Warner have essentially divided up the country into spheres of market share, making any company the virtually exclusive option for Broadband Access in their given part of America. 

When you consider the Libertarian obsession with property rights in particular, it seems to me that there would be absolutely nothing preventing this phenomenon from happening in a true free market.  The incentives all line up: Aggregation ensures marketshare.  Greater marketshare ensures profitability.  Profitability ensures the availability of capital, which can then be used to bully start-ups who will be unable to compete with large, well established companies (what I would term the “Walmart” effect).  Yes, this means lower prices in the short-term.  But price isn’t the only consideration. If you are unsatisfied with the service, you have no feasible alternatives.  And taking the example of the Telcoms, a strict property rights regime would prevent start-ups from even laying the infrastructure necessary to form a competing network (smart Telcoms would buy up every underground mile they could to prevent competitors from laying wire on it).

So in short, I agree with the thrust of this article: the natural Libertarian objection on Corporatist grounds has merit, but the answer is not to completely excise the State from the market.  The answer is smart policy, which means electing officials who have the balls to stand up to Corporate interests.  This is obviously easier said than done, and there is plenty of historic examples to suggest that in practice, it doesn’t happen (Dodd-Frank being a good example of good legislation gone bad).  On the other hand, the prodigious body of regulatory law in this country suggests that there is no shortage of political will to get the State involved in the activities of Big Business.  And at any rate, Libertarians can surely agree: just because the right solution is unpopular or unlikely doesn’t discredit the solution itself.

(Source: azspot)

September 10, 2011
"[M]arket share is not a good indicator of peoples tastes when the market itself is so badly broken. Most people drink Budweiser because they haven’t heard of other beers, because they grew up drinking it, or because people are creatures of habit. Believe me, if Sam Adams had the same advertising budget and national brand awareness that Budweiser has, not to mention their distribution capacity, they’d be pretty damn competitive. Same goes for any other small brewer with a decent product."

E.D. Kain, speaking about barriers to entry in the beer business.

September 3, 2011
Krugman And The Broken Window Fallacy



Krugman addresses the broken window fallacy

I’ve actually been avoiding thinking about the latest Obama cave-in, on ozone regulation; these repeated retreats are getting painful to watch. For what it’s worth, I think it’s bad politics. The Obama political people seem to think that their route to victory is to avoid doing anything that the GOP might attack — but the GOP will call Obama a socialist job-killer no matter what they do. Meanwhile, they just keep reinforcing the perception of mush from the wimp, of a president who doesn’t stand for anything.

Whatever. Let’s talk about the economics. Because the ozone decision is definitely a mistake on that front.

As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.

This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment. Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment.

And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.

More broadly, if you’re going to do environmental investments — things that are worth doing even in flush times — it’s hard to think of a better time to do them than when the resources needed to make those investments would otherwise have been idle.

So, a lousy decision all around. Are you surprised?

I think that his view on regulation helping the economy is pretty far off, if he believes in reguation he should let it stand on its own merits, not insisting that it will help the economy when in all likelihood it will simply discourage or force business to hesitate. 

However, at the risk of arguing with my libertarian followers, I agree with him 100% on the Broken Window “Fallacy”. American corporations are sitting on nearly 2 trillion dollars of wealth that no one can get them to spend on hiring workers or anything like that. Interest rates are at extreme lows and if the free market was working effectively, the lower price levels for labor and land would lead to the beginnings of a strong recovery by now. However, it is obvious that lower prices are not doing anything for an economy shell shocked by the crisis. 

So we know where the money is, we know these corporations are not spending it, we know what will make them spend their money in order to recover. It suggests to me that in the name of economic recovery, I do something that I’ve always wanted to do, sneak into the suburbs at night and burn down a Wal Mart 

The author of the Broken Window Fallacy, Frederic Bastiat, said the following in the same essay in which he identified the Fallacy: What is Seen and What is Not Seen:

As a temporary measure in a time of crisis, during a severe winter, this intervention on the part of the taxpayer could have good effects. It acts in the same way as insurance. It adds nothing to the number of jobs nor to total wages, but it takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times. As a permanent, general, systematic measure, it is nothing but a ruinous hoax, an impossibility, a contradiction, which makes a great show of the little work that it has stimulated, which is what is seen, and conceals the much larger amount of work that it has precluded, which is what is not seen.

It takes labor from ordinary times and doles them out in difficult times.  In other words, as a temporary measure, stimulus policies are not inherently suspect.  But making them the rule “in ordinary times” (in an attempt to make them even better) won’t work because it’s an unsustainable policy.  The point is to break the cycle of negative intangibles (consumer confidence, excessive investor and business owner risk aversion, etc.)  to get the economy moving again. 

Also, with respect to the Broken Window Fallacy: it is interesting how many Free Market advocates latch on to it as implacable criticism of Redistribution/Stimulus policies; particularly when Bastiat himself rebukes the idea that these are never acceptable policy responses in the very same essay in which he identified the Broken Window Fallacy.  Yet Paul Krugman’s critics never tire of accusing him of having committed it.  To quote PhD Economics candidate, Daniel Keuhn:

Nothing convinces me you don’t understand what Bastiat wrote more thoroughly than accusing Paul Krugman of having committed a Broken Window Fallacy.

(via huberthumphreydeathrally-deacti)

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