The government (including the Federal Reserve) has paralyzed the credit markets. It has attacked the markets in many ways, but one particularly insidious move was the inject a massive amount of new reserves, and then pay interest to keep them bottled up.
This is one of the most perverse outcomes of the Fed’s combination of decisions. Because nominal interest rates have been pushed so low, it is relatively cheap for the Fed to turn itself into the ideal place for banks to park reserves. In a booming economy with nominal interest rates at 7%, it would be very expensive for the Fed to bribe backs into restricting their loan portfolio. But not now, with the fed funds rate hovering at 0%.
In yet another case where the government creates the very problem it was (supposedly) trying to solve, check out this graph. Remember, the unprecedented actions were justified as a way to patch up the “credit crunch” and to unclog or unfreeze the credit lines on which businesses rely.
Isn’t it ironic, then, that–as the graph shows–bank lending didn’t go down until after Bernanke shot the moon? There was no “credit crunch” before that intervention.
There is one group of people in America who truly care about social injustice, but they don’t consider the violation of property rights to be high on the list. That’s why they approve government programs that involve redistribution.
On the other hand, there are Americans who take property rights seriously; they get tingles when they watch Russell Crowe tell his boy in Cinderella Man(paraphrasing) “We don’t take food from the butcher that isn’t ours, because that’s stealing, and we don’t steal. Not ever.” And yet, these same people don’t really get all worked up about police brutality, or the fact that some people are living under bridges while others eat filet mignon.
(Note that the above two groups aren’t exhaustive–there are Americans who care about property rights and want to help the sick and the poor. But the above two groups catch a lot of people.)
What’s ironic is that both groups would see their objectives better satisfied, if they paid more heed to the concerns of the other. If the first group really took property rights seriously, and therefore couldn’t support any government “social” programs that relied on coercion, then as if by magic there wouldn’t be so many people living under bridges, and there wouldn’t be millions of people who couldn’t afford health insurance.
By the same token, if people in their capacity as private citizens got more involved with “making the world a better place”–through voluntary means–then their opponents on Election Day might be more willing to let things run their course, rather than voting in a political “solution.”
==> Related to the above musings, Anthony Gregory has an article at LRC explaining how the power elites have used the two-party system to constantly grow the size of government with every successive administration. (Those are my words, not his.)
Someone who is working on these matters emailed me in regard to this article. Here is a self-explanatory portion of my response. I’m trying to show the problems of “treating our grandchildren as just as entitled to happiness as we are.” In other words, I’m trying to show why you need to use market interest rates when comparing present costs of emission cutbacks, with future benefits of averted climate damage. (You might want to do a rights-based approach, not a cost/benefit. That’s fine, but if you are going to do a cost/benefit, then you need to use a discount rate, arguably the market’s.)
OK so let’s say that we have decided we’re going to limit GHG
emissions today and this will cause our (conventional) GDP to drop by
$1 billion. Someone says, “Wow, that’s a lot of money. Is the program
worth the high cost?”
The proponent says, “Yeah, it sure is! Our scientists tell us that our
policy will spare our grandchildren climate change, and our economists
tell us that the damage we are thereby averting would be priced at $3
billion at the time it occurs. So we’re spending $1 billion today to
spare our kids $3 billion in damages, as they would have appraised
Then the critic says, “Are you nuts? Instead of cutting back our
output, let’s go ahead and produce that $1 billion in extra GDP, but
then we’ll put $200 million of it into a safe investment earning 3
percent (after inflation) per year. One hundred years from now, that
will be worth $3.7 billion, which we’ll bequeath to our grandkids. So
everyone is better off! We only lose $200 million this year, instead
of the $1 billion you suggested. And our grandkids are happier too.
Sure, they’ve got $3 billion in climate damages to deal with, but
they’ve got an extra $3.7 billion in wealth to deal with it.”
As Oprah-esque as it sounds to say this, I think there were really just a handful of teachers who really influenced the way I now view the world. And one of them was Gary Wolfram, in his Public Choice class at Hillsdale College.
I am still amazed at Wolfram’s abilities. If my memory serves, he had to give an opening lecture in the big auditorium to the incoming freshmen class. And not only was he hilarious, but he was hilarious in the midst of giving a lecture on political economy. In particular, he pointed out the crazy, unintended consequences of government measures.
For example, seatbelt laws can actually do little to reduce traffic injuries, while they definitely put bicyclists and pedestrians in more danger. (I leave the proof as an exercise to the reader.)
But my favorite example of the night, was his discussion of “three strikes and you’re out,” some feel-bad (get it?) law-and-order gimmick that had recently been put into effect. This was a while ago, but I think I have the details right: Under this new rule, a federal judge had to automatically give life in prison to anyone convicted of his third felony. At first that sounds OK, but then somebody informs you that a high school senior was charged with a felony for bringing a smokebomb to school. I found that story after 45 seconds of googling.
Do you really think it’s right to take away all discretion from judges during sentencing, if someone has committed the equivalent of three smokebomb pranks? Is it really just that that person gets life in prison? Because that’s what will happen, if “three strikes” is in place. You can’t hope that “oh they’d override the rule” to prevent that outcome. That’s the whole point; you’re taking away the judges’ ability to use commonsense, to realize that the statutes as written were not intended to yield this massive punishment on this particular defendant, and so the judge will ignore the sentencing guidelines. “Three strikes” takes away this power, so as to keep those effete liberal justices from legislating from the bench. “Three strikes” removes yet another buffer between the people and the raw, arbitrary actions of the federal government. I feel much better knowing that the mandates coming from the 535 members of Congress first get refracted through the prism of scores of “activist” judges who don’t do as they’re told. Yes, in a free judicial market, where judges competed for clients who wanted to have cases heard in a reputable court, the judges would likely be extremely fastidious and could back up every decision with precedent. Their reputations–and hence livelihood–would depend on it. But when the federal government has a monopoly on the entire judicial system in the country, I’m not sure that you want the people applying the rules to do what their told.
But I digress. Wolfram’s main argument against “three strikes” was that it gives the guy with two felony convictions an incentive to kill all the witnesses if he decides to hold up a liquor store. That person knows that if he gets arrested again, he’s spending life in prison. So he’s going to make darn sure he does what he can to prevent that. The marginal cost, if you will, of killing an additional person is zero, at least in a state with no death penalty.
So even from a purely pragmatic viewpoint, if the goal is to minimize “crime,” we have to realize that the deterrence effect may indeed reduce the commission of many types of felonies. But it will probably push up the number of homicides. It’s not clear, a priori, whether “three strikes” actually decreases crime. When you throw on all the injustices that it will occur in terms of harsh penalties, it seems an obviously bad policy.
And just to round out the title of this post, let’s not forget that if you lock someone up for life, then you have to siphon yet more money from the taxpayers, to keep the slave, er, prisoner, alive. The third and final strike against “three strikes.”
This is a great example of where suspicion of the other side’s motives can really juice up a conflict. The global warming debate is chock full of this tendency. Check out this story, which is based on true facts (as I understand them):
The world’s source for global temperature record admits it’s lost or destroyed all the original data that would allow a third party to construct a global temperature record. The destruction (or loss) of the data comes at a convenient time for the Climatic Research Unit (CRU) in East Anglia – permitting it to snub FoIA requests to see the data.
The CRU has refused to release the raw weather station data and its processing methods for inspection – except to hand-picked academics – for several years. Instead, it releases a processed version, in gridded form. NASA maintains its own (GISSTEMP), but the CRU Global Climate Dataset, is the most cited surface temperature record by the UN IPCC. So any errors in CRU cascade around the world, and become part of “the science”.
Professor Phil Jones, the activist-scientist who maintains the data set, has cited various reasons for refusing to release the raw data. Most famously, Jones told an Australian climate scientist in 2004:
Even if WMO agrees, I will still not pass on the data. We have 25 or so years invested in the work. Why should I make the data available to you, when your aim is to try and find something wrong with it.
In 2007, in response to Freedom of Information Act requests, CRU initially said it didn’t have to fulfil the requests because “Information accessible to applicant via other means Some information is publicly available on external websites”.
Now it’s citing confidentiality agreements with Denmark, Spain, Bahrain and our own Mystic Met Office. Others may exist, CRU says in a statement, but it might have lost them because it moved offices. Or they were made verbally, and nobody at CRU wrote them down.
Now don’t get me wrong, there are some kidney shots in the above–like calling Phil Jones an “activist-scientist.” But even so, you can get why the “global warming is a hoax” crowd would look at this and think their worst fears had been vindicated decisively. I mean, just think of it: The group that is the caretaker of one of the most venerable global temperature series, is basically just asking us to trust it!
That was actually Roger Pielke’s take on the whole sordid affair. And I have to confess, it did seem crazy to me that Jones gave his excuse with a straight face. But then Chip Knappenberger, a climate scientist who often blogs at MasterResource, posted a comment on Pielke’s blog that made me doubt my quick conclusion:
I have plenty (probably the vast majority) of papers which I couldn’t provide the raw data for if asked, much less many of my analysis routines. But, in my published papers, I include Data, Methods, and Results sections where I describe my work. And the fact that it is peer-reviewed means that someone, somewhere, with some qualifications in the field thought it was reasonable. So readers of my papers don’t simply have to “trust me” even if I can’t provide the data and/or the routines at some later date. If what I have done is wrong, it’ll be replaced by new and improved science, either by me or others—that is one of the primary ways that science moves forward—historically with our without the co-operation of all interested parties.
Perhaps my way of thinking about this is old-school and a new era is upon us (one which I have yet to fully embrace and not sure I ever will, especially the latter) in which everyone has to use the same data archiving techniques and the same analytical tools and reviewers will be required to precisely replicate the results before they are published—if not the reviewers themselves, perhaps a staff of analysts employed by the journals. But even if this will someday be the case, I don’t see how it should be retroactively applicable. Will all the journals be wiped clean of all past material, only to have it reinstated once each and every article has been replicated?
So if the CRU is guilty of requiring people to just “trust them” them, I would imagine that so too are 90% or more of all the authors ever published in the scientific literature.
I should stress that there are two distinct issues in the global warming (aka climate change) debate: First, what is our understanding of the impact of human activities on the environment? Second, what (if anything) should the government do, in light of this scientific understanding?
Libertarians shouldn’t be afraid to find out that the climate’s true sensitivity to greenhouse gas emissions is on the high end of the range of guesses. And they certainly shouldn’t rest their opposition to cap and trade legislation on the relatively fragile claim that “global warming is a hoax.” I consider it a much safer argument to observe, “Politicians have never solved a societal defect in the history of the world.”
The Pentagon has approached Congress to grant the Secretary of Defense the authority to post almost 400,000 military personnel throughout the United States in times of emergency or a major disaster.
This request has already occasioned a dispute with the nation’s governors. And it raises the prospect of U.S. military personnel patrolling the streets of the United States, in conflict with the Posse Comitatus Act of 1878.
In June, the U.S. Northern Command distributed a “Congressional Fact Sheet” entitled “Legislative Proposal for Activation of Federal Reserve Forces for Disasters.” That proposal would amend current law, thereby “authorizing the Secretary of Defense to order any unit or member of the Army Reserve, Air Force Reserve, Navy Reserve, and the Marine Corps Reserve, to active duty for a major disaster or emergency.”
Taken together, these reserve units would amount to “more than 379,000 military personnel in thousands of communities across the United States,” explained
Paul Stockton, Assistant Secretary of Defense for Homeland Defense and America’s Security Affairs, in a letter to the National Governors Association, dated July 20.
The governors were not happy about this proposal, since they want to maintain control of their own National Guard forces, as well as military personnel acting in a domestic capacity in their states.
“We are concerned that the legislative proposal you discuss in your letter would invite confusion on critical command and control issues,” Governor James H. Douglas of Vermont and Governor Joe Manchin III of West Virginia, the president and vice president of the governors’ association, wrote in a letter back to Stockton on August 7. The governors asserted that they “must have tactical control over all . . . active duty and reserve military forces engaged in domestic operations within the governor’s state or territory.”
According to Pentagon public affairs officer Lt. Col. Almarah K. Belk, Stockton has not responded formally to the governors but understands their concerns.
“There is a rub there,” she said. “If the Secretary calls up the reserve personnel to provide support in a state and retains command and control of those forces, the governors are concerned about if I have command and control of the Guard, how do we ensure unity of effort and everyone is communicating and not running over each other.”
Yeah, I’m sure that’s what the governors are worried about.
Every once in a while it occurs to me that it’s possible my worldview has a serious flaw in it, and that the people who really drive me through the roof might actually be right. Fortunately, such moments soon pass and I can get back to blogging.
But just to make sure you guys realize that our opponents aren’t morons, let me quote from a recent Brad DeLong essay in which he discusses the thought of John Hicks. After explaining the conventional mechanism through which central bank operations can stimulate an economy, DeLong says:
A little thought, however, will lead us to the conclusion that such open-market operations may fail. In them, the Federal Reserve is buying bonds, shrinking the supply of bonds out there–and thus pushing up their price and pushing down interest rates. For each amount that the Federal Reserve expands the money stock, therefore, it puts downward pressure on interest rates and thus on monetary velocity. In the limit where interest rates are so low that people don’t really see a difference between cash and short-term government bonds like Treasury bills, open-market operations have no effect because they simply swap one zero-yielding government asset for another.
It is in this situation that a government deficit can be useful. A government deficit means that the government is printing and issuing a lot of bonds at exactly the same moment that private investors are looking for a safe asset to hold. As these bonds hit the market, people who otherwise would have socked their money away in cash–thus diminishing monetary velocity and slowing spending–buy the bonds instead. A large and timely government deficit thus short-circuits the adjustment mechanism, and avoids the collapse in monetary velocity that was the source of all the trouble.
Lately I have come to believe that the notorious “liquidity trap” is a legitimate phenomenon. The closer nominal interest rates approach zero, the more that government debt begins to resemble government fiat money. This surely can’t be a good thing.
Think of it: The central government and central bank conspire to take the distinct markets of debt and money, and merge them into a common reality. It’s like they divided by zero.
Naturally, I’m not endorsing the Keynesian policy prescriptions for “what to do when you’re in a liquidity trap.” But I’m saying that Keynesians have been saying for more than a year that something funky happens when central banks drive interest rates down to zero. And unfortunately, their Chicago School / monetarist critics have largely ignored their insights.
Lately I have been giving economic arguments that suggest the government will soon have to legalize marijuana. I’ve come up with an independent argument.
The authorities over the next few years will need to legalize marijuana in order to clean out the prisons. They will need to make room for people like you.