The Fed's Good News

Today’s AP headline made me laugh: “Fed says recession easing, inflation not a threat.” The press release masquerading as a news story continued, saying “…the recession is easing, but the economy likely will remain weak and keep a lid on inflation.”

Ah, yes. The weakness of the economy is going to keep a lid on inflation. The corollary to this claim would be that a healthy economy is de facto inflationary, or that inflation is merely a naturally occurring economic phenomenon. Birds gotta fly, fish gotta swim, and prices gotta rise.

It’s in the Fed’s best interest to present the case in this light, of course. Why bother taking the blame for something as nasty as inflation when instead you can convince the masses that inflation is just one of those unfortunate aspects of life on this earth, as uncontrollable as the tides?

And the Fed’s spin doctors have clearly earned their fiat money – people have swallowed their story hook, line, and crawdad. Today, the term “inflation” is synonymous with price increases in the minds of most people, and most people believe that prices just naturally increase from year to year. There was a time when this wasn’t the case. People used to understand that inflation is actually the increase in the money supply, and that when money and credit is expanded by government, the prices for most goods and services tend to rise as a consequence of that expansion.

The problem with the classical understanding of inflation, though, is that it doesn’t allow the government to get away with nearly as much mischief as it might like. So the Fed (and the feds) simply redefined the term. Instead of inflation referring to the government-induced increase in the money supply, it now refers to the subsequent increase in prices, which blurs the line between cause and effect quite nicely. This in turn lets the Fed and the rest of the political class off the hook, and gives them the leeway they need to do all sorts of fun government-y stuff, like waging elective wars and promising people something for nothing. Do you really think people would support idiotic schemes like invasions of foreign lands or government-provided health insurance if they had to pay for it through direct taxation? Of course not. But inflation allows the government to do all of this and more, because it can now impose the costs of this stupidity indirectly.

Nevertheless, there are a few souls out there who still know what’s what. No doubt they read today’s AP headline and marveled at the Fed’s ability to claim that inflation is under control when the Fed itself publishes graphs like this one:

The astute observer (and even the merely semi-conscious observer) can see that the money supply has doubled in the past eleven months. This increase in the money supply is the inflation that Bernanke claims is under control. Just because the prices of everything under the sun have not yet gone through the roof does not mean for one second that there is no inflation. Some of these newly created dollars are being held by foreign central banks (last one holding dollars loses!), some are being held by US banks in the form of higher reserves, and some of the new money has yet to work its way through the system. But it’s just a matter of time before those dollars start circulating with a vengeance. That will not only result in dramatically higher prices, but could also drive yet another asset bubble.

No matter how or when the effects of this monetary insanity manifest themselves, the above graph shows that, far from being some minor risk that’s well under control, inflation has already happened. If this is what passes for good news from the Fed, I shudder to think of what life will be like once they finally have to deliver the bad news.

Trust Me, I'm a Doctor

I knew an Obama administration would be bad, but I never thought it would be so bad, so soon. The scope of Obama’s disastrous policies is beyond anything I could have predicted, and his relentless assault on whatever remnants of the American free market still exist is absolutely breathtaking. Beginning where the Bush administration left off, President Obama and his accomplices in Congress, the Fed, and the Treasury have managed to place large swaths of the automotive and financial industries under state control in the space of just five short months. And they’re not done yet.

President Obama gave a speech in Green Bay, Wisconsin yesterday to pitch the next item on the nationalization agenda, health insurance. Evidently the President believes that now would be the perfect time to create another wildly expensive government entitlement program to complement the $100 trillion in unfunded liabilities from Social Security and Medicare.

Obama addressed some of the petty bourgeois concerns voiced by a few reactionary and counter-revolutionary factions, saying, “If you’ve got a private plan that works for you, that’s great. But we want some competition. If the private insurance companies have to compete with a public option, it’ll keep them honest… When you hear people saying socialized medicine, understand, I don't know anybody in Washington who is proposing that.”

Now I know that many Americans just can’t wait for a visit to their doctor to feel like a visit to the Department of Motor Vehicles (only with needles and tongue depressors). And I understand how powerful an illusion “free” health care can be. Why pay for your own health care when you can just force your neighbors to chip in instead? So it’s no surprise that government health insurance is a popular policy for many voters (at least until they see what it’s like in practice). But my question is this – how can anyone, no matter how deeply they might love and worship Obama, suspend their disbelief so far as to buy any of his claims?

Both of the points Obama made in the Green Bay speech – that privately provided health insurance will continue unaffected and that this proposal is not socialized medicine – are outright lies, and even his most sycophantic supporters should be able to recognize that. They may still support socialized medicine as a policy, but it should be plain to all that this proposal is specifically designed to eviscerate private health insurance providers so that the health insurance industry can be socialized in its entirety.

Lest there be any doubt, let’s imagine some enterprising individual were to open a convenience store. He saves up some money, gets a loan from the bank, and goes into business for himself. Times are tough, of course, and he’s got to watch the bottom line like a hawk. If the profit margin on the sales he makes to his customers isn’t enough to cover his costs, then obviously he’ll have to shut down eventually.

Now let’s imagine that the government opens its own convenience store right across the street. The government store is not subject to the same kinds of market disciplines as our private entrepreneur. The government store doesn’t have to worry that the profit generated by the customers who shop there is enough to cover its costs – it gets to allocate its operating costs over the entire taxpayer base, regardless of whether those taxpayers shop at the convenience store or not. This is not an insignificant competitive advantage. It enables the government store to price its goods far below their market value, so why would customers continue to shop at the private store across the street? And since it’s a government-run store, it will be able to run Amtrak-level deficits over a functionally infinite time horizon.

It doesn’t take an advanced degree to realize that our young entrepreneur cannot possibly compete in this environment. Indeed, one is hard-pressed to see how this situation can even be termed “competition” at all. And yet this is the model President Obama is proposing for the health insurance industry.

The outcome is not in doubt. Private insurers will be run out of business, leaving the government insurance scheme as the only game in town. Demand for health care will rise, as consumers’ link between the provision of the service is further divorced from payment for the service. As the government becomes the monopsony customer for health care, it will seek to control its spiraling costs and the resulting deficits by rationing service, increasing taxes, and paying health care providers less-than-market prices. This will ensure that fewer people will wish to enter the medical field, thus exacerbating the shortages. This is already happening. As reported in the New York Times, more and more doctors are refusing to accept Medicare patients because of the bureaucratic hassles and the below-market reimbursement rates. A report by the Lewin Group indicates that Medicare doesn’t even cover the health providers’ costs. There is no reason to believe that making a failed government program even bigger than it already is will deliver better results.

Granted, none of this will sway those who still believe that government can wave its magic wand and simply force goods and services to be cheaper and more available than they currently are. And one must admit that the popular frustration over the current health care system is very real, giving the politicians something to tap into. Many people feel they’re paying too much for the insurance they do have. (Of course, doctors’ rates are higher than they probably should be. This is due in part to the fact that the American Medical Association is a government-protected union that keeps the number of physicians artificially low). Other people don’t like the services provided by their HMOs. (Then again, HMOs were a government creation - thank you, Ted Kennedy). And some people are frustrated by the fact that if you lose your job, you often lose your health insurance because it was part of your benefit package at work. (But even this is the result of wage and price controls imposed by the government after World War II).

So it seems that much of the frustration with our current health care system is due not to the free market, but rather to the lack of one. One intervention begets another, and another, and another, until finally we wind up with a completely unworkable system that everyone hates. And yet many people still look to the government to fix the problem by doing more of the same things that caused the problem in the first place. It seems like a strange prescription to me, but then again, I’m not a doctor like President Obama.

The Wit and Wisdom of Oliver Wendell Holmes

In announcing his nomination of Sonia Sotomayor for the Supreme Court, President Obama made the following comment, "For as Supreme Court Justice Oliver Wendell Holmes once said, the life of the law has not been logic, it has been experience; experience being tested by obstacles and barriers, by hardship and misfortune; experience insisting, persisting, and ultimately overcoming those barriers. It is experience that can give a person a common touch and a sense of compassion, an understanding of how the world works and how ordinary people live."

The reference to Justice Holmes was telling, I think. Holmes is the model jurist for many Progressives, due to the fact that he was utterly incapable of identifying any limits whatsoever on the power of the state over its citizens. His legacy was, by and large, overtly hostile to individual liberty. Based on some of Sotomayor’s comments and her record as an appeals court judge, I suspect she will continue in the Holmesian statist tradition. And I’m positive that President Obama expects no less. But since the President seems to hold the wit and wisdom of Oliver Wendell Holmes in such high esteem, perhaps it would be worthwhile to take a closer look at a few of the quotes from the Supreme Court’s most frequently cited Justice.

No doubt you’ve heard the phrase, “Shouting fire in a crowded theater.” It’s one of Holmes’s most memorable lines. It comes from the Schenck v. United States case, for which Holmes wrote the unanimous decision. Here’s a slightly fuller excerpt from that decision:

“The most stringent protection of free speech would not protect a man falsely shouting fire in a theater and causing a panic. [...] The question in every case is whether the words used are used in such circumstances and are of such a nature as to create a clear and present danger that they will bring about the substantive evils that Congress has a right to prevent.”

The “shouting fire” line has clearly survived the test of time, ranking right up there with, “Four score and seven years ago,” and “May the force be with you.” It has been used by statists from all across the political spectrum as some sort of talisman to ward off debate and quash unpopular speech. Upon closer analysis, however, we find that this little gem is not all it’s cracked up to be – particularly when we consider what Holmes and the rest of the Supreme Court actually decided in the Schenck case.

The facts of the case are fairly straightforward. During World War I, Charles Schenck was arrested for distributing flyers protesting the draft, and the Supreme Court upheld Schenck’s conviction. Holmes’s “fire in a crowded theater” line was meant to support his finding that Charles Schenck’s right to free speech did not extend to criticizing government policy. Holmes was dead wrong in this case, yet his quip is still held up as though it had been brought down from the mountain on stone tablets.

Another one of Justice Holmes’s famous quotes comes from the Buck v. Bell case, in which this paragon of jurisprudence discovered the state’s right to force sterilization on those individuals the government deemed “defective” in some way. Delivering the majority’s downright ghoulish opinion, Holmes wrote,

“The judgment finds the facts that have been recited and that Carrie Buck 'is
the probable potential parent of socially inadequate offspring, likewise
afflicted, that she may be sexually sterilized without detriment to her general
health and that her welfare and that of society will be promoted by her
sterilization,' and thereupon makes the order. In view of the general
declarations of the Legislature and the specific findings of the Court obviously
we cannot say as matter of law that the grounds do not exist, and if they exist
they justify the result. We have seen more than once that the public welfare may
call upon the best citizens for their lives. It would be strange if it could not
call upon those who already sap the strength of the State for these lesser
sacrifices, often not felt to be such by those concerned, in order to prevent
our being swamped with incompetence. It is better for all the world, if instead
of waiting to execute degenerate offspring for crime, or to let them starve for
their imbecility, society can prevent those who are manifestly unfit from
continuing their kind. The principle that sustains compulsory vaccination is
broad enough to cover cutting the Fallopian tubes. Three generations of
imbeciles are enough.”

Creepy much? And as if any further proof were needed to solidify Holmes’s statist bona fides, there’s always the following:

“I like to pay taxes. With them I buy civilization”.

An interesting take on the subject, don’t you think? Say what you want about taxes, they are by their very nature coercive, and few people actually like to pay them. But that’s not what I find troubling about this particular quote. The problem here is that Holmes has the link between taxes and civilization completely backward. Taxes are not the price we pay for civilization. At best, they are the price we pay for our lack of civility. After all, a civilized society should not be characterized by the degree to which it cloaks and institutionalizes coercion. A civilized society should be characterized by the degree to which it eschews coercion altogether and seeks peaceful, voluntary solutions instead.

Of course, that’s just my (dissenting) opinion.

The Happiness Machine

One of the podcasts I listen to regularly is the Australian Broadcasting Corporation’s Philosopher’s Zone. I have no idea why I do this, as they rarely talk about anything interesting. I’ve wasted untold hours listening to topics such as “Hypatia of Alexandria” or “The Unhappy Family of Ludwig Wittgenstein.” On those rare occasions they manage to touch on something I’m interested in, like “The Ethics of Economic Rationalism” or “Philosophers Advising Government,” they usually just make a hash of the whole thing.

I shouldn’t be surprised by this. After all, the Austrialian Broadcasting Corporation is just NPR Down Under. The host of The Philosopher’s Zone, Alan Saunders, is certainly a talented interviewer and is obviously very well schooled in philosophy, but he never strays too far from the standard big-government welfare statism that one would expect from a taxpayer-funded media outlet. He does, however, bring a certain air of sophistication to the tired center-left policies he and the majority of his guests obviously support.

From time to time, though, I do hear things on the show that I haven’t heard before. For example, the May 30th episode was entitled “The Happiness Machine,” featuring Caroline West. Ms. West is Senior Lecturer in the University of Sydney’s Philosophy Department, and her main point was that the term “happiness” has several meanings and that we need to be very specific if we expect to make any progress. In short, it seemed like one of those topics, good for little more than background iPod noise while I mowed the lawn. But then Ms. West made a few claims that made me stop and pay attention.

The first claim was evidently empirical. According to Ms. West, multiple studies have shown that people without children report greater happiness throughout their lives than parents do. As a father of two I find this extremely hard to believe, but then again I’ve got the greatest kids in the world. (I know, all parents think their kids are the best, but in my case it’s actually true - they won the J.D. Power and Associates award for initial quality). Be that as it may, I’m not really trying to refute Ms. West’s point here. I suspect that these studies come with a lot of qualifying statements, but I have no doubt she’s got the data to back up the claim.

The second point Ms. West made involved the effect that money has on self-reported happiness. Although her core claim also had some sort of empirical data behind it, she continued far beyond what any data points could possibly prove. From the show’s transcript:

“Multiple studies find that over a certain surprisingly low threshold, about USD $40,000 or equivalent, every extra dollar you earn makes very little, if any, difference to your happiness. But there's an interesting difference in the finding. One cluster of studies shows a steep increase in happiness from zero dollars to around about $27,000 a year, and a still increasing, but less steeply increasing rise between $27,000 and $40,000 a year, and a complete leveling off in happiness levels after $40,000 a year, until you get to $125-million a year, and you're on the Forbes Rich List where there's another sharp jump. So people on the Forbes Rich List, they don't just look happy, they probably genuinely are.

OK so that's one finding, which has a leveling off, almost complete leveling off in increases in happiness earning over $40,000 a year. There's a flat line. I mean the surprising finding is, it makes absolutely no difference to your happiness, whether you earn $40,000, $70,000, $150,000 or $3-million a year. I mean when you think of all the things that people give up in order to earn more money ...

But another cluster of studies, quite a number of them, show something different.
There's a slight but nonetheless overall significant increase in happiness after
$40,000. A less steep but still very steady increase in happiness all the way up
until $125-million and then you're very happy.

…[T]here are some really interesting and difficult questions for policymakers around these sorts of issues, because some people think that the findings about income and wealth, in particular the fact that after $40,000 happiness sort of levels off, notwithstanding quite significant increases in income. I think this is a sort of strong argument for aggressive redistribution of income from people who earn over $40,000, to people who earn between zero and $27,000, because if it's true as the studies suggest, that every dollar over $40,000 that you earn makes very little difference to your happiness, but every dollar that someone gets if
they're between zero and $27,000 makes an enormous difference to their
happiness, and you want to do what makes most people happy, then there seems to be an argument for redistribution, taking from those who have more than $40,000 and giving to those who have between zero and $27,000.”

Although I wasn’t terribly interested in the topic overall, I found this bit to be absolutely fascinating. I mean, I’ve heard all sorts of rationalizations for income redistribution before – everything from “it’s the social contract” to “public goods” to “it’s not really stealing if most voters say it’s okay” – but I had never heard anyone defend theft on the basis of how happy it makes the thief! Kudos to Ms. West for blazing new frontiers in statist thinking.

As I listened to this “strong argument for aggressive redistribution of income,” I wondered how this would all play out in practice. If we assume for a second that the government has a) the ability to calculate Person X’s happiness relative to Person Y’s happiness, and b) a mandate to maximize or equalize said happiness, then I suppose the first step would be to change the income tax structure. Perhaps the IRS could give an exemption on any income below $27,000 a year and then impose a 90% rate on any income over $40,000. Since happiness (according to the studies cited by Ms. West) stays rock steady for any income between $40,000 and $125 million, it would probably make sense to impose a 100% rate over that level just to ensure that we don’t suffer from any widening happiness gaps in our society.

I wonder what else could be justified by a federal happiness initiative. I suppose the administration would name a Happiness Czar to the cabinet. Perhaps this person would impose a one- or no-child policy à la Communist China, complete with forced abortions. After all, the research clearly shows that fewer children mean happier couples, right? And I suppose some redistribution of existing children may also be needed to ensure maximal happiness, although I’m not sure how the math would work. They’d probably have to get the Census Bureau involved somehow.

This is hyperbolic, of course, and nothing in the podcast would indicate that Ms. West would go so far as all that (although I suspect she may be sympathetic to the taxation argument). But my point is this – far from being a “strong argument,” believing that some people can quantify subjective values for others and then determine the relative merits of those values is a very dangerous concept, particularly where government is concerned. This is probably one of the reasons why I have always found the natural rights approach so appealing. It helps draw bright lines around interpersonal interactions and places limits on what even the majority of people within a society may legitimately do. This seems far more prudent than giving the government intellectual cover to decide something as fundamental and yet as nebulous as the happiness of hundreds of millions of complete strangers. And it’s not much of a leap from rationalizing government policy on the basis of “maximizing happiness” to rationalizing it on the basis of “the greater good.” The history of 20th century should be enough to demonstrate that governments may have very different ideas about what these terms mean than your average, run-of-the-mill lefty philosophy professor.