Adam Smith and Obamacare

November 14, 2013

by Mario Rizzo

Based on my non-scientific sampling of the morning talk-programs on TV, the “progressives” have discovered the law of unintended consequences. There seems to be universal agreement that if Obamacare is altered to allow people to keep their current healthcare insurance, regardless of whether it covers all of the contingencies the law has so far mandated, the entire Obamacare framework will begin to unravel. As Steve Rattner (of the auto bailout “fame”) admitted on the MSNBC program “Morning Joe,” the law is a complex web of interrelated provisions. Once you pick at one, the law may unravel.

Let me take this opportunity to remind everyone of the famous passage from Adam Smith’s Theory of Moral Sentiments in which he sees so clearly the problem with statist redesign of social institutions.

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder (VI.II.42, Liberty Press edition).

There really is nothing more to add. So I will not (for now).


Instead of the Fed

November 5, 2013

by Jerry O’Driscoll

 

For the month of November, Cato Unbound features an essay by me on “The Fed at 100.” Over the course of a week, there will be comments by Larry White, Scott Sumner and Jerry Jordan. I will respond to these as appropriate.

“End the Fed” has become a political slogan. Long before that, however, there was a serious academic literature on the prospects for competitive banking. I examine that literature in my posting. One interesting aspect of that literature is that important papers on free banking came out of Federal Reserve banks in the 1980s.

I argue that “the literature on free banking demonstrates the viability of private, competitive banking without a central bank.” But we now have a system of central banking almost everywhere. The fact that the road not taken would have been a viable path does not mean that we can retrace our steps and take that path now.

I devote roughly half the posting to consideration of what it would take to end the Fed. It would be a formidable but not impossible task. It is generally acknowledged that to be viable, a system of competing currencies would need convertibility into something that is in inelastic supply. Historically that has been a commodity, and I suggest gold is as good as any (though many disagree about that). What are the prospects for a return to a commodity standard?

Central banking is historically linked to governments running deficits and needing them to be financed. That is equally true today. Central banks cannot be abolished until permanent deficits are abolished, and governments are shrunk down in size. What are the prospects for that?

I have just returned from a very important conference at the Mercatus Institute at George Mason University on “Instead of the Fed: Past and Present Alternatives to the Federal Reserve System.” As the title suggests, alternatives to central banking in the past and the future were discussed. All three discussants of my posting also participated in important roles at that conference. I was a discussant of three papers, including one by Scott Sumner. So I imagine we will be continuing our dialog at Cato Unbound.

One of the most interesting discussions was among advocates of Fed abolishment and of Fed reform. All agreed that we need better monetary policy now and into the future, regardless of our differences on the issue of free banking versus central banking. I will observe that it was encouraging that people as diverse as George Selgin, Scott Sumner, Ben McCallum and I were able to arrive at a consensus.

I invite everyone to visit Cato Unbound this month and follow the conversation.

 


The Macroeconomics of Food Stamps

November 2, 2013

by Mario Rizzo

The expansion of food stamp eligibility in response to the Great Recession was part of the so-called stimulus package. There were several aspects. First, there was a simple increase in the maximum amount allowed to beneficiaries of about 14%. There was also a tremendous drive to get people who are eligible, but did not get food stamps, to apply and get them. Then there was a loosening of eligibility requirements in some states. Finally, there was the increase in unemployment resulting from the recession and thus an increase in the number of eligible people.

In 2007 the number of people on food stamps was 26 million. Today it is about 48 million! But look more closely at the data (in thousands):

2008

28,223

2009

33,490

2010

40,302

2011

44,709

2012

46,609

2013     

47,637

The reader should note that, even as unemployment has declined, the number of food-stamp recipients has increased. Based on decades long trends we should have observed a significant decrease in the number of recipients. Read the rest of this entry »


O’Driscoll on Inflation

October 30, 2013

by Mario Rizzo

ThinkMarkets blogger, Cato Senior Scholar, and former VP of the Federal Reserve Bank of Dallas, Gerald P. O’Driscoll, Jr., speaks on the Fox Business channel about the problems of deliberate inflation as a policy to reduce unemployment and spur growth. See the video here:

Gerald O’Driscoll on Inflation


The Return of Inflationism?

October 29, 2013

by Mario Rizzo

The Fed has become desperate, not because the American economy is currently falling apart, but because the economy has stubbornly failed to respond well to the policies of the “best and the brightest.” And now, as if to welcome the impending chairmanship of Janet Yellen, stories are surfacing in various places about the growing consensus inside and outside of the Fed for inflation. There is not enough inflation to stimulate adequate economic growth. Just a little more, or maybe even a lot more (perhaps as high as 6 percent) is needed as Ken Rogoff of Harvard is suggesting.

The arguments being used today are not exactly the same as those of the 1970s, yet I have the feeling that I have been here before.  It is important to distinguish theory from what policy economics is about. Policy economics often comes down to rather simple ideas. The real world has a way of making a mockery of today’s sophisticated macroeconomic theory. For one thing, policy has to be relatively simple if it is to be transparent. Read the rest of this entry »


Military Service and the New Paternalism

October 27, 2013

by Mario Rizzo

In the last few years there has been a small expansion in the number of universities that are reinstating ROTC (Reserve Officer Training Corps) after the cancellation of such programs due to protests against the war in Vietnam. I express no opinion here about whether universities should have ROTC programs. My points here have equal applicability to military recruiting of all kinds.

My concern here is a relatively wonkish one. Why have not the new paternalists (those who base their paternalistic policies on the findings of behavioral economics) sought to apply their ideas to young college students signing up for ROTC? Or to other young people going to their neighborhood military recruitment center.

Consider that these potential recruits seem to meet all of the behavioral red flags. First, they are young with little experience of the world and so their decision is would be one in which their data base is deficient. They would seem to be similar to first-time home buyers who are alleged to be easily subject to fraud and manipulation. Read the rest of this entry »


Lawrence Klein: Keynesian Economist Who Wanted to Sidestep the Constitution

October 24, 2013

By Richard M. Ebeling


Nobel Prizing-winning Keynesian economist, Lawrence Klein died on October 20, 2013, at the age of 93. A long-time professor of economics at the University of Pennsylvania, he was awarded the Nobel Prize in 1980 for his development of econometric (or statistical) models of the United States “macro” economy for purposes of prediction and “activist” government policy making.

 

He also was a senior economic advisor to Jimmy Carter during his successful run for the presidency in 1976, but Klein declined a position in the Carter Administration for fear of the negative publicity from his membership in the American Communist Party in the 1930s. 

 

What is less well known today is that immediately after World War II he was one of the great popularizers of the “new economics” of John Maynard Keynes, especially in his widely read book, The Keynesian Revolution, published in 1947.

 

Keynes’ Conception of Government as Savior

In The General Theory of Employment, Interest, and Money (1936) Keynes had argued that the market economy was inherently unstable and susceptible to wide and unpredictable swings in output, employment, and prices. Worse yet, he asserted, the market could get stuck in a prolonged period of high unemployment and idle resources. Only judicious government monetary and fiscal policy could assure a return to sustainable full employment. Read the rest of this entry »


Questions for Free Market Moralists? Some Answers

October 22, 2013

By Mario Rizzo

A philosopher, Amia Srinivasan, fellow in philosophy at All Souls College, University of Oxford, writing in the New York Times Opinionator (online commentary) says that in order to be a consistent defender of Robert Nozick, the free market and classical liberalism, one must answer “yes” to all four questions below. And she believes that such consistent yes answers are not plausible. She is wrong that we are required to answer yes to all four and she is wrong that yes answers on any are implausible. She also misconceives the task of liberalism as a political philosophy.

Let us start with the last point. As Ludwig von Mises constantly reminded us, liberalism is not a philosophy of life. It does not deal with the ultimate questions of man’s place in the universe and the full range of choices human beings must make both in dealing with others and in guiding one’s own life. It is a philosophy about the role of the state in a world in which people differ in their life-philosophies or in the concrete application of a philosophy to different circumstances of time and place.

With this in mind we can briefly answer her questions: Read the rest of this entry »


The Government Shutdown and the Debt Default Issue: The Dreadful Lesson

October 18, 2013

by Mario Rizzo

I grant that the government “shutdown” and the perceived threat of default on the debt was a public relations disaster for the Republican Party. I think that the shutdown problems, like those of the Sequester, were grossly exaggerated by the traditional media and as well as by various left-wing hysterics. Neither of these spending or service adjustments affected the overwhelming majority of our (excessive) government spending.

The default problem could have been much worse. It would have presented the following options: Delay payments to bond holders, axe discretionary spending, and/or cut entitlement spending. Another possibility would have been to continue borrowing anyway, perhaps provoking a Constitutional problem. I believe that had this continued for only a few days not much would have happened that would not have been quickly undone afterwards. However, none of this activity would have served the interests of reducing the size and scope of government.

So what is the “dreadful lesson”? It is this. We do not know how to reduce the size of our Leviathan state. Tea Party critics are correct, for example, that the longer ObamaCare stays unaltered or unrepealed the harder it will be to get rid of it. This is not because it will suddenly turn out to be good but because, as with so many other laws, special interests will benefit and will not easily yield.  How well have the efforts to find alternatives to Social Security and Medicare gone?

Provoking crises will not work. The current Republican Party does not seem competent enough to devise clever political methods to accomplish the goal of smaller government, even if it were truly willing to do so. (And that is debatable.)

So we are left, politically speaking, with nothing. How dreadful.


Herbert Davenport: The Economics of Enterprise

October 16, 2013

Economics of EnterpriseHerbert davenport

by Richard M. Ebeling*

This year marks the hundredth anniversary of the publication of Herbert J. Davenport’s (1861-1931), The Economics of Enterprise, which appeared in the early months of 1913.

Both mainstream economists as well as many “Austrians” seem to have long since forgotten Herbert Davenport. But during his time he was recognized as one of the early formulators of a subjectivist conception of opportunity cost, a harsh critic of Alfred Marshall’s attempt to partly preserve the “real cost” doctrine of the Classical Economists, and a lucid expositor of the central role of the entrepreneur in a dynamic vision of the market process.

His earlier article, “Proposed Modifications in Austrian Theory and Terminology” (Quarterly Journal of Economics, May 1902), and his book, Value and Distribution (1908) were “friendly criticisms” meant to clarify inconsistencies or ambiguities in the “Austrian” approach with which he was, in general, highly sympathetic.

Born in Vermont, he earned a PhD in economics under J. Laurence Laughlin (a strong defender of laissez-faire economics) at the University of Chicago, but was also influenced by (though critical of) Thorsten Veblen. For many years he served as the Dean and Department Chair of the College of Business at the University of Missouri. He later served as a professor of economics at Cornell University.

According to Paul Homan, he was a captivating classroom professor: “One remembers him most vividly and typically leaning back in his chair, his penetrating eyes touched with the shadow of a smile, as of triumph, while he deployed his arguments, humorously but with devastating order and precision, usually at the expense of someone, preferably Marshall, whom other people took seriously and whom he regarded as hopelessly muddle-headed.”

The Economics of Enterprise presents his full analysis of the market order in terms of subjectivism, causality, and entrepreneurial competitiveness. Read the rest of this entry »


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